Bernie Sanders, Wealth, and the Washington Post Fact Checker

October 04, 2017

04 Octubre 2017

Earlier this week the Washington Post Fact Checker gave three Pinocchios to Bernie Sanders for saying that the world's six richest people had more wealth than the bottom half. Several people contacted me to complain about the piece. I had originally intended to let it pass because I actually agree with many of the criticisms, but on second thought, this piece applies a level of scrutiny that it never does to claims of other politicians or its own editorial page. First, I'll make a few quick points on wealth as a measure on inequality. Wealth can fluctuate enormously and often for reasons that really don't tell us much about inequality. When the stock market fell by 50 percent between the bubble peak in 2000 and the trough in 2002 did we become a much more equal society? Asset prices, and therefore wealth, fluctuate inversely with interest rates. In fact, with bond prices the inverse relationship is definitional. If the interest on 10-year treasury bonds doubles from 2.2 percent to 4.4 percent (roughly its pre-recession level), will the implied plunge in bond prices mean we are more equal? Also, as the piece points out, the world's poorest people by this measure are not those who are starving and homeless in the developing world, but rather recent graduates of Harvard med school and business school who took out large amounts of debt to pay for their education. I'm afraid I can't shed many tears for these folks. Finally, what counts as wealth is hugely arbitrary. In the good old days, many workers had defined benefit pensions that helped support them in retirement. At least in the private sector these have been mostly replaced with 401(k) plans and other defined contribution retirement plans. A defined benefit pension would not show up in most measures of wealth whereas a defined contribution pension would. This means we would count someone with $50,000 in a 401(k) plan as having more wealth than someone who would get $30,000 a year in retirement until they die from their pension. That makes no sense.

Paul Krugman Won't Give Paul Ryan Credit for Wanting to Eliminate the Federal Government

By CEPRCEPR

October 03, 2017

03 Octubre 2017

Paul Krugman again went after Paul Ryan for the lack of specifics in his proposals for eliminating the national debt. As he reminds us, centrist commentators widely praised these proposals at the time as serious budget plans.

While Krugman is absolutely right on the tax side (Ryan says that he will offset lower tax rates by eliminating unspecified tax loopholes), he should give Ryan credit for what he actually proposes on the spending side. As I have pointed out elsewhere, Ryan has essentially proposed eliminating the federal government other than Social Security, Medicare and other health programs, and the military.

“This fact can be found in the Congressional Budget Office’s (CBO) analysis of Ryan’s budget (page 16, Table 2). The analysis shows Ryan’s budget shrinking everything other than Social Security and Medicare and other health care programs to 3.5 percent of GDP by 2050. This is roughly the current size of the military budget, which Ryan has indicated he wants to increase. That leaves zero for everything else.

“Included in everything else is the Justice Department, the National Park System, the State Department, the Department of Education, the Food and Drug Administration, Food Stamps, the National Institutes of Health, and just about everything else that the government does. Just to be clear, CBO did this analysis under Ryan’s supervision. He never indicated any displeasure with its assessment. In fact he boasted about the fact that CBO showed his budget paying off the national debt.”

So the Washington press corps favorite thoughtful conservative wants to get rid of almost the entire federal government. Let’s give Mr. Ryan credit for what he is proposing. It is specific, it just happens to be crazy.

Paul Krugman again went after Paul Ryan for the lack of specifics in his proposals for eliminating the national debt. As he reminds us, centrist commentators widely praised these proposals at the time as serious budget plans.

While Krugman is absolutely right on the tax side (Ryan says that he will offset lower tax rates by eliminating unspecified tax loopholes), he should give Ryan credit for what he actually proposes on the spending side. As I have pointed out elsewhere, Ryan has essentially proposed eliminating the federal government other than Social Security, Medicare and other health programs, and the military.

“This fact can be found in the Congressional Budget Office’s (CBO) analysis of Ryan’s budget (page 16, Table 2). The analysis shows Ryan’s budget shrinking everything other than Social Security and Medicare and other health care programs to 3.5 percent of GDP by 2050. This is roughly the current size of the military budget, which Ryan has indicated he wants to increase. That leaves zero for everything else.

