Conversable Economist

I have been the Managing Editor of the Journal of Economic Perspectives since the first issue in Summer 1987. The JEP is published by the American Economic Association, which decided back in 2011–to my delight–that the journal would be freely available online, from the current issue all the way back to the first issue. You can download individual articles or entire issues, and it is available in various e-reader formats, too. Here, I’ll start with the Table of Contents for the just-released Spring 2024 issue, which in the Taylor household is known as issue #148. Below that are abstracts and direct links for all of the papers. I will probably blog more specifically about some of the papers in the few weeks, as well.

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Symposium: How Research Informs Policy Analysis

“How Economists Could Help Inform Economic and Budget Analysis Used by the US Congress,” Staff of the Congressional Budget Office

The US Congress uses economic and budgetary projections, cost estimates for proposed legislation, and other analyses provided by the Congressional Budget Office (CBO) as part of its legislative process. CBO makes assessments based on an understanding of federal programs and revenue sources, reading the relevant research literature, analysis of data, and consultation with outside experts—and often relies on economic research. This article begins with a discussion of the role of the Congressional Budget Office and then discusses how economists could conduct research that would help inform the Congress by improving the quality of the analysis and parameter estimates that CBO uses. It gives overall context and specific examples in seven areas: credit and insurance, energy and the environment, health, labor, macroeconomics, national security, and taxes and transfers.

Full-Text Access | Supplementary Materials

“The Economic Constitution of the United States,” by Cass R. Sunstein

The United States has an Economic Constitution, governing federal regulation, and explaining how to conduct regulatory impact analysis, with reference to quantification and monetization of the costs and benefits of proposed and final regulations. Known as OMB Circular A-4, the Economic Constitution of the United States was thoroughly revised in 2023, with new directions on behavioral economics and nudging; on discount rates and effects on future generations; on distributional effects and how to account for them; and on benefits and costs that are hard or impossible to quantify. The revised document leaves numerous open questions, involving (for example) the valuation of human life, the valuation of morbidity effects, and the value of the lives of children.

Full-Text Access | Supplementary Materials

“The Financial Crisis Inquiry Commission and Economic Research,” by Wendy Edelberg and Greg Feldberg

Researchers and economic research were essential to the success of the Financial Crisis Inquiry Commission. For example, researchers submitted testimony, briefed commissioners, and spoke with our staff in recorded interviews. They also provided access to key data sources and helped us use them. Although we started our investigation barely one year after the height of the crisis, there was already a strong core of early, empirical research grappling with many of our key questions, such as why investors ran certain markets, why incentive problems pervaded securitization markets, and why risk management failed at so many large companies. We also benefited from the wealth of research exploring developments in financial markets leading up to the crisis. The process to build the research staff on a tight deadline was chaotic, and we needed people willing to work long hours, work on a team, and follow the evidence wherever it took us.

Full-Text Access | Supplementary Materials

“Philanthropic Cause Prioritization,” by Emily Oehlsen

Many foundations decide how much and where to give based on their founders’ personal precommitments to specific issues, geographies, and/or institutions. If a grantmaking organization instead wanted to select problems based on a general measure of impact per dollar spent, how should it approach this goal? What tools could it use to identify promising cause areas (climate change, education, or health, for example) or to compare grants that achieve different results? This paper focuses on an approach followed by the grantmaking organization Open Philanthropy for its “Global Health and Wellbeing” portfolio, with an emphasis on two key frameworks: equalizing marginal philanthropic returns, as well as importance, neglectedness, and tractability. It describes measurement and comparability under the first framework, and then applies the second framework to the example of reducing exposure to lead. It concludes by considering critiques and areas for improvement.

Full-Text Access | Supplementary Materials

The Labor Market and Macroeconomics

“The Shifting Reasons for Beveridge Curve Shifts,” by Gadi Barlevy, R. Jason Faberman, Bart Hobijn and Ayşegül Şahin

We discuss how the relative importance of factors that contribute to movements of the US Beveridge curve has changed from 1959 to 2023. We review these factors in the context of a simple flow analogy used to capture the main insights of search and matching theories of the labor market. Changes in inflow rates, related to demographics, accounted for Beveridge curve shifts between 1959 and 2000. A reduction in matching efficiency, that depressed unemployment outflows, shifted the curve outwards in the wake of the Great Recession. In contrast, the most recent shifts in the Beveridge curve appear driven by changes in the eagerness of workers to switch jobs. Finally, we argue that, while the Beveridge curve is a useful tool for relating unemployment and job openings to inflation, the link between these labor market indicators and inflation depends on whether and why the Beveridge curve shifted. Therefore, a careful examination of the factors underlying movements in the Beveridge curve is essential for drawing policy conclusions from the joint behavior of unemployment and job openings.

Full-Text Access | Supplementary Materials

“Perspectives on the Labor Share,” by Loukas Karabarbounis

As of 2022, the share of US income accruing to labor is at its lowest level since the Great Depression. Updating previous studies with more recent observations, I document the continuing decline of the labor share for the United States, other countries, and various industries. I discuss how changes in technology and product, labor, and capital markets affect the trend of the labor share. I also examine its relationship with other macroeconomic trends, such as rising markups, higher concentration of economic activity, and globalization. I conclude by offering some perspectives on the economic and policy implications of the labor share decline.

Full-Text Access | Supplementary Materials

“Why Labor Supply Matters for Macroeconomics,” by Richard Rogerson

Benchmark models taught in undergraduate macro do not attribute any role for labor supply as an important determinant of macroeconomic outcomes. The first part of this paper documents three facts. First, differences in hours of work across OECD economies are large and imply large differences in GDP per capita. Second, there are large differences in the size of tax and transfer programs across countries, as proxied by differences in government revenues relative to the GDP. Third, these two outcomes are strongly negatively correlated. Taken together, these facts suggest an important role for labor supply in affecting macroeconomic outcomes. I conjecture that the reason why macro textbooks do not include a discussion of labor supply stems from a belief that labor supply elasticities are sufficiently small that even large differences in work incentives do not generate important macroeconomic effects. The second part of this paper argues that this belief is based on incorrect inference linking small elasticities for prime age male to small aggregate labor supply elasticities. The role of labor supply at the extensive margin plays a critical role in understanding this mistake in this inference.

