Tax Cuts and Labor Supply Elasticity

Dietrich E. Vollrath on why tax cuts don’t lead to growth:

We think that if you lower the tax rate, and hence raise the returns to inputs, we should get more of them. But to “supercharge” growth in GDP, or to have any appreciable effect on GDP at all, you need that the elasticity of that input supply with respect to those returns is really big.

For labor, there appears to be good evidence that this elasticity is in fact small. There is not some pent-up store of workers and human capital out there that is just a 35% tax bracket away from getting off their ass and going to work. This labor supply elasticity is found to be essentially zero in almost every case, with the exception of married women. You can see some citations on this in the review paper by Saez, Slemrod, and Giertz (SSG). With an elasticity close to zero, no matter how much you lower the tax rate, and raise the return to labor (i.e. the wage), you can’t induce a substantial increase in labor supply. And without a substantial increase in labor supply, you don’t get a big increase in GDP. Continued….

Deficits and Spending

Stephanie Kelton with an NYT editorial on why the deficit doesn’t matter, but the economy does:

The trick is to adjust the budget to make efficient use of the people, factories and raw materials we have…. But all of this goes unrecognized on Capitol Hill, where the very words “debt” and “deficit” have been weaponized for political ends. They serve as body armor to politicians who would deny resources to struggling communities or demand cuts to popular programs.

Mark Dow on the distinction between liquidity(i.e. the recent quantitative easing at the Federal Reserve) vs credit in banks– then, if reserves are not used directly to prop up the stock market, and if the Federal Reserve keeps yields low for the future to encourage people to put their cash to work, it would be safe to assume that the policy is working to keep inflation low; yet, my perception is that demand is weak and unemployment is higher than desirable(where’s the beef?):

The other, more mechanical, implication is that financial sector lending is neither nourished nor constrained by base money growth. The truth is the Fed’s monetary policy can influence only the price at which lending transacts. The main determinant of credit growth, therefore, really just boils down to risk appetite: whether banks and shadow banks want to lend and whether others want to borrow. Do they feel secure in their wealth and their jobs? Do they see others around them making money? Do they see other banks gaining market share?

August Shorties

In the wake of hateful organizing, here are a few insightful posts with practical recommendations for restoring justice in everyday life. From the Southern Poverty Law Center, “Ten Ways to Fight Hate: A Community Response Guide”. From Ijeoma Oluo, “So You Want to Fight White Supremacy”. From New Socialist, “A Critique of White Marxism and Jacobin Magazine”.

Unemployment Rates for Black Residents in the District of Columbia

Linnea Lassiter at DCFPI wrote a paper on the growing unemployment rates for Black D.C. residents, and the Washington City Paper has done a recap. One hypothesis is that the culprit is a booming D.C. economy that has drawn an influx of jobs and labor that typically go to white, college-educated applicants, combined with the gentrification of the City that pushes out businesses and jobs that are black-owned or staffed by minorities:

Lassiter’s research also indicates that educational attainment in itself doesn’t explain employment outcomes. Even among the city’s black residents who have bachelor’s degrees, the joblessness rate was three times higher than that of their white peers: 5.7 percent versus 1.9 percent. Moreover, D.C.’s black college graduates were more likely to be unemployed in 2016 than before the recession.

Federal Job Guarantee

Mark Paul, “Why We Need a Federal Job Guarantee”: Further, the FJG will have a strong macroeconomic stabilization effect. During economic downturns, it would expand and hire more people; it would then shrink during economic boom periods as people move from public to better-paying private employment. Pavlina R. Tcherneva, a leading voice on the FJG’s macroeconomic effects, argues that policies like the UBI have no counter-cyclical features. Thus, when the economy takes a downturn — say as it did in 2007 — basic incomes provide no automatic stabilizers to right the sinking ship.

The Latino Effect on Economic Growth

Jeffrey Eisenach on “Making America Rich Again” : The study focuses on Latino demographics, presents data on the role of Latinos as workers and entrepreneurs, presents data on Latino income and purchasing power, and focuses on the top 25 power Metropolitan Statistical Areas (MSAs). The data presented in this study demonstrate that the Latino community in the US is a source of both demographic and economic dynamism. Given the demographic profile of Hispanic Americans, it seems extremely likely these trends will continue in the years to come.