Yes, but how could you not interview Scott Sumner for this piece? How could you not? I think "secular stagnation" is mostly just central bank incompetence. It's certainly possible to have an economy that is low productivity, low growth, low interest rate, high debt, but with full employment. See Japan nowadays.
+1000 for more discussion of Sumner’s work on SB. Would be great to have him as a podcast guest or have an article about his work or similar. I’d be really curious where Matt & him would end up in different topics after an hour long discussion.
Whoo! Killer piece. And I think ultimately, the basis for why we need a more liberal immigration policy over the coming decades. An interesting follow up is also listening to Jason Furman on the Plain English podcast talk about his perspective on the conundrum over this new interest rate paradigm.
I agree! But we need to get the border under control first. If I were Joe Biden, I would run on two things: a noun, a verb, and Roe v. Wade; and "I will build the wall and make billionaires like Donald Trump pay for it."
Of course, political rhetoric and high-minded discussions around monetary and fiscal policy rarely intersect. But I'd also distinguish between a more liberalized immigration policy, and maintaining order at the border. One can have both!
I’m not so sure about that. In our SOTU polling we found that 59-25 voters want to cut legal immigration. I don’t think that’s unrelated to public opinion over the border and illegal immigration.
I think you could largely resolve the border issue with a requirement to have been inspected by CBP before you are eligible for any benefits. We need an orderly line of people who want to immigrate. There needs to be serious disincentive to crossing illegally.
I'd like a cheek swab in addition to any fingerprinting.
There should also probably be more visas for brothers and sisters, since that's one of the roots of the problem.
All that said, Congress is not going to resolve the problem. :/
When the Pod Save America team throws in the towel on more liberalized immigration policy until the border crossings are reduced to Obama era levels ... you know the path forward on policy is just cooked.
Like the catchiness and simplicity of your campaign message. But I'll actually disagree a bit and say a much better (and simpler) message is a noun, verb, and Roe v. Wade. Leave out immigration stuff entirely unless prompted.
"Different political identities are activated at different times and in different ways. In 2012, for instance, Obama and Romney were running as, respectively, the Democratic and Republican nominees, and so they most powerfully activated those identities.
But they were also running amid an economic crisis, and so they focused on activating people’s economic identities: Obama spoke to workers who felt like they were getting screwed over by slick rich guys like Romney; Romney appealed to makers who felt like they were being held back by statist liberals like Obama."
Basically, the best thing Biden can do is try everything he can on a policy level to if not solve the border crises, at least do what he can to alleviate it so it's less of a headline issue in 2024. Which he obviously tried to do in the early part of the year which Trump told GOP to kill for the very explicit reason that it would harm his reelection campaign to resolve the crisis.
And reality is, Trump's political instincts on this are actually completely correct. It really is better for him for immigration to be a salient issue. And because of that, it doesn't make sense to me for Biden literally highlight this issue on his own on the campaign trail. Reality is, he should be doing everything he can to mitigate the possibility the issue comes up at all.
I'm extremely pro immigration, but Lyman Stone made an interesting point that if a country's culture is driving a TFR below 2 and immigrants adopt that culture, then immigration delays but increases the problem later (an even larger aging population).
Still think immigration is a good thing, but at some point we need to figure out how to get to at least a replacement TFR as a country/culture.
>then immigration delays but increases the problem later (an even larger aging population).<
It's desirable to delay this as long as possible because A) hopefully the CCP will no longer be in control and history will finally end, and B) AI/robots might mitigate the baby crash.
Right now we're in a very serious Great Power competition, and need more hands on deck. We're also thankfully steadily getting richer, and the richer you are, the more you can afford a lot of old people.
It depends on how rapidly TFR falls and immigrants birthrates follow as well as how much economic growth those immigrants support. As an extreme example to demonstrate the point - half the population of India immigrates to the US and matches the TFR in the US immediately. GPD per capita will plummet, but in 30 years there will a MUCH larger population of elderly people who need will need resources. That's extreme and is unlikely, but even small changes across a large population of hundreds of million of people are impactful.
But in 30 years, wouldn’t there still be a better ratio of young people to retirees, because fewer of these retirees would still have living parents in the country? It’s a larger total number, but better ratio.
In 30 years its better. In 60 years its *potentially* worse. That's the point about it being a delaying action. It's probably still worth doing just to give a society time to get its culture to fix the TFR issue.
That's Lyman's point. Its a temporary boost, but after that boost fades, you're left with a larger population that then has the same aging population issue. That delay might help you fix the underlying cultural problem and get TFR back up to 2.1, but if it doesn't all you've done is kick a bigger can down the road.
First, good overview of some current thinking about macro, growth and trends. Nicely done, Milan. What follows isn't a criticism, but an idea for further exploration the next time you are talking with these economists.