Full-Text Access | Supplementary Materials

“How Cyclical Is the User Cost of Labor?” by Marianna Kudlyak

In employment relationships, a wage is an installment payment on an implicit long-term agreement between a worker and a firm. The price of labor that impacts firm’s hiring decisions, instead, reflects the hiring wage as well as the impact of economic conditions at the time of hiring on future wages. Measured by the labor’s user cost, the price of labor is substantially more pro-cyclical than the new-hire wage or the average wage. The strong procyclicality of the price of labor calls for other forces for cyclical labor demand to explain employment fluctuations.

Full-Text Access | Supplementary Materials

Privacy Protection and Government Data

“Government Data of the People, by the People, for the People: Navigating Citizen Privacy Concerns,” by Claire McKay Bowen

The data privacy community generally agrees that government data should be more widely accessible, especially being of the people (data collected about them), by the people (collected and supported using taxpayer dollars), and for the people (providing public and social good). But what to protect in that data and how to do so are highly and intensely debated. This paper discusses the fundamental tradeoff between data privacy and data usefulness—and how determining an appropriate balance can be difficult. The paper also provides thoughts on what must be addressed to help shape the future of data privacy, make meaningful contributions to its policy debates, and ensure the responsible representation of people in data.

Full-Text Access | Supplementary Materials

“When Privacy Protection Goes Wrong: How and Why the 2020 Census Confidentiality Program Failed,” by Steven Ruggles

The US Census Bureau implemented a new disclosure control strategy for the 2020 Census that adds deliberate error to every population statistic for every geographic unit smaller than a state, including metropolitan areas, cities, and counties. This article traces the evolving rationale for the new procedures and assesses the impact of the 2020 disclosure control on data quality. The Census Bureau argues that the traditional disclosure controls used for the 2010 and earlier censuses revealed the confidential responses of millions of Americans. I argue that this claim is unsupported, and that there is no evidence that anyone’s responses were compromised. The new disclosure control strategies introduce unnecessary error with no clear benefit; in fact, the new procedures may actually be less effective for protecting confidentiality than the procedures they replaced. I conclude with recommendations for minimizing disclosure risk while maximizing data utility in future censuses.

Full-Text Access | Supplementary Materials

Articles

“Gabriel Zucman: Winner of the 2023 Clark Medal,” by Emmanuel Saez

The 2023 John Bates Clark Medal of the American Economic Association was awarded to Gabriel Zucman, associate professor of economics at the University of California, Berkeley for his fundamental contributions to the study of inequality and taxation. Through meticulous empirical work and creative methodological approaches, he has revealed key trends about the concentration of global wealth, the size and distribution of tax evasion, and the tax-saving strategies of multinational companies. These findings have had a profound impact on the academic literature and on global policy debates. He has shifted the way economic research is done by showing that measurement can have a large impact in our field and on the world, inspiring many younger scholars to follow in his footsteps.

Full-Text Access | Supplementary Materials

Features

“Recommendations for Further Reading,” by Timothy Taylor

Full-Text Access | Supplementary Materials

Lawsuits are still pending, but the current schedule if for a congestion pricing scheme to begin in Manhattan on June 30. An online issue of Vital City published on May 1 has a group of short and readable explainer articles on aspects of the plan.

In the opening essay, Josh Greenman lays out the basics this way:

The congestion pricing plan has twin, closely related objectives: to reduce stubbornly high automobile traffic in Manhattan, and to raise at least $1 billion, and ideally more, in capital funding annually to support public transit. MTA officials expect the plan to reduce the number of vehicles entering the central business district by 17%. The program’s final details go like this: Cars will pay $15 to enter Manhattan at 61st Street and below during daytime hours (5 a.m. to 9 p.m.), and $3.75 during off-peak hours (9 p.m.-5 a.m. on weekdays, and 9 p.m. to 9 a.m. on weekends). At peak times, motorcycles will pay $7.50; small trucks and charter buses, $24; and large trucks and tour buses, $36. Ubers, Lyfts and for-hire vehicles will charge $2.50 per ride, and yellow taxis, $1.25 per ride. There will be no tollbooths: Automated license-plate-reading cameras at 110 locations will photograph vehicles’ license plates

There are of course a bunch of little exceptions, and if you want to dig deeper into details, read Greenman’s article. Here, I want to mention some of the issues that come up in other articles.

On Day 1 of the program, there will be extra charges and probably all kinds of practical problems, while any benefits of additional funds for mass transit will take time. This may not be a politically sustainable equilibrium. Howard Yaruss suggests offering an immediate carrot: as one example, make all of New York City mass transit free on Sundays.

At best, the congestion charge is only going to take a moderate bite out of Manhattan traffic. Sam Schwartz notes that in the decade up to 2019, the number of cars entering Manhattan’s central business district declined–and traffic congestion got worse. A substantial part of the problem was the rise in ride-share traffic, and if autonomous vehicles arrive in Manhattan, the congestion could worsen further.

New York has been using cameras that take a picture of license plates to enforce speeding laws, and there has been a large rise in the number of cars with license plates that are unreadable for many possible reasons: Buy a fake plate on eBay? Buy a legitimate paper license plate in states that allow it? Hang a bike rack over the license plate? For $100, buy an electronic gizmo that makes your plate unreadable to the camera? Use certain coatings or covers that makes a plate unreadable? Just slop some mud on the plate? Drive without a license plate? Reading license plates to collect the congestion toll will have problems, too.

The projected additional funding for NYC mass transit will increase its capital budget by a little less than 10%. More broadly, as funds become available from the congestion toll, what parts of the NYC mass transit system will see noticeable short-term benefits?

Traffic will reroute in creative ways to minimize or avoid the toll, creating new bottlenecks and issues. As one example, people may commute to upper Manhattan (outside the toll zone) or to other parts of New York City, avoid paying the toll, and then take mass transit the rest of the way. If cars are discouraged from commuting into Manhattan, it may be that trucks find it easier to drive into Manhattan. Fewer cars may also open up opportunities for lanes dedicated to buses, or to expanded walking and bike paths, or allow restaurants to keep serving outdoors.