“Included in everything else is the Justice Department, the National Park System, the State Department, the Department of Education, the Food and Drug Administration, Food Stamps, the National Institutes of Health, and just about everything else that the government does. Just to be clear, CBO did this analysis under Ryan’s supervision. He never indicated any displeasure with its assessment. In fact he boasted about the fact that CBO showed his budget paying off the national debt.”

So the Washington press corps favorite thoughtful conservative wants to get rid of almost the entire federal government. Let’s give Mr. Ryan credit for what he is proposing. It is specific, it just happens to be crazy.

Roger Cohen's Lecture to Catalan's Populists Suffers from Bad Arithmetic

By CEPRCEPR

October 03, 2017

03 Octubre 2017

Roger Cohen showed us yet again that it seems our children aren't learning when it comes to basic arithmetic skills. He used his NYT column to lecture the people of Catalan on their bad manners in seeking to become independent of Spain over the objections of both the national government and the European Union. "The Catalan lurch is of its time. Yes, it’s about Catalan self-determination. But it’s also of a piece with the anti-establishment, anti-elitist, disruption-at-any-cost upheavals that have been buffeting and undermining the postwar liberal order in Europe."Of course, it’s precisely that order — embodied in the European Union and by the presence of the United States as an offsetting power in Europe — that over the past four decades has ushered Spain, and Catalonia within it, to a degree of prosperity and democratic stability unimaginable at Franco’s death. Spain is a poster child for European integration. So, of course, is Catalonia."But we have entered the Age of Amnesia." So Cohen says that the European Union and the current world order have ushered in a period of unimaginable prosperity for Catalan and Spain, but the dumb masses just can't remember how bad things were in the bad old days because of their amnesia. Well, let's check the numbers.

The Decline of the Center Left: No Happy Face for the Financial Industry

By CEPRCEPR

October 02, 2017

02 Octubre 2017

The NYT had an interesting piece by Sheri Berman on the decline of the center-left in Europe. It points to the sharp drop in the support for social democratic parties across the continent, with many parties that used to lead government barely getting above 20 percent of the vote. Voters apparently see little reason to support these parties. A similar story could be told about the center-left in the United States, although the money they command may allow them to still control the Democratic Party.

To carry her observations a bit further, these center-left parties have been largely complicit in the policies that have redistributed income upward over the last four decades. Tony Blair in the U.K., Gerhard Schroeder, and Bill Clinton were all associated with policies that benefited the financial industry at the expense of the rest of society.

The center-left parties have all been supportive of longer and stronger patent and copyright monopolies, which give money to Bill Gates and other incredibly rich people, as well as more educated workers generally, at the expense of workers with less education who would provide the traditional base for center-left parties. These parties, especially the Democrats under Clinton, supported trade deals which were designed to redistribute income from less-educated workers to capital and the most highly educated workers.

And, these parties have generally supported fiscal and monetary policies that have had the effect of keeping unemployment high in order to minimize the risk of inflation. By reducing workers’ bargaining power, these policies have put downward pressure on the wages of the bulk of the workforce. (Yes, these points and more are covered in my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

Anyhow, it is not surprising that workers will not support political parties that are committed to taking money out of their pockets and giving it to the rich. If this continues to be the agenda of center-left parties, they are not likely to have much of a future.

The NYT had an interesting piece by Sheri Berman on the decline of the center-left in Europe. It points to the sharp drop in the support for social democratic parties across the continent, with many parties that used to lead government barely getting above 20 percent of the vote. Voters apparently see little reason to support these parties. A similar story could be told about the center-left in the United States, although the money they command may allow them to still control the Democratic Party.

To carry her observations a bit further, these center-left parties have been largely complicit in the policies that have redistributed income upward over the last four decades. Tony Blair in the U.K., Gerhard Schroeder, and Bill Clinton were all associated with policies that benefited the financial industry at the expense of the rest of society.