I'd be interested in a follow-up to what Larry Summer said here, from your essay: "Government provides for national security, invests in science, supports the aged, and deals with inequality and its various consequences”, he told me. “And all of those things have become more necessary relative to other things than has been true historically."
It's the "more necessary" part that doesn't ring true to me. More possible, perhaps. Though I would argue it is only more possible due to a richer and more dynamic economy primarily as a result of private investment, which seems to be underexplored by the economists you spoke with. They all seem quite focused on government actions -- taxing, redistributing, spending -- with little discussion of how to encourage more private investment.
Support for the aged and national security do seem more neccesary, given population aging and great power competition with China. On private investment, that's the whole point of secular stagnation: it's falling because of demographics, and only the government can fix this!
I’d love to see an analysis of the impact of reducing capital gains taxes to zero on anything held continuously for more than 5 years (or 10) while increasing to 50% (or more) the rate on anything held less than 30 days (or 180). Day traders and millisecond algo traders shriek “but liquidity!” when ideas like this are mentioned but I don’t buy that marginal liquidity outweighs the distortive effects of quantitative speculation. We need to build vast amounts of durable stuff not tap stock price vibrations hundreds of times a second. Granted, if you add the Economics PhD I possess to Matt’s and Milan’s you’d still have a total of zero.
Anything held less than a year is considered short term and taxed at income tax rates instead of capital gains rates. Throw in some state taxes which often don't distinguish between capital gains and income (and NY City tax if applicable) and they are already close to if not surpassing 50% if the day trader actually makes a lot of money doing it.
A trader on Wall Street in NYC -
If they are making over 250k, is paying 35% federal + 6.9% NY state + 3.8% NY city tax = ~46%
If they are making over a million then it passes 50%
I feel like the NYC experience is actually kind of "proof of concept" that capital gains taxes could be increased nationally with only minimal downside economically. Finance is clearly the biggest economic driver in NYC and yet with effective marginal* tax rates of 50% the effect on employment and citywide GDP appears to be zilch. As Matt has noted many many times, despite the banner headlines about some hedge fund billionaire moving to Miami due to the "burden" of high taxes, the real reason NYC has lost people is sky rocketing housing costs driven by NIMBY and people's general overestimation of the marginal utility of year round warm/hot weather. And as Matt has noted, if taxes really were the driving force here, the population exodus would be coinciding with falling housing costs like we saw with St. Louis and Detroit post WWII.
Also, capital gains taxes were significantly higher in the 90s and this is famously considered a "golden" era for the US economically.
I work in NYC and get a significant amount of my compensation in bonus which is taxed at the highest marginal rate. So I have some personal experience to say high NYC taxes has made a dent in my thinking about where to work.
Thanks for this! I hadn’t considered all the NY tax layers. But I suspect Wall Street algos are run from a subsidiary in Wyoming or Grand Cayman or something. Maybe rates have to go up on 1-3 year holds and down on longer? The exact shape of that decaying function is beyond my expertise level but I still think the investment/taxation balance can be better optimized than it is now.
National security is perhaps more necessary than in the 1990s (or the aughts when we were under the delusion that guys with boxcutters required we spend trillions more on security). Not so much as during the Cold War when we spent up to 9% of GDP on defense.
>>So, I wasn’t contradicting myself when I went from worrying about secular stagnation to worrying about fiscal policy. I was responding to a radically changed world.<<
“When the facts change, I change my mind. What do you do, sir?”
I can't find the actual story -- but there's a great story of a group of Ind. Eng. professors touring a new Toyota plant here in the US and one of them thinks they identified how the new assembly line design breaks a core tenant of the Toyota Production System (e.g., using batched inventory instead of JIT or something) and apparently the response from the Toyota eng. was just something like "we needed to solve a different problem". I love the story - who knows if it's true - but I can totally image some dogmatic professor trying to lecture the actual experts on their own methodology.
This is why physicists have such contempt for economists. Exhibit one: how economists understand the word "theory." I.e., we're kinda like journalists but we throw in regressions and lots of Greek letters, all subject to change at a moment's notice of course.
I had always theorized that population growth must surely drive productivity, in that expanding production *mechanically* involves installing newer plant and equipment (after all, if you're building a new office building or food processing plant or water purification system—all of these are the kinds of physical plant you need more of as your population grows—you're going to implement today's technical standards, not 1987's). And I figured economists must have looked into this topic in depth. But I'd never bothered to look into it. Like Milan and Matt, I, too, lack an Econ Phd. And I must confess I wasn't overly familiar with the name "Alvin Hansen." Well, now I have something to go on.
