Sunday, August 2, 2020

Is The Latest Apparent Economist Suicide A Sign "Economics Is A Disaster"?

On July 23, 41-year-old Emmanuel Farhi, Professor of Economics at Harvard, a native of France with Egyptian Jewish ancestry, "unexpectedly" died a few hours after having a Zoom conference on how economics and economists can help the world (or something like that) with fellow Frenchmen, Nobelist Jean Tirole and former IMF Chief Economist Olivier Blanchard.  No one has officially given a cause of death, but the entire internet has decided that it was a suicide, with a long thread with over 800 comments going on the infamous Economics Job Market Rumors (ejmr) about it with scads of speculation about it. On July 29, Claudia Sahm, formerly a Division Chief at Fed Board of Governors and now at Center for Equitable Growth, published a long post on her EconoMom blog called "Economics is a Disaster," in which she singled out what she called his "suicide" as a leading sign of the general "toxicity" of the economics profession, although most of her piece focuses on issues of sexism and racism in the profession, as well as giving bad advice to the public (more on her post below, although I note Fed Chair Jay Powell responded to a question about her blog post when asked by the media, admitting the Fed has had a problem with discrimination and is trying to deal with it).

Many are now saying there is a suicide epidemic in the economics profession, with Alan Krueger and Marty Weitzman (also of Harvard) doing themselves in last year, and Bill Sandholm of U-Wisconsin doing it quite recently. Farhi was a top math student in high school and later in France and many thought he would go into math or physics (which he won a prize for) with some saying he would be alive today if he had gone into one of those fields. But he got an MIT PhD in 2006 and tenure at Harvard by 2010.  He has been a leading mathematical macroeconomic theorist, following some ideas I am sympathetic with, such as agent-based modeling of macroeconomies and considering seriously heterogeneous capital and reconsidering the old Cambridge controversies in the theory of capital.  He has also been involved in some policy analysis and advising, proposing a "social VAT" for France as well as studying proposals for revising the international monetary system. Some claim that as Weitzman was depressed by not winning the Nobel Prize, Farhi may have been so for not getting the John Bates Clark Award for Best Economist Under 40, although he won many awards and was widely praised and respected.

Regarding Claudia Sahm's post I note I have never met her or directly communicated with her, and I am not going to comment in detail on her long post, most of which I either definitely agree with or think looks reasonable.  She recounts personal experiences at the Fed of being mistreated, accounts of mistreatment of RAs and grad students, especially women and minorities.  She also recounts bad or badly given advice by economists. She also names names of quite a few prominent economists she charges with bad behavior of one sort or another, including among others Dick Thaler, Larry Summers, Olivier Blanchard, James Heckman, Harald Uhlig, Lones Smith, and Bill Dudley, along with some who remain anonymous, including an especially unpleasant sounding "tormenter" at the Fed.  I shall make just a few comments on that.

At least one of those she criticizes has engaged in public behavior that is well known and notorious, namely Larry Summers, who is also notoriously arrogant, and some of these the charge of arrogance is a large part of her argument, indeed mostly towards those beneath them, as well as simply to rivals, with it being especially nasty when directed at women or minorities. The views of Summers on women are well known, and she reinforces what has been known. 

I shall defend one of these people, Lones Smith, who is at Wisconsin and whom I know quite well. She makes a vague accusation, no specifics, and none have since been provided near as I can tell in subsequent debates in various places, about mistreating women grad students when he was at Michigan.  I am pretty sure there has been none of that at Wisconsin, and he is personally a very nice guy, unlike several of those other people on her list.  He posts lots of stuff on various media and is known not to necessarily carefully censor himself, so may well say things that annoy people from time to time.  He also got Sahm angry during debates about Harald Uhlig on Twitter.  My observation on that is that I am not on Twitter and every time I hear about something an economist said there it seems to be embarrassing.

I could say more, actually a lot more, but I think this will do for now.  Anyway, although I did not know him (I did know Krueger, Weitzman, and Sandholm) I am sorry that Farhi has died so young, however it happened. RIP to Emmanuel Farhi, and indeed I agree with Sahm that economics and economists have some very serious problems to deal with.

Barkley Rosser

Tuesday, July 28, 2020

Goodbye To The Last True Georgist Economist: Mason Gaffney

Mason ("Mase") Gaffney died on July 26 in Redlands, CA of Covid-19 at age 96.  He was both a great guy as well as arguably what the title to this says: "the last true Georgist economist," with such economists being followers of Henry George, whose 1878 book, Progress and Poverty, was the best-selling book on economics in the US during the 19th century.  George was a journalist who ran unsuccessfully for Mayor of New York.  His book, drawing on influences from Quesnay and Ricardo, advocated that there be a single ("site") tax on land, replacing other taxes.  Advocates of this view, such as Mase, argued that it brought about an economy that was both equitable and efficient.

Gaffney became a follower of Henry George in 1940 in his senior year of high school, when he read Progress and Poverty while convalescing from an accident.  He started at Harvard in econ in 1941, but dropped out from majoring in econ due to his disgust with the non-Georgist approach in the department there, joining the US military to fight in WW II.  He would later say that a virtue of an overseas military deployment was that it made one appreciate life as one felt they were living on "borrowed time."  In any case, he ended up having quite a lot of it.

After the war he attended Reed College and got his PhD at UC-Berkeley.  He worked in many places around the US, including at the US Dept. of Agriculture for awhile, but mostly in academic positions, ending up at UC-Riverside in 1976, where he remained until his retirement in 2012.  I think he stopped attending conferences after that, but I remember seeing him at some up to about that time, when, well into his 80s he was very lively and articulate and fun to talk with.

Unsurprisingly he became a major leader, maybe the major leader, of the organized Georgist movement in mid-century US, working the the Robert F. Schalkenbach Foundation on this and founding the long-running Committee on Taxation, Resources, and Economic Development (TRED), which had some prominent members including the late Nobelist, William Vickrey.  This group did a lot of lobbying and writing of letters to people in many nations and even religions (such as the Pope) urging the adoption of the single land (or site) tax.