The center-left parties have all been supportive of longer and stronger patent and copyright monopolies, which give money to Bill Gates and other incredibly rich people, as well as more educated workers generally, at the expense of workers with less education who would provide the traditional base for center-left parties. These parties, especially the Democrats under Clinton, supported trade deals which were designed to redistribute income from less-educated workers to capital and the most highly educated workers.

And, these parties have generally supported fiscal and monetary policies that have had the effect of keeping unemployment high in order to minimize the risk of inflation. By reducing workers’ bargaining power, these policies have put downward pressure on the wages of the bulk of the workforce. (Yes, these points and more are covered in my [free] book Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.)

Anyhow, it is not surprising that workers will not support political parties that are committed to taking money out of their pockets and giving it to the rich. If this continues to be the agenda of center-left parties, they are not likely to have much of a future.

• WorkersSector del trabajo

If Uber Leaves Due to Regulations, More Competent Companies Will Take Its Place

By CEPRCEPR

October 01, 2017

01 Octubre 2017

A NYT article on the debate in Europe over regulating Uber and other “gig economy” companies raised the possibility that Uber may stop doing business in the United Kingdom if it was required to treat its workers as employees:

“If the ruling is upheld [that Uber workers are employees], it could hit the business model on which Uber, Deliveroo and similar online platforms rely. That may mean a major recalibration of the gig economy, or it may drive companies out of those countries which choose to impose stiffer regulation.

“Outside Europe, there have been signs of that happening: Uber threatened to leave Quebec this month if the government there pressed ahead with tougher standards for drivers.”

While the article implies that the departure of Uber would be a bad outcome for the people of the United Kingdom and Quebec there is no reason to think this is the case unless they happen to be large holders of Uber stock. There are plenty of other companies that apparently are better able to deal with regulations than Uber. They would presumably fill any gap created by Uber’s departure.

We saw this last year when Austin imposed a law requiring that drivers for services like Uber and Lyft be finger-printed, just like other taxi drivers. The two companies sponsored a ballot initiative in the city and spend a huge amount of money pushing their opposition to fingerprinting. They also threatened to leave if the initiative failed.

The initiative was defeated and both companies stopped serving the city. The gap created was quickly filled by a number of start-ups that apparently were able to deal with the fingerprinting requirement. (Uber then lobbied the Texas legislature to have the Austin rule overturned.) Anyhow, the prospect of Uber ending its operations in an area should be seen an opportunity for local start-ups, not a threat.

Note: An earlier version of this post said that Uber CEO Dara Koshrowshahi was on the board of the NYT. He resigned this position on September 7th.

A NYT article on the debate in Europe over regulating Uber and other “gig economy” companies raised the possibility that Uber may stop doing business in the United Kingdom if it was required to treat its workers as employees:

“If the ruling is upheld [that Uber workers are employees], it could hit the business model on which Uber, Deliveroo and similar online platforms rely. That may mean a major recalibration of the gig economy, or it may drive companies out of those countries which choose to impose stiffer regulation.

“Outside Europe, there have been signs of that happening: Uber threatened to leave Quebec this month if the government there pressed ahead with tougher standards for drivers.”

While the article implies that the departure of Uber would be a bad outcome for the people of the United Kingdom and Quebec there is no reason to think this is the case unless they happen to be large holders of Uber stock. There are plenty of other companies that apparently are better able to deal with regulations than Uber. They would presumably fill any gap created by Uber’s departure.

We saw this last year when Austin imposed a law requiring that drivers for services like Uber and Lyft be finger-printed, just like other taxi drivers. The two companies sponsored a ballot initiative in the city and spend a huge amount of money pushing their opposition to fingerprinting. They also threatened to leave if the initiative failed.

The initiative was defeated and both companies stopped serving the city. The gap created was quickly filled by a number of start-ups that apparently were able to deal with the fingerprinting requirement. (Uber then lobbied the Texas legislature to have the Austin rule overturned.) Anyhow, the prospect of Uber ending its operations in an area should be seen an opportunity for local start-ups, not a threat.

