Winter 2015 Journal of Economic Perspectives On-line

Since 1986, my my actual paid job (as opposed to my blogging hobby) has been Managing Editor of the Journal of Economic Perspectives. The journal is published by the American Economic Association, which several years back made the decision--much to my delight--that the journal would be freely available on-line, from the current issue back to the first issue in 1987. The journal's website is here. I'll start here with Table of Contents for the just-released Winter 2015 issue. Below are abstracts and direct links to all the paper. I will probably blog about some of the individual papers in the next week or two, as well.

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Symposium

Wealth and Inequality

Daron Acemoglu and James A. Robinson, “The Rise and Decline of General Laws of Capitalism”

Charles I. Jones, “Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality”

Wojciech Kopczuk, “What Do We Know about the Evolution of Top Wealth Shares in the United States?”

Thomas Piketty, “Putting Distribution Back at the Center of Economics: Reflections on Capital in the Twenty-First Century”

Articles

Marion Fourcade, Etienne Ollion, and Yann Algan, “The Superiority of Economists”

Allen R. Sanderson and John J. Siegfried, “The Case for Paying College Athletes”

David H. Howard, Peter B. Bach, Ernst R. Berndt, and Rena M. Conti, “Pricing in the Market for Anticancer Drugs”

Wallace E. Oates and Robert M. Schwab, “The Window Tax: A Case Study in Excess Burden” 

Andrei Shleifer, “Matthew Gentzkow, Winner of the 2014 Clark Medal”

Features

Brett M. Frischmann and Christiaan Hogendorn, “Retrospectives: The Marginal Cost Controversy”

Timothy Taylor, “Recommendations for Further Reading”

Correspondence: “Fair Trade Coffee,” Victor V. Claar and Colleen E. Haight . . 215

Editorial Note: “Correction to Richard S. Tol’s ‘The Economic Effects of Climate Change’” 

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Symposium

Wealth and Inequality

"The Rise and Decline of General Laws of Capitalism," by Daron Acemoglu and James A. Robinson
Thomas Piketty's (2013) book, Capital in the 21st Century, follows in the tradition of the great classical economists, like Marx and Ricardo, in formulating general laws of capitalism to diagnose and predict the dynamics of inequality. We argue that general economic laws are unhelpful as a guide to understanding the past or predicting the future because they ignore the central role of political and economic institutions, as well as the endogenous evolution of technology, in shaping the distribution of resources in society. We use regression evidence to show that the main economic force emphasized in Piketty's book, the gap between the interest rate and the growth rate, does not appear to explain historical patterns of inequality (especially, the share of income accruing to the upper tail of the distribution). We then use the histories of inequality of South Africa and Sweden to illustrate that inequality dynamics cannot be understood without embedding economic factors in the context of economic and political institutions, and also that the focus on the share of top incomes can give a misleading characterization of the true nature of inequality.

Full-Text Access | Supplementary Materials


"Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality," by Charles I. JonesSince the early 2000s, research by Thomas Piketty, Emmanuel Saez, and their coauthors has revolutionized our understanding of income and wealth inequality. In this paper, I highlight some of the key empirical facts from this research and comment on how they relate to macroeconomics and to economic theory more generally. One of the key links between data and theory is the Pareto distribution. The paper describes simple mechanisms that give rise to Pareto distributions for income and wealth and considers the economic forces that influence top inequality over time and across countries. For example, it is in this context that the role of the famous r - g expression is best understood.

Full-Text Access | Supplementary Materials


"What Do We Know about the Evolution of Top Wealth Shares in the United States?" by Wojciech Kopczuk
I discuss available evidence about the evolution of top wealth shares in the United States over the course of the 20th century. The three main approaches—the Survey of Consumer Finances, estate tax multiplier, and capitalization methods—generate generally consistent findings until mid-1980s but diverge since then, with the capitalization method showing a dramatic increase in wealth concentration and the other two methods showing at best a small increase. I discuss strengths and weaknesses of different approaches. The increase in capitalization estimates since 2000 is driven by a dramatic and puzzling increase in fixed income assets. There is evidence that estate tax estimates may not be sufficiently accounting for mortality improvements over time. The nonresponse and coverage issues in the SCF are a concern. I conclude that the changing nature of top incomes and the increased importance of self-made wealth may explain difficulties in implementing each of the methods and why the results diverge.

