• Republicans Finally Have Kumbaya Moment on Tax Bill

    House and Senate Republicans are working busily to reconcile their versions of the tax bill, but it’s tough sledding. They have a lot of disagreements to hammer out, and of course they also have to deal with demands from Donald Trump. What, oh what, can finally bring them together?

    Congressional Republicans are in advanced talks to lower the top tax rate for individuals from 39.6 percent to 37 percent as they finalize a massive $1.5 trillion tax package, said three people familiar with the negotiations.

    ….The change, if finalized, would amount to a major tax cut for the wealthiest Americans….After the House and Senate passed their versions of the tax bill, complaints from wealthy Americans – particularly in New York – grew louder….Trump has received an earful from friends and supporters in New York, and last week signaled that he could support changes that he said would help a “sliver” of people.

    It’s heartwarming, isn’t it? When things are at their roughest, Republicans can always find comfort in the old traditions.

  • Lunchtime Photo: Mood Ring Edition

    It’s Election Day in Alabama! What’s your current mood? Will tomorrow be morning in America?

    Or are the gates of hell about to open?

    Top photo: sunrise in Irvine from the soccer field at our local elementary school. This disproves once and for all the canard that I have never personally witnessed a sunrise.

    Bottom photo: the south bank of the Thames near the Eye, taken on the day of the great sandstorm.

  • Does Rising Inequality Harm Economic Growth?

    Does rising income inequality reduce economic growth? EPI’s Josh Bivens takes another crack at this hypothesis today, starting with some (uncontroversial) evidence that the rich save more than the non-rich:

    If the rich squirrel away their income instead of spending it, then total national consumption will be highest when the non-rich have a bigger share of total income. As Bivens says: “A straightforward back-of-the-envelope estimate of [blah blah blah]. Table 2 shows the results of this procedure.” Long story short, Table 2 shows that total national consumption is about 2 percent lower than it would be if income inequality hadn’t risen since 1979.

    So far, so good. But there’s always been a big problem with this theory: if the rich save more of their income, this implies a higher overall savings rate as income inequality rises. But that’s not what happened: From 1980 through the early aughts, the savings rate dropped:

    Bivens agrees this is a problem for the inequality hypothesis, but suggests that it’s something of an illusion because normal measures of saving don’t include unrealized capital gains, a substantial source of household net worth for the rich. If you include that, the savings rate looks different:

    It’s true that there’s more volatility in this measure, but in fact it doesn’t look much different from the standard savings chart. Once you fit a trendline, you get the same result: savings decreased from 1980 through the mid-aughts.

    Unrealized capital gains don’t represent reduced spending from current income, so I don’t know if Bivens’ approach is kosher in the first place. Unfortunately, it’s not clear if that matters since it doesn’t change the overall trendlines anyway. The hypothesis that increased income inequality reduces overall demand remains one of those tantalizing theories that seems like it’s obviously true, but just doesn’t fit the data. For the time being, I continue to think of it as one of our great mysteries.

  • Donald Trump’s Gillibrand Tweet, Explained

    Ron Sachs/CNP via ZUMA

    Everyone wants to know what this tweet means:

    I’m here to help. As you know, I’ve long been a proponent of the theory that Trump’s tweets are designed primarily (solely?) to create an alternate universe for his fans. They aren’t meant for the rest of us. But I’m now edging toward accepting a different theory: they are meant to keep Trump’s name in the news because he really likes it when CNN talks about him. As the New York Times put it, “One former top adviser said Mr. Trump grew uncomfortable after two or three days of peace and could not handle watching the news without seeing himself on it.”

    Trump has real talent at self-promotion, and a sort of animal cunning about what kinds of insinuations will get everyone talking. The obvious insinuation here is that Gillibrand did something sexual, but Trump didn’t actually say that and can self-righteously deny it if anyone mentions it.

    So that’s what this is all about. It puts Trump back in the news and might even give him an opportunity to launch another wave of FAKE NEWS tweets. What’s not to like?

  • Your Smartphone Is the Latest Excuse for Low Inflation

    Here’s the latest bizarre excuse for low inflation:

    Holiday shoppers with smartphones can retrieve instant price comparisons that make bargain hunting easier—and the Federal Reserve’s job tougher….Most Fed policy makers agree they should keep gradually raising short-term rates in the months ahead to prevent the buoyant U.S. economy from overheating. But some are hesitant because inflation remains puzzlingly weak, running below 2% for most of this year. Moving too quickly could stall growth.

    ….In a nod to the growing practice, Ms. Yellen said in September that increased competition created by online retailers “may have reduced price margins and restrained the ability of firms to raise prices in response to rising demand.” She said in October that online shopping “could be helping to hold down inflation in a persistent way in many countries.”

    For most of the 20th century, inflation was low. Then, starting in the late 60s, it climbed steeply for about 15 years, peaking around 1980. Then it spent the next 15 years declining to its old rate. Here’s what it’s looked like since then:

    Core inflation—the Fed’s preferred bellwether—has been dead flat for 20 years. It hasn’t been very noisy, either, staying tightly within a band of 1-2.5 percent. It’s maintained this level through recessions and expansions, through war and peace, and even during the tight labor market of the late 90s. For a while, it was globalization that was supposedly to blame. But even after the China shock had mostly passed, inflation stayed low. So then it was because of retiring boomers. Or maybe the Great Crash of 2008. Then came the subsequent expansion, and inflation still remained quiet. So then it was because even though unemployment was low, the labor market was too loose. But now the labor market is starting to genuinely tighten, and inflation is going nowhere. So we’re adding web-based comparison shopping to the list.

