Furman on Progressivity

My friend and former student Jason Furman has a letter in today's Wall Street Journal, taking on the CEA op-ed from earlier in the week. Here is an excerpt:

Edward P. Lazear and Katherine Baicker of the President's Council of Economic Advisers are correct in stating that a tax-policy change is progressive if it "narrows the difference in take-home earnings" ("America at Work," editorial page, May 8). But they are incorrect in stating that this is what the president's tax cuts have done.

According to the Tax Policy Center, the tax cuts passed since 2001 have raised the after-tax income of the top 1% of Americans by 5%, while raising the after-tax income of the bottom 60% of Americans by just 2%. In other words, the tax cuts have contributed to widening, not narrowing, the difference in take-home earnings.

In a previous post, I noted that there are different ways to frame the progressivity question. Jason says the first of the three frames I described is the "correct" one. Is he right? I report, you decide.

Jason would say that after-tax income is what people care about, so that should be the focus of our discussion. On the other hand, blogger Brandon Berg notes that, by Jason's preferred metric, a tax cut that completely eliminated the tax on the poor, leaving the rich bearing the entire tax burden, could be judged as making the tax code less progressive. Berg views this an odd use of language.

The framing really matters here; it is not mere pedantry. A little algebra is necessary to explain why. The number that Jason reports, which I will call x, is

x=dT/(Y-T),

where Y is before-tax income, T is taxes, and dT is the change in taxes. After slight rearrangement, we can write the percentage change in taxes as:

dT/T = x(Y/T - 1).

The percentage change in the tax burden is a function of Jason's x and the average tax rate T/Y. The average tax rate varies strongly with income.

I don't have the average tax rate for the data that Jason is using, but based on other data I have seen, I would guess that the top 1 percent pays about 31 percent of income in federal taxes, and the bottom 60 percent pays about 12 percent. (This includes all federal taxes, not just income taxes.) Let's use these figures for T/Y. With the above formula and Jason's numbers, we can estimate that taxpayers in the top 1 percent of the income distribution got a 11-percent tax cut while those in the bottom 60 percent got a 15-percent tax cut.

These figures are roughly consistent with figures in the 2005 Economic Report of the President (pages 78-79). Using CBO data, it reported that in 2004 the average tax rate for the lowest quintile was reduced from 6.7 to 5.3 percent (a 21 percent cut), while the average tax rate for the top quintile was reduced from 27.6 to 25.2 precent (a 9 percent cut). Once again, to avoid confusion, I should say that this includes all federal taxes, not just income taxes.

Jason in his letter brings up the intertemporal government budget constraint (not in the above excerpt). Because I addressed that issue in a previous post, I won't comment again.

Finally, I should mention that all of these numbers are based on simplistic assumptions about tax incidence. For example, to the extent that cuts in capital taxes increase capital accumulation, which in turn increases productivity and wages, the true incidence of tax changes could be very different from the incidence assumed in these data. So, even putting the framing issue aside, all of these numbers need to be taken with a grain of salt.

Why Economists Love Wal-Mart

An article in yesterday's Pittsburgh Times-Review explains why economists have a more favorable view of Wal-Mart than, it seems, everyone else:

A larger complaint against Wal-Mart charges that the giant retailer comes in and wipes out main street, puts an end to all those mom-'n-pops that are selling everything from hammers to salmon.

The other side of the story is that salmon is no longer a high-end delicacy, beyond the reach of the average household. With fresh fillets selling for $4.50 a pound in Wal-Mart's display cases, the price for an 8-ounce dinner portion is 44 cents lower than the current price of a Cheeseburger Happy Meal at McDonald's.

The end result is better nutrition in America, especially among lower-income households, and less poverty and unemployment in Wal-Mart's primary supply regions in southern Chile.

Altogether, Wal-Mart's prices, according to a study by M.I.T. economist Jerry Hausman and USDA economist Ephraim Leibtag, are saving U.S. consumers more than $50 billion a year, money that's spent elsewhere, boosting volume at other businesses and creating new enterprises, including mom-'n-pops.