Full-Text Access | Supplementary Materials


"Putting Distribution Back at the Center of Economics: Reflections on Capital in the Twenty-First Century," by Thomas Piketty
When a lengthy book is widely discussed in academic circles and the popular media, it is probably inevitable that the arguments of the book will be simplified in the telling and retelling. In the case of my book Capital in the Twenty-First Century (2014), a common simplification of the main theme is that because the rate of return on capital r exceeds the growth rate of the economy g, the inequality of wealth is destined to increase indefinitely over time. In my view, the magnitude of the gap between r and g is indeed one of the important forces that can explain historical magnitudes and variations in wealth inequality. However, I do not view r > gas the only or even the primary tool for considering changes in income and wealth in the 20th century, or for forecasting the path of income and wealth inequality in the 21st century. In this essay, I will take up several themes from my book that have perhaps become attenuated or garbled in the ongoing discussions of the book, and will seek to re-explain and re-frame these themes. First, I stress the key role played in my book by the interaction between beliefs systems, institutions, and the dynamics of inequality. Second, I briefly describe my multidimensional approach to the history of capital and inequality. Third, I review the relationship and differing causes between wealth inequality and income inequality. Fourth, I turn to the specific role of r > g in the dynamics of wealth inequality: specifically, a larger r - g gap will amplify the steady-state inequality of a wealth distribution that arises out of a given mixture of shocks. Fifth, I consider some of the scenarios that affect how r - g might evolve in the 21st century, including rising international tax competition, a growth slowdown, and differential access by the wealthy to higher returns on capital. Finally, I seek to clarify what is distinctive in my historical and political economy approach to institutions and inequality dynamics, and the complementarity with other approaches.

Full-Text Access | Supplementary Materials

Articles
"The Superiority of Economists," by Marion Fourcade, Etienne Ollion and Yann Algan
In this essay, we analyze the dominant position of economics within the network of the social sciences in the United States. We begin by documenting the relative insularity of economics, using bibliometric data. Next we analyze the tight management of the field from the top down, which gives economics its characteristic hierarchical structure. Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and their confidence in their discipline's ability to fix the world's problems. Taken together, these traits constitute what we call the superiority of economists, where economists' objective supremacy is intimately linked with their subjective sense of authority and entitlement. While this superiority has certainly fueled economists' practical involvement and their considerable influence over the economy, it has also exposed them more to conflicts of interests, political critique, even derision.

Full-Text Access | Supplementary Materials


"The Case for Paying College Athletes," by Allen R. Sanderson and John J. Siegfried
Big-time commercialized intercollegiate athletics has attracted considerable attention in recent years. Popularity of this uniquely American activity, measured by attendance, television ratings, or team revenues, has never been higher. At the same time, however, several high-profile scandals exposing unseemly behavior on the part of players, coaches, and even respected higher education institutions—as well as questions about the distribution of the enormous revenues pouring into university athletic departments—have marred the image of these college football and men's basketball programs. Currently there are several legal challenges to the National Collegiate Athletic Association (NCAA) and its member institutions that may change dramatically and permanently the arrangements between the NCAA cartel, its member colleges and universities, and the "student-athletes" who play on the teams. These challenges all focus on the NCAA's collective fixing of players' wages. We describe this peculiar "industry," detailing the numerous market imperfections in both output and labor markets, the demand for and supply of college athlete labor, and possible alternative arrangements in the college athlete labor market, including the ramifications of compensating players beyond the tuition, room, board, books, and fees that some current players already receive as grants-in-aid.

Full-Text Access | Supplementary Materials


"Pricing in the Market for Anticancer Drugs," by David H. Howard, Peter B. Bach, Ernst R. Berndt and Rena M. Conti
In 2011, Bristol-Myers Squibb set the price of its newly approved melanoma drug ipilimumab— brand name Yervoy—at $120,000 for a course of therapy. The drug was associated with an incremental increase in life expectancy of four months. Drugs like ipilimumab have fueled the perception that the launch prices of new anticancer drugs and other drugs in the so-called "specialty" pharmaceutical market have been increasing over time and that increases are unrelated to the magnitude of the expected health benefits. In this paper, we discuss the unique features of the market for anticancer drugs and assess trends in the launch prices for 58 anticancer drugs approved between 1995 and 2013 in the United States. We restrict attention to anticancer drugs because the use of median survival time as a primary outcome measure provides a common, objective scale for quantifying the incremental benefit of new products. We find that the average launch price of anticancer drugs, adjusted for inflation and health benefits, increased by 10 percent annually—or an average of $8,500 per year—from 1995 to 2013. We argue that the institutional features of the market for anticancer drugs enable manufacturers to set the prices of new products at or slightly above the prices of existing therapies, giving rise to an upward trend in launch prices. Government-mandated price discounts for certain classes of buyers may have also contributed to launch price increases as firms sought to offset the growth in the discount segment by setting higher prices for the remainder of the market.

Full-Text Access | Supplementary Materials


"The Window Tax: A Case Study in Excess Burden," by Wallace E. Oates and Robert M. Schwab
The window tax provides a dramatic and transparent historical example of the potential distorting effects of taxation. Imposed in England in 1696, the tax—a kind of predecessor of the modern property tax—was levied on dwellings with the tax liability based on the number of windows. The tax led to efforts to reduce tax bills through such measures as the boarding up of windows and the construction of houses with very few windows. In spite of the pernicious health and aesthetic effects and despite widespread protests, the tax persisted for over a century and a half: it was finally repealed in 1851. Our purpose in this paper is threefold. First, we provide a brief history of the tax with a discussion of its rationale, its role in the British fiscal system, and its economic and political ramifications. Second, we have assembled a dataset from microfilms of local tax records during this period that indicate the numbers of windows in individual dwellings. Drawing on these data, we are able to test some basic hypotheses concerning the effect of the tax on the number of windows and to calculate an admittedly rough measure of the excess burden associated with the window tax. Third, we have in mind a pedagogical objective. The concept of excess burden (or "deadweight loss") is for economists part of the meat and potatoes of tax analysis. But to the laity the notion is actually rather arcane; public-finance economists often have some difficulty, for example, in explaining to taxpayers the welfare costs of tax-induced distortions in resource allocation. The window tax is a textbook example of how a tax can have serious adverse side effects on social welfare. In addition to its objectionable consequences for tax equity, the window tax resulted in obvious and costly misallocations of resources.

