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Article Artículo

Reconciling the Dow and the Dollar

Landon Thomas Jr. had an NYT piece noting the peculiar divergence between the stock market, which has risen sharply since Donald Trump's election and the dollar, which has fallen. The article claims this is peculiar since both tend to move in the same direction, rising in a strong economy and falling in a weak economy.

Actually, this is not really true. There have been many long periods where they have gone in opposite directions. For example, the dollar peaked in the mid-80s and then fell through the rest of the decade. The stock market did crash in the fall of 1987 but then rose through the rest of the decade. The dollar fell against most currencies from 2001 to 2007 even as the market recovered from its crash beginning in the summer of 2002.

A weaker dollar can be good news for U.S. corporate profits since it means that domestically produced goods and services become relatively more competitive internationally. This could be a reason the two would move in opposite directions.

However, there is another story in this case which could plausibly explain the divergence. President Trump and the Republicans have made reducing corporate income taxes a priority. Trump has proposed outlandish treatments of pass-through corporations, which would allow them to pay just 15 percent on their income.

This is a total joke proposition: no serious economist thinks this is a way to treat these companies. It essentially allows every rich person in the country to pay a 15 percent tax rate on the bulk of their income, as opposed to the 25 percent rate currently paid by teachers and fire fighters and other middle-class workers. Almost none of them are so stupid that they can't figure out how to have their income show up in a pass-through corporation and the ones that are too stupid have accountants that can figure out how to tie their own shoes.

CEPR / August 04, 2017

Article Artículo

Reforming the Tax Code: It's More Complicated and Simpler than They Say

Eduardo Porter had an interesting piece discussing the prospects for tax reform in the NYT. While the piece correctly highlights some of the absurdities of the U.S. tax system, it may have given readers a wrong impression in some areas.

For example, it notes that income-related taxes are a far higher share of the tax burden in the U.S. than in other wealthy countries. It argues that this is bad because income taxes tend to be more of a drag on growth than taxes on consumption.

While there is clearly some truth to this, it is important to note that income taxes are far more progressive than consumption taxes. In other countries, where consumption taxes are higher, the government provides much more generous benefits to the public, such as national health care, more generous pensions, and free or low-cost college education. While it is possible that the public would support regressive taxes that support programs with broadly based benefits, as they do with Social Security, it is unlikely that they would support an increase in regressive taxes that are not tied to an expansion of benefits.

The piece also exaggerates the harm caused by the current tax system when it refers to the profits that corporations keep abroad to avoid paying taxes. There is little reason to believe that companies would invest more in the United States if they claimed these profits here. Corporations are currently flooded with cash, paying out large dividends and doing massive share buybacks. A lack of capital is not a major factor limiting most corporations investment.

CEPR / August 03, 2017

Article Artículo

Beat the Press: Is It Time for a Name Change?

Given the hostility that President Trump and his followers have directed towards the media, several people have suggested a name change for my blog. While I understand and sympathize with the idea of not promoting violence toward the media, I don’t think BTP has contributed to this sort of hostility.

First, there are different meanings of the word “beat,” and I did intend to play off these differences in choosing the name. There is “beat” as in the sense of the Chicago Cubs beat the Cleveland Indians in the World Series. I like to think that in many areas I do a better job of discussing economic issues than most of the media.

For example, I have endlessly harangued reporters about writing large numbers, most importantly budget numbers, without any context. When people hear that the government is spending $20 billion on TANF or $30 billion on foreign aid, they think these are sizable sums. After all, none of us will ever see anything like this amount in our lifetime.

However, as a share of the federal budget these programs are pocket change, with the $20 billion for TANF being roughly 0.5 percent of total spending and $30 billion for foreign aid a bit less than 0.8 percent. Polls consistently show that people hugely over-estimate the share of the budget that goes to foreign aid, TANF, and other anti-poverty programs.

I know that many people want to believe that all their tax dollars go to foreign aid and poor people’s programs because they are racists who hate the people they think of as beneficiaries of these programs. But many of the people who think large shares of the budget go to these programs are not racist, they just hear $20 billion or $30 billion and think that is a lot of money.

It would be a very simple matter if reporters got in the habit of reporting these numbers in some context. Some people might still insist that all of our tax dollars go to TANF even if they constantly heard that it was 0.5 percent of the budget, but my guess is the public would be much better educated.

I consider it one of my BTP victories that I got then NYT Public Editor Margaret Sullivan to agree with me (with assists from Just Foreign Policy and Media Matters). I thought this would lead to a change in practice at the country’s leading newspaper, but unfortunately not. The big numbers still routinely appear without any context.

There have been a number of other areas where I think my commentary beats the major news outlets in economic reporting. I should say that I think economic reporting has improved considerably in the more than two decades that I have been commenting on it. I’d like to think that my calling attention to some seriously bad practices has played a role.

CEPR / July 31, 2017