Topic: Finance, Banking & Monetary Policy

Why Piketty Was Mistaken for Endorsing the Zucman & Saez Slide Show

I will have more to say about this fairly soon, but this might serve as a preview.

Thomas Piketty is now advising innocent readers of his book to (1) not demand a refund or dump the book used on Amazon, and (2) ignore his own flawed estimates of top 1% U.S. wealth shares and instead utilize a PowerPoint by Gabriel Zucman and Emmanuel Saez.  Zucman and Saez use capital income reported on individual tax returns (dividends, interest, rent and capital gains) to infer ownership of capital assets, and not just greater realization of gains or portfolio shifts from tax-exempt bonds to dividend-paying stock.

That might be semi-plausible if businesses and professionals were not free to report income on either corporate or individual tax forms, and if tax rates never changed. But this methodology can’t possibly work after the huge tax rate reductions of 1986 (for partnerships & SubS corps), 1997 (capital gains) and 2003 (dividends and capital gains).  The reason it can’t work was fairly well explained by Piketty, Saez and Stantcheva in the original unsanitized version of a paper they published this February (which I have cited beforebut also critiqued):

There is a clear negative overall correlation between the [reported] top 1% income share and the top marginal tax rate: …  [T]he top 1% income share has increased significantly since 1980 after the top tax rate  has been greatly lowered… . [T]he top 1% income share more than doubled from around 8% in the late 1970s to around 18% in last five years, while the net-of-tax (retention) rate increased from 30% (when the top marginal tax rate was 70%) to 65% (when the top tax rate is 35%).”

Ex-Im Bank Weakens American Capitalism

One of the policy fissures in the Republican Party is over business subsidies, and the current debate about the Export-Import Bank illustrates the conflict. The Ex-Im Bank is one of many corporate welfare or crony capitalist programs that litter the federal budget. The Bank’s authorization runs out in September, and so Congress must act if it wants to extend the operations of this business subsidy machine.

Veronique de Rugy at Mercatus and Sallie James at Downsizing Government have looked at the Bank’s operations and discussed why the economics of the Bank do not make sense. Veronique says, “the Export-Import Bank is one of the least defensible corporatist boondoggles that taxpayers are forced to subsidize.”

The main problem with corporate welfare programs like Ex-Im is often overlooked. It is that they undermine American capitalism by weakening the recipient businesses. All subsidies can change the behavior of recipients, and nearly always in a negative way. Just like individual welfare programs reduce work incentives, corporate welfare dulls the competitiveness of recipient companies.

Corporate welfare focuses the energy of business executives on Washington and away from the marketplace. It gives companies a crutch, an incentive not to make the innovations needed to remain on the leading edge. It induces recipient businesses to make foolhardy decisions, as we saw with export subsidies for Enron. And corporate welfare often steers business capital into dead-end markets favored by politicians, and away from uses that would be more productive and profitable in the long run.

Here are some of the points made by Veronique and Sallie about Ex-Im:

  • Veronique: The Bank backs less than 2 percent of the value of total U.S. exports.
  • Veronique: The Bank mainly subsidies very large businesses, not small businesses.      
  • Veronique: Taxpayer exposure to possible Bank losses is rising.
  • Sallie: Export subsidies cannot substantially change the U.S. trade balance, even if that were a good idea.
  • Sallie: The Bank’s activities may slightly shift the U.S. employment mix, but they do not raise overall employment.
  • Sallie: The Bank’s aid to some foreign businesses—such as foreign airlines—comes at the expense of U.S. businesses.

For more on the problems with corporate welfare, see my 2012 congressional testimony on Corporate Welfare Spending vs. the Entrepreneurial Economy.

Los Angeles’ Confused Suit against Mortgage Lenders

Recently the City of Los Angeles filed suit against JP Morgan Chase.  The suit alleges “the bank engaged in discriminatory lending, which the City contends led to a wave of foreclosures that continues to diminish the City’s property tax revenues and increase the need for costly City services.”  So the City’s logic basically goes like this:  the housing market was humming along just fine, kicking off lots of property tax revenue allowing the City to spend like there’s no tomorrow, then evil JP Morgan comes in and lends to borrowers with the intention of pushing those borrowers into default, which pushed down housing prices, reducing property taxes and causing the city to cut “essential services”. 

