Skip to: Content
Skip to: Site Navigation
Skip to: Search


Donald Marron

Gold bars are displayed in the Austrian Gold and Silver Separating Plant Oegussa in Vienna in this June 2009 file photo. Rather than thinking of themselves as builders or architects, entrepreneurs should think of themselves as prospectors in search of gold, Dr. Cornwall writes. (Leonhard Foeger/Reuters/File)

The entrepreneur as prospector

By Guest blogger / 10.29.12

When first starting a new business, entrepreneurs are not well served when they view themselves as builders or architects.  That is the wrong frame of mind.

When entrepreneurs enter the market with a predetermined view of what they are going to build or design they run the risk of creating a business that does not really fit with what the market wants.

Steve Blank, successful entrepreneur and author, cautions entrepreneurs to learn the difference between the searching stage of launching a new business and the executing stage.  ( Continue… )

From left, Per Krusell, Staffan Normark, Peter Gardenfors and Tore Ellingsen of the Swedish Royal Academy of Sciences present the winners of the Nobel Memorial Prize in Economic Sciences, in Stockholm, Sweden Monday. The recipients, Lloyd Shapely and Alvin Roth, are much-deserving of the prize, Marron writes. (Henrik Montgomery/Scanpix Sweden/AP)

Shapley and Roth get the Nobel Prize for economic engineering

By Guest blogger / 10.15.12

A much-deserved Nobel prize today for Lloyd Shapley and Alvin Roth for their theoretical and practical work on designing markets. In particular, matching markets where you don’t have prices to help you.

The Royal Swedish Academy of Science released a very readable account of their contributions here. Here’s the introduction:

This year’s Prize to Lloyd Shapley and Alvin Roth extends from abstract theory developed in the 1960s, over empirical work in the 1980s, to ongoing efforts to find practical solutions to real-world problems. Examples include the assignment of new doctors to hospitals, students to schools, and human organs for transplant to recipients. Lloyd Shapley made the early theoretical contributions, which were unexpectedly adopted two decades later when Alvin Roth investigated the market for U.S. doctors. His findings generated further analytical developments, as well as practical design of market institutions.

Traditional economic analysis studies markets where prices adjust so that supply equals demand. Both theory and practice show that markets function well in many cases. But in some situations, the standard market mechanism encounters problems, and there are cases where prices cannot be used at all to allocate resources. For example, many schools and universities are prevented from charging tuition fees and, in the case of human organs for transplants, monetary payments are ruled out on ethical grounds. Yet, in these – and many other – cases, an allocation has to be made. How do such processes actually work, and when is the outcome efficient?

Along with his colleague David Gale, Shapley provided theoretical answers to these questions based on the idea of finding stable allocations (i.e., allocations in which no one would later have an incentive to change their mind). Roth then studied how those answers apply in real markets, e.g., designing algorithms to match doctors to hospitals.

Roth also blogs at the aptly-named Market Design. What did he write about yesterday? How Nobel Prices correlate with chocolate consumption.

P.S. For a moving example of how well-designed matching markets improve human lives, see this post about kidney exchanges.

Republican presidential candidate and former Massachusetts Gov. Mitt Romney campaigns in front of The Golden Lamb Inn and Restaurant in Lebanon, Ohio Saturday. (Charles Dharapak/AP)

Five things you should know about Mitt Romney’s '$5 trillion tax cut'

By Guest blogger / 10.15.12

You’ve probably heard claims that Mitt Romney wants to cut taxes by $5 trillion. Here are five things you should know about that figure:

1. $5 trillion is the gross amount of tax cuts he has proposed, not the net impact of all his intended tax reforms.

Governor Romney has been very specific about the taxes he would cut. Most notably, he would reduce today’s individual income tax rates by one-fifth (so the 10 percent bracket would fall to 8 percent, the 35 percent to 28 percent, etc.) and reduce the corporate income tax rate from 35 percent to 25 percent. In addition, he would eliminate the alternative minimum tax (AMT), the estate tax, the taxes created in 2010’s health reform act, and taxes on capital gains, dividends, and interest for incomes up to $200,000 ($100,000 for singles). The $5 trillion figure reflects the revenue impact of all those cuts. 

But Romney has also said that he intends his reforms to be revenue-neutral, with the specified revenue losses being offset by a combination of economic growth and unspecified cuts in deductions and other tax preferences. The net impact of his reforms would undoubtedly be less than $5 trillion, perhaps much less if he’s aggressive in going after tax breaks or willing to compromise on some of his other tax reform goals (e.g., not raising taxes on investment income). Without any details about what he would do, however, we can’t measure the net revenue impact of his ideas.

