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Article Artículo

Economic Growth

United States

Workers

President Trump Will be Boasting About the Yellen–Obama Economy

It is virtually certain that Donald Trump will devote much of his State of the Union Address to boasting about the economy. And there is something to boast about there: the economy is looking better by most measures than it has since 2001. However, he has had almost nothing to do with the economy’s performance to date. What we have seen in the last year is a continuation of trends that were in place for the prior six years.

To take a few examples, we created an average of 171,000 jobs a month in 2017. That is down from 187,000 a month in 2016, and 226,000 a month in 2015. This brought the unemployment rate down to 4.1 percent at the end of 2017, compared to 4.7 percent at the end of 2016. The unemployment rate has been on a consistent downward path since it was at 9.8 percent in November of 2010 (roughly a drop of 0.8 percentage points a year), so the decline in 2017 is not any kind of break from the prior pattern.

Dean Baker / January 30, 2018

Article Artículo

The Money New York Would Save Workers with a Payroll Tax

An important provision of the new federal tax code was the capping of the deduction for state and local taxes at $10,000. This was an explicit hit at states like New York and California, which have relatively high tax rates in order to provide relatively high-quality services in areas like education and health care. These states also tend to vote Democratic in national elections.

One way that these states can partially get around this cap is by replacing a portion of the state income tax with an employer-side payroll tax. This can be in such a way that almost no one would end up paying more in state taxes, but they would effectively be able to still deduct their taxes from their federal income taxes.

The way a payroll tax works is that an employer pays it on the worker's wage. If a worker gets paid $50,000 a year and we impose a 5 percent employer-side payroll tax, then the employer would pay $2,500 on this worker's pay.

Economists generally believe that employer-side payroll taxes come out of wages. Employers don't care whether they have to pay the money to the worker or to the government, they will pay the same amount in either case. (To make the transition as easy as possible, it should be done in two or three steps, which would mean that workers would more likely be foregoing pay increases rather than looking at actual cuts in pay.)

In this case, the new payroll tax would lead to a reduction in this worker's pay of $2,500 to $47,500. But if the worker had been paying 5 percent of their wage to the state income taxes, they are in the exact same position as they had been in previously. They have $47,500 income after the money paid to the state in taxes.

The big difference comes when they pay their federal income tax. If they getting paid $50,000 and are unable to deduct their state taxes from their income, they will pay federal taxes on the full $50,000. However, with the employer side payroll tax, they will only pay income tax on the $47,500 they get paid by their employer. This will save them from paying income tax on $2,500 and also Social Security and Medicare taxes on this money.

CEPR / January 28, 2018

Article Artículo

Mnuchin Is Not Wrong: Secular Stagnation and the Value of the Dollar

A couple of days ago, Treasury Secretary Steven Mnuchin touched off a firestorm by saying something that is obviously true. He said that a lower-valued dollar would reduce the trade deficit. 

As I pointed out yesterday, this is based on the radical concept of downward sloping demand curves. The idea is that when the dollar falls in value relative to other currencies, it makes goods and services produced in the United States cheaper for people living in other countries. This means that they will buy more of our exports.

On the other side, a lower-valued dollar means that we will pay more for imports. This means that we would buy fewer goods and services from other countries and instead buy domestically produced goods and services.

With fewer imports and more exports, we have a smaller trade deficit. It's all pretty straightforward. But for some reason, Mnuchin's comments prompted widespread outrage, with former Treasury Secretary Larry Summers leading the charge.

For the most part, the complaints don't make much sense (yeah, a lower-valued dollar raises the price of imports — that's the point), but one of the central lines seems to be the idea that the Treasury Secretary is not supposed to try to talk down the value of the dollar. I'm not sure where that appears in the Constitution, but others have violated this sacred principle.

For example, Lloyd Bentsen, one of Summers' predecessors as Treasury Secretary in the Clinton administration, quite openly suggested that the US would benefit from a lower-valued dollar. Going back a little further, James Baker, who was Treasury Secretary during the Reagan administration, negotiated a decline in the value of the dollar with our major trading partners in the 1985 Plaza Accord. In short, the idea that the Treasury secretary has some obligation to blather about the virtues of a "strong dollar" has no basis in either economics or history.

CEPR / January 26, 2018