The net impact? The director of economic policy for the 2004 Kerry-Edwards campaign, New York University economist Jason Furman, contends that Wal-Mart is "a progressive success story." With Wal-Mart's prices ranging from 8 percent to 40 percent lower than people would pay elsewhere, states Furman, the increase in buying power that Wal-Mart delivers, disproportionately to lower-income families, more than offsets any impact that the company has allegedly produced in the earnings of retail workers.

By the way, Jason Furman was a former student of mine at Harvard. (We had some interesting dinner conversations while I was at the CEA and he was working to unseat my boss.) You can find Jason's study of Wal-Mart here.

How much progressivity is optimal?

Over at the Hamilton Project, Jason Furman, Lawrence H. Summers, and Jason Bordoff say we should make the tax code more progressive:

At a minimum, the tax cuts of 2001 and 2003 should be repealed or allowed to expire for married couples making above $200,000 a year.

But they say we should not go too far:

To be sure, there are limits to how far policy should go in using progressive taxation to offset inequality.

The paper does not, however, say what those limits are. How do we know that the current top rate of 35 percent is not already past the limit?

Unfortunately, the authors do not spell out what economic model they have in mind in reaching their conclusions. Here is my guess, based in part on their footnote 8, about the model in their heads. They believe:

1. Tax policy should be set to maximize a social welfare function.
2. The social welfare function has strong aversion to inequality.
3. The tax-setting social planner must take into account that taxes are distortionary, but elasticities are small enough that the distortions are not much of a problem until tax rates reach much higher levels than we have today.

Note that points 1 and 2 are about political philosophy rather than economics. Economists can have opinions about these matters, but our opinions are not much better or worse by virtue of our training than those of anyone else. One can even reject the whole idea of a social welfare function. Utilitarian philosophers argue for interpersonal comparisons of utility, but nothing inherent in economics permits such comparisons. If we reject the idea of a social welfare function, then we are left with Pareto efficiency as the only valid criterion for judging tax policy, and economics has little to say about optimal progressivity--a point emphasized in a recent paper by MIT wunderkind Ivan Werning.

Point 3 is more economic, but it raises an issue about which economists hotly debate. See here and here. And even if that debate is resolved, point 3 on its own tells you nothing about optimal policy. You need the social welfare function to draw normative conclusions.

As a political document aimed at advising Democratic candidates and elected officials, the Hamilton paper makes sense. But as an intellectual document, it would been more compelling if the authors had spelled out the model of optimal tax policy they had in mind. It would have been nice to see explicitly their assumed social welfare function and elasticity estimates and then some calculations of optimal progressivity based on these. As it stands, the paper leaps to conclusions without stating premises, so it is hard for the reader to reach a reasoned judgment about whether to agree or disagree.

By the way, I bet if the Hamilton authors took their framework seriously, they would conclude that taxing height is an inevitable implication of their normative axioms.

Update: While my former student Jason Furman argues for greater progressivity, my former student Alan Viard takes the opposing view.

The Obama Social Security Plan

Via Jason Furman, director of economic policy for the Obama campaign:

Obama is confident that we can come together to find a workable solution. He believes that one strong option to improve Social Security's long-term solvency is asking people who earn more than $250,000 to pay a little more into the system. But Obama will not raise the retirement age or reduce Social Security benefits.

That is, it sounds like Senator Obama wants to close the projected gap between taxes and spending entirely by raising taxes.

N.B.: Most economists favor raising the retirement age.

Update: A reader notes a rhetorical correction:

you might ask Jason Furman if Obama is really going to "ask" people who earn more than $250,000 to pay a little more into the system, or is he going to "tell" them to pay?

Update 2: Andrew Biggs, an expert on this issue, emails me a more substantive problem:

There's a big mathematical hole in Sen. Obama's plans for Social Security. While Obama is vague about the exact tax rate he would apply to people earning over $250,000 and whether they would receive extra benefits in exchange for the new taxes, a best-case scenario is that Obama's plan would fix around 15% of the long-term deficit, adding 3-5 years to the life of the trust fund. He's ruled out cutting benefits or increasing the retirement age, which could otherwise fill the rest of the gap, so it's not clear where the other 85% of the fix comes from. Sen. Obama has put himself in a bit of a box, which is perhaps the best rationale for a post-election commission -- it lets both sides forget about their previous campaign promises.

