Thursday, February 9, 2017
Wednesday, February 8, 2017
The U.S. Tax Code Actually Doesn’t 'Soak the Rich' [feedly]
http://economistsview.typepad.com/economistsview/2017/02/the-us-tax-code-actually-doesnt-soak-the-rich.html
Nick Buffie at the CEPR:
The U.S. Tax Code Actually Doesn't "Soak the Rich" : In 2012, Republican presidential candidate Mitt Romney famously commented that 47 percent of Americans were "dependent on government" because they didn't pay any federal income taxes. He went on to explain that his job was "not to worry about those people."
Journalists and other public figures often claim that only the rich pay taxes, supporting this with the argument that the rich pay the vast majority of federal income taxes. However, federal income taxes are just one part of the broader tax code. When we consider other types of federal taxes as well as state and local taxes, it becomes clear that the overall tax code isn't extremely progressive – in other words, it doesn't "soak the rich," and it certainly doesn't let the poor off the hook. ...
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DAPL Doesn’t Make Economic Sense [feedly]
http://triplecrisis.com/dapl-doesnt-make-economic-sense/
The Dakota Access Pipeline (DAPL) imposes huge environmental and health costs, creates few jobs, and generates little government revenue.
Mark Paul
Mark Paul is a postdoctoral associate at the Samuel DuBois Cook Center on Social Equity at Duke University. He holds a Ph.D. in economics from the University of Massachusetts Amherst.
Last week, Donald Trump signed an executive order to advance approval of the Keystone and Dakota Access oil pipelines. This should come as no surprise, as Trump continues to fill his administration with climate deniers, ranging from the negligent choice of Rick Perry as energy secretary to Scott Pruitt as the new head of the Environmental Protection Agency. Pruitt, a man who stated last year that "scientists continue to disagree" on humans role in climate change may very well take the "Protection" out of the EPA, despite a majority of Americans—including a majority of Republicans—wanting the EPA's power to be maintained or strengthened.
As environmental economists, my colleague Anders Fremstad and I were concerned. We crunched the numbers on the Dakota Access Pipeline (DAPL). The verdict? Annual emissions associated with the oil pumped through the pipeline will impose a $4.6 billion burden on current and future generations.
First and foremost, the debate about DAPL should be about tribal rights and the right to clean water. Under the Obama administration, that seemed to carry some clout. Caving to pressure from protesters and an unprecedented gathering of more than a hundred tribes, Obama did indeed halt the DAPL, if only for a time. Under Trump and his crony capitalism mentality, the fight over the pipeline appears to be about corporate profits over tribal rights. Following Trump's Executive Order to advance the pipeline, the Army Corps of Engineers has been ordered to approve the final easement to allow Energy Transfer Partners to complete the pipeline. The Standing Rock Sioux have vowed to take legal actionagainst the decision.
While the pipeline was originally scheduled to cross the Missouri River closer to Bismarck, authorities decided there was too much risk associated with locating the pipeline near the capital's drinking water. They decided instead to follow the same rationale used by Lawrence Summers, then the chief economist of the World Bank, elucidated in an infamous memo stating "the economic logic of dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that." That same logic holds for the low wage counties and towns in the United States. The link between environmental quality and economic inequality is clear—corporations pollute on the poor, the weak, and the vulnerable; in other words, those with the least resources to stand up for their right to a clean and safe environment.
In 1994, President Bill Clinton signed Executive Order 12898, which ordered federal agencies to identify and rectify "disproportionately high and adverse human health or environmental effects of its programs, policies, and activities on minority populations and low-income populations." Despite this landmark victory, pollution patterns and health disparities associated with exposure to environmental hazards by race, ethnicity, and income remain prevalent. Researchers at the Political Economy Research Institute (PERI) released a report identifying the toxic 100 top corporate air and water polluters across the country, finding the 'logic' of dumping on the poor and racial and ethnic minorities persists.
We do not accept this logic, and nor should any branch of the U.S government. As the Federal Water and Pollution Control Act makes clear, water quality should "protect the public health." Period. Clean water and clean air should not be something Americans need to purchase, rather they should be rights guaranteed to all. The Water Protectors know that and are fighting to ensure their right to clean water, a right already enshrined in law, is protected.
The Numbers The Dakota Access Pipeline is a bad deal for America, and should be resisted. Our findings indicate that the burden of pollution associated with oil passing through the pipeline amounts to $4.6 billion a year—a number none of us should accept. This was arrived at using conservative estimates, and numbers provided by Energy Transfer Partners and the EPA.
