Will China’s Economy Hit a Great Wall? [feedly]

Important questions, and not from an adversarial perspective.

Will China's Economy Hit a Great Wall?
https://www.nytimes.com/2019/01/15/opinion/will-chinas-economy-hit-a-great-wall.html

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Links (1/15/19) [feedly]

Links (1/15/19)
https://economistsview.typepad.com/economistsview/2019/01/links-11519.html

• Will China's Economy Hit a Great Wall? - Paul Krugman
• Disruption, Concentration, and the New Economy - Raghuram Rajan
• The Flynn Effect (Rising IQ Scores Over Time) Reverses - Tim Taylor
• Bad Precedent - Cecchetti & Schoenholtz
• 1789, the return of the debt - Thomas Piketty
• Front-Door Criterion Follow-Up - Marc F. Bellemare
• How Much Value Was Destroyed by the Lehman Bankruptcy? - Liberty Street
• In Conversation with Atif Mian - Equitable Growth
• Why deficits are sustainable and inflation has a life of its own - Roger Farmer
• Does Ultra-Low Unemployment Spur Rapid Wage Growth? - FRBSF
• What U.S. Government Shutdown Means for Economic Data - Washington Post
• Border walls - VoxEU
• The future of work - Economic Principals
• Machine Learning & Econometrics - Dave Giles
• Should we worry about temporarily raising government debt? - mainly macro

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Working-Family Tax Credits Lifted 8.9 Million People out of Poverty in 2017 [feedly]

Working-Family Tax Credits Lifted 8.9 Million People out of Poverty in 2017
https://www.cbpp.org/blog/working-family-tax-credits-lifted-89-million-people-out-of-poverty-in-2017

The Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) together boosted the incomes of 29.1 million Americans in 2017, lifting 8.9 million above the poverty line and making 20.2 million others less poor, our analysis of new Census data shows. These totals include 12.5 million children, 4.8 million of whom were lifted out of poverty and another 7.7 million made less poor. The figures use the Census Bureau's Supplemental Poverty Measure, which — unlike the official poverty measure — accounts for the impact of taxes and non-cash benefits as well as cash income.

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Au pair lawsuit reveals collusion and large-scale wage theft from migrant women through State Department’s J-1 visa program

Au pair lawsuit reveals collusion and large-scale wage theft from migrant women through State Department's J-1 visa program https://www.epi.org/blog/au-pair-lawsuit-reveals-collusion-and-large-scale-wage-theft-from-migrant-women-through-state-departments-j-1-visa-program/

Time to Make a Deal on the Federal Minimum Wage [feedly]

Time to Make a Deal on the Federal Minimum Wage
https://workingclassstudies.wordpress.com/2019/01/14/time-to-make-a-deal-on-the-federal-minimum-wage/

The federal minimum wage has been stuck at $7.25 per hour since 2009.  Until last year, when the unemployment rate dropped almost to the level of full employment, wages were stagnant, exacerbating inequality.  In 2018, average hourly earnings went up 3.15% and closed the year with a 3.9% jump.  Even with those recent adjustments, workers still need a federal minimum increase.

The Raise the Wage Act offers the prospect for change.  The bill was introduced in May 2017 by Rep. Bobby Scott (D-VA), the ranking Democrat on the House Committee on Education and the Workforce, but it died in committee in 2018 with 170 co-sponsors, Democrats all.  It proposed a dollar-a-year increase over seven years, eventually reaching $15.00 – more than twice the current minimum.  It would also phase out lower pay for tip-credit workers who are currently frozen at $2.13 per hour as well as disabled worker exceptions.

The Fight for $15 campaign, largely engineered and financed by the Service Employees International Union, has been a key force in defining $15.00 an hour as the goal.  Their work has helped set eight states on the path to establishing minimum wages of between $12 and $15 per hour in coming years, including Arizona, California, Colorado, Maine, Massachusetts, Minnesota, New York, and Washington.  Thirteen cities, including New York City, Seattle, and San Jose, are already at $15 or higher.  While Fight for $15 has created momentum for the new Democratic House majority, today's leaders should not forget the lessons learned from decades of living wage fights.