It’s why steel foundries got shut down in the U.S. rather than reinvested in. The old blast furnaces were used until the capital was depreciated. New companies started up with modern arc furnaces and focused on recycling old steel. The old method of doing things was no longer competitive.
Especially true once the installed base of steel had grown latge relative to current demand. The US (and Europe, Japan, etc) don't really need much brand new steel. They can repurpose from their existing stock given the much slower growth expected.
Is that true? With all those wind turbines and solar panels, I imagined we needed to boost supply. There's also the issue of green steel, which we're going to have to produce a lot more of if we're going to cut emissions. But maybe decarbonizing the steel sector is impossible/not fully worth it anyway. I've heard good arguments on both sides.
Solar panels don't use steel; the mounts are concrete and the cells silicon or other semiconductors.
Wind turbine blades are primarily fiberglass (except for a a few smaller turbines, which use aluminum), because it's lighter than steel. The towers are steel, but a skyscraper needs comparable amounts of steel as the whole wind farm, because it requires multiple towers throughout the floorplan. I am not an industrial economist, but I expect that the recent rise in wood-framed construction here in the US is likely freeing up steel demand to go towards the turbines.
In political economy, “the worse the better” really is a thing. It took the great depression to get the government to experiment with stimulus, it took COVID to get family allowances (briefly). If inequality gets bad enough, Congress will find some way to address it. However, it’s utterly impossible to know what the breaking point will be. Many people, including me, thought Obama’s election would decrease the political salience of race and boy were we wrong. Thirty year old David never thought the Democratic party would prioritize identity and climate change over kitchen table issues. But maybe Republican orthodoxy will shift once the white working class (and perhaps the black and Latino lower middle classes) begin to punch their weight within the Republican coalition. The system is so complicated that it’s hard to predict. Nate Silver doesn’t put his models up til a few months before an election and that is a very wise choice.
Great piece, Milan. Wonkier pieces about fundamental economic concepts are among my favorite topics to read and to think about.
If Summers isn't worried about secular stagnation anymore, then it seems to me that he shouldn't have been worried about it in the first place. The problem with the economy in the 2010s, imo, wasn't stagnation, but rather insufficient stimulus following the worst recession since the Great Depression. Covid provided an opportunity to get the economy back to a "true" normal.
That said, I do agree with you and the other economists that secular stagnation is still an issue. As I was reading the piece, I was thinking "more immigration" so I'm glad you mentioned it. While I understand the political challenges around inflation, those problems are fixable (at least in theory - I'd like to think that the public would be more pro-immigration if said immigration is more orderly). Additionally, I'm less inclined to put much weight on the possibility of global population peaking in about 62 years. I think there is a lot of value in increasing immigration, even if it does ultimately only delay the problem.
I tend to think it's a bad idea to structure policy to maximize growth predicated on population growth, even to the extent it's possible to do so. I think the evidence is pretty overwhelming that the birth rate is largely beyond the ability of policy to dictate. The risk of creating a pyramid scheme where the whole deal collapses due to uncontrollable drops in the working age population is too great. Good policy maximizes productivity per capita that scales with the population regardless of the birth rate/immigration trend. Gains from population growth should be considered a bonus that accrues as an externality of sound policy.
I've often uttered the phrase "Elites Matter" 'round these parts. And this is an example of what I mean. I don't think there's any democracy where voters *prefer* higher taxes or spending trims. The US is an extremely rich country, and the kinds of austerity measures required to rebalance our trajectory (at this point at least, though they'll likely grow more difficult the longer we wait) would have a trivial impact on living standards. But I don't blame Americans qua Americans for not wanting higher taxes or less government spending. Again, which country's voters are nobler or wiser in that regard?
It's our elites and/or our constitution that making doing the right thing so difficult. To me "American voters are children" as an explanation smacks of a reverse American exceptionalism I personally find unconvincing and unlikely. People are people.
(The hot take here, of course, would be: the country's booming, and there's a strong argument we've gotten a lot more calls right than wrong over the last five years, even if, drearily, mortgage rates are now where they were in the early 90s.)
Maybe a hot take, and I hate to say it, but it seems like the solution is for President Biden to say that's not going to raise taxes on the non-1% and then to do so on a subset of those (e.g. top 10%, top 25%, whatever is needed) when the American people are no longer able to directly hold him accountable
I don't think Biden should touch austerity with a ten foot pole this year, and I doubt he will, though he is talking about raising taxes on the rich (which should be done, mind you; I just don't think most reasonable people think we can indefinitely confine tax increases to the 1%).
IIRC some Trump tax cuts will expire soon. So I think we may get some deficit relief on that front if Democrats have a good election in November. But I haven't looked at the specifics of this in quite some time.
