Kevin Drum - September 2012

My Baroque Argument for Higher Capital Gains Taxes

| Wed Sep. 26, 2012 12:37 PM EDT

Matt Yglesias tweets about my post this morning on capital gains taxes:

Arguments for higher capital taxes grow more baroque, as @kdrum says private investment is economically harmful.

This is just a tweet, and there's not much room for nuance in 140 characters. Still, I don't think I've ever made my capital gains argument directly before, so maybe it's worth doing. In a nutshell, here it is.

The usual rationale for low taxes on capital income is that it encourages capital formation and thus investment. This is self-evidently a good thing, since investment is good for economic growth, and it's one of the reasons why most countries (including most European countries) tax capital lightly. Capital is good! The more the better!

I agree with the first sentiment: capital is good. However, I'm not so sure I agree with the second. There really might be a limit to just how much capital is a good thing. Economies are strongest when there's a sensible balance between capital income and labor income.

The aughts are instructive here. Back in 2005 Ben Bernanke famously warned of a "savings glut," a tsunami of money that was flooding into the United States looking for a home. The problem is that there was too much money and not enough productive uses to put it to. As a result, all that money flowed into housing and an increasingly baffling collection of Wall Street investment vehicles, and eventually it all came crashing down.

The fundamental problem was a mismatch. The flip side of a savings glut is an investment drought, and I've always argued that this was the real problem. If all that capital had flowed into real-world production — factory expansions, new startups, etc. — everything would have been great. But real-world production requires customers, and that in turn requires an expansion of labor income. We weren't getting that in the aughts, though. As capital income increased, labor income necessarily decreased, which reduced the number of good investment opportunities for holders of capital. And it seems to be an iron law that when there's not enough real-world investment for all the capital sloshing around, it piles up and eventually gets stupid. At some point the imbalance becomes too large and then the whole house of cards collapses.

So my question is this: would we have been better off in the aughts with higher capital gains taxes? I think you can make a good case. What we got with lower capital gains taxes was an extra boost to a trend that was already entering dangerous territory. Increasing capital gains taxes wouldn't have prevented the Great Crash, but it might have lightened it a bit.

In any case, my main point about capital formation is that more is not always better. If you want a non-bubble ecoomy, you need a balance: enough capital to drive economic growth, and enough labor income to give that capital something useful to do. When that balance gets out of whack in either direction, you're headed for trouble.

UPDATE: I should add that even if you don't buy my argument about low tax rates on capital gains being potentially harmful, it's still the case that the bulk of the empirical research shows no real relationship between capital gains rates and economic growth rates. The best you can say is that within reasonable limits, raising capital gains rates doesn't seem to hurt much and lowering them doesn't seem to help much.

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You Hate Me, You Really Hate Me

| Wed Sep. 26, 2012 11:50 AM EDT

A recent paper that was posted online for the first time last week concludes that we just can't stand each other these days. "Using data from a variety of sources," say the authors, "we demonstrate that both Republicans and Democrats increasingly dislike, even loathe, their opponents." And apparently this has little to do with policy positions. It's more about the relentless tsunami of negative attack ads and partisan media that have consumed American politics over the past couple of decades. 

Sadly, the full paper is gated. However, Claude Fischer offers up a few tidbits:

From the late 1970s through the late 2000s, Americans rated their own political party pretty consistently, at about an average of 70 on the scale. However, Americans rated the other party increasingly coolly, from about a 47 average four decades ago down to about a 35 average these days. This trend portrays a growing animosity toward the other side. Notably, the gulf in party temperatures is now wider than that between whites and blacks and that between Catholics and Protestants.

A pair of surveys asked Americans a more concrete question: in 1960, whether they would be “displeased” if their child married someone outside their political party, and, in 2010, would be “upset” if their child married someone of the other party. In 1960, about 5 percent of Americans expressed a negative reaction to party intermarriage; in 2010, about 40 percent did (Republicans about 50 percent, Democrats about 30 percent).

Wow. I'm a pretty partisan hack, but I really can't imagine not wanting my daughter to marry a Republican. But who knows? If I actually had a daughter, maybe I'd feel differently.

Still, it's pretty disturbing. I'd call this the Fox Newsification of America, or perhaps the Limbaugh-ization of America, and increasingly liberals are playing the same game. MSNBC may not be quite the partisan hatefest that Fox is, but it's certainly moving in that direction. If America were a parliamentary democracy, this might be more tolerable, but in our presidential system it basically just leads to uncompromising gridlock. Not a good sign for the future.

Via Balloon Juice.

Employers Are More Tolerant of Long Jobless Spells When the Economy Is Bad

| Wed Sep. 26, 2012 11:10 AM EDT

Tyler Cowen links today to a new paper that, at first glance, comes to an unsurprising conclusion: the longer you've been out of work, the less likely you are to get a job interview. Employers generally figure there's a reason that someone has been out of work for a long time, so resumes and job applications with long jobless spells usually get tossed aside. This is, obviously, especially bad news during a recession, when lots of people have long periods of unemployment through no fault of their own.

