Building Connections with Active Labor Market Policies

"Passive" labor market policies involve paying money to the unemployed, like with unemployment insurance. "Active" labor market policies involve a range of programs to assist the unemployed with finding jobs. In both categories, the US has long lagged well behind other high-income countries. Chad P. Bown and Caroline Freund review the evidence in "Active Labor Market Policies: Lessonsfrom Other Countries for the United States" (Peterson Institute for International Economics, January 2019. 19-2).

Here's the difference in spending on passive and active labor market policies across countries. Notice that the US is second from the left, above only Mexico in this comparison group of OECD countries.

Not all active labor market policies are created equal. As different policies have been used and then studied in different countries, a body of evidence has built up that is overviewed by Bown and Freund. They write:

"The evidence documented in this paper shows that many other countries deploy “active” labor market policies (ALMPs) that have been more effective than those in the United States. Programs in other countries under review have improved the possibilities of workers and firms matching up with each other’s needs, and when these efforts have fallen short, governments have sometimes created jobs in the face of intractable local conditions. The research demonstrates that job placement services, training and education, wage subsidies, and other adjustment policies have been proven effective in helping workers find employment and stay in the job pool. Although public works programs and direct job creation have also been tried to address the problem, these programs tend to be ineffective in helping workers over the long run. ...

The most common ALMPs are placement services (public employment services [PES] and administration), training, employment incentives, and direct job creation. ...  There is significant variation across the major economies, with the United Kingdom and Germany relying largely on job placement services; Austria, Finland, and Denmark targeting training; Luxembourg and Sweden offering employment incentives; and Hungary, France, and Korea using direct job creation as their main form of assistance.

Here's a table from the authors summarizing the state of knowledge about active labor market policies.

There's a lot of talk in the US about problems faced by workers who have a hard time finding jobs, or who are displaced from their jobs. The menu of policy responses at this point seems to involve either: blame it all on the Chinese and impose tariffs, or have the government guarantee everyone a job. I view both of these options as posturing. Active labor market policies certainly aren't the only step toward building connections between US workers and potential employers, but they could be a useful step. While I don't think such programs would pay for themselves, a substantial part of the cost could be covered by the lower need for other government payments like unemployment insurance, disability, Medicaid, and other programs. Bown and Freund write: 

The United States currently spends about 0.1 percent of GDP on active labor market policies, compared with an average of 0.5 percent of GDP in 31 other OECD countries. Bringing the United States to the average could help stem the decline in labor force participation, return millions of working-age Americans to employment, supporting their well-being and US economic growth.

I try to beat the drum for active labor market policies every now and then. Some previous posts include:

• "Active Labor Market Policies: Time for Aggressive Experimentation" (November 15, 2016) 
• "Improving How Labor Markets Function: Active Labor Market Policies" (December 30, 2016)
• "Addressing Dislocation Costs of Trade: IMF, WTO, WB Weigh In" (April 11, 2017)

How to Reduce Health Care Costs?

The US spends about 18% of GDP on health care. Other high-income countries spend an average of about 11%, Thus, the Society of Actuaries and Henry J. Kaiser Family Foundation have created Initiative 18/11 to consider ways of holding down US heath care spending. A first report from the initiative, "What Can We Do About the Cost of Health Care?" (January 2019), doesn't yet offer proposals for action. But it offers a useful sense of what many of the main targets are likely to be of any serious effort to reduce healthy care costs. Here are some of my own reactions and takeaways from the report.

Although the report doesn't emphasize this point, it's worth noting that 18-11=7, and with a US GDP of about $20 trillion, 7% is $1.4 trillion. If you find yourself wondering why other countries can apparently afford improvements in physical infrastructure or higher support for education or higher social benefits of certain kinds,  part of the reason is that a much lower level of their social resources is going to health care spending. If you wonder why your paycheck seems to go up so slowly, part of the reason is that your employer keeps paying more for you health insurance. My point here isn't that a substantial share of US health care spending is wasteful or even harmful, although that does seem to be true. It's just that output going to health care has a tradeoff of less output available for other uses--even when some of those other uses might do more to improve health.