2. $5 trillion is a 10-year extrapolation from a TPC estimate for 2015.

TPC has estimated that the gross tax cuts proposed by Romney would amount to $456 billion in 2015. Budget debates in Washington often focus on ten-year periods, so commentators have coalesced around a natural, if imprecise, extrapolation: multiply by 10 and round up because of a growing economy. Result: $5 trillion over ten years.

3. $5 trillion does not include the impact of permanently extending many expiring tax cuts, including those from 2001 and 2003.

In budget parlance, the $5 trillion is measured against a current policy baseline, not a current law one. TPC’s current policy baseline assumes that many expiring tax cuts, including the 2001 and 2003 cuts, the AMT patch, the current version of the estate tax, and the tax credits enacted or expanded in 2009 will all be extended permanently. Romney proposes to extend all of these except the 2009 credits. Because it is measured against current policy, the $5 trillion figure does not include the revenue impact of any of those extensions (but does include a small revenue increase from expiration of the credits).

The current law baseline assumes all tax cuts expire as scheduled yielding almost $5 trillion more revenue than does current policy. Relative to current law, Romney’s tax proposal would thus be roughly a $10 trillion gross tax cut. (The same issue arises with President Obama’s tax proposals, which we estimate amount to a $2.1 trillion net tax increase relative to current policy, but a $2.8 trillion net tax cut relative to current law.)

4. $5 trillion includes more than $1 trillion in gross tax cuts for families earning $200,000 or less.

Governor Romney’s specified tax cuts would go primarily to high-income taxpayers for a simple reason: they pay a large share of taxes and thus get a large benefit from a proportional reduction in tax rates. But that doesn’t mean that all the tax cuts go to top earners. Middle- and upper-middle income taxpayers would also get a gross tax reduction because of the reduction in tax rates, the elimination of taxes on capital gains, dividends, and interest for low and middle incomes, and, for some, the elimination of the AMT. Those gross tax cuts amount to more than $1 trillion over ten years.

5. $5 trillion includes around $1 trillion in gross tax cuts for corporations.

Cutting the corporate income tax rate from 35 percent to 25 percent would lower corporate tax revenues by roughly $1 trillion over the next decade. Little-discussed in the current debate is whether and how Governor Romney would offset this revenue loss.

As he has rightly noted, corporate taxes are ultimately borne by people, including workers and shareholders. Most of the corporate rate reductions would ultimately benefit high-income taxpayers since they own more investment assets and earn higher labor income. But about two-fifths of the benefit would go to low-, middle-, and upper-middle income workers and investors.

Bottom line: Governor Romney has proposed about $5 trillion in specific, gross tax cuts over the next decade relative to current policy, most but not all of which would go to high-income taxpayers. He has also promised to offset a substantial portion of those cuts—presumably in the trillions of dollars—by reducing deductions and other tax breaks, primarily for high-income households. Lacking any specifics, however, we can’t know what net tax cut, if any, he proposes.

In this September 2012, file photo, job applicants wait for the opening of a job fair held by National Career Fairs in Fort Lauderdale, Fla. Friday's job numbers were so good that conspiracy-mongerers are suggesting the BLS cooked the numbers to help President Obama get re-elected, Marron writes. (Lynne Sladky/AP/File)

A good jobs report

By Guest blogger / 10.05.12

Today’s jobs data exceeded expectations. Payrolls expanded by 114,000 in September, in line with expectations, but upward revisions to July and August added another 86,000 jobs, so the overall payroll picture is better than the headline.

The big news, though, is that the unemployment rate fell to 7.8%. That’s big economically and symbolically. Indeed, it’s so big that conspiracy-mongerers are suggesting the BLS cooked the numbers to help President Obama get re-elected. Let there be no doubt: That’s utter nonsense.

Other numbers also indicate an improving job market: the labor force participation rate ticked up to 63.6%, the employment-to-population ratio rose 0.4 percentage points to 58.7%, and the average workweek increased by 0.1 hours. All remain far below healthy levels, but in September they moved in the right direction.

Despite the drop, unemployment and underemployment both remain very high, as well. After peaking at 10% in October 2009, the unemployment rate has declined a bit more than 2 percentage points. The U-6 measure of underemployment, meanwhile, peaked at 17.2% and now stands at 14.7%.

As you may recall, the U-6 measures includes the officially unemployed, marginally attached workers, and those who are working part-time but want full-time work. One anomaly in the September data is that the unemployment rate fell from 8.1% to 7.8%, but the U-6 remained unchanged at 14.7%. Why? Because the number of workers with part-time work who want full-time work spiked up from 8.0 million to 8.6 million.