"a step in the right direction"

That's how Leonard E. Burman, Jason Furman, and Roberton Williams describe the health care proposal that President Bush will propose in tonight's speech. So, yes, there is hope for bipartisanship.

Update: The Wall Street Journal also likes the proposal. Here's a theorem: Any time the Wall Street Journal editorialists and Jason Furman agree, they are right.

Update 2: Steven Pearlstein and Ruth Marcus have nice pieces on the topic in today's Post.

Update 3: Here is a description of the distributional impact of the policy. The U.S. Treasury estimates that it would be a tax cut for the bottom four quintiles and a tax increase for the top quintile.

Furman on PAYGO

My friend Jason Furman is a smart, reasonable Democratic economist. (Note to my Republican friends: No, that's not an oxymoron.) In response to a previous post, Jason emails me to lobby on behalf of PAYGO rules. While I ponder his arguments, he has graciously allowed me to share them with my blog readers. Here's Jason:

You don't need a lexicographic preference for deficit reduction to join Alan Greenspan, GAO Comptroller David Walker and me in supporting PAYGO rules for tax cuts and spending increases.

You should give sincere thought to this, you would have a positive impact on current debates and do tangible good. Sorry for the long e-mail, but I'm really not trying to score points or to win a debate but to convince you that this is consistent with your beliefs.

Helping to build future support for sensible spending cuts and base broadeners is worthwhile but it's also a bit of a parlor game that looks serious, impresses your friends, assuages your conscience, but doesn't have much immediate impact in improving our fiscal situation -- or keeping it from deteriorating further. (I don't think the parlor game is pointless, see here, just that it's not sufficient.)

In the 1990s, PAYGO was commonsense. Dole and Gingrich supported it -- that's why they proposed Medicare and Medicaid cuts to pay for their tax cuts. Clinton supported it when we had a deficit -- his original prescription drug plan was fully paid for and even the later versions were explicitly contingent on being enacted together with a plan to ensure Social Security solvency. And John McCain, who you traveled on the bus with in 2000, remains a strong supporter of PAYGO.

The 1997 Balanced Budget Act was one product of this consensus. You would be heartened to know that it included about $400 billion in Medicare and Medicaid cuts and $400 billion in gross tax cuts (including capital gains, estate tax, and IRA expansions you would like).

I wouldn't expect you to agree with Alan Greenspan and me that PAYGO should apply to the extension of the tax cuts already enacted. Instead, you could agree with George Bush and the implicit position of the Kerry-Edwards campaign budget that these tax cuts were never intended to be temporary, that not extending them would be a tax increase, and that the baseline should assume they are extended. (Ideally you would put the estate tax in the not yet enacted and thus subject to PAYGO category, but I won't let the good be the enemy of the decent.)

It would be consistent with your philosophy -- and helpful in actual debates going on in Washington and not just on economics blogs -- if you argued that PAYGO should apply to all new tax cuts and spending increases. Admittedly it would put some constraint on tax cuts, but it also might put more pressure on Congress to reduce spending -- since they would need to eat their spinach contemporaneously in order to have their desert.

Our political system needs simple rules to restrain itself and prioritize. Most responsible, good policy types -- liberal and conservative -- believe that PAYGO is one of those simple, easy to understand, black-and-white rules. Put another way, when you're in a hole the first thing to do is stop digging.

Think about it.

Jason

P.S. PAYGO won't, of course, reduce the fiscal gap. So even better would be to call for mutual sacrifice, including spending cuts and tax increases that you might not like but have a chance of being enacted. As you wrote in 2000, "More vital than choosing a President with the right tax plan is electing a President with the political courage to change course when events demand it."

Furman on Health Insurance

Economist Jason Furman, a frequent adviser to Democratic candidates, has a new article on health insurance that is well worth reading. In this excerpt, Jason points out that our tax code leads to excessive use of health insurance:

if your employer pays $1,000 in premiums to your insurance company, that money is effectively tax deductible to you. But if your employer raises your salary by $1,000 and you use the extra money to pay for medical bills, you generally will not get a tax deduction. As a result, many people end up with more-generous health insurance plans than they would otherwise choose to have. These plans have lower deductibles, lower co-payments, and lower co-insurance and are often focused around providing first-dollar coverage for routine medical expenses, rather than genuine insurance. As a result, individuals in the health system are often spending someone else’s money, which is never a recipe for cost consciousness. Unfortunately, ultimately it is not really someone else’s money: the cost is paid in higher premiums, which in turn are reflected in lower wages.

