The Relevance of the Global Economy to the U.S. (VIDEO)

By and ·May 19, 2019
The Fletcher School, Tufts University and The University of California, Berkeley

The Relevance of the Global Economy to the U.S. (VIDEO)

The Issue:

Because of increasing reliance on international trade, the special role of the U.S. dollar as an international currency, and the vast flows of borrowing and lending in the global financial market, what happens abroad impacts the United States.

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Carbon Taxes: What Can We Learn From International Experience?

By ·May 3, 2019
Tufts University

The Issue:

As of early 2018, more than 25 national or subnational carbon tax systems had been implemented or were scheduled to be implemented around the world. New evidence is emerging on the way they work and their effects on greenhouse emissions and on the economy in general. What can we learn from international experience?

The Facts:

  • The tax rate applied to activities that generate a ton of CO2 varies widely across countries. As of 2018, tax rates ranged from less than $1 per ton of carbon dioxide in Poland and Ukraine, to as much as $139 per ton in Sweden. Twelve out of the 27 national or subnational systems that are in place had a rate of at least $25 per ton.
  • By increasing the cost of the goods associated with CO2 emissions, a carbon tax reduces demand for those “dirty” goods. With carbon taxes in place, people would be expected to drive less, purchase more energy efficient vehicles and appliances, and switch to more efficient sources of energy. These shifts in demand reduce greenhouse emissions.
  • Although the empirical evidence of the effects of carbon taxes is relatively sparse given their relatively recent imposition, it has been found that emissions have declined in Finland, Denmark, Sweden and the Netherlands relative to those in other 13 European countries in which carbon taxes are not in place. In British Columbia, I estimate emissions have decreased between 5-8 percent since the introduction of carbon taxes in 2008.
  • Carbon taxes may have a negative impact on some people and businesses, but the revenues generated by a carbon tax can be used by governments to reduce their potential negative impacts. The more than $1 billion that have been collected each year by British Columbia’s local government, have been returned to households and businesses. Low-income families and small businesses are receiving tax credits, and their tax rates have been reduced. A one-time dividend was also given to every BC resident. While carbon taxes have stimulated employment (although modestly) across all industries, jobs have shifted from carbon and trade sensitive sectors, such as chemical manufacturing, to cleaner service industries, such as health care.

What this Means:

British Columbia provides an example of structuring a carbon tax plan that lowers greenhouse emissions and, at the same time, is revenue neutral, fair, and promotes economic activity. Yet a domestic carbon tax alone will not curb greenhouse emissions. It is fundamental to invest part of the revenues generated by carbon taxes in R&D (as the Swiss have done) so that new inventions (like advanced battery storage, carbon capture and storage, and inexpensive, safe and modular nuclear power) and production processes are developed and successfully introduced into the market. And strong political leadership is required to make all these changes that will have a positive impact on many generations to come.

  • Editor's note: Gilbert Metcalf is the John DiBiaggio Professor of Citizenship and Public Service and Professor of Economics at Tufts University and author of "Paying for Pollution: Why a Carbon Tax is Good for America" (Oxford 2019). This post was co-written with freelance writer Beatriz Yemail based on Metcalf, Gilbert E. 2019. “On the Economics of a Carbon Tax for the United States” BPEA Conference Draft, Spring.

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    What Problems (If Any) Arise From Stock Buybacks?

    By ·April 29, 2019
    Brandeis University

    The Issue:

    An increase in stock buybacks has raised concerns about whether they disproportionately apportion company earnings to wealthy stockholders and happen at the expense of greater capital investment. But is the increase in stock buybacks cause for concern?

    The Facts:

    • Stock buybacks by the firms included in the S&P 500 index have increased recently, rising from an average of about $135 billion per quarter over the previous three years to over $200 billion per quarter (see chart). Some of this growth may have to do with the increasing overall value of the stock market. By scaling gross share repurchases (the solid red line in the figure) by the market value of corporations (the dashed red line), we see that there is no clear long-term trend since the recovery from the financial crisis of 2007-2009.
    • Stock buybacks are a channel that corporations use to return value to their owners. In the absence of profitable investment opportunities, a corporation can maximize value for investors by paying them dividends or, alternatively, by repurchasing shares of the firm from investors. Investors can then reinvest this money in other firms with better prospects. This is an important engine of growth in a dynamic, market-based economy and helps liberate capital from declining businesses to have it redirected to higher-growth firms.
    • Looking only at the value of stock buyback activity provides an incomplete view of the capital flows into and out of corporations and, by extension, of their ability to invest in their business. Corporations buy back shares, but they also issue new shares that raise additional capital, by either selling them directly to public investors in exchange for cash or indirectly, such as when a company issues shares as part of an acquisition of another firm or to compensate its employees. Repurchases and issuances can offset each other, so the value of gross repurchases gives a misleading picture of the net flow of capital into or out of the corporate sector.
    • Some of the increase in share repurchases may reflect a pivot from dividend payments to repurchases as a mechanism for distributing returns to shareholders. One problem that does arise with stock repurchases as opposed to dividend payments is due to tax rules. Because of the way that stock passed to heirs through estates gets taxed, and because of the fact that foreign investors are taxed on dividends but not on capital gains, a pivot to stock buybacks could impact federal tax revenues.

    What this Means:

    While stock buybacks reached record levels in 2018, it is not clear that this represents a barrier to overall corporate investment or that it calls for legislation to limit buyback activity. There is an intrinsic similarity between paying dividends and repurchasing shares of a corporation. Thus, one likely immediate consequence of only allowing firms to repurchase shares when certain conditions are met would be a pivot from repurchases to dividends as a method for distributing excess cash to investors. Over a longer horizon, forcing a corporation to go through a “gate” before it can repurchase their shares would likely act as a deterrent to new investors who want to invest in equity in the American corporate sector.

