Robert Barro: Tax Reform Will Pay Growth Dividends

January 11, 2018 by Miles Kimball

I wrote about the possible effects of the December 2017 tax reform on capital accumulation in "The Real Test of the December 2017 Tax Reform Will Be Its Long-Run Effect." In this post, I am writing about the possible effects on labor hours.

This division of the discussion follows Robert Barro's. In "Tax Reform Will Pay Growth Dividends
The effects will be even larger thanks to last-minute cuts in marginal individual rates," he writes:

In a November letter to Treasury Secretary Steven Mnuchin, eight other economists and I argued that the bill’s corporate tax provisions would increase business investment and expand the economy. But what about the changes to the individual tax code?

Here is the heart of Robert's claims:

The Tax Policy Center estimates that the weighted-average marginal tax rate from individual income and payroll taxes will fall in 2018 by 3.2 percentage points. By comparison, the cuts were 4.5 points from 1986-88 in the Reagan reform, 3.6 points from 1963-65 in the Kennedy-Johnson tax reduction, and 2.1 points from 2002-03 in the George W. Bush reform.

Moreover, the Tax Policy Center finds that marginal tax rates in 2018 will drop for taxpayers across the income distribution. Most cuts are near 3 percentage points, with the smallest being zero for incomes below $10,000 and 0.6 point for incomes between $500,000 and $1,000,000.

My research with Charles Redlick, published in 2011 by the Quarterly Journal of Economics, suggests that cutting the average marginal tax rate for individuals by 1 percentage point increases gross domestic product by 0.5% over the next two years. This means the tax bill’s average cut of 3.2 points should expand the economy by 1.6% through 2019, or extra growth of 0.8% a year. This growth effect is temporary, but what it adds to the level of GDP is permanent.

In line with standard economic theory, Robert is arguing that a reduced distortion in the labor market due to lower marginal tax rates is likely to increase the total amount that people work. The key mechanism is that with less of every extra dollar earned taken by taxes, people will be willing to work more even if they don't get a raise. With people willing to work more even if they don't get a raise, wage pressures will be muted and the Fed can afford to keep interest rates lower than it otherwise would, leading to higher GDP.

How long does it take for the increase in employment and labor hours to happen? As I discussed in "The Real Test of the December 2017 Tax Reform Will Be Its Long-Run Effect," capital accumulation is painfully slow. By contrast, changes in employment and labor hours can happen relatively quickly. Robert suggests that adjustments in employment and labor hours would take about two years, which seems reasonable to me.

How big is the effect? To get the total amount of extra work that people do, Robert is multiplying two numbers:

An estimate of the semi-elasticity of GDP with respect to reductions in the average marginal tax rate: .5
An estimate of the reduction in the average marginal tax rate: 3.2 percentage points

This leads to estimate of the overall increase in GDP of 1.6%. Spread out over a two-year adjustment period, that raises the growth rate of GDP by .8% over each of two years. (Of course, the extra growth wouldn't really be equal in both years. It might be tilted toward the second of the two years, since there is a lag in the effect of monetary policy.)

How reasonable is the estimate of how much a one percentage point reduction in the tax rate raises GDP? Here, I think making things as simple and transparent as possible is helpful. Let me use a toy model so simple that I can figure out a semi-elasticity of GDP with respect to reductions in the marginal tax rate in just a few lines. I will use "h" to represent the fraction an extra dollar of pay that a worker takes home. That is,

h = 1 - marginal tax rate.

If there is monopolistic competition in the picture

h = (1- marginal tax rate)/(1 + markup)

This marginal tax rate doesn't have to equal the average tax rate, and so h doesn't have to have any particular relationship to government purchases G.

Here are the key simplifications:

There are no distortions other than the marginal tax rate and the markup. The economy is otherwise frictionless. The effect of the Fed getting the economy to its new natural level of employment, hours and output by appropriate monetary policy is approximated by using a model in which the economy is always at the natural level of employment, hours and output because prices adjust instantly.
Workers get to choose the number of hours they work, given their wage.
There is no capital and no investment. This means that all effects involving capital accumulation are ignored. It also means that the effect of a 1% increase in total amount people work is overestimated because the fact that they are more likely to be fighting to use the same tools at the same time and more crowded in the office is ignored.
Hours go up by an equal percentage for each worker rather than additional people being employed. Since I will use an estimate of the labor supply elasticity based only on increases in hours for a given worker, this tends to underestimate the total increase in amount worked. There is no need to assume that everyone is identical. The model still works fine if some people have, say, the productivity of two people and have each of their hours counted as two hours, and so earn twice the wage. Also, though not an exact result, if people's marginal tax rates differ, the concept of an average marginal tax rate is meant to give a good approximation to the right result when plugged into a model where people's marginal tax rates are all the same.
I will use a consumption-constant labor supply elasticity of 1. This is is close to the Frisch elasticity Matthew Shapiro and I found in “Labor Supply: Are the Income and Substitution Effects Both Large or Both Small?" but below the consumption-constant labor supply elasticity we found there. (This is a paper I mentioned in my first post on this blog "What is a Supply-Side Liberal?")
The income and substitution effects for labor supply cancel. What I mean by this is that—holding the number of hours per week fixed—a worker requires a wage 1% higher when the worker's consumption is 1% higher. Barring other unreasonable assumptions, something close to this assumption is needed in order to avoid the implication that the large increase in wages over most of the 20th century should have resulted in huge changes in weekly work hours that we don't see.