Most economists agree with this analysis (see my previous post on health insurance).

Jason suggests several policy responses, such as limiting the amount of health insurance that is tax-deductible. That proposal has my vote.

A Gold Star for Barack Obama

My friend and former student Jason Furman has joined the Obama campaign as Director of Economic Policy.

Update: The far left objects.

I am tempted to come to Jason's defense here, but somehow I doubt that support from me would allay the fears of Jason's critics. Maybe it would help if I attacked him?

Toward, and Away From, Bipartisanship

Obama economic advisers Jason Furman and Austan Goolsbee described the Obama tax plan in yesterday's Wall Street Journal.

A notable sentence:

The tax rate on dividends would also be 20% for families making more than $250,000, rather than returning to the ordinary income rate.

That is, Senator Obama appears to embrace the principle that dividends should be taxed at a much lower rate than ordinary income. (Recall that this income has already been taxed at the corporate level.) This principle was a fundamental premise behind the 2003 tax bill, signed by President Bush and opposed at the time by a vast majority of Democrats in Congress. If we can now achieve bipartisan consensus to limit the tax burden on corporate capital, that would be a significant step in the right direction.

On an unrelated issue, however, the Furman-Goolsbee piece seems to take a surprising step away from bipartisanship. They take a swipe at Senator McCain's proposal to replace the tax exclusion for employer-provided health insurance with a more flexible health insurance credit. When President Bush suggested a similar idea last year, Furman and coauthors called it "a step in the right direction," and many other commentators agreed. It is too bad that Team Obama is now dissing the proposal.

Memo to the POTUS-elect

Congratulations, Senator Obama. You ran a good campaign, and you racked up an historic victory. As you get ready for your new responsibilities, let me suggest four ways for you to become a reliable steward of the economy:

Listen to your economists. During the campaign you assembled an impressive team of economic advisers from the nation’s top universities, including Austan Goolsbee from University of Chicago and David Cutler and Jeff Liebman from Harvard. Your campaign’s director of economic policy, Jason Furman, is a smart, sensible, and well-trained policy economist. I know: He is a former student of mine.

Pay close attention to what they have to say. They will often give you advice quite different from what you will hear from congressional leaders Nancy Pelosi and Harry Reid. To make sure you hear the views of your economists, put them in offices close to yours. Tell your chief of staff to invite them to all the relevant meetings.

Embrace some Republican ideas. No party has a monopoly on truth. Be ready to take the best Republican policy proposals and make them your own, as Bill Clinton did with welfare reform in 1996.

Health policy is a case in point. Over the past several months, you lambasted McCain’s proposal to reform the tax code to include a refundable health insurance tax credit. Did you know that long before McCain ever proposed this idea, it was advanced by Mr. Furman, your campaign’s policy director? He can explain to you why the Furman-McCain plan makes a lot of sense.

Now you may decide that this plan does not go far enough. You may want a more generously funded social safety net to help the less fortunate get health care. Fair enough, but in pursuing that goal, you run into the next issue.

Pay attention to the government’s budget constraint. The nation faces a long-term imbalance between government spending and tax revenue. The fundamental problem is that the federal government has promised the elderly more benefits than the tax system can support. This fiscal imbalance will become acute as more baby boomers retire and start collecting Social Security and Medicare.

Yet during the campaign, you promised that you would cut taxes for 95 percent of Americans, that you would vastly expand health insurance coverage, and that you would never cut Social Security benefits or raise the retirement age. You will almost surely have to renege on some of these promises. As your economic team will often remind you, even if the laws of arithmetic are ignored during campaigns, they provide a real constraint when making actual policy.

Recognize your past mistakes. As a new senator, you voted along predictable left-wing lines. As president, you will need a more eclectic, nuanced approach.