Finding a way to lower corporate tax rates is easier said than done. Marron demonstrates the complexities with a corporate tax reform calculator. (John Nordell/The Christian Science Monitor/File )

Think the corporate tax system is broken? Go ahead, try to fix it.

By Guest blogger / 09.27.12

Almost everyone in Washington wants to lower the corporate tax rate. President Obama wants to go from today’s 35 percent down to 28 percent. Governor Romney and Ways and Means Chairman Camp want to get to 25 percent.

There’s just one problem: paying for it. To offset the costs of cutting rates, policymakers will need to roll back tax preferences, each of which has powerful defenders.

To illustrate the challenges, the Committee for a Responsible Federal Budget just released a nifty corporate tax reform calculator that shows how your revenue goals and willingness to cut tax preferences affect what tax rate you have to accept.

Bottom line: going low is harder than it sounds.

In this Sept. 17, 2012 photo, Republican presidential candidate and former Massachusetts Gov. Mitt Romney speaks to reporters in Costa Mesa, Calif. Marron predicts that the number of Americans who don't pay federal income tax will decline as the economy recovers. (Charles Dharapak/AP)

Breaking down the 47 percent

By Guest blogger / 09.19.12

My most popular blog post, by a long shot, was this one in July 2011 explaining why almost half of Americans paid no federal income tax. If you are interested in some context behind Governor Romney’s now famous remarks about the 47 percent (TPC calculated it as 46 percent for 2011), please check it out.

One item I didn’t mention in that post is that the number of taxpayers not paying federal income tax should decline over time. As the economy recovers, higher incomes will boost the fraction of households that pay federal income tax.

Carmine Sodora (L) of Tavern Tax prepares Peter Marafioti's income tax documents at Duffy's tavern in Hoboken, New Jersey in this April 2008 file photo. Workers bear an estimated 20 percent of the corporate income tax, Marron writes. (Joshua Lott/Reuters/File)

Workers bear the corporate income tax burden

By Guest blogger / 09.14.12

Corporations pay income taxes in an administrative sense: they write checks (or send electrons) to the IRS. But corporations can’t actually bear the burden – they are just legal entities, not living and breathing human beings.

So who ultimately bears the burden of corporate income taxes? Shareholders? Employees? Customers?

Economists have struggled with this question for decades. When Mick Jagger dropped out of the London School of Economics in the 1960s, for example, he allegedly complained that “economists can’t even tell if corporations pay taxes or pass them on.”

We’ve made some progress since then. Over at the Tax Policy Center, my colleague Jim Nunns summarizes what economists have learned over the past five decades and describes TPC’s new approach to distributing the corporate income tax.

As Jim reports, our best estimate is that workers bear 20 percent of the corporate income tax,  shareholders bear 60 percent, and investors as a whole bear 20 percent. [Editor's note: This paragraph and a sentence two paragraphs down have been corrected. In the original, two figures were transposed.]

Workers bear some of the corporate income tax because capital can move around the world. All else equal, the corporate income tax encourages some capital to locate abroad rather than in the United States. That reduces worker productivity (since they have less capital with which to work) and thus reduces worker wages and benefits. As a result, some of the corporate tax burden falls on workers.

Investors in general bear a portion of the corporate income tax for a similar reason. When you tax corporations, you encourage capital to flow out of corporate equities and into other investments, including corporate debt and non-corporate businesses. That flow reduces the rates of return that investors earn in those other asset classes as well. Much of the corporate income tax thus gets passed on to investors in general, not just corporate shareholders.

Shareholders alone, finally, bear the portion of the corporate income tax that falls on “super-normal returns” — i.e., the returns they get in excess of a normal rate of return.

If any readers know Mick Jagger, please send him a link to the study. Maybe it will finally give him some satisfaction.

P.S. For another overview, see this TaxVox post by Howard Gleckman.

A woman counts her US dollar bills at a money changer in Jakarta in this June 2012 file photo. According to a recent report, most US investors lack basic financial literacy, including an understanding of compound interest, basic risks, and fees. (Beawiharta/Reuters/File)

Investors lack basic financial literacy, study finds

By Guest blogger / 09.04.12

“American investors lack basic financial literacy,” according to a new report from the Securities and Exchange Commission (much of which is based on an earlier report by the Congressional Research Service at the Library of Congress). Many fail to grasp compound interest, don’t understand fees and other investment costs, and aren’t aware about the risks of investment fraud.

