International evidence shows that low corporate tax rates are not strongly associated with stronger investment

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International evidence shows that low corporate tax rates are not strongly associated with stronger investment // Blog | Economic Policy Institute
http://www.epi.org/blog/international-evidence-shows-that-low-corporate-tax-rates-are-not-strongly-associated-with-stronger-investment/

The Trump administration's Council of Economic Advisers (CEA) released a paper last week arguing that cuts in the statutory corporate tax rate would lead to gains in business investment, productivity, and wages. I noted in a piece released yesterday why this was unlikely to be true.

The key piece of evidence the CEA claimed was "highly visible in the data" and showed the wage-boosting effect of corporate tax cuts was simply a graph that showed faster unweighted wage growth in just two years in a set of "low-tax" countries relative to a set of "high-tax" countries. I noted in my paper yesterday why this was so unconvincing: a serious test of this claim would look at corporate tax rate changes (not levels), would look over a longer time-period than four years, and would not allow three countries with a combined national income that is less than 0.4 percent of American national income to drive the results.

But, the CEA report did make me curious if we would see anything "highly visible in the data" linking changes in statutory corporate tax rates to nations' capital stocks. The key theory behind claims that corporate rate cuts will boost wages is the idea that these rate cuts will lead to substantially faster investment in productivity-enhancing plants and equipment, boosting the nation's capital stock and making workers more productive. We can assess the first link in that chain of causation below, asking simply "are lower corporate tax rates associated with a larger capital stock"? Figure A shows a scatterplot of the relationship between the average statutory corporate tax rate between 2000 and 2014 the capital-to-labor ratio in 2014. The hypothesis is that low-tax countries should have attracted more capital investment and hence should have accumulated a large stock of capital relative to their workforce by the end of the period. (The data on capital stocks and employment comes from the Penn World Table 9.0.)

Figure A

As the trendline through the scatter indicates, the relationship actually goes the wrong way—countries with higher corporate tax rates over this period had larger capital stocks by 2014. This positive relationship is not particularly significant, either statistically or economically, but that's largely the point: tax cuts are an extremely weak lever with which to attempt to move capital investment.

Some might argue that looking at the average rate over a 14 year period might hide the fact that some countries went from high rates at the beginning of the period to low rates in the end. In this case, the large change in rates could likely have affected capital investment, but this would be obscured by our long-run averages. This is fair enough—though it highlights once again the CEA report's inappropriate use of averages over a short-run period. But Figure B below shows the change in corporate tax rates versus the growth rate of capital inputs into production (a measure of capital investment used in productivity analysis).

Figure B

Again, the correlation here goes the wrong way for sustaining claims that slashing corporate rates would increase capital investment; countries that saw larger reductions in the statutory rate saw slower growth of capital inputs.

The international evidence presented above just re-confirms what we already know: no binding constraint on American economic growth exists today that would be helped at all by cutting corporate income taxes. Instead, such cuts would simply boost incomes for owners of corporations—a group that is already overwhelmingly among the richest households in America. Promises of gains to investment, productivity and wage growth that will force these tax cuts to trickle down to typical American households are completely empty.


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Enlighten Radio Podcasts:Podcast: The Moose Turd Cafe-- "No Live Frogs Allowed"

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Link: http://podcasts.enlightenradio.org/2017/10/podcast-moose-turd-cafe-no-live-frogs.html

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Enlighten Radio Podcasts:Podcast: Winners and Losers: Dr Keith Alexander and the 2st Century Humanities Symposium

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Wall Street wins big as Senate votes to roll back regulation allowing consumers to sue their banks [feedly]

Wall Street wins big as Senate votes to roll back regulation allowing consumers to sue their banks
https://www.washingtonpost.com/news/wonk/wp/2017/10/24/wall-street-wins-big-as-senate-votes-to-roll-back-regulation-allowing-consumers-to-sue-their-banks/

Vice President Pence cast a tie-breaking vote late Tuesday to block new regulations allowing U.S. consumers to sue their banks, handing Wall Street and other big financial institutions their biggest victory since President Trump's election.

The rules would have cost the industry billions of dollars, according to some estimates. With the Senate's vote, Wall Street is beginning to reap the benefits of the Trump administration focus on rolling back regulations it says are strangling the economy. The vote is also a major rebuke of the Consumer Financial Protection Bureau, which wrote the rules, and has often found itself at odds of Republicans in Congress and the business community.

At issue is the fine print in many of the agreements that consumers sign when they apply for credit cards or bank accounts. These agreements typically require them to settle any disputes they have with the company through arbitration, in which a third party rules on the matter, rather than going to court or joining a class-action lawsuit.

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Workers Abroad Are Catching Up to U.S. Skill Levels [feedly]

Workers Abroad Are Catching Up to U.S. Skill Levels
http://ritholtz.com/2017/10/workers-abroad-catching-u-s-skill-levels-2/

Workers Abroad Are Catching Up to U.S. Skill Levels

October 23, 2017 9:00am by Barry Ritholtz

This is a pretty fascinating – and surprising — collection of data:

 

Source: Federal Reserve of St. Louis

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Dani Rodrik: Growth without industrialization?