When thinking about cutting health care spending, and obvious approach is to look at how the money is being spent, and the bulk of health care spending is on those with multiple chronic conditions. The Kaiser report notes:

"Remarkably, 86 percent of health care spending is for patients with one or more chronic conditions—conditions expected to last three months ... Among the chronic population, people with more than one condition account for 71 percent of total spending. The cost of chronic diseases goes far beyond the direct amounts spent on these diseases. In the United States, seven out of every 10 deaths are caused by chronic diseases each year. There are indirect costs through lost productivity and an unmeasurable loss in the quality of life and the loss of ability to perform activities of daily living, such as bathing and eating. For adults, the most prevalent conditions are uncontrolled hypertension (uncontrolled blood pressure) and hyperlipidemia (high cholesterol and high triglycerides). For children, the most common conditions are allergies and asthma."

One way of thinking about chronic conditions is that if they are managed properly (medicine, diet, exercise. whatever is needed),  then health care costs are usually low. But if such conditions are not not managed properly, very expensive episodes of hospitalization become likely.

For example, just looking at noncompliance with taking prescriptions drugs, the report notes:

In a 2011 Consumer Reports survey, one of the leading complaints among primary physicians is that patients do not take the doctor’s advice or follow treatment. For example, although 3.8 billion prescriptions are written every year, more than 50 percent of them are not taken or are taken incorrectly. The cost of noncompliance has been estimated at $290 billion. Also, 125,000 deaths each year are attributed to poor medication compliance.

Interestingly, the report doesn't make an argument that Americans overall live less healthy lifestyles than those in other high-income countries. Yes, obesity is bigger problem in the US. But compared to other high-income countries, the US has a smaller share of smokers and a lower share of elderly. Thus, taken as a whole, it's not clear that US lifestyles and demographic factors are less favorable than other high-income countries.

The report is also bracingly honest about what can be accomplished by going after "indirect" costs. The report notes:

"In its simplest form, the total cost of health care has two components: the direct cost of care and the indirect expenses needed to develop systems and administer the program. According to national health expenditures reports, indirect expenses have been around 15 percent of total spending for more than 25 years. Currently, 8 percent of the total is associated with costs related to administering a program, such as billing and claims payments. The remaining costs are associated with other indirect services, such as research, public health and infrastructure."

Let's say for the sake of argument that we could agree on steps that would have the effect of cutting these indirect expenses from the 15% level of the last 25 years by half, with no effect on the quality of care actually received. Sounds good to me! If we can do it, it certainly seems worth doing. But with health care spending rising at about 4% per year, these cost reduction savings would be cancelled out in about two years--at which point we would face exactly the same health care cost problem that we do now. This is of course not an argument against finding ways to cut health care administrative costs. But it suggests that such changes are only a short-term palliative for the long-term of health care costs. It's certainly not going to get the US from spending 18% of GDP on healthc are to 11%.

The US pays more for health care compared with other countries not because the US is sicker, but because the US pays higher prices for health care services. The report notes: "For example, a 2018 Journal of the American Medical Association (JAMA) study concluded that the major drivers of the increase in health care costs were due to the `prices of labor and goods, including pharmaceuticals, and administrative costs.' They also noted that utilization rates in the United States were similar to those in other countries."

The specific study is "Health Care Spending in the United States and Other High-Income Countries," by Irene Papanicolas, Liana R. Woskie, and Ashish K. Jha (JAMA, March 13, 2018). From the "findings of that study:

The US did not differ substantially from the other countries in physician workforce (2.6 physicians per 1000; 43% primary care physicians), or nursing workforce (11.1 nurses per 1000). The US had comparable numbers of hospital beds (2.8 per 1000) but higher utilization of magnetic resonance imaging (118 per 1000) and computed tomography (245 per 1000) vs other countries. The US had similar rates of utilization (US discharges per 100 000 were 192 for acute myocardial infarction, 365 for pneumonia, 230 for chronic obstructive pulmonary disease; procedures per 100 000 were 204 for hip replacement, 226 for knee replacement, and 79 for coronary artery bypass graft surgery). Administrative costs of care (activities relating to planning, regulating, and managing health systems and services) accounted for 8% in the US vs a range of 1% to 3% in the other countries. For pharmaceutical costs, spending per capita was $1443 in the US vs a range of $466 to $939 in other countries. Salaries of physicians and nurses were higher in the US; for example, generalist physicians salaries were $218 173 in the US compared with a range of $86 607 to $154 126 in the other countries.

This report from Kaiser Society of Actuaries and Kaiser Foundation the is about setting the stage for further discussion, not about concrete recommendations. While such discussions are certainly needed, I confess that the hints about possible solutions don't fill me with great hope. There's talk about how future health care technologies might be cheaper and money-saving, rather than expensive and expenditure-increasing. Maybe! There's talk about how certain kinds of budgeting and incentives might focus more on improving health outcomes, and thus reduce the need for care. Sounds good!

