Trickle or treat

Who's laughing now? Photo credit: Biography

Trickle-down theory is back in the headlines this year with President Donald Trump’s One Big Beautiful Bill that extended the income tax cuts targeting the rich from the 2018 Tax Cuts and Jobs Act. The theory says we can grow the economy by cutting income taxes on the rich, because they save more of their income than the poor. They will invest the tax cut in factories that create jobs and future income. Well, the theory has three problems.

First, if we don’t tax the rich, we must tax the poor. Millionaires would have paid the tax out of savings. But the poor must consume most of their income. To pay the tax, they must spend less. That will slow the economy. Or, if we don’t tax the rich or poor, the government must spend less. But that means paring back Social Security, Medicare and Medicaid. That cut amounts to a tax on the poor. The only other option is to tax economic growth itself. But the whole point of trickle-down theory is to spur growth, not brake it.

Second, it seems unfair to tax most heavily those least able to pay for services that we all enjoy, like national defense and clean air. If anything, the valuation of these services rises with income, so it would be fair to increase the tax rate with income, too.

Third, the theory misses the point. Yes, we must save to grow the economy. We must set aside funds to finance the factory. So why not cut taxes on savers rather than on the rich? You don’t have to be Daddy Warbucks to save. – Leon Taylor, Seymour, Indiana USA tayloralmaty@gmail.com

For what it's worth

The elections of self-described socialist mayors in New York City and Seattle this month have revived the chestnut that economists are monsters who don’t understand that the poor need a hot meal and a roof over their heads. Since food, lodging and healthcare are basic rights, let’s just give them to the poor for free. Economists oppose this because they are apologists for the filthy rich. Or so socialists argue.

In reality, I don’t know of any economist who blames poverty on the poor. Economists know that people lose their jobs because of a business cycle that no one can control, or because their skills suddenly become obsolescent. It was not the fault of the bank tellers that ATMs proved to be more efficient and convenient.

Instead, the economist’s argument against mandating free stuff is that it will hurt the poor themselves. Suppose that we give away healthcare. The hospitals will be overwhelmed by patients demanding cosmetics and repairs of hangnails. They won’t have time for gunshot wounds. The way to ensure that they give priority to threats to life is to set a price on each service that reflects its value as well as its cost. That’s what the market does. If the poor can’t afford this price, then the solution is to tax away the income that is due to good luck and give it to those who are poor because of bad luck. Let the poor decide how to spend the money, since they know their own needs better than anyone else. -– Leon Taylor, Seymour, Indiana USA tayloralmaty@gmail.com

Mamdani, Commies, and Marx

Photo credit: Getty Images, Angela Weiss

Old videos about New York City Mayor-Elect Zohran Mamdani have revived Fears of the Commies reminiscent of the Twenties and Fifties. Fox News reports Mamdani's comments to the 2021 Young Democratic Socialists of America conference: "Right now, if we're talking about the cancellation of student debt, if we're talking about Medicare for all, you know, these are issues which have the groundswell of popular support across this country. But then there are also other issues that we firmly believe in, whether it's BDS or whether it is the end goal of seizing the means of production, where we do not have the same level of support at this very moment."

In July, Fox News played a videotape of Mamdani commenting in an interview: "My platform is that every single person should have housing, and I think faced with these two options, the system has hundreds of thousands of people unhoused, right? For what? If there was any system that could guarantee each person housing, whether you call it the abolition of private property or you call it, you know, just a statewide housing guarantee, it is preferable to what is going on right now. People try and play like gotcha games about these kinds of things, and it's like, look, I care more about whether somebody has a home."

Mamdani has not retracted either statement. But he insists that he is a democratic socialist. The practical difference is that a democratic socialist advocates state ownership of the means of production only via elections -- such as an elected legislature nationalizing the oil industry -- and accepts partial ownership.

As Chapter 2 of “The Communist Manifesto” makes clear, state seizure of the means of production is the central task of communism. The reactions to Mamdani’s statements have fallen along two lines. First, Mamdani is a good man, so he can’t be a Communist. Or: Mamdani is a Communist, so he can’t be a good man. Both ridiculous arguments stem from the peculiarly American terror of reading a book that just might change your mind.

Contrary to popular opinion, the seminal works of Karl Marx and Friedrich Engels are not evil incarnate. Despite its flaws, Marx’s “Das Kapital” is the most penetrating critique of capitalism that I’ve read. “The Communist Manifesto,” by Marx and Engels, is not as bone-headed as some of Mamdani’s supporters and critics, or Mamdani himself. The Manifesto expresses the inescapable consequence of Marx’s remorseless logic. To say that someone is a Communist, as Mamdani appears to be, is to neither criticize nor praise him. It is to describe his adherence to a philosophy that makes better sense than liberals and conservatives do today.

