Deciphering MMT (wonkish)

One of the most interesting debates blowing up the econ blogosphere is between mainstream macro and modern monetary theory (MMT) (see here, here, here, and here). MMT seems to flip the conventional wisdom surrounding money, banking, and monetary and fiscal policy on its head—the federal government, as the monopoly issuer of the currency, has no budget constraint; budget deficits lower interest rates instead of raising them; and fiscal policy should be the primary tool used to achieve full employment.

Nope, We Still Don't Have An Income Inequality Problem

A follow up piece to my original post on inequality is up at The Federalist. 

A slice regarding the myth of wage stagnation:

The myth of wage stagnation is commonly perpetrated by looking at average real wage statistics. But there are several problems with using average wages as a measure, which I’ve explained before, here, here and here. Briefly, one big problem is that average wage statistics are skewed downward due to the large wave of immigration we experienced in the 1980s and 1990s. Even though many immigrants were finding work and improving their lives, the influx of low-skilled work pulled wage averages downward, which makes it appear like there was stagnation when there really wasn’t.

Read the full piece here.

The Moral Case For Low Taxation

The economic case for low taxation is familiar enough, but in my piece at the Daily Caller I make the moral case.

A slice:

Important as these matters are, however, the case for reduced taxation is also compelled by moral considerations.

Every generation of Americans has understood that taxation is a fact of life. Ben Franklin famously remarked that in life “nothing can be said to be certain, except death and taxes.” However, our founders worked to keep taxes limited and uniform. “[A]ll duties, imposts and excises shall be uniform throughout the United States,” reads the U.S. Constitution. [emphasis added] That is why they not only rejected progressive income taxation, but income taxation entirely. The early republic instead applied taxes primarily to goods, which provided maximum personal choice (to avoid the tax one could avoid purchasing the product).

This vision generally held until the early 20th century, although there were two brief experiments with an income tax prior to that period. The first involved income taxation as high as ten percent during the civil war, which was repealed shortly thereafter. The second was in 1894, when congress passed an income tax that applied to the top two percent of wealth holders. However, it was quickly struck down by the Supreme Court as unconstitutional. As historian Burt Folsom notes, “At age 77, [Stephen] Field,” who was a Supreme Court justice at the time, “not only repudiated Congress’s actions, he also penned a prophecy. A small progressive tax, he predicted, ‘will be but the stepping stone to others, larger and more sweeping, till our political contests will become a war of the poor against the rich.’”

Read the full piece here.

We Don't Have An Income Inequality Problem, We Have An Ego Problem

In my recent piece at the Federalist I argued that we don't have an income inequality problem, we have a culture of entitlement problem.

A snippet:

Despite what we routinely read in the news, we do not have an income inequality problem.

First, as I’ve previously argued, we don’t refer to height differences as “height inequality.” Nor should we speak of income differences as “income inequality.” Doing so implies the deck is stacked for the “haves” and against the “have nots” before scrutinizing the facts.

Second, the statistics are often misleading.

A common tactic is to paint a dire economic picture by looking at statistical units— “households,” “families,” “income quintiles,” etc.—instead of individuals. For example, a headline from The New York Times reads: “Household Incomes Have Remained Flat Despite Improving Economy.”

Another article claims that, “after adjusting for inflation, U.S. median household income is still 8 percent lower than it was before the recession, 9 percent lower than at its peak in 1999, and essentially unchanged since the end of the Reagan administration.” Moreover, we are repeatedly warned that increasing shares of income go to the “top one percent” of earners while the rest stagnate or worse.

For the full piece, click here. 

Do We Have a "Right" to Health Care?

My explanation is up in a piece at The Federalist.

A snippet:

Buried beneath the Obamacare replacement debates is the philosophical question of whether health care is a “right.” Article 25 of the United Nations’ Declaration of Rights, for instance, declares it so. While this is correct as a means, it’s wrong as an end. Understanding the distinction is vital.

For the first time in human history, the Declaration of Independence announced that “all men are created equal.” As Abraham Lincoln argued, everyone is equal because everyone is free, and everyone is free because everyone is equal. Hence no man has the authority to rule over another without the other’s consent. Furthermore, because this equality emanates from the “Laws of Nature and of Nature’s God,” it imbues every individual with the rights to life, liberty, and the pursuit of happiness.

Read the full article here.

The Great Recession: This Time Really is Different

David has a piece up at the Daily Caller highlighting an article by economist Robert Barro, who claims that the U.S. economy should have recovered much faster from the recession than it did. David expands on this point, arguing that too much focus on fiscal stimulus is to blame for the anemic recovery. I don’t find either of these arguments very convincing.

The Myth that Tax Cuts Don't Work

My piece is up at the Daily Caller.

It begins:

Despite the preponderance of contrary evidence, myths persist that tax cuts primarily benefit “the rich” and have no discernible impact on economic growth.

Months ago, for instance, Hillary Clinton charged that “slashing taxes on the wealthy hasn’t worked. And a lot of really smart, wealthy people know that.”