He had at least some partial successes in some places, including New Zealand and Taiwan, among a few others.  While very few nations were willing to completely go with such a tax given that in modern economies with large governments they are unlikely to provide enough revenue to fund everything, in quite a few municipal areas there have been efforts to at least tax structures on land at a lower rate than the land they sit on, thus moving in a Georgist direction.  The old argument is that this discourages leaving land vacant and combats pure land speculation, among other things.  The main place in the US that did this for many decades, but eventually gave it up, was the city of Pittsburgh, where several urban economists claimed that it had the desirable effects argued for it.

If the land tax is so much better than the property tax, its great rival at the local (and more practical) level, why then do we see it so rarely used?  This actually goes back to my own PhD dissertation at UW-Madison on "Essays Related to Spatial Discontinuities in Land Values at the Urban-Rural Margin," which involved me gathering lots of data on sales of vacant land around Madison, both inside the city and outside.  I became aware that there could be administrative and just plain old data problems for the land tax in an urban area.  There are lots of sales of vacant land at or near the edge of a city where it is expanding and vacant formerly rural land is getting built on.  But in the interior of a built-up city there are many fewer, a thin market, with the upshot that prices on such sales can wildly vary for plots of land not too far apart and not all that different from each other.  One can scarf over such peculiarities of thin data coming from thin markets, but it involves the imposing of a certain amount of arbitrary judgment that can become subject to whim and influence from especially wealthy and powerful landowners in such downtown areas. The hard fact is that it is simply a lot easier to use a property tax given that there are so many more sales in central areas providing a reasonably reliable data base for property values, although even with these influence and corruption happen in the real world involving assessments of such valuable property.

Interestingly, in recent years since the crash of the real estate bubble starting in 2006 led to the Great Recession, there has been a revival of interest in Georgist ideas, and although I do not think there has been that much implementing of them in practice, I have seen quite a bit of economics literature on the topic that largely reinforces the old arguments for how such an approach might be both equitable and efficient.  Mase got a new burst of support near the end of his life.

As a final note I shall observe  something not mentioned in the various obituaries and commentaries I have seen on him following his passing.  This involves work he did on forestry economics, an unsurprising adjunct to his main interests.  There has been a long debate in that field over "optimal rotation of a forest," the question of how long one should let a tree, or a forest of similar trees, grow before harvesting them for timber (or more general uses, but the older literature focused simply on the timber value.  This is now largely resolved in the existing literature, but well up into the 1970s there was an old debate about this, with obviously what the real discount rate (or interest rate if you prefer) playing a crucial role, with generally speaking higher such rates implying shorter rotation periods, whichever formula being used.

For a long time in the English language literature the dominant solution was due to Irving Fisher from his influential 1905 The Theory of Interest, with the problem being one of his iconic ones in developing his theory.  His solution was neatly intuitive and simple: cut the tree (or trees) when its growth rate equals the real rate of interest (Fisher was the one who first emphasized the importance of real versus nominal interest rates). As long as the tree(s) is growing more rapidly than the rate of interest, the tree's owner's wealth is growing more rapidly than money sitting in a bank.  But once that growth rate falls below the real rate of interest then one gains more wealth by cutting down the tree and selling it for timber and then putting the money so gained into a bank to earn interest.

It turns out that despite having such an intuitively appealing solution, Fisher was wrong.  He left out an important part of the rotation question, in particular he failed to take into account the implication of replanting another tree (or trees in a forest) after the tree(s) is/are cut down, which is what is implied by the term "rotation," a patch of land on which trees grow, are cut down, are then replanted with more growth, and so on, in principle forever.  It turns out that this complicates the solution and implies a shorter rotation period than the Fisher solution as, assuming a positive real interest rate, one wants to get those new young and more rapidly growing trees into the ground sooner.  An actual analytical solution was in fact discovered in the 1840s by a once-little known German foresty economist named Martin Faustmann, who wrote the solution in an obscure pamphlet that would eventually be translated into English in the 1960s.  We do not need the details of this that are more complicated than Fisher's solution, but as noted it implies a shorter rotation period than Fisher's and can be generalized to account for non-timber amenities, and so forth.

In any case, it turns out that before Faustmann's pamphlet was translated and became known in the English language literature, there were two American economists who figured out that Fisher was not right and why, although neither of them went all the way to come up with the precise analytical solution.  One of those the late Armen Alchian.  The other was the now late Mason Gaffney, who always thought very seriously and deeply about the land and what it produces and how people use it.

Barkley Rosser

A Republican Idea for Onshoring Pharmaceutical Intangible Assets

Alex Parker reports on a proposal from Representative Darin LaHood:
As part of the next round of pandemic relief, House Republicans are pushing new incentives for companies to bring home offshore intellectual property — something that they contend could boost job growth but that critics see as another corporate giveaway … While the 2017 Tax Cuts and Jobs Act overhauled the federal tax code and eliminated many of the incentives for offshore income-shifting, it left the structures themselves intact, and companies have been reluctant to undo them as the law remains young.
I think we admitted this 2017 tax cuts for the rich was complex so permit me to slightly disagree with Mr. Parker’s excellent reporting. If the intellectual property (IP) were left offshore, the GILTI income would face a tax rate of only 10.5% whereas onshore IP would face that FDII rate of 13.125%. Why bring the IP back home and face the higher rate? But I interrupted Mr. Parker who basically notes all these nuances:
Current law gives companies plenty of reasons to onshore the intellectual property they spent decades pushing offshore in licensing and cost-sharing agreements. Income from intangible assets held domestically may qualify for a reduced 13.125% tax rate as foreign-derived intangible income. The same income, held offshore, may fall under the global intangible low-taxed income regime, which is meant to penalize companies for holding intangibles abroad. Those carrot-and-stick provisions ultimately ensure neutrality in decisions about where to locate IP, the TCJA's authors said when it was passed. The TCJA also included a deemed repatriation that allowed companies to bring home offshore income after it had paid a one-time transition tax. But the intangible assets that generated that income were not brought home with it, and they must be repatriated under the normal tax rules. And companies still face a potential tax charge when bringing a valuable asset home. Upon repatriation, if the property has gained value offshore, the company's taxable income will increase based on that gain for that year, depending on how it classifies the transaction. Even though it's a one-time payment, it could be enough to discourage the transaction.
Didn’t I say this was complex? Here’s the deal. Biopharma multinationals transferred their IP offshore at lowballed values generally based on some fancy disinformation posing as valuation reports. But now that we know that the profits are quite high, they might be asked to pay effectively a capital gains tax based on the true value of the IP. Of course, only a Republican could object to this:
LaHood's proposal would eliminate those tax consequences for repatriation of currently held intangible assets, although it would not apply to companies that sell those assets later on. The Senate version of the TCJA, passed in November 2017, included a similar provision that the Joint Committee on Taxation estimated would reduce revenues by $34 billion over the next decade. The provision was stripped from the final law.
We were right to strip this loophole from the 2017 but of course now Republicans want to sneak it into the tax code.

