Wednesday, December 13, 2017

Adding Monetary Costs of Lost Lives to the Opioid Crisis

Sometimes if you can justify putting a bigger dollar sign in front of a problem, then you can also justify giving it more attention. This is a useful function of "The Underestimated Cost of theOpioid Crisis," a report recently published by the Council of Economic Advisers (November 2017).  As background, here's a figure showing the rise in opioid-related deaths--more than doubling in the last decade.

Total deaths from opioid overdoses have climbed very close to the number of deaths from motor vehicle accidents, which totaled over 37,000 in 2016. Here's the age distribution of the opioid overdose deaths. They are not concentrated among elderly Americans, but rather in the 25-55 age bracket.
As the CEA report points out, the most prominent recent study of this topic in 2016 calculates the costs of opioid problems by measuring the costs of fatalities in terms of lost potential earnings. Thus, the biggest change in the CEA report is to put a monetary value on the deaths. The report notes:
"Among the most recent (and largest) estimates was that produced by Florence et al. (2016), who estimated that prescription opioid overdose, abuse, and dependence in the United States in 2013 cost $78.5 billion. The authors found that 73 percent of this cost was attributed to nonfatal consequences, including healthcare spending, criminal justice costs and lost productivity due to addiction and incarceration. The remaining 27 percent was attributed to fatality costs consisting almost entirely of lost potential earnings. ... Using conventional estimates of the losses induced by fatality routinely used by Federal agencies, in addition to making other adjustments related to illicit opioids, more recent data, and underreporting of opioids in drug overdose death certificates, CEA finds that the overall loss imposed by the crisis is several times larger than previous estimates."
Putting a monetary value on the loss of life is of course a vexed business. For previous discussions on this website of the "value of a statistical life," see "Value of a Statistical Life? $9.1 Million" (October 22, 2013) and "The Origins of the Value of a Statistical Life Concept" (November 25, 2014). The CEA report gives a quick overview of the academic literature on this point, and also on what numbers are actually used by government agencies:

Three Federal agencies have issued formal guidance on the VSL [value of a statistical life] to inform their rule-making and regulatory decision-making. The U.S. Department of Transportation’s (DOT) guidance (U.S. DOT 2016) suggests using a value of $9.6 million (in 2015 dollars) for each expected fatality reduction, with sensitivity analysis conducted at alternative values of $5.4 million and $13.4 million. According to a recent white paper prepared by the U.S. Environmental Protection Agency’s (EPA) Office of Policy for review by the EPA’s Science Advisory Board (U.S. EPA 2016), the EPA’s current guidance calls for using a VSL estimate of $10.1 million (in 2015 dollars), updated from earlier estimates based on inflation, income growth, and assumed income elasticities. Guidance from the U.S. Department of Health and Human Services (HHS) suggests using the range of estimates from Robinson and Hammitt (2016) referenced earlier, ranging from a low of $4.4 million to a high of $14.3 million with a central value of $9.4 million (in 2015 dollars). The central estimates used by these three agencies, DOT, EPA, and HHS, range from a low of $9.4 million (HHS) to a high of $10.1 million (EPA) (in 2015 dollars).
Putting a monetary value on lives lost raises other issues, too, like whether the same value is appropriate regardless of whether the lives lost are young, middle-aged, or elderly. Rather than trying to resolve these issues, a common approach is to offer a range of possible options. In this report, the preferred estimate is that total costs of the opioid epidemic in 20115 were $504 million, of which $72.3 million is the kinds of costs from the earlier 2016 study, and the costs of lost lives are $431.7 billion. As the report explains: 
"There are several reasons why the CEA estimate is much larger than those found in the prior literature. First, and most importantly, we fully account for the value of lives lost based on conventional methods used routinely by Federal agencies in cost-benefit analysis for health related interventions. Second, the crisis has worsened, especially in terms of overdose deaths which have doubled in the past ten years. Third, while previous studies have focused exclusively on prescription opioids, we consider illicit opioids including heroin as well. Fourth, we adjust overdose deaths upward based on recent research finding significant underreporting of opioid-involved overdose deaths."
I do not claim to be well-versed in this literature, but it seems to me as if lots of people are deploring the opioid epidemic, but not many changes are in the works that would plausibly bring a large reduction in these costs.

