Not Such a Capital Idea

Yeah but wages are tax-deductible anyway, so if you cut taxes on profits you probably do preferentially encourage capital investment, although tons of that is deductible, too. Surely your best approach is to cut the payroll taxes, since that directly reduces the cost of labor without affecting the buying power of the wages? I mean, you more or less just instantly jump productivity up a notch.

Reagan did that.... Bush did that.... so how we doing?

How about our hero Kennedy? He is the one who started the messy trend in 1961. We had 48 terrible years for the economy. Average American still lives in the 1960s.

Mmmmwwwwwwwwaaaaaaaaaaaahhhhhhhhhhhh

Study finds that the majority of domestic and foreign corporations in the United States avoid paying federal income taxes.

http://money.cnn.com/2008/08/12/news/economy/co...

NEW YORK (CNNMoney.com) -- Nearly two-thirds of U.S. companies and 68% of foreign corporations do not pay federal income taxes, according to a congressional report released Tuesday.

The Government Accountability Office (GAO) examined samples of corporate tax returns filed between 1998 and 2005. In that time period, an annual average of 1.3 million U.S. companies and 39,000 foreign companies doing business in the United States paid no inc

Fantastic Muir, CNN is an excellent source of news. My buddy Ted Turner, with really cherry red heart worth billions, owns a large stake in it. They are the ultimate purveyors of truth. Kaching! I'm certain that it is all Bush's fault.

Mmmmmwwwwaaaaahhhhhh

Our effective corporate tax rates are NOT the highest in the world and they are have gone down as a percentage of all taxes right along with the rest of the economy.

Allowing multinational corporations to pit country against country makes them more powerful in effecting the global economy and under minds a nations sovereignty. That's why the global economy is a train wreck. Calling for more of the same is like shouting , " I WANT TO BE RULED BY MULTI-NATIONAL CORPORATIONS!!!"

That's sad.

http://elainemeinelsupkis.typepad.com/.a/6a00d8...

http://thinkorthwim.com/wp-content/uploads/2007...

I want to see what's in all the economic professors emails because I think they've misled us on how the economy works. I think they've contributed to destroying the worlds economy with fake science.

Effective tax rate as a % of GDP doesn't tell you much. It can be lower in the US than in other countries simply because there are fewer and smaller corporations contributing to GDP than in those other countries.

That itself could be the result of a high corporate tax rate, which discourages the formation of corporations.

Or it could be because there are many deductions available.

Or it could be because the marginal tax rates are low.

There's no way to tell without at least other pieces of information. So your argument is not a very strong one, I'm afraid.

What's the evidence say about why corporations increase output after cutting corporate taxes? Is it mainly because they have a greater reward for their effort? Or is it partially because with lower rates, corporations can spend less time worrying about incorporating in a lower-tax jurisdiction/less time avoiding taxes? Or is it something else?

My question stems from our (economists') belief that corporations act as if they maximize profits, and if we believe this, then maximizing (1-t)*profits should yield the same behavior as maximizing profits (t is the tax rate).

One more important point: when global corporations make investment decisions, they sometimes consider tax rates in different countries. Some economists have argued that the relatively high corporate tax rate of the U.S. has inhibited capital investment in the U.S. I haven't seen any supporting data for this assertion, but the argument makes sense to me.

For the benefit of those who understand what is meant by the term "corporate tax rate", here are the findings reported by economists of the Organization for Economic Co-operation and Development (OECD):

"New data compiled by economists at the OECD shows that for the 17th consecutive year the average rate of corporate taxes in non-U.S. countries fell while the U.S. corporate tax rate stayed the same. As a result, the overall U.S. corporate tax rate is now 50 percent higher than the OECD average."

For those who do not understand what is meant by the term "corporate tax rate", this comment is obviously beyond your ability to comprehend.