According to Energy Transfer Partners, the company responsible for the Dakota Access Pipeline, the pipeline will transport 570,000 barrels of Bakken oil a day once the project is fully operational. It turns out, a barrel of oil is not a barrel of oil. Oil from the Bakken oil fields, which is where the pipeline originates is substantially dirtier than average—containing almost a quarter more CO2 per barrel. (A full breakdown of the numbers is available here.)
The CO2 content of the oil matters tremendously. After all, it's the leading GHG contributing to global warming—the largest test we have collectively faced as a species. To think about this in economic terms, we need to take a few more steps. While Energy Transfer Partners hired its own economics firm to provide an economic impact study of the pipeline, they left out crucial information. Substantial negative externalities from burning the fossil fuels transported by the pipeline are not priced into the analysis. While the private profits of the pipeline certainly look good, we are concerned about the greater social costs associated with the pipeline, in particular pollution.
To calculate the cost, we need to think about the cost of CO2 emissions. The EPA. and other federal agencies use the social cost of carbon (SCC) to estimate the climate benefits and costs of rulemaking. The EPA's estimate of the SCC for 2015 is $36 (in 2007 dollars). The SCC is an estimate of the economic damages associated with a small (one metric ton) increase in CO2 emissions in a given year (i.e., the damage caused by an additional ton of carbon dioxide emissions). Applying the SCC to the oil transferred via the pipeline provides the estimated $4.6 billion (2016 dollars) in annual burden from pollution associated with the pipeline. But won't that simply be a burden on future generations? No.
The case for climate policy is frequently made on the grounds of "intragenerational equity"; intragenerational equity is also critical. The immediate net benefits for people living in polluted communities must be taken into consideration. Co-pollutants and co-benefits are necessary to take into account, as the marginal abatement benefits will vary across carbon emissions sources due to the presence of co-pollutants, such as particulate matter, sulfur dioxide, NOx, and air toxins released during the burning of fossil fuels. The U.S. National Academy of Sciences has calculated that premature deaths attributed to co-pollutant emissions from fossil fuel combustion impose a cost of $120 billion a year in the United States, while Taylor and Boyce find that the co-pollutants result in the deaths of thousands per year.
OK, how about the jobs? Trump after all has vowed to bring back jobs—"a lot of jobs." Not so fast. According to Energy Transfer Partners' own estimates, the Dakota Access Pipeline will employ just 40-50 permanent workers along the entire route. Surely those jobs matter for the folks that get them. They'll likely be well-paying jobs with benefits—the types of jobs the economy needs. But with 7.5 million Americans currently unemployed, and millions more underemployed, this won't make a dent. The pollution associated with the pipeline and the risk of contaminated drinking water, on the other hand, will. Putting Americans back to work through the fossil fuel industry simply doesn't make sense. According to research by Professor Robert Pollin at the Political Economy Research Institute, investing in a green-energy economy provides three times more jobs than if the money were invested in the fossil fuel economy. Want jobs? How about a green New Deal?
The financial crisis and ensuing banking bailouts ensured private profits while socializing losses. Trump is bringing the same logic to the table, socializing costs associated with pollution—and not counting them—while privatizing profits from the pipelines. Sure, there will be some tax revenue associated with the pipeline, an estimated $56 million annually in state and local divided between four states, but that pales in comparison to the $4.6 billion in annual burden. The economics don't add up, but let us be clear—the economics shouldn't necessarily come first. People should have a right to clean water and respect of their ancestral lands.
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Larry Summers: Big risks in the hasty rollback of financial regulation [feedly]
http://larrysummers.com/2017/02/07/resist-changes-in-the-financial-regulatory-framework/
Many business people think it is wonderful that we now have an Administration filled with people from business backgrounds. To a point, I relate. People who have worked primarily in the private sector bring an awareness that others sometimes lack of maintaining business confidence, which as I have often said is the cheapest form of stimulus. And for some government tasks, management experience is much more important than policy experience. That is why Bob Rubin and I worked to install a (Republican) business leader as commissioner of the IRS given its vast IT problems.
Unfortunately, just as being able in government does not equip you to step in and run a company—at least not without much help—so also business experience does not equip you to run on your own public policy and political processes.
The concerns of those who worry about business dominated government have been demonstrated all too clearly by the Trump administration's roll-out of plans to scale back financial regulation. There are surely areas where regulation is too burdensome, particularly involving bureaucratization and small banks. But much of what was said by the President and his advisors sounds more like grousing at an East Hampton cocktail party than a serious basis for public policy reform.