We wouldn't have to use every single option on that list. For example, raising payroll taxes by 10% and taxing employer-provided health insurance would close most of the revenue gap.
"The problem is that Americans are, politically speaking, teenagers: We expect to be taken care of but resent being told what to do." - Kevin Williamson
“Economic theories are not like physics theories” I find this bizarre, and the way Larry Summers is talking about a "secular stagnation" as a passing trend not to be an useful framework. Maybe this is because I am a physicist! But I think we should talk of "secular stagnation" as three distinct effects:
1) Long-term (decades and centuries), developed countries have a slowing productivity growth rate as a fairly universal rule. They are starting from a higher base number, and trying to improve on a higher standard for quality of life. There is no shame in this, it's just setting a high bar for a succesful society.
2) Long-term (years and decades), the US has an aging population and insufficient fertility to replace the loss of their labor. Demographic decline is a very difficult trend to fight without immigration, and will adversely impact our living standards if we don't do something about it.
3) Short-term (months and years), the US economy is macroeconomically stimulated after decades of understimulation. We're seeing a lot latent potential unleashed, a lot of attention on previously neglected bottlenecks, a reorientation of the economy towards building, a distribution from capital to labor, but the economy does not have unlimited bandwidth to transform overnight.
Well done in characterizing the topology of secular stagnation. It's a timely reminder that this issue is still very much alive and well, whether we are focused on it or not.
On Summers ... I thought this was an interesting paper on how the cost of money is overlooked today. If we use the pre-1983 inflation formula - which measured monthly mortgage payments, instead of rental prices - then inflation in 2022 topped out at 15% vs. 9.1% and has had a much slower decline.
I get that. I think the point is more about how there's a large push by the chattering class to call the negative economic sentiment just ... vibes. But it's not just mortgage interest payments constraining wallet share. Credit card debt is a disaster. Interest rates are > 20%. This will snowball.
1. I agree that is a problem which is why I am voting for Joe Biden who favors capping credit card interest rates at 15%.
2. Based on Summers’ paper we put an option for “lower rates on mortgages and credit cards” to Blueprint’s “what would you most like to see changed in the economy” question and over 60% still said lower price level.
No, they'll just drop risky borrowers. And that is the goal of capping credit card interest rate; not lowering costs for risky borrowers but instead eliminating them from the credit markets.
The system will be far safer comparable to how requiring large down payments and higher credit scores for mortgages neutralized the subprime risk after 2008.
Yeah. It's a really bad proposal. Something like 20% of the US is already "invisible" to the commercial credit markets and use pay day loans, title loans, pawn shops instead. That's a way worse outcome.
Just take a look at the first link. The "average interest rate on credit card plans (all accounts) at commercial banks" was 11.94% in 2013 and is now 21.2%. Source: U.S. Federal Reserve Board via FRED
Did you miss me?
Always
Yes, but how could you not interview Scott Sumner for this piece? How could you not? I think "secular stagnation" is mostly just central bank incompetence. It's certainly possible to have an economy that is low productivity, low growth, low interest rate, high debt, but with full employment. See Japan nowadays.
Because I have a day job
+1000 for more discussion of Sumner’s work on SB. Would be great to have him as a podcast guest or have an article about his work or similar. I’d be really curious where Matt & him would end up in different topics after an hour long discussion.
MILAN IS BACK
prediction market take when?
Prediction markets are good because there is social value in knowing how likely someone is to win the election; this is not early the same for sports betting which should be illegal. https://thehill.com/opinion/campaign/4484827-prediction-markets-and-polls-are-telling-different-stories-about-the-presidential-race/
cant wait for the Yale Harvard Football preview this fall
Whoo! Killer piece. And I think ultimately, the basis for why we need a more liberal immigration policy over the coming decades. An interesting follow up is also listening to Jason Furman on the Plain English podcast talk about his perspective on the conundrum over this new interest rate paradigm.
I agree! But we need to get the border under control first. If I were Joe Biden, I would run on two things: a noun, a verb, and Roe v. Wade; and "I will build the wall and make billionaires like Donald Trump pay for it."
Of course, political rhetoric and high-minded discussions around monetary and fiscal policy rarely intersect. But I'd also distinguish between a more liberalized immigration policy, and maintaining order at the border. One can have both!
I’m not so sure about that. In our SOTU polling we found that 59-25 voters want to cut legal immigration. I don’t think that’s unrelated to public opinion over the border and illegal immigration.
eek, I didn't know it was that underwater.
I think you could largely resolve the border issue with a requirement to have been inspected by CBP before you are eligible for any benefits. We need an orderly line of people who want to immigrate. There needs to be serious disincentive to crossing illegally.
I'd like a cheek swab in addition to any fingerprinting.