Damian,

Corporations analyze a number of factors when making a decision to pursue an opportunity. Generally the most important factor is the expected after tax return on the investment that opportunity will require. (Different companies use different methods, though most use some form of discounted cash flow.) If tax burdens are higher, some opportunities will, at the margin, be rejected. In other words, the NPV of some marginal opportunities become negative when tax rates are higher.

Right - so given that an entity is going to undertake an investment, then their behavior is no different with higher or lower marginal tax rates. But the process of actually choosing and undertaking the investment is one step removed from my earlier narrow take on the situation, and clearly is affected by increases in the tax rates.

"...in the long-run workers’ wages are determined by their productivity..."

The higher the productivity, the less labor is needed per unit of production and assuming constant demand for the final product, demand for labor should decrease.

So it seems that higher productivity should mean lower wages, not higher. What am I missing?

Thanks for the answers, but it still doesn't make sense to me.

Wages are cost just like any other.

If I am able to produce a car while using less steel than I used before, what will happen to the price of steel? It will go down, due to reduced demand.

Same with labor. Why should it be any different?

Curious,

Imagine an isolated island about a mile square, and with a million people crowded onto it. Land would be scarce relative to labor.

Now, imagine the reverse of that, a much bigger island, and with only, say, a thousand people on it. Labor would be scarce relative to land.

Which is the more usual situation in the world today? Do we usually find people literally shoving one another into the sea, for lack of land to stand upon? Far from it, for it isn't land that is scarce relative to labor, but the other way around, labor that is scarce relative to land, and with a great deal of land going unused because there isn't enough labor to work it all.

As technology advanced, and fewer people were needed to work a given plot of it, they would be freed to work another plot of it. So, they wouldn't be unemployed. They'd be employed somewhere else and perhaps doing something else. And they'd be employed at a higher real wage than before, for, with the advancement of technology, their productivity has gone up, and there would not be just the same demand for them but even greater demand for them than before. For, aided by better technology and tools, they produce more than before, and are more valuable to employers than before.

Another way of looking at it:

Rather than thinking of employers employing labor, think of machines employing it. The more machines, the more employers, in effect, competing for the same number of workers. Or, even if there were no more machines, but better machines, the effect would still be the same, more use for labor, and more demand for it.

As technology advances, its wage must go up.

I should have said,

more valuable use for labor, and more demand for it.

Admiral,

I can't speak for Don or Gary, but I start from the assumption of the market's tendency toward equilibrium, and

Curious,

The unhampered market, tending toward equilibrium, tends toward full employment, equilibrium between the supply of and demand for labor. Only one thing in the market itself could keep it, theoretically speaking, from equilibrium and full employment, an oversupply of labor relative to the supply of land. But with equilibrium between land and labor, or undersupply of labor, the owners of land must employ all of the available labor in order to maximize the profitable use of their land. And any not capable of it will be displaced by those who are.

DG lesvic,

There is no reason to believe an equilibrium wage rate will result in everyone being employed. "Full employment" generally means that everyone who is seeking work finds work. But it doesn't include those who decide not to work because the equilibrium wage rate is too low. The supply curve for labor is upward sloping.

Mr Dewey,

You've won the argument.

Congratulations.

I've learned - and relearned - quite a lot as I prepared my replies on this thread. Thank you for stimulating my thinking.

By the way, I do agree that arguments based on logic are easier to defend than are arguments based on statistics. At least for this thread, I posted "no goddamned statistics". :)

John Dewey said,

"At least...I posted no 'goddamned statistics.'"

You're goddamned logic was bad enough.

And I thought you were sincere in offerring congratulations.

Are you kidding?

And statistics would have been a relief.

Are these people ( not seeking employment) surviving on their own savings, or surviving on some sort of government welfare program? If it is the former case, then could it not be considered full employment?

I don't see why it matters. Regardless of their method of surviving, they're not employed. If wage rates were high enough, they would be employed.

My assertion all along has been that higher productivity will lead to more employment in the long run. Please note that I said more employment. I did not say a lower rate of unemployment.