Note that the intertemporal aspects of the utility function don't matter, because there is no way for the economy to transfer resources intertemporally anyway. So the utility function can be represented simply as

log(C) - N²/2

C is consumption. N is total amount worked. N is measured in units so that if government purchases were zero and h = 1, the total amount worked would be equal to 1. Each unit of labor produces one unit of output. Since there is no investment,

N = Y = C+G,

where Y is GDP and G is government purchases. From here on, I will just use N, but it is important to remember that Y = N in this simple model.

If there is no markup, the pre-tax wage will be equal to the marginal product of 1. If there is a markup, the pre-tax wage will be 1/(1+markup). Whether there is a markup or not, the after-tax wage will be equal to h. With the worker choosing herhis hours, the after tax wage will equal the reservation wage for one extra hour. The reservation wage for an extra hour is equal to the marginal disutility of a little extra work—which for the utility function above is equal to N—divided by the marginal utility of a little extra consumption—which for the utility function above is equal to 1/C. That makes the reservation wage equal to N/(1/C) = CN. Setting the reservation wage for an extra hour equal to the after-tax wage,

CN = h

Now, combine C = N - G from the equation N =Y = C+G above with CN = h to get the quadratic equation

N² - GN - h = 0

To get a starting point at which to calculate a semi-elasticity, take G = .2 and h = .8. Then, at this starting point,

N² - .2 N - .8 = 0

This has the solutions N = 1 and N = -.8. Only the solution N=1 makes sense. So this is the starting level of labor for this numerical example. Actually, you can fairly easily show that if G = 1-h, then the positive solution for N is equal to 1. (In particular, if G = 0 and h = 1, then N=1.)

To find the semi-elasticity of N (equal to GDP) with respect to h, take the total differential of

N² - GN - h = 0

The total differential is

(2N – G) dN – N dG - dh = 0.

If government purchases G stay the same, dG = 0, and one can solve for the semi-elasticity in general and then plug in the starting values of N=1 and G=.2.

(1/N) dN/dh = 1/[N(2N-G)] = 1/1.8 = .556

This is in the same ballpark as the estimate that Robert Barro uses. There are offsetting positive and negative biases relative to a more complex model. So the bottom line is that the semi-elasticity estimate Robert uses can be questioned, but is reasonable.

How reasonable is the Tax Policy Center's estimate of the reduction in the average marginal tax rate from the December 2017 tax reform? I don't know the answer to this, but at this point I have no reason to doubt their estimate. I would be interested in any criticisms readers have of the Tax Policy Center's estimate of the effect of the tax reform on average marginal tax rates.

The Vicious Self-Fulfilling Prophecy That You Can't Do Math →

January 10, 2018 by Miles Kimball

Stop Counting Calories; It's the Clock that Counts

January 09, 2018 by Miles Kimball

To see my latest posts on diet and health, follow @mileskimball on Twitter.

My title comes from the first words in Sumathi Reddy's Wall Street Journal article shown above. Sumathi writes:

Stop counting calories. It’s the clock that counts.

That’s the concept behind time-restricted feeding, or TRF, a strategy increasingly being studied by researchers as a tool for weight-loss, diabetes prevention and even longevity.

Sumathi goes on to detail this approach and the accumulating evidence that it works.

The idea is simple: keep your "eating window" within a day down to a certain number of hours. This is a strategy that Jason Fung emphasizes in his powerful book The Obesity Code, which I try to distill into a blog post in "Obesity Is Always and Everywhere an Insulin Phenomenon."