Full-Text Access | Supplementary Materials


"Matthew Gentzkow, Winner of the 2014 Clark Medal," by Andrei Shleifer
The 2014 John Bates Clark Medal of the American Economic Association was awarded to Matthew Gentzkow of the University of Chicago Booth School of Business. The citation recognized Matt's "fundamental contributions to our understanding of the economic forces driving the creation of media products, the changing nature and role of media in the digital environment, and the effect of media on education and civic engagement." In addition to his work on the media, Matt has made a number of significant contributions to empirical industrial organization more broadly, as well as to applied economic theory. In this essay, I highlight some of these contributions.

Full-Text Access | Supplementary Materials


Features

"Retrospectives: The Marginal Cost Controversy," by Brett M. Frischmann and Christiaan Hogendorn
From 1938 to 1950, there was a spirited debate about whether decreasing-average-cost industries should set prices at marginal cost, with attendant subsidies if necessary. In 1938, Harold Hotelling published a forceful and far-reaching proposal for marginal cost pricing entitled "The General Welfare in Relation to Problems of Taxation and of Railway and Utility Rates." After several years and many pages of discussion, Ronald Coase gave a name and a clear formulation to the debate in his 1946 article "The Marginal Cost Controversy." We will tell much of the story of this controversy by comparing the frameworks of Hotelling and Coase, while also bringing in other contributors and offering some thoughts about contemporary relevance. The arguments marshaled by Coase (and his contemporaries) not only succeeded in this particular debate, as we shall see, but more generally served as part of the foundation for various fields of modern economics, particularly institutional, regulatory, and public choice economics as well as law and economics. Yet the underlying issues are quite difficult to resolve, and the strengths and weaknesses of the arguments for marginal cost pricing can turn on specific elements of the industry.

Full-Text Access | Supplementary Materials


"Recommendations for Further Reading," by Timothy Taylor
Full-Text Access | Supplementary Materials


"Fair Trade Coffee: Correspondence" Victor V. Claar and Colleen E. Haight
Full-Text Access | Supplementary Materials


Editorial Note: Correction to Richard S. Tol's "The Economic Effects of Climate Change"
Full-Text Access | Supplementary Materials

The Disconnections of Unemployment Insurance

You might think that those who are unemployed would be eligible for unemployment insurance, but you would be wrong. To be eligible to receive unemployment insurance, you need to meet certain qualification tests typically based on earnings in the previous year or so. As a result, many of the unemployed do not receive unemployment insurance.

Here's a striking figure from a February 2015 report by Claire McKenna, "The Job Ahead: Advancing Opportunity for Unemployed Workers," written for the National Employment Law Project. The vertical axis measures the share of unemployed workers receiving unemployment insurance. The yellow shaded area shows that the about 30-40% of the unemployed receive unemployment benefits paid for by the regular state-run unemployment insurance programs. During times when unemployment rates are stuck at high leves--typically just after the recessions shown by the shaded gray areas--the federal government steps in and offers extended periods of unemployment insurance benefits. During these periods, shown by the blue shade areas in the figure, the share of unemployed receiving unemployment benefits can get higher, reaching about two-thirds of the unemployed after the Great Recession. The federal extension of unemployment insurance has now expired. The share of the unemployed receiving unemployment insurance is now at the lowest level in this time period going back to 1972.

The NELP report lays out a policy agenda for the reform of unemployment insurance. For example, it includes additional funding for reemployment and training services; encouraging part-time employment while the unemployed receive benefits; and making unemployment benefits more accessible to the part-time, temporary, and low-income workers who are less likely to have a high and continuous enough level of earnings in the previous year to meet the current eligibility tests now. Readers interested in redesiging the unemployment insurance system for the 21st century might also might also check my February 13, 2013 post on "Rebuilding Unemployment Insurance."

1,000 Conversable Posts

As a one-person blogging operation bobbing along in the oceanic vastness of the internet, every little once in awhile I feel a need to commemorate my own efforts. It's a little pathetic, I suppose, like throwing yourself a birthday party. But it beats not having a birthday party at all. This week, the total number of posts on this "Conversable Economist" blog since its beginning in May 2011 has now exceeded 1,000.

I understand, of course, that 1,000 posts is only significant because it's a round number for a species with 10 fingers. If humans counted in base 9, then I would have passed the round number of 1,000 in base nine (which would be nine cubed or 729 as written in base 10) more than a year ago.  I have a friend who points out that if you use your fingers as binary up-or-down digits, you can then use your two hands to count up to a 10-digit number in base 2, and 1,111,111,111 in base 2 is 1,023 in base 10. In a few weeks, I can celebrate that landmark number next. (Yes, my friends and I are a good time crew, no doubt about it.)