Here's two examples of potential workers who might be in the workforce at higher wage rates but not at lower wage rates:

1. spouses of highly paid workers
2. retirees

I'm sure there are many other potential worrkers who will give up leisure time, but only if the pay is high enough.

John,

How are the self-employed counted? I've often wondered because if I were employed by a financial institution but dropped out of the work force to trade for my own account, I would consider myself employed. However, I don't know if I would be picked up as employed in official statistics. Also, if a former job seeker decides to start his own business, how would that be reflected in official statistics?

Interesting question. I've known "retired" people who spend a lot of time trading on their own accounts. I've known "retired" people to build themselves houses too. I suppose you're officially "employed" under the circumstances only if you say you are.

Census Bureau's interviewers do not ask persons in the sample if they are employed. They ask a series of questions about income and about their work-seeking activity. Computer programs determine from each person's answers whether or not they are employed, unemployed, or not in the workforce.

It is possible that some respondents could be untruthful in their responses. For example, a drug dealer who is also collecting welfare may not answer truthfully when asked if he did anything last week to earn money.

Yes, thank you. As you and Martin point out, the definition of "employed" and "unemployed" is not always clear.

Over 2,000 employees of the Census Bureau interview 60,000 households each month to provide the statistics for the Current Population Survey. All 110,000 working age individuals in these households are classified as "Employed", "Unemployed", or "Not in the Workforce". Classification is based on responses to a number of questions asked by the Census bureau employees.

According to the Bureau of Labor Statistics, self-employed persons are considered to be employed.

If you're curious, you can go to the BLS site and get more information about how unemployment rates are calculated. I found it interesting, but I get fascinated very easily.

Thank you. I was really thinking about the compilation of the monthly unemployment number.

I'll have another look at the BLS. I remember digging around there to find out what's baked into the "income" number just because I wanted to know. I know what you mean by becoming fascinated easily. As a teenager, I would go to the public library for a specific book and then get lost in the stacks until the library closed because I found so many other cool books while searching for the one I came for. I guess we now have the internet for that.

Thank you. I was really thinking about the compilation of the monthly unemployment number.

I'll have another look at the BLS. I remember digging around there to find out what's baked into the "income" number just because I wanted to know. I know what you mean by becoming fascinated easily. As a teenager, I would go to the public library for a specific book and then get lost in the stacks until the library closed because I found so many other cool books while searching for the one I came for. I guess we now have the internet for that.

"I was really thinking about the compilation of the monthly unemployment number."

The link I provided goes directly to the explanation of the monthly unemployment numbers.

According to the BLS, the monthly unemployment numbers - total number of unemployed and unemployment rate - are derived directly from the Census Bureau's monthly Current Population Survey. As I said before, it is the Census Bureau's 2,000 interviewers gather the responses to numerous questions about the work situation of each of the 110,000 persons in the sample. Based on those responses, Census Bureau software classifies each person as "Employed", "Unemployed", or "Not in the workforce". The data is seasonal adjusted, but I think that's the only adjustment made.

You miss the continual reorganization of resources to produce goods hardly imagined earlier in the developmental process. Laborers that no longer produce wagon wheels produce other goods instead, and if the productivity of laborers producing automobile tires for a fixed tire market doubles, half the laborers don't simply become idle. They produce something else, assuming they have sufficient means of production.

If some privileged class monopolizes means of production for its exclusive use, that's another matter. If half the population of potential peasant farmers starves for want of farmland, because lords of the land prefer idle land to the employment of these farmers, the system of forcible propriety breaks down as the peasants march on the lords' castles with their pitchforks. That's all well and good and properly libertarian of course.

If you asked me what privileged class might monopolize means of production this way in our modern circumstances, I'd say look toward the millions of pensioners expecting consumption from the state in the next few decades, both directly as state pensioners and indirectly as holders of various securities. We hardly discuss the role these expectations played in the present financial meltdown, but they surely played a very substantial role.

