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]

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.

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.

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.

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.