Corporate Welfare in Maryland

Corporate welfare is having a bit of a moment in the sun, particularly after the very public tax credits and threatening that Carrier and its parent company received in order to keep about 800 jobs in Indiana. Incidentally, manufacturing employment in Indiana has decreased by 3,900 jobs year-over-year as of November 2016, or by about 0.8% [1]. Corporate welfare, however, is a bi-partisan endeavor. Even in “deep blue” Maryland, the Democratic controlled legislature and Republican governor can agree on giving hand-outs to large companies. And it’s nothing new; past governors supported such measures.

Most recently, Governor Larry Hogan and legislative leaders have agreed to give a $20 million forgivable loan to Northrop Grumman, on top of about $38 million in refundable tax credits over the next five years, approved last legislative session. They also agreed to pursue around $60-70 million in refundable credits and forgivable loans in order to keep Marriott’s headquarters in Maryland (including $22 million from Montgomery County, where Marriott is currently headquartered). 

Marriott was given about $43 million in 1999 (or $62 million in today’s dollars) for a promise to add 700 jobs (or about $88,600 per job in today’s dollars). Unsurprisingly, the jobs never came. The final value of the incentives was pared down, but Marriott kept a majority of the money despite not fulfilling its promise [2]. This time around Marriott does not need to create any jobs to be paid in full, but only to keep the ones that already exist. There are many other tax credits that reduce state revenues for dubious benefit, such as a film production credit. Altogether, corporate tax credits reduce revenue by over ten million of dollars a year.

In Maryland, a portion of corporate income tax revenue goes towards higher education and the Department of Transportation (MDOT). Tax credits therefore lower investment in higher education and transportation networks. The revenue that goes to MDOT for capital projects often includes matching dollars from the federal government, multiplying the opportunity cost. To the extent that we end up with lower quality education and transportation systems, the state will suffer [3]. Good education systems and transportation networks attract employers, without the choice of who benefits being left up to politicians. Only a portion of corporate income tax goes to those purposes, but the point is that against the dubious supposed benefits, there are real costs in reduced public investment.

In defending corporate welfare, Hogan stated: “In the past eight years, I believe Maryland lost 20 of its 24 Fortune 500 companies. I don’t want to see that happen. We have four left.” He repeatedly made this claim during his campaign, although the numbers cited tend to vary. Whichever quote you use, it's false. But even if it weren't, who gives a shit? What matters is not how large some of our employers are, but whether jobs are being created and how much they pay. Here’s the performance of employment and income over the past eight years, indexed to 2006 Q4:

Neo-Nazis Among Us or If Adolf Hitler Flew in Today, They’d Send a Limousine Anyway

The second part of that title is from a Clash song that is increasing in relevance. Anyway, everyone’s heard of the new iteration of the illiberal right (aka fascists) that recently burst onto the scene in US politics. I’m even avoiding using their name for themselves since they seem to have all damn day to search the internet and bother anyone who mentions them or the spray-tanned asshole president who, whatever his real - probably fascist - views, they support wholeheartedly. It seems like they already have gained some level of acceptance in the media / mainstream politics, at least in the sense that they have succeeded in framing their public image and are treated like a KKK-lite.

This is possible only if one refuses to think through how they could possibly achieve their goals. They want a nation built around and for white men and no one else, where whites remain the majority and white men hold all socio-economic power indefinitely[1]. There is no way such a future could come about with our Constitution intact. There is no way such a future could come about without the wholesale denial of our inalienable rights to vast quantities of US citizens. If they succeed, the best-case scenario may be that they make things so bad for non-whites that they leave, or it may be the unconstitutional revocation of citizenship and mass deportation. The worst-case is genocide. Otherwise, whites will become a minority in the US in about 30 years[2]. This is why they are neo-Nazis, pure and simple. It is not possible for their desired outcome for this nation to include the survival of our constitutional rights. Take them at the logical implications of their word; they mean it.