Sumathi talks about a 12-hour eating window. Some people may get good results from an eating window of this length, but many people will need to restrict their food intake to a shorter window to get good results. Let me give my sense of things this way: in explaining the rise of obesity in the population as a whole, the two things that have the right timing are the rise of sugar and the lengthening of the eating window in a typical person's day. If, 120 years ago, many people ate breakfast at 8 AM and dinner at 6 PM, that is a little over a 10-hour eating window and well within a 12-hour eating window. Now it is common for many people to eat from soon after they wake up to right before they go to bed, somewhere around a 16-hour eating window. The rise in sugar consumption is less speculative; the data are better:

Based on this history, I suspect that for most people, avoiding all sugar and restricting food intake to 12 hours every day from childhood on is enough to avoid becoming obese in the first place. But prevention is much easier than cure. For those who are already overweight or obese, and have become insulin resistant, losing weight and restoring health might require avoiding even sugar-free carbs that are high on the insulin index, and restricting the eating window to something considerably shorter than 12 hours. (On insulin resistance and the insulin index, see "Obesity Is Always and Everywhere an Insulin Phenomenon" and "Forget Calorie Counting; It's the Insulin Index, Stupid.)

Personally, although I think I could keep my weight steady with an 8-hour eating window, I need something shorter in order to lose weight. In my experience, as long as I only eat foods low on the insulin index during the eating window, even going 20 to 21 hours between a 3- or 4-hour eating window each day is not at all painful. Any hunger I experience is mild and non-insistent hunger. What hunger I do experience is usually from thinking about food. And for the most part, I don't think about food because I am hungry, I am hungry because I thought about food for some other reason.

Eating this way for a while has two effects. On the one hand, for the same practices, weight loss gets tougher when your weight it lower to begin with. On the other hand, eating food that is low on the insulin index during your eating window gets a lot easier over time, and assuming you do that, over time it gets easier to go substantial periods with no food—"fasting"—without any substantial disutility. With fasting, "No pain, no gain" takes on a totally different meaning. If you do it right by eating well during your eating window, there is no pain in fasting, and you won't gain any weight while you are fasting!

When I first started on this program, I hated the idea of an "eating window." Both for theoretical reasons (see "Obesity Is Always and Everywhere an Insulin Phenomenon") and my own idiosyncratic reaction to particular rules, I liked the idea of length of time fasting as the thing to shoot for. But after a month or two, I came to terms with the fact that, logically, if you are eating every day, there is a very close mathematical relationship between the average length of the eating window and the average length of time fasting between the eating window one day and the eating window the next.

Of course, if there are some days when you don't eat at all (which can be quite a reasonable thing to do, and is also not as hard as you might guess–see "Obesity Is Always and Everywhere an Insulin Phenomenon"), then that mathematical relationship doesn't hold. When you skip eating for a whole day, it is cognitively easier to think about the length of the fast than the length of the eating window. But during periods of time when you are eating at least once a day, focusing on the length of your eating window is a perfectly good way to think about things.

There are three ideas that I keep reminding myself and others that keep the program I am following from seeming too abstemious and severe.

First, dietary fat is good, not bad. I have a post specifically on this: "Jason Fung: Dietary Fat is Innocent of the Charges Leveled Against It." And the message that dietary fat is good, not bad comes through clearly if you read "Forget Calorie Counting; It's the Insulin Index, Stupid." Knowing that foods such as olive oil, butter, cheese, cream, cashews, macadamia nuts and sugar-free bacon are great goes a long, long way toward making up for the sugar, bread, potatoes and rice that I have given up. Because I also treat meat as fine in moderation, it is easy to get a good restaurant meal.

Second, because foods that are low on the insulin index are quite satiating per calorie (especially those with significant dietary fat), if you have a reasonably short eating window, you don't have to restrict quantity at all. If you overeat much at all, you will feel uncomfortably overfull afterwards, and you are unlikely to want to do that again. By contrast, sugar or other easily-digestible carbs have a way of making you hungry so you want to eat more and more and more; eating any substantial amount of sugar or other easily digestible carbs makes it very, very easy to overeat badly.

Third, though some people try to make systems, I love the fact that I don't need to do things in any regular way. If it is convenient to go for a long time without eating, I can do that. If I want to shift the timing of my eating window, that is fine. If it is convenient to do a longer eating window on some particular day, that is fine. Things average out. Indeed, holding the average length of the fasts fixed, it may well be more effective to have a long fast and a short fast than to have two fasts of equal length. So irregularity may well be a good thing, as long as the overall rigor of your program is reasonably high. Some of this is speculative; the experiments have not all been done. But the theory I discuss in "Obesity Is Always and Everywhere an Insulin Phenomenon" (following Jason Fung's The Obesity Code) gives no reason to think that smoothing out the timing of your eating windows is important. Most people will get encouraging results from eating windows of 4 hours (one big leisurely meal) or 8 hours (two meals as big as you want with healthy things) every day, even if they vary the timing and jump back and forth between the 4-hour and 8-hour eating windows.

