·November 29, 2017
Harvard Kennedy School, Harvard University
(This is an interactive graph. Hover your cursor over the chart area for more)
President Donald Trump has invoked the experience of the Reagan Administration's tax reforms to promote the current Republican tax reform proposals. To recall what transpired in the 1980s might indeed help shed some light on the potential impacts of proposed tax legislation. But the two huge tax bills during the Reagan years — the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986 – differed in almost every respect. These differences must be taken into account in order to draw lessons for today.
- The Economic Recovery Tax Act of 1981, made deep cuts to both corporate and personal income taxes and was followed by a sharp increase in the government deficit. The White House, surprised at the acceleration in the budget deficit, sharply reversed some of them the next year. The Tax Equity and Fiscal Responsibility Act of 1982 raised taxes well in excess of 1 percent of GDP (making it the largest tax increase since 1968 by that measure).
- The 1986 law, by contrast, was the thought-out result of an extended and bi-partisan process, designed to be revenue-neutral. The reform further lowered the top tax rate for individuals, simplified the tax code, and expanded the standard income deduction. In order to keep marginal income tax rates low, it made up the lost revenue by eliminating deductions, particularly on the corporate side.
- The tax cuts that the Republicans are proposing in 2017 would raise the budget deficit as the 1981 cuts did; but there is good reason to think that the long-term effects on the economy would be much worse this time. Cyclically, the 1981 tax cuts went into effect just as the 1981-82 recession was hitting, a time when some short-term fiscal stimulus came in handy (see chart). The opposite is true today: At a 4.1 percent unemployment rate, the economy does not need additional stimulus. As for the demographic timing, the baby boom generation is now retiring and Medicare and social security outlays will increase rapidly from here on out.
If the 1986 tax bill was a model of how to do fiscal reform and the 1981 tax cut was a model of how not to do it, the 2017 process emulates the less worthy of the two precedents. Instead of aiming for revenue neutrality, as the 1986 reform did, current proposals will expand the government's budget deficit over the next decade, at a time when an aging population will place a growing fiscal burden. To be sure, the current proposals do not get everything wrong. Reducing the U.S. corporate income tax rate would be good policy, provided the lost revenue could be paid for by eliminating business loopholes that the economy would function better without anyway, such as the corporate interest deduction and the favored treatment of carried interest. But the legislation cuts the corporate tax rate too much and limits these deductions too little to come anywhere near meeting the criterion of revenue neutrality.
·November 28, 2017
University of California, Irvine
People’s economic fortunes are often tied to where they live. Telling people to move to high-income areas in the hopes of raising their economic fortunes downplays the costs and uncertainties of relocating, and also ignores the fact that people are tied to where they live by social connections, not just by their jobs. Given long-standing difficulties in certain locales, as well as more recent downturns caused by economic dislocations, can government programs targeting particular areas succeed in raising the standard of living of people in those areas?
- The most prominent place-based policy in the United States is federal and state enterprise zones. The federal Empowerment Zone program, for instance, was authorized in 1993 and targeted relatively poor areas with high unemployment by offering business tax credits for hiring residents of those zones, as well as block grants for business assistance, infrastructure investment and training programs.
- Studies generally do not find increasing employment in response to these policies. There is even less evidence of reduced poverty in these zones and there is also some evidence of rising housing prices which could hurt those who rent and live in those areas. Benefits to Enterprise Zones can come at the expense of economic performance in other areas.
- A different type of place-based policy is one that attempts to promote economic development through infrastructure investment, such as the Tennessee Valley Authority (TVA) that, beginning in 1933, provided electric generation to most of Tennessee and parts of Kentucky, Alabama and Mississippi, aiding industrialization and improving the quality of life in that region. More recently, there is evidence that university research facilities attract high-tech, innovative firms which, in turn, can form industry clusters that benefit from agglomeration economies. But these benefits may be quite localized and limited to technologically sophisticated firms.
There are many sources of economic dislocations, such as international trade and automation, which have vastly different effects across cities and regions. There are also cities and regions which have long-standing and persistent levels of high unemployment and poverty. Some well-designed place-based policies may be able to address these issues, especially if these policies build needed infrastructure or target subsidies where they will do the most good and hold recipients accountable. But policies that subsidize businesses based solely on their location have a poor track record. Successful place-based policies are likely to become more important as economic divergence across regions and cities continues to rise, and research into the characteristics that make such policies successful is vitally important.
·November 21, 2017
Among the arguments being laid out by the U.S. Department of Justice in its opposition to AT&T’s acquisition of Time Warner is the notion that the mega deal would stifle innovation from online streaming firms. The showdown over the proposed merger highlights an issue of rising importance for antitrust in the information age: the relationship between market power and innovation.
- Antitrust laws are meant to preserve competition. A primary concern has been that the existence of monopolies and oligopolies leads to higher prices for consumers. Increasingly, antitrust authorities have come to recognize that dominant firms and mergers have potentially important effects on innovation as well.