Rural Privilege

One of the explanations for Trump’s victory is that “Rural America” has been ignored and forgotten by our government, and so a majority of voters in rural areas picked the only outsider/change candidate that was available. In this telling it just so happens that the outsider they voted for is a racist, misogynist, xenophobe. Whatever voters’ reasons, that premise is false. First, it’s somewhat lazy to generalize about such people as a whole, as I’m now doing, because not everyone in any area votes the same way. Second, rural areas are over-represented in our congress and in their voting power for the president. They consistently receive more in federal spending than they pay in taxes. This wasn’t a protest vote to get the attention of our ruling class. Rather, it was a vote to preserve the privileges the (mostly white, male, and native born) ruling class gives them and to warn us off of challenging that status-quo.

Our rural areas are depopulating, but this is an inevitable consequence of economic and technological growth that is occurring the world over. And who is supposedly being pandered to at the expense of Rural America? Urban America? Our cities, excluding the largest few, have suffered from depopulation and job loss as well. Both urban and rural areas would be worse off if people weren't able to move away to find opportunities elsewhere, and better off if we were more accepting of immigrants. The residents of urban areas also feel that no one from outside cares how bad things get, but they lack an equal voice in our system.

What up

I took quite a break from this. Partly because I had less time for it, and partly because I ran out of things I really wanted to post on a website no one looks at. I blame Obama. He's pretty reasonable and moderate on economic issues (except that he's bad at monetary economics, but so are most economists even), so he wasn't giving me much material. I'm pretty confident that's about to change. A halcyon age of heterodox economics is about to be unleashed upon us. To the barricades.

Which Unemployment Survey is Better?

As a follow up to my post about the two employment surveys, it is often asked which report is better. The CES seems to be conventionally preferred. And research by George Perry, among others, finds evidence of a preference among traders and central bankers for the CES estimates. The CES surveys businesses, rather than households, to measure non-farm payroll employment, and has a larger sample size and less monthly volatility than the CPS. 

But the CES has the added complication of needing a representative sample of businesses, which are created and fail all the time. The BLS gets around this by adjusting the sample periodically using Unemployment Insurance tax data, which is collected for nearly all payroll employees. They also use models to predict business creation and failure to inform sample adjustment. The answer of which one is better is “it depends”.

Both surveys overlap in that they produce employment, hours, and earnings data, but they also measure things that the other survey does not. The CPS measures the size of the labor force, and its composition. It also collects demographic information on the employed and unemployed, whereas the CES does not. That data is needed for calculating the unemployment rate. The CPS does not exclude the self-employed or farm workers.

It also depends on how quickly data is needed. Much of the volatility of the CPS diminishes when averaging across quarters or years. Perry finds that when using quarterly employment data to track changes in GDP, an average of the two series performs better than either on its own. William Wascher uses the first month’s employment report for each quarter to get at monthly accuracy[1]. He finds that an average of the two series does as well as the CES on its own, and both do better than CPS on its own[2].

So it depends on what data is needed, over what time period, and how soon after release it is needed. But if I had to pick which survey is best for estimating what last month’s change in employment was, I’d argue for the CES. If you want a more holistic look at the labor market over any longer period of time, either survey by itself leaves you with an incomplete picture.

Just got a Smartphone

I just got a smartphone; it's harder to text with. Sometimes the auto-correct doodle guesses right and that's cool. But the first time I typed in "im", which it correctly made into "I'm", the next word that was the phone's first guess at what my next word would be was "sorry". Listen phone, sorry I'm not sorry, and you better learn that.

The Two Employment Surveys

The BLS produces two main monthly employment reports, taken from different surveys. One, the Current Economic Statistics (CES), or Establishment Survey, estimates the change in non-farm payroll employment. The other, the Current Population Statistics (CPS), or Household Survey, estimates the change in the size of the labor force and employment. Information from the CPS is used to generate the unemployment rate. Both surveys exclude those committed to institutions, such as prisons and mental health facilities, and the military.

The CES surveys around 140,000 businesses each month. But it does not capture those who are self-employed, working under the table, or on unpaid leave during the sample period. An individual with more than one job will show up on multiple payrolls. An individual who works two part time jobs, but gives up one to work full time would show up as a net loss of one payroll job.