Tuesday, December 12, 2017

Snapshots of the US Housing Market: Ten Years Later

Ten years ago, December 2007, was the start of the Great Recession. Have US housing markets recovered? My go-to source for regular updates on the US housing market is "Housing Markets at a Glance," a monthly chartbook published by the Housing Finance Policy Center at the Urban Institute. Here are some snapshots from the most recent (November 2017) issue.

The total value of US housing can be broken down into homeowners' equity and the mortgage debt still outstanding. As this figure shows, during the fall in housing prices from 2006 to 2011, the total value of US housing fell by about $7 trillion--a fall of roughly 30%. Of course, the fall in housing prices didn't reduce the debt that people already owed (the blue line), so it mainly shows up in home equity (the yellow line), which falls by about 50%. Home equity is usually larger than outstanding debt, but that relationship reversed itself for a few years. However, the total value of US housing has now risen again and exceeds its level in 2006, while the amount of housing debt has actually declined a bit.
Here's a figure showing the corresponding annual change in home prices, using two housing price index (HPI) measures, one from CoreLogic and one from Zillow.

Unsurprisingly, the sharp decline in home mortgages led to severe stresses for households. This figure shows the share of home loans in serious delinquency or actual foreclosure. At its worst, about one-tenth of all mortgage loans in the entire US were more than 90 days delinquent or in foreclosure.

A much larger number of households were not delinquent on their mortgage, but found themselves "underwater"--that is, what they owed on the mortgage was more than the house would have been worth in a sale. In 2009, about one-fourth of all US homes with a mortgage had negative equity.

The economic story behind these charts--the loss of value, price meltdown, delinquencies, and negative equity--is cataclysmic.  The charts also provide some evidence on what was happening behind the scenes in mortgage finance. To understand these figures, it's useful to know that most mortgages are now "securitized," meaning that they are financed by investors who purchase financial securities based on the underlying mortgage.  These investors can be banks, pension funds, insurance companies, hedge funds, or others. The process of securitization can happen through the "government-sponsored enterprises" of Fannie Mae, Freddie Mac, and Ginnie Mae, or they can happen through the private sector with "private-label" securities.

One big change the years just before the melt-down in housing prices was that the private-label securities expanded substantially, and in particular expanded into subprime and Alt-A mortgages, which are riskier than the usual "prime" mortgage. (Alt-A is a risk category in-between prime and subprime.)
This share of the housing market going to these private-label securities, which had been rising slowly in the late 1990s, spiked for few years. But in the heat of the housing crisis, they melted away. Now the government-sponsored firms almost totally dominate mortgage-backed securities. Of course, they survive because they received huge federal government bailouts, as well as a promise that the government would stand behind them in the future.
In the aftermath of the housing market meltdown, and the near-demise of private-label mortgage-backed securities, it's no surprise that it's become harder to get a mortgage loan. Indeed, one can make a case that the market is still in overreaction mode. This index offers a calculation of the share of owner-occupied home purchase loans that are likely to default. It separates out the risk that it is due to borrowers not repaying, and the product-risk that is due to higher-risk loans being made.

Thus, you can see the arrival of the larger share of subprime and Alt-A loans arriving in the market--and how the product risk they brought with them pushed up the risk of default. The Urban Institute estimate is that time from about 2001-2003 can be viewed as "Reasonable Lending Standards," which implies that the very low level of expected defaults in recent years is part of an ongoing overreaction to what went so badly lwrong.