There should also probably be more visas for brothers and sisters, since that's one of the roots of the problem.
All that said, Congress is not going to resolve the problem. :/
What? The incredible strain on the shelter system in big_city is primary caused by people who have active court hearings
When the Pod Save America team throws in the towel on more liberalized immigration policy until the border crossings are reduced to Obama era levels ... you know the path forward on policy is just cooked.
One can also have neither, by far the most popular option!
Like the catchiness and simplicity of your campaign message. But I'll actually disagree a bit and say a much better (and simpler) message is a noun, verb, and Roe v. Wade. Leave out immigration stuff entirely unless prompted.
Matt's old Vox colleague Ezra Klein really impacts my thinking on this; activation of particular identities is more important that the details of the actual policies discussed. https://www.vox.com/policy-and-politics/2018/11/5/18052390/trump-2018-2016-identity-politics-democrats-immigration-race.
Key passage:
"Different political identities are activated at different times and in different ways. In 2012, for instance, Obama and Romney were running as, respectively, the Democratic and Republican nominees, and so they most powerfully activated those identities.
But they were also running amid an economic crisis, and so they focused on activating people’s economic identities: Obama spoke to workers who felt like they were getting screwed over by slick rich guys like Romney; Romney appealed to makers who felt like they were being held back by statist liberals like Obama."
Basically, the best thing Biden can do is try everything he can on a policy level to if not solve the border crises, at least do what he can to alleviate it so it's less of a headline issue in 2024. Which he obviously tried to do in the early part of the year which Trump told GOP to kill for the very explicit reason that it would harm his reelection campaign to resolve the crisis.
And reality is, Trump's political instincts on this are actually completely correct. It really is better for him for immigration to be a salient issue. And because of that, it doesn't make sense to me for Biden literally highlight this issue on his own on the campaign trail. Reality is, he should be doing everything he can to mitigate the possibility the issue comes up at all.
Best way to mitigate is to close the distance between you and the other guy. When it comes up just say “yeah, we agree on this, but on abortion…”
I was kinda hoping he'd go after Trump on the weak dollar plot.
I'm extremely pro immigration, but Lyman Stone made an interesting point that if a country's culture is driving a TFR below 2 and immigrants adopt that culture, then immigration delays but increases the problem later (an even larger aging population).
Still think immigration is a good thing, but at some point we need to figure out how to get to at least a replacement TFR as a country/culture.
>then immigration delays but increases the problem later (an even larger aging population).<
It's desirable to delay this as long as possible because A) hopefully the CCP will no longer be in control and history will finally end, and B) AI/robots might mitigate the baby crash.
Right now we're in a very serious Great Power competition, and need more hands on deck. We're also thankfully steadily getting richer, and the richer you are, the more you can afford a lot of old people.
I see how immigration delays the problem, but how does it increase it later?
It depends on how rapidly TFR falls and immigrants birthrates follow as well as how much economic growth those immigrants support. As an extreme example to demonstrate the point - half the population of India immigrates to the US and matches the TFR in the US immediately. GPD per capita will plummet, but in 30 years there will a MUCH larger population of elderly people who need will need resources. That's extreme and is unlikely, but even small changes across a large population of hundreds of million of people are impactful.
But in 30 years, wouldn’t there still be a better ratio of young people to retirees, because fewer of these retirees would still have living parents in the country? It’s a larger total number, but better ratio.
In 30 years its better. In 60 years its *potentially* worse. That's the point about it being a delaying action. It's probably still worth doing just to give a society time to get its culture to fix the TFR issue.
That's Lyman's point. Its a temporary boost, but after that boost fades, you're left with a larger population that then has the same aging population issue. That delay might help you fix the underlying cultural problem and get TFR back up to 2.1, but if it doesn't all you've done is kick a bigger can down the road.
Maybe the future is a ton of duplex sprawl with long automated car commutes into transit hubs and some WFH jobs for a stay at home parent.
First, good overview of some current thinking about macro, growth and trends. Nicely done, Milan. What follows isn't a criticism, but an idea for further exploration the next time you are talking with these economists.
I'd be interested in a follow-up to what Larry Summer said here, from your essay: "Government provides for national security, invests in science, supports the aged, and deals with inequality and its various consequences”, he told me. “And all of those things have become more necessary relative to other things than has been true historically."
It's the "more necessary" part that doesn't ring true to me. More possible, perhaps. Though I would argue it is only more possible due to a richer and more dynamic economy primarily as a result of private investment, which seems to be underexplored by the economists you spoke with. They all seem quite focused on government actions -- taxing, redistributing, spending -- with little discussion of how to encourage more private investment.
Support for the aged and national security do seem more neccesary, given population aging and great power competition with China. On private investment, that's the whole point of secular stagnation: it's falling because of demographics, and only the government can fix this!