Note: An earlier version of this post said that Uber CEO Dara Koshrowshahi was on the board of the NYT. He resigned this position on September 7th.

Republicans Condemn Their Leadership for Lack of Details in Tax Plan

By CEPRCEPR

September 30, 2017

30 Septiembre 2017

This is in effect what they did when they criticized an analysis of the proposal by the non-partisan Tax Policy Center. An NYT article on the analysis, which showed the plan would lead to massive tax breaks for the wealthy and a large increase in the deficit, referred to the Republican response:

“Republicans quickly dismissed the analysis, saying the tax cut framework needs detail before it can be accurately assessed. A nine-page proposal for a tax overhaul, announced by Mr. Trump and Republican leaders in Congress on Wednesday, did not include income levels for its three personal income brackets. It left the door open to a fourth level of taxation for high-income taxpayers, and it did not specify the size of an enhanced child tax credit.

“‘This analysis is based on guesswork and biased assumptions designed to promote the authors’ point of view — rather actual detail from a bill that has not yet been written by the committees,’ said Antonia Ferrier, a spokeswoman for Senator Mitch McConnell of Kentucky, the majority leader.”

The claim that there is not yet enough information available to evaluate the plan is incredibly damning to the Republican leadership who crafted it. They spent months working on the plan. As their comment indicates, there are still important aspects of the plan that need to be filled in.

This should warrant a separate article telling readers what the Republicans were doing when they were supposed to be working on their tax plan. If the idea is that they will just decide major aspects of the tax plan in the last days before Congress votes (they plan to vote this fall) then it means they intend to put in place major changes in the U.S. tax code in a way that doesn’t allow for serious public debate. This fact deserves attention.

This is in effect what they did when they criticized an analysis of the proposal by the non-partisan Tax Policy Center. An NYT article on the analysis, which showed the plan would lead to massive tax breaks for the wealthy and a large increase in the deficit, referred to the Republican response:

“Republicans quickly dismissed the analysis, saying the tax cut framework needs detail before it can be accurately assessed. A nine-page proposal for a tax overhaul, announced by Mr. Trump and Republican leaders in Congress on Wednesday, did not include income levels for its three personal income brackets. It left the door open to a fourth level of taxation for high-income taxpayers, and it did not specify the size of an enhanced child tax credit.

“‘This analysis is based on guesswork and biased assumptions designed to promote the authors’ point of view — rather actual detail from a bill that has not yet been written by the committees,’ said Antonia Ferrier, a spokeswoman for Senator Mitch McConnell of Kentucky, the majority leader.”

The claim that there is not yet enough information available to evaluate the plan is incredibly damning to the Republican leadership who crafted it. They spent months working on the plan. As their comment indicates, there are still important aspects of the plan that need to be filled in.

This should warrant a separate article telling readers what the Republicans were doing when they were supposed to be working on their tax plan. If the idea is that they will just decide major aspects of the tax plan in the last days before Congress votes (they plan to vote this fall) then it means they intend to put in place major changes in the U.S. tax code in a way that doesn’t allow for serious public debate. This fact deserves attention.

Economics 101 for Bret Stephens

By CEPRCEPR

September 30, 2017

30 Septiembre 2017

We know the NYT has to practice affirmative action for conservative columnists. Otherwise, they would never have any on their opinion pages, but they might have gone too far with Bret Stephens. The guy apparently knows literally nothing about the economy and is so ignorant he doesn’t even know how little he knows.

In his latest column he touts the good economic news under Donald Trump:

“The Dow keeps hitting record highs, and the economy is finally growing above the 3 percent mark.”

This is meant to say that things are going great for the country. The new highs in the stock market are good news for the roughly 25 percent of the country that holds substantial amounts of stock. For the rest of the country, they make less difference than the outcome of this Sunday’s football games.

As fans of Econ 101 know, the stock market is a measure of expected future profits, that is when it is not in a bubble driven by irrational exuberance. So the current expectation is that after-tax corporate profits will be a larger share of future income. That’s great news for large shareholders. And guess where those larger expected profits will come from? Are you celebrating yet?