There's of course a lot more to this story of the Great Recession. But it does support a concern that when financial regulators see a large and rapid build-up of a new kind of high-risk loan, they should seriously consider putting on the brakes. And it's a reminder to investors that when asset prices shoot up rapidly, as housing prices did in the early 2000s, it's wise to start thinking about how to ensure a soft landing.

Monday, December 11, 2017

Do You Rejoice for China?

Hereby is an op-ed piece I wrote for the Star Tribune, published on Sunday, December 10.

"China's rise: The wealth of a nation (not ours)
By Timothy Taylor"

When the economic histories of our time are written, 30 or 50 or 100 years from now, I strongly suspect that the main topic of discussion will not be U.S. budget deficits and taxes, nor health insurance, nor the struggles of the European Union with the euro, and perhaps not even “globalization” writ broadly.

Instead, history will see our era defined by the extraordinary economic rise of China.

Although this rise has been happening right in front of our eyes for almost 40 years, it has changed the lives of more than a billion people in ways that are not fully appreciated. Here are a few measures of how life in China changed between about 1980 and the present, according to World Bank data:

  • The share of China’s population below the poverty line, modestly defined as having a consumption level of $3.10 per capita per day, has fallen from 99 percent of the population to 11 percent.
  •  Per capita GDP has risen from $200 per person to $8,200 per person.
  •  Life expectancy has risen from 66 years to 76 years.
  •  Infant mortality per 1,000 live births has fallen from 48 to 9.
  • The literacy rate for those 15 and older has risen from 66 percent to 96 percent.
  • The share of China’s total population over age 25 who have completed a secondary-level (high school) education has risen from 6 percent to 22 percent.
Such a list could be extended, of course. But the bottom line is that more than a billion people in China have risen out of a combination of grinding poverty, poor health and low levels of education to what the World Bank classifies as “upper middle income.” A Chinese person who was a young adult back in 1980 has observed the entire process in his or her own lifetime — and hasn’t yet reached retirement age.

So, do you rejoice for China? Adam Smith, who launched the systematic study of economics in 1776 with “The Wealth of Nations,” published an earlier tome in 1759 called "The Theory of Moral Sentiments,” which includes a meditation on how most people in the West think about the welfare of people in faraway China. Smith wrote:
"Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity.
“He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general.
“And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befal himself would occasion a more real disturbance.
“If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.”
In Smith’s spirit, one might ask: Do you rejoice that China’s economic growth has lifted hundreds of millions of people out of the most dire and terrible poverty? Or do you wish the process had been considerably more restrained, and slower? Or deep down, does a part of you sort of wish that it had not happened at all?

After all, the earthquake of China’s shift to a moderate prosperity has caused tremors throughout the world economic and political systems. A shortlist of the aftershocks would include economic dislocations experienced in communities throughout the world to wages, interest rates and communities; theft of intellectual property and technology; environmental costs, like severe air pollution experienced mostly in China as well as the global effects of China’s role as by far the leading emitter of carbon and other gases related to climate change; and political disruptions and muscle-flexing, especially with other Asian nations.

Of course, the rest of the world has also experienced positive effects from China’s economic transformation. Consumers of products with Chinese inputs have benefited from lower prices, and now are starting to benefit more from Chinese-developed technology. Investment funds from China have helped to finance U.S. government borrowing and have encouraged economic development in certain parts of Africa and Latin America.

But when thinking about China, it seems to me remarkably easy to focus on negative effects, and more generally on how China’s economic growth has affected the U.S. or other nations outside China. And in doing so, it seems remarkably easy to undervalue the transformative and improved lives of more than a billion of our fellow humans.

Back in 1759, Adam Smith argued that when thinking about the welfare of faraway people, it wasn’t going to be enough to rely on “love of neighbor” or “love of mankind.” He wrote that “it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love.”