    Come on. If web shopping has constrained the ability of companies to raise prices, you’d expect corporate profit margins to be down. But they aren’t:

    Granted, this shows profit margins for all corporations, and web shopping only affects a subset of consumer products. Still, you’d expect to see something. Instead, starting around the time smartphones took off, what we see is higher margins. They’re now at their highest point in 50 years.

    I’m not smart enough to know what’s going on. But when inflation has stayed flat so widely and for so long, it’s hardly credible that it’s the result of a bunch of factors that have coincidentally followed one after the other. There’s something more fundamental going on. And this something has been at work for at least 20 years, and probably more like 30.

    I’ll toss out one possibility that I think gets too little attention in general. The late 60s and 70s, when the world truly left the gold standard and opened up financial markets, represented a massive financial sea change that neither governments nor central banks were prepared to deal with. Add in a couple of oil shocks and the global economy became unmoored. It took years for financial rules to adapt and for the major central banks to learn from experience what they had known only academically before. But then they learned. They’re nowhere near perfect, but ever since the late 80s they’ve been surprisingly good at dealing with recessions and expansions—and just generally keeping the economy on an even keel. The result is that inflation is roughly as quiet as it was for most of the 20th century until the mid-60s.

    Feel free to leave your own guesses in comments.

  • Another Look at Donald Trump’s Job Approval Rating

    Via Gallup, here’s the latest look at approval levels of Donald Trump and three other recent presidents¹ during their first year in office:

    It’s worth noting that Trump’s decline is pretty normal. On average, the other three presidents declined from 58.7 percent approval to 50 percent approval by this time in their first term. That’s a drop of 8.7 percentage points.

    Trump has declined from 45 percent approval to 36 percent approval. That’s 9 percentage points.

    Despite everything, Trump’s performance has been completely average. The big difference is that he started office with an historically low approval rate. Since then, nothing unusual has happened.

    ¹You can’t use George W. Bush in this kind of comparison because his job approval spiked massively after 9/11. Nor can you use George H.W. Bush since his first term was essentially the ninth year of the Reagan/Bush administration. So I used Reagan instead.

  • Lunchtime Photo

    Ireland is famous for its donkeys, though for reasons not entirely clear to me. We didn’t see many donkeys on our travels around Kerry, but we did see a few on a farm a few miles north of where we stayed. Mostly they just stood around and looked at us, but as you can see, one of them was pretty friendly. Perhaps he was hoping for an apple or something?

  • Europe Doesn’t Like the Republican Tax Bill

    It’s not just Americans who are getting screwed by the Republican tax bill:

    Europe’s five largest economies on Monday warned the U.S. its planned corporate tax reform could breach world trade rules and violate double-taxation treaties the U.S. has signed….“It is important that the U.S. government’s rights over domestic tax policy be exercised in a way that adheres with international obligations to which it has signed up,” the ministers wrote in the letter.

    ….A provision of the House bill for a 20% excise tax on payments to foreign-affiliated companies, the Europeans warned, would discriminate against non-U.S. businesses operating in the country, contravene World Trade Organization rules and breach double-taxation agreements.

    Likewise, the proposed “base erosion and anti-abuse tax provision” contained in the Senate bill could harm international banking and insurance businesses because it would treat cross-border financial transactions between a company and a subsidiary as nondeductible, subjecting it to a 10% tax, the ministers warned.

    The finance chiefs also said a proposed preferential regime for some types of foreign incomes, another provision of the Senate bill, could be seen as an export subsidy banned under international trade rules.

    This is no surprise. The Republican Party’s enemies these days are liberals and foreigners. The tax bill goes after liberals with a chain saw, and it’s hardly surprising that they’re going after foreigners too.

    Sure, foreigners have “treaties” that liberals don’t, but the new regime has made it crystal clear that it cares nothing for past promises except those made to the most extreme elements of the Republican base. Everyone else is on their own.

  • Pentagon Obeys Court Order, Will Allow Transgender Enlistments


    I wonder what I’m missing here? I’m all for this, of course, but doesn’t the commander-in-chief get to set rules like this? Did Trump tweet about it but forget to ever send the military an official order? I’ll be interested in hearing some more details about this.

    UPDATE: It turns out the missing piece is something I’ve forgotten and the AP failed to mention: a court enjoined Trump’s ban. So the Pentagon is merely obeying a court order that requires transgender enlistment starting on January 1. I’ve rewritten the headline to reflect this.

  • The Grad Student Tuition Fee Waiver, Explained

    The tuition waiver provision of the tax bill was aimed at folks like this. Sorry about that, STEM.Paul Rodriguez/The Orange County Register via ZUMA

    One of the provisions of the Republican tax bill would force graduate students to pay taxes on waived tuition fees. So if annual tuition is, say, $50,000, and that cost is waived, the student would have to pay taxes on $50,000 of income. Jeremy Berg, the editor-in-chief of Science, is perplexed:

    It is not clear what the objective is, as the new policy would disproportionately affect students without additional resources to support their educations and would likely decrease economic viability and competitiveness as talent is lost from the science, technology, engineering, and mathematics (STEM) enterprise.

    Well, here’s the thing: I’m afraid STEM is just collateral damage in a war against economics, sociology, women’s studies, education, history, and so forth. These are all areas that produce lots of lefties who write mean things about conservatives, and the objective of the tuition waiver is to make life hard for them. Unfortunately, the tax writers couldn’t think of a way of making this provision apply only to “fields that harbor lots of liberals,” so STEM got hit too. Sorry about that.

    On another note, I attended a math summer camp with Jeremy in 1975. We were not great friends or anything, but we all knew each other and this means he is now in the running for most famous person that I used to know when I was young. None of my friends from the 70s has won a Nobel Prize or become a show runner for HBO, so editor-in-chief of Science might well be the current top dog in my personal universe.