Growth Without Industrialization?

Oct 10, 2017 DANI RODRIK

Low-income African countries can sustain moderate rates of productivity growth into the future, on the back of steady improvements in human capital and governance. But the evidence suggests that, without manufacturing gains, the growth rates brought about recently by rapid structural change are exceptional and may not last.

CAMBRIDGE – Despite low world prices for the commodities on which they tend to depend, many of the world's poorest economies have been doing well. Sub-Saharan Africa's economic growth has slowed precipitously since 2015, but this reflects specific problems in three of its largest economies (Nigeria, Angola, and South Africa). Ethiopia, Côte d'Ivoire, Tanzania, Senegal, Burkina Faso, and Rwanda are all projected to achieve growth of 6% or higher this year. In Asia, the same is true of India, Myanmar, Bangladesh, Lao PDR, Cambodia, and Vietnam

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This is all good news, but it is also puzzling. Developing economies that manage to grow rapidly on a sustained basis without relying on natural-resource booms – as most of these countries have for a decade or more – typically do so through export-oriented industrialization. But few of these countries are experiencing much industrialization. The share of manufacturing in low-income Sub-Saharan countries is broadly stagnant – and in some cases declining. And despite much talk about "Make in India," one of Prime Minister Narendra Modi's catchphrases, the country shows little indication of rapid industrialization.

Manufacturing became a powerful escalator of economic development for low-income countries for three reasons. First, it was relatively easy to absorb technology from abroad and generate high-productivity jobs. Second, manufacturing jobs did not require much skill: farmers could be turned into production workers in factories with little investment in additional training. And, third, manufacturing demand was not constrained by low domestic incomes: production could expand virtually without limit, through exports.

But things have been changing. It is now well documented that manufacturing has become increasingly skill-intensive in recent decades. Along with globalization, this has made it very difficult for newcomers to break into world markets for manufacturing in a big way and replicate the experience of Asia's manufacturing superstars. Except for a handful of exporters, developing economies have been experiencing premature deindustrialization. It seems as if the escalator has been taken away from the lagging countries.

What, then, are we to make of the recent boom in some of the world's poorest countries? Have these countries a discovered a new growth model?

In recent research, Xinshen Diao of the International Food Policy Research Institute, Margaret McMillan of Tufts University, and I have looked at the growth patterns among this new crop of high-performing countries. Our focus is on the patterns of structural change these countries have experienced. We document a couple of paradoxical findings.


Second, rapid structural change in these countries has come at the expense of mostly negative labor productivity growth within non-agricultural sectors. In other words, even though the services that absorbed new employment exhibited relatively high productivity early on, their edge diminished as they expanded. This pattern contrasts sharply with the classic East Asian growth experience (such as in South Korea and China), in which structural change and gains in non-agricultural labor productivity both contributed strongly to overall growth.First, growth-promoting structural change has been significant in the recent experience of low-income countries such as Ethiopia, Malawi, Senegal, and Tanzania, despite the absence of industrialization. Labor has been moving from low-productivity agricultural activities to higher-productivity activities, but the latter are mostly services rather than manufacturing.

The difference seems to be explained by the fact that the expansion of urban, modern sectors in recent high-growth episodes is driven by domestic demand rather than export-oriented industrialization. In particular, the African model appears to be underpinned by positive aggregate demand shocks generated either by transfers from abroad or by productivity growth in agriculture.

In Ethiopia, for example, public investments in irrigation, transport, and power have produced a significant increase in agricultural productivity and incomes. This results in growth-promoting structural change, as increased demand spills over to non-agricultural sectors. But non-agricultural labor productivity is driven down as a by-product, as returns to capital diminish and less productive firms are drawn in.

This is not to downplay the significance of rapid productivity growth in agriculture, the archetypal traditional sector. Our research suggests that agriculture has played a key role in Africa not only on its own account, but also as a driver of growth-increasing structural change. Diversification into non-traditional products and adoption of new production techniques can transform agriculture into a quasi-modern activity.

But there are limits to how far this process can carry the economy. In part because of low income elasticity of demand for agricultural products, outflows of labor from agriculture are an inevitable outcome during the process of development. The labor that is released must be absorbed in modern activities. And if productivity is not growing in these modern sectors, economy-wide growth ultimately will stall. The contribution that the structural-change component can make is necessarily self-limiting if the modern sector does not experience rapid productivity growth on its own.

Low-income African countries can sustain moderate rates of productivity growth into the future, on the back of steady improvements in human capital and governance. Continued convergence with rich-country income levels seems achievable. But the evidence suggests that the growth rates brought about recently by rapid structural change are exceptional and may not last.