As the number of posts on this blog heads into four digits (in base 10), I find myself mulling several questions. Readers of this blog, especially those who check in on a semi-regular basis, are welcome if so moved to send feedback to me at conversableeconomist@gmail.com.

1) Should my posts on average be shorter? 

A typical length for one my posts is about 1,000 words of text, and often a few figures or tables as well. Thus, those of you who have been following me over the years may now have read about a million words from me. Sure, a certain proportion of that total is made up of quotations sliced from articles that I am discussing.  My point is that compared to many blogs, the posts here are relatively long. I have mixed feeling here. There's an old line, apparently dating back to Blaise Pascal, that a piece of writing is long because the author lacked time to make it shorter. For me, it's paradoxically true that writing shorter posts would probably take me longer. In addition, part of my reason for doing the blog is to extend my memory by saving quotations and figures and tables from stuff I read so that I can find them later. However, I could maybe put up some much shorter posts, like just a link to a study or a single figure or a quick quotation.

2) Should I post more often? 

My answer is "no," because of that nasty constraint of 168 hours per week that plagues us all. This blog is an unpaid hobby, and with family, paid work, and the rest of that thing called "having a life," I'm already pushing the limits to how much time I can reasonably put into the blog.

3) Should I post less often? 

I've been posting about five times a week, typically on weekdays. Is my "hit rate" of interesting posts high enough to justify this volume? Or should I drop down to 3-4 posts per week?

4) Should I shift the focus of the blog more toward my own opinions and analysis? 

 The usual approach of this blog is to discuss a report or research paper that I've read. My opinions about what issues are interesting and what facts and analysis are persuasive are of course implicit in my choice of material. But I often let the report or research paper that I'm discussing do most of the talking. My explanation for this approach appears on my FAQs page:

The word “conversable” was suggested to me by the Scottish philosopher/economist David Hume, in his 1742 piece “Of Essay Writing.” In that essay, Hume laments the separation of the “learned” and the “conversable” world. Hume wrote:

“The separation of the learned from the conversable world seems to have been the great defect of the last age, and must have had a very bad influence both on books and company: for what possibility is there of finding topics of conversation fit for the entertainment of rational creatures, without having recourse sometimes to history, poetry, politics, and the more obvious principles, at least, of philosophy? Must our whole discourse be a continued series of gossiping stories and idle remarks?” Hume concludes: “I cannot but consider myself as a kind of resident or ambassador from the dominions of learning to those of conversation, and shall think it my constant duty to promote a good correspondence betwixt these two states, which have so great a dependence on each other.”

In Hume’s spirit, I will attempt to serve as an ambassador from my world of economics, and help in "finding topics of conversation fit for the entertainment of rational creatures."

My usual belief is that passing along facts and analysis is a more useful social function than whether I feel a need to emote. To put it another way, I do not view this blog as an exercise in personal psychotherapy. After all, whether readers agree with me or even have a clear sense of what I  believe doesn't seem all that important. It's not like I'm running for office. Whether readers agree with my opinions or not, the actual facts and analysis that I pass along may be of interest. But I do sometimes give a little more free rein to my own voice, and I could presumably get the mush out of my mouth and do that more often.

5) Should I continue blogging more-or-less as I've been doing, on the philosophy that if it isn't broke, don't fix it? 

For now, this approach is working for me. One main reason for starting this blog was as an aid to my memory. I read widely, but I have sometimes had trouble remembering where I saw I certain fact or figure or table or useful explanation. On the blog, I can easily find those materials again as needed. The blog has also been a useful discipline for me, encouraging me to track down and read through reports and research papers that I might only have skimmed before.

But the honest truth is that those personal factors alone probably wouldn't be enough for me to keep the blog going. I like having readers. It pleases me that this blog has now just reached 2 million page-views--which doesn't count all of those viewing it by email, RSS feed, or some other form of reposting. Thus, if you're a regular reader, many thanks. If you're an occasional reader, drop in more often. Those who like what I'm doing on this blog are always going to be a selective group. But if you know someone who might enjoy the blog--whether its a friend or a classroom full of students--please do me a favor and pass along the web address.

Corporate Tax Reform: The Opening Obama Administration Bid

There has been some hope that as President Obama and the Republican Congress face off, corporate tax reform might be an area where compromise and progress might be possible. But given how the issue is laid out in the Analytical Perspectives volume of the 2016 Budget of the United States Government (this is the budget asproposed by the President), the potential for common ground doesn't look very big. Here's how the budget document sets up the discussion of corporate tax reform in Chapter 12, under the subheading "Reserve for Business Tax Reform that is Revenue-Neutral in the Long Run":

The number of special deductions, credits, and other tax preferences provided to businesses in the Internal Revenue Code has expanded significantly since the last comprehensive tax reform effort nearly three decades ago. Such tax preferences help well-connected special interests, but do little for economic growth. To be successful in an increasingly competitive global economy, the Nation cannot afford to maintain a tax code burdened with such tax breaks; instead, the tax code needs to ensure that the United States is the most attractive place for entrepreneurship and business growth. Therefore, in the Budget, the President is calling on the Congress to immediately begin work on business tax reform that achieves the following five goals: (1) cut the corporate tax rate and pay for it by making structural reforms and eliminating loopholes and subsidies; (2) strengthen American manufacturing and innovation; (3) strengthen the international tax system; (4) simplify and cut taxes for small businesses; and (5) avoid adding to deficits in the short-term or the long-term.