Henry Grabar points to the interaction of congestion pricing and the rules that govern parking. In describing New York City, he writes:

The City manages 19,000 lane miles and 3 million parking spaces; streets make up an astounding 36% of Manhattan. The unthinking allocation of most of that space to private cars — those in motion, but in particular, those that are parked — has long presented one of the city’s greatest opportunities for improvement. … The city can resolve that issue by borrowing a technique from Vancouver: Issue low-cost permits to current car-owning residents, and give them and low-income households an option to renew at that rate in perpetuity. But after that initial period, start charging applicants a market price for a limited number of permits. Gradually, old-timers move away and the system transitions into one where street space is appropriately priced, and the city can easily weigh the distribution of new permits against other curb priorities in terms of space and money. It’s hard to take away parking privileges, but it’s easy not to grant them in the first place. 

Congestion pricing is a bundle of complexities, and a bundle of winners and losers. I don’t live in or near New York, so I’m delighted to watch the experiment play out from a distance. In addition, I’m not hearing a lot of other ideas that offer the possibility of reducing congestion and increasing mass transit in the city. But it also seems like the kind of idea that could be tripped up by practicalities.

For more on congestion pricing, see:

• “What if the Argument Was About Whether to Remove Congestion Pricing?” (May 24, 2019)
• “The Stockholm Congestion Charge” (May 2, 2018)
• “The Pricing Answer to Traffic Congestion” (July 17, 2017)

Why leave a tip? You have already received whatever food or service you are going to receive. Maybe if you are a very regular customer, tipping could lead to better service in the future. But most people who leave tips do so even if they are stopping off at, say, a restaurant in a city they are never going to visit again, or getting a ride from a driver they will never meet again.

Tim Sablik discusses the evolution of the tipping norm in “Tipping: From Scourge of Democracy to American Ritual,” subtitled “Over the course of the 20th century, tipping went from rare and reviled to an almost uniquely American custom. We still like to complain about it” (Econ Focus: Federal Reserve Bank of Richmond, First/Second Quarter 2024, pp. 18-21).

Part of what makes tipping especially interesting just now is that norms about tipping seem to be in flux. In particular, the pandemic and new technology seem to have given tipping a boost. Sablik writes:

According to a Pew Research Center survey released in November 2023, 72 percent of Americans agreed that tipping is now expected in more places than it was five years ago. Social media is filled with stories of customers being asked to tip for all sorts of transactions where that custom previously wasn’t the norm: buying office furniture, going through the drive-thru, or even paying for lunch at a self-checkout.

A few factors seem to be driving this trend. A growing number of businesses have adopted more sophisticated point-of-sale payment terminals and software developed by companies such as Square and ShopKeep. Square reports that it processed 4 billion transactions in 2022. In addition to allowing small businesses to easily accept non-cash payments, these point-of-sale devices give owners the option to include a tipping prompt as part of the checkout process.

There is also some evidence that customers increased tipping during the pandemic. Michael Lynn, a professor of consumer behavior and marketing at the Cornell University School of Hotel Administration … found that tipping frequency declined at restaurants in 2021 and 2022, but the size of tips went up. In another study of data from Square, Lynn found that the size of tips also went up for quick-service and takeout restaurants in 2020 and 2021. Lynn and others have hypothesized that many Americans felt increased compassion for service workers during the height of the pandemic, prompting them to be more generous. This experience, coupled with the inflation of the post-pandemic recovery period, has given businesses more incentives to ask for tips.

If norms about tipping are indeed in flux, it wouldn’t be the first time. The standard history is that tipping originated in western Europe, was brought back to American by US tourists in the later part of the 19th century, and now has largely died out in Europe but become entrenched in the United States. Sablik offers a lively overview of some previous tipping norms:

n his 1998 book Tipping: An American Social History of Gratuities, historian Kerry Segrave placed its origin in the Middle Ages. In 16th century England, wealthy travelers who came to stay in a friend’s home would give money to the host’s servants. These sums of money, known as vails, were intended to compensate the servants for taking on the additional work of caring for the guests on top of their regular duties.

The custom grew quickly. Household servants came to expect and even demand vails, to the growing irritation of travelers. Segrave noted that by the 18th century, even British royalty complained about the rising cost of staying with friends because of the vails. House staff reportedly went so far as to threaten guests who refused to pay. Ungenerous guests might be met with spilled food at the dinner table or an injured horse in the stables. Some nobles reduced their travels to avoid the issue altogether, while others tried to band together to abolish the practice. Such efforts met fierce resistance. A meeting in London in 1764 to discuss the banning of vails was disrupted by servants throwing rocks through the windows of the meeting hall.

Tipping was not welcomed as it spread into the United States:

Still, tipping continued to face fierce opposition as it spread in America. Unions in the early 20th century frequently opposed the practice because they felt it stood in the way of workers being paid fair wages and left them too dependent on the whims of customers. Business owners, particularly hotel managers, also feared that the proliferation of tipping requests would annoy and drive away guests. Some hotels installed something called a Servidor in guestroom doors. It was a compartment that could be opened from both sides, allowing hotel staff to leave cleaned laundry that the guest could then retrieve inside the room without meeting the employee face-to-face and being asked for a tip.

Between 1909 and 1915, six states (Arkansas, Iowa, Mississippi, South Carolina, Tennessee, and Washington) took things even further, passing laws criminalizing the solicitation and giving of tips. Violators were subject to fines and, in the case of South Carolina, even jail time. But the laws proved ineffective and were largely ignored; by the 1920s, they had all been repealed (or, in the case of Iowa, overturned by the state Supreme Court).

In modern times, a number of US restaurants have experimented with a compulsory tip added to the bill. This step is understandably popular for owners of restaurants, who can then decide how to disburse the money. It’s generally unpopular among those who would have received a higher share of the tips, and also among customers, who often act as if tipping is required but prefer to think of it as voluntary. In most cases, the combination of unhappy customers and (at least some) unhappy employees means that experiments with a no-tipping policy have faded out.