Take trade policy, for example. In the senate, you voted against the Dominican Republic-Central American Free Trade Agreement. You opposed free trade agreements with Colombia and South Korea. You supported Senators Charles Schumer and Lindsey Graham in their quest to put tariffs on Chinese goods if China failed to revalue its exchange rate. You supported the Byrd Amendment, which encouraged domestic companies to file anti-dumping suits against foreign competitors. You supported subsidies for domestic producers of corn-based ethanol and tariffs on imports of more efficient sugar-based ethanol.

Your economists can explain to you why these positions were wrong-headed. Economic isolationism is not in the national interest. A high point of the Clinton presidency was the enactment of the North American Free Trade Agreement, which passed both the House and Senate with a majority of Republicans and a minority of Democrats.

This past Tuesday, many people voted for you hoping you would achieve the kind of economic success that Bill Clinton enjoyed in the 1990s. Your best chance of delivering what they want requires that you abandon some of your past positions and pursue a more moderate, bipartisan course.

----
Tomorrow's NY Times includes an edited version of this article.

Post-Partisan Health Policy

The PEP blog draws our attention to this trenchant analysis of health policy:

The most promising way to move forward in all three dimensions – coverage, cost, and long-run fiscal situation – is to replace the employer exclusion with a tax credit, a step that has been proposed many times before (e.g., Butler 1991 and Pauly and Hoff 2002). Firms would still be allowed to deduct the cost of their contributions to employee premiums, just as they can deduct wages and other expenses today for the purpose of calculating taxable income. But workers would now have to include employer contributions to health insurance in their earnings for the purpose of calculating taxes (precisely which taxes is discussed below). In exchange for, workers who purchased qualifying insurance would get a refundable tax credit. Qualifying insurance would be along the lines proposed by the President in his standard deduction for health insurance, including limits on out-of-pocket payments, coverage of a general range of medical care, and guaranteed renewability by the provider (Treasury 2008).

The PEP blog then points out,

This is a pretty fair description of the McCain health care plan. The funny thing is, this is not be found in McCain campaign literature or on his senate website, but rather in a paper written by Jason Furman, Obama's Economic Policy Director.

All true. This description is from the McCain campaign website:

John McCain Will Reform The Tax Code To Offer More Choices Beyond Employer-Based Health Insurance Coverage. While still having the option of employer-based coverage, every family will receive a direct refundable tax credit - effectively cash - of $2,500 for individuals and $5,000 for families to offset the cost of insurance. Families will be able to choose the insurance provider that suits them best and the money would be sent directly to the insurance provider. Those obtaining innovative insurance that costs less than the credit can deposit the remainder in expanded Health Savings Accounts.

Obviously, there is a lot of common ground between Furman and McCain on this specific policy reform. My guess is that most health economists would endorse the Furman-McCain plan.

The Newest Hamiltonian

The Wall Street Journal's Washington Wire reports:

Hamiltonian Democrats’ Get New Leader

Former Clinton administration economist Jason Furman will become the new director of The Hamilton Project, a year-old effort of the Brookings Institution to promote a centrist economic strategy. Named for Alexander Hamilton, the nation’s first Treasury secretary, the project is better known for its association with his modern successor, Clinton Treasury Secretary Robert Rubin, a founder and funder....

In the Clinton White House, Furman was a top staffer for budget and tax issues. He also was an economist at the World Bank and in 2004 was director of economic policy for Sen. John Kerry’s presidential campaign. He received his doctorate in economics from Harvard University, under the supervision of N. Gregory Mankiw, who went on to be a top economic adviser to President Bush.

I once heard a colleague opine, "A good student is worth a paper and a half." Jason is worth one and three-quarters.

CBO on Fiscal Stimulus: A Strange Menu

The CBO gives its analysis of various forms of fiscal stimulus.

Some of the proposals on the table strike me as particularly odd. For example: a temporary increase in food stamp benefits.

In standard macroeconomic theory, the business cycle is symmetric. That is, stimulating an economy that is suffering from insufficient aggregate demand should be the opposite of cooling off an overheated economy to reduce inflationary pressures. Would anyone seriously propose a temporary cut in food stamp benefits in an overheated economy? I don't think so. Food stamps seem the wrong tool to address the business cycle.