DANI RODRIK

Writing for PS since 1998 
136 Commentaries

Dani Rodrik is Professor of International Political Economy at Harvard University's John F. Kennedy School of Government. He is the author of The Globalization Paradox: Democracy and the Future of the World Economy and Economics Rules: The Rights and Wrongs of the Dismal Science. His newest book Straight Talk on Trade: Ideas for a Sane World Economy will be published in Fall 2017.

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When econ models potentially mislead, econ profs should say so [feedly]

When econ models potentially mislead, econ profs should say so
http://jaredbernsteinblog.com/when-econ-models-potentially-mislead-econ-profs-should-say-so/

Last week saw an interesting and revealing dustup in the tax debate. President Trump's economic council, headed by Kevin Hassett, released a piece claiming that the proposed corporate tax cut would immediately boost average household income by at least $4,000, a claim that was widely pilloried in the economics community. One of the authors of a paper CEA cited to defend their results claimed that the CEA misinterpreted their paper.

A particularly salient objection was the CEA's claim that the incidence of the corporate tax cut fell not just wholly on workers, but that their aggregate wage gains from the cut would be multiples of the revenue lost. Their paychecks would grow more—a lot more, as much as 500% more!—than the revenues lost to the cut.

That sounds wrong, but as Greg Mankiw points out, the direction of Hassett's result is consistent with a particular economic model (though even Greg's model doesn't get you the magnitudes Hassett claims). Mankiw was not per se defending Hassett, as much as teaching his students how to get a result like Hassett's by imposing standard assumptions common to such models. Greg's explanations, for the record, are lucid and instructive as always.

But, because the model he employs bears little resemblance to reality, his work does not provide information that would help someone answer the key question at hand. That is, Greg answers the question: is there an economic model that might defend Kevin's findings, at least directionally if not their magnitudes? Answer: yes.

Yet, the much more pressing question for people trying to decide if $200 billion a year in corporate tax cuts will help workers is: what's the real-world likelihood that corporate tax cuts will raise workers' wages anywhere near the amount Hassett claims?

As many, including myself, have stressed, the answer to that question is "very low." That's based on both theory and evidence. The historical record is unconvincing regarding corporate cuts leading to wage gains, and in most of the models used by the Joint Tax Committee and CBO, corporate tax cuts that aren't paid for lower GDP (relative to a baseline) and thus over time would reduce wages. Moreover, even if the wage effect ispositive, it is highly unlikely to be large enough to offset the future cuts in benefits (or, less likely, increase in taxes) needed to pay for the plan either now or, more likely, later.

The interesting economics question is why the model predicts such an unrealistic result for the US economy? Which of the assumptions most fail to comport with reality? To the extent that we want to train students to be useful practitioners as opposed to proficient, yet unrealistic, modelers, answering those questions would also provide some real educational value-added.

In this case, the model assumes that the US is a small, open economy such that capital inflows instantaneously fund more investment, such investment immediately boosts productivity, and the benefits of faster productivity immediately accrue to paychecks. The simple model ignores the extent to which these inflows would raise the trade deficit as well as their impact on revenue losses and higher budget deficits.

The model assumes away imperfect competition, which is relevant today as a) monopolistic concentration is an increasing problem, and b) the one thing economists agree on in this space is that in these cases, the benefits of the corporate cut flows to profits and shareholders, not workers, other than maybe some "rent sharing" with high-end workers.

Larry Summers made a great point about this: The modelling of Mankiw and others "illustrate why well-resourced, team-based institutions with a strong culture of attention to detail like the Congressional Budget Office, the GAO, the Joint Tax Committee Staff or the Tax Policy Center are so important." By "detail," I take him to mean an unbiased use of literature (unlike Hassett, who totally cherry-picked), and more important, an historical perspective. As many critics of the White House analysis have shown, corporate tax cuts never come close to the wage impacts Hassett claims and Mankiw's modelling supports. Real modelers analyzing real policy proposals must reference real empirical results, and not just the ones that go their way.

This all points to a bigger problem with contemporary economics, particularly as it is deployed in DC debates. A well-placed, highly-pedigreed economist (Hassett) makes an implausible claim, one that is likely to impose great costs on our fiscal outlook and on those who will ultimately pay the cost of the cuts (likely through spending cuts). Sure enough, his claims can be and are, if not defended, then apparently corroborated, by an economic model, in this case by other highly pedigreed economists.

This is lovely development from the perspective of the politicians and their donors who crave these high-end tax cuts. All they need is some "analysis," regardless of how cherry-picked, and a little backup from other erudite economists saying "under certain conditions, yeah…this could happen."

They—those other erudite economists—shouldn't do that. That is, unless they too have a thumb on the scale, they should be explicit about how applicable the model is to the real world, and whether the assumptions it violates are germane to policy makers (Krugman does so here; Furman here). To do otherwise may seem neutral in the analytic community, but in the hurly-burly of political economy, it's an egregious omission, one with the potential to mislead policy makers and, once the tax cuts fail to generate the result predicted by the model, reduce the trustworthiness of economic analysis.

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