I liked a comment at the end of Sablik’s article. Michael Lynn, who has done research on tipping, was asked by Sablik “who benefits from tipping.” Lynn answered: “”People who don’t tip very well … They’re being subsidized by the people who do.” That’s plausible, but is it that simple?

For more on the economics of tipping, a useful starting point is Ofer H. Azar, “The Economics of Tipping” in the Spring 2020 issue of the  Journal of Economic Perspectives (where I work as Managing Editor.)

It would be nice if the processes of economic growth were well-mannered: for example, if it benefited all workers and industries and groups equally–or perhaps with some additional benefit for those with lower incomes. But of course, growth isn’t a neat process. As technology and tastes evolve over time, some firms do better, some industries to better, some places do better. Even when growth is a net plus for the economy over time, some firms and industries and places end up worse off.

As it turns out, an ability to tolerate these disruptions of growth may be one of the secret weapons for the US economy. The IMF offers an argument that can be interpreted along these lines in Chapter 3 of the April 2024 World Economic Outlook, “Slowdown in Global Medium-term Growth: What Will it Take to Turn the Tide?”

The chapter discusses a variety of causes of slower growth around the world: a slowdown in productivity growth, lower rates of investment, a decline in the growth rate of the working-age population in many countries, and others. Here, I’ll focus on one particular cause of slower productivity, which is “misallocation of capital and labor across firms within sectors.” Or to put it more bluntly, it’s that part of the growth process, where successful firms in a given industry expand and unsuccessful firms in that industry either change their ways or else shrink and even disappear. The authors write (footnotes and references to boxes and figures omitted):

This section documents the contribution of rising misallocation of capital and labor to the decline in TFP [total factor productivity] growth and draws lessons for medium-term growth. So-called allocative efficiency measures the extent to which capital and labor are allocated to an economy’s most productive firms … A decline in allocative efficiency, whereby resources become more concentrated in relatively unproductive firms over a period of time, can reduce TFP growth; an improvement in allocative efficiency, as resources move toward more productive firms, will, however, boost TFP growth. …

The approach used here … finds that allocative efficiency declined during 2000–19 in most countries in a sample of 15 advanced and 5 emerging market economies. The median country in the sample experienced an average annual drag on TFP growth of about 0.9 percentage point from declining allocative efficiency. For the median advanced economy, this drag was 0.5 percentage point. Given that the median advanced economy saw TFP growth of only 0.5 percent during this period, this suggests that increased misallocation of capital and labor may have halved its TFP growth. A notable exception is the United States, where improvements in allocative efficiency helped boost annual TFP growth by 0.8 percentage point over the period.

This process of reallocation to more productive firms could, in theory, happen either within a given sector of the economy or between sectors. The IMF analysis suggests that the between-sector misallocation is important only for a few economies going though dramatic restructuring of growth, like China. For advanced economies, most of the misallocation is within sectors.

In turn, the greater misallocation traces back to a pattern I’ve been noting here for almost a decade now: within given sectors of the economy, the gap between the firms that are productivity leaders in a given industry and other firms in that industry has been widening, not just in the US, but around the world (for example, see here, here, here, here, and here). The reasons for this shift are not altogether clear, but part of the reason seems to be that some firms have proven better than others at incorporating information technology throughout all of their processes. The IMF authors write:

A large part of the observed decline in allocative efficiency within sectors can be traced to uneven firm productivity growth during some of the 2000–19 period. … [T]he dispersion of firms’ real productivity in the 20 sample economies rose significantly leading up to the global financial crisis and, despite some subsequent reversion, remains elevated. This aligns with the decline in allocative efficiency, most of which also occurred in the first decade of the 2000s. … Ideally, firms with rapidly increasing real productivity should attract capital and labor from those growing more slowly, with marginal revenue products kept equalized. However, firm-level evidence points to frictions that slow this adjustment process. This leads to an initial decline in allocative efficiency, as faster-growing firms operate with less capital and labor than optimal. Consistently, sector-level evidence shows that a rise in a sector’s dispersion of real firm productivity is accompanied by a decline in its allocative efficiency.

What factors help the firms in some countries to adjust? The IMF points to factors like “market entry and competition, trade openness, financial access, and labor market flexibility.”

The United States has had an industrial policy aimed at boosting its domestic shipbuilding industry since the passage of the Merchant Marine Act of 1920, commonly known as the Jones Act. Whatever the arguments for the passage of the bill a century ago, it has over time been a disaster for the US maritime industry, and continues to impose significant costs on other parts of the US economy. Colin Grabow goes through the arguments in “Protectionism on Steroids: The Scandal of the Jones Act” (Milken Institute Review, Second Quarter 2024, pp. 44-53).

The Jones Act “requires that vessels engaged in domestic transportation be registered and built in the United States as well as crewed and at least 75 percent owned by U.S. citizens.” However, the underlying rule goes back to an 1817 law “prohibiting foreign vessels from transporting goods within the U.S.”

The political problem back in 1920 was that as US shipbuilding and shipping costs were protected from foreign competition, they were no longer cost-competitive. in terms of production costs, and shipping by US-owned firms was not cost-competitive, either. Grabow gives an example of one 19th-century firm that shipped from New York to Belgium to California–because it was cheaper to pay for two “foreign” trips with non-US firms than to pay a US shipping firm to go direct from New York to California.

The gap in US ship-building costs has only widened. Current estimates are that “large cargo ships constructed in U.S. shipyards today cost at least 300 percent more than the competitive world price.” For operating costs, Grabow cites a 2018 report from the Government Accountability Office which finds: “According to U.S. Maritime Administration (MARAD) officials, the additional cost of operating a U.S. flag vessel compared to a foreign-flag vessel has increased—from about $4.8 million annually in 2009 and 2010 to about $6.2 to $6.5 million currently—making it harder for such vessels to remain financially viable.”

The consequences of this US attempt at a pro-shipbuilding and pro-US-shipping industrial policy have been awful. Here are some of them.