An issue arises from the fact that businesses are created and fail all the time. Without proper accounting of business creation and failure, the CES's sample will become less representative over time. The BLS attempts to correct for this in its benchmarking process, where they use more accurate UI tax data (available bi-annually) to adjust the sample. They also use econometric models to predict business creation and failure to adjust the sample between benchmarks.

The CPS surveys 60,000 households each month to estimate the size of the labor force, employment, weekly hours, earnings, and demographic information. The labor force is defined as individuals who are employed or unemployed – those who are not employed but have actively looked for a job within the past month.. Those who are self-employed, farm workers, or unpaid workers in a family business are included in the CPS. The CPS has a smaller sample size than the CES, and is more volatile from month to month.

Due to its larger sample size and lower volatility, the CES is often considered to be the more accurate source. But the relative usefulness of the two sources depends on what data is needed, as well as when and for what time period. Much of the relative monthly volatility of the CPS is removed by averaging over a quarter or year. And less volatility is not necessarily a sign of greater accuracy. Both series often go through large revisions.

What caused the Great Recession? (or recessions in general)

This is kinda an important question, with a lot of different theories to answer it. Some theories offer a solution, but one in particular offers none. Years ago Paul Krugman called it the “hangover theory”. It's the idea that a boom must inevitably cause a bust, and any attempt to alleviate it will only delay the inevitable recalculation. As Krugman puts it himself in a piece you should read in its entirety (from 1998):

“In the beginning, an investment boom gets out of hand. . .Whatever the reason, all that investment leads to the creation of too much capacity—of factories that cannot find markets, of office buildings that cannot find tenants. Since construction projects take time to complete, however, the boom can proceed for a while before its unsoundness becomes apparent. Eventually, however, reality strikes—investors go bust and investment spending collapses. The result is a slump whose depth is in proportion to the previous excesses. Moreover, that slump is part of the necessary healing process: The excess capacity gets worked off, prices and wages fall from their excessive boom levels, and only then is the economy ready to recover. . .this is not a bad story about investment cycles. . . But let's ask a seemingly silly question: Why should the ups and downs of investment demand lead to ups and downs in the economy as a whole?”

Krugman goes on to point out that the fact that they are highly correlated is not a theory; a theory is causal. It's disturbing how little this question is asked among economists. I've taken numerous classes that take it as a given that if investment demand falls so does the economy as a whole, without ever explaining why. When an explanation is offered, it is usually that there is some friction in the transfer of workers out of one sector to another, such as out of housing construction and into whatever. But that doesn't answer the question of how a housing bust, which started in 2007, led to a world-wide crisis in late 2008. And if that's true, Krugman asks, why doesn't the boom cause frictional unemployment as workers transition from one sector to another? Then comes one of the best comments in the theory of recessions I've read:

“As is so often the case in economics, the explanation of how recessions can happen, though arrived at only after an epic intellectual journey, turns out to be extremely simple. A recession happens when, for whatever reason, a large part of the private sector tries to increase its cash reserves at the same time.”

The housing bust caused that increase in private demand for money, the failure to adjust the money supply to the change in demand caused nominal GDP growth to crash causing the crisis that started the Great Recession. I kinda like the part about “only after an epic intellectual journey”. I felt like I was grasping at this conclusion for a while but with only partial understanding and somewhat recently have come towards the end of that journey. Sure the trend rate of real GDP growth can't be affected by the money supply in the long run: one is a nominal variable and the other real. But recessions are short run deviations of lower than trend growth, and those can be made less severe by adjusting the supply of money to movements in demand. Generally, the determinants of the trend for long run real growth are real, the determinants of short run fluctuations from that trend are nominal.

Remittances to Somalia

A few years ago the United States put stricter regulations on the sending of money abroad in a process known as remittances, out of concern that money may end up in the hands of extremist groups. Remittances are money that immigrants in a rich country send back home to their families. The flow of remittances worldwide is huge; the World Bank estimates they will be about $500 billion in 2015. Around $1.6 billion of that annual total goes to Somalia, a larger amount than foreign aid and investment. According to the UN, nearly 40% of Somalis receive remittances, in a country where GDP per capita is around $1000. Remittances are an economic lifeline for families who have relatives working in rich countries, and are an important factor in the positive benefits of migration.

