Category Archives: Economy

Financial Frictions and Stimulative Effects of Temporary Corporate Tax Cuts

Source: William Gbohoui, Rui Castro, IMF Working Paper No. 19/97, May 2019

From the abstract:
This paper uses an industry equilibrium model where some firms are financially constrained to quantify the effects of a transitory corporate tax cut funded by a future tax increase on the U.S. economy. It finds that by increasing current cash-flows tax cuts alleviate financing frictions, hereby stimulating current investment. Per dollar of tax stimulus, aggregate investment increases by 26 cents on impact, and aggregate output by 3.5 cents. The average effect masks heterogeneity: multipliers are close to 1 for constrained firms, especially new entrants, and negative for larger and unconstrained firms. The output effects extend well past the period the policy is reversed, leading to a cumulative multiplier of 7.2 cents. Multipliers are significantly larger when controlling for the investment crowding-out effect among unconstrained firms.

The ‘giant sucking sound’ of NAFTA: Ross Perot was ridiculed as alarmist in 1992 but his warning turned out to be prescient

Source: Harley Shaiken, The Conversation, July 12, 2019

…. As it turns out, Perot, who died on July 9, had a point. His projections were often fanciful, but his warning turned out to be prescient. ….

…. “You implement that NAFTA, the Mexican trade agreement, where they pay people a dollar an hour, have no health care, no retirement, no pollution controls,” Perot said during the second presidential debate in October 1992, “and you’re going to hear a giant sucking sound of jobs being pulled out of this country.”

The response to that remark was fierce and immediate. Economists argued he was dead wrong as they sang the praises of free trade. Perot’s warning, however, resonated with workers, unions, environmentalists and people in manufacturing towns across the country, helping him earn 20 million votes or about 19% of the total. ….

…..Scholars and policymakers often disagree about the impact that NAFTA has had on economic growth and job generation in the U.S. That impact, they say, is not always easy to disentangle from other economic, social and political factors that have influenced U.S. growth.

It is true that leaders of all three countries did tear down trade barriers and insert effective protections for corporations and investment. But critics like Perot were right – and Clinton was wrong – about the warning on jobs.

The Economic Policy Institute, a left-leaning think tank, concluded that the U.S. lost about 850,000 jobs from 1993 to 2013 as a result of NAFTA and that number has undoubtedly risen. And the “social progress as well as economic growth” in relation to the agreement never seemed to appear. Despite strong productivity growth in U.S. and Mexican manufacturing, real wages sank by 17% in Mexico from 1994 to 2011 and slid in the U.S. as well. ….

Calculation and Corporate Tax Incentives

Source: Rosolino Candela, Peter Jacobsen, GMU Working Paper in Economics No. 19-21, July 1, 2019

From the abstract:
Amazon’s HQ2 campaign drew both large support at the possibility of job creation and backlash for perceived cronyism. In this paper we evaluate corporate tax incentive policies in light of the Austrian contribution to the problem of economic calculation. In doing so we highlight the contextual nature of the knowledge problem associated with policy packages and the potential cronyism arising from such a problem. We argue that because political decision-makers lack the knowledge generated via competition in the market process, they are unable to allocate resources in a way that achieves economic growth. In the place of this knowledge, they tend to gain knowledge from the political process which helps them respond to political incentives and rent-seeking behavior by special-interest groups.

Everything but the Kitchen Sink? Factors Associated With Local Economic Development Strategy Use

Source: Jonathan Q. Morgan, Michele M. Hoyman, Jamie R. McCall, Economic Development Quarterly, OnlineFirst, Published June 28, 2019
(subscription required)

From the abstract:
Rubin (1988) argued communities “shoot anything that flies and claim anything that falls” in their efforts to attract businesses. Such a perspective implies local governments will use large numbers of strategies as they try “everything but the kitchen sink” to promote job creation and private investment. Conversely, Stokan (2003) claims localities are more selective in how they approach economic development, which implies there should be wide variation in the number of development strategies used across jurisdictions. Based on original survey data from North Carolina cities and counties of all sizes, the findings provide support for both explanations. The data show localities vary considerably with respect to the number of strategies they employ. Notably, variation in strategy use is associated with certain community characteristics including government capacity and development network strength. However, the data also reveal that communities are, on average, utilizing a relatively high number of strategies, lending some credence to Rubin’s theory.

Where jobs are concentrating and why it matters to cities and regions

Source: Chad Shearer, Jennifer S. Vey, and Joanne Kim, Brookings, June 18, 2019

From the blog post:
The relationship between place and economy is constantly evolving, and continually shaping the growth, development, and decay of our communities. Today, new ideas and innovations are fostering the creation of products and services that increase productivity and raise overall standards of living. But this digital revolution is also benefiting some industries, workers, and communities over others.

This report aims to help leaders and local stakeholders understand how the changing demands for place are shifting the concentration and dispersal of economic activity within 94 large metropolitan areas from 2004 to 2015—a period of dramatic urban and economic change.

