mercredi 17 juin 2009

"Russian Flat Tax Myth and Fact"

 
 

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via Economist's View de Mark Thoma le 16/06/09

Do tax cuts increase productivity?:

Study separates Russian flat tax myth and fact. EurekAlert: Proponents of a flat rate income tax often point to Russia's 2001 switch to a 13 percent flat tax as nothing short of an economic miracle.

The new tax policy slashed taxes for higher-income Russians who previously paid rates of 20 and 30 percent. Despite the savings to taxpayers, real tax revenues reaped by the government increased by 25 percent in the year after the reform. The windfall, flat tax advocates say, happened because a simpler, fairer tax system leads to better compliance, and because lower taxes spur productivity.

That assessment is half right, according to a study published this month in the Journal or Political Economy. The study by economists Yuriy Gorodnichenko (University of California, Berkeley), Jorge Martinez-Vazquez and Klara Sabirianova Peter (both of Georgia State University) looked at household level data to see how tax reform influenced tax evasion and real income. The study found that tax evasion decreased under the flat tax, but the reform did little to increase real income for taxpayers.

The lesson? Where underreporting of income is widespread, a flat tax can produce a revenue increase, but don't expect massive economic productivity gains.

Tax evasion by nature is tough to quantify. To get an estimate of the extent to which Russians hide income from the tax collector, the researchers used what they call the "consumption-income gap." They gathered data from household surveys conducted in 1998 and from 2000 to 2004 by the University of North Carolina. The surveys asked respondents to catalog their monthly spending on everything from food to entertainment. The data from these surveys show that Russians generally spend 30 percent more than they report receiving in income. It's unlikely that households are getting the extra buying power by dipping into savings accounts, because most of those surveyed had little or no savings. So the gap between household consumption and reported income is largely explained by an underreporting of income.

Looking at the survey data over time, the researchers found that the consumption-income gap shrank substantially in the years after the tax reform. In other words, the amount of income Russians reported got closer to the amount they spent. This effect was strongest for households who had been in the highest tax brackets before the reform. That's a good indication that the flat tax was directly responsible for decreasing tax evasion in Russia.

The other implication in these data is that the flat tax seems to have done little to increase real income for taxpayers. If real income had increased substantially, one would expect consumption to increase as well. That wasn't the case. Taxpayers whose tax rates were cut increased their consumption net of windfall gains by less than 4 percent.

"The results of this paper have several important policy implications," the authors write.

"The adoption of a flat rate income tax is not expected to lead to significant increases in tax revenues because the productivity response is shown to be fairly small. However, if the economy is plagued by ubiquitous tax evasion, as was the case in Russia, the flat rate income tax reform can lead to substantial revenue gains via increases in voluntary compliance."

The lack of a significant productivity response undercuts the main supply-side argument that cuts in taxes produce increased growth in output that generates a partial offset (some even argue a more than full offset) to the revenue lost from the tax cut. So many supply-siders have switched to the compliance argument for the US, but I doubt this effect would be large, and certainly not large enough to pay for the tax cut, and compliance can be increased in other ways such as closing loopholes and better enforcement of existing tax law.


 
 

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"A Long Way to Inflation"

 
 

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via Economist's View de Mark Thoma le 17/06/09

Andy Harless says we're not even close to experiencing an outbreak of inflation:

A Long Way to Inflation, by Andy Harless: Most of the media seem to have interpreted today's lower-than-expected increase in the producer price index as good news. ... Personally, I was more worried about deflation, and I still am. The inflation risk, if it exists at all, is in the distant future, and you could even argue that deflation in the short run increases the risk of high inflation in the long run. It's hard for me to see how falling prices today are good news at all. And prices – excluding food and energy – did fall in May according to the PPI.

You might worry about energy and commodity prices feeding through to the broader price level. I'm worried about that too, but not in the way you might think. Undoubtedly some of that feed-through is already happening, and it hasn't been enough to keep core producer price growth on the positive side of zero. I'm worried about what happens when commodity prices (1) stop rising (which they must do eventually) and/or (2) start falling again (which they may well do if the recent increases have been driven largely by unsustainable forces such as stockpiling by China). If core prices are already falling, and only energy prices are keeping the overall PPI inflation rate positive, what happens when energy prices stop rising?