1) The US shipbuilding industry, with no need to respond to international competition, has become irrelevant in global markets. Here’s a table on large ocean-going ships under construction from the Congressional Research Service (“U.S. Commercial Shipbuilding in a Global Context,” November 15, 2023).

The CRS reports:

During World Wars I and II, the United States built thousands of cargo ships. These were sold to merchant carriers after the wars, including foreign buyers, but were soon replaced by more efficient ships built in foreign yards. In the 1970s, U.S. shipyards were building about 5% of the world’s tonnage, equating to 15-25 new ships per year. In the 1980s, this fell to around five ships per year, which is the current rate of U.S. shipbuilding. … The Jones Act’s domestic construction requirement likely underpins the entirety of U.S. commercial ship construction. None of the U.S.-flag international trading fleet is domestically built, though shipbuilders could take advantage of both the loan guarantee and tax shelter programs discussed above. No overseas purchase of large U.S.-built ships has occurred in decades because U.S.-built ships can be four or more times the world price.

Indeed, the US military relies on Chinese-built ships to support its military vessels: “Three of the ten commercial oil tankers selected to ship fuel for DOD as part of the newly enacted Tanker Security Fleet are Chinese-built. As for dry cargo supplies for DOD, 7 of the 12 most recently built ships in the Maritime Security Fleet are Chinese-built.

2) The higher costs of Jones-Act-compliant US shipping naturally impose heavy costs on places like Hawaii, Alaska, and Puerto Rico. Weird consequences result, and Grabow provides a number of examples. Puerto Rico gets its liquified natural gas from Nigeria, because there are no Jones-Act-compliant US ships to transport natural gas within the United States. US lumber producers complain that they have a disadvantage vs. Canadian firms, because the US lumber producers must use higher-cost Jones Act ships to send their products to US destinations, while Canadian lumber producers can use cheaper international shipping companies.

3) One might think that a natural transportation advantage for the United States would be to take advantage of maritime shipping via oceans on both sides. But the high cost of Jones-Act-compliant US shipping means more trucks and freight trains, with costs including traffic congestion, highway repair, and greater pollution.

4) Various specialized uses of ships become more costly. For example, if you want offshore wind-power to be an important part of future US electricity generation, you should know that it is considerably more costly to build with Jones-Act-compliant ships. Even basic tasks like dredging US ports and rivers are slower and more costly because the Jones Act (along with some other legislation of that time) shuts off the supplier of higher-quality and lower-cost dredging ships made elsewhere.

Supporters of industrial policy have a tendency to brush aside examples like the Jones Act: “Sure, that’s a foolish way to implement industrial policy, but my plan is a smart way to do so.” “Yes, the Jones Act is a problem, but the way to fix it is with much bigger government subsidies to expand US shipbuilding.” But the Jones Act is a classic example of a special interest law that benefits a small and very vocal group, while imposing large but diffuse costs. The problems of the Jones Act have been well-known for decades, and nothing has changed. Every proposal for industrial policy faces similar political economy dynamics.

Thus, it seems to me that the challenge for supporters of industry policy is not just to pick some alluring industries and then to hand out government favors like Halloween candy, but to specify in advance how they intend to measure success or failure of these subsidies–perhaps with a series of goals that must be met over time or else the subsidies get turned off. In South Korea, for example, which is often cited as an example of successful industry policy, the government subsidies for certain industries were often made contingent on the industries expanding their export sales at prevailing prices in international markets. When industrial policy goes poorly, as in the Jones Act, the costs are broadly felt across an array of related industries.

Extremely high levels of wealth are were not typically generated by people who were saving out of the income that they earned. Instead, high levels of wealth are typically about assets that rose considerably in value–sometimes land or real estate, often stock in a company. Billionaires like Elon Musk or Kim Kardashian don’t have a basement full of dollar bills, like Scrooge McDuck. Instead the bulk of their wealth is held in shares in corporations, where those shares have risen in value over time.

Thus, if you want to impose taxes that will affect the wealth distribution, raising the top-level income tax rates is not the most useful answer. “How to Tax Wealth,” a group of economists from the IMF (Shafik Hebous, Alexander Klemm, Geerten Michielse, and Carolina Osorio-Buitron, IMF How to Note 2024/001, March 2024). They write:

This note discusses three approaches of wealth taxation, based on (1) returns with a capital income tax, (2) stocks with a wealth tax, and (3) transfers of wealth through an inheritance (or estate) tax. Taxing actual returns is generally less distortive and more equitable than a wealth tax. Hence, rather than introducing wealth taxes,
reform priorities should focus on strengthening the design of capital income taxes (notably capital gains) and closing existing loopholes, while harnessing technological advances in tax administration—including cross-border information sharing—to foster tax compliance. The inheritance tax is important to address the
buildup of dynastic wealth.

I’ll add a few more words about the three options.

Income from capital can arrive in various ways, including interest payments, rent payments, dividends, share repurchases, or a pass-through firm that distributes profits to owners. But here, I want to focus on the problem of taxing capital gains: again, when you look at billionaire-level wealth, the wealth is commonly built on how the value of an asset, like stock ownership, has risen over time.

As the authors explain, the common approach is to tax capital gains when they are “realized”–that is, when the asset is sold. But this approach raises two issues. One is that if the asset has been held for a substantial period of time, the capital gains during that time have gone untaxed until they are realized–and deferring taxes for years is a substantial benefit.

The other issue is that it is often possible to roll one capital gain into a new asset without being taxed on the gain. In a US context, individuals can roll the capital gain from one house into the purchase of another house. If someone dies while holding stock, there is a “step-up” where the heir can value the stock at the price at the time of death, so the gains during the lifetime of the previous owner are not taxed.