Consistent with these goals, the Budget includes a detailed set of business proposals that close loopholes and provide incentives for growth in a fiscally responsible manner.

The Administration proposes that these policies be enacted as part of business tax reform that is revenue neutral over the long run. As a result, the net savings from these proposals, which are described below, are not reflected in the budget estimates of receipts and are generally not counted toward meeting the Administration’s deficit reduction goals. However, as part of transitioning to a reformed international tax system, the President’s plan would impose a one-time transition toll charge of 14 percent on the $1 to $2 trillion of untaxed foreign earnings that U.S. companies have accumulated overseas. The Budget proposes to use the one-time savings from this toll charge to pay for investment in transportation infrastructure.

Certainly, a substantial number of Republicans in Congress would be in agreement that the corporate tax code is too full of "special deductions, credits, and other tax preferences," and that a revenue-neutral tax reform to simplify the tax code and bring down tax rates is a worthy goal. The problems arise when you start digging into the details.

Table 12-3 in the chapter lists about 67 provisions of the corporate income tax that the Obama Administration proposes altering for this grand trade-off. I've created a table of the 10 provisions that would increase federal revenue by more than $1 billion in 2017 (some of the provisions take a year or two to phase in).

This list of corporate tax revenue-raisers, waiting to be traded off for lower rates and tax simplification, raises several questions.

1) As you can see, adding up the 10 provisions in the table would raise an estimated $49 billion in revenue. However, the total revenue raised by all 67 provisions in the table is only $18.9 billion. This arises because many items in the table do not increase tax revenue, but instead spend it. For example, there is $13.5 billion in 2017 in extra tax breaks for various provisions under the category of "Simplification and  tax relief for small business." There is another $11.7 billion for various tax breaks under heading of "Incentives for manufacturing, research, and clean energy." Clearly, the temptation to redistribute the "special deductions, credits, and other tax preferences," rather than ending them, remains strong.

2) As you look more closely at the revenue raisers, many of them fall into a few broad categories. The first three items, for example, have to do with corporations that have international operations. For a quick overview of what the specific proposals mean, you can check the explanations in the budget document. Here, I'll juse make the point that the U.S. is unique among the major economies in that it claims the right to tax the profits of U.S. corporations wherever in the world they are earned. Other countries only tax profits earned within their borders. Of course, this is one reason why U.S. companies sometimes seek to merge with a foreign firm and transfer their official ownership abroad. A foreign-controlled domestic company in the United States is taxed only on its U.S. profits; in contrast, if a company with the same structure is a U.S.-controlled firm, then the U.S. government claims the right to tax its foreign profits as well. This is a real issue for US corporate tax reform in a globalizing economy, and the approach in this budget document bascially just doubles down on going after revenue from abroad.

3) Some of the proposals here seem to be ideas whose time may have come. For example, the LIFO method of accounting for inventories refers to a last-in-first-out approach. Imagine a manufacutring company that buys a set of physically identical inputs over time, but the price of those inputs rises and falls. Thus, when the company pulls an item out of inventory and uses it, should it count as the cost the more recent purchase price, or an older purchase price (say, the FIFO or first-in-first-out method). There are reasonable arguments and well-established accounting rules for letting firms use LIFO and FIFO smooth out their expenses on fluctuating input prices over time. That said, corporations do use these tools to reduce their taxes. The International Financial Reporting Standards (IFRS) do not allow LIFO, which means that many international firms have already changed. In a globalizing economy, this seems like change worth making.

4) As the budget document notes, the Obama administration also proposed a one-time tax on the previously untaxed foreign income, which the budget estimates would raise $56 billion in 2017. As is well-known, U.S. corporations are holding something close to $2 trillion in profits they have earned abroad outside the United States, in part because they would have to pay taxes on those funds if they bring them back to the U.S., and so they keep some flexibility for making future foriegn investments if they wait before repatriating the funds. The budget proposes spending these one-time funds on transportation infrastructure. Again, this proposal assumes that the U.S. government should continue being the only country that seek to tax corporate profits wherever they are earned in the world, not just in the U.S. For those interested in reforming the corporate tax code, it will not feel "revenue-neutral" that the budget is proposing a net of $18.9 billion as tradeoffs for reforming the corporate income tax, while proposing that more than three times as much be taken out of the corporate tax system and spent on transportation.

5) Those who study business income in the U.S know that 90% of all U.S. businesses, now representing about one-third of all business income--and rising--do not fall under the corporate income tax. They are individual proprietorships or so-called S-corporations that instead are taxed under the individual income tax. Tinkering with the corporate income tax does not address this issue of businesses that are finding ways to organize themselves so that they are outside the traditional corporate income tax. For many economists, an important concern is that goal corporate income can often be taxed twice: for example, when a firm pays taxes on profits, and then distributes some of those profits as dividends that are taxed under the individual income tax. The true challenge of corporate tax reform is both to make sure that corporate income is taxed, so that corporations don't function as a huge tax shelter, but also to assure that corporate income is taxed only once, so there is no bias created against the corporate organizational form.