But if you look a little closer, the study (here) has a bit of a silver lining. It turns out that when the economy is in good shape, employers do indeed discriminate against job applicants who have been out of work for a while. That's the blue line in the chart below, which shows that applicants initially get callbacks about 10% of the time, dropping sharply to only 4% of the time after they've been unemployed for eight months.

But take a look at the red line. That's the callback rate when the economy is bad. The overall callback rate is lower, as you'd expect, but it also doesn't go down as sharply. It starts out a bit above 5% and then declines to a bit below 4%. That's still a drop, but not a huge drop. Apparently, when the economy is bad employers really do cut some slack for people who have been out of work for a while. I'm actually a little surprised by this, but it certainly makes sense.

On the other hand, if you've been out of work for a year, the state of the economy hardly matters anymore. It's just really hard to get anyone to give you a chance.

Higher Capital Gains Taxes Might Be Actively Good For the Economy

| Wed Sep. 26, 2012 10:04 AM EDT

Felix Salmon passes along a new Fed study that contains the chart on the right, tracking labor's share of national income since World War II. He comments:

This chart comes from Margaret Jacobson and Filippo Occhino at the Cleveland Fed, and it’s reasonably terrifying — yet another one of those charts where the trend is down and to the right, and where it’s only gotten worse since the end of the recession.

I don't want to argue too much with this, but maybe I'll argue just a little bit. If you take a closer look at the data, there's a lot of noise but by the year 2000 we're at about the same place we were at in 1947. This is clearest in the NIPA data, which barely shows any secular downward trend at all through 2000, but it's also true of the BLS data, if less dramatically. (The BLS data shows a brief rebound to 1947 levels in the late 90s, but also appears to reach a permanent lower level in the mid-80s.)

In other words, it's not that things have "gotten worse" since the end of the recession, but that things were basically pretty steady all along until the early aughts. Starting around 2000, though, there's been a sharp and massive drop in the labor share of income. Something seems to have happened right around then to change the long-term trend. But what?

As an aside, I'll agree completely with another of Felix's comments:

The more powerful, if less obvious, story, is just how entrenched capital income has become in the US economy. As recently as 2000, it was at levels more or less in line with the historical average. And then, something big happened. During the Great Moderation — when yields fell on all capital asset classes — capital income went up sharply. Then the crisis happened, a classic case of a dog not barking: you’d expect capital income to have fallen enormously, at least for a year or two, but it didn’t, it just stopped rising. Most recently, in the wake of the financial crisis, capital income has been soaring again.

Felix uses this as an argument for taxing capital income at higher rates. After all, if capital income is increasingly where the income is, then we don't have any choice. If you don't tax it, your tax revenues are going to fall sharply.

That's true, but I'd put a different interpretation on this. The usual reason for taxing capital lightly is that this encourages investment, and investment is what drives economic growth. But that presupposes that more capital is always and everywhere a good thing. I think this assumption deserves a closer look. The experience of the 90s, reinforced in spades by the experience of the aughts, suggests that, in fact, you can have too much capital. By taxing it so lightly, we may have encouraged too much capital formation. Without a thriving real-world economy to go along with it, this produced a housing bubble and a global economic crash. A higher capital gains tax might have helped reduce this imbalance and produced a stronger economy in the long run.

Or, if that's too strong for you, the weaker version of this argument is that even if low capital gains taxes didn't actively hurt the economy, they sure didn't do it any good. Theory is one thing, but practice certainly doesn't suggest that low investment taxes have done our economy any favors lately.

Who Really Blew It in Last Night's Seahawks-Packers Game?

| Tue Sep. 25, 2012 3:43 PM EDT

So, um, football. By chance, I tuned into last night's Packers-Seahawks game with six seconds left to play. And that turned out to be plenty! One Hail Mary later it was the blown call heard round the world, leading to an improbable Seahawks victory and a million outraged tweets about the incompetence of the replacement refs and the greediness of the NFL.

All of which I agree with.1 But I do have a question here. The call on the field2 didn't seem wildly outrageous to me. The two refs were far enough away from the scrum that they couldn't see who caught the ball first, and by the time they ran over it probably looked like simultaneous possession to them and therefore a Seattle reception. That's a mistake, but frankly, it's hardly the worst on-field mistake I've ever seen. These things happen.

But in replay, it was obvious that it was a Green Bay interception. So the real problem here is with the replay official who didn't overturn the ruling on the field. But the replay officials aren't replacement refs. They're the same folks as always.

