Wednesday, August 31, 2011

Why I have Trouble Paying Attention to Libertarians

From a naive reading, it would seem that I'd have a lot in common with libertarians, after all the policies I favor can generally be described as socially liberal and economically conservative, at least in some senses of the term since I think spending has to rise but that deficits need to be closed (if the groups still existed I think Teddy Roosevelt Progressive or Eisenhower Republican updated to the 21st century most accurately describes my views).  But this isn't accurate once policy tendencies beyond the completely facile come into play, myself and libertarians exist in completely different and incompatible paradigms.

I was going to let this past, but it has been nagging at me.  Over at DiA a post on the new MLK memorial reminds me of why I disagree with libertarians so vehemently.  They simply don't have any well developed theory of the state, how humans groups form or act, or really about the very concepts of identity and culture and the role these play in human societies and the economy.  Their perspective is simply grossly inadequate for exploring political economy questions generally since they stick so closely to a fundamentalist definition of individualism without considering its historical evolution or role.  While a very minor issue, I think the MLK memorial post exhibits the very worst aspects of libertarian ideology and exposes why it is so ill equipped for understanding human action.

That King's monumental likeness was chiseled from stone by an ace aesthetic hype man for Mao, a dictator responsible for " one of the most deadly mass killings of human history", suggests a couple things. First, and most obviously, it suggests that monuments like this one are pieces of propaganda, attempts to manipulate a state's citizens (or subjects, as the case may be) into parcelling out honour, reverence and esteem according to an "official" account of the country's history. This is a line of business most states are in, but it is not a line of business I think liberal states ought to be in, even if from time to time they happen to exalt worthy heroes, such as Martin Luther King. Second, not only is propaganda morally dubious, but it is almost always aesthetically repugnant. The "worker's-paradise seriousness" Mr Page rightly detects in Mr Lei's new work is a sign that the artist has no notable interest in his subjects, but is instead a master of achieving a certain cheap effect, a vacuous sublimity easily mistaken for awed reverence, by means of a formulaic, emotionally rote approach to monumentality. Mr Lei is not hired to offer his interpretation of a subject—to create a portrait of a real, complicated man which reflects the insight and judgment of his personal artistic genius. On the contrary, he is hired not to interpret, to apply the same psychologically dead and mendaciously indifferent treatment to all his subjects. Mr Lei is a political bullshit artist, and it shows. That Chinese white granite is especially durable is a stupid reason to get stuck with this kind of soulless stone agitprop.

The first thing I'll deal with is the factual nature of these statements, though this is just to illustrate how ideologically biased this post it, it has little bearing on my critiques of the libertarian point of view.  First of all, the state played only an indirect role in developing this monument, only $10 million of the projects roughly $120 million cost was paid by the state as matching funds.  Most of the funds were raised by a foundation originating with King's fraternity and donations by private charities.

While the government did have to prove the design, they were not the motivating force behind suggesting what was chosen.  In fact, at least one government agency overseeing the design objected to it initially, though their objections were (obviously) overcome. 

The Flaws with Investment Centric Economic Thinking

After writing as much as I have recently on taxes I can't help but comment on a few articles in the NY Times today.  I'll admit upfront that this coverage may be an example of selection bias in the news, I couldn't find similar coverage of candidate's views on taxes in any of the more conservative sources I checked.*

The first article is a NY Times editorial on some candidates talking about tax rises on the poor.  This is absurd, US labor force participation has been falling since peaking in 1997-2000 and it is not at all controversial to point out raising taxes on these groups will lead to declining employment.  This is the last thing we need right now.  This is particularly wrong headed since the US is a naturally high participation rate economy, in a comparison of 10 countries the BLS found that we had the highest participation rate between 1992 and 2000, by 2002 Canada had overtaken us, by 2007 both Canada and Australia had, and by 2010 Sweden can be added in as a tie.  Now, I don't think this is all policy but I do think it helps to indicate that the Bush tax cuts focused on the wealthy didn't help and tax raises on the poor to help fund this will just exacerbate the situation.

The second article was on how tax evasion by companies was becoming a big area of emphasis to increase profits, some CEOs were making more than their company's Federal tax payments.  Not a lot of deep information here but it does indicate that the complexity of our tax code is extremely problematic and that it already favors the successful to such a degree that we must be far into the realm of diminishing returns to potential investment from this favorability.

The third, and most disturbing, article is on Huntsman's suggested tax changes.  I wanted to like Huntsman, but after this I can't.  He suggests:

There, aides said he will repeat his call for a tax code with dramatically lower individual and corporate tax rates, an end to taxes on capital gains and dividends and the elimination of the alternative minimum tax.
But in exchange, Mr. Huntsman will say the tax code needs to be stripped of all loopholes, deductions and tax giveaways, a step that would make the changes neutral in terms of how much money would flow into the government’s coffers.

Being in the middle of some reading on taxes I have to say this would be disastrous.  While I agree with the need to strip deductions and that rates should be lower to account for this we need more revenue to close the deficit, saying taxes would be dramatically lower would offset much, if not all, of the deficit reduction benefits.  More generally, our big problem right now is employment, growth wasn't doing so bad until the recession.  While whether or not this policy would increase growth is disputable there's no dispute that it would lower employment.  Shifting the tax burden away from capital and towards labor will activate many of those disincentives to work that I tend to go on about, such as in yesterday's post.  This policy would so heavily favor capital over labor that companies would have an incentive to eliminate labor in favor of capital even in some cases where this would be inefficient before taxes.  I have some idea of what economic theory is behind this, but it's madness and contradicts empirical findings on taxation.  

We need to have a real debate about taxes in this country; we have one of the most inefficient tax codes in the developed world.  But to do this we have to address what we actually know about taxes and the mixed effects they have, it's not just a trade off between taxes and growth but also a trade off regarding employment, labor and capital ratios, income inequality (and associated effects on politics as well as growth), human capital vs. physical capital, human capital vs. employment, etc.  Right now, this debate looks like the tax discussion is in its most damaging potential form with any action more likely to do greater harm than good.  Even sensible reforms, like lowering rates and eliminating loopholes, is being combined with other tax reforms that would do more than enough damage to make up for the gain.  It's frustrating.

*I am also reminded of how annoyed I am at the increasing number of restrictions on which articles are viewable at the Wall Street Journal.  It used to be part of my daily news read but too little is available today. This is made worse by the fact that unlike most major papers they are not available (or were not, it has been a while since I checked) on LexisNexis so I can't even get it that way.

[Edited for clarity and for errors]

Tuesday, August 30, 2011

More Musing on Taxes

While I haven't found anything that can directly answer my question on whether the incidence of taxation at the very top of the pyramid makes a difference on growth rates, it has led me to reading some excellent papers on taxes.

A couple of these are available without journal access.  The main one I want to discuss is the OECD paper "Taxes and Economic Growth" which can be downloaded from here.

The first thing I want to mention is that this paper does claim that highly progressive tax brackets are associated with lower rates of entrepreneurship.  However, a quick look at Wikipedia (sufficiently accurate for my purposes here) showed that many states have their top tax bracket kick in well before the very highest income brackets are reached (though I could not easily find data on income by decile for many countries, this is representative of my time commitment rather than lack of data I'm sure).  This is consistent with my earlier hypothesis, that entrepreneurship is concentrated in the top fifth of the distribution but the top 1% (or some subset thereof) is likely acting differently.  Of course, this does weigh against that hypothesis but I don't have data specifically analyzing changing rates at the top 1% so it also does not falsify it.  Perhaps interestingly enough, consulting Saez for the income among the top earners in the US does reveal we are one of the few with an additional bracket (at $372,951) not far off from the $382,600 Saez identifies as the top 1% (these are different years, but I'm lazy and I doubt there has been much change).

There are a few other takeaways from this paper.  First of all, there are strong labor promoting effects (with some costs) for high personal exemptions.  I can personally speak to this, I had worked in both Canada and the U.S. out of my undergrad in fairly low wage jobs and I really noticed the difference in the basic personal amount (or standard deduction in the U.S.).  Here in the U.S. we could gain substantial efficiencies from raising this amount, as well as addressing equity concerns.  It also claims that after tax benefits are far more efficient than using the tax code for this purpose, consistent with other things I've read.