On January 18, 1997, ACORN and Local 100, United Labor Unions (then affiliated with the SEIU), presented voters in Houston, Texas with what seemed a radical proposal at the time: a city ordinance to raise the minimum wage to the level of $6.50 per hour for all workers.  Only months before, the federal minimum had finally risen from $4.25 per hour to $4.75.  In a patronizing campaign against us, service industry and general business employers insisted that they understood our demand, but we were going about it the wrong way, and our proposal would cost jobs.  While we won in lower-income and working-class districts, we lost the election 2 votes to 1. In River Oaks, the district where former President George H. Bush lived and voted, we garnered just one vote.

Soon after, ACORN put a similar proposal before Denver voters, asking them to approve a minimum wage of $6.25.  An expensive, blunt force campaign in the final two weeks by the hotel and restaurant association and fast food operators swamped us. Again, we lost two to one loss even as we swept black and brown, lower income, and working precincts throughout the city.

We learned a key lesson from those losses: do the research. In Arizona, Michigan, Florida, and Ohio, we used polling to find out the rate that would gain support from at least 60% of voters. When we did that, even strident corporate campaigns didn't block our way. Where we couldn't do polling, we pegged the increase more modestly as a premium above the federal minimum, usually one dollar, which won in New Orleans, Missouri, and elsewhere. Once we learned to propose acceptable target rates, we won many more votes, and no living wage statewide proposition has lost at the ballot box in more than a dozen years. Between 1996 and 2008, we won more than 125 "living wage" campaigns around the country, delivering billions of dollars' worth of raises to millions of workers. Where we won increases indexed to cost-of-living, like Florida, lower-waged workers continue to benefit.

State and local minimum wage and living wage campaigns have continued in full force and fury.  Approximately twenty states and twenty-three localities now have higher base hourly wage rates than the federal standard, and some 5.2 million workers began this year with a wage increase. Individual bumps in annual pay from $90 to $1300 add up to about $5.4 billion of increased income for workers. This is good news. But workers in twenty-nine states – about 2.2 million people — are still stuck at $7.25 per hour – or less!

It's time to make a deal.

Reportedly, Democrats believe they now have enough votes to pass something like the Raise Wages Act and demand that the Senate either support, negotiate, or reject raising workers' wages.  We need to force politicians to finally deliver, whatever the intraparty polarization and squabbles.

We also need to remember the lessons from the past.  In Houston, Denver, and initially New Orleans, we lost support when we proposed raising the minimum 37% over the existing federal standard.  To get to $15 on a fast track would be a jump of more than 100%, doubling the minimum wage.  Pew Research found only 52% support for that big an increase.

It's just not likely to happen all at once.

Even raising the minimum $1 per year is steep and unprecedented. The last ten-year freeze of the federal minimum, between 1997 and 2007, the raise was seventy cents annually for three years l.  A dollar per year for seven years will be hard to win.

But low wage workers need a deal, and at this point, just about any raise would do. Fifty more cents an hour for a full-time, 2080 hours a year worker is over $1000.  Sure, a dollar would be even better, but any raise would be a godsend. This would be even better if we could finally win some form of automatic indexing for future increases and at least lift the cap on tipped workers' wages.  Both of those adjustments would be worth paying some real money to achieve at the negotiating table.

Does making a deal hurt the states and cities that are already over the federal minimum wage?  No, indeed.  As President John F. Kennedy argued, raising the minimum wage "lifts all boats," because workers making $10 or $12 an hour would fight to keep their hourly wages a few dollars higher than the minimum wage. If employers want to keep those workers, they will have to pay more.

Of all of the divisions in the United States now, the wage gap might be easiest to attack.  Even Republicans feel the pressure as the 2020 election comes into view. We need to make it hard for them to defend keeping the minimum wage at $7.25 an hour.  They will argue that $15 an hour is catastrophic, and we must be prepared to fight back. Republicans may not like bargaining over a hike in the minimum wage, but other than the stone-cold ideologues, some of whom are in the White House, they will be ready to do so.

It's time to demand an increase in the federal minimum wage but also to talk realistically about the terms of an agreement.  Lower wage workers must have a raise, and they need it now. We can't wait for a new President or a new Congress.