The President suggested that it was a problem that many of his good friends could not get as much credit as they wanted. We do not travel in the same social circles, so I am not sure who he means. But if he is saying that real estate developers cannot get all the credit they want, that would seem a good thing. Indeed, I would submit that the financial history of the last 40 years demonstrates that often when real estate operators are thrilled about credit availability, financial crisis is only a few years away.
Gary Cohn, the former number two at Goldman Sachs now heading the NEC, asserts that " we are not going to burden the banks with literally hundreds of billions of dollars of regulatory costs every year". I would challenge him to document that such costs exist today, which feels to me like an "alternative fact". Note that total bank profits last year were about 170 billion so the claim is that without excessive regulation profits would more than double.
There is room for reasonable argument about the fiduciary rule requiring that financial advisors act in the best interest of their clients. I think the case made in the Obama CEA report is very strong but I can see counter arguments. Cohn's analogy that "this is like putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn't eat it because you might die younger" is bizarre. We do after all require food labeling, inspect food processing, and no one is suggesting that financial products be banned, only that the economic interests of advisors be disclosed.
It does not get better. Leaving aside Cohn's statement that "we have all submitted living wills" referring to Goldman Sachs, which was a slip for a policy official, I wonder why an Administration that professes to hate "too-big-to-fail" wants to scale living wills for banks and plans for resolution way back.
And Cohn's argument that since banks are so well capitalized now we do not have to worry much about other aspects needs to reckon with the experience of 2008. Some of the institutions that failed, like Bear Stearns and Lehman Brothers, had capital cushions well above what both the Federal Reserve and Basel required to be labeled as "well-capitalized" in the week before their failures. Others like Goldman would likely have failed but for the bailout of their counterparties. Evidence on ratios of the market value of equity to assets suggests that even after the recent run-up, banks are operating with historically high levels of operating leverage.
I would rather live with even a very bad knee than let a carpenter operate on me. On the evidence of statements so far by those in the executive branch, the safest posture is to resist changes in the financial regulatory framework until there is proof that they have been thought through carefully. If and when this happens, there will be room to promote the flow of credit, reduce bureaucratic burdens, and make the financial system safer.
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Revoking Trade Deals Will Not Help American Middle Classes [feedly]
http://economistsview.typepad.com/economistsview/2017/02/revoking-trade-deals-will-not-help-american-middle-classes.html
Larry Summers:
Revoking trade deals will not help American middle classes: ...The idea that renegotiating trade agreements will "make America great again" by substantially increasing job creation and economic growth swept Donald Trump into office.
More broadly, the idea that past trade agreements have damaged the American middle class and that the prospective Trans-Pacific Partnership would do further damage is now widely accepted in both major US political parties. ...
The reality is that the impact of trade and globalisation on wages is debatable and could be substantial. But the idea that the US trade agreements of the past generation have impoverished to any significant extent is absurd. ... My judgment is that these effects are considerably smaller than the impacts of technological progress.
A strategy of returning to the protectionism of the past and seeking to thwart the growth of other nations is untenable and would likely lead to a downward spiral in the global economy. The right approach is to maintain openness while finding ways to help workers at home who are displaced by technical progress, trade or other challenges.
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Paul Krugman: Springtime for Scammers [feedly]
http://economistsview.typepad.com/economistsview/2017/02/paul-krugman-springtime-for-scammers.html
Financial regulation is under attack:
Springtime for Scammers, by Paul Krugman, NY Times: ...Donald Trump ... and his allies in Congress are making it a priority to unravel financial reform — and specifically the parts of financial reform that protect consumers against predators.
Last week Mr. Trump released a memorandum calling on the Department of Labor to reconsider its new "fiduciary rule," which requires financial advisers to act in their clients' best interests — as opposed to, say, steering them into investments on which the advisers get big commissions. He also issued an executive order designed to weaken the Dodd-Frank financial reform...
Why ...was the fiduciary rule created? The main issue here is retirement savings..., "conflicted investment advice" has been ... costing ordinary Americans around $17 billion each year. Where has that $17 billion been going? Largely into the pockets of various financial-industry players. And now we have a White House trying to ensure that this game goes on.
On Dodd-Frank: Republicans would like to repeal the whole law, but probably don't have the votes. What they can do is try to cripple enforcement, especially by undermining the Consumer Financial Protection Bureau, whose goal is to protect ordinary families from financial scams. ...
Remember the Wells Fargo scandal...? This scandal only came to light thanks to the bureau.
So why are consumer protections in the Trump firing line?