President Obama has put forward one vision of corporate tax reform as far back as 2012, and other proposals are floating around. But judging from how the issue is laid out in this year's budget, a revenue-neutral simplification that resolves the international issues and addresses issues of alternative corporate forms like S-corporations is going to be hard to find.

The Blurry Line Between Competition and Cooperation

I wrote "The Blurry Line Between Competition and Cooperation," a short article published today at the website of the Library of Economics and Liberty.

If you aren't familiar with this libertarian-leaning website, it has several facets worth checking out regardless of your political persuasions. Along with the short articles like my own, the website includes:

• The text of many classical works in political economy, in a searchable format. If I'm trying to track down a quotation from Adam Smith, or John Stuart Mill, Karl Marx, William Stanley Jevons, or many other writers, it's often my go-to starting point. 
• Audio interviews with a wide range of economists, which can be listened to online or downloaded. The most recent is Luis Zingales on costs and benefits of the financial sector, but there are many more. 
• The Concise Encyclopedia of Economics with a wide range of short and readable entries written by well-positioned authors. 
• The EconLog blog, with Bryan Caplan, David Henderson and Scott Sumner as regular contributors. 

Here are the opening paragraphs of my article: 

What is the opposite of "competition"? If you fear that this is a trick question and run off to check a synonym/antonym dictionary, you will find an answer that probably came to mind in the first place: "cooperation." Indeed, many people view economics as morally suspect because they perceive economics as emphasizing competition, rather than the arguably more virtuous approach of cooperation.

When I bump into this concern, I often respond that economics seeks to analyze the world as it is, not as we might prefer it to be. We live in an economy in which consumers often seek the best deal; workers commonly seek the job with the best mixture of work conditions and compensation; and firms seek higher profits. If you want to discuss the real-world economy, diagnose problems and suggest solutions, the presence of competition and self-interest among individuals and firms is typically a useful working assumption. The study of economics and public policy would be quite different in a hypothetical world of perfect cooperators.

This response typically works, in the sense that the questioner is more or less satisfied with having received an answer. However, I fear that it concedes too much ground. Specifically, it risks conceding that competition and cooperation are, indeed, opposites, with vice on one side and virtue on the other. But this is a false dichotomy.

And the closing paragraphs:

If both competition and cooperation are understood as voluntary choices (and, after all, "involuntary cooperation" is an oxymoron), then a fully planned economy would be the opposite of both competition and cooperation. When government dictates prices and quantities, a planned economy eliminates the incentives of market participants—whether suppliers, producers, or consumers—either to compete or to cooperate.

Those of us who self-identify as economists should not wear the terminology of "competition" as a badge of shame, while wistfully contemplating a presumed ideal of cooperation. For the study of economics, as in the real-world economy, the concepts and practices of competition and cooperation are inevitably interlocking.

High School Career and Technical Education

Roughly two-thirds of the US students who graduate from high school in a given spring go on to attend a college or university that fall. The breakdown is that about 40% of all high school graduates attend a four-year college, and 25% attend a two-year college. Along with the 35% of high school graduates that aren't attending college the next fall, there are also those who did not complete high school About 20% of those who attend high school in the US do not graduate on time with a regular diploma--although some of these will later pass a GED or other high school equivalency test. 

How will those who do not attend college, or who end up not finishing college, make a connection to jobs that offer a genuine career path: that is, reasonably stable paychecks, building skills and responsibilities over time, wage raises, and health care and retirement benefits? The most popular answer is that public policy should encourage more of these students should attend college, but I'm skeptical about that answer.

From the student point of view, imagine someone who has struggled to make it through K-12 schooling, perhaps consistently ranking in, say, the 30th percentile of academic performance. That person has for years received a consistent message that academic studies are not their strong point. Telling such a person that the route to adult success involves yet more years of study, this time in a more academically intense environment where they are likely to be closer to the bottom and to struggle even harder, doesn't seem like a positive message to send.

This point is an uncomfortable one to make. It's emotionally much easier to remember true stories about a student who didn't seem to be doing well, but then soared. I like it that the US education system offers a range of multiple chances to those who want to keep trying that path. But it's a hard reality that not all students will soar academically. As a mathematical fact, 50% of all students will always perform below the median, and 25% will fall into the bottom quarter. We need alternative pathways to job and career success that don't assume a college degree is the right path for everyone. 

For example, I've written a number of times on this blog about the need for expanded programs of apprenticeships (for example, here, here, and here). In addition, I regret the trend away from career and technical education at the high school level. The National Center for Education Statistics collects statistics through its Career/Technical Education division. Here's one figure showing trends in the areas where high school students take their credits. Lots of areas are up, but career/technical education (CTE) is down. At a time when one of the major problems of the US economy is connecting those with lower academic skills to decent jobs, this seems like a mistake. My sense is that a lot of high schools are implicitly defining their mission as "pre-college," even while knowing that most of their students will not follow a four-year college path.

Here's another figure showing the breakdown within areas of career/technical education from the National Center for Education Statistics. The big growth areas since 1990 are communications and design, health care, and public services. The biggest drops since 1990 are in business, manufacturing, and (perhaps surprisingly) computer and information services.