But I feel as if I've been hearing similar arguments for several decades, about how managed care would alter incentives of health care providers, and new technologies might help drive down costs. Across the high-income countries, there does seem to have been slower growth in the rate of health care spending starting back around 2005.  But with all of that said, the fact remains that the US is spending 18% of GDP on health care.

As health care economists like to note, every dollar of US health care spending is income to someone. Any steps that reduce the income received by someone will lead to protests. In a broad social sense, reducing health care spending from 18% to 11% of GDP would involve a very large shift of (mostly) well-paid workers to other jobs, with industries that provide supplies for health care receiving less revenue, and facilities devoted to health care being shifted to other uses. The build-up of US health care spending to 18% of GDP has taken decades, and a substantial reduction from that level will involve disruptive and controversial changes. 

Some Puzzles About Asset Returns in the Long Run

It can be hard to draw broad lessons about macroeconomics from the experience of one country alone, or from the experience of one or two recessions. Thus, a group of researchers including Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor have been working to compile macroeconomic and financial data for 16 high-income countries going back to 1870.  Alan Taylor provides a readable overview of several puzzles that emerge from the long-run financial data in "The Rate of Return on Everything" (NBER Digest, December 2018, pp. 20-23).

(The detailed research behind this short article is available as National Bureau of Economic Research Working Paper #24112: Ò. Jordà, K. Knoll, D. Kuvshinov, M. Schularick, and A. Taylor, "The Rate of Return on Everything, 1870–2015," December 2017. It's also available as a Centre for Economic Policy Research Discussion Paper #12509: Jordà, O, K Knoll, D Kuvshinov, M Schularick, and A M Taylor (2017), “The Rate of Return on Everything, 1870–2015.” A short readable overview of the work that is very similar to the version I'm referring to here, with the same title but listing  Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan Taylor as the authors appeared at the VOX website on January 2, 2018).

#1 The Housing Puzzle

In general, economists would expect that assets with more risk--that is, more likely to rise or fall over time--will tend to have higher returns on average. From the standpoint of investors, the higher returns are needed to make up for the higher risk. This logic suggests that over the long run, a risky asset with volatile prices like corporate stock should have a higher average rate of return than a less risky asset with less volatile prices like housing. But that doesn't seem to be true. The blue line shows returns to housing, while the black line shows returns to corporate stock across the 16 countries in this sample.. Corporate stock is more volatile, but the average rates of return are quite similar.



Why might this pattern hold true? One possibility is that the risks for housing are higher than they at first appear, because it's harder to diversify the risks of owning housing, and perhaps also because it's harder to buy and sell housing quickly or in incremental chunks when prices change. But these factors don't seem nearly enough to explain the housing puzzle.

#2 The "Safe Rate" Puzzle

A lot of theories in finance and macroeconomics start with idea of a "safe" investment that pays a low rate of return but also has low risk. A common example would be investing in US Treasury debt, where the risk of default is near-zero. The theory then discusses how the safe assets might be combined with riskier assets. The puzzle is that "safe" assets like government debt actually can have quite volatile rates of return, once factors like inflation are taken into account. Here's a figure showing international returns on government debt.

For a concrete example, think about US experience since the 1970s. When inflation went way up in the 1970s, it mean that those who were holding government debt paying a low fixed rate were experiencing negative real returns for a time. The nominal rates paid on government debt rose by the early 1980s, but then when inflation declined substantially, those holding the "safe" asset for a time had substantially positive real returns for a time. Since then, a combination of declining nominal interest rates and low inflation have meant a steady decline in the real rate of return on "safe" assets. In real terms, the "safe" rate doesn't look all that safe.

Indeed, if you look at the "risky" assets like housing and corporate stock, but focus on moving averages over any given ten-year period rather than annual returns, the returns on the "risky" assets actually look rather stable.

#3 The r > g Question

If wealthy people can invest and receive a rate of return r, while the economic grows at a slower rate g, then wealth might grow faster than the economy over time (at least if wealthy people don't spend all of the returns on wealth), leading to greater inequality of wealth. This was a common interpretation of the work of Thomas Piketty in Capital in the Twenty-First Century on causes of income and wealth inequality a few years back. The findings here are that returns on risky assets like stocks and housing are often twice as large as rates of economic growth, or more.