Sunday, July 26, 2020

Managing A Zoom Conference

As of the end of this week I completed chairing the 30th annual international conference of the Society for Chaos Theory in Psychology and Life Sciences, with 54 participants from around the world.  It basically went well, and it was kind of cool to make introductory remarks at 8 AM during EDT, with somebody on at 6 AM their time in Montana and someone else on at 10 PM their time in Sydney, Australia.  It can be done, and even with parallel sessions happening.

Of course there were the usual snafus of people getting bad internet connections and disappearing or becoming mute while presenting, which does not happen in live sessions.  There were also some people who failed to present due to not being able to properly load or manage their slides or videos, although I have seen problems with this sort of thing even in live conferences.

Something I throw out there for anybody managing one of these involves how we managed the parallel sessions.  So we had both a co-host/moderator, who managed entry to a session, as well as a session chair who managed timing by speakers, with on this following the old incentive compatible strategy of usually having that be the final speaker in the session, giving them incentive to keep the earlier presenter in line on timing.  Indeed, in our wrapup session someone noted, accurately near as I could tell, that there may have been better adherence by speakers to time limits in this format than is often the case in live sessions. 

We also had it that each parallel session had its own Zoom link so that when somebody wanted to go from one to another, they would need to leave the whole conference and reenter. But that seemed to work, and it beat having breakout rooms because with those in Zoom if one goes into a breakout room, one cannot go back to the original space.

Of course we missed the direct personal interaction, no schmoozing in the hallways or over food and drink at reception or dinner.  We did have a social hour at end of first day, simply a wide-open joint session with people saying whatever, and some waved beer bottles around. But not the same thing as live.  Oh well. 

There was one time slot where there were some more serious problems and confusion with the sessions, but otherwise the problems were mostly garden variety.  We had our max attendance of 32 for our keynote speaker, Simon Levin, a mathematical ecologist at Princeton, with that going very well.  And indeed, in general things went better than I was worried they might, and I am glad to have it over and behind me.

Barkley Rosser

Wednesday, July 22, 2020

Donald Trump's Only Chance

It looks like Donald Trump has finally figured out that his only chance is to actually act to help make the pandemic actually get better, and substantially better as in what has been going on in most of Europe and East Asia.  That is the only way he will get his sustained economic growth that he has had on his mind as the key to getting reelected.

So in his briefing last night he both stopped repeating fantasies about everything being great and the virus just disappearing, blah blah.  He actually admitted it is likely to get worse before it gets better. He also did probably the most important single thing he can do: he clearly and publicly supported the public wearing of masks, which indeed might actually get things under control, if his followers pay attention to him and start wearing masks.

Now, he undercut that by not wearing a mask himself when going out to the briefing, although he had one in his pocket to wave around at one point.  And he is still handing out fantasies about the availability of various kinds of covid-relevant medical equipment around the country. And while suddenly also making some noises about taking "responsibility," he also seems to still put most of it on governors. And we also have him apparently still supporting axing funding for testing and other such things, although there were hints in the briefing that he might back off that in the ongoing negotiations with Congress over the next, and probably final before the election, package.  So, he is not at all doing all he could and should to combat the virus.

But he did make a couple of big moves, especially on the mask issue.  If in fact the pandemic slows soon and actually gets seriously under control by November, with a booming economy by then, the race will be a lot closer than it is now, and Trump will have done the best thing he could to get reelected.  But it is a long way still to November, and darned near anything can happen. That is really the bottom line.

Oh, for the next two days I shall be totally occupied chairing the conference I announced in an earlier post that is happening online.