Many people worry that if they try a diet, it might backfire. That is, they could end up yo-yoing back up to an even higher weight than where they started. The scary evidence so far that says most diets backfire does not yet include a regimen relying on substantial periods of time with zero food and fairly strictly avoiding all foods that are high on the insulin index during eating windows. In predicting what that evidence will look like when it is systematically gathered, I am reassured by two things:

I am not suffering at all. No intrusive, onerous hunger; plenty of fun food to eat.
Everyone agrees that while you are eating zero food, it will tend to bring your weight down. Hence, it seems to me that some dosage of fasting will do the trick to maintain my weight or to lose weight. I can't guarantee in advance what that dosage will be, but if I am determined to do whatever it takes, what it takes won't be so bad.

For those who don't read Sumathi's article in its entirety, here are some key passages:

1. The findings, published in the journal Cell Metabolism, showed that when eight overweight people who naturally ate for 15-plus hours a day restricted their eating to a 10-hour window for 16 weeks, they lost 4% of their weight. A year later, they reported sticking to the plan, even though they didn’t have to, and had kept the weight off.

“All of them said they slept better, and they felt more energetic throughout the day,” said Dr. [Satchidananda] Panda. “They were actually feeling less hungry.”

TRF studies of mice—which provide the bulk of research on the strategy—have found that the body, when fasting for half a day or more, has more time to produce the components for cellular repair, break down toxins and coloring agents in food, and repair damaged DNA in the skin and stomach lining, according to Dr. Panda. There is also some evidence that TRF

2. “Many patients have gone off of blood-pressure medications,” [Dr. Julie Shatzel] said. “In some cases, I’ve seen the reversal of prediabetes.”

3. “Both improved their glycemia responses,” Dr. [Leonie] Heilbronn said, referring to the effect food has on blood sugar levels. While the men lost weight, she said, it wasn’t enough to account for the improved glucose levels. “There’s something else going on that’s not just driven by weight change,” she said.

4. “I think the real power of TRF is the simplicity of it,” [Dr. Krista Varady] said.

For annotated links to other posts on diet and health, see:

Miles Kimball on Diet and Health: A Reader's Guide

For example, here is what the first section looks like:

I. The Basics

Peter Conti-Brown on the Effect of Ideology on the Federal Reserve Board →

January 08, 2018 by Miles Kimball

Sam Brown and Miles Kimball on Teleotheism

January 07, 2018 by Miles Kimball

I had a very interesting email discussion with Sam Brown about my sermon "Teleotheism and the Purpose of Life." I am grateful for Sam's willingness to have me post that discussion here and his help in putting together the edited version of that discussion below. To see the text of the sermon, in addition to this link to the text of "Teleotheism and the Purpose" of Life," you can also find it by googling the word "teleotheism." Alternatively, there is a video of me delivering the sermon at "Live: Teleotheism and the Purpose of Life."

Sam: I’m working on a theology book, and am grappling a bit with emergentism, within which “teleotheism” may play a role as an alternative framing for the phenomenon of interest. When I google that phrase, it mostly comes back to a sermon you preached a few years back. It seems to have developed a currency among some Mormon intellectuals, but I can’t tell whether that’s a term you coined or whether it has a longer pedigree. Primarily, I’m wanting to know how best to cite it.

Miles: It is great that you are doing a book on theology. I am delighted that other Mormons are talking about teleotheism. Are they aware of my sermon "Teleotheism and the Purpose of Life?

I did not coin the term. I give its origins in my post "Leaving a Legacy." There I write:

As for the origin and history of the word "Teleotheism," when I wrote the Unitarian-Universalist sermon "Teleotheism and the Purpose of Life," I googled to find the preexisting word "Teleotheism" from the bvio.com post "Talk:-ism."

I should note that I have sections for religion posts and inspirational posts before 2017 in my organized bibliography of key posts. From 2017 on, my "Religion, Humanities & Science" subblog is the best place to to find them.

There is a sense in which "teleotheism" as I use the term doesn't amount to much of a theology. It boils down to saying "Let's build something wonderful and call it God." I have been most interested in teleotheism as an approach to homiletics and devotion (e.g., my post "The Book of Uncommon Prayer") for unbelievers, within an assumption of nonsupernaturalism.

In addition to my sermons, you might be especially interested in "What If Jesus Was Really Resurrected?" and "The Teleotheistic Achievement of the New Testament."