By contrast, the first line of defense against short-run economic fluctuations--monetary policy--is applied symmetrically. You cut money growth and raise interest rates in an overheated economy, and you increase money growth and lower interest rates in a lackluster one.

Update: Jason Furman emails me:

Greg,

As always, thanks for using your blog as a means to educate your readers through discussion and debate. I was surprised to see you single out food stamps as an example of what is wrong with fiscal stimulus. At a minimum the same logic would apply to every other fiscal stimulus option. You are correct that policymakers do not cut food stamps in order to restrain an overheated economy. Then again, policymakers do not generally raise taxes during booms either—if anything it is the opposite and the transitory revenue boost associated with an overheated economy is often employed as an argument for more tax cuts.

The Congressional Budget Office menu is responsive to the question policymakers from both parties are asking today: if we want to increase aggregate demand in the short run, what is the best way to do it. And a temporary increase in food stamps is, appropriately, high up on this list. Food Stamp administrators could simply press a button and everyone’s electronic debit cards would have, say, an additional 20 percent more money starting almost immediately and ending whenever policymakers want. Plus as Marty Feldstein explained: “Food stamps strikes me as a pure cash transfer to people with a high propensity to spend and people who would not benefit from a tax cut.” Tax rebates are administratively more difficult and have somewhat lower bang-for-the-buck, but have the big benefit of being scalable to the size policymakers desire – which is why Doug Elmendorf and I recently included them in our list of more effective stimulus options.

You might be convinced that food stamps are no worse than any of the other options and, from a purely technocratic point of view, even somewhat better. But what about the case for fiscal stimulus in general? An economist king would use both fiscal and monetary policy to stabilize aggregate demand. In particular, because monetary policy takes about a year to significantly impact the economy, the economist king would well-designed fiscal policies like tax rebates and food stamps to affect aggregate demand over three to six month horizons.

I have not written down the model, but I suspect that even if the economist king was constrained to use asymmetric fiscal policy (i.e., fiscal expansions timed to downturns but no fiscal contractions timed to booms) it would still be better to use a combination of fiscal and monetary policy to stabilize the economy than to eschew fiscal policy altogether.

Of course, reality falls a considerable amount short of even the asymmetric economist king. Just how far short is a difficult judgment and entails weighing the benefits of fiscal stimulus done right against the costs of fiscal stimulus done wrong. But given that policymakers have now chosen to undertake fiscal stimulus, one important task for economists is to help them sort through their options so that the end result is at least a little bit closer to what an economist king would do.

Jason

Greg again: Marty Feldstein may well be right that those on food stamps have a higher-than-average marginal propensity to consume. Nonetheless, I wonder if we really want to target such cyclical measures on the poorest members of society. That is, for any mean level of food stamps, wouldn't the poor be better off with a constant stream of benefits than with a benefit that fluctuates over the business cycle? Using food stamps as a cyclical tool seems to risk destabilizing some families' food consumption in an attempt to stabilize the overall business cycle.

If we are going to use fiscal policy to smooth out the business cycle on a regular basis, then we should think harder about improving the economy's automatic stabilizers. For example, imagine we enacted an investment tax credit, the size of which was a function of the unemployment rate. Firms would have an incentive to time their investment projects toward those periods when the economy was weakest and most needed a shot in the arm.

I can more easily imagine, when the economy starts to overheat, telling corporations that their investment credit has shrunk or disappeared than telling poor families that their food budget has been cut.

CEA Chair

Rumor has it that my friend and former student Jason Furman will be the next chair of the Council of Economic Advisers.  If true, that is great news.  Jason is smart, knowledgeable, and sensible.  He does not come to the job with as long an academic track record as other recent picks, but he has far more policy-relevant experience and expertise.

The Jason Furman Fan Club

AEI Chapter.

Update: Here the President's announcement of Jason's appointment.

News for Emily Litella

All of us who work with macroeconomic data have learned, sometimes the hard way, that conclusions based on preliminary data are subject to change. Here is a good example.

The NY Times two days ago in a front-page, above-the-fold article:

wages and salaries now make up the lowest share of the nation’s gross domestic product since the government began recording the data in 1947.

