The one thing you cannot do with cash

There are many theories of why people are willing to hold fiat money without any explicit backing. One theory that I’ve never been very fond of is that the ability to pay taxes with cash is what gives fiat money value.  This caught my attention:

DENVER (AP) — A marijuana business in Colorado has filed a lawsuit against the Internal Revenue Service for assessing a penalty for paying taxes in cash.

The IRS charges a 10 percent penalty on cash payments for federal employee withholding taxes. But many marijuana businesses are forced to pay taxes in cash because of difficulty accessing banking services

Thus it seems like taxes are one of the very few things that you cannot pay for in cash, at least not without a sizable penalty.  

Should the Detroit city government spend $185 million/year on art?

Let´s apply the “Piketty 5% rule” to the City of Detroit.  More specifically, their art wealth:

DETROIT — A city-commissioned report on Detroit’s fine-art collection released Wednesday pegs its entire value between $2.8 billion and $4.6 billion, a sharp increase over a previous estimate that could create a headache for the city in bankruptcy court.

Some creditors pushing the city to sell or lease its world-class art collection argue that the city previously lowballed the artwork by valuing only a slice of the collection at the Detroit Institute of Arts.

With the comprehensive estimate by Artvest Partners many times the earlier estimate of up to $867 million, the battle over Detroit art could play a big role in a trial on the city’s debt-cutting plan to be held next month.

On Wednesday, Detroit’s emergency manager who represents the city in its municipal bankruptcy case said the report wouldn’t change his support to keep the city-owned collection intact and transfer ownership to a nonprofit separate from the city. His office also noted that selling off the entire collection immediately would only yield a fraction of the overall valuation, according to the report.

“The report makes it abundantly clear that selling art to settle debt will not generate the kind of revenue the City’s creditors claim it will,” Bill Nowling, spokesman for Detroit Emergency Manager Kevyn Orr, said in a statement Wednesday.

Abundantly clear?  Only to people who have already made up their minds. Imagine how much billionaires in places like New York and LA would pay for that collection.  Imagine how much the Getty Foundation would pay.  And 5% of $3.7 billion is $185 million a year, the annual income that (according to Piketty) could be generated by the midpoint of the Detroit art wealth estimate. What else could be done in Detroit for $185 million/year, forever?

When individuals have expensive art collections they are viewed as being “rich.”  When the City of Detroit has a lot of this sort of wealth most pundits let the city get away with pleading poverty.  The paintings suddenly don´t “count.”

Is anyone surprised by this?  Is wealth inequality really about wealth inequality?  Or is it about power and envy?

PS.  Should Detroit be contemplating giving away $3.7 billion in wealth?

PPS.  Detroit could sell a handful of the most valuable paintings for $1 billion and keep the museum mostly intact.

PPPS.  TravisV sent me a good Paul Krugman post on interest rates.  Of course this is also the market monetarist view.

Vox on market monetarism

Vox.com did a fairly long article on my views on monetary policy, and market monetarism more generally.  I´m traveling so I´ve only quickly read it once, but I thought it worth linking to.  I was also told that on Sunday the big Frankfurt newspaper (FAZ) may do a piece on me.  Let me know if you see anything.

I´d like to thank Timothy Lee for taking the time to research this topic, and also interview me.  It looks like an excellent piece.

PS.  I see that Tyler Cowen linked to my Kansas tax post.  Rereading the post I realize my claim about a 25% rise in Kansas GDP was too strong.  Tax avoidance might fall, and there are the lower tax rates to consider (which were cut by fairly similar amounts.)  But I stand by the gist of my argument.

Update:  I’m told the FAZ story was delayed.