The second part of this sentence is perhaps even worse than the first part. “The economy is finally growing above the 3 percent mark.” No, the economy is not growing above the 3 percent mark, we had one quarter of growth above the 3.1 percent mark. We have had many quarters of growth above the 3.0 percent mark in this recovery.

fredgraph18

Economic growth tends to fluctuate quarter by quarter. Those old enough to remember will recall that growth in the first quarter was just 1.2 percent. That explains part of the stronger growth in the current quarter, as weak sales of durable goods in the first quarter led to strong growth in sales in the second quarter.

Anyhow, Stephens apparently seems to think that the 3.1 percent growth in the second quarter implies that the economy is now on a growth path of above 3.0 percent. If there is any economist who agrees with this assessment, they are keeping a very low profile. For what it’s worth, the most recent projection for third quarter GDP, based on the data we have to date, is 2.3 percent.

Note: An earlier version put the 3.1 percent growth as being in the third quarter. This was reported GDP for the second quarter. Thanks to Boris Soroker.

We know the NYT has to practice affirmative action for conservative columnists. Otherwise, they would never have any on their opinion pages, but they might have gone too far with Bret Stephens. The guy apparently knows literally nothing about the economy and is so ignorant he doesn’t even know how little he knows.

In his latest column he touts the good economic news under Donald Trump:

“The Dow keeps hitting record highs, and the economy is finally growing above the 3 percent mark.”

This is meant to say that things are going great for the country. The new highs in the stock market are good news for the roughly 25 percent of the country that holds substantial amounts of stock. For the rest of the country, they make less difference than the outcome of this Sunday’s football games.

As fans of Econ 101 know, the stock market is a measure of expected future profits, that is when it is not in a bubble driven by irrational exuberance. So the current expectation is that after-tax corporate profits will be a larger share of future income. That’s great news for large shareholders. And guess where those larger expected profits will come from? Are you celebrating yet?

The second part of this sentence is perhaps even worse than the first part. “The economy is finally growing above the 3 percent mark.” No, the economy is not growing above the 3 percent mark, we had one quarter of growth above the 3.1 percent mark. We have had many quarters of growth above the 3.0 percent mark in this recovery.

fredgraph18

Economic growth tends to fluctuate quarter by quarter. Those old enough to remember will recall that growth in the first quarter was just 1.2 percent. That explains part of the stronger growth in the current quarter, as weak sales of durable goods in the first quarter led to strong growth in sales in the second quarter.

Anyhow, Stephens apparently seems to think that the 3.1 percent growth in the second quarter implies that the economy is now on a growth path of above 3.0 percent. If there is any economist who agrees with this assessment, they are keeping a very low profile. For what it’s worth, the most recent projection for third quarter GDP, based on the data we have to date, is 2.3 percent.

Note: An earlier version put the 3.1 percent growth as being in the third quarter. This was reported GDP for the second quarter. Thanks to Boris Soroker.

Promoting the TPP as an Anti-China Pact: The Flavor of the Month

By CEPRCEPR

September 29, 2017

29 Septiembre 2017

In elite circles you are supposed to be for anything called a “free trade” agreement, otherwise, people will call you names. And names really hurt highly educated people. This is why most highly educated people supported the Trans-Pacific Partnership (TPP), even though they had no clue what was in it. As NYT columnist Thomas Friedman famously said:

“I was speaking out in Minnesota — my hometown, in fact — and a guy stood up in the audience, said, ‘Mr. Friedman, is there any free trade agreement you’d oppose?’ I said, ‘No, absolutely not.’ I said, ‘You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.'”

The rationale given for the TPP has constantly shifted in response to the political climate. It was originally pushed for its economic benefits in terms of more growth and jobs. However, no serious analysis could show anything other than trivial benefits for the economy.

While removing trade barriers might generally be good for growth, there are relatively few barriers remaining between the United States and the other eleven countries in the TPP. It already has trade agreements with six of these countries.

