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Macro Shifts and Distributional Impacts

Paper Session

Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM

Pennsylvania Convention Center, 106-A
Hosted By: Society of Government Economists
  • Chair: Brian W. Sloboda, University of Phoenix

Imperfect Competition, Secular Stagnation and Factor Shares

Ignacio Gonzalez
,
Columbia University and American University
Gabriel P. Mathy
,
American University

Abstract

Secular stagnation is a term coined to describe the last 30-year period of lower economic growth and declining interest rates. Among the potential causes of secular stagnation, the rise of monopoly rents has gained increasing attention in the current policy debates (Furman and Orszag, 2015; Summers 2016; CEA, 2016). We build a growth model with a corporate sector and imperfect competition and we show that the rise of monopoly power in both labor and goods markets is indeed consistent with phenomena that have characterized the post-1980 U.S. economy, namely, the rise of asset prices and corporate profits, the slowdown of output and investment, the stagnation of wages and the decline of the labor share. All of this, along with empirical indicators of increases in monopoly power, might be taken as evidence that increasing market power is a crucial factor to explain the evolution of the U.S. economy during the last three decades.

Tax Rates and Progressivity: Was the System More Progressive when the Top Rate was 91 Percent?

Gerald Auten
,
U.S. Treasury Department

Abstract

In 1960, the top individual income tax rate was 91 percent and the corporate tax rate was over 50 percent. The top estate tax rate was 70 percent and applied to a larger fraction of decedents. In addition, the more regressive payroll tax rates for employees and employers for Social Security was only 3.0 percent vs. 7.65 percent. Some economists have suggested bringing back top rates of as much as 80 percent. But how progressive was that high rate tax system compared to the current one? The tax system of the 1960s has been described as “dipping deeply into the incomes of the wealthy, with a sieve.” The Tax Reform Act of 1986 and other tax reforms broadened the tax base and repealed loopholes to pay for lowering the tax rates to reduce distortions and improve economic incentives. This paper presents new evidence on the average effective tax rates of the top 1 percent as compared to the rest of the population for the period 1960 to the present. A finding that may be surprising to many is that the tax system in 2013 (after the tax increases in that year) was just as progressive as the tax system in the 1960. This conclusion, however, is consistent with Brookings studies done at that time that showed that effective tax rates at the top were not all that high. This presentation focuses on a key aspect of a larger project on income measurement and inequality.

Effects of Trade on the United States Labor Market: Mobility and Market Structure

Caitlyn Carrico
,
Purdue University
Zeynep Akgul
,
Purdue University
Marinos Tsigas
,
U.S. International Trade Commission

Abstract

"As popular media highlights a backlash against globalization and trade, economic literature underscores the distributional effects of trade shocks on workers by skill, region, and time frame. In actuality, the extent to which workers are affected depends on the worker’s ability to adjust. In economic models, the extent to which we replicate trade shocks and their effects depends on theoretical specification of markets as well as implementation of worker mobility. In this paper, we use a quantitative trade model to analyze the distributional effects of trade shocks across occupations in the U.S. under three different market specifications and across a range of labor mobility assumptions.

For the base specification, we use a framework of perfectly competitive firms and international trade at the bilateral country-level. For the first alternate specification, we introduce direct cross-border supplier-buyer linkages. For the second alternate specification, we additionally introduce monopolistic competition and heterogeneous firms. By considering a span of specifications, we can measure the difference which each successive theoretical innovation contributes to results.

In each theoretical specification, we include heterogeneous workers which we distinguish by occupation. We use data from the U.S. Bureau of Labor Statistics and the U.S. Department of Agriculture to differentiate workers by occupation. For each specification, we alter elasticities governing labor mobility to analyze how labor adjustment contributes to results. We extend the GTAP data base to include twenty-two labor categories in the U.S. following \citet{Carrico_2014}, while retaining the standard unskilled and skilled labor categories in the rest of the regions.

In this paper, we examine how trade shocks following a reduction in variable and fixed trade costs affect the U.S. labor market. With further economic integration workers in production occupations face the lowest gains from trade as import competition induces contraction in manufacturing sectors.

In the first alternate specification, we explore the compositional difference of fixed and variable costs of firms and its general equilibrium effects on the U.S. labor market. We contribute to this literature by taking firm heterogeneity and extensive margin effects prevalent in the manufacturing industry into account. For this purpose, we use the newly developed GTAP firm-heterogeneity model, where we explicitly model monopolistic competition with heterogeneous firms based on the seminal work of Melitz (2003). In particular, the GTAP firm-heterogeneity model (i) accounts for fixed costs in domestic and export markets, (ii) traces out self-selection of firms into domestic and export markets based on productivity differences across firms, (iii) captures trade growth along the extensive margin, and (iv) incorporates consumer love-of-variety."

Identifying Multilateral Dependencies in the World Trade Network

Peter R. Herman
,
U.S. International Trade Commission

Abstract

When studying the formation of trade between two countries, traditional modeling has described this decision as being primarily dependent on characteristics of the two trading partners. It is likely the case, however, that this decision to trade is dependent not only on the two countries involved but on the patterns by which all partners trade with one another. Standard efforts to control for these higher level dependencies such as the inclusion of multilateral resistance measures provide only a blunt reflection of these dependencies and neglect valuable information that the global trade network contains. This paper proposes the explicit incorporation of higher level dependencies in traditional modeling frameworks. Two network-based, gravity-inspired approaches are considered–a probit model of trade incidence and an exponential random graph model. Each approach uses the structure of the entire world trade network to explain the formation of trade between individual countries. The use of exponential random graph modeling techniques (ERGM) in particular, which have largely been unexplored in economics, provides a powerful yet flexible framework with which to model and estimate bilateral trade in a way that allows for the identification of a wider variety of multilateral dependencies and a deeper consideration of the patterns that emerge in the world trade network. Using a standard gravity data set, a series of probit and ERGM estimations are conducted for observed world trade networks. The results from these models provide strong evidence that higher level dependencies are present in international trade and that ERGM analysis represents an effective modeling environment in which to study them.
Discussant(s)
Benjamin Bridgman
,
U.S. Bureau of Economic Analysis
Alejandro Badel
,
U.S. Bureau of Labor Statistics
Shushanik Hakobyan
,
International Monetary Fund
Maria Tito
,
Federal Reserve Board
JEL Classifications
  • E0 - General
  • F0 - General