What worries me particularly is that about 70% of the costs of production go to labor, and the forces of deflation work very slowly in the labor market. ... Wage growth is decelerating, and, based on all historical experience, the deceleration is likely to continue – in this case, to continue to the point where it becomes deflationary.

I'm not talking about what will happen in the next 6 months; I'm talking about what will happen over the next 5 years. "Green shoots" – however green they may be – do not presage an imminent end to deflationary wage pressure. And they certainly don't presage the beginning of inflationary wage pressure. Consider everything that has to happen before the wage pressure reverses and becomes inflationary:

  1. Output must stabilize.
  2. Output must start growing.
  3. Output must grow faster than trend productivity.
  4. Firms must slow layoffs to the normal rate.
  5. Firms must remobilize slack full-time employees (workers who are still on the full-time payroll but aren't being asked to produce much, because businesses have been trying to reduce inventories).
  6. Firms must bring part-time employees back to full time. (This recession in particular has been characterized by the tendency to reduce hours rather than laying off employees.)
  7. Hiring (which has been falling rapidly) must stabilize.
  8. Hiring must rise to the point where it equals the normal rate of layoffs, to get total employment to start rising.
  9. Hiring must become rapid enough that employment starts to grow faster than the population.
  10. Hiring must become rapid enough that employment growth is faster than the sum of the population growth & labor force re-entry. In other words, net hiring has to be fast enough to absorb all the workers who will start looking for jobs again once there are more jobs around to look for.
  11. The unemployment rate must start declining.
  12. The unemployment rate must decline by 4 or more percentage points, which, by historical experience, will take a matter of years.
  13. Firms must start competing for labor.
  14. Firms must start raising wages.
  15. Firms must raise wages faster than trend productivity growth.

Maybe – just maybe – we have already reached step 1. Step 2 may be just around the corner. There is no evidence thus far that we are approaching step 3. As for steps 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, and 15......that show may come to town eventually, but...I don't see much need to start reserving tickets in advance.


 
 

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mardi 16 juin 2009

Re-Interpreting the Blinder Numbers in the Light of New Trade Theory

 
 

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via Economist's View de Mark Thoma le 16/06/09

According to this, "the US is actually a net insourcer" of jobs:

How many jobs are onshorable? Re-interpreting the Blinder numbers in the light of new trade theory, by Richard Baldwin, Vox EU: Before the global crisis hit, offshoring was one of the scarcest things on rich nations' economic radar screens – especially the offshoring of "good" service sector jobs. Alan Blinder was one of the first to point out the threat in his 2006 Foreign Affairs article "Offshoring: The Next Industrial Revolution?" He wrote: "constant improvements in technology and global communications virtually guarantee that the future will bring much more offshoring of 'impersonal services''— that is, services that can be delivered electronically over long distances with little or no degradation in quality."

Blinder has more recently produced some estimates of the size of the revolution. And they make it look like "the big one". Blinder (2009): "I estimated that 30 million to 40 million US jobs are potentially offshorable."

This sort of media-friendly statement is part of what I consider to be very confused thinking by non-specialists – not that the economists involved are necessarily confused, but tacitly or not, they are allowing the media to misinterpret the numbers.

Let me start off by saying that I consider Alan Blinder to be one of the world's leading macroeconomic policy specialists. Moreover, I greatly appreciate the way he uses his knowledge of economics to make this a better world (rather than focusing entirely on impressing the other inhabitants of academe). This time, however, I'm not sure it has worked out right.

I don't wish to take issue with his numbers or methods. I wish to question the implications of those numbers. The trouble is that his numbers are being interpreted in the light of the "old paradigm" of globalisation – the world of trade theory that existed before Paul Krugman, Elhanan Helpman, and others led the "new trade theory" revolution in the 1980s.