In February, the last US bank handling transfers to Somalia stopped providing the service, citing US bank regulations, effectively cutting off every Somali who receives money from relatives in the US. This is a huge blow to the Somali economy, and will put millions further into poverty. The reason for the regulations is to prevent transfers to terrorist groups, such as Al-Shabab. But such groups have illicit sources of financing, and some degree of networks in multiple countries. The average Somali has no other options. It is unknown to what extent if any terrorist groups in Somalia are financed this way, making the benefits, if any, highly uncertain against high and certain costs.

Not to mention that increased poverty is a threat to well-being itself. Without resources, more Somalis may be pushed into the arms of extremist groups or militias that can provide them with some level of income or resources. Poverty is fertile ground for violent extremism. The intent of the regulations was to make people safer by defunding terrorist groups. The effect is to increase poverty, and reduce safety. It is a cautionary tale about judging regulation by its intent rather than effect.

Fortunately Somali-American groups in the US, and their representatives, have been pressuring the US to revise the relevant banking regulations. Supposedly remittance services will become available again to Somali-Americans this month; it can’t happen too soon.

November and December Jobs Report

Jobs reports have been consistently good recently. 252 thousand jobs were added in December; October and November were both revised upwards from previous estimates. It's starting to not be interesting to pay attention to the job numbers. GDP growth in the US isn't doing bad either, but the rest of the world seems to be slowing.


But as far as looking at job figures as an indicator of growth one must keep in mind the theory of the Natural Rate of Unemployment. This holds that there is some rate of unemployment that is inevitable: caused by things such as people choosing to switch jobs, or put out of work by technological changes for example. This is different from unemployment caused by cyclical short run changes in Aggregate Demand. The theory holds that in the long run wages and prices will adjust to any cyclical variation and unemployment will return to the natural rate. In the short run prices and wages are sticky, so this takes time. The take away lesson is that unemployment should fall to more normal levels regardless of economic growth performance, so long as the contraction stops. The result is lower unemployment from people taking jobs that they would not have before, or at lower real pay and such things. The reality isn't that bad, but such an adjustment is certainly at work in some proportion.

Economist Quotes

"The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds."

- John Maynard Keynes

November Jobs Report

November had the largest increase in non-farm payroll employment since January 2012, at 321,000 jobs added. October had a respectable 243,000 added after being revised up from 214,000. The labor market has been gradually picking up pace; the 12 moving average of job growth has been the highest of the recovery for the past few months.

The unemployment rate, at 5.8% didn't change, but that's more a sign of people being encouraged enough to look for work. The unemployment rate for whites is 4.9%, for Hispanics 6.6%, and for blacks 11.1% (higher now still than the overall rate was at the bottom of the Great Recession).

Scott Sumner on Finance and Monetary Economics

I'm often frustrated by the conflation of finance and monetary economics. I understand its occurrence in the lay-public (not hating, just saying), but most economists themselves fall into this trap. It occurs because the signaling mechanism central banks use is short term interest rates, but they could theoretically pick anything. Where interest rates are used, policy is still just about changing the money supply to target a nominal variable. The conflation presents all sorts of cognitive problems, such as thinking the “real problem” is the the financial system, so monetary policy can’t work, to thinking monetary policy is used up because interest rates are at 0%.

Anyway, here is Bently economist Scott Sumner on just how baseless this conflation is:

"…monetary policy consists of changing the supply of cash relative to demand. The nominal size of the entire banking system and all its components; capital, loans, reserves, deposits, etc., is determined endogenously, just like the nominal size of the plastic surgery industry, or nominal size of the ice cream industry. Normally, a permanent 20% increase in the [monetary] base[1] would be expected to increase the nominal size of the banking, plastic surgery, and ice cream industries by 20%. But other things are often not equal. 

