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Article Artículo

Will Progressives Ever Think About How We Structure Markets, Instead of Accepting them as Given?

(I originally posted this piece on my Patreon page.)

The right would like us to believe that the inequality we see in the United States, and increasingly in other countries, is a natural outcome of market processes. Unfortunately, many on the left seem to largely share this view, with the proviso that they would like the government to alter market outcomes, either with tax and transfer policy, or with interventions like a higher minimum wage.

While redistributive tax and transfer policies are desirable, as is a decent minimum wage, it is an incredible mistake to not recognize that the upward redistribution of the last four decades was brought about by conscious policy, not any sort of natural process of globalization and technology. Not recognizing this fact is an enormous mistake from both the standpoint of policy and politics. 

From the policy standpoint, we give up a huge amount by not examining the policies that have caused before-tax income to be redistributed upward. As a practical matter, it is much easier to prevent all the money from going to the top in the first place than trying to tax it back after the fact.

On the political side, we should never have our argument be that somehow the big problem is that the Bill Gates of the world were too successful. The big problem is that we have badly structured the rules of the market so that we gave Bill Gates too much money. With different rules, he would not be one of the world’s richest people even if he had worked just as hard.

Since we’re on the topic of Bill Gates, patent and copyright rules are a good place to start. For some reason, it is difficult to get people to accept an obvious truth: there is a huge amount of money at stake with these rules. By my calculations, patent and copyright monopolies could well direct more than $1 trillion a year, a sum that is more than 60 percent of after-tax corporate profits.   

CEPR / November 16, 2018

Article Artículo

Corporate Debt Will Not be the Basis for Another Financial Crisis/Great Recession

The folks who remain determinedly ignorant about the financial crisis and Great Recession continue to look for another crisis where it isn't. Much of the latest effort focuses on corporate debt. There are four big reasons why corporate debt does not pose anything like the same sort of problem that mortgage debt did during the housing bubble years.

First, many companies took on large amounts of debt for a simple reason, it was very cheap. The debt was not a necessity for them, but the opportunity to borrow for thirty or even fifty years at very low interest rates looked too good to pass up. As a result, many entirely healthy companies have large amounts of long-term debt on which they have very low interest payments. The ratio of corporate debt service payments to after-tax profits is at a relatively low (as in the opposite of high) level.

Second, the crisis mongers apparently missed it, but stock prices are very high right now. This means that most companies have the opportunity to raise more money by selling stock if they feel the need. Of course, the stock market could always plunge by 50 percent, but this one doesn't factor into most crisis mongers' predictions. As long as the market stays high, or even if it falls 20 percent, most companies would be able to sell shares to raise capital if they were facing trouble meeting their debt service payments.

The third reason corporate debt does not pose the same problem as mortgage debt is that even in a bankruptcy, debtors usually collect the bulk of their debt. It's rare for a company facing bankruptcy not to still own valuable assets, such as a profitable subsidiary or land and buildings that can be resold. As a result, debtors might have to accept 70 or 80 cents on a dollar, which is a substantial loss, but far more than zero.

CEPR / November 16, 2018

Article Artículo

Affordable Care Act

Health and Social Programs

United States

Labor Market Policy Research Reports, November 2018

CEPR regularly publishes a curated collection of original research from academic institutions and nonprofits on the state of the US labor market. The compilation is part of our ongoing effort to promote informed debate on the most important economic and social issues that affect people's lives.

The Brookings Institution

Learning from Opportunity Zones: How To Improve Place-Based Policies

Congress’ 2017 tax bill sought to funnel investment to economically distressed neighborhoods by creating Opportunity Zones. However, broad criteria for inclusion gave state decision makers considerable latitude in their selection processes. Some of the designated areas appear to be truly disadvantaged, but many are not. While the program’s design already constrains its benefits for impoverished residents, lackluster geographic targeting further limits its potential.

Work Requirements and Safety Net Programs

This analysis adds to the growing body of evidence that suggests that the subset of SNAP and Medicaid participants targeted for work requirements is vanishing. Meanwhile, the proposed work requirements would disproportionately burden those who are already working or who are legitimately unable to work.

CEPR and Hayley Brown / November 14, 2018

Article Artículo

Good News, the Stock Market Is Plunging: Thoughts on Wealth

This post was originally published on my Patreon page.

Several people on my Twitter feed touted the drop in the stock market last month as evidence of the failure of Donald Trump’s economic policy. I responded by pointing out that he was reducing wealth inequality. I was being only half facetious.

I have always been less concerned about wealth than income both because I think wealth is less well-defined and because income is the more important determinant of living standards. In the case of the stock market plunge, the vast majority of the losses go to the richest 10 percent of the population and close to half go to the richest 1 percent, for the simple reason that this is the distribution of stock ownership.

When people decry the rise in inequality in wealth over the last decade, they are basically complaining about the run-up in the stock market. The real value of the stock market has roughly tripled from its recession lows. With the richest one percent holding close to 40 percent of stock wealth and the richest 10 percent holding more than 80 percent, a tripling in the value of the stock market pretty much guarantees a big increase in wealth inequality. If we think this increase is bad, then why would we not think a drop in the stock market is good?

There is a correlation between the stock market and economic growth. The market generally rises when the economy is strong and falls in recessions, but this link is weak. Remember the recession of 1988?

I hope not, because the economy continued to grow at a healthy pace until the summer of 1990. This is in spite of the stock market’s largest one-day drop ever in October of 1987. (It did recovery half of its value by the end of the year.)

In short, the recent plunge in the market tells us little about the future direction of the economy. If we are troubled by wealth inequality then we should be happy, rich people now have substantially less wealth.

CEPR / November 09, 2018