The paper also discusses some other important to consider impacts of income taxes such as reductions in human capital investment since higher income is taxed at a higher rate.  Again though, I think there is a possibility that this result has more to do with taxing the top decile than it does with taxes on the top 1% or so.

The second thing is how much more efficient taxing property is.  The biggest thing here is how negative housing incentives are to growth, it distorts investment and spending in a large number of ways and is very costly to government.  Definitely the single biggest problem problem in most tax schemes.  Very well known but it's nice to have the links spelled out in a format where it can be compared to other taxes.

The second observation here is how efficient estate taxes are, especially if applied at the individual rather than the estate level.  This is also well known so I won't linger.

The third issue related to property taxes is how well capital gains taxes hold up to other means of taxing business holdings.  While there are disadvantages to taxing capital gains relative to other options it looks pretty good.  Ultimately, capital gains are more of a property tax than they are a disincentive to saving.

The paper also points out that corporate taxes are very bad for growth, though considerations involving foreign investment (which the paper mostly considers attracting FDI, for the US though I'm more worried about taxes leaking out, our market is large enough that I'm more concerned about lost income than I am about the need for FDI) and the possibility of people trying to conceal personal income as business income also come into play here.  Still, a simple, low corporate tax rate is worth it for the efficiency gains as long as they are not radically different from other taxes.

Also, consumption taxes are good especially when they are achieving other social ends, such as taxes on pollution and drugs.

My ending thoughts on this?  They haven't changed much, though this paper has made me think a bit more about the negatives of income taxation as well as the potential negatives of too big of a difference between income and corporate taxes.  My ideal tax reform remains eliminating the vast majority of deductions and exemptions, lowering rates overall especially the corporate tax, raising property taxes particularly on housing and capital gains, adding a VAT, adding in more excise taxes particularly on additional drugs such as cannabis as well as on pollution and perhaps soft drinks, instituting a much larger personal exemption, and imposing a higher tax on the top 1%, ideally a smooth upward progressive tax rate (these guys have graphing calculators and can hire accountants so I'm not too worried about the math involved for this particular segment).  Entrepreneurship concerns* are increasingly leading me to think that the progressivity of taxes after the personal exemption can be reduced until the very peak but I wouldn't eliminate it entirely.

*Asset levels are the single largest factor determining new business start ups.  Historical cases lead me to think that new, disruptive (creative destruction) businesses tend to be concentrated in those just below the very top of the income pyramid meaning these individuals should be a focus of particular concern.  However, helping those lower down the scale build up assets is also critical to smaller scale entrepreneurship.  Benefits are probably a bigger deal here.  Providing health care and a greater level of income supports for failed entrepreneurs will help here as well as getting rid of a lot of means testing requirements to help those on the lower rungs who want to take a chance on something like starting a restaurant to do this without also risking their health and benefits as they save up for the initial investment.

Monday, August 29, 2011

Freedom of Conscience and Liberty

Writing the last post made me think a bit about the roots of economic and political freedom.  I tend to locate liberty a step further back, in freedom of conscience.  Ultimately, I feel that liberty is inherently about the individual's own struggle to discover for themselves what is right and moral, other forms of liberty and secondary to an individual's right to commune with their own soul.  To secure liberty, laws and social norms must be constructed to enhance this process of self discovery to the extent possible, allowing individuals to become dependent on others with no way to fulfill their obligations is the surest way to erode moral autonomy.

This requires that laws be rooted not in some kind of objective morality but rather that they are rooted in mutual recognition of both autonomy and dependency, with society seeking to regulate the interactions, whether conscious and direct or unintended and indirect, between individuals rather than trying to restrict us solely as individuals.  Dependency is our natural state, we are born with debt to those that brought us into the world and to the society that allows us to be something more than barely differentiated savages scratching for roots in the dirt.  Autonomy is the recognition of our individual self-worth that allows us to perform actions to pay back the infinite debt incurred by our existence, by working to benefit others we not only to enhance our own social position through wealth but help to construct the society that will raise others above savagery.  This reciprocity between society's role in lifting us up and our role in supporting society is what allows us to exist in a state of liberty, rather than bondage.

But I am brought back to what Mill said in his introduction to "On Liberty." 

By liberty, was meant protection against the tyranny of the political rulers... Their power was regarded as necessary, but also as highly dangerous; as a weapon which they would attempt to use against their subjects, no less than against external enemies.

What worries me, when I'm feeling pessimistic anyway, is that this conception of liberty regarding political rulers has been becoming more prominent in our culture rather than one regarding individual autonomy and individual social, moral, and economic evolution.  We seem increasingly willing to restore the local institutions that were previously the source of our spiritual bondage in order to weaken our obligations to the state that has rusted away these iron bonds.

What we have forgotten is also mentioned in Mill:

To prevent the weaker members of the community from being preyed on by innumerable vultures, it was needful that there should be an animal of prey stronger than the rest, commissioned to keep them down.

In Mill's day no individual was able to amass a long standing fortune or personal reputation and power significant enough to be more than a local actor.  Businesses were family run and often dependent on the local economy for their survival.  Individuals were curbed both by dependence on the international economy and on the opinions and needs of their local communities, rendering them harmless and a general boon to their society.  

The wings of these minor harpies have been clipped for so long that we have forgotten how dangerous and repressive these minor harpies were when in full flight, it is either too long ago or too distant from our experience to appreciate the dependency that results from these grossly unequal interactions.  Rather than seeking to simply curb the excesses of power of the king of the vultures our culture is tending in a direction that so thoroughly blinds and blunts the beak of this beast that these minor harpies are again stretching their wings to take flight.  It concerns  me that there won't be a reaction until it's too late and we'll find ourselves free of government but dependent on innumerable minor harpies and unable to make our own way in the world without tying ourselves to organizations and individuals that will give us far greater scrutiny than the state has ever chosen to do.

Social vs. Personal Evil

Surprisingly enough I thought a New York Times editorial on the movie "The Help" was really excellent.  It addresses the fact that the characters displaying racism and otherwise negative traits are almost always generally despicable people.  Rarely are these people portrayed as good people who also happen to have these traits.

This is a major problem with understanding these issues and is not limited to racism.  There is a big difference between social and individual evil.  We deal very well with individual evil, most things we consider individually evil are carried out with intent to cause harm and are easily categorized.

Social evil is very different.  All social evil has its roots in people's desire to do good.  Even concepts such as racism were grounded in people's deep beliefs in how to create a morally ordered society and the people engaging in these behaviors usually had the best of intentions.  This goes especially for the great 20th century evils, Hitler, Stalin, Mao, and Pol Pot all had ideas about what was best for their societies and lived in and created cultures that attempted to fulfill their moral vision.  Going back further in history, the Inquisition, witch burnings, and even the Mongol invasions require knowing that these were perceived by the actors involved as being measures to protect and benefit their societies (though in individual cases individual aggrandizement was certainly a factor but this aggrandizement could only be exercised because of a social and cultural consensus regarding the basic rightness of the act).

The evil of these things is rarely seen at the time by those that share the perpetrator's culture, in most cases, the belief in the rightness of these acts are widely shared.  It is only outsiders, whether those from another culture or future observers, that can properly judge the morality of social norms and customs.  We should be very, very sceptical of any claims of ability to change society on a social or moral level.  Thus far, all experiments of this type have ended badly, whether social engineering, massive economic restructuring, or conformity to rigid religious beliefs.

Sunday, August 28, 2011

Thoughts and a Question on Taxes

I've been doing some reading on taxation as well as starting Hacker and Pierson's Winner Take All Politics.  This has been making me do a bit more thinking about the interaction of the distribution of taxation and economic growth.

The question I have is whether someone knows about a book or paper that looks at the incidence of taxation by income and its effects on economic growth?   Based on my historical reading, I tend towards the belief that economic growth is primarily the result of the actions of the top quartile of income distribution (the lower part of the distribution is important, but social and economic policies other than taxation are more important here). 