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    The Distributional Effects of Fiscal Policy (VIDEO)

    By and ·April 28, 2019
    The Brookings Institution and The Fletcher School, Tufts University

    William G. Gale of The Brookings Institution, and EconoFact co-founder Michael Klein discuss the distributional effects of fiscal policy and the progressivity of the US tax system.

    What this Means:

    Fiscal policy plays a role in income redistribution. This occurs through spending, by apportioning funds to programs like Social Security, the Supplemental Nutritional Assistance Program (food stamps), and housing assistance, for instance. But taxes also play a role. The share of income that you pay in taxes goes up as your income goes up, for example. Nonetheless, the overall progressivity of fiscal policy in the United States is relatively low as compared to other countries with similar levels of income.

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    Global Temperature and Human Activity

    By ·April 20, 2019
    Harvard University

    The Issue:

    Climate scientists agree that the warming of the Earth is extremely likely to be the result of human activity. That conclusion is based on models of the climate system, which are complex and hard for non-specialists to understand. Are there simpler statistical methods that provide a similar conclusion and thus provide independent validation of the model-based conclusions? Can standard econometric tools be used to estimate how much of this warming is anthropogenic, that is, due to human activity?

    The Facts:

    • Greenhouse gases and temperatures have persistent trends, and unless one is careful, an analysis of those trends can lead to estimates that only reflect spurious relationships. Statistical tools developed by economists – in particular cointegration methods, for which Sir Clive Granger won the Nobel Prize in 2003 – have been designed to handle such trends and to avoid spurious relationships.
    • Two co-authors and I conducted an analysis published in 2006 that used cointegration methods to estimate the relationship between total energy impacting the earth and global mean temperature. The figure plots temperature and its predicted value, using the relationship we estimated using data from 1860-1994 (all the data we had at the time, because of data availability lags). Because our data ended in 1994 (denoted by the vertical line in the figure), the past 20 years of data provide a true out-of-sample test of our regression relationship. The figure illustrates that the published regression does a very good job predicting the path of temperature post 1994.
    • The regression provides a simple way to estimate how much of the observed warming since 1870 is natural and how much is anthropogenic. To do so, consider the counterfactual in which anthropogenic emissions of greenhouse gases are held at their 1870-1890 average. The predicted value of temperature under this counterfactual is shown by the blue line in the figure; this is the temperature that that would have obtained, absent greenhouse gas emissions due to human activity. Today, nearly all the increase in observed temperature is a result of anthropogenic emissions of greenhouse gases.
    • The results from our statistical analysis match results from very different modes of analysis based on climate models that simulate the interactions between the surface temperature of the earth, the temperature of the oceans, and the amount of greenhouse gasses emitted and accumulated in the atmosphere. Importantly, those models provide far more nuanced projections, such as regional effects, storms, droughts, and so forth, than does our simple regression approach.

    What this Means:

    The earth is warming, with consequences including storms, heat waves, and droughts that we already see. Climate models attribute those changes to greenhouse gases emitted by human activities, but the complexity of those models provides an opportunity for muddying the waters in the political debate over climate. In fact, however, the core relationship between temperature and greenhouse gas emissions can be analyzed using standard statistical methods used in economics, with no need for a complex climate model. That relationship stands up over time and clearly attributes nearly all the observed warming to human impacts. That this result, which stays close to the data, aligns with results from climate models provides external validation of those models and the warnings they provide about future climate change as we continue to emit greenhouse gases.

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    The Mexican Border and U.S. Trade: What Would Be the Impact of a Border Closure?

    By and ·April 13, 2019
    University of California, Davis and University of Minnesota

    (Click here for state by state sales to Mexico.)

    The Issue:

    Recently, the Trump Administration proposed closing the U.S. border with Mexico. The United States has strong economic ties with Mexico and such an action could have ripple effects across the country. An actual border closure could slow or halt trade flows between the two countries, affecting more than one million U.S. jobs and we estimate could cost Americans as much as $130 billion a year, or nearly 350 million dollars per day.

    The Facts:

    • Taking into account both imports and exports, the United States trades close to $700 billion per year in goods and services with Mexico. A large share of this economic activity physically crosses the border on trucks and trains.
    • U.S. companies export goods and services to Mexico from every state. The states with the most sales to Mexico are Arizona, California, Illinois, Indiana, Louisiana, Michigan, Ohio, and Texas, each exporting between close to $5 billion and $100 billion in 2017. Mexico is one of the top three international markets for U.S. agricultural goods.
    • Approximately 60,000 U.S. companies export to Mexico. Roughly one third of these exports are from small and medium-sized enterprises. The U.S. Department of Commerce International Trade Administration estimates that U.S. exports to Mexico support a combined 1.2 million U.S. jobs in exporting companies and their suppliers.
    • Complex, integrated international supply chains mean that interrupting border flows of goods would have an impact beyond U.S. firms whose market for final goods is Mexico. About 30 percent of the content of Mexico’s manufacturing exports to the United States is, in fact, imported from the United States itself through cross-border supply chains according to one study. Cutting off access to these trading relationships risks price hikes, supply hangups, and fewer available options, similar to the effects of a very high tariff.

    What this Means:

    A border closure would disrupt economic relationships for communities across the United States with companies and workers in industries involved in trade with Mexico, shrinking U.S. real GDP by as much as 0.62 percent, or $130 billion per year, according to our estimates. The impact would be felt well beyond the border due to integrated supply chains and to the fact that Mexico is an important market for firms in all states in industries across the agricultural, manufacturing and service sectors.

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