The NY Times online today, presumably to be reported in tomorrow's paper (on what page? [update: page C1]):

Perhaps the biggest surprise in today’s report was a surge in wage-and-salary income during the first half of this year. Between the fourth quarter of last year and the second quarter of 2006, it grew at an annual rate of about 7 percent, after adjusting for inflation, up from an earlier estimate of 4 percent, according to MFR, a consulting firm in New York.

As a result, wages and salaries no longer make up their smallest share of the gross domestic product since World War II. They accounted for 46.1 percent of economic output in the second quarter, down from a high of 53.6 percent in 1970 but up from 45.4 percent last year.

Total compensation — including employee health benefits, which have risen in value in recent years — equaled 57.1 percent of the economy, down from 59.8 percent in 1970. Still, compensation makes up a larger share of the economy than it did throughout the 1950’s and early 60’s, as well as during parts of the mid-1990’s and the last couple of years.

As Emily Litella would say, "Never mind."

Update: My friend Jason Furman emails me his observations on the matter:

Greg,

Measured properly wages and salaries in the first half of 2006 were the lowest as a share of economy since WW II.

The proper denominator for factor shares is gross domestic income (GDI) or national income. Using either denominator, wages and salaries are the lowest since World War II. CEA's Economic Report of the President always shows incomes as a fraction of GDI as does NIPA Table 1.11.

You are correct that as a share of gross domestic product (GDP) wages and salaries are no longer the lowest since WW II. But this is an apples-to-oranges comparison -- which is why neither the very careful CEA nor the very careful BEA would do it. (It is, alas, a common practice to use GDP in the denominator -- one that many excellent economists and reporters, including the New York Times -- follow.)

Specifically, the statistical discrepancy between GDP and GDI shows up in the denominator but not in the numerator. In 2006-Q2, GDP was $76 billion lower than GDI. If you're using GDP in the denominator, then this $76billion should be subtracted from some combination of wages, profits, rents, etc. Conversely, in 2005 GDP was $71 billion higher than GDI. As a result, to use GDP in the denominator you should also add this $71 billion to incomes.

Since we don't know how the statistical discrepancy breaks out between different factor incomes (that's why it's a "statistical discrepancy") we use GDI in the denominator. Or to avoid screwy results from depreciation, I generally prefer to use national income. Either way, the Times headline holds up.

Best, Jason

P.S. I should say I'm not that interested in wage shares, compensation shares are the relevant metric for most important questions. And the upward revision in wages certainly is a good sign and helps make sense of the revenue surprises we experienced this year -- and might suggest they'll be somewhat more durable than the potentially more ephemeral capital gains and corporate profits. But since you were being picky, I thought you might as well help your Ec 10 students to learn some national accounting arcana.

Wake-Up Call for Jason

The headline on the front page of today's NY Times:

Eye on Election, Democrats Run as Wal-Mart Foe

Will this be enough to get my Democratic friend Jason Furman to change party?

Furman on SCHIP

On my invitation, Brookings economist Jason Furman, a frequent adviser to Democrats in Congress and on the campaign trail, offers his response to the White House's view of SCHIP:

Greg,

Thanks for voluntarily subjecting yourself to the Fairness Doctrine. Last week Senator Grassley, the Republican ranking member of Senate Finance, got so angry about the White House’s description of the SCHIP legislation that he said the President’s “understanding of our bill is wrong, and I would urge the president to reconsider his veto message based upon the bill we might pass, not something that some staffer has told him wrongly about our bill.” I have to agree.

While we might have differences of opinion about health insurance and the role of government we should all be basing our opinions on the same set of facts. And some key ones are:

(1) The President supports a proposal that would reduce annual spending on SCHIP relative to inflation and reduce the number of covered children and pregnant women by 840,000 according to the Congressional Budget Office (CBO).

You might ask how the $5 billion increase in spending over 5 years promised by the White House could result in more uninsured. The answer is that for technical reasons the CBO baseline assumes $5 billion in nominal dollars annually going forward, something depicted in the flat green line in your previous post. But spending at this baseline would fall relative to general price inflation and plummet relative to health spending growth. As a result, under CBO’s baseline the number of people covered would fall from 7.4 million in 2006 to 3.5 million in 2017, despite an increase in the eligible population.