However, I don't see the top 1% contributing in the same way, historically the activities of the very top of the distribution seem to be more about distributing the pie than they are about creating growth.  For the individual, more gains can be had by acquiring new businesses (or land or other limited resources) than can be had by actually growing a business.  I see this as a tendency rather than a rule, some wealthy individuals will certainly act as angel investors or take on high risk projects, given the small sample size there is undoubtedly a great deal of individual variation.

The reasoning behind this is simple.  I don't buy Schumpeter's notion that entrepreneurs are motivated by the existence of the outsize gains of a Carnegie or Gates for their risk-taking.  Rather, I think they are more concerned with the outsize returns possible relative to being a simple employee, being a restaurant owner has a lot more potential for upside than being the restaurant's cook.  At the very highest levels I see this as breaking down, if someone is already very wealthy their potential downside is too big to be taking big risks on the outside chance of rivaling Carnegie and J.P. Morgan.  The real thirst for gain, and thus for entrepreneurship is among those a couple rungs below this.

Some other thoughts making me think along these lines is that studies that look at taxes and growth tend to have mixed results when looking only at Europe and some sensitivity to time periods chosen.  The strong taxes and growth link seems to be at least partially the result of the different economic and political structures of the anglo-saxon countries relative to the rest of Europe, Japan has very low taxes and low growth as well giving at least one case with experience contrary to that of the anglo-saxon nations.  Something that stands out among the anglo-saxon countries is that we also have a very high rate of entrepreneurship relative to Europe, perhaps this, as well as other factors also correlated to lower taxes, is a bigger part of the explanation than the factors normally studied by economists.

All this is leading me to wonder if the low tax advantage has to do with promoting the fortunes of particular parts of the income distribution and little to do with taxes overall.  The very low growth experienced by the US in the last decade and the tax cuts slanted towards the very upper end of the income distribution makes me think that this part of the distribution might not have much to do with growth.  In my story, growth would be the result of the assets and access to credit among the well off and not the wealthy who aspire to rise higher.  Taxing those who have already made it heavily would have little impact on growth, if this story is correct (at this point the speculation to data ratio is rather high).  I'd like to find a paper or book examining this question in greater detail and would appreciate if someone can point me in that direction.

Thursday, August 25, 2011

Am I Not Understanding Something Here?

I find each Casey Mulligan post more baffling than the last.  Yesterday's post was on the failure of some studies praised by Krugman on stimulus spending that looked at cross-state variation.

He starts the post off by mentioning how moving Yankees stadium increased jobs in one area but decreased jobs in another.  So far so good.  He went on to say that sports stadiums displaces spending on other entertainment.  Fair enough, he doesn't claim displacement is 100% and I'd agree there is a lot.  I don't go to many sporting events, but even if I discover a really great restaurant (which is more my weakness) I probably only go out once or twice a year more because of it so I can buy displacement would be very high.

On the other hand, when I hear about a really great book I tend to go out and buy it over and above my normal book budget without checking my bank balance first, so here, displacement doesn't really exist (though my savings may be slightly less, but channeling this back towards demand is very, very indirect).

Back to where he's making sense, he points out that cross-state variation studies on the stimulus should take the national level into account.  Fair enough, but if we're talking aggregates G as a whole dropped due to decreases in state spending.  Since both state and government spending are very similar as a first approximation I'd expect the displacement effect to be very high (someone may have studied this, I'm just guessing).  So I don't know what would have to be looked at at the national level, it seems like state level comparisons might be far more appropriate here because we can get cases where net G increased at the state level, which did not happen at the national.  There may of course be some displacement between states but only to the extent where similar resources are being bid for, which may or may not be the case.

Of course, in some circumstances I would expect strong displacement effects from government spending.  A newly industrializing nation would probably see a strong displacement effect from both government and the private sector placing demands on cement, steel, and other construction goods.  If the employment rate were high, there would also be a large amount of displacement as wages get built up.  But the amount of displacement should be tightly linked to the similarity of the real goods being demanded and supplied, the more different they are, the lower the displacement should be.  Since the labor pool is differentiated, we shouldn't expect much competition at high levels of unemployment, the displacement would only occur when both are competing for workers that both find marginal and not particularly well suited for the need of either.

Looking back historically, I find a lot of evidence for demand driven rather than supply driven impacts.  One of my favorite books is Jan de Vries' The Industrious Revolution (bah links still won't work) which looked at the household economy and how households massively increased their labor supply as demand for goods such as sugar, tea, and coffee rose.  This drove both the supply of goods as well as changes in household structure that allowed for far more labor to be mobilized to obtain goods. There is far more friction today, few of us have many options to increase our individual labor supply for more goods, but the government has the ability to play a similar role by putting idle resources to work producing goods.  Assuming that government is not bidding for scarce resources, there should be little displacement effect.

Also, historically, if displacement were a significant drag on employment and growth we should expect states with small states to be the big ones today.  This isn't the case.  Great Britain had one of the largest states in the 18th century before the industrial revolution with a tax take of about 20% compared to 10 to 13% for France, 4 to 8% in China, and 4.5% falling to 2 to 3% late in the century, in the Ottoman Empire.  While distant from the main question, long run historical evidence doesn't fit the idea that state spending generally decreases growth and employment, even in the long run.  The opposite seems to be the case.

Of course, the idea that government spending displaces growth must come from somewhere.  I can assume that it does in fairly marginal and uncommon conditions, such as full employment or rapid industrialization where resources are near full utilization.  I also assume the displacement objection is using money as a stand in for real resources.  But this was never accurate, states can make money and when under pressure so do individuals.  During currency shortages in the Ming era, before the transfer of silver got under way from the west, parts of China reverted to cowrie shells as a means of exchange.  I am reading a book on Africa that mentions briefly how this happened in certain parts of Africa as well.  This is quite consistent with the Keynesian position, when demand for the means of exchange are high, resources become idled unless money is created.  Historically, even pre-modern societies realized this and responded, if very inefficiently (though the Song Chinese use of paper currency functioned quiet well at monetizing the economy for over a century and only fell apart due to military defeat and the loss of half their territory, I doubt the US dollar would hold value either if half the country was seized by foreign forces).

I'm not sure these digressions will convince anyone, but my point is there are multiple strands of evidence pointing to the importance of demand and how weak displacement effects are.  Size of government just isn't well correlated with growth over long run, historical time frames.  Displacement requires demand for similar resources, if government starts building roads as long as private industry isn't facing a shortage of steel and asphalt I see no reason for investment to be crowded out.  Money is an abstract representation of real resources and not a very accurate one, the US government printing money is equivalent to Chinese traders using cowrie shells to meet a shortage in copper cash.  If it gets otherwise idle resources working, there's no reason that displacement will occur.

Wednesday, August 24, 2011

Book Review: Do-Gooders: How Liberals Hurt Those They Claim To Help

[Updated with a new statistic for chapter 3, I had to check the raw data for comparable stats]
[ Updated 2nd time with information I happened to find interesting in the marriage report I checked for stats]

1: originating in or based on observation or experience
2: relying on experience or observation alone often without due regard for system and theory
3: capable of being verified or disproved by observation or experiment
4: of or relating to empiricism

So, what to say about a rather silly book Do-Gooders by Mona Charen (hmm, my Amazon Associates link function hasn't been working, this is annoying, not that I think anyone would want to buy this thing, but I like linking to the edition I read).  This is my first experience reading a book from the right wing rage machine (the left has one too, but they are more prone to documentaries). I don't think anyone is expecting much factual accuracy from this kind of work so I'll only go into things moderately. What does jump out at me though is this quote from the book, "Conservatives tend to underestimate the worth of their own principles-freedom, self0reliance, tough mindedness, empiricism- and seem to accept the idea that liberal values-compassion, soft-heartedness (soft-headedness?), and equality- are superior."  I can accept most of this as what I would expect from a political polemic, fair game for this genera.  This book displays all these qualities and attributes the qualities with liberals it claims to.  With one exception, there is nothing empirical about this book.  It quotes a lot of numbers but it does not seriously rely on observation, it makes a great deal out of system and theory rather than experience and observation, and it doesn't follow any kind of systematic method for collection or use of data.  The author jumps around between rates and absolute numbers with no regard for which is appropriate.  The author pays no attention to base rates, quoting statistics to prove her point without acknowledging underlying trends.  Most evidence presented is in the form or quotations and anecdotes, the fundamental attribution error (ascribing observations to human action rather than to situational factors) is rampant. 