Sam: I think it fits well with a somewhat religious existentialism that leans on the emergence theologies in an echo of process theologies. In a modern secularist register, it’s a new take on Swedenborg’s Maximus Homo (and, frankly, the zodiacal body that it gently remembers). While I’m personally a somewhat classical theist, I think theist and non-theist alike could benefit from thinking about the beautiful things/processes/realities/phenomena that can come into being as we work together in tender mutual regard. I think Mormonism provides a useful backbone for many of those meditations across the spectrum of belief. My inference from my own googling and your response is that you’re really the popularizer of that term. Other than that odd list of -theisms, I really don’t see it used elsewhere. So I’m going to call it a Miles Kimball thing, unless you object. I’ll cite that main sermon of yours on the topic.

Miles: Thanks, Sam. That sounds great. A footnote that I got the term from a list is sufficient for accuracy. I am honored if I am the popularizer.

By the way, I definitely think of my teleotheism as coming from my Mormon roots. It is obviously influenced by the idea of eternal progression. Also, there is the question of where the first gods came from, which is obviously raised by the succession of gods implied by Mormon theology. I addressed that most directly in "What If Jesus Was Really Resurrected?"

Even "nonsupernaturalism" is a way that many Mormons think of their theology: "God acts according to natural law." I am saying that, but identifying my posited natural law more closely with the currently believed laws of physics: What Do You Mean by "Supernatural"?

Sam: Thanks. Yeah, I'm playing with these ideas in an essay that's in press at Dialogue. I argue that the True Light is Smith's take on this question. I think this is more than Spinozist Law, even as I agree with you that many Mormons have been surprisingly Spinozist in their interpretation of it.

Fascinating sets of questions.

Miles: The sense in which I am still a believer in Mormonism is this: I believe Mormonism has an important teleotheistic role to play. Mormonisms's flaws, such as its treatment of women, gays and intellectuals, are counteracted by other powerful forces in our culture. Mormonism's strengths, such as those I write about in

are not that easy to find in full elsewhere. These strengths of Mormonism are an important part of building Zion, just as equality for women, acceptance of sexual diversity and respecting vigorous debate from all corners as a key part of the process for discovering truth are important parts of building Zion.

Sam: I am afraid I didn't get curious about the origins of “teleotheism” until after the Dialogue piece was already in galleys. I'll incorporate reference to your sermon into the book, though. I appreciate the thoughtful work you've done in this area.

By the way, I wonder whether you have read Richard Kearney's God Who May Be. Seems like it might be apropos here. Also, Adam Miller's book Future Mormon basically does a variant of teleotheism in a framework he borrows from Bruno Latour. I’m not sure what you think of Latour (I confess that I'm unpersuaded), but may be of interest.

Miles: Those sound interesting. Thanks for the recommendation.

Sam: I've done some more thinking about this topic in the meantime that has made me more skeptical of the rigor and explanatory utility of teleotheism.

Miles: Remember that I myself wrote to you:

There is a sense in which teleotheism as I use the term doesn't amount to much of a theology. It boils down to saying "Let's build something wonderful and call it God."

I have been most interested in teleotheism as an approach to homiletics and devotion (e.g. https://blog.supplysideliberal.com/post/95610279811/the-book-of-uncommon-prayer ) for unbelievers, within an assumption of nonsupernaturalism.

I doubt your view of teleotheism is more skeptical than that!

Sam: I should have mentioned that I think teleotheism is probably the best of the truly materialist options, so in saying I doubt the horse can run, I'm probably making a broader claim than just that teleotheism is inadequate (at least insofar as it's a purely materialist proposal).

Don Luis Espinal on the Hatred of People with an Accent →

January 06, 2018 by Miles Kimball

Noah Smith on Racial Politics →

January 05, 2018 by Miles Kimball

The Real Test of the December 2017 Tax Reform Will Be Its Long-Run Effect

January 04, 2018 by Miles Kimball

The Solow Growth Model is a mainstay of intermediate macroeconomics classes. A key lesson of the Solow Growth Model is that if the net marginal product of capital is above the growth rate of the economy, increasing the share of output devoted to investment can raise the long-run quantity of goods available for consumption.

As a cut in corporate taxes, the recent tax reform is intended (among other things) as a cut in the effective rate of taxation of capital formation through investment. (As examples of capital formation through investment, think of building factories or writing software.) Thus, it is hoped that it will raise the share of GDP devoted to investment now, leading to a higher capital stock later than what the path of the capital stock would otherwise be.