She’s right that it hasn’t worked, but she failed to mention that it’s also never happened. The tired “tax cuts for the rich” canard is disproven by the 1920s, the 1960s, the 1980s and the 2000s, when tax rates were reduced for all—and especially low—income groups.

Read the full piece here.

This is Why Economic Recovery is So Slow

My piece is up at the Daily Caller. 

A snippet:

“I actually compare our economic performance to how, historically, countries that have wrenching financial crises perform. By that measure, we probably managed this better than any large economy on Earth in modern history.” – Barack Obama

So say defenders of the sluggish recovery.  But recent research belies that idea. The truth is our lackluster growth is the result of neglecting an essential economic concept.

According to Just Facts Daily, “even after the recession ended in 2009 average real GDP growth has been 35% below the average from 1960–2009, a period that includes eight recessions.” Moreover,

In early 2011, the White House Office of Management & Budget projected that real GDP would grow by an average of 3.6% per year for five years after the Great Recession (see pages 14–16). Obama’s economists noted that this figure was lower than the typical post-recession growth rate of 4.2%, but they concluded that the “lingering effects from the credit crisis may limit the pace of the recovery,” even though the recession left “enormous room for growth in 2011.” Ultimately, GDP grew by an average of 2.2%, or 39% below the White House’s conservative estimate.

Read the full piece here. 

Making America Suffer Again

In December 2015, Mary Giliberti, CEO of the National Alliance on Mental Illness, wrote a call to action. Her message was to those “who believe in the importance of mental health services and supports” to be better advocates for mental health reform in 2016. The year just ended, but I’d like to answer that call.

Is it Time to End the Electoral College?

My piece defending the Electoral College is up at The Daily Caller.

It begins:

“Time to End the Electoral College,” announced the New York Times.

“Monday’s Electoral College results prove the institution is an utter joke,” declared Vox. 

The Electoral College is a “vestige” and a “carryover” from the past, proclaimed the president of the United States. 

It is a sign of our failing education system that reputable news outlets and intelligent people don’t understand the Electoral College. Its preservation is vital for securing the rights of the minority and averting the tyranny of pure democracy.

Yet seemingly unfamiliar with these arguments, the New York Times (NYT) haughtily pronounced that:

By overwhelming majorities, Americans would prefer to elect the president by direct popular vote, not filtered through the antiquated mechanism of the Electoral College. They understand, on a gut level, the basic fairness of awarding the nation’s highest office on the same basis as every other elected office — to the person who gets the most votes. 

The editors of the Times would do well to consult the history books. “Antiquated” is a term better applied to the idea of a direct popular vote. Millennia ago, Greece and Rome attempted what the NYT celebrates as a novel idea, and both collapsed.

To read the piece in full, click here.

The Problem with our Public Discourse

My piece is up at the American Thinker. A slice:

This political season has become especially emotion-driven. That may be understandable for the general public, for whom politics is neither a passion nor a preoccupation, but it is another matter when our “elite” who shape public opinion and whom we expect to elevate public discourse promote non-thinking.

Consider three examples. 

First is a leading editorialist who excoriated various Republicans for their support of Donald Trump, whom the author labels a “dangerous fascist:”

I am talking, for example, about Sen. Marco Rubio, who in the primary called Trump an "erratic individual" who must not be trusted with nuclear weapons -- and then endorsed him for president.

I am talking about Sen. Ted Cruz, who called Trump a "pathological liar" and "utterly amoral" -- and then endorsed him for president, even though Trump never apologized for threatening to "spill the beans" on Cruz's wife and suggesting Cruz's father was involved in the assassination of President John F. Kennedy.

Most of all, I'm talking about House Speaker Paul Ryan, a man whose pained, blue eyes suggest he desperately wants to cry for help. He's a man who runs around the country pathetically trying to pretend that Trump does not exist and that the key issue is his congressional caucus' "Better Way" agenda. And he's a man who, of his own free will, seeks to help Donald Trump become president.

One would think that a writer critiquing his opponents would demonstrate familiarity with their thinking. But here not even a cursory understanding of it is demonstrated. After providing nothing but a few obscure quotes from the primary season, he smears Messrs. Ryan, Rubio, and Cruz by concluding that their support of Trump is proof that “they love their careers more than they love America.”

To read the full piece, go here.

Freedom vs. Equality

My article on freedom and equality is up at The Federalist. A few snippets:

Modern politics is generally framed as a struggle between freedom and equality. But which is the greater end? Although both are important, in accepting either we’ve lowered our sights from the classical ideal of virtue. The modern mindset can be demonstrated by two examples: taxes and the minimum wage. Opponents of tax hikes often appeal to the right of individuals to keep the fruits of their own labor, while advocates argue the wealthy must “pay their fair share.”

The same applies to the minimum wage. Critics decry government criminalizing arrangements the parties involved have freely agreed to simply because it may not seem “fair” to an outsider, while supporters counter that everyone is entitled to a “living wage.” To be sure, freedom and equality are indispensable to our republic (although equality of opportunity as opposed to equality of outcome), but both fall short of the ideal of virtue.

Does Capitalism Cause Recessions?