The findings suggest a need for local leaders to embrace policies and investment strategies that advance more concentrated growth patterns, while also supporting transformative placemaking solutions that help such dense places become vibrant communities where businesses and workers thrive.

Related:
Press release
Data appendix

Americans Aren’t So Optimistic About Economic Mobility

Source: James Devitt, Futurity, June 25, 2019

Americans overestimate the future income for children from wealthy and middle-income families, but underestimate that of children from poor ones, according to a new study.

Related:
Americans overestimate the intergenerational persistence in income ranks
Source: Siwei Cheng and Fangqi Wen, Proceedings of the National Academy of Sciences (PNAS), first published June 24, 2019
(subscription required)

Significance
Intergenerational mobility indicates the openness within a society. The question of how Americans think about socioeconomic mobility prospects is drawing growing attention from scholars and policy makers. Our study proposes a survey instrument that connects the empirical literature on patterns of mobility with the literature on the public perceptions of mobility. With large-scale, population-representative data, we show that Americans overestimate the intergenerational persistence in income ranks. That is, they tend to see greater inequality of economic prospects between children from rich and poor families. These results highlight the need for policy and political solutions that seriously engage with Americans’ concerns about the equality of opportunity in the society.

Abstract
Recent research suggests that intergenerational income mobility has remained low and stable in America, but popular discourse routinely assumes that Americans are optimistic about mobility prospects in society. Examining these 2 seemingly contradictory observations requires a careful measurement of the public’s perceptions of mobility. Unlike most previous work that measures perceptions about mobility outcomes for the overall population or certain subgroups, we propose a survey instrument that emphasizes the variation in perceived mobility prospects for hypothetical children across parent income ranks. Based on this survey instrument, we derive the perceived relationship between the income ranks of parents and children, which can then be compared against the actual rank–rank relationship reported by empirical work based on tax data. We fielded this instrument in a general population survey experiment (n = 3,077). Our results suggest that Americans overestimate the intergenerational persistence in income ranks. They overestimate economic prospects for children from rich families and underestimate economic prospects for those from poor families.

Local Labor Markets in Canada and the United States

Source: David Albouy, Alex Chernoff, Chandler Lutz, Casey Warman, Journal of Labor Economics, Vol. 37 no. S2, July 2019
(subscription required)

From the abstract:
We examine US and Canadian local labor markets from 1990 to 2011 using comparable household and business data. Wage levels and inequality rise with city population in both countries, albeit less in Canada. Neither country saw wage levels converge despite contrasting migration patterns from/to high-wage areas. Local labor demand shifts raise nominal wages similarly, although in Canada they attract immigrant and highly skilled workers more while raising housing costs less. Chinese import competition had a weaker negative impact on manufacturing employment in Canada. These results are consistent with Canada’s more redistributive transfer system and larger, more educated immigrant workforce.

A Huge Tax Break Went to a Politically Connected Company in New Jersey Despite Red Flags

Source: Jeff Pillets and Nancy Solomon, WNYC, and Alex Mierjeski, ProPublica June 26, 2019

….Generous tax breaks from New Jersey’s new economic development program, he argued, could place Camden “on a level playing field” with Holtec’s other suitors. In return, the firm pledged the retention of 160 jobs and the creation of an additional 235 positions. Six months later, the EDA awarded the company $260 million in taxpayer assistance — the second-largest tax break in state history.

What Holtec didn’t reveal, though, was that just weeks before filing its application in New Jersey, Ohio had stripped the company of tax credits there for failing to create the jobs it had promised as part of a similar program. According to records obtained by WNYC and ProPublica, none of the 200 positions it had pledged in 2009 to bring to Orrville, a small town about 20 miles outside Akron, ever materialized….

An Estimate of the Local Economic Impact of State-Level Earned Income Tax Credits

Source: Eric James Stokan, Economic Development Quarterly, OnlineFirst, Published June 22, 2019
(subscription required)

From the abstract:
This study investigates the impact of state-level earned income tax credits on local economic outcomes (employment, wages, and establishments). The study employs difference-in-differences and triple-difference models to estimate the impact of these credits at the border of metropolitan areas where one side of the border adopts the credit between 1986 and 2012, and the other side of the border does not. Separate analyses are conducted for specific industries and subindustries. Synthetic control methods are used as a robustness check. The analyses suggest that state-level earned income tax credits do not have a significant impact on the local economic outcomes of metropolitan areas. At least one potential reason offered is that while these impacts are not a direct goal of the program, the credits may not be large enough to realize positive economic gains.

Why Does Immigration Matter So Much?

Source: Dante DeAntonio, Regional Financial Review, Vol. 29 no. 9, May 2019
(subscription required)

Given the demographic hurdles facing the U.S. economy, it becomes more clear that increasing immigration should be seen as a net positive. Although the changing face of immigration may provide slightly less support in terms of combating an aging workforce, the benefits of stronger labor force growth and the potential to fuel birthrates with a robust first generation remain clear.