Instead, Smith argued that people should listen to a much tougher judge than feelings of love or benevolence — namely their own conscience. He wrote:
“It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration.”
Dramatic and substantial real-world change is messy. In some ways, it was easier to be sympathetic with China back in the 1970s and early 1980s, when it was a poor country. It was picturesque, sentimental and sometimes just a little patronizing to watch some cultural dances and Chinese pingpong players, and sometimes at the end to make a moderate donation to help feed children or support schools.

But those times are done. Even with all the concerns about past side effects of China’s economic growth or future policy decisions that will need to be made, I rejoice for China.


Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul. He blogs at conversableeconomist.blogspot.com.

Friday, December 8, 2017

Natural Fisheries Overtaken by Aquaculture

Fisheries are a standard example for economists of the "tragedy of the commons." For any individual fisherman, it makes sense to catch as many fish as possible. However, if all fishermen act in this way and if the number of fishermen grows substantially over time, the underlying common resource can become depleted and unable to renew itself. In fact, this scenario has actually taken place with the world's natural fisheries, where production peaked a couple of decades ago and has been stagnant or declining since then. The just-published OECD Review of Fisheries: Policy and Summary Statistics 2017  notes: "Production of wild-caught fish in OECD countries is considerably below its peak in the late 1980s and continues to decline."

There are two ways out of this box. One way is to figure out a method of limiting what fishermen catch, which would over time allow natural fishing stocks to rebuild so that the total catch could be greater in the medium- and long-run. I've written about proposals and analysis along these lines in
"Saving Global Fisheries with Property Rights" (April 12, 2016) and"More Fish Through Less Fishing" (May 10, 2017). The obvious difficulty is while would be in the broad interest of a fishing industry to have limits on what can be caught, so that the resource is preserved, the practical issues of determining who should be allowed to catch how much and enforcing such decisions can be difficult.

The other approach is to have the fish-production migrate away from wild catch, and move toward "aquaculture," in which a certain body of water is no longer a common resource, but instead is owned by a fish producer. Aquaculture appears to be on is way to surpassing natural catch. As the OECD report notes:
"Global aquaculture production already exceeds the volume of catch from wild fisheries, if aquatic plants are included. Annual average aquaculture growth in OECD countries has accelerated and now averages 2.1% per year. Globally, it is even more rapid, at 6% per year. Moreover, average prices of aquaculture products are increasing ..."
Most of the OECD report is a point-by-point overview of what is happening in individual countries. There is lots of "reviewing and revising," and "advancing reforms" and "latest major policy developments." But at least to me, it's revealing that "Countries are also working actively to promote the sustainable development of aquaculture, which is seen as the primary source of future growth in fish production." This emphasis suggests that the process of rebuilding natural stocks of fish has a long way to go.

There is also a chapter on government support for the fishing industry. In most countries, other than China, fishermen are not supported directly, but instead the industry received indirect support equal to about one-sixth of its annual production. The OECD report notes:
"The Fisheries Support Estimate (FSE) Database now inventories budgetary support to fisheries that totals USD 13 billion (EUR 11.7 billion) in 33 countries and economies in 2015. For the first time, data for the People's Republic of China (hereafter, "China") is included in the database, revealing the scale of policies in this important fishing nation. Nearly 88% of all support transferred to individual fishers recorded in the database originates in China. In a positive development, China has announced plans to progressively reduce this subsidy. For most other countries and economies in the database, support to general services to the sector, rather than transfers to individual fishers, dominate. Governments invest a significant amount of resources to this kind of support, which includes management, enforcement, research, infrastructure and marketing. On average, these expenditures by government equal 16% of the value of landings: that is, USD 1 in every 6 earned by the sector. While some governments recoup these costs from fishers, this approach is not commonly applied and accounts for only a small percentage of the total outlay on general services to the sector."
The geography and policy issues fisheries is in many ways more national and regional than truly international. But the broader management of ocean resources and ecology is a global issue, with fisheries as one measure of the health of this ecosystem.