Now, from this sort of book I wouldn't expect empirics, except empiricism is singled out as a primary virtue.  I'll go briefly through the book to point out the real howlers.

Chapter One - Judge Not
This chapter basically goes over the rise, and decline, of the crime rate in the US attributing crime primarily to liberals insistence on rehabilitation and light sentencing and the fall in crime rates to increased punishments.  The big issue this ignores is that both the rise, and later fall, in crime rates were coordinated across all developed nations, none of which had the same tough on crime approach the US used.  While US crime rates were worse in many aspects before the sharp rise, they remain so in many aspects.  There are some anecdotes of particularly stupid things liberals said, but if I desired to do so, I'm sure I could find similar anecdotes from conservatives.  This proves nothing.  Crime is not an area of specialty for me and is overall not completely understood, so I've got little more to say.  But if base rates and widely ignored correlations are not taken into account to provide an explanation, empirical methods are not being used.  The main problem in this chapter is spurious correlation and the fundamental attribution error, base rates are ignored, causality is attributed because two things are happening roughly at the same time but precise dates are not established meaning that the comparison is meaningless, and all the incendiary rhetoric and quotes amounts to no more than meaningless anecdotes.

Chapter 2 Stoking Fear and Hatred in the Name of Racial Sensitivity

This chapter is mainly polemic quotes, I don't really have anything to say about this.  With one exception, the author states that "about 180,000 ballots in Florida were not counted due to voter error: either undervoting, or overvoting.  It is impossible to know how many of the "spoiled" ballots were cast by African Americans since we have a secret ballot."

Anyone that knows empirical methods will know this is bullshit.  We do not have to know the provenance of individual ballots cast to establish how many ballots were cast by African Americans (within a certain degree of statistical error).  If we know the demographics of given counties and if we know other relevant characteristics of the voting districts in question, and we know the participation rates for the districts, then we can use statistical methods to answer this.  It will take a lot of slogging through boring data for graduate assistants but this is well within the realm of the possible (assuming data is collected for the relevant counties, not being very interested in electoral politics I don't know 100% that this data exists, but I believe it does).  If more votes are being rejected consistently in African American counties than can be explained by other factors than it is possible to establish causality.  I don't know if this is the case, but anyone that understands statistics will know that the secret ballot should have no impact on establishing the veracity of this claim.

Chapter 3 The Promise of Compassion

This is basically a long chapter on the culture of dependency argument.  Here I'm going to break out some statistics, since I have them.  A lot of ink is spilled over rising illegitimacy rates, illegitimacy increased among all groups in society not just the poor or ethnic groups.  These rates varied with no relation to changes in welfare benefits.  There is no causal relation between welfare and illegitimacy (welfare did allow more women to keep their children despite being single, however, simply giving them up for adoption is no sure way to have them adopted so this is a naive suggestion).  There are legitimate concerns regarding the decline in marriage rates and the effect this has in children, but the dates and distribution of the problem isn't right for a welfare based explanation.

There are base rate problems, she claims between 1963 and 1973 welfare caseloads increased 230%.  Population increased, the economy was substantially worse in the 1970s, and family structure and demographics have both changed.  The raw number means nothing without associating it with other changes.  Poverty also declined remarkably during this period and labor force participation also rose.  What does the increased caseload have to do with anything?

She talks a bit about welfare reform.  The main takeaway here is that work incentives were a good thing but the actual fear of liberals largely came to pass.  There is evidence that the most poor and detached women that had been long term welfare recipients simply dropped off the rolls and did not start working, this pool has likely increased.  The poverty gap (basically how much income is below the poverty line) among the most deprived groups has increased.  On the other hand, employment has increased and welfare rolls decreased dramatically and spending declined from $24 billion in 1988 to $13 billion in 1999.  But what isn't mentioned is the massive increase in work supports that accompanied welfare reform,  spending rose from $11 billion in 1988 to $66.7 billion in 1999 and non-cash work supports increased from $9.5 billion in 1993 to $18 billion in 1999.  Claims about jobs are also misleading, once the expansion was over unemployment rose and labor force participation fell, the lack of rise in welfare rolls had less to do with lack of need than it had to do with new restrictions.  There is evidence that women use welfare more strategically, in the low wage sector of the economy jobs tend to be unstable so women delay going on welfare, despite lack of income, until joblessness is prolonged.  They want to save their 60 months for when the really need it.  This does not indicate reduction in need but that women value security over present income, they want welfare as insurance and are willing to undergo deprivation to retain a safety net.

Perhaps the best example of deceptive, and non-empirical use of statistical data is when she notes that the percentage of African American children raised by married parents increased from 34.8% in 1996 to 38.9% in 2001.  What's notable about this is the implication that the percentage was rising before welfare reform and declined after.  I couldn't find exactly comparable statistics, but the birth rate among unmarried women was already falling before 1996.  According to "Nonmarital Childbearing in the United States 1940-1999, National Vital Statistics Reports, the birth rate among unmarried women had begun to fall in 1994 (and probably even earlier due to changes in reporting data in the early 1990s resulting in an overstatement of births to unmarried parents in the first few years of the decade relative to the rest).  While this is change is a good thing, it is unlikely to have anything to do with welfare reform, unless a very high degree of political information and sophistication is assumed for unmarried poor women (also the number of people on welfare isn't large enough for it to be likely that welfare policy changes would be significant in national level statistics).*

Chapter 4 Rewarding the Worst Families

There are tons of problems with the foster care and adoption systems.  It would be nice if there were enough wiling parents to adopt all the children being cared for by bad parents.  The author does nothing to establish that her alternative is realistic.  Trying to offer services to dysfunctional families is an attempt to make the best of a bad situation.  Blaming liberals for this is just absurd.  Not much more to say about this.

Chapter 5 The "Grate" Society

Yep, homelessness is bad.  No, blaming this on deinstitutionalization is not really accurate.  It is true that we let people out of institutions without putting adequate systems in place.  But institutions were very destructive to the individuals involved and extremely costly.  This chapter is mostly anecdotes and doesn't really present real alternatives.  Yes this is a problem, but some empirical evidence rather than anecdotes would have helped.  But, of course, "there has never been a more humane country in the whole history of humanity," so I guess the problems with both the earlier and current system are OK then.

Chapter 6 The Liberal War on Rigor and Patriotism in America's Classrooms

Yeah, I like standardized testing to.  Other than that, this chapter is silly.

*Incidentally, reading this report was somewhat eye opening on numbers.  I realized that some of what I had understood about welfare and teen pregnancy came from reports written in the 1980s.  There is a high degree of cyclicality in these numbers and rates rose significantly in the 1980s, meaning that some of what I though was true based on these papers may not be (then again, those writing these reports may have had better data sets, the start of the series in 1940 is likely a trough without data going further back it's hard to say what a base rate would be).  This couldn't be due to welfare since the 80s weren't great years for welfare increases but it does indicate rates were somewhat higher than I believed relative to early periods (rates also fell in the 60s and part of the 70s before rising again, total % of births decreased because births to married mothers declined more sharply, what this indicates is that planned pregnancies fell while unplanned remained stable or increased).  Of course, 1940 is very likely to have had an unusually low rate of births of all kinds, given the war going on and the lingering effects of the depression.  I'd like to have numbers going back to 1900 for better comparability.

[Update: This was interesting, pregnancy rates feel sharply among non-white women between 1990 and 1995 from 175 per 1000 to 152 in 1995 (women 18 - 44). Among all women, the decline was from 102 to 96.  The abortion rate also fell sharply between 1980 and 1995.  I have no real theoretical observations from any of this, other than I hadn't realized the high cyclicality of birth rates.  Very interesting, and certainly something that doesn't seem to match with welfare state policies.  Marriage rates also increased among women who conceived first child before marriage in 1990-1994 relative to 1980-84.  Seriously contradicts the view about welfare reform having something to do with marriage, this seems to be varying independently.