Barkley Rosser

Monday, July 20, 2020

The 2017 Tax Cuts and Irish Jobs Act

Brad Setser has more to say about how the lack of enforcement with respect to transfer pricing in the Big Pharma sector has not only cost us Federal tax revenues but perhaps in American jobs in his “The Irish Shock to U.S. Manufacturing?” (May 25, 2020):
America’s production of pharmaceuticals and medicines peaked in 2006, back before the global financial crisis. Output now is about 20 percent below its 2006 level. Pharmaceuticals tend to be capital not labor intensive. High quality pharmaceuticals aren’t made in sweat shops. Pharmaceuticals certainly weren’t the kind of industry that most economists expected to be on the losing end of trade liberalization twenty years ago. Yet America’s consumption of pharmaceuticals didn’t peak in 2006. Only U.S. output. Imports have increased substantially since 2006. Imports of pharmaceuticals have increased from $65 billion in 2006 to $151 billion in 2019. As a result, the trade deficit in pharmaceuticals has increased from $32 billion at the end of 2006 to $93 billion in March of this year. That is about 0.4 percent of US GDP, or just under 10 percent of the total trade deficit in manufactures. The bulk of these imports are from countries that pay high wages. The two biggest sources of imports are Ireland and Switzerland. Many of the usual arguments around the gains to consumers from trade don't really apply here. The imports are of patent protected goods, so they don't expand consumer choice. And U.S. pharmaceutical prices are notoriously high—imports from Ireland and Switzerland haven't brought U.S. pharmaceutical prices down to European levels. The bulk of the gains from trade here almost certainly go to the owners of the pharmaceutical companies who benefit from lower taxes. And the main loser is the U.S. Treasury. Right now, the United States pays the highest prices in the world for its medicines (many of which derive from NIH research) while U.S. pharmaceutical companies are often taxed at quite low effective rates.
I want to do two things here starting with an explanation of the Irish transfer pricing game and later a small complaint about his Swiss tale. He cites a story about an Irish affiliate of Pfizer by Tom Bergin and Kevin Drawbaugh:
Pfizer has used transactions between companies within its group to allow an Irish subsidiary based in Ringaskiddy - Pfizer Ireland Pharmaceuticals - to buy the rights to patents developed in the United States and then use them to make drugs which are sold back to U.S. affiliates. Even though the Irish and other overseas units pay $3.2 billion a year in royalties to use such patent rights, the higher prices at which Pfizer in the United States imports manufactured drugs from affiliates means almost all the profits from these drugs are reported overseas. Drugs which were discovered in the United States, manufactured in Ringaskiddy and sold back to the United States include anti-cholesterol treatment Lipitor - the best-selling prescription drug of all time - and epilepsy drug Lyrica, which generated revenue of over $5 billion last year for Pfizer … Pfizer does have manufacturing plants in the United States but filings for its overseas units show non-U.S. companies supply over 80 percent of U.S. sales. Those sales generate margins of around 40 percent for Pfizer’s overseas arm - earning it over $17 billion in 2013. However, Pfizer has reported losses on its U.S. business in each of the past five years.
Pfizer is not alone with very aggressive transfer pricing, which we will outline in an example based on its 10-K filing below. But let’s consider Switzerland in light of an interesting comment over at Angrybear which included this:
do we not want importation of cheaper pharmaceuticals as long as the US can adequately tax gains? Cheaper medicine is a necessary part of alleviating health care costs.
Brad notes Irish and Swiss wages are not exactly low but are those drugs we import from low taxed Swiss affiliates really produced in Switzerland? One of Pfizer’s competitors is a U.S. based multinational that has declared that its intangible assets are owned in Switzerland while production is actually performed in the Visigrad economies:
On the face of it, the Visegrad countries – the Czech Republic, Hungary, Poland and Slovakia – are doing well economically. The data for GDP per head suggest a gradual convergence in living standards with Western Europe. They continue to attract a disproportionate share of inward investment in EU manufacturing, and their integration into EU-wide supply chains helps to explain why they are now collectively Germany’s most important trade partner, ahead of China and the US.
This other multinational relies on contract manufacturers in the Visegrad nations in order to take advantage of both low wages but also modest corporate tax rates. But most of the profits end up in Switzerland as the contract manufacturers and distribution affiliates receive only modest operating margins. The Swiss principle then pays the U.S. affiliate only a modest royalty rate for the use of U.S. developed intangible assets reaping the lion’s share of profits even though this Swiss entity employs very few people. Now to our illustration of how abusive the transfer pricing for Big Pharma gets based on Pfizer’s 2013 financials, which showed $50 billion in worldwide sales with 60 percent of those sales made by foreign distribution affiliates. Distribution costs represent 30 percent of sales and the typical transfer pricing policy leaves it with a gross margin = 35 percent so operating profits are only 5 percent of sales. Of that, $1 billion is captured by the U.S. distribution division with foreign distribution affiliates receiving $1.5 million. Production costs are only 20 percent of sales so consolidated profits represent 50 percent of sales or $25 billion. The contract manufacturers receive profits = $2.5 billion leaving “residual” profits equal to 40 percent of sales or $20 billion. One might think the appropriate royalty rate would be 40 percent of sales, which would mean the U.S. parent would receive $20 billion but in a lot of cases the royalty rate is only 10 percent so the U.S. captures only $5 billion in royalties with the remaining $15 billion left in the Swiss tax haven. In other words, this multinational enjoys both low production costs and an incredibly low effective tax rate. Now one might wonder how this transfer pricing abuse can be considered arm’s length. Well, there will be some law firm or accounting firm that will write some fanciful defense if the multinational pays them a lot to be their advocate.

Sunday, July 19, 2020

Brad Setser on Offshoring Life Science Production and Transfer Pricing

I just posted a discussion of an interesting proposal from Biden written by Alex Parker who mentioned some February 5, 2020 testimony from Brad Setser. The gist of this testimony was noted back in a March 26, 2019 blog post entitled When Tax Drives the Trade Data:
I often hear that pharmaceuticals are one of America’s biggest exports. But that isn’t what is in the actual trade data (see exhibits 7 & 8). American firms (or formerly American firms, if there has been an inversion) may own the intellectual property behind many successful drugs, but the active ingredients themselves are often manufactured abroad. In fact, the (goods) trade deficit in pharmaceuticals now exceeds the surplus in civil aircraft. This trade isn’t obviously driven by differences in labor costs. The biggest sources of pharmaceutical imports, Ireland and Switzerland, aren’t exactly low wage countries. Trade here seems motivated in large part by the ability to use transfer pricing to shift profits to low tax jurisdictions. And the new Tax Cuts and Jobs Act if anything looks to have made those games more not less attractive. The incentive to offshore intellectual property generally remains—the “GILTI” rate on profits shifted to no tax jurisdictions is the lowest rate in the tax code. And the lower tax on intangibles than on tangibles has created an incentive to offshore actual production and jobs as well—the more tangible assets abroad, the higher your deemed tangible income and the lower your tax on your intangible income (the same is true for firms that retain their intellectual property in the United States, as there is a lower tax rate on the export of intangibles than the export of tangibles). To be concrete, a firm with its intellectual property in the Caribbean believes it can reduce its effective tax rate to under 10 percent (a rate somewhat below the global "minimum"). It is too early to say definitively that these incentives drove the increase in the pharmaceutical deficit in 2018. But it doesn’t seem too early to say that there is no evidence that these kind of tax games have gone away after the tax reform.
Brad’s thesis is certainly going to be controversial. As I read what he is saying is that it is not just the GILTI provisions of the 2017 tax cut that led to the increase in the life science trade deficit over the years. Rather it was the weak enforcement of basic transfer pricing rules that allowed Big Pharma to massively evade U.S. corporate taxes and created these perverse incentives. While we were told that the 2017 Republican tax cut for the rich would close the transfer pricing loopholes and perverse incentives they clearly did not. I’m all for scrapping GILTI and FDII for a lot of reasons but these steps alone will not fundamentally change what Brad is suggesting unless we start actually enforcing good old fashion transfer pricing rules. Let’s hope Biden has this in mind.

