Monday, August 22, 2016

Based on well-documented and widely accepted empirical evidence

Update: Hi MBRU readers! Thanks as ever Tengrain!

From the economists Aparna Mathur and Kevin ("Dow 36,000") Hassett at the Wall Street Journal last week, and recycled this morning in the daily bulletin of the American Enterprise Institute, where Hassett is director of economic policy studies,

The cure for wage stagnation

I know, teacher! Give everybody a raise! No, silly, of course that's not how economics works. If the boss gives you a raise, that isn't real; you have to get it from the Invisible Hand.

But it turns out that's going to be easy. All you need is a plan that everybody agrees in advance is the right one:
If the next president has a plan to increase wages that is based on well-documented and widely accepted empirical evidence, he should have little trouble finding bipartisan support. If politicians in Washington oppose the president’s ideas, he can, as Ronald Reagan did, go over their heads to the outraged voters.
Isn't it great that when there's a 75% chance that the next US president will be a woman (according to the more conservative of the FiveThirtyEight forecasts this morning), the economists can't figure out a way to refer to the person other than as "he"?

And what irresistible evidence-based plan would that be? You guessed it:
Fortunately, such a plan exists. Regardless of who is elected in November, workers from both parties should unite and demand a cut in corporate tax rates. 
The same plan they've come up with for every exigency since the Ford administration, cutting taxes on capital in whatever form it takes. Because the cause of wage stagnation is that your companies are just not making enough money! Our bosses would just love to give us a raise, but because of the burdensome taxes they just can't afford it!
The economic theory behind this proposition is uncontroversial. More productive workers earn higher wages. Workers become more productive when they acquire better skills or have better tools. Lower corporate rates create the right incentives for firms to give workers better tools.
It's uncontroversially wrong, in that rising productivity stopped tracking with wages in the United States more than 40 years ago and has been soaring while wages remain stagnant ever since. For one thing.

And a look at effective corporate tax rates over the same period, when they were pushed down very steeply from 39% to 20.5%, shows that lowering them has more or less no effect on wages at all, except in the negative sense that as after-tax profits rose continually (except in the catastrophic years of the Bush 43 administration), a gigantic pot of money that became available to invest in wages, it never was.

The Masters of the Universe kept it all for themselves (the income of the top one-hundredth of one percent more than quintupled, in spite of a couple of roller-coaster swings along the way, while the share of wages in the GDP remained more or less the same), even though the theory promised faithfully that they wouldn't. When this sort of thing happens, students of scientific method generally say the theory has some flaws.

Leaders from both parties have proposed lowering America’s 35% corporate tax rate, the highest in the developed world. President Obama has called for cutting it to 28% (25% for manufacturers), while Donald Trump proposes 15%. Hillary Clinton is the outlier. To the detriment of her working-class supporters, she has failed to back even a minor cut to corporate taxes.
It's the highest statutory tax rate in the developed world (unless you count the United Arab Emirates, at 55%), but because of the many loopholes and deductions, nobody actually pays that rate, and so it is of no relevance. The effective rate, which is what matters, can be calculated in a variety of ways (not everybody sees it as low as 20.5%) but by all calculations it is pretty much average or sightly below.

Mathur and Hassett offer a bunch of citations to research said to demonstrate how lower business taxes raise wages, but I don't see why I should bother to look at it when the people who cite them deliberately conceal such basic facts. Maybe some other time.

President Obama's 2012 proposal was not meant to lower the effective corporate rate at all overall (it would actually have raised it for fossil fuel industries, while lowering it for manufacturers); at the same time as lowering the statutory rates, it was going to get rid of loopholes, so that the general effect was supposed to be revenue-neutral. It is not a proposal for a tax cut except for the particular case of the manufacturing industry, which is under 10% of the workforce and shrinking (and where a targeted tax cut might really make a difference). The Trump proposal, in contrast, is meant to cut revenue and would certainly do so (there are no numbers for his new plan, but his old plan would have cost the treasury by up to a trillion dollars a year). The implication that Obama's and Trump's proposals are in any sense similar is really too absurd to even comment on.

It's true that Clinton has not provided her own proposal for corporate tax reform, but the Democratic Party platform calls for one that raises revenue, and Clinton has suggested something similar, in the idea that unspecified reforms in the "business tax code" would provide the $275 billion to pay for her infrastructure proposal. Good! That's not to the "detriment" of her working-class supporters at all—it's a program that really creates good-paying jobs, as opposed to pretending to do so while fattening the CEOs.

As I keep saying, she is in economic matters more liberal than either Obama or her husband, and I like seeing more evidence that it's true. There's no reason to cut those taxes in any event, except to balloon income inequality ever farther. The money donated by these means to these companies has no productive use at all.

For more on the ingenious Dr. Hassett and his startling intellectual leaps, see Mark Thoma (e.g., here and here).

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