In fact, the TPP actually increases protectionist barriers in the form of longer and stronger patent and copyright and related protections. For some reason, the economic analyses don’t include the negative effects of increasing these protections, even though their impact on the prices of the affected products, most importantly prescription drugs, dwarfs the impact of lowering a tariff of one or two percentage points to zero.

Since economics won’t sell the TPP, the alternative is to make it a geo-political pact, with the main target being China. The NYT goes this route with an article that tweaks Donald Trump for his opposition to the TPP.

“Faced with such an enemy, one might imagine the United States would gather allies in a concerted effort to contain China’s mercantilist ambitions. Except that Mr. Trump, in one of his earliest actions, revoked American participation in the Trans-Pacific Partnership, a pact promoted by his predecessor as a means of doing precisely that. He walked away while extracting no discernible benefits from China.”

The main problem with seeing the TPP as a pact designed as a weapon against China is that it doesn’t seem to have been designed that way. Most obviously, the rules of origin (ROO) provisions, which determine which items can benefit from the preferential treatment provided by the TPP, are extremely weak. For example, the ROO in the TPP require originating content of between 45 percent and 55 percent for vehicles and engines and some other car parts. For most parts, the requirement is between 35 and 45 percent. These TPP ROO are considerably weaker than the ones in NAFTA, which required 62.5 percent content from the countries in the agreement.

This matters in reference to China since China is likely to be the main provider of inputs from countries outside the pact. This means that for some car parts, China can legally provide 65 percent of the value, and still get favorable treatment through the TPP. Given the ability of companies to fudge numbers presented to customs agents, we can envision the share of Chinese content rising to 70 or 75 percent, and still getting preferential treatment under the TPP. This doesn’t sound like a pact designed in opposition to China.

In elite circles you are supposed to be for anything called a “free trade” agreement, otherwise, people will call you names. And names really hurt highly educated people. This is why most highly educated people supported the Trans-Pacific Partnership (TPP), even though they had no clue what was in it. As NYT columnist Thomas Friedman famously said:

“I was speaking out in Minnesota — my hometown, in fact — and a guy stood up in the audience, said, ‘Mr. Friedman, is there any free trade agreement you’d oppose?’ I said, ‘No, absolutely not.’ I said, ‘You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.'”

The rationale given for the TPP has constantly shifted in response to the political climate. It was originally pushed for its economic benefits in terms of more growth and jobs. However, no serious analysis could show anything other than trivial benefits for the economy.

While removing trade barriers might generally be good for growth, there are relatively few barriers remaining between the United States and the other eleven countries in the TPP. It already has trade agreements with six of these countries.

In fact, the TPP actually increases protectionist barriers in the form of longer and stronger patent and copyright and related protections. For some reason, the economic analyses don’t include the negative effects of increasing these protections, even though their impact on the prices of the affected products, most importantly prescription drugs, dwarfs the impact of lowering a tariff of one or two percentage points to zero.

Since economics won’t sell the TPP, the alternative is to make it a geo-political pact, with the main target being China. The NYT goes this route with an article that tweaks Donald Trump for his opposition to the TPP.

“Faced with such an enemy, one might imagine the United States would gather allies in a concerted effort to contain China’s mercantilist ambitions. Except that Mr. Trump, in one of his earliest actions, revoked American participation in the Trans-Pacific Partnership, a pact promoted by his predecessor as a means of doing precisely that. He walked away while extracting no discernible benefits from China.”

The main problem with seeing the TPP as a pact designed as a weapon against China is that it doesn’t seem to have been designed that way. Most obviously, the rules of origin (ROO) provisions, which determine which items can benefit from the preferential treatment provided by the TPP, are extremely weak. For example, the ROO in the TPP require originating content of between 45 percent and 55 percent for vehicles and engines and some other car parts. For most parts, the requirement is between 35 and 45 percent. These TPP ROO are considerably weaker than the ones in NAFTA, which required 62.5 percent content from the countries in the agreement.