(2) The Democrats and a substantial number of Senate Republicans support a proposal whose principal focus is covering low-income children who are currently eligible (3.2 million according to CBO) plus expanding coverage modestly to new children (600,000 according to CBO). In total 85 percent of the coverage expansion is for those who are already eligible but are not getting coverage either because the funding limits assumed in the baseline are projected to be reached leading states to turn away currently eligible children or because families simply do not sign up for the coverage that is available to them.

(3) Although the SCHIP legislation is typically described as “costing” $35 billion, much of this sum is needed simply to maintain the current enrollment and service levels. Democrats insisted that the entire $35 billion be paid for without increasing the deficit. This was significant because some in the party were arguing that there was no need to pay for the portion of the $35 billion that covers the continuation of current service levels, just like Republicans argue that there is no need to pay for the extension of tax cuts.

And to continue on the subject of fiscal responsibility, it is indeed unfortunate that the SCHIP bill has a cliff after 2012 (although it’s an odd accusation for supporters of the 2001 and 2003 tax cuts to be making). It is, however, important to realize that the cliff wasn’t in the original House bill which helped pay for the SCHIP expansion with $50 billion over five years in Medicare spending cuts along the lines recommended by Congress’ bipartisan Medicare Payments Advisory Commission (MedPAC). Senate Republicans insisted on taking out the Medicare spending cuts, leaving behind a cliff in net spending. But as long as PAYGO is still in force five years from now the extension will again have to be paid for, hopefully next time with many of the spending cuts originally supported by House Democrats.

(4) States have always enjoyed flexibility on setting their own income eligibility levels under the SCHIP program. And since 2001, the Administration has actively encouraged states to apply for waivers to use SCHIP funds for adults. All but two of the waivers covering parents or adults without children were approved by this Administration. The House bill left this flexibility in place but at the insistence of the Senate, the bicameral SCHIP legislation actually significantly scale back current state flexibility. As Senator Grassley explained:

This bipartisan bill refocuses the program on low-income children. It phases adults off the program. It prohibits a new waiver for parent coverage. It reduces the Federal match rate for States that cover parents. It includes new improvements to reduce the substitution of public coverage for private coverage… The compromise bill discourages States from covering higher income kids by reducing the Federal matching rate for States that wish to expand eligibility over 300 percent of Federal poverty limits. It rewards States that cover more low-income kids by providing targeted incentives to States that increase enrollment for coverage of low-income kids.

(5) About three-quarters of people covered by SCHIP are in HMOs run by private insurance companies. Moreover, the new bill expands private insurance options for SCHIP beneficiaries. Which might be why the hospital insurance lobby AHIP – not usually a proponent of steps towards a government-run system for all Americans – supports the bill. (PhRRMA and the American Medical Association also support the bill.)

You believe in a smaller government. But in this case there’s no free lunch. The White House veto will deliver a smaller government but at the cost of a reduction in the number of currently eligible low-income children covered by SCHIP and an increase in the number of uninsured. You might have better ideas about to reduce the number of uninsured children. But I have a hard time seeing how a Presidential veto could be one of them.

Jason

Furman signs up

Jason Furman testifies for the Senate Budget Committee on the long-term fiscal gap and, in the process, becomes a member of the Pigou Club:

A third promising strategy for tax reform is to rely more on taxes that correct distortions and improve the functioning of markets. For example, as N. Gregory Mankiw has argued, "A tax on carbon is the best way to deal with global warming." There are legitimate concerns that such a tax, by itself, would be regressive and disproportionately affect low- and moderate-income families. These concerns, however, could and should be addressed by combining a carbon tax with other tax cuts that compensate low- and moderate-income families. Or, alternatively, a carbon tax reform could be combined with tax cuts in such a manner that it was both revenue neutral and distribution neutral, although in this case it would not have the benefit of reducing the long-run deficit and thus would not reduce the need for other revenue increases or benefit cuts.

Furman on Tax Reform

I don't agree with all of it, but these slides from a recent talk by Jason Furman make a lot of good points.