The IMF authors describe the resulting problems in this way:

• Tax avoidance is encouraged, as there is an incentive to turn income into capital gains to benefit from lower taxation. For example, investment funds can reinvest rather than distribute earnings, and bonds can be designed to increase in value rather than pay interest.
• Tax legislation and administration increase in complexity as there is a need to address loopholes. For example, zero-coupon bonds are often taxed on their implied interest.
• Horizontal equity is diminished, because similarly profitable investments are taxed differently depending on the form in which they generate income.
• Vertical equity is diminished, because the share of income earned as capital gains rises with wealth and income. In the United States, the top 0.001 percent of taxpayers earned 60 percent of their income as capital gains (IRS 2022). In the United Kingdom, among the top 0.01 by income, almost 60 percent receive at least 90 percent of their remuneration in capital gains (Advani and Summers 2020).
• There is a lock-in effect as investors prefer to hold on to an asset even if the expected future returns are lower than those of alternative investments, as long as the tax saving from not realizing a capital gain outweighs the difference in returns.21 This leads to inefficient capital allocation. Some countries tax capital gains at lower rates (especially for long-term gains) to reduce this effect but thereby exacerbate the relative undertaxation of capital gains.
• In an international context, tax avoidance and evasion occur even on realized capital gains. For example, instead of trading a security directly, investors can trade a depository receipt in an offshore market that does not tax capital gains. Similarly, rather than directly selling a real asset, stocks or entire companies (registered in a different, conduit, country) that derive their values from that underling asset can be traded. The revenue loss can be significant in the case of high-value assets such as natural resources.

A final issue with taxation of capital gains involves inflation. If the increase in the value of my asset (say, my house) over time just matches inflation, then should this gain be treated as “income” to me when I sell the house?

There are ways to address all of these issues, but they aren’t simple.

With regard to a wealth tax, one immediate concern with a wealth tax is that a number of countries with wealth taxes decided to repeal them: basically, they were too much trouble to administer for too little revenue gain. The authors note:

[A]mong OECD members, those levying an explicit wealth tax declined from 12 in 1990 to only 3, while the Netherlands de facto also levies a wealth tax as part of its personal income tax (as does, outside the OECD, Liechtenstein). And where employed, the wealth tax is not a significant source of revenue, because of high
exemption thresholds and widespread evasion, amid severe enforcement challenges (Kopczuk 2019; Advani and Tarrant 2021). At 1.4 percent of GDP over the 2018–20 period, Switzerland has the highest revenue yield globally, but the country does not levy a capital gains tax (and its wealth concentration is high by international standards [Föllmi and Martínez 2017]). With the existing wealth taxes mostly modest and limited, studying them will not necessarily be indicative about the effect of more comprehensive or higher wealth taxes.

I’ve written earlier posts about countries dropping their wealth taxes here and here, and the case of equality-minded Sweden dropping its inheritance tax here.

One can make a case on paper for a tax on the super-wealthy, like those with more than a billion dollars in wealth. But the reality that even lower wealth taxes were too difficult to collect should raise some doubts. And even a substantially more aggressive wealth tax on the super-wealthy would have limited effects on revenue: “The EU Tax Observatory (2023) estimates that a wealth tax of 2 percent on the world’s top billionaires in 2023 (about 2,800 billionaires, 30 percent of whom are in the United States according to the report) can raise about $250 billion (or 0.2 percent of world GDP).”

In terms of incentives, a wealth tax applies whether or not there is income. Imagine a risky investment. With a tax on capita income, the tax revenue goes up if the investment is a success–say, if it doubles in value–but the tax rate goes down and even becomes negative if the investment fails–say, falls to half its value. With a wealth tax, the investor still owes the wealth tax on whatever remains even if the investment has failed: in this way, a wealth tax increases risk. In addition, because wealth is typically held not in rolls of dollar bills, but in assets, paying a wealth tax may require selling off some of the asset itself.

With regard to an inheritance tax, the primary goal is to limit the intergenerational transfer of extreme wealth. The authors write:

Empirical evidence shows that the share of inherited wealth in overall wealth is large, though precise figures are hard to come by. One difficulty is that estimates differ much depending on whether capital income earned on inherited wealth is counted as part of the inherited share or not. Davies and Shorrocks (2000) argue that a share of 35–45 percent is a reasonable estimate, based on balancing different assumptions made in papers yielding much higher or lower estimates. With more detailed and recent data, which are available for a few European countries, Piketty and Zucman (2015) report results for France, Germany, and the United Kingdom, finding that in 2010, the share of inherited wealth ranges from just over 50 percent in Germany to close to 60 percent in the United Kingdom. Moreover, as shown by Acciari and Morelli (2020) using Italian data, inheritances appear to become larger (from 8.4 to 15.1 percent of GDP between 1995 and 2016) and more concentrated over time. According to a UBS (2023) report, new billionaires acquired greater wealth through inheritance than entrepreneurship.

The creativity of tax attorneys will pose challenges for an estate tax. What if a wealthy person leaves their money to a trust? What the wealthy person leaves the money to a nonprofit, but also establishes their children with extremely well-paid jobs at that nonprofit? In what ways can wealth be transformed into untaxed forms? How does an inheritance tax after death compare with tax treatment of large gifts that are given during life? Is it right if an inheritance tax forces a family to sell off, say, a family home or a family farm?

In most countries, the inheritance or estate tax raises a relatively small amount.

For a follow-up to this post, see “The Super-rich and How to Tax Them” (November 17, 2020).

The IMF publishes a Fiscal Monitor report twice a year about levels of spending and taxes around the world. The April 2024 report, subtitles “Fiscal Policy in the Great Election Year,” contains some warnings about the size of US budget deficits.

For context, here a table with fiscal balances for high-income countries, with actual data for 2019-23, and projected data from 2024-29. You can see that before the pandemic in 2019, the US already had a higher-than-average budget deficit. When the pandemic hit, deficits go up everywhere, but among high-income countries are largest in the US. The US deficits are projected to be much higher than those of other high-income countries moving forward: for example, in 2025 the US fiscal deficit is 7.1% of GDP, while other advanced economies excluding the US have an overall deficit of 2% of GDP.

I’ll note in passing that this is not a party-line issue. US deficits were already high under President Trump. The increase US government spending in response to COVID was bipartisan. The high deficits are now persisting under President Biden.

The IMF describes the US budget situation this way (mentions of figures omitted):

In 2023, the United States experienced remarkably large fiscal slippages, with the general government fiscal deficit rising to 8.8 percent of GDP from 4.1 percent of GDP in 2022, despite strong growth. Income tax revenues fell sharply, by 3.1 percentage points of GDP, owing to lower capital gains taxes in 2023 and delayed tax payment deadlines. Spending, in turn, increased by 1.3 percentage point of GDP.