Monday, August 22, 2011

Texas and the Fallacy of Composition

As the debate over Texas heats up I become increasingly unconvinced that Texas shows a way forward for the US.  Douthat's column this morning finally inspired me to comment on it.

First of all, the composition of the employment picture shows a great deal of job growth is due to the simple effects of growth, such as government and health care.  Resisting sharp cuts to government, which is very unlike the picture in most other states, definitely helped this situation.  Oil and gas played a role in bringing in high wage jobs more high paid jobs, more supporting jobs in other sectors.  Then there is the migration picture, which seems to be driven in large part by a reputation as a job creator, which, in times like these, becomes a self-fulfilling prophecy as more people move in bringing skills and talents with them.   Avoiding the housing bust also prevented a downward spiral from developing.

So far, the picture is basically a virtuous circle of what most left leaning Keynesians say we should have been doing.  Not cutting government, supporting high wage sectors (in the case of Texas intervention wasn't required, but many states with abundant natural resources have enjoyed this prop, though they lack some of Texas' other characteristics),  and encouraging migration all help to create a positive spiral, resisting the housing bust prevented the spiral from being broken.

Of course, this positive spiral was reinforced by Texas' low cost.  But there is no reason to think the advantages of being low cost are relative to an absolute scale, rather the advantage comes form being low cost to other options.  During a downturn the comparative advantage for being low cost will be a multiple of its normal effect, if everyone is holding onto cash then cost weighs much heavier than normal.  Investors are favoring reducing downside risk over potential upside.  So Texas is strongly favored right now relative to the US.

But this is already true of the US as a whole.  We have the third lowest taxes as percent of GDP in the OECD, behind Mexico and Chile.  Compared to developed countries, the factors under the Federal government's control are already slanted towards low cost.  This relative advantage is already doing what it can do for us, factors to increase this effect, such as looser zoning requirements to lower housing costs, are under state or municipal control, not the Federal government.  In any case, even if we did try to cut, there are no competitors in close competition that we could develop a relationship comparable to Texas vs. California with.  Either that relationship already exists, in the form of say US vs. Germany, or the relative costs are so much lower that we can't compete on cost without sacrificing our standard of living (as expressed as per capita GDP).  Do we really want to reform the entire US economy to compete on costs with China, whose per capita GDP is below our poverty rate?

On the whole, I feel that trying to use the success of Texas as a model for the US is an instance of the fallacy of competition.  It works for Texas, I'm not disputing the large number of jobs there or that it is to a significant extent the result of Texas' policies, but that something works within a given system doesn't mean that it will work for Texas as a whole.  If an investor decides they want to invest in the US given current conditions a premium will be placed on low costs relative to other factors, this favors Texas.  If a business wants to keep costs low, land and labor costs favor Texas, in other times other factors may be more important but not right now.  But this doesn't mean the US as a whole can drum up business and jobs by lowering costs, there simply isn't anyone we can undercut.  Texas has hit upon exactly the right strategy for growth and job creation within the US economy, this does not mean that the same strategy will work for the US as a whole within the world economy, which has a different set of actors and conditions and requires a different strategy.

Sunday, August 21, 2011

Some Thoughts on Capital:Part 1

As readers of this blog know, I have some real problems with what I consider simplistic thinking in economics.  I am currently on an anti-market-fundamentalism kick, partially inspired by my recent reading of Schumpeter as well as some poverty reading I've been doing.

A New York Times article this morning looking at how companies are spending made me think of some of the issues related to this, so I thought I'd do some thinking out loud on this blog on this subject (which is what about 75% of the posts on this blog amount to).  The primary issue here I think, is that many economists seem to look at factors such as investment and capital without paying much attention to who has the money.

However, I think who has the money matters a very, very great deal.  Culture matters, and elite culture tends to be different from the culture of other sectors of society.  Also, the amount of assets possessed tends to alter incentives, this lead to different outcomes involving innovation.  I think the concentration of wealth may be behind some of the lack of innovation that Cowen is writing about in another article in today's NY Times

This is an observation with a long historical presence.  To quote Jan De Vries' in The Economy of Europe in an Age of Crisis, "the true industrialists were still... among the humblest and least wealthy bourgeois."  (de Vries The Economy of Europe in an Age of Crisis, 1600 - 1750. 235)  While many industrialists today are of course among the very wealthiest individuals, I'm suggesting a more general application of this idea.  To paraphrase Schumpeter (oh, how I wish dead tree books were searchable) capitalism is an evolutionary process characterized by creative destruction.  To foster this, I think it matters very much who has the money. 

The truly wealth elite tends to become socialized into a set of habits and ideas that lead to them having a greater sensitivity to economic stability and current ways of doing business that tends to erode the evolutionary change of creative destruction.  They become hyper-sensitive to small changes in regulation that wouldn't phase their entrepreneurial peers of less pecuniary fortune (who don't have large existing capital stocks to be threatened, those without large assets are motivated by the possibility of change, those with large assets are primarily motivated by the potential downside of any changes, listening to those with a lot too lose hardly gives a balanced perspective on the net benefit of change to society) and are far more sensitive to opportunities to create wealth through more conservative means, such as land investment, acquisition, and mergers than they are through creating a new, disruptive business that may have a negative impact on their existing economic holdings. 

When wealth is highly concentrated, the wealthy have the means to forestall the upsetting of the stable existing economic system by acquiring new challengers and integrating them into the existing social structures and leading former disruptive elements to assimilate to the social norms and ideas that are necessary to maintain social prestige and station among these individuals.  The individual that chooses to thumb their nose at these conventions is a relative rarity, though often remarkable for their success relative to their peers (once they reach this live, non-conformity without assets is often a road to poverty, not prosperity, adaptive behavior is situational, not a constant, and tied to an individual's other personal qualities).  More often, individuals find themselves better off by acclimating to existing norms and selling their new businesses to those in the existing upper social strata to buy their own membership at this level as well as to begin to play the game of maximizing returns through investment in existing economic assets rather than the creation of new, disruptive, and innovative ideas.  The social forces trump the economic factors, as always in human society.

[To be continued...]

Libya: End of the Beginning

It seems that the uprising against Gaddafi has reached its final stages.  News reports indicate that rebel forces are outside Tripoli and are perhaps coordinating with an uprising inside Tripoli itself.  At this point, rebel victory is only a matter of time.

What remains to be seen though is what comes after.  The rebel leadership seems to be faction ridden to the point of factions arranging assassinations against other leaders.  This raises reason to doubt, but shouldn't be blown out of proportion.  These kinds of problems are to be expected in countries without much history of participatory political leadership.  This means that the probability that Libya will fracture into competing violent factions is a real factor to be taken into consideration but it doesn't make this result inevitable.  Powerful forces pushing against this outcome are also evident, including the current outside military support, political support from the Arab League and especially the United Arab Emirates, and perhaps most significantly the unifying impact of successfully overthrowing Gaddafi.

On the whole, I think Libya is perhaps the best case for how foreign intervention should be done.  It is not without risks but as every foreign war has shown the ability of military forces to exert control is largely illusory, Iraq and Afghanistan being the key exhibits here.  Military force can at most create a very high level, imprecise form of control that has little impact on the functioning of a social system that has been of greatest interest in modern conflicts.  It lacks the ability to create political legitimacy, economic stability, or to address the grievances driving terrorism, these things persist despite boots on the ground.  By contrast, the conflict in Libya is serving to generate the political legitimacy that may lead to future economic stability and to addressing the Libyan people's grievances.

This result is by no means assured, we are operating with a great deal of uncertainty about ultimate outcomes, but our actions there have maximized the probability of a good outcome.  It's very important to recognize that in these sorts of situations there is no way to have certainty of results or to calculate precise enough outcomes to allow for a formal cost/benefit accounting.  We do know enough to have a rough approximation of the relative importance of factors leading to success however.  All human action is inherently uncertain, we should not let arguments that point out this essential quality lead us to tying our hands unnecessarily.