It's worth asking if increasing capital gains taxes (one of Summer's suggestions) is part of the "fix", and if so, why.
I agree we need more taxation, but the inclusion of capital gains increases seems unhelpful to the problem being discussed.
I’d love to see an analysis of the impact of reducing capital gains taxes to zero on anything held continuously for more than 5 years (or 10) while increasing to 50% (or more) the rate on anything held less than 30 days (or 180). Day traders and millisecond algo traders shriek “but liquidity!” when ideas like this are mentioned but I don’t buy that marginal liquidity outweighs the distortive effects of quantitative speculation. We need to build vast amounts of durable stuff not tap stock price vibrations hundreds of times a second. Granted, if you add the Economics PhD I possess to Matt’s and Milan’s you’d still have a total of zero.
Anything held less than a year is considered short term and taxed at income tax rates instead of capital gains rates. Throw in some state taxes which often don't distinguish between capital gains and income (and NY City tax if applicable) and they are already close to if not surpassing 50% if the day trader actually makes a lot of money doing it.
A trader on Wall Street in NYC -
If they are making over 250k, is paying 35% federal + 6.9% NY state + 3.8% NY city tax = ~46%
If they are making over a million then it passes 50%
I feel like the NYC experience is actually kind of "proof of concept" that capital gains taxes could be increased nationally with only minimal downside economically. Finance is clearly the biggest economic driver in NYC and yet with effective marginal* tax rates of 50% the effect on employment and citywide GDP appears to be zilch. As Matt has noted many many times, despite the banner headlines about some hedge fund billionaire moving to Miami due to the "burden" of high taxes, the real reason NYC has lost people is sky rocketing housing costs driven by NIMBY and people's general overestimation of the marginal utility of year round warm/hot weather. And as Matt has noted, if taxes really were the driving force here, the population exodus would be coinciding with falling housing costs like we saw with St. Louis and Detroit post WWII.
Also, capital gains taxes were significantly higher in the 90s and this is famously considered a "golden" era for the US economically.
I work in NYC and get a significant amount of my compensation in bonus which is taxed at the highest marginal rate. So I have some personal experience to say high NYC taxes has made a dent in my thinking about where to work.
We should eliminate the corporate income tax and tax capital gains as regular income.
Thanks for this! I hadn’t considered all the NY tax layers. But I suspect Wall Street algos are run from a subsidiary in Wyoming or Grand Cayman or something. Maybe rates have to go up on 1-3 year holds and down on longer? The exact shape of that decaying function is beyond my expertise level but I still think the investment/taxation balance can be better optimized than it is now.
NY and NYC are famous for not letting anyone escape from paying their tax if anything you do touches there.
I don't think the evidence for the "distortive effects of quantitative speculation" is actually all that well-baked.
National security is perhaps more necessary than in the 1990s (or the aughts when we were under the delusion that guys with boxcutters required we spend trillions more on security). Not so much as during the Cold War when we spent up to 9% of GDP on defense.
>>So, I wasn’t contradicting myself when I went from worrying about secular stagnation to worrying about fiscal policy. I was responding to a radically changed world.<<
“When the facts change, I change my mind. What do you do, sir?”
I can't find the actual story -- but there's a great story of a group of Ind. Eng. professors touring a new Toyota plant here in the US and one of them thinks they identified how the new assembly line design breaks a core tenant of the Toyota Production System (e.g., using batched inventory instead of JIT or something) and apparently the response from the Toyota eng. was just something like "we needed to solve a different problem". I love the story - who knows if it's true - but I can totally image some dogmatic professor trying to lecture the actual experts on their own methodology.
This is why physicists have such contempt for economists. Exhibit one: how economists understand the word "theory." I.e., we're kinda like journalists but we throw in regressions and lots of Greek letters, all subject to change at a moment's notice of course.
In physics the facts dont' change!
Super interesting piece, Milan.
I had always theorized that population growth must surely drive productivity, in that expanding production *mechanically* involves installing newer plant and equipment (after all, if you're building a new office building or food processing plant or water purification system—all of these are the kinds of physical plant you need more of as your population grows—you're going to implement today's technical standards, not 1987's). And I figured economists must have looked into this topic in depth. But I'd never bothered to look into it. Like Milan and Matt, I, too, lack an Econ Phd. And I must confess I wasn't overly familiar with the name "Alvin Hansen." Well, now I have something to go on.
It’s why steel foundries got shut down in the U.S. rather than reinvested in. The old blast furnaces were used until the capital was depreciated. New companies started up with modern arc furnaces and focused on recycling old steel. The old method of doing things was no longer competitive.