The new trade theory: Micro, not macro, determinants of comparative advantage

Krugman's contribution, which was rewarded with a Nobel Prize in 2008, was to crystallise the profession's thinking on two-way trade in similar goods.[1] This was a revolution since the pre-Krugman received wisdom assumed away such trade or misunderstood its importance. In 1968, for example, Harvard economist Richard Cooper noted the rapid rise in two-way trade among similar nations and blamed it for the difficulty of maintaining fixed exchange rates. Using the prevailing trade theory orthodoxy, he asserted that this sort of trade could not be welfare-enhancing. And since it wasn't helping, he suggested that it should be taxed to make it easier to maintain the world's fixed exchange rate system – a goal that he considered to be the really important thing from a welfare and policy perspective (Cooper, 1968).

Trade economists back then took it as an article of faith that trade flows are caused by macro-level differences between nations – for example, national differences between the cost of capital versus labour. Nations that had relatively low labour costs exported relatively labour intensive goods to nations where labour was relatively expensive.

This is the traditional view that Blinder seems to be embracing.

What Krugman (especially Krugman 1979, 1980) showed was that one does not need macro-level differences to generate trade. Firm-level differences will do.

In a world of differentiated products (and services are a good example of this), scale economies can create firm-specific competitiveness, even between nations with identical macro-level determinants of comparative advantage. Krugman, a pure theorist at the time, assumed that nation's were identical in every aspect in order focus on the novel element in his theory (and to shock the "trade is caused by national differences" traditionalists). His insight, however, extends effortlessly to nations that also have macro-level differences, like the US and India.

This brings us to interpreting Blinder's 30 to 40 million offshorable jobs.

Blinder's calculations

Blinder's approach is easy to explain – a fact that accounts for much of its allure as well as its shortcomings.

  • Step 1 is to note that Indian wages are a fraction of US wages.
  • Step 1a is to implicitly assume that Indians' productivity-adjusted wages are also below those of US service sector workers, at least in tradable services.
  • Step 2, and this is where Blinder focused his efforts, is to note that advancing information and communication technology makes many more services tradable. The key characteristic, Blinder claims, is the ease with which the service can be delivered to the end-user electronically over long distances.
  • Step 3 (the critical unstated assumption, if not by Blinder, at least by the media reporting his results) is that the new trade in services will obey the pre-Krugman trade paradigm – it will largely be one-way trade. Nations with relatively low labour costs (read: India) will export relatively labour-intensive goods (read: tradable services) to nations where labour is relatively expensive (read: the US).

The catch

This last step is factually incorrect, as recent work by Mary Amiti and Shang-Jin Wei (2005) has shown. They note: "Like trade in goods, trade in services is a two-way street. Most countries receive outsourcing of services from other countries as well as outsource to other countries."

Voxoutin

Source: Author's manipulation of data from Amiti and Wei (2005), originally from IMF sources on trade in services.

The US, as it turns out, is a net "insourcer". That is, the world sends more service sector jobs to the US than the US sends to the world, where the jobs under discussion involve trade in services of computing (which includes computer software designs) and other business services (which include accounting and other back-office operations).

The chart shows the facts for the 1980 to 2003 period. We see that Blinder is right in that the US importing an ever-growing range of commercial services – or as he would say, the third industrial revolution has resulted in the offshoring of ever more service sector jobs. However, the US is also "insourcing" an ever-growing number of service sector jobs via its growing service exports. The startling fact is that not only is the trade not a one-way ticket to job destruction, the US is actually running a surplus.

Conclusion

None of this should be unexpected. The post-war liberalisation of global trade in manufactures created new opportunities and new challenges. To apply Blinder's logic to, say, the European car industry in the early 1960s, one would have had to claim that since the German car industry (at the time) faced much lower productivity-adjusted wages, freer trade would make most French auto jobs "lose-able" to import competition. Of course, many jobs were lost when trade did open up, but many more were created. As it turned out, micro-level factors allowed some French firms to thrive while others floundered, and the same happened in Germany. Surely the same sort of thing will happen in services, as trade barriers in that sector fall with advancing information and communication technologies.

In short, what Blinders' numbers tell us is that a great deal of trade will be created in services. Since services are highly differentiated products, and indivisibilities limit head-to-head competition, my guess is that we shall see a continuation of the trends in the chart. Lots more service jobs "offshored" and lots more "onshored". What governments should be doing is helping their service exporters to compete, not wringing their hands about one-way competition from low-wage nations.