Though it helps for my view that I regard the atrocities that have happened after previous failed revolts in the mid-east as the baseline condition.  If it wasn't for our support, I believe the situation in Libya would have been far worse than what we're seeing in Syria.  Our intervention in Libya may have even had an impact on Syria delaying its use of heavy-handed tactics for fear of intervention, though there's no way to be sure.

Friday, August 19, 2011

Destruction by Fire or Ice: Armageddon or Hypothermia?

This is a bit of free association inspired by a post over at Free Exchange.  Complacency in the face of tail risks is of course a big problem and well explored over there.  What it made me think about however is instead our ability to normalize to decline and not do anything about.

In particular, I've been paying some thought to how some ideas that have no empirical backing have been impacting our society in ways that seem to me to lead inevitably to decline and decadence.  Specifically, I have in mind  a notion that's been floating around for awhile but was rather articulately put by Paul Ryan.  This is the idea that there is an "expanding culture of dependency" linked to increases in government spending and that receiving assistance from government somehow leads to a trend that "drains individual initiative and personal responsibility. It creates an aversion to risk, sapping the entrepreneurial spirit necessary for growth, innovation, and prosperity. In turn, it subtly and gradually suffocates the creative potential for prosperity."

There are huge problems with this contention, most notably that the data points in the opposite direction.  To give crude examples, entrepreneurship rates bottomed out in the 1950s before the advent of the progressive Great Society programs, they have been rising since the 1970s across ethnic groups.  While there is a lot more argument than agreement over the complete explanation for these changes, the most basic and widely agreed upon cause is that the shift towards more capital intensive industry in the 1950s and 1960s discouraged entrepreneurship and the shift back towards labor and skill intensive industries that has been occurring since the 1970s has promoted entrepreneurship.  No reason to bring government or personal character into it.
A second piece of crude evidence is the employment rates among gender and ethnic groups.  Most assistance in the US is targeted towards single parents with children, very little is available to single persons of either gender.  Yet, we have seen employment rise quite sharply among black women, from 60% in 1972 to a peek of 79.4% in 1999.  I singled out the ethnic factor due to popular perception,* but if there were some kind of cultural change associated with government assistance why is the group most strongly associated with assistance in popular perception working more and not less over more than a generation as government spending has risen?  Also, total labor force participation peaked in the 1990s, and men, who receive far less in government assistance have seen their labor force participation rate decline.**  Where is this culture of dependency?

Now, I say this false belief leads to progressive decline as a result of how I understand markets and society to work.  As I've written in other posts, and will doubtlessly expand on in future posts, I see markets and society as intrinsically linked and symbiotic.  I don't think that markets can function in the absence of a robust society that takes care of its members.  Historically, it's also notable that both Britain and the Dutch Republic had the first systems of generalized social insurance.

To put this in more formal terms, to the extent that I see the term capitalism as a useful term at all (I think I have to address my problems with the term fully sooner or later in a series of posts) I see it as the replacement of economic relations based upon individualized reciprocal bonds with generalized ones.  Primitive economies are dominated by economic relations that can be described as some form of clientelism that mixes social and economic obligations.  This takes many specific forms, from Roman clientage, to European feudal relations, to Chinese lineage based relations, to Southeast Asian forms of clientelism, etc.  All pre-modern societies have some form of this.  Alongside this there are market relations among specific groups that are able to generalize these relationships.  These are often ethnic groups, Syriac Christians/Armenians in the Mid-East and in India, Jews in Europe and parts of the Near East, Chinese throughout Southeast Asia, etc.  They can also be less formal, such as the merchants interacting on a regular basis at fairs in medieval Europe.  What distinguishes the market relations from more primitive economic relations is that social obligations have become distinct from the economic obligations.  Parties can contract with each other freely without the broader obligations of clientage relations.  Social insurance functions are fulfilled by the broader group rather than by specific formal alliances within that group.  I see this as being the distinctive feature of capitalism, economic relations have been separated from social obligations with the social obligations being fulfilled by the society as a whole (not necessarily territorial based and in insecure times/regions often tied to some kind of ascriptive identity) with the social obligations falling on the group.  This allows for economic specialization which in other forms of organizations is short-circuited by the need to take social functions into account alongside economic concerns.

That was a long digression, but it is necessary to explain why I think market fundamentalism is so dangerous.  Something I find myself sharing with social conservatives is a concern for moral and social degradation, I think this is a real threat.  I just believe its causes are different.  My belief is that the market can only function when people believe they have a stake in it, they have to feel they can advance within it and that they are full members of the market society.  This implies some degree of social obligation, just as in a clientage system.  However, in the market system, those social obligations are no longer filled by private contract, they have become general.  Obligations are fulfilled through the tax system (other systems are possible, but it is hard to see how the universal membership required by integrated markets can be achieved through these methods, Jews or Armenians had their own methods for enforcing this that didn't rely on taxes but this kind of system was necessarily exclusionary and thus limited in scope and prospects for growth and specialization) rather than by relationships between small groups and individuals.

What happens when people do not feel that this social obligation is being met is that they drop out.  This is very obvious in pre-market systems, all of them had substantial populations that existed partially outside and preyed on members of the formal system.  These groups begin to form their own culturally distinctive society that rewards its members separately from the formal society, though the organization draws a great deal from the parent society and membership is at least partially fluid.  These same characteristics happen in our society, those that feel left out find their own ways to survive and develop a culture that seeks to valorize their distinctiveness from the larger society.  The more we seek to punish those that don't do well under our system the more strongly we drive the formation of this kind of toxic counter-society and the more we'll see social breakdown, the development of grey and black markets, and the more we'll erode the labor supply that we need for a successful society.  Excluding people is the surest way possible to drive the social breakdown that many fear, dependency is driven by the formation of bonds similar to clientelism in the absence of formal social institutions.  Social institutions prevent this erosion and maintain the integrity and integration of markets.

And this is why I find market fundamentalism, and the specific belief in a culture of dependency, so dangerous.  It's a kind of metastisized political ideology, it turns our own culture's virtues into a hypertrophic growth that consumes our ability to grow and adapt to a changing world.  It makes our own population a threat to us by believing the market system is a natural phenomenon distinct from our social institutions.  By making this mistake, it threatens the greatest of human achievements, the market system, by eroding the social bonds and sense of obligation that is necessary for its proper functioning.  This is part of the long, slow road into decadence which concerns me far more than does the threat of tail risks.  But this ideology seems to be on the ascendent despite its great discrepancies from empirical and historical evidence.  This shouldn't be surprising, all cases of decadence and decline involve the most active and socially connected groups seeking to validate their own continued social dominance and relative position.  This can also be explained by the fundamental attribution error, people have a psychological need to explain events in human terms based on character rather than systemic or social forces despite a very large amount of evidence indicating that situational factors explain the majority of behavior, with individual traits only explaining a very small portion of variation.

I should probably note that this post is also partially due to my extended hangover from reading Schumpeter.  If Schumpeter is right, and I'm wrong, about the nature and functioning of capitalism I can see why socialism might be inevitable, that form of capitalism will necessarily cannibalize itself.  However, I think Schumpeter makes some critical mistakes about the historical evolution of capitalism and the functioning of its antecedents by drawing too heavily on Marx, who in turn draws too heavily from European experience and attributes too many extraneous factors to capitalism's development and misses the importance of many relationships that go further back in time than the period they are looking at.  As I've said before, I am often struck by the similarities between Marxism and this form of economics, the reason being that they both share certain fundamental assumptions and it is these assumptions rather than specific analysis of either perspective, that I ultimately disagree with.  Both give economics too big of a role and don't properly explore the interactions with social phenomenon, leading both astray.  Of course, they both lacked good data on non-western societies as well as a lot of the archival data that we possess today on Europe.  This data paints a very different picture from what they had available.

*More than half of welfare recipients are white.