There are of course many reasons for the decline in U.S. manufacturing jobs (starting points for discussion are here and here) or for the decline in U.S. rates of entrepreneurship (as discussed here and here). But if fewer high school students are being prepared to consider careers in these areas, then perhaps it shouldn't be a surprise when these areas don't flourish.  

The Moynihan Report: 50 Years Later

Daniel Patrick Moynihan, who died in 2003, was a U.S. Senator from New York for four terms from 1977 to 2001. Before that, he was Ambassador to the United Nations. Before that, he was U.S. Ambassador to India. Back in the 1960s, he held various positions in the Kennedy and Johnson administraions. He was also a Ph.D. sociologist who among his writings included 19 books, leading the newspaper columnist George Will to remark (if I remember correctly) that Moynihan had written more books than most Senators had read.

But in discussing Moynihan's career, the talk inevitably at some point goes to a famous report that he authored a half-century ago in 1965 while working for the Office of Policy Planning and Research
in the Department of Labor, called "The Negro Family: The Case For National Action." (The text of the report is available at the DoL website here, although the tables and figures are not.) Less than a year after the passage of the Civil Rights Act of  1964, Moynihan wrote in the introduction:

In this new period the expectations of the Negro Americans will go beyond civil rights. Being Americans, they will now expect that in the near future equal opportunities for them as a group will produce roughly equal results, as compared with other groups. This is not going to happen. Nor will it happen for generations to come unless a new and special effort is made.

There are two reasons. First, the racist virus in the American blood stream still afflicts us: Negroes will encounter serious personal prejudice for at least another generation. Second, three centuries of sometimes unimaginable mistreatment have taken their toll on the Negro people. The harsh fact is that as a group, at the present time, in terms of ability to win out in the competitions of American life, they are not equal to most of those groups with which they will be competing. Individually, Negro Americans reach the highest peaks of achievement. But collectively, in the spectrum of American ethnic and religious and regional groups, where some get plenty and some get none, where some send eighty percent of their children to college and others pull them out of school at the 8th grade, Negroes are among the weakest.

The most difficult fact for white Americans to understand is that in these terms the circumstances of the Negro American community in recent years has probably been getting worse, not better.

Indices of dollars of income, standards of living, and years of education deceive. The gap between the Negro and most other groups in American society is widening.

The fundamental problem, in which this is most clearly the case, is that of family structure. The evidence — not final, but powerfully persuasive — is that the Negro family in the urban ghettos is crumbling. A middle class group has managed to save itself, but for vast numbers of the unskilled, poorly educated city working class the fabric of conventional social relationships has all but disintegrated. There are indications that the situation may have been arrested in the past few years, but the general post war trend is unmistakable. So long as this situation persists, the cycle of poverty and disadvantage will continue to repeat itself.

The thesis of this paper is that these events, in combination, confront the nation with a new kind of problem. Measures that have worked in the past, or would work for most groups in the present, will not work here. A national effort is required that will give a unity of purpose to the many activities of the Federal government in this area, directed to a new kind of national goal: the establishment of a stable Negro family structure.

This would be a new departure for Federal policy. And a difficult one. But it almost certainly offers the only possibility of resolving in our time what is, after all, the nation's oldest, and most intransigent, and now its most dangerous social problem. What Gunnar Myrdal said in An American Dilemma remains true today: "America is free to chose whether the Negro shall remain her liability or become her opportunity."

Anyone schooled in the ways of political correctness can predict what happened next, even if you have never heard of the Moynihan Report. Moynihan's analysis of the problem and his obvious sympathy with the plight of African-Americans addressing a legacy of government-sanctioned discrimination was ignored. Instead, he was harshly criticized for blaming the victims of discrimination and for being a racist. Sara McLanahan and Christopher Jencks describe the reaction in their essay "Was Moynihan Right?" in the Spring 2015 issue of Education Next. They write:

Moynihan’s claim that growing up in a fatherless family reduced a child’s chances of educational and economic success was furiously denounced when the report appeared in 1965, with many critics calling Moynihan a racist. For the next two decades few scholars chose to investigate the effects of father absence, lest they too be demonized if their findings supported Moynihan’s argument. Fortunately, America’s best-known black sociologist, William Julius Wilson, broke this taboo in 1987, providing a candid assessment of the black family and its problems in The Truly Disadvantaged. Since then, social scientists have accumulated a lot more evidence on the effects of family structure.

The same issue of Education Next includes a group of articles on the state of the American family, timed for the 50th anniversary of the Moynihan report. For example, James T. Patterson offers an overview of the Moynihan report itself, how it was received, and how Moynihan viewed the controversy. A list of the other articles is available here.

Several decades later, Moynihan eventually received considerable credit for the prescience and force of his 1965 arguments, and for his willingness to make those arguments while facing some very ugly rhetoric. But to my knowledge, at least, none of those who so enthusiastically strafed Moynihan's reputation in 1965 took any responsibility for an important subject being pushed off the national radar for the next two decades.

Moynihan's 1965 argument can be broken down into two parts: a claim that family structure was in the process of shifting dramatically, and a claim that this change was injurious to the life prospects of children. The first claim has copious support. The second claim is harder to demonstrate, because disentangling cause and effect is always tricky, but McLanahan and Jencks point to the recent evidence suggesting that it probably holds true as well.