Banking is only special a few cases. For instance, government regulation of banks might create a large and time varying demand for base money. Or the public may hoard cash because they fear a banking collapse. Otherwise, banking is of no interest to monetary economics. If the Fed abolished reserve requirements, insured bank deposits, and targeted NGDP growth expectations at 5%, then you might as well drop banking out of monetary textbooks."

Second-hand Clothing Donations

In the rich world, much of the clothes donated to local charities or thrift stores are actually sent to poor countries. I recently came across a paper that attempts to look at the effects of this on the domestic garment industries of recipient countries. This ties into the larger debate on in-kind aid, from food to Tom’s shoes. But I will not address that here. In general, the consensus in both theory and empirical studies seems to be that just giving money to the poor is best, conditional cash transfer programs do well too. So generally, just give money and let adults make their own decisions.

But, there is a functional purpose of donating still usable but unwanted clothing, it increases the efficiency of resource use, despite looking worse on GDP figures. And Second Hand Clothes (SHC) are only charity for the organization that receives them in the rich world. That charity then bears the transactions cost of gathering and sorting through the clothes. They take the best clothes to donate, or in the case of thrift stores, sell. The rest is given to a for-profit exporter, who must bear the transactions cost of gathering, and sorting the clothes and finding buyers abroad. The clothes are bought by importers in poor countries and sold on local markets. This means the clothes are only sold in developing economies if they can compete on price with other options. Anyway, the author finds:

"used-clothing imports are found to have a negative impact on apparel and textile production in Africa, explaining roughly 40% of the decline in African apparel production and roughly 50% of the decline in apparel employment."

This is important because garment production has repeatedly been a step on the development ladder for poor countries, such as China and Bangladesh[1]. The logic being that hobbling domestic garment industries in poor countries can block their path to development. The author uses an instrumental regression technique to estimate the effect of SHC on domestic garment production and employment. When done correctly, the technique isolates the effects on the local garment industry to only SHC imports. For example, controlling for the effect of cheap imports from China.

However, this is not a per-se finding of net harm[2]. First, as the author plainly states, the paper looks only at the effect on the domestic garment industry, not the net effect on employment and income. Importers and sellers of SHC create local jobs that are not considered in the paper. The paper mentions that the garment industries are a very small proportion of GDP in the countries examined. This fact, and that the author found data on employment levels, leads me to believe he is looking at formal sector employment only. Most garment workers are in the informal sector, which the state fails to reliably measure. The result would be that the paper misses the majority of the garment industry. The paper also looks at the period 1980 – 2000, during which time local garment industries were declining and growth stagnating; a correlation that supports concerns of a blocked development path. The cut off just misses the recent impressive economic growth in many areas of Sub-Saharan Africa. This growth has occurred despite increasing SHC imports.

And then there is this statement in the paper that any economist knows to be true:

"In an open economy...the used-clothing imports will not affect domestic production, as domestic production is based on comparative advantage…and worldwide, rather than domestic, demand"

Ah! So it’s maybe harmful only if the receiving country has terrible economic policy. Sub-Saharan African countries have made a lot of progress in opening up their economies in the past couple decades, a process mostly missed by the paper’s time horizon. Either way, should we really not reduce waste in the rich world and benefit poor consumers because of that? And could a country possibly develop anyway with bad economic policy and more expensive clothing that benefits relatively better off producers?

That reminds me of the Import Substitution Industrialization (ISI) policies of Latin America in the latter half of the 20th century. Their intent was to replace foreign imports with domestic production to develop domestic manufacturing. This was accomplished through import tariffs and quotas that made foreign products more expensive and less available. The result was that domestic consumers paid more for lower quality. This benefited manufacturers with cozy relationships to policy makers at the expense of poorer domestic consumers. They were a failure and ended with a debt crisis. It’s true that Latin America experienced growth under the policies, higher than it experienced for almost two decades after ditching them. But it’s also true that a hangover is caused by drinking the night before[3].