Especially true once the installed base of steel had grown latge relative to current demand. The US (and Europe, Japan, etc) don't really need much brand new steel. They can repurpose from their existing stock given the much slower growth expected.
Is that true? With all those wind turbines and solar panels, I imagined we needed to boost supply. There's also the issue of green steel, which we're going to have to produce a lot more of if we're going to cut emissions. But maybe decarbonizing the steel sector is impossible/not fully worth it anyway. I've heard good arguments on both sides.
Solar panels don't use steel; the mounts are concrete and the cells silicon or other semiconductors.
Wind turbine blades are primarily fiberglass (except for a a few smaller turbines, which use aluminum), because it's lighter than steel. The towers are steel, but a skyscraper needs comparable amounts of steel as the whole wind farm, because it requires multiple towers throughout the floorplan. I am not an industrial economist, but I expect that the recent rise in wood-framed construction here in the US is likely freeing up steel demand to go towards the turbines.
In political economy, “the worse the better” really is a thing. It took the great depression to get the government to experiment with stimulus, it took COVID to get family allowances (briefly). If inequality gets bad enough, Congress will find some way to address it. However, it’s utterly impossible to know what the breaking point will be. Many people, including me, thought Obama’s election would decrease the political salience of race and boy were we wrong. Thirty year old David never thought the Democratic party would prioritize identity and climate change over kitchen table issues. But maybe Republican orthodoxy will shift once the white working class (and perhaps the black and Latino lower middle classes) begin to punch their weight within the Republican coalition. The system is so complicated that it’s hard to predict. Nate Silver doesn’t put his models up til a few months before an election and that is a very wise choice.
Politics Ain’t Beanbag: Milan’s Down Home Politics and Duck Hunting Blog.
*camo hoodies at sensible prices
No tote bags though.
Great piece, Milan. Wonkier pieces about fundamental economic concepts are among my favorite topics to read and to think about.
If Summers isn't worried about secular stagnation anymore, then it seems to me that he shouldn't have been worried about it in the first place. The problem with the economy in the 2010s, imo, wasn't stagnation, but rather insufficient stimulus following the worst recession since the Great Depression. Covid provided an opportunity to get the economy back to a "true" normal.
That said, I do agree with you and the other economists that secular stagnation is still an issue. As I was reading the piece, I was thinking "more immigration" so I'm glad you mentioned it. While I understand the political challenges around inflation, those problems are fixable (at least in theory - I'd like to think that the public would be more pro-immigration if said immigration is more orderly). Additionally, I'm less inclined to put much weight on the possibility of global population peaking in about 62 years. I think there is a lot of value in increasing immigration, even if it does ultimately only delay the problem.
Should read "Political challenges around immigration," not inflation
I tend to think it's a bad idea to structure policy to maximize growth predicated on population growth, even to the extent it's possible to do so. I think the evidence is pretty overwhelming that the birth rate is largely beyond the ability of policy to dictate. The risk of creating a pyramid scheme where the whole deal collapses due to uncontrollable drops in the working age population is too great. Good policy maximizes productivity per capita that scales with the population regardless of the birth rate/immigration trend. Gains from population growth should be considered a bonus that accrues as an externality of sound policy.
>Summers said there is “a substantial chance we’ll have to go beyond the top 1%” to raise the necessary revenue.<
Apparently Larry Summers realizes there's an election this year.
Anyone with a brain and basic math skills should easily figure out you can't fund government on the top 1%.
Larry Summers is consistently correct at the wrong time.
But American voters are children.
I've often uttered the phrase "Elites Matter" 'round these parts. And this is an example of what I mean. I don't think there's any democracy where voters *prefer* higher taxes or spending trims. The US is an extremely rich country, and the kinds of austerity measures required to rebalance our trajectory (at this point at least, though they'll likely grow more difficult the longer we wait) would have a trivial impact on living standards. But I don't blame Americans qua Americans for not wanting higher taxes or less government spending. Again, which country's voters are nobler or wiser in that regard?
It's our elites and/or our constitution that making doing the right thing so difficult. To me "American voters are children" as an explanation smacks of a reverse American exceptionalism I personally find unconvincing and unlikely. People are people.
(The hot take here, of course, would be: the country's booming, and there's a strong argument we've gotten a lot more calls right than wrong over the last five years, even if, drearily, mortgage rates are now where they were in the early 90s.)
Maybe a hot take, and I hate to say it, but it seems like the solution is for President Biden to say that's not going to raise taxes on the non-1% and then to do so on a subset of those (e.g. top 10%, top 25%, whatever is needed) when the American people are no longer able to directly hold him accountable
Let the some things in the TCJA expire. Keep the reduced SALT deduction.