So let’s start with the facts upon which I assume everyone can agree on.  Los Angeles experienced a massive boom in housing prices starting in the late 1990s (see chart below).  Rather than see this boom as temporary, the City increased property tax revenues as prices soared.  it spent those property tax revenues (have these people never heard of a rainy day fund?).  As the boom was building in 2002, according to the Census Bureau Los Angeles collected about $850 million in property tax revenue.  At the peak of the market in 2006 Los Angeles was collecting over $1 billion in property tax revenue, an increase of around 17% over four years.

Then the market begins to slow in 2006, prices decline and surprise property revenues decline as well.  A central flaw in Los Angeles’ logic is that the inflection point in prices came before that in delinquencies.  Put simply, Los Angeles has their causality wrong.  Price declines drove foreclosures.  Yes, I suspect there was a feedback from foreclosures to prices, but the temporal order of events strongly suggests price declines was the driver here.

Now one could argue that loose lending drove up prices in the first place.  But then that would mean that LA owes mortgages lenders for all that extra property tax revenue it collected during the boom.  Somehow I suspect they aren’t interested in sharing the up-side of boom/busts, just the downside.  And if LA believes that foreclosures drove down prices and hence revenues, why isn’t the city suing all the borrowers who walked away from their homes?  After all, under the City’s theory these delinquent borrowers cost the City tax revenues.  But since some of these borrowers are voters, I doubt we’ll see any consistency from the City there.

At the end of the day this suit appears little more than cheap pandering meant to distract from the dysfunctional governance of Los Angeles.  If mortgage lenders had any sense they’d just cut off lending to LA altogether, but then they’d probably get suited by DOJ for discriminating.  Can’t win either way.

Iran, Stable but Miserable

Since Hassan Rouhani assumed the presidency of the Islamic Republic of Iran in August of last year, the economic outlook for Iran has improved. When Rouhani took office, he promised three things: to curb the inflation which had become rampant under Mahmoud Ahmadinejad, to stabilize Iran’s currency (the Rial), and to start talks to potentially end the sanctions which have battered Iran since 2010. Rouhani has delivered on each of these promises. From this, one might assume that the Iranian economy, and the Iranian people, are headed towards better times.

Unfortunately, the Misery Index paints a different picture. The Misery Index is the sum of the inflation, interest, and unemployment rates, minus the annual percentage change in per capita GDP. It provides a clear picture of the economic conditions facing Iranians.

Piketty Problems: Top 1% Shares of Income and Wealth Are Nothing Like 1917- 28

Former Treasury Secretary Larry Summers’ review of Thomas Piketty’s Capital in The Twenty-First Century, claims that Mr. Piketty and Emmanuel Saez have documented, “absolutely conclusively, that the share of income and wealth going to those at the very top—the top 1 percent, .1 percent, and .01 percent of the population—has risen sharply over the last generation, marking a return to a pattern that prevailed before World War I.”  That statement is false.

Paul Krugman’s review “Why We’re in a New Gilded Age,”  claims that “since 1980 the one percent has seen its income share surge again—and in the United States it’s back to what it was a century ago.”  That statement is false.  

A Pew Research Center report on the same data was titled, “U.S. income inequality, on rise for decades, is now the highest since 1928.”  That too is false.

First of all, the Piketty and Saez estimates do not show top 1 percent income shares nearly as high as those of 1916 or 1928 once we use the same measure of total income for both prewar and postwar data.

Second, contrary to Summers, there is no data from Piketty, Saez or anyone else showing that the top 1 percent’s share of wealth “has risen sharply [if at all] over the last generation” – much less exhibited a “return to a pattern that prevailed before World War I.”

Dealing first with income, it is interesting that the first graph in Piketty’s book is about the top 10 percent – not the top 1 percent.  Saez likewise writes that “the top decile income share in 2012 is equal to 50.4%, the highest ever since 1917 when the series start.”  That is why President Obama said, “The top 10 percent no longer takes in one-third of our [sic] income – it now takes half.”  A two-earner New York City family of six with a pretax income of only $110,000 would be in this top 10 percent, and they are certainly not taking “our” income.  Regardless whether we examine the Top 10 percent or Top 1 percent, however, it is absolutely dishonest to compare the postwar estimates with prewar estimates. 