Wade Rathke

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Opportunity Zones: Can a tax break for rich people really help poor people? [feedly]

Progressive trickle down? The Chinese BRI -- isn't this their model? And the fascist billionaires want to go to war over that.

Opportunity Zones: Can a tax break for rich people really help poor people?
https://www.washingtonpost.com/outlook/2019/01/14/opportunity-zones-can-tax-break-rich-people-really-help-poor-people/

Progressive economists, myself included, have been highly critical of the 2017 tax law, as it will surely deepen income inequality and starve the Treasury of needed revenue. But there is a measure in the law that has the potential, if well implemented — a big "if" — to actually help low-income people. I'm talking about Opportunity Zones.

There's no evidence that simply giving rich people more after-tax income helps those with fewer means. If this new idea works, it's because it incentivizes those with capital gains to reinvest their returns in places starved for capital investment.

Let me explain, and then talk about what could go right and wrong with this new tax policy.

When an investor sells an asset, she pays a tax, typically at a rate of about 24 percent, on the asset's appreciation, i.e., its capital gain. But if she taps this new incentive, she can diminish her liability by putting the gain in a fund dedicated to investing in disadvantaged areas certified as Opportunity Zones (OZs). The longer she leaves the investment in place, the bigger the tax break on both the original capital gain and on the returns from the investment itself (see here for details).

OZs don't assume that just because they get a tax cut, wealthy people will make investments that will somehow lead to higher incomes for others. The tax break is conditioned on investing in economically left-behind places where patient, equity capital is a scarce commodity. To push back on sheltering risk, investors can't just park their deferred gains in OZs. They must be used to build new homes or businesses, finance new or expanding companies in the zones, or substantially rehabilitate preexisting structures and/or businesses.

As an early contributor to this idea, I was motivated by two realities. One, the United States is fraught with capital scarcity in most places amid race/gender unbalanced capital accumulation in just a few places. The vast majority (over 75 percent) of venture capital goes to white male founders in Massachusetts, New York and California. Two, it is increasingly well understood that the facile economic solution to being stuck in a depressed area — move to a better place! — isn't working. Diminished geo-mobility has left too many families in places with too little opportunity. If policy is going to help them, it needs to bring jobs and investments their way.

It is inconceivable that a few white guys in three states are the only people and places where untapped potential exists. Instead, I'm sure the status quo underinvests in the future of ailing regions and less-advantaged demographics. Hence the bipartisan backing the Opportunity Zones idea garnered in both chambers of Congress before it was wrapped into the tax overhaul package.

ADVERTISING

It's too soon in the life of OZs to evaluate actual investments, but we can examine some critical, early developments, including the zone certification process, market reactions and some early, proposed investment targets. Such monitoring is essential if we want OZs to realize their potential to help left-behind places and people, vs. them turning into another wasteful, ineffective, place-based tax break.

A good place to start is the outcome of the certification process, wherein governors designated over 8,700 OZs across all 50 states, the District, and U.S. territories (almost all of Puerto Rico received designation to aid disaster recovery) to receive tax-favored investments. Eligibility criteria include places with above-average poverty rates and below-average incomes.

According to the Economic Innovation Group, a D.C. policy organization closely associated with OZs (I co-chair EIG's research advisory board), the average zone has a 29 percent poverty rate — nearly twice the national rate — and a median family income of $42,400, nearly 40 percent lower than the national median of $67,900. EIG finds that more OZ adults lack a high school diploma than have earned a bachelor's degree. Likewise, on jobs, housing and life-expectancy measures (almost four years shorter among zone residents), OZs paint a picture of economic distress and disinvestment.

In Louisville, for example, the 19 certified OZs have a poverty rate of 43 percent compared with 14 percent for its metro area. Median income is $22,000 in the zone compared with $52,000 in the metro area; over half of zone residents are African American compared with 14 percent metro-wide residents.