I agree but I don't think that will be nearly enough
I don't think Biden should touch austerity with a ten foot pole this year, and I doubt he will, though he is talking about raising taxes on the rich (which should be done, mind you; I just don't think most reasonable people think we can indefinitely confine tax increases to the 1%).
IIRC some Trump tax cuts will expire soon. So I think we may get some deficit relief on that front if Democrats have a good election in November. But I haven't looked at the specifics of this in quite some time.
A list of possible tax increases to close the SS and Medicare revenue shortfalls over the next few decades: https://ibb.co/7N1MJkV
That list is brutal.
We wouldn't have to use every single option on that list. For example, raising payroll taxes by 10% and taxing employer-provided health insurance would close most of the revenue gap.
"The problem is that Americans are, politically speaking, teenagers: We expect to be taken care of but resent being told what to do." - Kevin Williamson
Not just Americans here - anyone who has the experience of living in a functional state.
“Economic theories are not like physics theories” I find this bizarre, and the way Larry Summers is talking about a "secular stagnation" as a passing trend not to be an useful framework. Maybe this is because I am a physicist! But I think we should talk of "secular stagnation" as three distinct effects:
1) Long-term (decades and centuries), developed countries have a slowing productivity growth rate as a fairly universal rule. They are starting from a higher base number, and trying to improve on a higher standard for quality of life. There is no shame in this, it's just setting a high bar for a succesful society.
2) Long-term (years and decades), the US has an aging population and insufficient fertility to replace the loss of their labor. Demographic decline is a very difficult trend to fight without immigration, and will adversely impact our living standards if we don't do something about it.
3) Short-term (months and years), the US economy is macroeconomically stimulated after decades of understimulation. We're seeing a lot latent potential unleashed, a lot of attention on previously neglected bottlenecks, a reorientation of the economy towards building, a distribution from capital to labor, but the economy does not have unlimited bandwidth to transform overnight.
That was exceptionally well written.
Well done in characterizing the topology of secular stagnation. It's a timely reminder that this issue is still very much alive and well, whether we are focused on it or not.
"the topology of secular stagnation"
ITYM "typology"? It's not at all clear to me that we should understand Summers' shift in terms of homotopy classes.
Fantastic piece, Milan.
Well done. Good overview of the topic, judicious snark, and use of the serial comma as befits a civilized man.
Great post Milan.
On Summers ... I thought this was an interesting paper on how the cost of money is overlooked today. If we use the pre-1983 inflation formula - which measured monthly mortgage payments, instead of rental prices - then inflation in 2022 topped out at 15% vs. 9.1% and has had a much slower decline.
https://www.npr.org/2024/02/28/1234554967/inflation-cost-of-living-economy-mortgages-auto-loans-larry-summers
It’s a good paper but there’s a reason the methodology change, which is that using mortgage payments means that a rate hike would mechanically increase inflation. https://www.fullstackeconomics.com/p/why-the-government-took-home-prices-out-of-the-consumer-price-index
I get that. I think the point is more about how there's a large push by the chattering class to call the negative economic sentiment just ... vibes. But it's not just mortgage interest payments constraining wallet share. Credit card debt is a disaster. Interest rates are > 20%. This will snowball.
https://www.cnbc.com/2023/09/21/credit-card-interest-rates-near-loan-shark-territory-advisor-says.html
https://www.cnbc.com/2023/11/09/average-credit-card-balances-top-6000-a-10-year-high.html
Two points:
1. I agree that is a problem which is why I am voting for Joe Biden who favors capping credit card interest rates at 15%.
2. Based on Summers’ paper we put an option for “lower rates on mortgages and credit cards” to Blueprint’s “what would you most like to see changed in the economy” question and over 60% still said lower price level.
Capping credit card interest rates would mechanistically increase risk for banks.
No, they'll just drop risky borrowers. And that is the goal of capping credit card interest rate; not lowering costs for risky borrowers but instead eliminating them from the credit markets.
The system will be far safer comparable to how requiring large down payments and higher credit scores for mortgages neutralized the subprime risk after 2008.
Yeah. It's a really bad proposal. Something like 20% of the US is already "invisible" to the commercial credit markets and use pay day loans, title loans, pawn shops instead. That's a way worse outcome.
I'm genuinely suprised that the government wants to become Dave Ramsey.
Credit card interest rates have always been > 20%. IIRC most have been 20.99 to 24.99% since forever.
Just take a look at the first link. The "average interest rate on credit card plans (all accounts) at commercial banks" was 11.94% in 2013 and is now 21.2%. Source: U.S. Federal Reserve Board via FRED
Data as of Oct. 6, 2023
Hum…I could have sworn it was 20% since the 90s.
Good thing I thought it was 20% or I would have spent more 10 years ago.