The overall fiscal deficit is projected to persist at more than 6 percent of GDP over the medium term. Financing costs have increased substantially in recent years. Nominal yields on 10-year US Treasury bonds surged from below 1 percent in 2020 to 5 percent in October 2023, the highest level in 16 years, before receding to about 4 percent more recently amid a rapid pickup in inflation and inflation expectations. …

The rise in nominal term premiums also contributed to the surge in nominal Treasury yields in mid-2023. This rise reflects several factors, including the perceived risk of sustained inflation and uncertainty about the future path of monetary policy (US Congressional Budget Office 2023). Further, the Treasury’s plans to issue more debt, coinciding with quantitative tightening, likely contributed to heightened volatility in bond markets and a rise in term premiums … An empirical analysis to quantify the spillovers of US long-term nominal interest rates to nominal rates in other economies suggests that a 1 percentage point spike in US rates is associated with a rise in long-term nominal interest rates that peaks at 90 basis points in other advanced economies, with a persistent impact over many months. For emerging market economies, the same spike in US rates is associated with a peak increase in long-term interest rates of about 100 basis points. Moreover, it is possible that uncertainty about US fiscal policy and long-term rates could adversely affect financial conditions elsewhere. …

In sum, the previous analysis points to risks from loose fiscal policy in the United States along several dimensions. Loose US fiscal policy could make the last mile of disinflation harder to achieve while exacerbating the debt burden. Further, global interest rate spillovers could contribute to tighter financial conditions, increasing risks elsewhere.

The IMF also traces most of the surge in US core inflation rates to the very high budget deficits:

It is remarkable and discouraging that in the run-up to a US presidential election this fall, a central economic issue like the federal budget is not seriously discussed–indeed, it is barely mentioned.

The Dunning-Kruger effect can be paraphrased in this way: “On any particular topic, people who are not experts lack the very expertise they need in order to know just how much expertise they lack.” Corey S. Powell interviews David Dunning on how the underlying idea has been developed since the original paper published in 2000 (“David Dunning: Overcoming Overconfidence,” Open Mind, April 5, 2024).

For those who have only seen “Dunning-Krueger effect” deployed as an insult, it’s perhaps useful to briefly review the original paper from 25 years ago: “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments,” in the December 1999 issue of the Journal of Personality and Social Psychology (77:6, 1121-34). The paper opens with a lovely opening anecdote:

In 1995, McArthur Wheeler walked into two Pittsburgh banks and robbed them in broad daylight, with no visible attempt at disguise. He was arrested later that night, less than an hour after videotapes of him taken .from surveillance cameras were broadcast on the 11 o’clock news. When police later showed him the surveillance tapes, Mr. Wheeler stared in incredulity. “But I wore the juice,” he mumbled. Apparently, Mr. Wheeler was under the impression that rubbing one’s face with lemon juice rendered it invisible to videotape cameras (Fuocco, 1996). …

We argue that when people are incompetent in the strategies they adopt to
achieve success and satisfaction, they suffer a dual burden: Not only do they reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the ability to realize it. Instead, like Mr. Wheeler, they are left with the mistaken impression that they are doing just fine. … [A]s Charles Darwin (1871) sagely noted over a century ago, “ignorance more frequently begets confidence than does knowledge” (p. 3).

The actual study involved surveys of dozens of Cornell undergraduates. From the abstract:

People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of the participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities. 

Obvious questions arise. Do the results from these tests and from college undergraduates generalize to other settings and populations? This is where Powell’s interview with Dunning comes in. Dunning describes how he sees the main insight in this way:

The Dunning-Kruger result is a little complicated because it’s actually many results. The one that is a meme is this idea: On any particular topic, people who are not experts lack the very expertise they need in order to know just how much expertise they lack. The Dunning-Kruger effect visits all of us sooner or later in our pockets of incompetence. They’re invisible to us because to know that you don’t know something, you need to know something. It’s not about general stupidity. It’s about each and every one of us, sooner or later.

You can be incredibly intelligent in one area and completely not have expertise in another area. We all know very smart people who don’t recognize deficits in their sense of humor or their social skills, or people who know a lot about art but may not know much about medicine. We each have an array of expertise, and we each have an array of places we shouldn’t be stepping into, thinking we know just as much as the experts. My philosopher friend and I call that “epistemic trespassing,” because you’re trespassing into the area of an expert. We saw this a lot during the pandemic. … I think it was Vernon Law, the baseball pitcher, who said that life is the cruelest teacher because it gives you the test before it provides the lesson.

Is the Dunning-Kruger effect just a statistical artifact?

The critique is that the Dunning-Kruger effect is a statistical artifact known as regression to the mean. People who are poor performers on a test can only overestimate themselves. Those who are high performers can only underestimate themselves, so it’s a measurement error, an artifact. We talk about that issue in the original article. We did a nine-study series investigating regression to the mean. Other people have done studies that call the artifact into question. The critique tends to focus on the first two studies of a four-study paper in 1999. I can’t dismiss the irony of people not taking into account the 25 years of research that have happened since.

Dunning discusses social norms like “do not insult other people” and, at least as a first approximation, “if someone tells us something, we’ve been taught to assume it’s true.” These rules function fairly well in person-to-person interactions, but not on social media.

 think what’s interesting about the internet and social media is that it takes us out of the setting where we learned all these politeness rules. Right here, you and I are having a conversation. We’re in a relationship. Twitter is not that. On Twitter, I proclaim something by posting, and you come along a few hours later and you proclaim. We’re not interacting, we’re proclaiming asynchronously. The kindness rules and the politeness rules are not in play.

My anthropologist friends remind me that every time a new communication technology comes around, such as the telegraph or telephone, there is a breakdown in social norms. Whatever politeness rules have been built up don’t yet apply to the new platform. We’re in the middle of that right now. I think what’s happening with social media is that we haven’t developed the politeness rules that we have for face-to-face interaction.