The Piketty and Saez prewar estimates express top incomes as a share of Personal Income, after subtracting 20% to account for tax avoidance.  Postwar estimates, by contrast, express top incomes as a share of only that fraction of income that happens to be reported on individual income tax returns – rather than being unreported, in tax-free savings or assets, or sheltered as retained corporate earnings.

 Transfer payments are not counted as income in either series (as though federal cash and benefits were worthless); this distinction is inconsequential for the prewar figures but increasingly important lately.  “Total income” as Piketty and Saez define it accounted for just 61.8 percent of personal income in 2012, down from 67 percent in 2000.

Hobble Thy Competitors — In Renaissance Italy

The calendar of saints sets aside this day, May 20, as the feast of St. Bernardine of Siena, famous across Renaissance Italy for his impassioned sermons against what he saw as the luxury, vice and corruption of his times, especially usury (the lending of money at interest). While opposition to usury has faded in the West – we now recognize interest-charging as a foundation stone of capitalism and modern economics generally – Bernardine is still invoked on behalf of such causes as relief from respiratory ailments, help for compulsive gamblers, the welfare of the California city of San Bernardino, and, of interest here, the fields of advertising and public relations. The scope of public relations is often taken to include lobbying, and it’s as a forerunner of modern lobbyists that Bernardine appears in a tale, fanciful or otherwise, told a century ago

A comic incident throwing light upon Bernardine’s attitude toward usurers is reported in an old chronicle. While preaching at Milan, he was often visited by a merchant who urged our saint to inveigh so strenuously against usury as to render it obnoxious in the eyes of all. On making inquiries, however, the latter ascertained his visitor to be himself the greatest usurer of the place, whose action in this matter was prompted by a wish to lessen the number of his competitors by inspiring them with a wholesome horror of the trade.

Our own era, as we know, is one in which moralistic attacks on gambling have been secretly backed by nearby casino proprietors who don’t want the competition, in which “the estate-planning industry [has lobbied] hard against a [reduced federal] estate tax, which would kill its costly tax-avoidance schemes,” and in which various energy producers quietly assist environmental and NIMBY resistance to projects advancing competing sources of energy.  My colleague Chris Edwards has compiled many more examples. You have to wonder whether much has really changed since Bernardine’s time. 

 

Will Congress Allow Hawaii to Expand Racial Discrimination?

I’ve written before about the curious and recurring desire of some Hawaiians to treat other Hawaiians differently based on the quantum of “native Hawaiian” blood they have coursing through their veins. In 2005, the U.S. Commission on Civil Rights issued a scathing report saying that Hawaii was “in a league by itself” regarding racial discrimination by government entities. Yet again and again, advocates for race-based government and tax treatment seek to push their divisive policies into the most racially integrated state of the union.

The latest such development comes to us in the form of a seemingly technocratic Senate bill, S.1352, the “Native American Housing Assistance and Self-Determination Reauthorization Act,” which was introduced last July and has slowly been making its way through the relevant committees. One particular provision of this dry legislation, when cross-referenced to the underlying law that it reauthorizes, is relevant to the racial shenanigans in the Aloha State. As Hans von Spakovsky describes:

S.1352 has a seemingly innocuous provision, Section 503, which simply re-authorizes the Native Hawaiian Home-Ownership Act through 2018.  You have to dig into the existing federal law to find out that, under 25 U.S.C. §4223(d), Hawaii is exempt from the nondiscrimination requirements of Title VI of the Civil Rights Act of 1964 and the Fair Housing Act when it is distributing federal housing funds made available by the Secretary of Housing and Urban Development to “Native Hawaiians” or “a Native Hawaiian family.”

This exemption means the Department of Hawaiian Home Lands can discriminate in favor of “Native Hawaiians” and a “Native Hawaiian family” and against others such as whites, blacks, Hispanics and Asians. In other words, the federal government is authorizing Hawaii (and providing it with taxpayer funds) to engage in blatant discrimination by providing government benefits for some of its residents and denying federally funded benefits to others based solely on their ancestry and “blood quantum.”