But interestingly, Piketty himself doesn't view this r>g dynamic as central to the processes that generate wealth inequality. In an article her wrote for the Winter 2015 issue of the Journal of Economic Perspectives, "Putting Distribution Back at the Center of Economics: Reflections on Capital in the Twenty-First Century," Piketty commented:

"[T]he way in which I perceive the relationship between r > g and wealth inequality i soften not well-captured in the discussion that has surrounded my book—even in discussions by research economists. ... I do not view r > g as 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. ... I certainly do not believe that r > g is a useful tool for the discussion of rising inequality of labor income: other mechanisms and policies are much more relevant here, for example, the supply and demand of skills and education.  ...  The gap between r and g is certainly not the only relevant mechanism for analyzing the dynamics of wealth inequality. As I explained in the previous sections, a wide array of institutional factors are central to understanding the evolution of wealth. Moreover, the insight that the rate of return to capital r is permanently higher than the economy’s growth rate g does not in itself imply anything about wealth inequality. Indeed the inequality r > g holds true in the steady-state equilibrium of most standard economic models ..."

What are some of the main factors that affect the rise or fall of wealth inequality over time? Examples would include taxes on wealth, the extent to which wealth is saved or consumed, and even the birth and death rates of the population, which affects how long concentrations of wealth will stay together and how many slices they will be divided into when passed to a new generation. There are questions about the extent to which whether the new fortunes being created in businesses around the globe will displace earlier fortunes, and whether the new fortunes will be long- or short-lived. There are also events of history like World Wars, and events of politics like surges of populist sentiment. For more on these topics, see "Piketty and Wealth Inequality" (February 23, 2015), or the four-paper symposium on these issues in the Winter 2015 issue of the Journal of Economic Perspectives.

Why Did Simon Kuznets Want to Leave Military Spending out of GDP?

Simon Kuznets (Nobel 1971) usually gets the credit for doing as much as anyone to organize our modern thinking about what should be included in GDP, or left out. But I had not known that Kuznets apparently argued for leaving military spending out of GDP, on the grounds that it wasn't actually "consumed" by anyone, but should instead be treated as an intermediate input that supported production and consumption. Here's how Hugh Rockoff tells the story in his essay, "On the Controversies behind the Origins of the Federal Economic Statistics," in the Winter 2019 issue of the Journal of Economic Perspectives. [Full disclosure: I work at JEP as Managing Editor.]  Rockoff writes:

Military spending presented another problem. In one of his last discussions of national income and product before US entry in World War II, Kuznets (1941, pp. 19–20) explained that his estimates included “dreadnoughts, bombing planes, poison gas, and patent medicines because they are rated economic goods in our country today,” even though they “might well be considered worthless and even harmful” in a society organized differently. In a footnote, Kuznets (p. 31, fn. 5) used an analogy with private spending to buttress his case for including military expenditures: “If the activities of the private police used by many large corporations are productive, why not those of the municipal police? And if of the domestic police, why not of the international police, i.e., the armed forces of the nation?” During World War II, however, Kuznets (1945) modified his thinking. He argued that military spending should be counted in national product during a time of total war, but it should be excluded during peacetime because military spending was then an intermediary good for producing a flow of consumption to consumers. Other economists, including decisively those at the Department of Commerce, thought otherwise (Gilbert, Staehle, Woytinsky, and Kuznets 1944).

A number of economists, however, have found Kuznets’s concept of a Peacetime National Income to be attractive. Higgs (1992), for example, argued that the then-current interpretation of the impact of World War II on the American economy, that it created unprecedented prosperity, was reversed when one used Kuznets’s peacetime concept rather than the conventional measure. Higgs even took exception to Kuznets’s decision to include some military durables such as aircraft in investment because Kuznets thought that they could later be turned to peacetime purposes. 

In retrospect, a number of concerns weighed against adopting Kuznets’s concept of peacetime national product. One reason, as Coyle (2014, p. 20) suggests, was the rise of Keynesian economics. In principle, one could use Kuznets’s peacetime version of national product to analyze the macroeconomy, but the conventional measure fit more smoothly into the simple Keynesian model taught to a generation of economics students in Samuelson and other textbooks. Perhaps the most important reason for rejecting Kuznets’s concept, however, was the Cold War. In his famous study of productivity, Kendrick (1961, p. 25) chose to include all defense spending in his estimates of national product partly on the grounds that “national security is at all times [Kendrick’s italics] a prime objective of economic organization.” In political terms, excluding national defense from national product would create the appearance that the government’s statistical agency was siding with the critics of America’s defense budget. Of course, no one was required, as Kuznets had pointed out, to use only one measure of aggregate product. To the contrary, Kuznets thought that it would be best to produce a series of measures, some specialized for one purpose and some for another. But as we have learned, public attention does tend to focus on a single measure of national product, so the decision to ignore Kuznets’s peacetime concept may have had important consequences.