** A certain portion of the decline in labor force participation among men is due to poor institutionalization of disability benefits.  Even with Ticket to Work, the transition back to work for someone with a disability is rough.  Also, many people trying to transition back into the workforce find that employment is uncertain and not consistent.  It can take a long time to reapply for benefits so these individuals are understandably reluctant to take a chance.  Add in the fact that many of these people have medical conditions which make a prolonged absence from work at some point just about inevitable, and the likelihood of losing Medicaid benefits once they are employed, and the incentives for individuals on disability to work become quite low.  But remove benefits and a lot of these people would lack sufficiently good health to work.  The current system is a catch-22, but this is almost solely due to cost saving and the belief that only people who really need it should receive assistance.  In the long run, it is often more cost effective to provide assistance to anyone who is at high risk for dropping out of the labor force, it prevents skill erosion and means programs with less barriers for those that might want to work.  This of course means more redistribution and higher taxes, but on net, we get higher labor force participation and more net wealth in the economy, benefiting everyone in the long run.

[Edited for unusual font change mid post]

Thursday, August 18, 2011

Some New Thoughts on Stimulus

Reading this post over at Free Exchange crystallized a few thoughts about stimulus that I've been having.  First thing I agree with A.S. that "I am not convinced that cutting payroll taxes is so effective."

A.S. has some very good thoughts on some of these issues, for me however, I just feel there is a huge incidence problem.  Payroll tax cuts do very little to make workers cheaper, the pay increase is pretty small so I don't see it having much impact on consumption, and a certain chunk of it will inevitably go towards paying down debt.  The big problem though is that its impact is so diffuse and we have such high capacity underutilization.  While I'm sure there is some impact on employment, it seems to me that a large chunk of this form of spending will be absorbed by slightly higher rates of utilization of existing employees and capacity.  This isn't nothing, but I don't see it having much bang for the buck.

While I'm normally opposed to targeting, I think stimulus is one of the few policy areas where it pretty much has to be.  A big part of downturns is psychological, since people's expectations are for low growth they invest and hire as if it were.  There are two immediate logical implications of this (I admit upfront that I am sceptical of making arguments through logic without empirical backing, what backing I have is largely from the fairly weak impact of stimulus that has largely been diffuse).  First, that stimulus spending has to be seen as being large enough to make a real difference.  If the overall stimulus is fairly small, this means that it has to be carefully targeted to areas it can impact more strongly with the hopes that seeing an upturn in one area will have knock on effects in other areas.  Second, the stimulus has to be sufficiently prolonged to impact expectations.  I think this has been a big problem with much of the stimulus.  While we want to make it temporary, we don't want to make it so temporary that a business can meet new demand with additional overtime or temp workers.  Much of the last stimulus was aimed at lasting for a 2 year period, I think this may have been too short.  For this reason, I tend to like direct spending, such as infrastructure spending, far more than I like fiddling with tax rates.  Putting in place a 5 year bridge building project will create some medium term demand both for suppliers and for workers in the region it is being built, this is probably too long to ask people to do overtime for and long enough for new businesses to feel confident to step in to fill new demand.  Two years isn't.  The downside is the threat of white elephant projects but there's never such a thing as a purely optimal policy, the question is deciding which risks are most problematic.

I'll also add that I like the idea A.S. suggests about subsidizing part time workers, this also helps reduce the problems with disincentives I like to point out regarding unemployment benefits.

Though I have no idea what is meant by unpredictable government policies, unless the debt ceiling debate is meant.  The only industry under considerable pressure is the financial industry but I don't see why this does much more than impact considerations regarding funding through debt vs. equity.  I just don't see how this could be having a large real impact on businesses.

Wednesday, August 17, 2011

Some Additional Thoughts on Incentive Effects

This is a tangent from the last post to add some harder evidence to my critique of Mulligan.  I've been doing a lot of reading on poverty, some of this has bearing on discussions of incentive effects.  It's generally been found that the level of benefits granted by welfare, or other anti-poverty programs, tends to have no statistically significant impact on employment (and the magnitude tends to be small, as well as insignificant).  This is simply another piece of data that makes me sceptical of the supply side and incentive argument.

This of course isn't to say there is no impact due to government policies.  Welfare benefit levels tend to be below survival level anyway, it's not surprising that variation in a too small benefit will have little impact.  Larger amounts do show significant incentive effects, in particular means testing on Medicaid.  People do work less to maintain Medicaid since it is not uncommon that losing Medicaid would result in a far greater loss of income than any additional earnings.  What this shows is that incentive effects do matter, but only when they're quite chunky.  They don't have any impact at the margins.  If I ever get around to finishing my rationality posts I'll explain why this is in more detail.  The basics of my perspective is that most marginal, maximizing, and individualistic behavior is the result of particular institutional structures that drive this behavior, it's purely situational.  Absent these situational factors, people's more natural, less market oriented cognitive scripts gain prominence, which tend to be more granular and not very prone to either marginal or maximizing behavior.  Government programs that are not designed to encourage marginal behavior, such as unemployment insurance, Medicaid, and a few others, tend to push people out of market based behavior and back into pre-market methods of thinking.  The problem is not the government program, but that unlike voting, taxing, and many other government institutions structured to drive individualistic behavior, many anti-poverty programs are built according to more primitive impulses that do not encourage market based behaviors and instead erode these norms.  Means testing being a primary culprit.  But I've digressed.

The issue with all government programs is that as popular as it is to say things along the lines of we need to use a scalpel instead of a hatchet, the choice is better described between that of a chainsaw and a hatchet.  We have to worry very much about unintended consequences.  What this means is that we have to throw out the idea that we can impact either the economy or society with any precision or targeting.  We can make programs that reduce poverty, joblessness, or lessen the impacts of unemployment.  But if we try to target these programs narrowly at those who  most need them we will make things worse because there is no institutional method that gives this degree of precision.  What we can do is  make programs that gradually taper off, such as unemployment benefits that slowly reduce or are reduced at a slow rate as if they were being taxed down.  This wouldn't be fair, but we can't do fair with government, it's beyond our capacity.  But to do otherwise is to create perverse incentives and this we should avoid to the degree possible.

Rigid Thinking and Smart People

Something I've often said, and which few people seem to agree with me on, is that I've never noticed any particular correlation between intelligence and flexibility of thinking.  I'm probably reacting to this because of having a strong similar reaction to reading Schumpeter's Capitalism, Socialism, and Democracy, which I expected to be much better,* but Mulligan's "Exceptions to Keynesian Theory" post struck me today as particularly narrow minded.

Mulligan has been doing a series of posts showing that supply still has some impact on things such as hiring even during a recession.  Well, duh.  However, this doesn't contradict anything I've read of Keynesian theory, despite his shrill insistence it does, and taking some Krugman** posts out of context.

I'll leave it to proper economists to get into the details, my formal training in economics is fairly slight with the partial exception of political economy.  My confidence in my own self-study is not such that I'm prepared to take on a professional economist within the narrow confines of economics.  What is obvious to me is that Keynesian theory is primarily a macro aggregate level theory and not a micro theory.  Mulligan's examples are all micro examples.  Aggregate level theories tell nothing (perhaps more precisely little) about distribution within the aggregate area under study.  Once the aggregate body is opened up relative competitiveness within the area under discussion will matter a great deal, however this competition will have little aggregate impact.

And here's the key thing with studying any social science, you can't explain everything.  There will always be activity that falls outside of the model, the test is which model explains the greatest amount of the available evidence (and which sets, different models explain different things, explaining aggregate impacts and distribution between two of these different things).  A model also requires clear falsifying conditions (I don't claim to know what these are for Keynesianism), but variation in micro level sectoral changes is not sufficient to discredit a macro model, it doesn't really say anything about it at all, much less discredit it.  Social science tends to be tough on people who are rigid thinkers generally, policy tends to be completely impossible for them. 

In political science we teach the levels of analysis.  The key thing about this is that at each level different explanations of behavior are available, each step contributes to different portions of the overall result.  So we can use say, Waltz's defensive realism to describe the overall international conditions facing various states and the probabilistic outcomes (actually I don't think this theory is developed enough to result in actual probabilities, but it helps to think things through and this would be an intelligible eventual objective), various takes on national level politics to describe the incentive effects faced by individual leaders in response to this, and then individual level political psychology theories to describe the actual choices that are made by leaders at the individual level.  The existence of each of these theories and the evidence supporting them does not discredit any of them, rather it provides a greater level of descriptive detail to the researcher able to master the various perspectives allowing a more complete and accurate description and possibly prediction of events.