It is important to realize how slow this process is. In "The Medium-Run Natural Interest Rate and the Short-Run Natural Interest Rate" I wrote:

Introductory macroeconomics classes make heavy use of the concepts of the "short run” and the “long run.” To think clearly about economic fluctuations at a somewhat more advanced level, I find I need to use these four different time scales:

The Ultra Short Run: the period of about 9 months during which investment plans adjust–primarily as existing investment projects finish and new projects are started–to gradually bring the economy to short-run equilibrium.
The Short Run: the period of about 3 years during which prices (and wages) adjust gradually bring the economy to medium-run equilibrium.
The Medium Run: the period of about 12 years during which the capital stock adjusts gradually to bring the economy to long-run equilibrium.
The Long Run: what the economy looks like after investment, prices and wages, and capital have all adjusted. In the long run, the economy is still evolving as technology changes and the population grows or shrinks.

Obviously, this hierarchy of different time scales reflects my own views in many ways. And it is missing some crucial pieces of the puzzle. Most notably, I have left out entry and exit of firms from the adjustment processes I listed. I don’t know have fast that process takes place. It could be an important short-run adjustment process, or it could be primarily a medium-run adjustment process. Or it could be somewhere in between.

Suppose that after a cut in capital taxation the adjustment process brings the economy 10% of the way toward its new steady state each year. Then, after whatever the impact effect is, the gradual adjustment in the capital stock thereafter has on average only 37% percent of the effect in the first ten years that it will have in the new steady state. You can see some details of the calculation in my wonky Christmas Twitter thread here, but you can also see it visually in the blue graph near the top of this post. The area below the upside-down exponential curve for the convergence to the new steady state is obviously less than half the area beneath the line for the full steady state effect. Personally, I learned something I hadn't realized from doing this calculation.

Note that, among the effects tied to the increase in the capital stock are a large share of the dynamic tax revenue effects of the tax reform. The dynamic benefits for tax revenue should be more than two and a half times as big (1/.37 times) in the new steady state as they are in the first ten years, which is the bureaucratic window over which such things are often evaluated.

Now, what about the impact effect? Let's consider the impact effect on GDP first, then the impact effect on interest rates. Most of the supply-side improvement from the tax reform, if it has one, should only occur when additional capital formation has actually taken place. So aggregate supply shouldn't be that different in the short run. So if the Fed keeps output at the natural level, GDP also shoulnd't be affected all that much in the short run by the tax reform, even though it could be raised quite a bit in the long run if it works as claimed.

As for interest rates, remember that this tax reform changed the taxation of interest rates. One reason the Fed doesn't need to raise interest rates all that much to keep GDP at the natural level is that the tax reform itself raises after-tax interest rates. For example, in addition to some direct limitations on deducting mortgage interest, the standard deduction is so much bigger that many people won't want to deduct mortgage interest. That means that the same before-tax interest rate corresponds to a larger after-tax interest rate for many people. The Fed's interest rate is a before-tax interest rate. So if the Fed looks like it is standing pat, after-tax interest rates are going up.

For business investment, the after-tax rental rate on capital also goes up because it got a big tax cut. (The rental rate is the more general concept that in very simple models is equal to the marginal product of capital.) Investment per the Q-theory depends on the gap between the after-tax rental rate and the after tax interest rate. So given a large corporate tax cut and a reduction in interest deductibility and no reaction by the Fed, business investment can go up while housing investment goes down.

Contrary to the headline of Pedro da Costa's Business Insider article above, the bottom line is that the Fed not needing to react to the recent tax reform in a big way doesn't mean that the tax reform isn't working as intended to increase capital formation through investment. The real test of the tax reform is what it does in the long run, not what it does in the next few years.

Why I Am Not a Neoliberal—In Tweets →

January 03, 2018 by Miles Kimball

2017's Most Popular Posts

January 02, 2018 by Miles Kimball

The "Key Posts" link at the top of my blog lists all important posts through the end of 2016. This is intended as a complement to that list, in two categories: popular new posts and popular older posts. (You can see other recent posts by clicking on the Archive link at the top of my blog.) The numbers shown are pageviews throughout 2017 according to Google Analytics. My blog homepage had 34,833 pageviews in 2017. Total pageviews were 240,568 in 2017.

New Posts in 2017

Older Posts with Continuing Popularity

Many of the popular older posts are posts that turn up easily in Google searches.

The Inauguration Day Letter Barack Obama Left for Donald Trump

January 01, 2018 by Miles Kimball

Dear Mr. President -

Congratulations on a remarkable run. Millions have placed their hopes in you, and all of us, regardless of party, should hope for expanded prosperity and security during your tenure.

This is a unique office, without a clear blueprint for success, so I don't know that any advice from me will be particularly helpful. Still, let me offer a few reflections from the past 8 years.