Party like it’s 1999 (1.385 million ZMP workers go back to work)

What a first half!  We don’t have a GDP report for the second quarter, but all indications are that first half RGDP growth will come in around 0.00%.  Meanwhile, it’s the best half year for jobs since late 1999.  When you break things down further, the first quarter was typical of recent years, coming in at 569,000 jobs.  Was that held back by winter weather?  I’m not sure, but the second quarter was unusually strong, coming in at 816,000 jobs.  Wage growth is still running at 2%, so the economy shows no sign of overheating.  Some thoughts:

1.  This is the natural rate hypothesis in action.  Even though NGDP growth remains slow, and indeed is getting slower, wage moderation does eventually allow the labor market to heal.  And no, it’s not about discouraged workers leaving the labor force.  Recent job growth is far above labor force growth, which is now very slow due to boomers retiring.  Indeed if you take the slowing labor force growth into account, then the job growth was actually far, far better in the first half of 2014 than during the housing boom, and even better than 1999.

2.  The jobs speed-up may have something to do with the extended unemployment benefits ending at the beginning of the year.  But the excess job growth is only a few 100,000s, so there is no sign yet that the extended benefits had a major impact on the unemployment rate.  That was my assumption all along, and although the data isn’t strong enough to draw any firm conclusions, I see no reason to change my prior that the recession was mostly about demand, with some modest supply-side factors such as extended UI and 40% higher minimum wages.

3.  The Fed has a big NGDP problem.  It’s becoming increasingly clear that when the labor market recovers, RGDP growth will be very slow, maybe 1.2%.  Add in about 1.8% on the GDP deflator, and 3% NGDP growth looks like the new normal, assuming the Fed intends to stick with 2% PCE inflation targeting.  Bill Woolsey wins!!  Here’s the problem.  The Fed wants to do both of these things:

a.  Continue targeting inflation at 2%.

b.  Continuing to use interest rates as the instrument of policy.

But it won’t work.  At 3% trend NGDP growth, nominal interest rates will fall to zero in every single recession going forward.  The Fed will be spinning their wheels just when monetary stimulus is most needed.  At some point they will need a new policy instrument/target.  Lars Christensen has a very good post discussing a clever idea by Bennett McCallum, but in my view this idea works better for small countries than for the US, which is likely to follow the global business cycle.  NGDP futures anyone?  Level targeting?

4.  Unemployment is likely to fall to the natural rate (estimated by the Fed at 5.6%) quite quickly. There will be a debate about what to do next.  It will be the wrong debate.  The debate needs to be about where the Fed wants to go in the long run.  First figure out where you want to go in the long run, then adjust your short run policy as needed.  Otherwise the blogosphere debate will be like a bunch of drunken frat boys arguing about which street to take, when they can’t even agree on which bar they are going to.

Not much blogging over the next few weeks—happy 4th!

Update:  The US population age 16 to 64 is growing at about 0.4% per year, and will slow further. In the first half payroll employment rose at an annual rate of more than 2%, and the household survey was up 2.26%.  I beg you not to mention “discouraged workers.”  That’s the old story, not what’s going on now.

BTW, 3% may well be an overestimate of trend NGDP growth, if current productivity trends hold up.

Picking apart Piketty

Here’s Thomas Piketty on the US financial crisis (page 297):

In my view, there is absolutely no doubt that the increase of inequality in United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.

Where does one begin?

1.  In my view there is plenty of doubt as to whether inequality contributed to the crisis, partly because Europe is much more equal, and had an even worse financial crisis.  In fairness, he did say “contributed,” but my real complaints lie elsewhere.

2.  Why would stable real wages lead to more debt?  More specifically, why would it “inevitably” lead to more debt?  If my wages were stagnant I certainly wouldn’t react by taking on more debt, rather I’d borrow more if I expected my income to rise.  Is there a theory here?

3.  Correct me if I am wrong, but I thought the extra saving injected into the US economy came from the poor Chinese, not “well-to-do” Americans.  Why weren’t the Chinese “inevitably” forced to go into debt?  They were much poorer than Americans.  Yet they saved 50% of their incomes.  Some of this was forced by the government, but nowhere near all of the savings was forced.

4.  Experts say that the risks taken by the banks had little to do with deregulation, that subprime lending and mortgage-backed securities were legal well before “deregulation.”  Lehman wasn’t even a commercial bank.  And wasn’t US banking among the most heavily regulated industries in the world, even after the “deregulation” of the 1980s and 1990s?