"If half the population of potential peasant farmers starves for want of farmland, because lords of the land prefer idle land to the employment of these farmers, the system of forcible propriety breaks down as the peasants march on the lords' castles with their pitchforks. That's all well and good and properly libertarian of course."

Since when is violence and theft of private property valid to Libertarianism simply because the perps were poor and starving?

Since when are you the Lord of Proper Liberty? I think I'll claim the title in this case, and if you don't like it, you can meet me and the other poor, starving peasants at the castle.

You can show us your stone tablets, engraved with your titles to property, carved by the hand of God Himself. Then we'll stab you with our pitchforks before adding a few engravings about feeding the poor or at least staying clear of enough land for us to feed ourselves.

Maybe you think titles to property developed otherwise. I'm a libertarian, not a proprietarian, and I always will be.

As a non-economist, I will take a stab at this.

If the employee holding the job has the acquired skills, experience and expertise to properly run and maintain the capital equipment in his/her workplace and can produce $500 worth of product (maybe profit) per hour then their individual wages will be increased to something less than that $500. These jobs would be in high demand by labor, but you first need the requisite skills and experience.

Some people will lose their jobs because of these capital improvements. As a refugee of the textile industry, we saw productivity improvements of 10% per year from the mid-late 1970's through the middle 1990s. That means that the average employee was producing three to four times as much in 1995 than was the case in 1975 and was being paid more because of that. However, the media's only point of focus was on job losses.

Those who lost jobs sought other training, found other work, etc and recovered after what was undoubtedly a difficult period (remember, I am also a refugee from the industry but for different reasons).

The whole thing boils down to Schumpeter's (I believe) concept of creative destruction. What the tax credit for non-productivity looks like is a sorry re-tread of the policies employed in the old Eastern bloc countries. I once had a Czech engineer tell me that they had created all sorts of improvements with respect to automation of their yarn spinning machines. The government did not allow them to be used because it would put people out of work. Instead, the machine builder (darn good engineers across the board) became uncompetitive with their counterparts in Germany that were free to deploy the technology. Government can never see the unseen.

Cutting payroll taxes would be better for jobs than cutting corporate taxes.

A revenue neutral cut of payroll taxes with offsetting oil or carbon taxes (as Carbon Added Taxes -CAT- which like a VAT can be added to imports and deducted from exports -- isolation from the international trade issues). We could then get more jobs while cutting or oil dependence and carbon intensity.

What a nice wonky solution! Congrats!

I do not want to argue global warming, so I'll skip discussion of carbon intensity. But what do you mean by "cutting our oil dependence'?

Both a carbon tax or an oil tax would increase the price of gasoline which would shift the consumption. You can't easily cheat on payroll taxes, but you can use less gasoline (carpool, move closer to work, get a more efficient car, work from home, etc. -- thousands of options). At a $100 per bbl oil tax with a revenue neutral payroll tax offset, you would be surprised how fast our per capita gasoline consumption would match those in Europe. A side benefit may also be a decrease in the price of oil resulting in better behavior from Venezuela and Iran (it takes money to create trouble).

I find it very strange that the American Academy, said to be advanced, does not understand that the demand for labor comes from the production and that both the quantity of labor demanded and the wage paid increases with productivity . Did they not realize the principle of bad substitution of production factors?. Such bad substitution causes a deadlock production, a depression of wages and impoverished population.

juan carlos,

Economists, American and otherwise, seem to agree that productivity gains will increase real wages. I'm not sure they all agree that productivity gains will increase employment.

A digest of a William Nordhaus productivity/emplyment paper reveals that:

"For individual companies or industries, higher productivity growth may lead to a loss of jobs. ... But from the perspective of manufacturing as a whole, or of major manufacturing industries, the lower prices that result from higher productivity have increased demand growth and more than offset the employment-lowering effect of higher productivity."

I understand that there can be a very unproductive country with full employment. My point is not that. My observation is that there is no "reason" to reject the hypothesis of consistency between more jobs and more productivity, just as there is no "evidence" for reject the hypothesis of consistency between more jobs and less productivity.