David A. Price interviews Ulrike Malmendier, “On law versus economics, the long-term effects of inflation, and the remembrance of crises past” (Econ Focus: Federal Reserve Bank of Richmond, First/Second Quarter 2024, pp. 22-26). One theme of the interview is Malmendier’s recent work which emphasizes that living through a salient event can leave a lasting mark.

I mentioned how my early life path was influenced by my dad experiencing World War II and how everything can get destroyed — the house gets destroyed, you lose all your possessions and savings, and maybe your country’s currency isn’t worth anything anymore. One way of looking at the effects of this is simply in terms of information: After such an experience, you have new data about what can happen. That’s the traditional economic view. But I’d argue that there’s an element beyond the intellectual. When it’s your own life, you tend to put a lot of weight on what has happened to you. You’re pushed toward overweighing outcomes that have happened to you. I first worked on that in the context of the stock market, with a paper Stefan Nagel and I wrote on Depression babies in the U.S. We showed that people who experience big crashes of the stock market tend to shy away for years and decades from investing anything in the stock markets.

How might this experience of overweighting the past be playing out since the pandemic? One possibility is in how younger people, who had not previously experienced inflation, think about inflation.

For starters, look at inflation, which started creeping up since 2021, and then in 2022 you were getting close to the double digits. There was such a sharp contrast between the long period of the Great Moderation and all of a sudden that price shock kicking in. For older people, who have seen high inflation before in the ’80s or even the ’70s, I’m predicting they’re just taking that into the average of the long period of low inflation since the early 1980s and of their experience of high inflation in the 1970s and early 1980s. Given their long history of experiences, the new spike does not get too much weight. It just goes up a bit.

But for young people in the United States who basically had seen no inflation at all outside of textbooks, it’s a different story. All of their life before they had experienced very low inflation, and then all of a sudden there’s the spike. Initially, then, they might be a little slow to react. But if the spike in inflation lasts long enough — it isn’t just a two-month blip — they realize, whoa, the world I live in is different than the world I thought I was living in, where high inflation happens only in textbooks. So the weight they put on that experience increases and can in fact end up being much higher than for older generations because the new experience makes up a much larger part of their lives after it has happened for two years or so.

Another possibility relates to the question of why worker who were willing to come into the office five days every week have now become unwilling to do so.

One area where I do expect big experience effects from recent years is living through the COVID-19 crisis and many of us being relegated to working from home. I do expect there to be a lasting change in how we view the value of social interaction, the value of working from home versus working at your workplace. The leadership here at the Haas School of Business, where I am right now, is encountering exactly this issue. They wonder why the same people who were happily coming in five days a week before COVID absolutely refuse to do so now. It’s clearly an experience that has changed people. In the classical economic model, you would just talk about the information obtained from that experience and maybe the setup cost of learning Zoom. But that can’t explain everything. We knew the length of our commutes before COVID.

And yet, personally experiencing what remote work and cutting out your commute means for your personal life makes an enormous difference. You have to experience it first, not because of lack of information, not because you cannot add and subtract hours spent in the car versus not, but because it just enters your decision-making differently if you have physically experienced it.

In current work, Malmendier is looking at how the experience of being a CEO through a period of corporate success or failure leaves a mark on that person–and finds that being CEO during a period of corporate turmoil can literally take years off a person’s life. In a past essay back in 2015 for the Journal of Economic Perspectives (where I work as Managing Editor), Malmendier (with Geoffrey Tate) “Behavioral CEOs: The Role of Managerial Overconfidence.” Although she was not emphasizing the theme of how past experiences affect current judgments at the time, it seems obvious to wonder if those who have the past record to end up as CEOs may develop an inflated opinion of their own judgment and skills as they move forward.

Over the last half-century or so, the share of corporate stock that is owned by investors with taxable mutual funds or brokerage accounts has fallen dramatically. Steven M. Rosenthal and Livia Mucciolo tell the story in “Who’s Left to Tax? Grappling With a Dwindling Shareholder Tax Base” (Tax Notes, April 1, 2024).

Here’s their figure showing a breakdown of who owns stock in US publicly traded corporations. Back in the 1960s, 80% of this ownership was in the form of taxable accounts. But the share of US corporate stock held by foreign investors and retirement accounts has risen substantially, and nonprofits own a chunk of US corporate stocks as well. So in the last two decades, only 20-30% of US corporate stock is in taxable accounts.

Rosenthal and Mucciolo offer some additional discussion of how these groups are taxed. For example, dividends paid by US firms are taxable, even when paid to foreign investors, but these payments are governed by international treaties. They explain: “However, the rate is often reduced by tax treaties between the United States and the home country of the foreign investor: from 30 percent to 15 percent on portfolio investment dividends, for example, and 5 percent or even 0 percent on dividends from direct investments.” Foreign investors do not pay capital gains on stocks to the US government–instead, such gains are taxable in their home country. If US firms use the increasingly common practice of distributing funds to their investors by repurchasing their shares, then such payments are treated as capital gains, not dividends.

For retirement accounts, the common practice is that the money is not taxed when it goes into the account, and the returns are not taxed as they occur over time. Instead, retirement money is taxed as income to the taxpayer when it is received after retirement. Nonprofit, of course, are not subject to income taxes.

With these patterns in mind, proposals for taxing owners of corporate stock as a group–not just the minority who hold their investments in taxable brokerage and mutual fund accounts–are going to run into complexities. Dramatic changes in retirement accounts or international tax treaties are not a simple matter, in politics or economics. Jacking up taxes on the 20-30% of shareholders who are taxable would created incentives to push their share even lower. One can make an argument that a reason for an explicit tax on corporate income is that it has become so difficult to tax the gains to shareholders of those firms.

The authors describe the challenges without trying to spell out policy recommendations. They note: “The transformation over the past 60 years in the nature of U.S. stock ownership from overwhelmingly domestic taxable accounts to overwhelmingly foreign and tax-exempt investors has many important policy implications, including how we can most effectively tax corporate profits; who is affected by changes in corporate taxation; and the form of corporate payouts to shareholders. Policymakers must continue the process, only now beginning, of grappling with the dwindling shareholder tax base.”