I find myself in agreement with the views of Kuznets expressed back in 1941, that if private security guards and municipal police are in GDP, the military should be, too.

But more broadly, the dispute serves as a useful reminder that GDP includes some categories of expenditures that society would have preferred not to make. For example, GDP includes all measures for home security and corporate security--not just guards but also locks, bars, and electronic measures. In addition, GDP includes cleaning up after pollution spills and natural disasters, although it would certainly have been preferable if such events had not happened in the first place. It would also be socially beneficial if people got more exercise and at healthier diets, and as a result a substantial proportion of health care spending didn't need to happen.

For other comments on the relationship between GDP and social welfare, readers might be interested in the well-known comments from "Robert Kennedy on the Shortcomings of GDP in 1968" (January 30, 2012). My own sense is that economists are well-aware of the shortcomings of GDP--indeed, probably better aware of the shortcomings than many critics. But economists also point out that on a wide array of dimensions, people who live in societies with higher GDP tend to live better lives. For samples of these arguments, see "Why GDP Growth is Good" (October 11, 2012)  and "GDP and Social Welfare in the Long Run" (April 6, 2015).

Why Have Other Countries Been Dropping Their Wealth Taxes?

A wealth tax is what it sounds like: a tax imposed not on income, but on wealth. The standard economic definition of wealth includes both nonfinancial assets like real estate and financial assets like stocks and bonds. Thus, a wealth tax doesn't care if the value of someone's wealth went up or down in the last year/ It is not a tax on the transfer of wealth to others, like an inheritance tax or a gift tax. It is just imposed on the amount of wealth.

In the US, property taxes are a cousin of a part of a broader wealth tax, in the sense that they are imposed annually on the value of a property, whether the value rises or falls. But they are not at true wealth tax in the sense that they don't differentiate between someone who own their home debt-free--and thus all the value of the home is wealth--and someone who is still paying off the mortgage, where only the equity you have in your home is wealth. The inheritance tax is also a form of a wealth tax.

Back in 1990, 12 high-income countries had wealth taxes. By 2017, that had dropped to four: France, Norway, Spain, and Switzerland (In 2018, France changed its wealth tax so that it applied only to real estate, not to financial assets.)  The OECD describes the reasons why other countries have been dropping wealth taxes, along with providing a balanced pro-and-con of the arguments over wealth taxes, in its report The Role and Design of Net Wealth Taxes in the OECD (April 2018).

For the OECD, the bottom line is that it is reasonable for policy-makers to be concerned about the rising inequality of wealth and large concentrations of wealth But it also points out that if a country has reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax.  The report notes: "Overall ... from both an efficiency and an equity perspective, there are limited arguments for having a net wealth tax on top of well-designed capital income taxes –including taxes on capital gains – and inheritance taxes, but that there are arguments for having a net wealth tax as an (imperfect) substitute for these taxes."

Here, I want to use the OECD report to dig a little deeper into what wealth taxes mean, and some of the practical problems they present.

The most prominent proposals for a US wealth tax would apply only to those with extreme wealth, like those with more than $50 million in wealth.  However, European countries typically imposed wealth taxes at much lower levels of wealth. Here's a table showing how much wealth is exempt from the wealth tax in European countries. Clearly, most countries with such taxes were applying them to wealth well below $50 million.

It's interesting, then, that in these European countries the wealth tax generally accounted for only a small amount of government revenue. The OECD writes: "In 2016, tax revenues from individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland ... Switzerland has always stood out as an exception, with tax revenues from individual net wealth taxes which have been consistently higher than in other countries ..." However, Switzerland apparently has no property tax, and instead uses the wealth tax as a substitute.

The fact that wealth taxes collect relative little is part of the reason that a number of countries decided that they weren't worth the bother. In addition, it suggests that a US wealth tax which doesn't kick in until $50 million in wealth or more will not raise meaningfully large amounts of revenue.

Why do wealth taxes imposed on what seem to be quite low levels of wealth collect so little revenue in various European countries, especially during the last few decades when high-wealth individuals as a group have done pretty well? The answer seems to be that when countries impose a wealth tax, they often typically create a lot of exemptions for certain kind of wealth that aren't covered by the tax. Each of these exemptions has a reasonable-sounding basis.  But every exception also creates a potential loophole.