However, some high-profile zones were poorly chosen, raising the risk of subsidizing places that are already on a stable footing. Exhibit A is the zone chosen for one of Amazon's second headquarters in Queens. Not only will this area already receive over $1 billion in tax credits and subsidies from the deal local governments struck with Amazon, it also is considerably more prosperous than the typical zone. Its choice was a function of a glitch in the law that allows governors to nominate up to 5 percent of better-off places next to low-income ones. EIG found that governors used this discretion sparingly; it was tapped by less than 3 percent of OZs. Other, independent research found less than 4 percent of chosen tracts showing signs of gentrification before nomination. Still, even while these are small percentages, such leakage undermines the intent of the program and wastes valuable tax revenue. It is also possible that such places could absorb disproportionate shares of OZ investments.

That said, given that most zones appear to be well chosen, what kind of investments might follow?

To answer this question, I looked at a few of OZ investment prospectuses starting to come out, and I urge fellow skeptics to do the same. There's evidence that governors worked with mayors to designate zones, and many mayors are now leading the charge to steward investment into their communities. One such case is Oklahoma City, which chose the 23rd Street Corridor, long a commercial and cultural hub at the core of the city's African American community. In 2014, the city government designated the area as "blighted," but development plans have foundered for lack of patient capital. Residential housing, retail (including a much-needed grocer), and health facilities are all featured options in their OZ prospectus. Similar ideas are in motion for Park DuValle neighborhood in Louisville, and the Civil Rights District in Birmingham, Ala. In Boulder, Colo., stakeholders are coming together to figure out how their local OZ can be used to address the city's lack of affordable housing, a problem that has long kept low-income families from living close to work.

Yes, such investments invoke gentrification risk. It is not for nothing that James Baldwin relabeled the 1960s urban renewal as "Negro removal." But unlike the federal projects of that era, OZs and their investment funds have zero power to override local rules. As columnist Jan Burton said about the Boulder initiation, "We control our zoning and land use decisions, and we retain the long-standing 1 percent per year growth limit on housing units. We control our own future."

I'm keeping my powder dry on this one. If OZs turn out to largely subsidize gentrification, if their funds just go to places where investments would have flowed even without the tax break, or if their benefits fail to reach struggling families and workers in the zones, they will be a failure (my Center on Budget and Policy Priorities colleagues raise these and other concerns about OZs). Moreover, when it comes to anti-poverty policy, readers of this column know my preference for direct hits vs. bank shots. The most direct ways to help those left behind is to guarantee them jobs, incomes, housing and health care. The direct way to improve infrastructure in poor neighborhoods is for public projects to build it.

But the fact is that most OZ communities have faced disinvestment and depopulation for so long, they have both the need and capacity to absorb new investment, development and people without displacing local residents. And our politics is such that we're living in a second-best world. At the same time, the inequality of our era means there are trillions of dollars in idle capital sitting on the sidelines over here, and communities suffering from decades of disinvestment over there. As Bruce Katz, a longtime regional development expert told me, "For a lot of these places, Opportunity Zones represent the last and best chance to drive a new economic vision."

Thus, I suggest we give OZs a chance, while scrutinizing their progress. That will require the Treasury to dictate strong reporting requirements that will accommodate thorough evaluation. As I've stressed, my support for the idea is conditional on such data and what they show (my biggest concern is that the Treasury fails to collect the tracking data needed to evaluate relevant outcomes). I'm enthusiastic, not naive, and the last thing we need in this country is a new way for investors to shelter capital gains. But we have a pressing need to channel lasting, opportunity-creating investments to people in left-behind places, and OZs might just meet that need.
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1789, the return of the debt [feedly]

1789, the return of the debt
http://piketty.blog.lemonde.fr/2019/01/15/1789-the-return-of-the-debt/#xtor=RSS-32280322

One of the ideas raised by the yellow vests is the possibility of a referendum on the cancellation of the public debt. For some, this type of proposal, already heard in Italy, demonstrates the extent of the 'populist' danger: how can one possibly imagine not repaying a debt? In reality history shows that it is customary to resort to exceptional solutions when the debt reaches this type of level. However, a referendum would not enable us to solve such a complex problem. There are numerous ways of cancelling a debt, with very different social effects. This is what should be discussed instead of leaving these decisions to others and to the forthcoming crises.

To ensure that everyone can make up their minds, I am going to give two sets of information here. The first concerns the present European regulations; then I will turn to the way in which debts of this size have been dealt with in history.