Footnotes

1 Full disclosure: Krugman was my PhD thesis supervisor and we have coauthored a half-dozen articles since 1986.

References

Amiti, M. and S.J. Wei (2005), "Fear of Service Outsourcing: Is it Justified?", Economic Policy, 20, pp. 308-348.

Blinder, Alan (2006). "Offshoring: The Next Industrial Revolution?" Foreign Affairs, Volume 85, Number 2.

Blinder, Alan (2009). "How Many U.S. Jobs Might Be Offshorable," World Economy, 2009, forthcoming.

Cooper, R. (1968). The Economics of Interdependence. New York: McGraw-Hill.

Grossman, G. and E. Rossi-Hansberg (2006a). "The Rise of Offshoring: It's Not Wine for Cloth Anymore," July 2006. Paper presented at Kansas Fed's Jackson Hole conference for Central Bankers.

Krugman, Paul (1979). "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479,

Krugman, Paul (1980). "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, vol. 70(5), pages 950-59, December.

Krugman, Paul (1991), "Increasing Returns and Economic Geography", Journal of Political Economy 99, 483-499.


 
 

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lundi 8 juin 2009

Insufficient Innovation: Where are the New Products?

Les TIC en offrent une illustration en réduction :
- il y a trente ans : le PC,
- il y a 20 and : internet
- il y a dix ans : l'explosion du web,
- aujourd'hui : facebook & twitter

Loi des rendements décroissants ou je ne m'y connais pas

 
 

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via Paul Kedrosky's Infectious Greed de pk le 04/06/09

Interesting piece by Michael Mandel making a case I've made idly in the past -- that maybe a cause of our current predicament is insufficient innovation. Really.

The gist: We have convinced ourselves that we live in revolutionary innovative times, but we have much less to show for it than we should. In a sense, we staffed up for the coming rush of new-new things -- took on credit, hired like mad, and spent wildly anticipating growth -- only to find that new products took much longer coming than anyone expected. As a result, the binge left us a tottering and insolvent mess.

Read this excerpt from Mandel's piece:

But there's growing evidence that the innovation shortfall of the past decade is not only real but may also have contributed to today's financial crisis. Think back to 1998, the early days of the dot-com bubble. At the time, the news was filled with reports of startling breakthroughs in science and medicine, from new cancer treatments and gene therapies that promised to cure intractable diseases to high-speed satellite Internet, cars powered by fuel cells, micromachines on chips, and even cloning. These technologies seemed to be commercializing at "Internet speed," creating companies and drawing in enormous investments from profit-seeking venture capitalists—and ordinarily cautious corporate giants. Federal Reserve Chairman Alan Greenspan summed it up in a 2000 speech: "We appear to be in the midst of a period of rapid innovation that is bringing with it substantial and lasting benefits to our economy."

With the hindsight of a decade, one thing is abundantly clear: The commercial impact of most of those breakthroughs fell far short of expectations—not just in the U.S. but around the world. No gene therapy has yet been approved for sale in the U.S. Rural dwellers can get satellite Internet, but it's far slower, with longer lag times, than the ambitious satellite services that were being developed a decade ago. The economics of alternative energy haven't changed much. And while the biotech industry has continued to grow and produce important drugs—such as Avastin and Gleevec, which are used to fight cancer—the gains in health as a whole have been disappointing, given the enormous sums invested in research. As Gary P. Pisano, a Harvard Business School expert on the biotech business, observes: "It was a much harder road commercially than anyone believed."

If the reality of innovation was less than the perception, that helps explain why America's apparent boom was built on borrowing. The information technology revolution is worth cheering about, but it isn't sufficient by itself to sustain strong growth—especially since much of the actual production of tech gear shifted to Asia. With far fewer breakthrough products than expected, Americans had little new to sell to the rest of the world. Exports stagnated, stuck at around 11% of gross domestic product until 2006, while imports soared. That forced the U.S. to borrow trillions of dollars from overseas. The same surges of imports and borrowing also distorted economic statistics so that growth from 1998 to 2007, rather than averaging 2.7% per year, may have been closer to 2.3% per year. While Wall Street's mistakes may have triggered the financial crisis, the innovation shortfall helps explain why the collapse has been so broad.

More here.


 
 

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