Biden Proposes Ending the GILTI Loophole

Alex Parker covers an interesting and important tax policy issue:
Former Vice President Joe Biden's recent proposal to secure medical supply chains in the wake of the COVID-19 pandemic includes tweaks to the 2017 federal tax overhaul, reigniting the debate about whether its international provisions are pushing manufacturing facilities offshore …Former Vice President Joe Biden's recent proposal to secure medical supply chains in the wake of the COVID-19 pandemic includes tweaks to the 2017 federal tax overhaul, reigniting the debate about whether its international provisions are pushing manufacturing facilities offshore … the TCJA exempted most foreign income from taxation as part of a shift toward a more territorial tax system, similar to those used in Europe and much of the world. But it also enacted new provisions, including the GILTI tax and the base erosion and anti-abuse tax, which lawmakers said would block companies from shifting U.S. income abroad. Many of the structures for tax avoidance that have drawn public scrutiny and outrage over the past decade have involved intangibles, which are relatively easy to move from jurisdiction to jurisdiction to chase the lowest tax rate. But the very attribute that makes them difficult to tax also makes them difficult to define. Rather than attempt to pinpoint the intangibles themselves, the TCJA instead targets unusually high returns on tangible assets. Under the GILTI provision, the total foreign income of a U.S. company, beyond a 10% return on its offshore depreciable tangible assets, is taxed at 10.5%. That rate is half of the overall corporate rate of 21%. As the bill was passed by Congress in 2017, Democrats and outside critics quickly noted that the GILTI tax could encourage companies to shift investments in tangible assets abroad. Because the GILTI tax kicks in only at a 10% return on foreign tangible property, the more valuable that property is, the smaller the ultimate GILTI tax bill will be. Even further, because GILTI is calculated at the global level, in most cases it would not matter where new tangible assets were located; as long as they were offshore, they would decrease the GILTI tax. A reduced rate on foreign-derived intangible income, or domestic income defined through a formula similar to GILTI, also creates a similar incentive, critics contend. If a company has tangible assets at home, it will have less income defined as FDII, and less of the tax benefit.
The 2017 tax cut for rich people was written in secret by Republicans who had told us that it would somehow stop transfer pricing manipulation and would encourage onshoring. But when the details were released, a lot of economists including conservative economics were taken back by the complexity of the international provisions. Parker’s discussion is interesting even though he might be faulted for not defining FDII and GILTI. FDII stands for Foreign Derived Intangible Income while GILTI stands for Global Intangible Low-taxed Income where both are defined as profits minus a 10 percent return to tangible assets, which is a crude attempt to allow intangible profits sourced in the U.S be taxed at a 12.5 percent rate instead of the 21 percent corporate tax rate. A lot of the large life science multinationals have found a way of sourcing profits in a tax haven. Rather than vigorously enforcing our transfer pricing rules, the Republican tax cut for rich people decided to let them by taxed a 10.5 percent, which does not exactly discourage shifting profits abroad. But hey they did set up a complex set of rules that kept the Big Four accounting firms and international law firms gainfully employed trying to figure out how to manipulate these rules. But Biden’s first concern here was how these complex rules might actually encourage shifting production abroad. Parker also notes:
Brad Setser, a senior fellow at the Council on Foreign Relations and the former deputy assistant secretary for international economic analysis at the U.S. Treasury Department, has blamed the provision for a 20% increase in pharmaceutical imports since 2018. "The rise in pharmaceutical imports is likely, in part, a reaction to the incentives to offshore pharmaceutical production that were included in the Tax Cuts and Jobs Act," Setser said Feb. 5 in testimony to the U.S. House Ways and Means Health Subcommittee.
Brad has written a lot of very interesting things on transfer pricing so it is time to go read his latest on this issue as well.

Wednesday, July 15, 2020

RIP Tonu Puu

Seems like more people I know are dying.  In this case it is a good friend of mine and occasional coauthor, the Swedish economist, Tonu Puu, who was born in Estonia of an Estonian father and a mother of German ancestry.  As it was, he ended up speaking a very large number of languages, as well as being very cosmopolitan in many other ways. He was 83 years old and had cancer for some time, which is what I presume he did of, although the announcement did not specify a cause, but it happened this past Saturday in Umea in northern Sweden, where he was at the university there for most of his career.

Before talking about his work in economics, I want to note that probably more important for him was music.  He made baroque instruments such as viols and harpsichords, and was so good at it that professional musicians had him make such instruments for them.  For many years he ran an annual Baroque music festival that attracted fine musicians from all over the world to Umea. I shall note here that an important characteristic of Tonu, which some of you may not like, was that he was deeply conservative in many ways. A sign of this in music is that he considered Beethoven to be the "worst thing that ever happened to music," at least I heard him say that.  He saw Beethoven as being ultimately responsible for there being rock concerts in Venice that knocked off parts of the roof of the opera house.  I happen to disagree with that, seeing that as a pretty shaky link, but this was the sort of long-run perspective that he took to many things, full of his own integrity that ignored popular and transient trends, even if those were centuries long.

As a segue to talking about his economics, I note that he focused most of his attention on writing books, which are his most cited works, and covered not only many areas of economics in them, but also wrote on interdisciplinary matters. Thus one of his later books, which went into a second edition, is Arts, Sciences, and Economics: A Historical Safari, Springer (almost all his books were published by Springer), 2006, 2015, with him also being a deep student of the history of technology.

As noted he wrote on many things, but he is probably best known for something I am also into: nonlinear economic dynamics, with him applying these ideas to various parts of economics, including industrial organization, urban and regional economics, macroeconomic dynamics, international and interregional trade, and even capital theory, with over 100 articles and into the teens of books, with several of them going into multiple editions. His most cited are Nonlinear Economic Dynamics (first edition, 1989, not sure how many of them), Attractors, Bifurcations, and Chaos: Nonlinear Phenomena in Economics (3 editions,first in 2000), Mathematical Location and Land Use: An Introduction (2nd edition, 2003, not sure when first was), and Spatial Economics: Density, Potential, and Flow, coauthored with the late Martin Beckmann in 1984 (this one by North-Holland).  In that one and in a few articles earlier, he presaged Paul Krugman in presenting rigorous and highly innovative models urban and regional models with economies of scale, work that Krugman never cited or recognized, although this was half of what Krugman got his Nobel Prize for.  Tonu's final book came out in 2018, Disequilbrium Economics.