First, we've both been blessed, in different ways, with great good fortune. Not everyone is so lucky. It's up to us to do everything we can (to) build more ladders of success for every child and family that's willing to work hard.

Second, American leadership in this world really is indispensable. It's up to us, through action and example, to sustain the international order that's expanded steadily since the end of the Cold War, and upon which our own wealth and safety depend.

Third, we are just temporary occupants of this office. That makes us guardians of those democratic institutions and traditions -- like rule of law, separation of powers, equal protection and civil liberties -- that our forebears fought and bled for. Regardless of the push and pull of daily politics, it's up to us to leave those instruments of our democracy at least as strong as we found them.

And finally, take time, in the rush of events and responsibilities, for friends and family. They'll get you through the inevitable rough patches.

Michelle and I wish you and Melania the very best as you embark on this great adventure, and know that we stand ready to help in any ways which we can.

Good luck and Godspeed,

source

John Locke Pretends Land Ownership Goes Back to the Original Peopling of the Planet

December 31, 2017 by Miles Kimball

*Source for this image of a Hittite chariot*

It only takes a little knowledge of history to know that most real-world land claims actually go back to either conquest or to some kind of squatting on land that someone else had a nominal claim to. Few real-world land claims go back to the original peopling of the earth. So there are problems with both halves of section 35 of John Locke's 2d Treatise on Government: “Of Civil Government” (in Chapter V "Of Property"):

It is true, in land that is common in England, or any other country where there is plenty of people under government, who have money and commerce, no one can inclose or appropriate any part, without the consent of all his fellow-commoners; because this is left common by compact, i. e. by the law of the land, which is not to be violated. And though it be common, in respect of some men, it is not so to all mankind; but is the joint property of this country, or this parish. Besides the remainder, after such inclosure, would not be as good to the rest of the commoners, as the whole was when they could all make use of the whole; whereas in the beginning and first peopling of the great common of the world, it was quite otherwise. The law man was under, was rather for appropriating. God commanded, and his wants forced him to labour. That was his property which could not be taken from him wherever he had fixed it. And hence subduing or cultivating the earth, and having dominion, we see are joined together. The one gave title to the other. So that God, by commanding to subdue, gave authority so far to appropriate: and the condition of human life, which requires labour and materials to work on, necessarily introduces private possessions.

What force John Locke's argument here had in the era when he wrote it comes mostly from his clever use of the Bible. Here two of the Bible verses he is alluding to:

In the sweat of thy face shalt thou eat bread, till thou return unto the ground; for out of it wast thou taken: for dust thou art, and unto dust shalt thou return. (Genesis 3:19)

And God blessed them, and God said unto them, Be fruitful, and multiply, and replenish the earth, and subdue it: and have dominion over the fish of the sea, and over the fowl of the air, and over every living thing that moveth upon the earth. (Genesis 1:28)

But even in John Locke's reading of Bible verses, there is a serious problem, akin to the problem I mentioned above. "Be fruitful, and multiply, and replenish the earth, and subdue it," which sounds the most like land claims based on the peaceful peopling of the earth, is a Bible verse from before the Fall. The verse requiring unpleasant labor is in the third chapter of Genesis, after the fall. The fourth chapter of Genesis moves toward the reality of where land-claims come from:

And Cain talked with Abel his brother: and it came to pass, when they were in the field, that Cain rose up against Abel his brother, and slew him. (Genesis 4:8)

The rest of the first five books of the Bible, where God promises land to the Israelites that they ultimately claim in bloody conquest, completes a more realistic picture of where land claims come from.

My focus here is on land claims in John Locke's before-the-Fall model and land claims in what believers would call our actual fallen world. But it is worth also pointing to the Bible's contrast between labor after the Fall, as described in the third chapter of Genesis and labor before the Fall, as described in the second chapter of Genesis:

And the Lord God took the man, and put him into the garden of Eden to dress it and to keep it. (Genesis 2:15)

Reducing human violence—which Steven Pinker talks about in The Better Angels of Our Nature—is much more important, but it would be a great advance in human happiness if we can figure out how to make the experience of work more like dressing and keeping the Garden of Eden than eking out survival from thorny ground by the sweat of our brows.

Don't miss other John Locke posts. Links at "John Locke's State of Nature and State of War."

Percentage of Women in the Labor Force in Countries around the World |HumanProgress.org →

December 30, 2017 by Miles Kimball

Why I Am Not a Physicist

December 29, 2017 by Miles Kimball

Link to "Why Can't We Find the Theory of Everything? Einstein, Rogue Genius, String Theory | Eric Weinstein" on YouTube."