This matters in reference to China since China is likely to be the main provider of inputs from countries outside the pact. This means that for some car parts, China can legally provide 65 percent of the value, and still get favorable treatment through the TPP. Given the ability of companies to fudge numbers presented to customs agents, we can envision the share of Chinese content rising to 70 or 75 percent, and still getting preferential treatment under the TPP. This doesn’t sound like a pact designed in opposition to China.

Inflation Falls Yet Again

By CEPRCEPR

September 29, 2017

29 Septiembre 2017

The Fed has been raising interest rates for the last 21 months with the idea that it wanted to slow growth in order to prevent inflation. It has now begun the process of selling off assets, which will also have the effect of raising interest rates and slowing growth.

While the need to slow growth is premised on the fear that inflation will rise to a higher than the desired rate, the data refuse to cooperate. The Bureau of Economic Analysis released data for the personal consumption expenditure deflator (PCE) this morning. The year over year rate of inflation in the core PCE, which is the focus of the Fed, fell to 1.3 percent, from 1.4 percent in July. (The annualized rate for the last three months compared to the prior three months was slightly higher at 1.4 percent.)

Anyhow, it is difficult to see any basis for the Fed’s concern that the inflation rate will exceed its target of a 2.0 percent average rate. At least for now, it is going in the wrong direction.

The Fed has been raising interest rates for the last 21 months with the idea that it wanted to slow growth in order to prevent inflation. It has now begun the process of selling off assets, which will also have the effect of raising interest rates and slowing growth.

While the need to slow growth is premised on the fear that inflation will rise to a higher than the desired rate, the data refuse to cooperate. The Bureau of Economic Analysis released data for the personal consumption expenditure deflator (PCE) this morning. The year over year rate of inflation in the core PCE, which is the focus of the Fed, fell to 1.3 percent, from 1.4 percent in July. (The annualized rate for the last three months compared to the prior three months was slightly higher at 1.4 percent.)

Anyhow, it is difficult to see any basis for the Fed’s concern that the inflation rate will exceed its target of a 2.0 percent average rate. At least for now, it is going in the wrong direction.

We Really Don't Have to Worry About Fairness for Pass-Through Businesses

By CEPRCEPR

September 29, 2017

29 Septiembre 2017

Neil Irwin seems to get a bit lost in his concerns about treating owners of pass-through businesses fairly. His NYT Upshot column argues that there is a problem where we are left with a choice between large-scale evasion, treating them unfairly, and micro-monitoring their behavior. The story is actually far simpler than he presents it. The basic story is that the tax rate on a pass-through business is zero. The business itself pays no taxes, all its income is passed on to its owner(s) to be taxed at the individual rate. As it stands now, the income from pass-through businesses is treated as ordinary income and taxed at the same rate as labor income. The Republicans are proposing to put a cap on the tax for income from pass-through businesses at 25 percent. This means that high-income people who own pass-through businesses will be able to pay taxes at a 10 percentage point lower rate than the 35 percent top marginal rate they are proposing. (The savings are 14.6 percentage points compared to the current 39.6 percent top marginal tax rate.) Irwin correctly points out that this gap will be an invitation for every high-end earner to set up a pass-through business so that they can pay a 25 percent tax rate on their income rather than a 35 percent rate. Treasury Secretary Mnunchin has noted this problem but said that the I.R.S. will scrutinize pass-through corporations to prevent this sort of scamming. (Mnuchin's claim must be taken with a continent worth of salt. The Republicans have worked for the last two decades to do everything they can to weaken the I.R.S.'s enforcement powers.) While Irwin recognizes the incentive this structure creates for gaming and also the difficulty of enforcement, he seems to accept that there is some inequity that the lower tax rate on pass-through income would address. This is not true. Irwin is concerned that genuine pass-through income is income from capital, which we tax at a lower rate than income from labor. The current maximum tax rate on dividends and capital gains is 20 percent, compared to the rate of 39.6 percent on labor income. He argues that by taxing pass-through income at the rate on ordinary income we would be imposing too high a rate on the capital income from these companies.