His most cited articles were involved applying nonlinear dynamics to industrial organization problems, such as his 1995 paper on "The Chaotic Monopolist," which appeared in Chaos, Solitons, and Fractals, a journal he served as the first economics coeditor of..  He tended to publish his papers in odd journals, many of them not strictly in economics, such as Environment and Planning A and Geographical Analysis. I note that in that paper he followed up on Joan Robinson's 1933 point that monopolists may face non-monotonic marginal revenue curves.  While he was generally conservative, he paid no attention to ideology in his economics work and drew from many sources and inspirations.  I think that he supported the more conservative parties in Sweden, although those tend to be to the left of the US Democratic Party. In any case, most of his macroeconomic models drew on the nonlinear Keynesian ones by people like Hicks and Goodwin.

Besides his original work on nonlinear location theory models, and his chaos theory analysis of industrial organization, another original model he developed was the first analysis of the possibility of chaotic hysteresis in business cycles.  He more or less laid this out in the first edition of his Nonlinear Economic Dynamics book, his most cited work, but the full development of it appeared as the first artcle to appear in the journal Occasional Paper Series on Socio-Spatial Dynamics, which would later become Discrte Dynamics in Nature and Society.  The paper is "A Chaotic Model of the Business Cycle,"  1(1), 1-19.  Later I and some others would empircally find evidence for such a pattern in Soviet investment patterns, of all things.

He also founded the ongoing Nonlinear Economic Dynamics Society (of which I am Chair of its Executive Committee) and also CERUM at Umea University.  I am not sure what that acronym stands for precisely, but it is a center devoted to research in regional economics, and it was his final professional location. The announcement of his death came from its current director, Lars Westin.

I shall close this by quoting at length from his view on publishing and how it has changed, comparing how things used to be in Europe compared to now, especially under the influence of American academia, with this showing also showing both his integral conservatism and view of standards.This is from pp. 31-32 of his book, Arts, Sciences, and Economics: A Historical Safari, 2006 edition, and it also gives a flavor of his persona, I think.

"European university culture, until the 1960s, heavily depended on seminars, where various members of the staff, working with entirely different topics, communicated their results. For that reason, the staff members had to keep a broad perspective on their disciplines. Relatively little was regarded as being worth publishing, and national and local 'schools' were established, which made visits toother universities really interesting.

We tend to look down on the previous generation as they published relatively little. This fact, however, does not imply that the worked little or were less creative. It might just signify that they were more choosy about what they regarded as being significant enough to merit publication.

After large scale production ideals from the US overtook the European style, everything is produced for immediate publication, even the relatively insignificant ideas. If it is publishable, it is not insignificant, and the number of journals will expand to allow ever-increasing publications. The number of journals, which has exploded accordingly, conveniently provides for the space. We still have seminars, but we read already published or accepted papers, which we do not want to criticize, and we hardly expect anybody else at the department to understand our whole message. Travel and change of department only results in new personal relations, not new ideas; it may be that we would urgently need more interdisciplinary scientific fora in the future just in order to provide for encounters with the unexpected ideas we need to secure creativity."

I close by noting that an extreme example of his older view is shown by Piero Sraffa, who took 35 years to finally publish in 1960 his magnum opus, reportedly only after many efforts by Joan Robinson, the not-quite-even 100 page long Production of Commodities by Commodities: A Prelude to a Critique of Economic Theory.

Anyway, RIP, my old friend, Tonu Puu (and there should be an umlaut over that "o" in his name.)

Barkley Rosser

Tuesday, July 14, 2020

Truth Is The Daughter Of Time

This is a frontispiece to a 1951 mystery novel by Josephine Tey (real name: Elizabeth Makintosh) named _The Daughter of Time_It is about the question of whether or not King Richard III ordered the murder of the "Little Princes in the Tower," his nephews Edward and Richard, as has  long been alleged, and for a long time was simply accepted as historical fact.  This bestselling and very well and wittily written novel makes the case that Richard was framed by his successor, Henry (Tudor) VII, who usurped him after defeating and killing him in the Battle of Bosworth Field in 1485.  Tey manages to build up through the novel a very convincing case for this view, which I shall not get into the details of, although I highly recommend the novel, which I just finished reading. In any case, if she is right, or even partly right (because  have been many other accusations against Richard made as well), then this is one of those cases where "the victor gets to write the history."

I note a few points.  The usual argument, still put accepted by many, is that Richard did the little princes in because they were  threats to his having succeeded their father, his brother, Edward IV.  But in fact it is now accepted (documents surfaced centuries later on this apparently suppressed by Henry VII) that  showed that they were illegitimate and thus not possible heirs to the throne. Richard had no reason to kill them.  He was invited to assume the throne by both houses of parliament and was thus completely legal and legitimate. And after his death, Henry had a Bill of Attainder brought against him in parliament listing all sorts of terrible things he supposedly did that justified the completely illegitimate Henry usurping Richard's throne.  But murdering the princes was somehow not included in this Bill, which would obviously have been the top charge against Richard if  it  were true.  Furthermore, given Henry's lack of any legitimacy, there was a large group of individuals, including the little princes if they were still alive, who had more claim to the throne than Henry.  He  was the British monarch who initially instituted Star Chambers that brought charges against each of these in turn allowing them to be "judicially murdered." The  grounds for these in some cases were as vague as "for certain reasons" (unnamed).  OTOH, a major reform Richard introduced was the right to bail.  There is much more, but this gives some idea of what Tey puts forth, most  of which I have verified from other sources.

I see a couple of relevances of this to current events, both the matter of arguments over "the Lost Cause" and Confederate monuments as well as the matter of whether ot not Donald Trump will get away historically with stating over 20,000 lies since becoming president.  There seem to be three factors here.  One is whether a leader can be authoritarian or not, which Trump would like to be but is not quite.  Henry VII certainly was.  This allows one many advantages in putting forth a false historical narrative.