Above is a very interesting peek into the world of theoretical physics. Theoretical physics are making mathematical progress, but are stalled out in an effort to better understand reality, despite being an incredibly smart and highly-skilled group of people.

At one point in my youth, I said to everyone that I wanted to someday be a physicist. (And my interest in physics was great enough that I took a full two semesters of the most advanced freshman physics course at Harvard.) But at some point I realized just how stiff the competition would be because of how smart and highly-skilled the community of physicists is. So I decided to go into a field where the competition wouldn't be so stiff: economics. By comparison with physics, economics is still the Wild, Wild West, and it is much easier to make a real contribution in economics.

It is not lost on me that thinking about how much competition there would be in physics demonstrated some tendency to think like an economist. All the more reason I still think it was the right decision for me to become an economist rather than a physicist.

Noah Smith: Must-Reads of 2017: Monopolies, Sexism and Economics →

December 28, 2017 by Miles Kimball

Monetary Policies in the Age of Uncertainty

December 27, 2017 by Miles Kimball

Miles's presentation on negative interest rate policy begins right after the 35 minute mark.
Eric Lonergan's presentation on helicopter drops is right after MIles's presentation, beginning not long after the 52 minute mark
Q&A begins right after the 1 hour and 22 minute mark.
Eric Lonergan's answer in the Q&A begins at the 1 hour and 41 minute mark
Miles's answer in the Q&A begins 5 seconds before the 1 hour and 59 minute mark

Powerpoint file for Miles's Presentation

Link to the video above on YouTube

I was invited to speak at an October 2, 2017 Bruegel conference with the title "Europe and Japan: Monetary Politicies in the Age of Uncertainty." My presentation starts right after the 35 minute mark of the video above.

The great thing about this session was the Eric Lonergan's advocacy of massive helicopter drops made my advocacy of deep negative interest rates as a key tool look moderate :) For my views on helicopter drops, see my post "Helicopter Drops of Money Are Not the Answer."

I think many of you, my readers, will find the parts of this video I bulleted above quite interesting. For example, for the Bruegel presentation, I boil down my views on negative interest rate policy to 17 minutes. For the 5-minute version, see my CEPR interview posted here in "How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide." For the 87-minute version, see "18 Misconceptions about Eliminating the Zero Lower Bound (or Any Lower Bound on Interest Rates): The Video." (Those 87 minutes includes excellent Q&A. The video quality is tolerable, but not great.)

See Jan Musschoot's blog post "Carrot or stick? The Lonergan-Kimball debate" based on what you see in the video above.

Also: I added some of Eric Lonergan's tweets about the conference to the end of my story "Miles Kimball, Roger Farmer, Stephen Williamson and Joe Little on Recent Japanese Monetary Policy."

Chris Frith on Free Will →

December 26, 2017 by Miles Kimball

Miles's Recipe for Success

December 25, 2017 by Miles Kimball

The thing I would recommend for success is pretty simple. Try every day to get smarter. Learn something. Think. Think hard about some math. Try to figure things out.

If every day you try to get smarter, you are going to find that you are—certainly ten years later, twenty years later, thirty years later. If you really keep thinking, thinking, thinking all the time, it's also going to keep your mind in better shape when you get older.

People often, in our society, have the attitude, "You're born smart—or not smart." I think that is a terrible attitude to take. You can make yourself smarter by trying. One of the key things is to have patience with it. People say they can't do math. Math is something you need a lot of patience with. Almost everybody learns math slowly. That is true of a lot of other things, too. Just keep working on it, and you'll find that you do get smarter and smarter.

Update: Nelson Mark shares this on my Facebook page for this post:

I think it was Sherwin Rosen who told us that the “economic intuition” that the faculty tried to teach us is familiarity. Totally consistent with your recipe. Keep working at it and thinking about stuff.

The same can be said about intuition for many other pursuits.

Hal Boyd:  The Ignorance of Mocking Mormonism →

December 24, 2017 by Miles Kimball

You might also like some of my other religion posts. Here are my UU sermons I have posted:

Here some religion posts beyond those sermons, leaning towards posts related to Mormonism:

Noah Smith also did a series of religion posts on my blog. Please help me to persuade him to do more! Here they are in chronological order:

The World of Debt

December 23, 2017 by Miles Kimball

Source: visualcapitalist.comh/t World Forum for Economists Facebook group — *Source: visualcapitalist.com*
*h/t World Forum for Economists Facebook group*

I found it interesting how dominant US and Japanese debt is in the world of sovereign debt and how small a part of the whole the debt of individual European countries was. However, added together, European debt is quite important.