- Economists debate how the nature of market competition affects innovation. One approach argues that highly competitive markets spur innovative activity because firms under competitive pressure will vie to produce better or more cost-efficient goods in order to gain market share and increase profitability. On the other hand, the large expenses incurred in setting up research labs, testing, and obtaining regulatory approval means that firms that innovate must have enough market power to appropriate most of the profit that their innovation generates. And these firms will pursue innovative activities precisely because if they do not, their profit, and their very existence will be threatened by other large firms that do innovate.
- The underlying uncertainty regarding how market conditions affect innovation is reflected in the diversity of antitrust policies. In the recent cases against Google and the 2017 merger of Dow Chemical with the DuPont Company, European and U.S. authorities had essentially the same market information. Yet in both cases, they reached markedly different conclusions on the threat to innovation.
Promoting innovation and future technological progress is important and so getting antitrust policy right in this area is also important. We now have good theoretical models of innovative competition. We know that some competition — what economists call contestability — is needed to spur innovation. We also know that appropriating the gains of innovation requires that successful firms subsequently grow large. Differences in European and U.S. policy stem from disagreements about the evidence and about what the facts say is the right theoretical conclusion, and hence, the right policy choice. In antitrust, as in other areas, economic data are a lot messier than economic models. With time, we can hope that experience with the data will facilitate recognizing empirical patterns and reaching consistent conclusions. But no one ever said that this would be easy. In this day and age “the future isn’t what it used to be!”
·November 20, 2017
Carnegie Mellon University
The bilateral trade deficits between the United States and a range of countries, including Japan, Korea and, especially, China, fuel President Trump’s claims that these countries compete unfairly at the expense of American workers. This echoes the 1980s. In the face of unprecedented trade deficits members of the Reagan Administration and its successors tried to use American diplomatic pressure to decrease the trade deficit with Japan using tariffs and quotas on politically sensitive Japanese export industries like cars and motorcycles.
- Bowing to pressure from the United States, Japanese trade negotiators agreed to a whole constellation of agreements designed to limit exports of steel and cars to the U.S., expand imports from the U.S., and eliminate “barriers” to the success of American firms in the Japanese market during the 1980s.
- In spite of all the trade restrictions, the bilateral trade deficit remained stubbornly high throughout the 1980s and 1990s and dramatically increased in the late 1990s and 2000s (see chart). The reduction in the deficit in the late 2000s was driven by the Great Recession which severely limited people's ability to buy and consume goods — including imports.
- Those trade measures did not address the underlying economic conditions that were contributing to higher levels of imports over exports: The record budget deficits during President Reagan’s first term which were not matched by an increase in private savings or a drop in private-sector investment. By definition, a country will have a current account deficit if the sum of government budget deficits and private investment are greater than its private savings.
- Trying to tamp down the trade deficit through negotiated import restrictions, like those imposed in the 1980s, was like squeezing on a balloon. Motorcycle imports might get squeezed down after Washington slapped a de facto quota on Japanese motorcycle manufacturers, but then stereo imports would just increase.
That fact that America’s trade deficit with Japan proved impossible to eliminate with tough talk should give us pause about trying to apply this failed strategy to any of America’s contemporary trading partners. For one thing, America’s leverage in negotiations is lower now than in the 1980s. But even in the 1980s, the effort to negotiate the trade deficit down through trade policy did not work. And another lesson from the 1980s should also be heeded – a tax bill that adds hundreds of billions in additional deficit spending over the next few years will further raise the trade deficit.
Crime and Criminal Justice
Crime and Criminal Justice
·November 17, 2017
University of Virginia
Public outrage following several high profile police shootings captured on cell phone videos led police departments across the nation to equip officers with body cameras. The programs aimed to improve transparency and accountability, in the hopes of reducing the use of force by police officers and increasing trust in those paid to serve and protect.
- The cameras are typically designed to be located on an officer's chest or head and are equipped with a microphone and internal data storage that allows audio and video footage to be stored and analyzed. The programs are extremely costly, mostly due to the costs of storing and managing the video footage.
- In theory, the cameras could reduce the use of force because they could have a civilizing effect on all involved. But cameras are already so ubiquitous in society that these programs could have little additional impact. It is also possible that cameras could increase the use of force: officers may become more likely to use force when they know camera footage will demonstrate the facts were on their side.
- So far the evidence is mixed. Studies in American and European police departments found that body-worn cameras reduced the number of complaints filed by local residents against the police. But in some places body-worn cameras increased the use of force, while in others they decreased the use of force. The first large-scale study of body-worn cameras in a major U.S. city, Washington, DC, found no significant effects from the use of cameras.
In trying to understand why results on the effectiveness of police body-worn cameras have been mixed, the context surely matters – how severe is the local problem, how motivated are officers to change their behavior, and how much accountability do the cameras provide? Specific details also play a role. Local policies about when officers are required to turn their cameras on, and when footage is released, likely have an impact on the value of body-worn camera programs. Figuring out whether changing these policies can increase effectiveness is a crucial next step. Given the mixed results so far, places considering implementing body-worn cameras should rigorously evaluate their programs to be sure the local benefits are worth the costs.