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Article Artículo

Contrary to What You Read in the WaPo, Weather Actually Sped Growth in First Quarter

The Washington Post's article on first quarter GDP growth wrongly told readers that unusually warm weather slowed GDP growth in the first quarter. The rationale was that this lead to a decline in the use of electricity and heating compared with a normal winter, which meant less output. While I noted this fact in my own write-up of the GDP report, the drop in energy usage was more than offset by an increase in construction that was made possible by the mild weather.

Residency and non-residency construction rose at 13.7 percent and 22.1 percent annual rates, respectively. The former increase added 0.5 percentage points to the quarter's growth rate, while the latter added 0.55 percentage points. By contrast, the drop utility usage likely lowered growth by around 0.4 percentage points. (The release lumps it in with housing consumption, so it does not provide a direct measure.) This means that on net, good weather was almost certainly a net positive even before considering its impact on restaurant spending and other forms of consumption.

The major anomaly in the first quarter data was the slow pace of inventory accumulation, which subtracted 0.93 percentage points from growth. Pulling out inventories, the growth in final demand was 1.6 percent in the first quarter which is very much in line with the 2.0 percent average annual growth rate for the last six years.

CEPR / April 29, 2017

Article Artículo

More on Free Trade in Doctors: Response to Simon Lester

Simon Lester took the time to write a thoughtful response to my often repeated complaint that we don't have free trade in doctors. The gist of his response is that trade liberalization usually results from the other party demanding more access to U.S. markets. In the case of doctors, we don't generally have foreign countries demanding that we make it easier for their doctors to practice in the United States, therefore there is little pressure to have liberalization.

A friend asked for my response, which I thought I would share below. Before getting to this, let me just respond again to a widely repeated complaint, that liberalization of professional services would lead to brain drain from the developing world.

As I always point out, we can easily compensate developing countries for the loss of the doctors and other professionals they train. We can provide enough money to train two or three doctors for every one that comes here and still be way ahead.

I realize that many people don't like this idea, but this seems more a matter of religion that anything based in the world. As it is, we already get many doctors and other professionals from developing countries and their home countries get zero by way of compensation. I am proposing a route that might double or triple the flow from the developing world, but provide compensation. In almost all cases I suspect that developing countries would come out way ahead in this story.

Anyhow, the response is below.

CEPR / April 29, 2017

Article Artículo

The Trump Tax Cuts and the Which Way Is Up Problem in Economics

Much of the response to the tax cutting plans of Donald Trump shows us yet another illustration of the "which way is up?" problem in economics. The point is that economists can't even seem to agree on the most basic issues about the economy and the problems we now face.

I usually use the "which way is up?" problem to refer to the people who warn us about robots taking all the jobs. This is a theme that gets lots of air time in the media and is supposed to have us all very worried. There are two huge flaws in the story.

The first is that the robots taking all the jobs story is one of incredible abundance. It's one where we can have all the goods and services that we could want and not have to work for them. We should all be getting big pay increases and large cuts in hours. This will be just fine, since the robots will produce the goods and services that we want to buy with our larger paychecks.

There are slightly more sophisticated stories that can be told about the robots taking our jobs, but these don't really make the cut either. One is that robots only take the jobs of less-educated people. This is certainly not true as a matter of logic. Why can't robots do brain surgery? Is there any reason to think diagnostic software can't replace many doctors? There is no reason a priori to assume that robots and artificial intelligence will have more impact on the demand for workers with less education than workers with more education. And, the efforts to show empirically that this has been the case don't fly.

The other more sophisticated version of the robots taking all the jobs story is that it is a distributional issue, with money going from the people who work to the people who own the robots. The problem with this story is that people are able to own robots because the government gives them patent and copyright monopolies. If we are concerned about too much upward redistribution to robot owners, we can just make these monopolies shorter and weaker. This is not some huge technological problem confronting humanity, it is a problem of overly restrictive intellectual property rights.

CEPR / April 28, 2017

Article Artículo

Donald Trump's Big Tax Cut…For Himself

According to press accounts, Donald Trump seems prepared to put out a tax cut proposal that could net him hundreds of millions of dollars over the next decade. It probably won't do much to help the rest of us, but folks who were worried about whether President Trump would be able to pay off his debts should be relieved.

Here's the basic story. The word is that the Trump tax plan will include two measures that will personally help Trump enormously. The first is eliminating the alternative minimum tax. This is a special tax that is put in the tax code to ensure that people are not able to use loopholes to escape their tax liability altogether. The rate for very high income people like Donald Trump is 28 percent. 

The second special benefit for Mr. Trump is allowing individuals to pay the newly lowered 15 percent corporate income tax on income received through pass-through corporations. The idea of a pass-through corporation is a neat concept in itself.

The government grants the benefits of corporate status as a mechanism to promote wealth accumulation. Corporate status includes a variety of benefits, but first and foremost it gives you limited liability. This means that if you do something incredibly stupid that results in enormous harm to large numbers of people (e.g. producing a drug that leads to birth defects), the corporation is liable only to the extent it has assets. The individual shareholders are off the hook. In other words, they don't have to worry about losing their homes and their retirement accounts to cover the damage their company has inflicted on people.

In the good old days, before the focus of economic policy was giving ever more money to the rich, the quid pro quo for corporate status was paying the corporate income tax. In this sense, the corporate income tax is a completely voluntary tax. Anyone is free to organize a company as a partnership in which the owners do have personal liability, and thereby avoid the corporate income tax completely.

CEPR / April 26, 2017