As it happens, I don't care much about pro football, and I definitely don't care much about the Seahawks and the Packers. So maybe I'm viewing this whole thing with more equanimity than it deserves. But I'm curious: who really blew it here? Seems to me it's more the replay official than the replacement refs. What am I missing?

UPDATE: OK, I see my problem. In college ball, there's a separate replay official who reviews calls. That's what I'm used to. In pro ball, the replay official merely signals the referee on the field, and it's the referee who reviews the play. So it was replacement refs who blew the initial call, and a replacement ref who blew the replay call. Sorry about the confusion.

1Seriously, I do. This is just a question about the blown call at the end of last night's game.

2I'm talking only about the question of who caught the ball here. For the time being, I'm ignoring the missed offensive interference call.

Does the American Public Really Support Bowles-Simpson?

| Tue Sep. 25, 2012 12:40 PM EDT

Andrew Sullivan thinks that defeat in November will chasten Republicans and make them more likely to compromise. I doubt it. I think it takes several successive defeats to accomplish that (think Democrats under Reagan/Bush or Labor under Thatcher/Major), and at least one of those defeats needs to be a big one. But Republicans won the 2010 midterms, and if they lose this year it will probably be close. That's just not enough to convince them that they need to change.

But who knows? Maybe a few of them will see the writing on the wall, and Obama will certainly have more leverage over Congress in January if he lets the Bush tax cuts expire in December. That might force some tax compromises in the short term. But I'm even more skeptical of Sullivan's followup:

I think Americans want a fiscal compromise on a sane, Bowles-Simpson line. And radical tax reform is an area of common ground. That kind of deal is normally only possible in a second term, when the president is not going to get political capital for it, and if it is bipartisan, which was the idea behind Bowles-Simpson as well.

....And on immigration, all you need is a few Republicans to absorb the lesson of alienating the critical Latino constituency. If Jeb Bush and Karl Rove came out for a deal, and they both support one, politics change change. In other words, as I wrote, this is about the shift in thinking, a change in leverage after an election, not before it. Elections can concentrate the mind. The GOP loves to win and if it sees its current path is doomed, the fever, in Obama's metaphor, might break.

Do Americans really want Bowles-Simpson? I guess anything's possible, but if something like this passes it will most likely be in spite of the American public, not because of it. I know that "compromise" sounds great, and lots of Americans say they're in favor of it, but when push comes to shove what that usually means is that they think the other guys should compromise. The tax jihadists still won't want tax increases and the interest groups still won't want spending cuts and old people will still fight Medicare and Social Security reform to their dying breath. It's not impossible for some kind of Bowles-Simpson-ish thing to happen, but the truth is that it will almost certainly be unpopular. Politicians will have to drag the public into it, not the other way around.

Immigration might be a different story, though. I think a lot of Republican pols really do understand that diehard opposition to immigration reform is killing them, and the political calculus is different too. At this point, I suspect that big business would mostly be willing to support a reasonable bill, even if it contains tough employer sanctions; e-Verify continues to generate opposition, but it's declining as the accuracy of the system gets better; Obama has spent four years amping up border security; and hardcore opposition to immigration may well be smaller than we think. Yesterday, for example, Bill Bishop reported on a very interesting poll that asked rural voters about immigration policy. It turns out that if you read them the Democratic position, only 39% support it. But if you read it to them without telling them it's the Democratic position, 49% support it. That could well go up to 60% or higher if compromise language became the de facto Republican position.

So then: short-term tax compromise? Quite possible. Immigration reform? Somewhat possible. Bowles-Simpson? Not impossible, but the public will have to be dragged into it kicking and screaming.

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Cut Mitt Some Slack on His Airplane Window Gaffe

| Tue Sep. 25, 2012 11:33 AM EDT

Last Friday, after smoke from an electrical fire forced Ann Romney's plane into an emergency landing, Mitt Romney told reporters that airplane fires were a big problem because "you can't find any oxygen from outside the aircraft to get in the aircraft, because the windows don't open. I don't know why they don't do that."

That was dumb. But I'm with James Fallows: I think everyone should settle down about this. I wouldn't be at my best if Marian had just made an emergency landing either, and I might easily say something a little incoherent. Fallows has more:

1) Cut Mitt some slack. His wife had been through an upsetting and potentially dangerous episode. However stressed she was, he might have felt even worse — because he wasn't there, and because of reason #3 below.

....3) People are afraid of different things, and the reasons aren't purely logical. Some people are afraid of dogs — or snakes or spiders or rats, or the big needles a doctor uses to give a shot. I don't mind any of those, but (like many people who fly airplanes) I'm a little queasy with heights. I also get nervous in very tight spaces, and I have an irrational fear and dislike of horses....Here's why I mention this. I have heard over the years, within the flying world, that Mitt Romney views airplanes more or less the way I view horses. He is (I have heard) not a happy or comfortable flyer, and one who can always imagine things going wrong. Fortunately I don't actually have to ride horses — but he has no choice but to fly, white-knuckled, from one stop to the next. Someone with this outlook would naturally be all the more rattled by an emergency landing. So cut him all the more slack.