For example, a number of common exemptions are based on "liquidity" problems, which in this context refers to the idea that we don't want people to have to sell their homes to pay the wealth tax, and we don't want family businesses or farms that are maybe hitting a tough patch to have to be sold off because of the wealth tax. Thus, many European countries exempt a primary residence from the wealth tax (and instead apply a property tax).

Countries also often exempt the value of a business in which you are actively working, which of course means a potentially voluminous set of rules for what "actually working" means. As the OECD notes: "For the business asset exemption to apply, rules typically require that real economic activities are being performed (possibly excluding activities such as the management of movable or fixed assets, e.g. Spain), that the taxpayer performs a managing role, that income derived from the activity is the main source of the taxpayer’s revenue and/or that the taxpayer owns a minimum percentage of shares in the company (e.g. 25% in France and Sweden; 5% in Spain)."

Another common exemption is that wealth tax is usually not applied to the value of pensions and retirement savings. One can sympathize with this, but also recognize that it leads to potential issues. As the OECD notes: "Pension assets typically get full relief under net wealth taxes. ... However, this creates inequities between different taxpayers, raises fairness concerns, and creates tax planning opportunities. .... "

What other incentives does a wealth tax create? Here are some examples that often are not included int he discussion:

1) While we often think of a wealth tax as being applied to those who have already "made it" and accumulated a fortune, it's worth remembering that when a small- or medium-sized business is trying to get established, or going through hard times, it may lead to a situation where the overall value of the asset is substantial, but profits may be near-zero or even negative for a time. But at least in theory, a wealth tax would still be owed. As the OECD report notes:  

"Under a net wealth tax, however, if income is zero or negative, the tax liability will still be positive if the capital value of the assets remains positive. In practice, new entrepreneurs which tend to generate low, or even negative, profits in their first few years of operation would still face a wealth tax liability. Thus, a heavy net wealth tax which is unlinked to income might discourage entrepreneurship relative to an income tax with (perfect) loss offset."

2) A wealth tax will tend to encourage borrowing. Total wealth is equal to the value of assets minus the value of debts. Thus, one way to avoid a wealth tax is to borrow a lot of money, in ways that may or may not be socially beneficial. The OECD writes: "[D]ebt deductibility provides incentives to borrow and can encourage tax avoidance. If the wealth tax base is narrow, taxpayers will have an incentive to avoid the tax by borrowing and investing in exempt assets or – if debt is only deductible when incurred to acquire taxable assets – taxpayers will have an incentive to invest part of their savings in tax-exempt assets and finance their savings in taxable assets through debt." 

3) To get a fair picture of a wealth tax, one needs to look at it in the context of all the other taxes that exist, along with different situations that arise. It's quite possible for there to be situations where when the wealth tax is added, someone who saves more will actually reduce their wealth. The OECD notes: "In France and Spain, METRs [marginal effective tax rates] reached values above 100%, which means that the entire real return is taxed away and that by saving people actually reduce the real value of their wealth." Indeed, France recently decided to apply its wealth tax just to certain kinds of property wealth, not financial wealth, for this reason.  Indeed, many wealth taxes have provisions that if the combined tax burden gets too high, then the wealth tax gets scaled back. Again from the OECD : 

"Ceiling provisions or tax caps are common features of net wealth taxes. These often consist in setting a limit to the combined total of net wealth tax and personal income tax liability as a maximum share of income. They are used to prevent unreasonably high tax burdens and liquidity constraints requiring assets to be sold to pay the net wealth tax. In France, the wealth tax ceiling (often referred to as the “bouclier fiscal”) limits total French and foreign taxes to 75% of taxpayers’ total income. If the percentage is exceeded, the surplus is deducted from the wealth tax. In Spain, the aggregate burden of income tax and net wealth tax due by a resident taxpayer may not exceed 60% of their total taxable income."

4) A wealth tax is typically at a fairly low rate, like 1-2%, in recognition of the fact that it will be imposed every year. But if a wealthy person is investing in a way that has low risk and low returns, this wealth tax could completely swallow up low return,  while having no effect on higher returns. In general, setting up a situation where people receive no gain from saving is not usually regarded as a good set of incentives. The OECD writes:

"[A] tax on the stock of wealth is equivalent to taxing a presumptive return but exempting returns above that presumptive return. Where the presumptive return is set at the level of or at a level close to the normal - or risk-free – return to savings, a wealth tax is economically equivalent to a tax on the normal return to savings, which is considered to be inefficient. Indeed, the taxation of normal returns is likely to distort the timing of consumption and ultimately the decision to save, as the normal return is what compensates for delays in consumption. As discussed below, it is also unfair that the wealth tax liability does not vary with returns, which implies that the effective wealth tax burden decreases when returns increase."