Let's begin with the European regulations which are not well known and have generated a certain amount of confusion. Many people continue to refer to the '3% rule' and do not understand why Italy, which was considering a deficit of 2.5% of GDP, before agreeing to a compromise of 2%, has been blacklisted. The explanation is that the Maastricht Treaty (1992) was amended by the new budgetary treaty adopted in 2012. Its real name is the Treaty for Stability, Coordination and Governance (TSCG). This text stipulates that henceforth the deficit must not exceed 0.5% of GDP (Article 3), with the exception however of the countries whose debt is 'significantly less than 60% of GDP' in which case the deficit can rise to 1%. Barring 'exceptional circumstances' the non-observance of these rules leads to automatic penalties.

We should point out that the deficit targeted by these texts is always the secondary deficit, that is, after payment of interest on the debt. If a country has a debt equal to 100% of GDP and the interest rate in 4% then the interest will be 4% of GDP. To achieve a secondary deficit limited to 0.5%, a primary surplus of 3.5% of GDP is required. In other words, taxpayers will have to pay taxes which are higher than the expenditures benefitting them, with a difference of 3.5% of GDP possibly for decades.

The TSCG approach is not illogical: if we choose not to cancel the debt, and if we have almost zero inflation and limited growth, then only huge primary surpluses can reduce debts in the range of 100% of GDP. However the social and political consequences of this type of choice have to be considered.

Although they have been reduced by the unusually low rates which will perhaps not last forever, at the moment interest payments stand at 2% of GDP in the Euro zone (the average deficit is 1% and the primary surplus 1%). This amounts to over 200 billion Euros per annum, which one can compare for example with the miserable 2 billion per annum invested in the Erasmus programme. This is a possible choice, but are we sure that it is the best one to prepare for the future? If similar amounts were devoted to training and research, then Europe could become the leading pole of innovation at world level, ahead of the United States. In Italy, the interest payments represent 3% of GDP, or 6 times the budget for higher education.

What is certain is that history shows that there are other ways of proceeding. One example often quoted is the big debts of the 20th century. Germany, France and the United Kingdom all found themselves with debts ranging from 200% and 300% of GDP in post-World War Two which have never been repaid. Their debts were written off in a few years by a mix of cancellation pure and simple, inflation and exceptional taxation of private property (which is the same thing as inflation, but is more civilised: the rich can be made to pay more and the middle class protected). The German external debt was frozen by the London Debt Agreement in 1953, and then definitively written off in 1991. This is how Germany and France found themselves with no public debt and able to invest in growth in the years 1950-1960.

However, the most relevant comparison is the Revolution in 1789. The Ancien Régime was unable to force its privileged classes to pay taxes and had accumulated a debt of approximately one year of national income, even a year and a half if the sale of charges and offices (official posts and functions) are included (these were a way for the State to obtain money immediately in exchange for the future revenue to be collected from the population). In 1790, the Assembly obtained the publication of the list of names in the Grand livre des pensions which contained both annuities to courtiers, as well as payments to former senior officials, with payments ten or twenty times higher than the average income, which created a scandal (the comparison with the salary of the President of the National Commission for Public Debate springs to mind). It all ended with the setting up of a somewhat fairer form of taxation and above all, the bankruptcy of two-thirds of those named and a major inflation of the assignats or promissory notes.

In comparison the present situation is both more complex (each country holds a part of the debt of the others) and more simple: we have, with the ECB, an institution which enables us to freeze debts and we could adopt a fairer system of European tax system by finally setting up a sovereign Assembly. But if we continue to explain that it is impossible to make the richest Europeans pay and that only the immobile classes have to pay, then inevitably we run the risk of facing serious rebellions in the future.

 

PS. On current debt interests and primary surplus in the euro zone, see Economic Bulletin ECB December 2018, p.36, Chart 27, and  p.S23-S25. On the schedule of Italian debt interest payments, see  Italy Governement Securities, Debt Service(ECB Statistical DataWarehouse)

PS2. On the history of debt in 18th-20th centuries, see for instance Capital in the 21st century, 2014, chapters 3-5; for complete series, see this article published in QJE 2014 and its appendices.

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