And this is all I see happening with Mulligan's critiques.  I tend to think Krugman is basically right about the overall macro picture of the economy, however, this tells us little about how individual workers are being impacted.  Mulligan's work seems to be describing the variable impact on diverse groups and particular sectors, we know from other evidence as well that the recession is not having the same impacts on all groups, his attempts to disprove Keynesianism are simply providing a more detailed picture of the micro effects.

* There's a reason why I can never motivate myself to read anything from an Austrian perspective, I find their description of human nature preposterous.  Schumpeter's description of Marxism as scientific socialism also made me cringe, I see both perspectives as being little more than updated scholasticism, both rely on logic more than they rely on empirical evidence to describe the world.  Science is basically the rejection of this perspective in favor of rules bound testing and reliance on observation, there's no science in socialism and neither is there in Schupeter's description of capitalism.  Of course, I don't believe that there is even an identifiable system that can be called capitalism, there is too much in common with earlier forms of organization and no clear dividing line that I'm aware of, so it's not surprising I have no sympathy for this perspective.  It is also worth noting that many of my disagreements with Schumpeter involve beliefs that were common in his time that have since been thoroughly discredited, though this does not explain all points of difference.  I'll review the book when I think I can be more dispassionate, at this point there's so much I see wrong with it that I'd be writing a small novel to criticize it.

** While I think Krugman can be shrill, he does have an excellent track record.  Also, while I think sometimes he exaggerates his positions, I respect that he is willing to call people out and say they are wrong when he has good reason to do so, we need more of this.  This doesn't excuse his tendency to target things when he doesn't have strong arguments to back up his critiques, but this tends to be the exception, rather than the rule.  David Frum's writing on Krugman's basic accuracy is worth reading.  Myself, I tend to disagree with him most strongly about China, domestically my disagreement is rarely about facts though sometimes I think he has a tendency to use apocalyptic language and to over simplify the political aspects of what he is saying.  I am in agreement with him about the dangers of market fundamentalism, though I disagree with making this only about Republicans rather than about that philosophy more generally.  On the whole however, while Krugman is a strong partisan, I do think he has shown the mental flexibility that I find lacking in Mulligan.  He never gives me the impression that he doesn't understand the other sides arguments, he just tends to use his understanding as a platform to launch further attacks.  And for the record, Krugman's writing on China did inspire me to write a paper whose nucleus was disagreeing with his analysis, I'm happy to share it with anyone interested in the political economy of the Chinese currency dispute.  I had been considering getting it into shape for academic publication but realized that I can't afford to spend that kind of time working on something for free.

Tuesday, August 16, 2011

Taxes on Repatrioted Earnings

Have I mentioned before that I hate corporate taxes?

I've been reminded of this by a decent NY Times article on some of the problems with tax rates on repatrioted earnings, worth taking the time to read.

Now, a couple of thoughts on this.  First, absent other changes in the tax code, I'm a little uncertain about Dealbook's recommendation of simply slashing the tax.  The US tax code already provides a number of useful tax exemptions to multinational corporations, without addressing these I'm a sceptic that the advantage of some increased revenue collection and increased investment at home is worth the relative growth of these corporations relative to more domestically focused competitors.  While many ideas are still good in isolation, I'm not certain this is one of them without doing some more research.

More broadly however, the US is way overdue for corporate tax reform.  Corporate taxes in general are rather pernicious, they are uncertain in their incidence and allow for the deception that we aren't really taxing people.  But all taxes are ultimately taxes on individuals, with corporate taxes we just don't know which individuals are being taxed.  The simple solution would be to just eliminate the tax entirely and increase rates on individuals.

However, even at a crude first approximation, that doesn't work either.  For one thing, the income flowing to individuals from corporations isn't always going to individuals within the US power to tax.  If one likes bad sci-fi, it is possible to imagine this scenario leading to a situation where everything in the US is owned by people living on floating libertarian islands, denying the US all revenue it formerly received through corporate taxes.

More generally, the US corporate tax code is simply out of line in many aspects with international norms.  Simply bringing it within these norms would be a major step forward.  Another major problem, aside from international competitiveness and tax incidence issues, with the current situation is it simply reinforces the focus on capital gains rather than dividend income.  I've long thought this is a major driver behind many problems the US is facing today (and I've done a couple of posts on related subjects) so should be faced in any prospective reform.

Bottom line, Dealbook gets at an issue I think we need to think about.  I don't think however that dealing with this situation in isolation is worth doing.  If we are going to have an overall revenue deal within the next 5 years though, I think looking at corporate and individual tax rates as linked is the way to go.  Slashing corporate rates in exchange for higher rates on individuals, and in particular high income individuals and capital gains, is a deal that probably is necessary for long run US competitiveness. 

Friday, August 12, 2011

Which is It?

As lawmakers meet with voters back home in their districts, the message is often not “Can’t we all just get along?” but rather a push to get back into the ring and fight harder, as they face the most partisan and intransigent factions of both parties.
In middle school auditoriums, retirement centers, recital halls and other such venues, angry constituents are deriding their representatives for the spectacle of the past month over the raising of the debt ceiling.
But in many cases, the anger is less about the dissension that brought the nation to the edge of default than frustration with both Democrats — including President Obama — and Republicans that their side had not been tough enough.


If you really want to know why voters keep dumping incumbents of both parties and registering an alarming disdain for Washington generally, then go back and watch a scene from last night’s Republican debate in Iowa.


Specifically, fast forward to somewhere around the 48-minute mark, when the moderator, Bret Baier, asked the eight candidates on stage whether any of them would walk away from a “real spending cuts deal” that required one dollar in new tax revenue for every 10 dollars’ worth of reductions. To put this in perspective, Mr. Baier’s hypothetical deal, if it entailed rescinding the Bush-era tax cuts only on Americans earning more than $1 million annually, would yield something like $6 trillion in spending cuts — a lot more than anyone is actually talking about.


And yet every one of the Republican candidates instantly and emphatically raised his or her hand, as if Mr. Baier had just asked whether they liked puppies or whether they had voted for Ronald Reagan. Not a single candidate gave any hint that he or she would even entertain such a totally one-sided compromise.
In other words, all the candidates were essentially saying that they wouldn’t embrace fiscal reform if it included even a penny of additional taxation. No compromise could possibly be favorable enough to earn their support.

 I don't have much to say about the actual debates.  What I do think is interesting is how the media finds ways to have it both ways on the front page of their paper. 

Sometime over the next few weeks I'll get around to writing my rationality posts, where I'll offer some thoughts on what is going on here.  The basics of my view is that both perspectives are not dwelling sufficiently on how both narratives interact.  I think this needs more explanation and thinking through to refine it, but what I'm getting out of this is that the two viewpoints quoted above are missing the links that result in observers drawing such different lessons from essentially similar data.  I see a growing dichotomy between worldviews happening here with moderates on both sides feeling that it is more important to compromise temporarily in order to further their agenda while extremists see it as necessary to prioritize adherence to ideology over tactical compromise.

But, even if moderates are in the majority, this doesn't really make compromise possible if both sides desire mutually exclusive endpoints.  No significant group really has a centrist ideology, at best we have some rather weak slogans like balance spending cuts with tax increases.  But lying below this, ultimate ends of compromise remain polarized.  No one is really defending this result as a good thing, or to take just one frame of it, people are seeking either equality or growth, with compromises with the other side being a necessary temporary compromise for ultimate ends, and no large group seems to be defending the idea that equality is necessary for growth and growth necessary for equality. 

Or at least that's how I'm reading what data I have.  Even the moderates willing to compromise seem to see these things as competitive trade offs rather than as symbiotic complements.  Though I should note, that I don't think the equality vs. efficiency (or growth) argument is the only one or most essential, I just happen to have read a paper on the subject recently so that's the most available frame for me at the moment.