Then there is the matter of having propagandists, especially initial ones.  For Trump that is clearly Fox News.  For the Lost Cause there was not a single clear individual or group, but a long buildup through the late 19th and into the early 20th centuries.  For Henry VII the most important was his ally and enemy of Richard, John Morton, whom Henry made the Archbishop of Canterbury, a thoroughly corrupt individual.  Much younger than him, but working for him, was the much revered Sir Thomas More, and it was through More that Morton put forth the initial claims and accusations against Richard.

Then we have the role of arts and media.  I do not think Trump really has that yet, which takes more time, ,but for the enemies of Richard the most influential was William Shakespeare, whose play, Richard III, written during the reign of the last Tudor monarch, Elizabeth I, depicts him as a truly monstrous figure, murderer of the little princes, slanderer of his mother, and much else, as well as being hunch-backed and with a withered arm, these latter all apparently false.  But he makes for a great villain, and the count of famous actors portraying him as such is beyond count.  Shaekespeare's play may be the reason more than any other why most people and many textbooks present the standard story as fact without any hint of doubt.  In many peoples' minds, Richard may have been the worst of all British monarchs, with only King John a possible rival (btw, his corpse was found in 2012 under a parking lot in Leicester).

While Trump may not have his Shakespeare, the Lost Cause certainly had its victory in the arts and media by the early 20th century in the form of Hollywood, most influentially with the films Birth of a Nation by Griffiths that glorified the KKK and the not quite so virulent but probably more influential Gone with the Wind.  Hollywood bought the Lost Cause hook, line, and sinker all the way and really did a semi-Shakespeare version on it.

BTW, another curious example of historical distortion that I knew nothing about is reported in the novel, and it involves monuments, which do certainly reinforce these historical myths.  I had  never heard of the Covenanters, but they were a radical Presbyterian group in Scotland that played a major role in making Scotland be predominantly Presbyterian, with the height of their activities being in the early 1600s, with a dramatic peak around 1638. Anyway, Tey (who was born in Scotland) reports on some monuments somewhere there to some women who were supposedly martyrs to the Covenanter cause.  However, according to her they were not even killed. They were not martyrs at all. But the monuments and claims they were helped the cause. Apparently the truth is now generally accepted, and occasionally somebody suggests taking down the monuments.  But somehow it does not happen because they make good tourist attractions for the small towns they are in. 

Barkley Rosser

Monday, July 13, 2020

More Likely Bad Economic Forecasting: This Time From OECD And CBO

That would be the quintessentially establishment and boringly conventional Organization of Economic Cooperation and Development, the Paris-based "rich nations'" entity that grew out of the Marshall Plan and has a reputation for excellent data, and also the Congressional Budget Office, generally regarded as bipartisan and highly professional.

So I saw their forecasts of US economic performance in terms of GDP and unemployment rates for the end of this year, and I find both to be highly unlikely, probably way too pessimistic.  I get these from a column in today's Washington Post by the often execrable Robert J. Samuelson, but here he is playing it straight and just reporting.  Indeed, the main thrust of his column is to note an apparent disjuncture between the hot stock market and the not-so-obviously hot economy, suggesting either the stock market is overvalued or the economy is being underforecast.  I suspect actually that both are true, although I am not going to attempt forecast the stock market.

Anyway, RJS reports two forecasts coming out of the OECD, one "pessimistic" and one "more pessimistic" for the US.  The first is sort of a baseline one that assumes the coronavirus is gotten to be more or less under control. The second one assumes a second wave of the virus this fall.  The first forecast sees a GDP decline for 2020 of -7.3%  with an unemployment rate at the end of the year  of 11.3%.  The second more pessimistic one has GDP declining -8.5% with a resulting end-of-year unemployment rate of 12.5%.

The CBO forecast, just one, is not quite as pessimistic. It sees GDP declining -5.9% for the year with the unemployment rate ending up at 10.6%.

Well, the latest unemployment rate is reported to be 11.1%, already lower than what either of the OECD forecasts see as the US economy having at the end of 2020.  That is above the 10.5% forecast by the CBO, but not by much, especially if one notes that the rate declined by about 2% in just the last month.  For the OECD projections to hold, the US GDP will have to stop rising, as it appears to be doing and go back downwards, thus giving us the infamous "W" pattern some have forecast, even without a second wave. The CBO forecast may not need an outright downturn, but it will need a pretty hard flattening to near zero growth soon to come true, something like the "square root" pattern that some have forecast.

Now most think the growth of the US economy is slowing, probably has been since sometime in mid-to-late June after the new infection rate took off again and we began to see renewed closings, although in some states reopenings are still happennig. But in fact most private forecasters have the US economy still growing, although there is much debate about how much (see Econbrowser for a recent post on competing forecasts, all positive for the near term).

I think it is impossible for the US economy to follow the forecasts coming out of the White House and its sycophants that would have the US experience a V-shaped recovery all the way to the election, with the US getting back to its "perfect" February condition.  But unless we do have a full-blown second wave, I think it is unlikely the unemployment rate will be over 10 percent come November 3, even if I am not going to try to pin it down more.  The OECD and CBO forecasts are not impossible, but I think they involve a very serious and ongoing full-blown pandemic continuation in the US unlike what we see in all but a handful of other nations.  And if Trump starts wearing a mask all the time and starts actively pushing his followers to do so, that may well bring the virus more under control and make those OECD and CBO forecasts and up looking way too pessimistic.

Barkley Rosser

A Framework for Coronavirus Policy

There are two general ways to reduce the transmission of the virus.  One is “engineering”, changing the physical environment, the other is “social”, changing behavior to keep people distant from each other.  Under engineering we can include not only physical partitions, UV lighting and ventilation, but also mask-wearing and other PPE.  I know, there is a very large behavioral component to masking, but I want to focus on the distancing aspect, so let’s put everything else in the engineering box.

Now for distancing.  Suppose we know instantaneously and with certainty everyone who is infected.  In that case we can selectively quarantine them, and this will cut off transmission.  That is possible only in rare circumstances, such as a country that has fully eradicated the virus but has occasional external visitors.  If you have a reliable test you can identify anyone arriving with the disease and isolate them.  The rest of the population, known to be uninfected and unexposed, can move freely and congregate as they want.