As a starting  point, here's some facts about changes in family structure as presented by McLanahan and Jencks. The percentage of U.S. children under the age of 18 living with an unmarried mother rose sharply from the 1960s up through the mid-1980s.

As they point out, these kinds of comparisons over time need to be made with care. For example, back around 1960 most children living with an unmarried mother had been born to married parents, but the couple had separated, divorced, or the father had died. In addition, in 1960 unmarried cohabitation was rare. Children living with an unmarried mother in one year were often not in that category a few years later, if their mother remarried. As time went on, children born out of wedlock became much more common and cohabitation became more common. In other words, the situation of living with an unmarried mother was not the same experience in 1960 as in 1970 or 1980. As one example, unmarried motherhood spread fastest among those with lower levels of education who were most likely to be in poverty. Also, as McLanahan and Jencks write:

The historical shift from formerly married to never-married mothers has meant that single motherhood usually occurs earlier in a child’s life. Mothers who marry and then divorce typically spend a number of years with their husband before separating. Today, many women become single mothers when their first child is born. The shift to never-married motherhood has probably weakened the economic and emotional ties between children and their absent fathers.

It's tricky to think about how growing up with a single parent might affect the life prospects for a child. For example, it would obviously be foolish just to compare children with single parents and children with two parents, because children with single parents are not an event that is randomly distributed across all other population characteristics. As one of many possible examples, single parents on average have lower education levels, so perhaps differences are traceable to the education level of the parent, not the marital status. Or perhaps a mother is less likely to marry or live with a father who she suspects might be a negative influence on their children. 

But social scientists have come up with a number of more plausible ways to look at causal effects of single parenthood.  Sara McLanahan, Laura Tach, and Daniel Schneider review a number of studies concerning "The Causal Effects of Father Absence" in the Annual Review of Sociology (July 2013, pp, 399–427). For example, one can use statistical techniques to adjust for various observable parental and family characteristics--including characteristics that existed before the child was born.  One can compare across children in a given family, including full-siblings, half-siblings, and unrelated siblings, as well as looking at how events like divorce affect the path that children are on over time. One can look at the difference in the effect of parental death, which can be taken as a random event, and the effect of divorce or separation, which are clearly not random. One can compare across states that have more or less permissive laws about divorce. One can use "propensity score matching," which seeks to compare children who look the same on all other measurable characteristics, but some of whom are growing up with one parent while others are growing up with two. 

The authors look at about four dozen differerent studies of father absence using these techniques and others. Here is part of their summary of their findings across the studies:

We find strong evidence that father absence negatively affects children’s social-emotional development, particularly by increasing externalizing behavior. These effects may be more pronounced if father absence occurs during early childhood than during middle childhood, and they may be more pronounced for boys than for girls. There is weaker evidence of an effect of father absence on children’s cognitive ability.

Effects on social-emotional development persist into adolescence, for which we find strong evidence that father absence increases adolescents’ risky behavior, such as smoking or early childbearing. The evidence of an effect on adolescent cognitive ability continues to be weaker, but we do find strong and consistent negative effects of father absence on high school graduation. The latter finding suggests that the effects on educational attainment operate by increasing problem behaviors rather than by impairing cognitive ability.

The research base examining the longer-term effects of father absence on adult outcomes is considerably smaller, but here too we see the strongest evidence for a causal effect on adult mental health, suggesting that the psychological harms of father absence experienced during childhood persist throughout the life course. The evidence that father absence affects adult economic or family outcomes is much weaker. A handful of studies find negative effects on employment in adulthood, but there is little consistent evidence of negative effects on marriage or divorce, on income or earnings, or on college education.

What changes would help to address to the dissolution of the family that so many children experience as their day-to-day reality? In their Education Next essay, McLanahan and Jencks conclude:

Unmarried parents are not that different from married parents in their behavior. Both groups value marriage, both spend a long time searching for a suitable marriage partner, and both engage in premarital sex and cohabitation. The key difference is that one group often has children while they are searching for a suitable partner, whereas the other group more often has children only after they marry.

Changing this dynamic would require two things. First, we would need to give less-educated women a good reason to postpone motherhood. The women who are currently postponing motherhood are typically investing in education and careers. These women use contraceptive methods that are more reliable, and they use these methods more consistently. Postponing fertility in these ways would also have benefits for women who currently do not do so. They would be more mature when they became mothers, and they would probably do a better job of selecting suitable partners.

Nonetheless, postponing fertility will not solve the problem of nonmarital childbearing unless the economic prospects of the young men who father the children also improve. Women are not likely to marry men whom they view as poor providers, regardless of their own earning capacity. Thus, in addition to encouraging young women to delay motherhood, we also need to improve the economic prospects of their prospective husbands, especially those with no more than a high school diploma. This will not be easy. But it would improve the lives of the men in question, perhaps reduce their level of antisocial behavior, and improve the lives of their children, through all the benefits that flow from a stable home.

I know, I know: Easy to say, hard to do. But when the terrain is difficult, it's useful to know what direction to take.