At the same time, Latin America was being passed economically by East Asia, which developed through export led industrialization and relative openness to foreign goods. This, I think, is key. East Asia developed by producing cheap garments (and many other cheap labor intensive goods) by exporting them to the world market, rather than producing for domestic consumption. There is a lot of competition right now for cheap garment exports, and Africa generally has large logistic obstacles relative to East Asia. But their best strategy is to have more open economies and produce what they have a comparative advantage in. And let consumers benefit from increased purchasing power if imported goods are cheaper and better[4].

This is an intuitive result, it would be quite contrarian if it were the case that the world would be better off with rich consumers being more wasteful, and poor consumers facing higher prices.

Some Basic Macro and Monetary Econ

My mind has been a tempest of monetary economics lately; I can't figure out why my views aren't consensus, despite being built on basic theory. Many economists have a rigidly old Keynesian view that monetary policy, and QE in particular, is all about interest rates (it isn’t), that it is ineffective once rates are down to 0 (it isn’t), and that QE is only about reducing longer term interest rates (it isn’t, and downward pressure on longer term interest rates is merely a second order effect that is very weak at best).

So here’s what should have and can still be done to prevent current unnecessarily tight monetary policy from dragging down growth. Central banks can follow the example of Sweden, and put a negative interest rate on excess reserves[1], to force that money out into the economy. Because, as has been understood since John Locke, money locked in a vault is the same as if it had been burned, it effectively doesn't exist. Right now the Fed pays banks for keeping money with the Fed, the result is that money is pulled out of the economy to earn a no-risk return for doing nothing, rather than be invested. Doing so would make policies like QE more effective, thus needing less of it.

But wouldn't this cause inflation? Let’s hope so. Nominal GDP growth (which is real GDP growth and inflation) is too low[2]. Higher NGDP growth in a recession, and its recovery, means faster labor market recovery, lower real debt burdens, and higher investment as the real return on sitting on piles of cash falls. And if the inflation part gets too high? Great, now the Fed can go back to normal and increase interest rates to keep it from going too high. That’s exactly what we want, no more zero lower bound. That will help savers who currently get 0.1ish% on their savings and lose in real terms given that inflation is above 0.1%.

What if that doesn’t work? It may surprise you, and in fact probably surprise most economists, that there are "fool-proof" methods for escaping the zero lower bound. The best is printing money to buy foreign bonds and assets, thus driving down the exchange rate. With fiat money, there is literally no limit to how far down a central bank can push the exchange rate[3]. This will necessarily create domestic inflation, thus NGDP growth, as each individual dollar loses purchasing power on the world market. In fact any successful monetary stimulus would cause exchange rate depreciation and higher domestic inflation, even the old Keynesian lower long term interest rates junk.

But isn’t that a ~beggar thy neighbor policy~? No, and if you’re an economist and thought that find a new field to suck at. Economics is not a zero sum game. The faster recovery caused by these policies would mean a richer country for whoever does them. While exports would be cheaper, a richer country will consume more goods, and no country makes all the goods it consumes by itself. That means more imports and more global demand[4]. 

What if everyone does it? Does the world just stand still? No, it would mean a worldwide expansion of the money supply, which will increase worldwide NGDP and lead to the benefits mentioned above. This occurred in the Great Depression: as the monetary strait-jacket of the gold standard dragged the world economy down, country after country abandoned it, and their currencies immediately depreciated. In each country recovery set in shortly after, with numerous countries experiencing currency depreciation at the same time.

Aren't I just asking for run-away inflation? No, inflation depends on the money supply, if you double the money supply permanently, the price level will double in the long run; in the short run interest rates fall. Inflation never “runs away”, or becomes detached from monetary expansion. In normal times I’m as much for keeping inflation relatively low and stable as anyone else. And one reason to want higher inflation now is so that central bank interest rates can go above zero and once again be used to stabilize the economy rather than these unconventional policies. In good times too much inflation is usually the problem, in these times it’s too little. What I’m for is the optimal amount.

Please please ask me about any of this if you don't understand or are skeptical, and I'll be able to answer. There's a lot of foundation that I didn't want to spend pages and pages building from scratch.