Marx accepted, as most other economists of his age did, that all production value stemmed from labor. The value of a machine depends on the amount of labor spent to create it. Capitalists compete by mechanizing, since this enables them to produce faster than before and dominate their market. But they cannot profit from the machines: They must pay fully for the labor that created them. They can profit only on the back of the worker, who does not have to be paid a fixed amount to survive for another day. As market competition squeezes profits, capitalists respond by squeezing workers to the point of starvation. Workers must revolt to survive. The only solution to this tragic cycle is a workers’ state. They must seize the factories and stores and distribute the surplus value – the difference between the value of production and the workers’ wages – in a fair way. In the dynamic economy envisioned by Marx, rising affluence would free workers to pursue their own interests, to be truly human rather than machines. In chapter 10 of the first volume of Das Kapital, Marx vents his outrage at the 12-hour days worked by children in the mills of England, where Marx had fled from Germany.

To say that Marx was logical is not to say that he was right. His theory predicts a falling rate of profit and a falling wage. Both predictions turned out to be wrong. Wages since Marx’s day have increased many-fold. Workers are far better off today than in the 1840s. Child labor in high-income countries is illegal.

Where did Marx go wrong? I think that it was in assuming that the capitalist adds no value to production. A good manager motivates her workers to produce more in exchange for most of the surplus value. The manager’s own take reflects the value of her organizational abilities. Happier workers produce more. In this approach, the workers will not revolt, and a market economy will prosper.

Marx’s logic was less than watertight in maintaining that a Communist state, in which all share equally in power, was possible. Power is an aphrodisiac. Without checks and balances, someone will seize it. No democratic Communist state has ever made it to the steady state. The Communist economy is also hot-wired for failure, because it fixes prices. In the free market, the price automatically balances the demand for a product with the cost of providing it. Fixing the apartment rent imbalances housing demand and supply. More people will demand apartments in New York City than landlords will provide. Landlords will flee the housing market for more profitable adventures. Housing supply will diminish, creating homelessness.

Two points. First, Mamdani’s advocacy of seizing the means of production is understandable to anyone who has read Marx, although I'm not convinced that Mamdani himself really knows what Marx is talking about. Second, Mamdani is a Marxist. At least he likes the slogans. In fact, his superficiality may explain why he does not seem to have the courage of his convictions. But he does understand that offering people free stuff is great for votes.

In response to the conclusion that Mamdani is at least superficially a Marxist, I hear protests that he would never seize the means of production. Of course not. Not even the mayor of New York City has that power. But one’s beliefs precede, not follow, one’s actions. Do I have to be pregnant to be pro-choice? Few Marxists will ever be able to carry out Marx’s agenda. They are Marxists nonetheless.

Misconceptions are also pervasive among conservatives. A clueless podcaster says Mamdani “went back to his core beliefs in his victory speech basically yelling at Donald Trump and saying we are a communist city. Uh the Red Apple….” That wasn’t the victory speech that I read. Mamdani pitted the poor against the billionaires, but he said nothing about Communism. Possibly Podcaster XX inhabits another planet. Or just maybe Mr. XX is playing on the fears of people who know only that Communism is supposed to be Something Really, Really Bad.

A correspondent quotes Wikipedia to me: Communism is "centered on common ownership of the means of production, distribution, and exchange that allocates products in society based on need. A communist society entails the absence of private property and social classes, and ultimately money and the state." That is correct. The correspondent concludes that since Mamdani does not propose to abolish private property, he is not a Communist. That is not correct. A Communist is anyone who advocates seizing the means of production. Whether he actually does it, is another matter. One’s beliefs do not depend on what one is willing or able to do. Eugene V. Debs was never able to reorganize production. Was he therefore not a socialist?

The debate over Mamdani’s beliefs illustrates the sad state of the popular American intellect. "My God, Mamdani can’t be a Communist! Communism is Monstrous! Fox News says so!" Well, try reading a book rather than goggling Fox or googling Wikipedia. -- Leon Taylor, Seymour, Indiana tayloralmaty@gmail.com

Love's labor stats lost

                                            Opening the door or closing it? 

                                            Photo credit: Mark Schieflbein, AP

President Donald Trump just fired the US Commissioner of Labor Statistics, Erika McEntarfer, for revisions that substantially reduced this summer’s employment estimates. For May and June, the reduction was 258,000. That’s a big change indeed. Trump alleges, unencumbered as usual by evidence, that McEntarfer overestimated employment just before the November 2024 election to help Kamala Harris win.

Trump continues: “Important numbers like this must be fair and accurate, they can't be manipulated for political purposes.” He’s right about that. But the question is who is manipulating what.  Below are the real job numbers, not Trump’s  fantasies.

Figure 1 shows that employment has been remarkably stable for more than 20 years. We focus here on July in each year because employment varies with the season. For example, construction jobs abound in the summer but not in the winter. By concentrating on July, we get a good picture of what’s been happening over the years.

Employment fell sharply in the Covid-19 lockdowns, of course. But it recovered in two years. In Figure 1, you can see that employment has resumed the long-run pace of growth that prevailed before the pandemic. That growth is modest. This is not Trump bashing. It’s a simple fact that preceded Trump.

Figure 1
https://www.bls.gov/charts/employment-situation/civilian-employment.htm

The Bureau of Labor Statistics calculated Figure 1 from a monthly survey of 60,000 households by the Census Bureau. The Bureau of Labor Statistics also surveys 631,000 worksites -- a third of all nonfarm payroll jobs -- monthly to double-check on its estimates. Figure 2 shows the establishment results.

The pattern is like the one observed from the household survey and shown in Figure 1.  After a sharp decline during the lockdowns, employment returned to its long-run pace. Incidentally, note that in both charts, employment drops in recessions, shown by the vertical gray bars. That’s the Keynesian reason that the government borrows and spends in slowdowns – to create jobs until the economy recovers to the point that it can generate jobs on its own. But the main point is that recent employment is consistent with the trend of the past 20 years. If Trump was correct – that the Bureau is shaving the numbers to make him look bad – we should see a break in the data, like what happened in the deep recessions of 2020 and 2008.

Figure 2
https://www.bls.gov/charts/employment-situation/employment-levels-by-industry.htm

Figure 3 suggests why employment is not growing as rapidly as Trump pretends: Most adults who are able and willing to work already have jobs. In fact, the rate at which people participate in the labor force has been falling for two decades. Why? Well, for one thing, Americans are aging. Most old folks would rather retire than work.

By definition, the labor force includes both those who work and those who are looking for work. But the unemployment rate – the share of the labor force of people looking for work – is only 4%, the lowest it’s been for 20 years, as Figure 4 shows. So, a long-run reason for why employment grows slowly may be that firms have trouble finding folks to hire. In that case, deporting immigrants won’t help, because most of them work.

Figure 3
https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.ht

Figure 4
https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm

Figure 5 illustrates what the slow growth in jobs is doing to us. As wages rise, employment slows. Industries that are desperate for workers, like utilities, are bidding up their wages to the point where they can no longer afford to hire them. Jobs are growing more rapidly in lower-wage industries like retail, health care, and education.

My untutored hunch is that the long-run labor market is tight because of a lack of workers. Goosing the market by stimulating demand for workers -- for example, by cutting interest rates so that firms can borrow and spend more – may raise wages and prices rather than employment, in my opinion.

There’s lots of room for disagreement. In my view, the basic problem is excess aggregate demand. The economy is already producing about all that it comfortably can – hence the low rate of unemployment. People are trying to buy more output than that, so they bid up prices. If I’m right, prices should rise and output should slow down until the excess demand disappears. But I may not be right. Another view is that the labor market is cooling because of a fall in aggregate demand. People are demanding less output, not more. In that case, both inflation and output might slow down. And it is indeed true that inflation has halved in about a year.

Always fightin’

Well, OK. Economists love to argue, even if you don’t love to listen. But one thing is clear: Trump is shooting the messenger. There is no evidence that the Bureau is faking the employment numbers. Instead, it is describing the economy with dispassionate accuracy. If you would like the lowdown yourself, ignore the White House and read The Wall Street Journal.

It is natural to ask why job updates differ from the initial estimates. I will explain. The Bureau of Labor Statistics surveys more than a half-million firms each month about payroll employment; the deadline for the reports is the 12th. Many firms haven't finished their payrolls by the 12th. So the Bureau includes their estimates in two updates over the next two months. The third and final estimate includes 95% of the worksites. The first estimate may include 60% or 70% -- the share has been falling for more than a decade. https://www.bls.gov/opub/btn/volume-2/revisions-to-jobs-numbers.htm

If economic conditions haven't changed between the first two estimates, then the second estimate will look like the first. That is, it will be predictable. If conditions have changed, the second estimate can differ substantially. In the case at hand, the estimate was unexpectedly small. Perhaps the labor market is cooling. Firms might have delayed hiring until they knew what was up with Trump’s whimsical tariffs.  After a Lag, Consumers Begin to Feel the Pinch of Tariffs - The New York Times

Another factor in the revisions is seasonal adjustment. For instance, if the weather is changing, its effect on employment will also change. We want to adjust for such factors because we want to know whether employment is changing because of them or because of a permanent shift in the economy itself, such as in the number of women who work.

For instance, in June, youths are no longer in school, so they look for temporary jobs. This can obscure more subtle changes in the labor force if we do not adjust for it. https://www.bls.gov/news.release/empsit.nr0.htm

What’s up with an update

In short, the difference in the updates is not evidence that the Bureau is incompetent or corrupt, as Trump claims. To the contrary. The Bureau is providing the latest data so that we can understand how the economy is changing.

Why does Trump conclude that the Bureau is lying? Truth Social: “The Economy is BOOMING under 'TRUMP' despite a Fed that also plays games, this time with Interest Rates, where they lowered them twice, and substantially, just before the Presidential Election, I assume in the hopes of getting 'Kamala' elected – How did that work out? Jerome 'Too Late' Powell should also be put ‘out to pasture.’” As usual, when Trump wants to make an iffy point, he changes the subject as fast as he can. Keep your eye on the ball: His basic claim is that the economy is booming because the Trump brand is magic. Therefore it will always spin off jobs.  Um, he forgot to mention the tariffs.   

But how do we know that the Bureau is not lying? Well, by statistical measures, its estimates are quite accurate. It uses samples of households and establishments, because surveying every American worker every month would cost too much. DOGE would have a fit. No sample is exactly like the population from which it is drawn. However, the sampling errors in the Bureau's estimates are small. One can have 90% confidence in them, in the sense that the estimates come from an interval that includes the true estimates 90% of the time. In other words, the Bureau's estimate may not be exactly correct, but it is pretty darn close. https://www.bls.gov/news.release/empsit.tn.htm

Moreover, the employment numbers would be hard for anyone to fake, Democrat or Republican. The financial markets follow those numbers religiously. The bloggers would vet any unexpected change in employment. It could be cross-checked against changes in unemployment compensation filings in the 50 states.

Kurtosis and all that

It would also create statistical aberrations. In samples as large as the BLS uses for employment, random changes follow a normal probability distribution with well-known properties. Skewness is close to zero, and the height of the distribution (which relates to a characteristic called kurtosis) is not exaggerated (its kurtosis is close to 4). Inflating the employment numbers would skew the distribution to the right and increase the relative frequency of those values, which affects kurtosis.

The chances that skewness and kurtosis change by accident can be precisely estimated with simple tests of the distribution's normality, such as the Jarque-Bera test. To pass the tests, the scammer would have to fake the whole dataset, not only for total civilian employment but for at least a dozen related statistics (employment to population, the labor force participation rate, etc.). The whistleblowers would have a field day. At bls.gov, you will see that the Bureau publishes datasets as well as graphs. 

For those reasons, I don't stay up nights worrying about fudging. I do worry that Trump's meddling will cause the Bureau's highly competent statisticians to leave. After all, they would have no trouble finding more gainful employment elsewhere. The quality of the government labor statistics could take a nose dive. The global implications could be momentous. There would be greater uncertainty about economic forecasts, for states budgeting unemployment compensation, for businesses predicting market demand for their products...you name it. 

In principle, the President, as head of the executive branch, has great latitude in hiring or firing executive officials. But the statistical agencies, like the BLS, the Bureau of Economic Analysis in the Commerce Department, the Economic Research Service in the Agriculture Department, the Census Bureau, and so on, are supposed to be sacrosanct. They are not political. They just provide the hard data that drive policy and political decisions. As the econometrician Mark Kennet says, it's hard to see how those decisions can be correct if they can't draw upon accurate statistics.

Notes: For useful comments, I thank but do not implicate Mark Kennet, Paul Higgins, Barry Lenk, Steve Knott, and Kevin Morgan.



Figure 5
https://www.bls.gov/charts/employment-situation/employment-and-average-hourly-earnings-by-industry-bubble.htm

https://www.msn.com/en-us/money/markets/donald-trump-fires-person-behind-jobs-numbers-after-they-re-revised-down/ar-AA1JKiRA?ocid=msedgdhp&pc=EDGEXST&cvid=89abf8747fa44907acc9552b13e36c2a&ei=21

When not to kick a Congressman

 

                            Does this man understand public finance?  Photo source: Snopes.com 

Bad ideas have a way of coming back. In July 2011, when Congress was struggling with a legal limit to the debt, investor Warren Buffett quipped to CNBC that he could end the deficit in five minutes by passing "a law that says anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.”

There is, in fact, a proposal on social media for a 28^th Amendment to the US Constitution to do just that.  It has been making the rounds since 2009 but now is viral again.

Explanations are in order.  The deficit is government spending minus tax revenues received in that year. For example, suppose that the government collects $1 trillion in taxes but spends $1.5 trillion. Then the deficit is $500 billion, or half a trillion dollars.  

The deficit is just a loan to the government by its creditors, mainly taxpayers. It's like the charge that you just made on your credit card: Visa lent you $40 for a ramen dinner for two on Valentine’s Day, and you will pay it back at the end of the month.  The debt is like your outstanding balance on your Visa card, say, $10,000. It’s the amount that you would have to pay today to settle your full debt, that is, to pay off all your loans. On Valentine’s Day, your debt rose by $40 to $10,040.

The proposal to cap the deficit at 3% of gross domestic product (GDP, the market value of production on US soil -- a measure of the size of the economy, almost $30 trillion now) probably stems from a guideline for members of the European Union, in the Growth and Stability Pact. The guideline is honored in the breach: In the euro area, the deficit ratio in 2023 was 3.6%. Why can't we stick to a 3% ratio?  

Well, like any loan, the deficit can be good or bad. Consider the deficit of 15% of gross domestic product (GDP, a measure of the size of the economy) in 2020, when Donald Trump was President the first time. The government was spending to replace private spending lost in the pandemic shutdowns. Without the deficit, more firms would have had to lay off workers, and fewer of those laid off would have received money to tide them over until they found new jobs in a recovery. I would argue that the 2020 deficit was a good loan.

Likewise, the deficit of 10% of GDP in 2008, when a global financial crisis blew up, may have kept a severe recession in the United States from becoming a depression.

Benefits and deficit benders

But usually the deficit occurs because the government does not receive enough in income tax revenues to pay all Social Security and Medicare benefits. As the system works, current workers pay for current benefits. People think that they receive their benefits out of some savings account consisting of their past tax payments for Social Security and Medicare, but that isn’t the case. When workers retire, as the Baby Boomers (like me!) did, the number of workers supporting a typical retiree shrinks, and the benefits become harder for the government to pay. Congress then borrows from the grandchildren, by forcing them to pay off the loan when they become working adults.

Whether this is good or bad depends on your point of view. On one hand, the grandchildren don't have a vote today, so they have no say in the matter. On the other hand, they are likely to be richer than we are today, so they can more easily pay off the loan than we can.

In short, the question is not whether the deficit is too large relative to GDP. The deficit may need to run high for a while to address temporary problems like economic crises. The question is whether the debt is too large relative to GDP. The debt consists of all unpaid loans, not just this year's (that's the deficit). If the debt/GDP ratio rises over time, then the investments financed by loans to the government do not generate enough income (and thus income tax revenue) to pay off all its debts, and we have a long-run problem. For example, Congress may borrow $200 million to build a new Interstate. Does the new highway save so much time in production that it generates enough income to pay off the $200 million loan plus interest? 

Unfortunately, the debt/GDP ratio is indeed rising. It is 120% of GDP, almost quadruple the ratio in 1981. The EU guideline is 60%.

But to cap the deficit at 3% of GDP would prevent the government from responding to recessions. Hard times would become harder. As the graph below shows, Congress has usually responded to economic crises by borrowing a lot more than 3% of GDP. The gray vertical lines denote recessions.  You can see that the federal budget usually dips deeper into red ink in those periods. 

The 3% cap on the deficit is a “solution” that does not address the real problem: For better or worse, Americans want more benefits from the government than they can now afford.  Buffett's bromides won't change that. -- Leon Taylor, Seymour, Indiana USA tayloralmaty@gmail.com

  https://fred.stlouisfed.org/series/FYFSDFYGDP

 

Notes

For useful comments, I thank but do not implicate Annabel Benson.

 

References

Eurostat. Statistics explained: Government finance statistics.  Government finance statistics - Statistics Explained .  October 22, 2024. 

Barbara Mikkelson. https://www.snopes.com/fact-check/hometown-buffett/   Did Warren Buffett Suggest This Plan That Could Fix the Budget Deficit? | Snopes.com . October 23, 2011.