On the other side, it is sometimes argued that a wealth tax will encourage the wealthy to make more productive use of their wealth:

"For instance, if a household owns land which is not being used and therefore does not generate income, no income tax will  be payable on it. However, if a wealth tax is levied, the household will have an incentive to make a more productive use of their land or to sell it to someone who will ... The argument here is that wealth taxes do not discourage investment per se but discourage investments in low-yielding assets and reinforce the incentives to invest in higher-yielding assets because there is an additional cost to holding assets, which is not linked to the return they generate."

5) A wealth tax will encourage the spawning of ownership structures where people control assets, but do not technically "own" them. A common example is when assets are owned in a trust, or some kind of nonprofit. The possibilities for controlling and benefiting from wealth without technically "owning" it are even great for assets that can be held in other countries across the international economy. If there is a heaven for tax lawyers, it's a place where they get to sit around and invent legal arrangements for shielding wealth. 

6) The OECD notes: "Human capital is always exempt under net wealth taxes. This results from a number of considerations, including the fact that human capital is very difficult to value, that it is not

directly transferrable or convertible into cash, and that there is uncertainty about the
durability of its value. Therefore, a wealth tax lowers the net return on real and financial assets relative to the returns on investments in human capital. Thus, wealth taxes encourage investment in human capital, which may in turn have positive effects on growth. Human capital is a critical driver of long-run economic growth. This implies that a wealth tax may be less harmful to economic growth than commonly believed as it can encourage a substitution from physical to human capital formation ... "

7) A wealth tax may not seem especially fair if applied across people who started in similar circumstances. As one example, imagine two adults who split a large inheritance. One heir spends the money. The other heir tries to invest, with some success, in creating new technology and businesses and jobs. The spender depletes the inheritance and thus avoids the wealth tax. More broadly, consider wealth from a variety of sources: inherited financial wealth, inheriting a family business, inheriting a family-owned piece of property, starting and running a business, investing in businesses run by others, investing in property that increases in value over time, wealth from having a patent on an invention, wealth from producing a book or music or movie with high sales. A wealth tax treats all of these the same. 

8) The practicalities of imposing a wealth tax can be nontrivial. It means updating the value of assets and debts every year. If the assets are something that is bought and sold in financial markets, like shares of stock, then updating the value is easy. But updating the value of an expensive house or piece of property on an annual basis isn't easy. Updating the value of art or jewelry owned by a wealthy person isn't easy. Updating the value of a privately owned business isn't easy. Updating the current value of assets held in other countries can be hard, too In general, it's a lot easier to track flows of income than it is to measure changes in asset values.  

To me, many of the endorsements of a wealth tax feels more like expressions of righteous exasperation than like serious and considered policy proposals. Many of those who favor a wealth tax tend to favor a more European-style capitalism (and no, I don't think of any country in western Europe as "socialist") that places a higher value on economic equality. But when those who favor your goal of greater economic equality have been steadily deciding that the wealth tax isn't worth the trouble, and that other policy tools are more effective in reaching the goal, it's probably useful to pay attention. 

58 Episodes of Hyperinflation (Venezuela is #23)

Steve Hanke has devoted considerable effort to building up data on hyperinflations during the last century or so. He offers a quick overview of this work in Forbes (January 20, 2019). Below is his list of hyperinflations. When it comes to Venezuela, he writes:

Now, let’s turn to the world’s only current hyperinflation: Venezuela. It ranks as the 23rd most severe. Today, the annual rate of inflation is 120,810%/yr. While this rate is modest by hyperinflation standards, the duration of Venezuela’s hyperinflation episode, as of today, is long: 27 months. Only four episodes of hyperinflation have been more long-lived.

Here's the table of all 58 hyperinflations:

For those who want more, here's an earlier discussion of "Hyperinflation and the Venezuela Example" (April 28, 2016). Here's a discussion of "Hyperinflation and the Zimbabwe Example" (March 5, 2012). And I offered an earlier discussion of the list from Hanke and Krus in "A Systematic List of Hyperinflations" (August 21, 2012).

The Puzzle of the US Productivity Slowdown

In the long-run, the average standard of living in an economy is determined by the average productivity of its workers. For example, Paul Krugman started Chapter 1 of his 1990 book, The Age of Diminished Expectations, by stating: "Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker."