There are plenty of other reasons to mock Mitt. We don't really need this one too.

UPDATE: Dan Amira says there's an even better reason to cut Mitt some slack:

The Los Angeles Times story that relayed Romney's airplane remark to the world was based off a pool report written by the New York Times's Ashley Parker. When we asked Parker this morning whether it seemed as if Romney made the mark in jest, she left no doubt. "Romney was joking," she e-mailed. Parker told us that while the pool report didn't explicitly indicate that Romney was joking, it was self-evident that he was. "The pool report provided the full transcript of his comments on Ann's plane scare," she said, "and it was clear from the context that he was not being serious."

OK then.

Paul Ryan Has Something He Wants to Sell You

| Tue Sep. 25, 2012 10:57 AM EDT

Rebecca Kaplan reports that Paul Ryan is "letting his wonk flag fly":

It came to a head on Saturday, when he stepped to the podium for a town hall at the University of Central Florida. In addition to a debt clock — now a must-have prop at Republican political rallies — Ryan was flanked by two large screens that projected a favorite tool of academics and businessmen: a PowerPoint presentation.

Dave Weigel is unimpressed: "That's all it takes? Four slides about the size of the debt?" I'm unimpressed, too, but for a different reason: do wonks really use PowerPoint? I think most of them would recoil in horror at the thought. PowerPoint decks are the favored tool of the well-coiffed marketing weenies, not the number crunchers. True wonks would be a lot more likely to either (a) spend hours lovingly kerning their equations in LaTeX and producing 3-D scatterplots in R, or (b) spend five minutes pounding out something unreadable in Emacs, accompanied by a crude line chart generated by some completely inappropriate shell script.

So then: Ryan isn't a wonk. He's a marketing weenie. And here's a pro tip from a fellow member of the tribe: When you see a PowerPoint presentation, usually the first thing you should do is put your hand on your wallet. I think that's good advice in Ryan's case too. He's not wonking out, he's trying to sell you something.

Being Rich: Not That Tough After All

| Tue Sep. 25, 2012 10:01 AM EDT

I don't think this will come as a big surprise to anyone familiar with the real world, but it might come as a surprise to the Fox News set that endlessly glorifies all those job creators. It turns out that the rich and powerful don't lead especially tough lives after all:

A new study reveals that those who sit atop the nation's political, military, business and nonprofit organizations are actually pretty chill. Compared with people of similar age, gender and ethnicity who haven't made it to the top, leaders pronounced themselves less stressed and anxious. And their levels of cortisol, a hormone that circulates at high levels in the chronically stressed, told the same story.

The source of the leaders' relative serenity was pretty simple: control. Compared with workers who toil in lower echelons of the American economy, the leaders studied by a group of Harvard University researchers enjoyed control over their schedules, their daily living circumstances, their financial security, their enterprises and their lives.

...."People in a company at all levels may be affected by the market and its unpredictability," she said. But while rank-and-file employees may worry about being laid off, chief executives can pretty much rest assured that "they'll keep their position in society, their superiority, their lifestyle and their income" even if the organization over which they preside suffers, she said.

Worrying about whether your division will meet its revenue goals is unquestionably stress inducing. But guess what? Worrying about being laid off, not finding a job, losing your home, and not being able to buy food for your kids — that's a lot more stressful. People in the middle and at the bottom of the pile live tough lives, and lack of money and control make their lives even tougher. The rich should probably extend them a wee bit more sympathy than they do.

Obama's Lead Is Starting to Look Insurmountable

| Mon Sep. 24, 2012 10:09 PM EDT

Nate Silver has an epic post today about late September polls from past years and how well they predict the eventual winner of a presidential race. Here are the highlights:

  • Obama is currently up by 3.7 percent. No candidate in the past 50 years has lost a lead that big.
  • No candidate with more than 47 percent of the vote in late September has ever lost. Obama is currently at 48.3 percent.
  • Big changes in the final month aren't impossible, but they've gotten rarer in the past 20 years.
  • It's not true that undecided voters tend to break for the challenger in the last few weeks of a race.

Read the whole thing for more. At the moment, though, the race is pretty clearly Obama's to lose. And Sam Wang agrees: his latest electoral vote forecast has Obama winning 347-191. Given all this, I'll make two predictions of my own:

  • The mudslinging from the Romney campaign is going to get really, really nasty and desperate over the next few weeks.
  • The smart money is shortly going to start deserting Romney and focusing downballot instead. The conservative base never liked Romney all that much to begin with, and I don't think it will take much for them to abandon him.

Make your own predictions in comments!