A more realistic case is that you know with near certainty everyone who is infected, but only with a delay.  Then those who came into contact with them during their potential spreading period are also suspect and need to be isolated.  This is the idea behind contact tracing, which imposes distancing on a small subset of the population who may not be infected but leaves everyone else free to go on with their life.

Now what happens if there is some combination of too many cases, too little or inaccurate testing, and insufficient tracing?  This is where we are now, and the only recourse if we want to get control over the pandemic is to impose distancing on the entire population or as much of it as possible.  Only after this policy reduces the number of active cases to the point where testing and tracing can bring us back to the previous state will it be advisable to resume most congregating activity.

What it all adds up to is the notion that distancing is distancing, whether it applies only to quarantining those already infected, the larger group who have been in contact with those infected, or the whole population.  The smaller the number of people to whom distancing can be applied, the better.  The goal of policy should be to systematically move from the third case to the second and then to the first.

Sunday, July 12, 2020

Cancel Culture: Retail vs. Wholesale

When my stomach can take it, which is rarely, I take a look at Marginal Revolution.  Tuning in today, I see Cowen predicting that the intellectual right  will become much more open to deviations in the future -- as long as all agree in being anti-leftist. And the latter involves, of course, the condemnation ad nauseam of "Cancel Culture." Look I don't like this retail stuff they go on about either, but isn't it rich to hear the GMU crowd, using Koch money and the influence it buys to keep the groves of their Academy  quite free of any left-wing ideas --wholesale Cancel culture, that --making the case!

Saturday, July 11, 2020

Favoring Hi-Tech Tax Cheats Over Consumers of French Wine

Hoping to buy a nice bottle of French wine? Doug Palmer of Poltico has some bad news for you:
The Trump administration announced Friday a 25 percent tariff on $1.3 billion worth of French handbags, cosmetics and soaps in retaliation for a digital services tax on U.S. internet giants, but said it would suspend imposing them for up to six months. The United States believes the way the French tax is structured unfairly targets large U.S. internet companies like Facebook, Google and Amazon. However, other countries are increasingly determined to find a way to collect revenue from firms that earn billions of dollars in their markets.
Let’s note that Amazon, Facebook, and Amazon made yuuuuge profits and evade U.S. corporate profits taxes. So paying a modest excise tax on European sales is not exactly going to bankrupt these tax cheats. But back to the story:
U.S. Trade Representative Robert Lighthizer’s office concluded last year that France’s digital service tax was unreasonable, discriminatory and a burden on U.S. commerce. It also laid out a list of $2.4 billion worth of French goods — including Champagne, cheeses, handbags, soaps and fine dinnerware — that could be hit with retaliatory duties as high as 100 percent. U.S. trade officials said the final retaliation figure announced Friday reflects the value of U.S. digital transactions covered by France’s 3 percent digital services tax, which is estimated to be in the range of $15 billion per year, and the amount of taxes that France is expected to collect from U.S. companies.
If collecting tax revenues were the goal, the U.S. could make much more from Amazon, Facebook, and Google by simply enforcing the transfer pricing rules. Oh but that would be taxing rich people which is not the Republican way. Back to the story:
The final retaliatory list leaves off Champagne, cheese and fine dinnerware. U.S. wine wholesalers and retailers, who have already been hurt by a 25 percent U.S. retaliatory duty on European wine in a separate dispute over European government support for aerospace giant Airbus, fought Lighthizer’s threat to include French Champagne in the retaliatory list for the digital services tax.Industry groups estimated an additional 100 percent duty on French sparkling wine would increase the cost to importers by $718 million and cause the loss of more than 17,000 jobs throughout the distribution chain. A tariff of just 25 percent would boost costs by $179 million and jeopardize an estimated 6,000 jobs, the groups said.
Screw the little guy and consumers too. That’s the Republican way.

Being Targeted

Arguably this is paranoia, but the mayor and police chief of my city do not think so and have officially reacted with formal response.  What a sign that I am an old whatever, praising local law enforcement, but, well....

So the issue is that late last evening a truck full of masked white men, and no, we are not talking health masks but ones that cover ID, with flags waving including the Confederate battle flag, were going up and down our block taking photos of certain houses, including ours.  What did these objects of this photographic effort find consistent?  We all had posters on our property declaring "Black Live Matters." Many on our block became upset over this, including my wife, and now the City of Harrisonburg, VA  police are specially watching our block. I note that both the  mayor and police chief of our city happen to be Black, for which at this time I am grateful.

Background here is that I have been living where I am for 32 years with my wife, Marina, in a block in Old Town of Harrisonburg, VA, where most of the houses are somewhat over a century old, and we are five minutes from the central square, as well as being 20 minutes from offices at James Madison University.  Where we are is given by the 2004 prez election.  There are 5 precincts in Harrisonburg, but ours, closest to JMU, was the only precinct in the entire Shenandoah Valley that went for Kerry over Bush. Yes, we are an island of "liberalism," with Harrisonburg later in 16 going strongly for Bernie.

So I happen to live on the most publicized block of all of this Old Town, which I note for the record has both Trump supporters in good number as well as Republicans who  are not big fans of Trump.  There has been a long history of the local newspaper focusing on our block in particular [Daily News Record owned by family of the late racist Harry Byrd], with even our house appearing twice in stories in this paper representing the neighborhood [we have a nice garden in front]. I note  here that our block is a super fave on Halloween for trick or treaters, many hundreds coming from outside the city.  We do our best to treat them well.

Our neighborhood, heavily crawling with  JMU faculty, is certainly mostly an upper middle class neighborhood,  But while being mostly white there are Blacks as well as various people from abroad from all over the world. So we are fairly diverse these days.

Anyway, several weeks ago a friend-neighbor up the street starting putting out these Black Lives Matter signs, costing I think 3 bucks or so, that one could put in one's yard. They went all over town, but our block got more than anywhere else, with where I live 5 of us in a contiguous row puttng them in our visible front yards. At least one of those in our row is a Republican family..

Barkley Rosser