Thursday, December 7, 2017

Why More Americans Seem Stuck in Place

One traditional stereotype of the US economy is that it includes a high degree of physical mobility of workers and families: between states, between rural to urban areas, between suburbs and inner cities, and so on. In theory, this mobility offers possibilities for adjusting to economic shocks and for seeking out opportunities, which in turn part of what makes a fluid and flexible market economy work. But in fact, Americans are moving less. David Schleicher discusses the issue in "Stuck! The Law and Economics of Residential Stagnation," appearing in the Yale Law Journal (October 2017, 127:1, pp. 78-154). He writes (footnotes omitted):
"Leaving one’s home in search of a better life is, perhaps, the most classic of all American stories. ... But today, the number of Americans who leave home for new opportunities is in decline. A series of studies shows that the interstate migration rate has fallen substantially since the 1980s. Americans now move less often than Canadians, and no more than Finns or Danes. ... [M]obility rates are lower among disadvantaged groups and that mobility has not increased despite becoming “more important” to individual economic advancement.
"More troubling still, Americans are no longer moving from poor regions to rich ones. This observation captures two trends in declining mobility. First, fewer Americans are moving away from geographic areas of low economic opportunity. David Autor, David Dorn, and their colleagues have studied declining regions that lost manufacturing jobs due to shocks created by Chinese import competition. Traditionally, such shocks would be expected to generate temporary spikes in unemployment rates, which would then subside as unemployed people left the area to find new jobs. But these studies found that unemployment rates and average wage reductions persisted over time. Americans, especially those who are non-college educated, are choosing to stay in areas hit by negative economic shocks. There is a long history of localized shocks generating interstate mobility in the United States; today, however, economists at the International Monetary Fund note that “following the same negative shock to labor demand, affected workers have more and more tended to either drop out of the labor force or remain unemployed instead of relocating.”
"Second, lower-skilled workers are not moving to high-wage cities and regions. Bankers and technologists continue to move from Mississippi or Arkansas to New York or Silicon Valley, but few janitors make similar moves, despite the higher nominal wages on offer in rich regions for all types of jobs. As a result, local economic booms no longer create boomtowns. Economically successful regions like Silicon Valley, San Francisco, New York, and Boston have seen only slow population growth over the last twenty-five years. Inequality between states has become entrenched. Peter Ganong and Daniel Shoag have shown that a hundred-year trend of “convergence” between the richest and poorest states in per-capita state Gross Domestic Product (GDP) slowed in the 1980s and now has effectively come to a halt."
Schleicher makes the argument that state and local economic policies (and a few federal ones) are major contributors to this lack of mobility. More broadly, he argues that state and local policy is often much more strongly affected by those voters already in place who prefer stability, rather than by those who have not yet moved to the area and might prefer evolution and growth.
"[S]tate and local (and a few federal) laws and policies have created substantial barriers to interstate mobility, particularly for lower-income Americans. Land-use laws and occupational licensing regimes limit entry into local and state labor markets. Differing eligibility standards for public benefits, public employee pensions, homeownership tax subsidies, state and local tax laws, and even basic property law doctrines inhibit exit from low-opportunity states and cities. Building codes, mobile home bans, location-based subsidies, legal constraints on knocking down houses, and the problematic structure of Chapter 9 municipal bankruptcy all limit the capacity of failing cities to shrink gracefully, directly reducing exit among some populations and increasing the economic and social costs of entry limits elsewhere.  ....
"A number of these policies changed substantially in ways that made populations stickier during the period when mobility fell. It is not clear whether these legal changes caused declines in mobility, or simply failed to push back against “natural” changes that reduced mobility—such as an aging population, declining churn in employment, and decreasing diversity of employers by region due to the increasing economic dominance of the service sector. But state and local policies in part dictate where people move, particularly by keeping people out of the richest metropolitan areas and best job markets. Whether as a direct cause or as mere bystanders, state, local, and federal laws therefore bear some responsibility for declining interstate mobility.... In aggregate, these local and state policies play a substantial role in creating or failing to combat the central macroeconomic problems of our time: slow growth rates, increasing inequality of wealth and income, and the difficulties of balancing inflation and unemployment. ...
However, state and local policies must answer to state and local needs, which are often in tension with broader national interests. ... [T]he structure and process of state and local government decisionmaking often overrepresents the voices of those local residents who care the most about stability and the least about growth.  State and local governments have few incentives to consider broader national economic implications when writing zoning codes or establishing public pension rules. ... Where local or state governments have the power to limit entry or reduce exit, the harm to agglomerative efficiency, and thus national economic output, is substantially increased.
Mobility has traditionally been a way of smoothing the transitions that are a part of any dynamic and growing economy. Of course, lack of mobility isn't all that's ailing US labor markets. But I think it's a meaningful contributor.

