Category Archives: Econ & Money

Optional Thought

Today’s Exponential View by Azeem Azhar contains an arresting chart, sourced to a paywalled article in the Wall St. Journal, Individuals Embrace Options Trading, Turbocharging Stock Markets :

The WSJ article suggests that individual bettors investors on Robin Hood are the driver of the growth of options; to the extent that increases volatility, then old school securities firms feel driven to hedge more, which also adds to the options boom.

Somehow, this explanation feels inadequate to me, but I don’t know why.

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The Rent is Too Damn High

Lots of news outlets picked up on this report by the National Low Income Housing Coalition stating that there is no place in the USA where a person with a 40-hour minimum wage job can afford a two-bedroom rental.

I’m very much for greater equity, and I think it’s likely true as a general matter that this is a particularly bad time for new renters due to the house-buying mania plus the moratorium on evictions (both of which restrict supply of available rentals), but at a first glance this report seems to have some issues.

For starters, they stacked the deck by pricing 2 BR rentals with one worker with one job and no overtime. Why does a single person need a 2 BR to live? Or even a couple without kids? I agree that in a wealthy country like ours, decent housing ought to be a basic right, but does decent housing mean a 2BR for everyone?

What this report suggests to me is how tough things can be for a single parent, but even then in most states a single parent on 40hrs minimum wage ought to get various kinds of aid, e.g. food stamps, sometimes section 8 housing vouchers [which admittedly can be hard to use] or maybe the Low-Income Housing Tax Credit (LIHTC), plus Earned Income Tax Credit (EITC), plus now child subsidy. There’s no sign the report took account of any transfer payments at all nor that it took any account of family circumstances.

Also is it weird to think that maybe many single minimum wage job holders might live in shared housing? Have half of a 2BR? Or a share of a house? When I was a single law clerk I lived in an efficiency, not even a 1BR.

Yes, a two-parent household with kids often has to have at least 2 jobs, maybe more, to hope to make ends meet, and that is a real problem, but that isn’t what this study says, and that isn’t what got into the headlines (e.g. CNN, “Minimum wage workers can’t afford rent anywhere in America“).

And, oh yes, the numbers they used probably are too general to support the scare headline. To identify the cost of rent they use a HUD number, the FMR, which is based on an entire metro area. As the report itself notes, “The FMR is usually set at the 40th percentile of rents for typical homes occupied by recent movers in an area. FMRs are often applied uniformly within each FMR area, which is either a metropolitan area or nonmetropolitan county. Therefore, the Housing Wage does not reflect rent variations within a metropolitan area or nonmetropolitan county”.

In other words, in a large metro area, there could be less expensive parts of town with substantial amounts of more affordable if less desirable housing, but the FMR for the city/county could be pulled up by having lots of more expensive housing too.

This is not my subject, so I’m very open to correction, and I don’t want to suggest there is not an unequal income crisis, which in turn feeds a housing crisis, but I think this particular report is more advocacy than serious research. And thus, I suspect, it’s not actually the case that there are no places in the US where adequate housing can be afforded by a single person on a minimum wage and by couples on two minimum wages. Maybe it won’t be a great neighborhood, it likely will not be a 2BR, maybe even shared housing, it may be older, but I have a strong suspicion that it often exists. Not, perhaps, in San Francisco and a few other outliers, but likely much more often than this scare headline suggests?

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Wealth and (non)Taxes

Informed Comment reports in Taxes on the Rich: One-Sixth of What They Used to Be that,

According to a new IPS briefing paper, the richest .01 percent of Americans, about 33,000 lucky souls today, now pay just one-sixth of what they used to pay in tax, when measured as a percentage of their total wealth.

This suggests that “tax the rich” has a long way to go, but also that it may have a political opening.

On the other hand, we tend to tax income, and do not in the main do wealth taxes other than on real property, so to the extent this wealth increase is unrealized capital gains after a huge surge in the market it is maybe not surprising that there is such a large untaxed body of wealth out there.

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Digging Out

I’m sure it speaks badly for me, but I thought this, via Digby, was pretty funny:

For a more serious take, see today’s Krugman.

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It Only Looks Like Fear-Mongering on Social Security

On its face, the Biden campaign’s latest ad could reasonably be accused of fear-mongering about Social Security, doing so in the time-hallowed way that campaigns have adopted for a couple of decades–but for the fact that all of the ad’s claims are … wait for it … accurate.

Click here if the video above is not showing up in your browser.

As the Washington Post’s Paul Waldman put it,

If he wins the election, Trump vowed, he will “terminate the payroll tax.” He added: “We’ll be paying into Social Security through the general fund.”


The Biden ad assumes that Trump would eliminate the employee half of the payroll tax (it’s paid equally by employers and employees), which would indeed render the program unable to pay all its benefits in just a few years.

I should say at this point that even if Trump is never going to do this, and even if Biden is being accurate in how he characterizes what Trump is proposing, this comes after years of conservative fearmongering about the fate of Social Security, in particular the inaccurate idea that in a short time it will “go broke.”