Thus, it matters a lot that US productivity growth slowed down back around 2005, even before the start of the Great Recession, and that we don't really understand why. The Congressional Budget Office laid out the issues in its recent report The Budget and Economic Outlook: 2019 to 2029 (January 28, 2019). CBO pointed out that productivity growth--which it refers to by its more formal moniker of TFP for "total factor productivity"--seems to be higher or lower for periods of some years, with abrupt transitions between these periods.

"Over longer periods, however, years of comparatively steady TFP growth tend to be followed by rather abrupt transitions to years with steady but substantially different growth. For example, estimated trend growth in TFP remained  relatively strong in the 1950s and 1960s, slowed considerably from the early 1970s to the mid-1990s, and resurged in the late 1990s and early 2000s. Around 2005, a few years before\ the recession and financial crisis that began in 2007, TFP growth again slowed in many industries and throughout the international economy. In CBO’s estimate, TFP growth in the domestic nonfarm business sector was only about one-third as rapid during the 2006–2017 period as it had been from 1996 to 2005."

In the aftermath of the Great Recession, CBO has been scaling back its productivity forecasts. The top line show the CBO productivity forecasts in 2012. The other lines show how the forecasts were reduced in 2014, 2016, 2018, and now in 2019.

Why is US productivity growth slowing down? CBO is forthright in admitting: "[E]xtensive research has failed to uncover a strong, compelling explanation either for the slowdown or for its persistence ..." The report runs through a number of potential explanations, before knocking each one on the head.

Is the productivity slowdown a matter of measurement issues?

"Even though mismeasurement of economic phenomena is widespread and persistent, measurement issues do not appear to have been substantially worse since 2005 than they were in the past and probably account for at most a small portion of the slowdown."

Is the productivity slowdown a result of slower growth feeding back to reduced productivity growth?

"The slower growth of the labor force and of aggregate demand in the aftermath of the recession resulted in relatively modest demand for capital investment, slow turnover of capital stock, and slow introduction of new technologies in new plants and equipment. Nevertheless, there is little evidence of a backlog of technology that exists but is not raising output and productivity through its effect on capital stock, which suggests that slower economic growth did not feed back strongly into TFP ...

Is it a result of less human capital for US workers, either as a result of less experience on the job or reduced growth in education?

"Highly skilled and well-educated baby boomers are retiring, and the educational attainment of younger cohorts only modestly exceeds that of their predecessors—two demographic effects that could be restraining TFP growth. Higher-skilled workers tend to continue working longer than their predecessors, however, and younger cohorts made especially strong gains in educational attainment during the recession and the ensuing slow recovery. Both developments have tended to improve the average skill level of the aggregate labor force. As a consequence, growth of the estimated quality of the aggregate labor force since 2005 has been only moderately slower than growth over the preceding 25 years, and that slowdown has played at most a minor role in the overall slowdown in TFP growth."

Is the problem one of overregulation?

"Declining dynamism in many industries, possibly exacerbated by increasing regulatory constraints, could be contributing to slower growth in TFP. Regulatory restrictions on homebuilding in denser, high-productivity urban regions could also be slowing TFP growth. Such problems have been developing slowly over time, however, and are difficult to associate with an abrupt slowdown in TFP growth around 2005."

Is the scientific potential for long-term innovation declining?

"Some researchers believe that long-term innovation may be slowing as well and that the economy is `running out of ideas.' The costs of research and innovation are increasing, they argue, and the resulting new ideas are not as economically significant as past innovations. Again, no evidence exists of an abrupt change around 2005 connected to such developments. Moreover, other, more optimistic researchers conclude that the pools of potential innovators and the potential market for innovative products are now global, that research tools have greatly improved and communication of innovations has become much more rapid, and that major advances in technology can continue to be expected in the future, though they may diffuse through industry rather slowly."

When it comes to productivity growth, the great irony in our public discourse is that it's common to hear concerns that there is likely to be both too little of it and too much of it. The concern over too little productivity growth is that without productivity growth we won't have the economic strength both to offer job opportunities and rising wages to American workers--along with having the economic strength to devote resources to environmental protection, health and education, assisting the poor, and other issues. The concern over too much productivity growth is that a combination of robots and artificial intelligence will be so ultra-productive that they will greatly diminish the number of jobs for humans.

Of course, the scenarios of no-productivity-growth and the ultra-productivity-growth are not both going to happen. Personally, I'm considerably more worried about the the problems of slow growth.