Wednesday, December 6, 2017

What Financial Risks are Lurking

The Office of Financial Research, within the US Department of the Treasury, was created by the  Wall Street Reform and Consumer Protection Act of 2010 (commonly known as the Dodd-Frank act), to provide analysis and data  for the Financial Stability Oversight Council, another creation of the same law. It's Financial Stability Report 2017 discusses some "key vulnerabilities" of the financial system.

Cybersecurity Incidents. "Cybersecurity incidents rank near the top of our threat assessment because of the potential for disruption of operational and financial networks, and the damage such disruptions could cause to financial stability and to the broader economy. Cyber incidents can affect financial stability if defenses fail."

Resolution Risks at Systemically Important Financial Institutions. The term "resolution risk" refers to what process will begin if a big financial institution becomes insolvent. The regulators are still struggling to address some possible issues. "The treatment of derivatives held by a failing financial firm continues to present a conundrum for policymakers seeking to balance contagion and run risks against moral hazard concerns. Tools for orderly resolution of failing systemic nonbank financial firms remain less developed than for banks, despite the material impact of some nonbank failures in the past and the growing importance of nonbanks, particularly central counterparties (CCPs), in the financial system."

A Single Bank Deals with all Treasury Securities. The Treasury market will soon be more dependent on a single bank for the settlement of Treasury securities and related repos. A service disruption, such as an operational risk incident or even the bank’s failure, could impair the liquidity and functioning of these markets because some customers will need time to move their operations elsewhere. It could also disrupt other markets that rely on Treasuries for pricing and funding. The 2007-09 financial crisis showed the damage that can be done if activity in short-term funding markets is constrained. Dealers in Treasury securities use clearing banks to settle Treasury cash transactions. Since the 1990s, these services have been provided by two clearing banks, JPMorgan Chase & Co. and Bank of New York Mellon Corp. (BNY Mellon). With JP Morgan Chase’s announcement in July 2016 that it intends to cease provision of government securities settlement services to broker-dealer clients, this business will be concentrated in a single bank. A disruption in BNY Mellon’s Treasury settlement could have broad implications for the Treasury market. It could disrupt trading in Treasuries. If settlement services were interrupted for an extended period, risks could spread further to markets that rely on the Treasury market for hedging and pricing."

Fragmentation of Stock Markets. In 1996, almost all stock trading happened on the main exchanges of the NYSE or Nasdaq. Now, NYSE and Nasdaq each run a number of separate exchanges, and there are 50 off-exchange stock markets. This fragmentation raises possibilities of  playing one market against another, or of liquidity failing in one market with effects cascading across other markets.