We have an extremely corporatist economy already, packed with biases in every direction, biases favoring labor over machinery and other biases favoring machinery over labor, biases favoring holding entitlements over productive investment and other biases favoring the opposite, biases favoring destruction over production, biases here, there and everywhere.

Make me Philosopher King, and I'll repeal corporate income taxes altogether and also cut taxes on wealthy individuals practically to nothing by replacing the existing income tax with a progressive consumption tax. I'll also repeal insider trading laws, as Don suggests at Cato recently, while severely limiting patent protection and other anti-competitive proprieties. That's my utopian prescription, in part at least.

But I'm not Philosopher King and don't expect to be anytime soon, so a temporary tax credit or other subsidy for new employment, covering a portion of the cost for a limited time, seems defensible to me.

Labor is not just another form of capital. Forcible propriety favoring natural gas over coal or corn over sugar cane or aluminum over iron is difficult to justify. Markets can sort out the relative value of these resources to optimize output, but laborers are human beings, and human beings are the raison d’etre of economic growth. Laborers are not just another means to growth. They are the end of growth.

"Full employment" of aluminum is not an end in itself, but full employment of labor is, and subsidizing the experimental employment of idle labor seems preferable to entitling people to remain idle.

Heck if there were no minimum wages, labour laws or immigration restrictions then labour would be dirt cheap and there'd wouldn't be huge demand for machinery as both are interchangeable. Not to mention with wages really low then there's more capital available to be reinvested.

Heck if there were no minimum wages, labour laws or immigration restrictions then labour would be dirt cheap ...

Dirt doesn't stop working if you don't feed it.

"your proposed tax credit, by biasing firms away from capital investments, will cause future real wages to be lower than otherwise."

Makes sense to me. Also, if future real wages are lower, wouldn't future aggregate demand also be lower? If so, then this tax credit which biases productivity downward might prolong underutilization of the workforce - the exact opposite of its intended purpose.

John - Thanks, but the latter part of your analysis doesn't quite hold up. Lower productivity will unquestionably mean lower real wages and, hence, lower real aggregate demand. But because aggregate output will also be lower, in principle there's no reason why aggregate demand will be insufficient to clear markets and, hence, maintain full employment (albeit at lower real rates of compensation for workers).

OK. I understand that point. But here's what is confusing me. If higher productivity leads to more employment in the long run, why wouldn't lower productivity lead to less employment - in the long run?

Gary Becker explained in September that productivity increases will increase long term employment:

"advances in productivity are partly produced by investments in R&D and other innovations that generate new products and new processes. Both new products and new production methods typically require investments in both physical and human capital. They also stimulate the use of more workers of various skills that utilize the greater capital stock. This is why over longer time periods, productivity advances and robust labor and capital markets in different economies are strongly positively, not negatively, related. For this reason, the continuing advances in productivity in the US and elsewhere will at first limit and then reverse the falls in employment and rises in unemployment."

Don, I'm now genuinely confused, and I'd appreciate some help.

Higher productivity does not lead to more employment in the long-run. It leads to higher wages in the long-run.

I disagree with Becker's point here. The U.S., for example, had no significant unemployment in, say, 1960, even though productive then was much lower than it is today.

I appreciate your continued discussion on this topic, but I suspect that, like me, your other responsibilities will limit the time you can give to it.

Consider this argument about productivity and employment, which I read somewhere recently:

If U.S. labor productivity is restricted, then productivity gains in other nations will make U.S.-based operations less competitive over the long run. Assuming that U.S. consumers are free to purchase foreign goods and services, wouldn't they choose goods and services produced by more productive firms? Wouldn't all global consumers do likewise?

It seems to me that employment might be unrelated to productivity if the U.S. operated in a vacuum. But globalization of trade forces U.S. employees and employers to seek productivity gains. Does that make sense, or am I missing something else?

Don,

Congrats, One of your all-time bests!