5.  Why would “unscrupulous banks” lend on “increasingly generous terms?”  Why no discussion of how the government encouraged banks to lend money to low income people?  In Piketty it’s almost always the evil capitalists, never the well-meaning government bureaucrats.

A few pages later:

The familiar mobility argument is powerful, so powerful that it is often impossible to verify. But in the US case, government data allow us to measure the evolution of wage inequality with mobility taken into account: we can compute average wages at the individual level over long periods of time (ten, twenty, or thirty years). And what we find is that the increase in wage inequality is identical in all cases no matter what reference we choose. In other words, workers at McDonald’s or in Detroit’s auto plants do not spend a year of their lives as top managers of the large US firms, any more than professors at the University of Chicago or middle managers from California do.  One may have felt this intuitively, but it is always better to measure systematically wherever possible.

But at some point in their lives 73% of Americans do reach the top 20% of incomes.  Piketty doesn’t mention that fact.  Yes, most Americans don’t become corporate CEOs, is anyone surprised by that?

Piketty continues (p. 308):

We are free to imagine an ideal society in which all other tasks are almost totally automated and each individual has as much freedom as possible to pursue the goods of education, culture, and health for the benefit of herself and others. Everyone would be by turns teacher or student, writer or reader, actor or spectator, doctor or patient.

That might be ideal for a college professor, for most of the men that I have met during my life that sort of society would be a dystopia.

I love this comment on the very next page:

From 1980 to 1990, under the presidents Ronald Reagan and George H.W. Bush, the federal minimum wage remained stuck at $3.35, which led to a significant decrease in purchasing power when inflation is factored in. It then rose to $5.25 under Bill Clinton in the 1990s and was frozen at that level under George W. Bush before being increased several times by Barack Obama after 2008.

Oh, is that really what happened?  Or is that a very artful attempt at disguising what really happened. The following statement is even truer; see which one more accurately conveys what happened:

President George H.W. Bush increased the minimum wage from $3.35 per hour to $4.25 per hour. Bill Clinton increased the minimum wage from $4.25 per hour to $5.15 per hour. George W. Bush increased the minimum wage in three steps from $5.15 per hour to $7.25 per hour. The first two increases occurred while he was president; the third while Obama was president. Pres. Obama tried and failed to increase the minimum wage.

I wonder if Piketty has something against the GOP?  Of course the average reader of Piketty’s book knows nothing about these details, and takes his information at face value. 

On the very next page Piketty discusses the minimum wage in Germany.  But he forgets to point out that the 2004 labor reforms allowed for a large increase in low-wage German jobs, and that after these reforms the German unemployment rate plummeted while French unemployment increased. Isn’t that evidence important?

Three pages later Piketty provides a balanced discussion of the economic research on the effects of minimum wage laws.  He cites the Card and Krueger study, but no other.  I guess there haven’t been any empirical studies showing minimum wage laws reduce employment, or that they lead to discrimination, or that they reduce fringe benefits.

On pages 330-31 he points out that US corporate managers are now paid far higher salaries than Japanese corporate managers.  He then claims it is “naive” to assert that the pay might reflect productivity.  No mention of the fact that while the Nikkei is up 2 fold since 1982, the Dow is up 20 fold.  I don’t know about you, but I’d rather be a shareholder in US firms getting ripped off by the outrageous pay packages of the American CEOs, rather than invest in Japanese firms with their low paid CEOs.  You get what you pay for.

All that in 40 pages.  And this is pretty much how things go throughout the entire book.  In later posts I’ll pick up after page 331.  Just remember if you read the book that the information is not reliable.  Instead there is a constant left wing bias in facts, interpretation, evidence cited, etc. When he discusses outside sources like Kuznets he does not accurately convey their opinions.  The book has lots of good research, but it is not something that can be completely trusted.  Credulous readers are likely to get a very biased view of the US economy. Over at Econlog I soon do a post discussing Piketty’s views on size of government.