The Shift Away from LIBOR. The London Interbank Offered Rate, or LIBOR, has long been a benchmark for global financial transactions. But some will remember the scandal about a decade ago when it came to light that some traders had been making money by nudging the benchmark rate up or down. But LIBOR is no longer a good benchmark.
"Interest payments on at least $10 trillion in credit obligations and more than $150 trillion in the notional value of derivatives contracts were linked to U.S. dollar LIBOR at the end of 2013. But LIBOR is unsustainable across a number of currencies. It is based on a survey of a shrinking pool of market participants and reflects transactions in a shrinking market. Most LIBOR survey submissions are based on judgment rather than actual trades, and the rate tracks unsecured transactions, which represent a small share of banks’ wholesale funding."
A transition is underway to a new benchmark rate, the Secured Overnight Financing Rate (SOFR), which will be generated by the Federal Reserve Bank of New York. But shifting over tens of trillions of dollars in transactions from one benchmark rate to another may bring some bumps.

Risks if Low Interest Rates and Volatility Increase Risk-Taking. "The OFR has highlighted in each of our annual reports the risk that low volatility and persistently low interest rates may promote excessive risk-taking and create vulnerabilities. ... The increase in already-elevated asset prices and the decrease in risk premiums may leave some markets vulnerable to a large correction. Such corrections can trigger financial instability when important holders or intermediaries of the assets employ high degrees of leverage or rely on short-term loans to finance long-term assets. ... Equity valuations are high by historical standards. The cyclically adjusted price-to-earnings ratio of the S&P 500 is at its 97th percentile relative to the last 130 years. ... Real estate is another area of concern. U.S. house prices are elevated relative to median household incomes and estimated national rents, although these ratios are well below the levels observed just before the financial crisis. ... Valuations are also elevated in bond markets. ... Duration — the sensitivity of bond prices to interest rate moves — has steadily increased since the crisis."

Other concerns are mentioned as well, but just to be clear, the 2017 report is in no way alarmist or predicting doom. Instead, the lesson is that it's a lot better to deal with vulnerabilities at times when the financial system is not under stress or in crisis. 

Tuesday, December 5, 2017

Federal Income Taxes at the Highest Income Levels

There's an undeniable fascination with looking at the highest income levels and their tax payments. Adrian Dungan provides a glimpse in "Individual Income Tax Shares, 2014," which was published in the IRS house journal Statistics of Income Bulletin (Spring 2017, pp. 12-23).

Here's a figure showing the share of returns and the share of income taxes paid. For example, the top 1% of income tax returns in 2014 accounted for 20.6% of all income, but 39.5% of all income tax. The top 50% of all tax returns accounted for 88.7% of all income and 97.3% of all income tax. Which in turn implies that the bottom half of all tax returns accounted for 11.3% of all income and 2.7% of all income tax.

Here's a figure focused on the very upper end of this distribution. About 137 million tax returns were filed in 2014. Thus, the top 1% of those returns refers to the top 1.37 million tax returns; 0.1%, the top 137,000 returns; 0.01%, the top 13,700 returns; and 0.001%, the top 1,370 returns. The bars for the top 1% show the same numbers as in the figure above. But the top 0.001% accounts for 2.1% of all income and 3.6% of all income taxes.

What are the income levels for these different groups? The top 10% kicks in at about $130,000; the top 1% is at $460,000.
At the extreme upper end, the top 0.001% of tax returns reported income of nearly $60 million in 2014.
Finally, here's some information on the average income tax rates paid by those in the highest brackets. A few points are worth noting here: 1) This is an average tax rate, not a marginal tax bracket--so these people are paying much higher tax rates on the marginal dollar; 2) Average taxes on those with very high incomes rose in 2012; and 3) The very highest income levels of 0.01% and 0.001% have slightly lower average tax rates, probably because these very high levels of income are likely to take the form of long-term capital gains that are taxed at a lower rate than regular income.

A few words of warning are appropriate before over-interpreting the figures here. These figures and percentages apply only to federal income tax. They do not cover the federal payroll taxes that fund Social Security and Medicare, nor do they cover state and local taxes like sales, property, and income taxes. Thus, the figures do not show overall tax burden. The higher burden of income taxes on those with high income levels, as a share of their incomes, can be thought of as counterbalancing how other major taxes like sales tax and payroll taxes weigh more heavily on those with lower incomes, as a share of their incomes.