Why do recessions occur? This question divides free market economists. After recently blogging on the classical conception of the business cycle, in which I described how “classical” economists believed that economic crashes are due to production errors, a commenter linked to an alternative perspective which suggests that recessions are the result of central banking. While this is true some of the time, it doesn’t explain why recessions plagued the economy before the introduction of the Federal Reserve (Fed) in 1913.

Is Classical Theory Irrelevant?

For the last 70 years, macroeconomics has become so entrenched within a demand-side framework that arguments that don’t operate within that paradigm are often derided as irrelevant.

A couple weeks ago I wrote a piece explaining classical business cycle theory and its denial of demand deficiency. Someone from a prominent think tank (not my former employer) messaged me, asserting that although he agreed classical theory is routinely misunderstood, he didn’t understand why it mattered:

It seems to me that the piece is really about …the fact that goods will command some price in the market - that demand for them will never literally reach zero – [which] is not a terribly interesting finding … and I would really like a clear explanation of why this matters...

Given the difficulty of discarding the macroeconomic lens that has prevailed since the 1930s, this misunderstanding and subsequent dismissal of the argument isn’t surprising. Virtually all modern theory is rooted in an “aggregate demand” paradigm—that is, demand management is understood as the key to a well-run economy. This is true for “Monetarists,” “Keynesians,” and even many free market variations, where disagreement has been reduced to whose model best achieves that end.

How Keynesian Economics Has Distorted Economic Thinking (Somewhat wonkish)

For the better part of a century, most economists have believed that recessions are caused by overall demand failure—total purchasing power dropping below the number of total goods on the market.

Part of the reason for the predominance of this thinking is that the man who popularized it, John Maynard Keynes, mischaracterized “classical” arguments in order to better refute them. Unfortunately, few are aware of the success these distortions have had on economic theory.

Keynes began his criticisms of the classical school by insisting that it offered no explanation for “involuntary unemployment”—or forced unemployment—and hence recessions:

Classical theory…is best regarded as a theory of distribution in conditions of full employment. So long as the classical postulates hold good, unemployment, which in the above sense involuntary, cannot occur… [emphasis added]

He then added to his criticism by accusing his opponents of fallaciously arguing that “supply creates demand,” which Keynes would repudiate:

What is economic mobility?

Tim wrote a thoughtful rebuttal to my posts on economic mobility, but it seems we’re at least partly talking past one another.

One of Tim’s central arguments is that some of the studies I highlighted miss the point he has in mind—whether “someone from a poor or lower-income family has the same or better chance of attaining such a position than in an earlier generation”—and instead reflect the fact that part-time high school and college workers rise to higher income brackets over time.

King for a Day, Reconsidered

A couple of weeks ago, I critiqued a number of David’s pieces on the topic of income inequality. In those pieces, David seemed to accept that income inequality had grown over time, but claimed that it was no big deal because people move up and down the income distribution over the course of their lives—what economists call ‘income mobility’. I pointed out that one of the main sources for David’s claims—a study conducted by the U.S. Treasury in 2007—seemed to 1) confirm the notion that income mobility is low in the U.S., yet still managed to 2) overstate the amount of income mobility we actually have. David promptly composed a follow-up post responding to the former but ignoring the latter, arguing that

A deeper look at economic mobility

I recently wrote several posts on the issue of income differences. My central argument is that, to meaningfully measure the economic gap, one must observe individuals and how they fare over time.

Regrettably, most studies instead take a snapshot of statistical categories in time—such as the “top one percent” and the “bottom 99 percent”. Problem is, categories are not people, which is why major studies that track individuals over time contradict the popular studies.

My counterpart Tim differs with me, and in a recent post he makes his case in large part by critiquing a study from the U.S. Treasury, which shows high income mobility. There are a few points he raises that are worth further reflection.

King for a Day

Over the past few months, David has posted several times on the topic of income inequality (for example, see here, here, and here), which he deems to be a non-issue. To support his case, a recurring point of his is that comparing percentiles of the income distribution—such as the ‘top one percent’ and the ‘bottom 99 percent’—is fallacious. In a recent column, David explains that

"The late economist Joseph Schumpeter compared income groups to hotel rooms: just as the former ranges from high to low, so the latter ranges from high-end to low-end. But the different categories fail to reflect who occupies them and whether occupants move to higher categories over time." 

In other words, if we have high income mobility—that is, lots of movement up and down the income distribution—then comparisons between different portions of the distribution are meaningless. But unfortunately, we don’t have high income mobility.

Income inequality: Households are not people

Distinguished Harvard economist Martin Feldstein penned a recent column in the Wall Street Journal making the point that economic differences are less drastic than advertised.

He writes:

The Federal Reserve recently estimated total household net worth in the U.S. to be about $80 trillion, including real estate and financial assets. And data from the Fed’s Survey of Consumer Finances imply that the top 10% of households by net worth hold about 75%—or $60 trillion—of this total. The bottom 90% of households therefore have a net worth of about $20 trillion.

But, as he notes, this picture “leaves out the large amount of wealth held in the form of future retirement benefits from Social Security and Medicare”: