The Unassuming Economist

From a new IMF working paper:

“This paper has approached progressivity from different angles. Bringing together our findings, we can conclude strongly that progressivity has decreased over the last few decades, a finding that is robust to the choice of measure. We also conclude, but with less certainty, that the reduction in progressivity appears not to have given growth a boost.

While this paper focused on personal income taxes, developments in capital income taxation are also likely to have contributed to reducing overall progressivity: Capital income is distributed more unequally than labor income, has risen over the past few decades as a share of total income (IMF, 2017b), and is often taxed at a lower rate than labor income. The corporate income tax, in particular, plays an important role in determining progressivity. First, there can be a direct effect to the extent that it is partly borne by owners of corporations. Second, it indirectly supports the enforcement of the taxation of labor income: Corporate taxation mitigates arbitrage in response to taxation of entrepreneurial income, because distinguishing labor income from capital income can be difficult (or impossible) when individuals can freely choose the form through which they declare their income (IMF, 2014). When the personal income tax base can be shifted to some alternative tax base that is taxed at a lower rate (such as corporate income), optimal tax theory implies that the optimal tax rate on personal income rises with the tax rate on the alternative base. In recent decades, international tax competition—resulting from capital mobility—has led to a steady downward trend in corporate income tax rates (Table 2). This trend reduces overall tax progressivity and may also put downward pressure on personal income tax rates—even though labor itself is less mobile and could be taxed more easily in a globalized world.

There are many unresolved questions and areas for further research. For example, progressivity measures taking the entire tax and benefit system, and ideally even public spending, into account would enhance the understanding of overall progressivity tremendously. The challenges in finding such a measure, especially one that is still independent of pre-tax and spending distributions are enormous.

Despite the absence of a fully comprehensive measure of progressivity, and some reasonable doubts about the impact of progressivity on growth, it appears safe to say that progressivity-enhancing measures could be taken without major risks to growth. This would be especially relevant in countries that are marked by great inequality.”

From a new IMF working paper:

“Following a period of disinflation during the 1990s and early 2000s, inflation in emerging markets has remained remarkably low. The volatility and persistence of inflation also fell considerably and remained low despite large swings in commodity prices, the global financial crisis, and periods of strong and sustained US dollar appreciation. A key question is whether this improved inflation performance is sustainable or rather reflects global disinflationary forces that could prove temporary. In this paper, we use a New-Keynesian Phillips curve framework and data for 19 large emerging market economies over 2004-18 to assess the contribution of domestic and global factors to domestic inflation dynamics. Our results suggest that longer-term inflation expectations, linked to domestic factors, were the main determinant of inflation. External factors played a considerably smaller role. The results underscore that although emerging markets are increasingly integrated into the global economy, policymakers remain largely in control of domestic inflation developments.”

From a new IMF working paper:

“Populists claim to be the only legitimate representative of the people. Does it mean that there is no space for civil society? The issue is important because since Tocqueville (1835), associations and civil society have been recognized as a key factor in a healthy liberal democracy. We ask two questions: 1) do individuals who are members of civil associations vote less for populist parties? 2) does membership in associations decrease when populist parties are in power? We answer these questions looking at the experiences of Europe, which has a rich civil society tradition, as well as of Latin America, which already has a long history of populists in power. The main findings are that individuals belonging to associations are less likely by 2.4 to 4.2 percent to vote for populist parties, which is large considering that the average vote share for populist parties is from 10 to 15 percent. The effect is strong particularly after the global financial crisis, with the important caveat that membership in trade unions has unclear effects.”

From a new FRB Richmond Working Paper:

“Following two centuries of general economic prosperity, Petersburg has experienced a prolonged period of decline. A fixed-boundary city combined with a shrinking population may have left the city vulnerable to negative economic shocks as city officials faced “fixed” municipal costs in a context of declining tax revenues. When large layoffs occurred beginning in the 1980s, the city appears to have lost residents, especially higher-skilled residents, to the Richmond suburbs north of the city. Additionally, a new regional shopping center in neighboring Colonial Heights drained the city of retail tax revenues. These development led to a prolonged period of decline in the city.

But other Virginia cities also experienced substantial layoffs around the same time as Petersburg, yet they did not decline to the same degree. The question is why? We model two scenarios. The first incorporates two cities, one relatively economically vibrant and the other less so. We show that a negative productivity shock to the less vibrant city will lead to an outflow of high-skill workers to the more vibrant neighboring city along with higher-value homes. As tax revenues fall, the city experiences fiscal decline, which amplifies and reinforces its decline.

We also model an isolated city in which a negative shock does not result in as large of an outflow of high-skilled workers. In this setting, the city experiences a loss in aggregate utility for residents but is in a better position to weather the shock and eventually return to a path of economic growth.

Evidence from several Virginia cities is consistent with the implications of the models. In Petersburg, the period after the shocks saw high-income residents and higher home price areas decrease in the city and increase in areas closer to Richmond. As higher-skilled workers left, the population of Petersburg got older and less well-educated. In contrast, isolated cities that experienced somewhat similar shocks showed less pronounced effects. We conclude that Petersburg was a victim of being “too close” to Richmond, and as residents and the tax base left the city, an inability to scale down city municipal costs led to the severe fiscal difficulties seen today.”

From a new CEP Discussion Paper:

“The US suffers from large regional disparities in employment-population ratios (from here on, “employment rates”) which have persisted for many decades (Kline and Moretti, 2013; Amior and Manning, 2018). Concern has grown about these inequities in light of the Great Recession and a secular decline in manufacturing employment (Kroft and Pope, 2014; Acemoglu et al., 2016), whose impact has been heavily concentrated geographically (Moretti, 2012; Autor, Dorn and Hanson, 2013). In principle, these disparities should be eliminated by regional mobility, but this has itself been in secular decline in recent decades (Molloy, Smith and Wozniak, 2011; Dao, Furceri and Loungani, 2017; Kaplan and Schulhofer-Wohl, 2017).

In the face of these challenges, it has famously been argued that foreign migration offers a remedy. Borjas (2001) claims that new immigrants “grease the wheels” of the labor market: given they have already incurred the fixed cost of moving, they are very responsive to regional differences in economic opportunity – and therefore accelerate local population adjustment.1 And in groundbreaking work on the Great Recession period, Cadena and Kovak (2016) argue further that foreign-born workers (or at least low skilled Mexicans) continue to “grease the wheels” even some years after arrival. In terms of policy, if migrants are indeed regionally flexible, forcibly dispersing them within receiving countries may actually hurt natives as well as the migrants themselves. Basso, Peri and Rahman (2017) have extended the hypothesis beyond geography: they find that immigration attenuates the impact of technical change on local skill differentials.

I revisit the original question of geographical adjustment using decadal US data spanning 722 commuting zones (CZs) and 50 years – and using an empirical model which explicitly accounts for dynamic adjustment. Remarkably, I find that foreign migrants (and specifically new arrivals) account for around half of the average population response to local demand shocks. But in areas better supplied by new migrants, population growth is not significantly larger nor more responsive to these shocks. I claim that foreign migration crowds out the contribution from internal mobility that would have materialized in the counterfactual. This is not to say that natives gain little from the contribution of foreign migration. As I argue below, undercoverage of unauthorized migrants in the census may overstate the crowding out effect – and understate the foreign contribution to adjustment. And in any case, conditional on the overall level of immigration, a regionally flexible migrant workforce may save natives from incurring potentially steep moving costs themselves. As Molloy, Smith and Wozniak (2017) suggest, this may in principle shed a more positive light on the decline in regional mobility since the 1980s.”