Gary Cohn, the Goldman Sachs banker appointed to head Mr. Trump's National Economic Council — populism! — says that the fiduciary rule is like "putting only healthy food on the menu" and denying people the right to eat unhealthy food if they want it. Of course, it doesn't do anything like that. If you want a better analogy, it's like preventing restaurants from claiming that their 1400-calorie portions are health food.
Mr. Trump offers a different explanation for his hostility to financial reform: It's hurting credit availability. ... What we do know is that U.S. banks have generally shunned Mr. Trump's own businesses ... perhaps because of his history of defaults.
Other would-be borrowers, however, don't seem to be having problems. ... Overall bank lending ... has been quite robust since Dodd-Frank was enacted.
So what's motivating the attack on financial regulation? Well, there's a lot of money at stake — money that the financial industry has been extracting from unwitting, unprotected consumers. Financial reform was starting to roll back these abuses, but we clearly now have a political leadership determined to roll back the rollback. Make financial predation great again!
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The Great Recession: A Macroeconomic Earthquake [feedly]
http://economistsview.typepad.com/economistsview/2017/02/the-great-recession-a-macroeconomic-earthquake.html
Larry Christiano on why the Great Recession happened, why it lasted so long, why it wasn't foreseen, and how it's changing macroeconomic theory (the excerpt below is about the last of these, how it's changing theory):
The Great Recession: A Macroeconomic Earthquake, Federal Reserve Bank of Minneapolis: ...Impact on macroeconomics The Great Recession is having an enormous impact on macroeconomics as a discipline, in two ways. First, it is leading economists to reconsider two theories that had largely been discredited or neglected. Second, it has led the profession to find ways to incorporate the financial sector into macroeconomic theory.
Neglected paradigms
At its heart, the narrative described above characterizes the Great Recession as the response of the economy to a negative shock to the demand for goods all across the board. This is very much in the spirit of the traditional macroeconomic paradigm captured by the famous IS-LM (or Hicks-Hansen) model,9 which places demand shocks like this at the heart of its theory of business cycle fluctuations. Similarly, the paradox-of-thrift argument10 is also expressed naturally in the IS-LM model.The IS-LM paradigm, together with the paradox of thrift and the notion that a decision by a group of people11 could give rise to a welfare-reducing drop in output, had been largely discredited among professional macroeconomists since the 1980s. But the Great Recession seems impossible to understand without invoking paradox-of-thrift logic and appealing to shocks in aggregate demand. As a consequence, the modern equivalent of the IS-LM model— the New Keynesian model—has returned to center stage.12 (To be fair, the return of the IS-LM model began in the late 1990s, but the Great Recession dramatically accelerated the process.)
The return of the dynamic version of the IS-LM model is revolutionary because that model is closely allied with the view that the economic system can sometimes become dysfunctional, necessitating some form of government intervention. This is a big shift from the dominant view in the macroeconomics profession in the wake of the costly high inflation of the 1970s. Because that inflation was viewed as a failure of policy, many economists in the 1980s were comfortable with models that imply markets work well by themselves and government intervention is typically unproductive.
Accounting for the financial sector
The Great Recession has had a second important effect on the practice of macroeconomics. Before the Great Recession, there was a consensus among professional macroeconomists that dysfunction in the financial sector could safely be ignored by macroeconomic theory. The idea was that what happens on Wall Street stays on Wall Street—that is, it has as little impact on the economy as what happens in Las Vegas casinos. This idea received support from the U.S. experiences in 1987 and the early 2000s, when the economy seemed unfazed by substantial stock market volatility. But the idea that financial markets could be ignored in macroeconomics died with the Great Recession.Now macroeconomists are actively thinking about the financial system, how it interacts with the broader economy and how it should be regulated. This has necessitated the construction of new models that incorporate finance, and the models that are empirically successful have generally integrated financial factors into a version of the New Keynesian model, for the reasons discussed above. (See, for example, Christiano, Motto and Rostagno 2014.)
Economists have made much progress in this direction, too much to summarize in this brief essay. One particularly notable set of advances is seen in recent research by Mark Gertler, Nobuhiro Kiyotaki and Andrea Prestipino. (See Gertler and Kiyotaki 2015 and Gertler, Kiyotaki and Prestipino 2016.) In their models, banks finance long-term assets with short- term liabilities. This liquidity mismatch between assets and liabilities captures the essential reason that real world financial institutions are vulnerable to runs. As such, the model enables economists to think precisely about the narrative described above (and advocated by Bernanke 2010 and others) about what launched the Great Recession in 2007. Refining models of this kind is essential for understanding the root causes of severe economic downturns and for designing regulatory and other policies that can prevent a recurrence of disasters like the Great Recession.
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