John Dewey,

There is nothing foreigners can do to create unemployment in the US. For they cannot tell Americans not to work, not to better house, cloth, feed, and employ one another. Only our blessed "government" can do that.

No matter what else occurs in a free market, it always tends toward full employment, toward equilibrium between the supply of and demand for labor, as for anything else.

I'm not saying that foreigners create unemployment. I'm arguing that government-induced lower productivity will reduce employment in the U.S. (not exactly the same thing as increasing unemployment)

"No matter what else occurs in a free market, it always tends toward full employment, toward equilibrium between the supply of and demand for labor"

I agree, but equilibrium between supply and demand does not guarantee highest levels of employment in the U.S. If some U.S. workers are much less productive than their foreign counterparts, the demand for those U.S. workers can drop significantly. The new equilibrium wage rate for those U.S. workers may be too low to induce them to work at all. The supply of U.S. workers at the lowered equilibrium wage rate is smaller than the supply at the alternate higher equilibrium wage rate.

At the same time, potential immigrant workers will be paid less to work in the U.S. because of the government-induced bias against productivity gains. Those immigrants may reevaluate their decision to seek work in the U.S., further reducing the levels of employment in the U.S.

John Dewey,

You said that "government-induced lower productivity will reduce employment in the U.S. (not exactly the same thing as increasing unemployment)"

In the first place, as Don has already pointed out, it will reduce wages but not employment per se.

And, in the second place, whatever you mean by a reduction of employment not being an increase in unemployment, it could have nothing to do with what we are talking about.

You say that equilibrium between supply and demand does not guarantee highest levels of employment.

What could be higher than full employment?

You say that an equilibrium wage rate may too low to induce workers to work.

But, then, it wouldn’t be an equilibrium wage rate.

You said that a reduction in the number of immigrant workers was a reduction of employment in the US.

Just as an increase in the number of emigrants would be a reduction of employment in the US.

But how does that change anything that Don or I have said?

"You say that an equilibrium wage rate may too low to induce workers to work.

But, then, it wouldn’t be an equilibrium wage rate."

Yes, it is an equilibrium wage rate. It's just a different one than would have existed if the productivity gains had been achieved.

Equilibrium wage rates do not imply that every worker is employed. The supply curve for labor is upward sloping. At higher wage rates, more potential workers are induced to work.

We are comparing two different demand curves for labor and their different intersections with the single supply curve for labor. The normal demand curve for labor is the one which would exist if productivity gains described by Don are achieved over the long term. The abnormal demand curve is the one which would exist if productivity gains are inhibited by the government intereference in labor markets (tax credits).

Two different scenarios. Two different equilibrium points on the same supply curve. Two different levels of employment.

"whatever you mean by a reduction of employment not being an increase in unemployment"

Unemployment is almost always defined as the number of workers who are actively seeking work but who cannot find it. It does not include those who choose not to seek work. A reduction in wage rates can cause some workers to decide not to seek work.

Rather than give you one very long response, I'll post separately my responses to each point.

"In the first place, as Don has already pointed out, it will reduce wages but not employment per se."

Don said that. Gary Becker said something very different. Though I have the highest respect for Don, I'm not sure I'm ready to accept that he is always correct. It could be that the answers of Don and Gary were based on different assumptions, and I'd like to understand those assumptions.

"You said that a reduction in the number of immigrant workers was a reduction of employment in the US.... But how does that change anything that Don or I have said?"

Don and I agree that higher productivity - gained through innovation and capital investment in the U.S. - will increase real wages in the U.S.

Don later said: "Higher productivity does not lead to more employment in the long-run."

Since he was referring to higher productivity in the U.S., I assumed he was also referring to employment in the U.S.

My counter argument is that the higher wage rates in the U.S. will then attract more immigrants. This employment in the U.S. will increase.

If the government interference - the employment tax credits - inhibits those productivity increases as Don suggests, then lower wage rates and fewer immigrants. Also, lower wage rates for existing U.S. workers means less disposable income and less demand for service workers. That's the reduced demand I referred to in my first comment.