For the record, before the local troll gets excited, here’s my view on Social Security:

  1. We should start now — ideally should have started yesterday — to make plans to properly fund Social Security into the demographic future.

  2. In an ideal world, we’d actually do some form of what Trump proposed: kill the employee portion of the tax, which is regressive, and fund SSA out of general revenues, which are less regressive. But we don’t live in an ideal world, and that strategy would risk exposing Social Security to cuts as it competes with other priorities. And the GOP has long been supported cuts to Social Security to pay for the 1%’s tax cuts (under the guise of balancing the budget), so if Social Security funding falls into the general fund, its likely in trouble, and very likely in trouble if Mitch McConnel still controls the Senate, and never more so than in the coming years if and when we decide to pay off some of the Trump deficit.

  3. Thus, a second-best solution would be to lift the cap on the tax, so that wages above the first $137,700 of annual income get taxed at the same rate (or higher?) than wages to less-well-paid workers. To the extent that this wouldn’t fill the gap — an extent that would depend on how soon we start it — we should earmark some other progressive tax to make up any shortfall.

Posted in 2020 Election, 98%, Econ & Money, Law: Tax | 3 Comments

Researcher Casts Doubt on Effectiveness of Earned Income Tax Credit

The Earned Income Tax Credit is widely touted as a triumph of intelligent poverty relief.  Now Matt Bruenig suggests this is all wrong.

A bit of background: Suppose you want to give poor people money, but also don’t want to discourage work.  Yet you also don’t want to give money to people once they are earning enough not to be poor.  Imagine a program that provides, say, $6000 benefits up to an arbitrary cut-off, say earnings of $12,760 (the poverty line for a single person) per year.  The reason you don’t want to do that is that a person looking at a raise from $12K to $13K would likely find that the $1K raise actually cost them $5K when you factor in the lost benefits — a major disincentive.

The policy lesson was to do graduated cuts — none at first, so the first marginal extra dollar went right into the working poor pocket, and then on a percentage basis, so the marginal benefit of “working more” (actually, earning more) was always significant net of taxes.  A key feature of the EIC is the benefits are much more generous for persons with children: a key goal of the program has always been to target working single mothers with children.

Thus, as Wikipedia summarizes it,

EITC phases in slowly, has a medium-length plateau, and phases out more slowly than it was phased in. Since the credit phases out at 21% (more than one qualifying child) or 16% (one qualifying child), it is always preferable to have one more dollar of actual salary or wages considering the EITC alone. (Investment income, however, is handled far less gracefully, as one more dollar of income can result in the sudden 100% loss of the entire credit.)

Conventional wisdom, of which on this topic I’ve always been a happy consumer, says that while the EIC leaves behind those with no job at all (a political compromise to exclude the so-called  ‘undeserving poor’), for the population it targets EIC does a great job. And that, as far as know, is what most studies have shown.  Certainly back in the days I took economics EIC was touted as a substantial, if imperfect, success story.

But, comes now a heretic:

In order to determine whether the EITC works the same way in reality as it does on paper, policy researchers have historically relied upon the Annual Social and Economic Supplement (ASEC) microdata produced by the Census. Analyses of the ASEC microdata inevitably reveal that the EITC functions perfectly, pulling around 5.6 million people out of poverty.

But this is a mirage. The reason the EITC functions perfectly in the ASEC microdata is because the EITC values for each family are imputed using a tax simulation that assumes the EITC works perfectly. You cannot evaluate the effectiveness of a program by using data that is constructed by assuming its effectiveness. Yet that is precisely how most evaluations of the EITC are currently done.

If correct, that is a major gotcha.

The conventional figures that are produced through this tax simulation have three big problems that combine to dramatically overstate how many people the EITC pulls out of poverty.

The first problem is that the ASEC data counts EITC benefits in the wrong year. For example, EITC benefits that are actually paid out in early 2019 are counted as if they are received in 2018. This makes the program appear to be perfectly targeted to those with earnings right around the poverty line, even though it is not.

The second problem is that the ASEC data assumes 100 percent of eligible people participate in the program. In reality, according to the IRS, only 78 percent do.

The final problem is that the ASEC data assumes that eligible individuals receive their entire EITC benefit. Yet the IRS says that about 60 percent of EITC recipients use a paid tax preparer, and private surveys have shown that these preparers charge fees that are equal to around 13 to 22 percent of the average EITC benefit.

Adjusting the data to account for these problems reveals that the EITC only reduces poverty by half as much as is commonly reported. These adjustments also reveal that, due to its unique private administrative costs in the form of tax preparation fees, the EITC’s administrative overhead is around 11 percent of benefits received, making it one of the least efficient welfare programs in the country.

This is the one part of the analysis that looks suspect to the uninitiated (this is not my field): how many of the people paying a tax preparation fee would have done so anyway? In other words, is it fair to ascribe to the EIC 100% of the tax preparation fees borne by its beneficiaries or is the marginal cost much less?

Even so, the measurement circularity claim, if valid, seems like a very legitimate beef.  More studies please!


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