From the report summary:

According to the Library of Congress Report, studies show consistently that American investors lack basic financial literacy. For example, studies have found that investors do not understand the most elementary financial concepts, such as compound interest and inflation. Studies have also found that many investors do not understand other key financial concepts, such as diversification or the differences between stocks and bonds, and are not fully aware of investment costs and their impact on investment returns. Moreover, based on studies cited in the Library of Congress Report, investors lack critical knowledge about investment fraud. In addition, surveys demonstrate that certain subgroups, including women, African-Americans, Hispanics, the oldest segment of the elderly population, and those who are poorly educated, have an even greater lack of investment knowledge than the average general population. The Library of Congress Report concludes that “low levels of investor literacy have serious implications for the ability of broad segments of the population to retire comfortably, particularly in an age dominated by defined-contribution retirement plans.”

The report goes on to discuss ideas for increasing financial literacy and increasing the transparency of fees and other investment costs.

People sometimes talk about financial literacy as though the goal is helping people choose their own investments. That can be helpful, but the report rightly discusses another goal: improving consumers’ ability to work with financial advisers.

According to Marron, economic data should flag potential issues or anomalies with numbers, as seen here. Click on the number, and an 'explainer' of a certain data point would pop up. (Donald Marron, Bureau of Labor Statistics (BLS))

Economic data goofs make the case for metadata

By Guest blogger / 08.23.12

Harvard historian Niall Ferguson goofed on Bloomberg TV yesterday. Arguing that the 2009 stimulus had little effect, he said:

The point I made in the piece [his controversial cover story in Newsweek] was that the stimulus had a very short-term effect, which is very clear if you look, for example, at the federal employment numbers. There’s a huge spike in early 2010, and then it falls back down.  (This is slightly edited from the transcription by Invictus at The Big Picture.)

That spike did happen. But as every economic data jockey knows, it doesn’t reflect the stimulus; it’s temporary hiring of Census workers.

Ferguson ought to know that. He’s trying to position himself as an important economic commentator and that should require basic familiarity with key data.

But Ferguson is just the tip of the iceberg. For every prominent pundit, there are thousands of other people—students, business analysts, congressional staffers, and interested citizens—who use these data and sometimes make the same mistakes. I’m sure I do as well—it’s hard to know every relevant anomaly in the data. As I said in one of my first blog posts back in 2009:

Data rarely speak for themselves. There’s almost always some folklore, known to initiates, about how data should and should not be used. As the web transforms the availability and use of data, it’s essential that the folklore be democratized as much as the raw data themselves.

How would that democratization work? One approach would be to create metadata for key economic data series. Just as your camera attachs time, date, GPS coordinates, and who knows what else to each digital photograph you take, so could each economic data point be accompanied by a field identifying any special issues and providing a link for users who want more information.

When Niall Ferguson calls up a chart of federal employment statistics at his favorite data provider, such metadata would allow them to display something like this:

 Clicking on or hovering over the “2″ would then reveal text: “Federal employment boosted by temporary Census hiring; for more information see link.” And the stimulus mistake would be avoided.

I am, of course, skimming over a host of practical challenges. How do you decide which anomalies should be included in the metadata? When should charts show a single flag for metadata issues, even when the underlying data have it for each affected datapoint?

And, perhaps most important, who should do this? It would be great if the statistical agencies could do it, so the information could filter out through the entire data-using community. But their budgets are already tight. Failing that, perhaps the fine folks at FRED could do it; they’ve certainly revolutionized access to the raw data. Or even Google, which already does something similar to highlight news stories on its stock price charts, but would need to create the underlying database of metadata.

Here’s hoping that someone will do it. Democratizing data folklore would reduce needless confusion about economic facts so we can focus on real economic challenges. And it just might remind me what happened to federal employment in early 2009.

A trader works on the floor of the New York Stock Exchange, in this June 2012 file photo in New York City. High-frequency quoting that has skyrocketed recently, leading some in the US to think it might be time for a financial non-transaction tax, like France implemented. (Mary Altaffer/AP)

The rise of trading quote spam

By Guest blogger / 08.11.12

On Monday, I posted a lovely animated gif from Nanex showing the rise of high-frequency trading. What I failed to mention is that graph doesn’t show completed trades. It shows quotes.

And according to another nice chart from Nanex, it’s high-frequency quoting that has skyrocketed, not trading.

The number of unexecuted quotes, many allegedly not intended to be executed, has thus skyrocketed.

France recently took steps to try to deter the rise in quotes. In addition to a financial transactions tax it, France will also impose a tax on traders who submit too many unfilled quotes.

In short, France will levy a financial non-transaction tax.

  • Weekly review of global news and ideas
  • Balanced, insightful and trustworthy
  • Subscribe in print or digital

Special Offer

 
Become a fan! Follow us! Google+ YouTube See our feeds!