Many Economists Question that Capital Taxes Should be Lower

Since I have belabored this point often in the past, I felt like I should share a link to a rather more prominent blogger on how many economists do not share the idea that capital taxes should be lower than other taxes. The post is framed as a critique of claims regarding Mitt Romney's taxes, which is something I don't really care about.

What interests me is this,

Matthews rests his case on some arguments in the literature concerning scenarios in which we both look to an infinite future horizon and we have identically situated individuals, meaning that we all have the same wealth and the same opportunity to gain income. When these assumptions are relaxed, the case for preferntial treatment of capital income becomes considerably weaker, as argued in a recent Journal of Economic Perspectives article by Peter Diamond and Emmanuel Saez, two of the most prominent public finance economists in the world.

I've mentioned this before, but had to reference fairly specialized economic literature that I couldn't link to. Having something I can share is a great improvement.

This did lead me to ponder something. In the public finance and taxation literature, it seems rather common to question the assumption about the benefits of low capital taxation, or at least to limit claims regarding those benefits. However, it remains common for economists, and even the educated public, to profess the idea that capital taxes should be lower as common knowledge.

My working explanation is based on when I was in grad school, though since I only went to a Masters degree take the following with a grain of salt. Something I heard from some professors was that graduate students were most up to date on some subjects, it just wasn't possible to keep up with everything when someone had a career and specialty to work on. My hypothesis is that many of today's academics were trained in the 80s and 90s when it was widely accepted that low rates of capital taxation were ideal. This particular specialty has moved on from those conclusions, however, those with other specialties are relatively unlikely to have kept up with a specialty not their own. This means the substantial dissent within those focused on tax policy hasn't spread widely, particularly not to economists being contacted by journalists newspaper articles.

Working hypothesis, of course, but it is interesting how an interested amateur like me can easily find references that question the common wisdom in the literature yet this doesn't trickle down to people with an actual platform to spread their views, like journalists. Of course, another explanation would be elite mobilization, those with opinions favored by elites are given a platform to spread their views, those with unfavorable views have to find work that doesn't involve disseminating their point of view.

An Excellent Diagram to Explain Behavioral Economics

A while back I got involved in a rather long discussion regarding limiting soda sizes. The basics are that how a good is presented can shape behavior, often to the benefit of the producer and detriment of the customer, partially as a result of power relationships (try going into a gas station and wanting to treat yourself to a small soda, it's rare a 12 oz. size is available). People often make choices in the short term that they dislike in the long term as a result of framing and limiting choices.

A very good graph of how this works is up at Worthwhile Canadian Initiative, which I suggest taking a look at.

I do want to quibble with one point. At the end of the post it reads:

While I am sympathetic to behavioural economics, I worry about the consequences of viewing all policies through the lens of health. Some of the best things in life are also somewhat dangerous - like swimming across a lake with only the moon and stars for company. At the same time, I want to live in a world where I'm nudged towards healthy choices - where it's easy to get around by bicycle, for example, and the university cafeteria serves reasonably nutritious meals.

Welfare economics teaches us to respect people's choices. Behavioural economics urges us to protect people from making dumb choices that they'll regret later. I don't know of any way of resolving these two views.

I have a few thoughts based on this. First of all, it makes it rather stark that standard economics is taking the revealed preference as ideal. While this makes a lot of sense for methodological concerns, it is rather philosophically weak. If you are trying to investigate whether or not the market, as currently instituted, does deliver ideal outcomes you won't get very far in that investigation if you simply take revealed preferences as your ideal starting point. It is important when thinking about economics to remember that revealed preferences are used primarily because it eases methodological investigations, philosophically, defenses of revealed preferences look a lot more like justifications than they do valid starting premises. For methodological purposes it is an ideal place to start from, and it makes optimizing choices clear. However, in the quest for the ideal it is rather limited since it creates a self-confirming loop.

Second, I do see a way of resolving the two views. Both serve as different ways of informing policy. But to decide which to use, it is necessary to recognize the importance of having different decision rules. Ultimately, this is why market economies and democracy works so well together. The market provides a space for optimizing behavior; democracy provides a different decision rule that allows other considerations to rule. Behavioral economics provides an explanation for why other considerations may influence people differently than welfare economics. Economic assumptions can simply only take you so far, after that it becomes necessary to pick up concerns that are not expressed at the moment of decision by a consumer through the price signal. The tension between the two is very healthy, it provides opposing viewpoints that can be resolved through the democratic system, rather than an elitist, optimizing and technocratic process. It is better that this tension exists to be negotiated through this means than it is to try to choose one or the other as the better view for decision making.

Some Thoughts on Ancient China

I was catching up on Noahpinion, and a post on Myths of Ancient China caught my eye. I strongly suggest reading it (and the comments, which contain some excellent discussion and data). First of all, I agree with the idea that long run comparisons of China with the rest of the world can be misleading, data is too uncertain and the physical landscape has changed too much.

What I'd like to add is that I strongly agree that there are flaws with a lot of the per capita GDP estimates from previous eras when used in current arguments. If your interest is solely in what the actual per capita GDP was, agricultural output is probably fairly accurate.

However, if your interest is in making a statement about the modern world, then the measure looks less adequate. Just about every history book that I've read on the subject mentions that according to both contemporary accounts and archaeological findings, there is a large variance in the material prosperity of individuals at different places in times. This and not the relatively greater contribution of agricultural resources to real per capita GDP is generally what is relevant to modern discussions which focus on access to material resources.

Agricultural resources in the pre-modern world largely fluctuated with availability of land, focusing on this gets really odd results of living standards rising when population is falling and living standards falling when population is rising and contemporaries are writing of great wealth and affluence. If the purpose is to draw comparisons about the economic system as we understand it than it is necessary to attempt to distinguish changing levels of access to goods from access to foodstuffs since these seemed to vary largely independently. Though to the person faced with a shortage, having better tools, more knick knacks in the home, and a greater variety of occupations available is likely little comfort for an empty belly. If however, the question is in regards to technological change, economic sophistication, market integration, and changing material wealth Maddison's approach is likely insufficient.

Since I've seen the supposed stagnation of pre-modern economies brought up on occasion I'm mostly just really happy to have a post by someone other than myself that addresses ancient Chinese economic history. I think it is a critically important subject to understanding actual economic changes to provide a contrast with western development, which is the used too uncritically as a sole reference point.

Now to find some blog posts on middle-eastern economic history...

Makers, Takers, and Marxists

By now, I'm sure that Romney's statements at a fundraiser need little further comment. However, I happened to be reading an anthropology/history book from 1982 and was struck by how the Marxist framework's use of producers and takers sounded remarkably similar. Of course, in the Marxist framework the roles are reversed, with Romney's makers being the takers of a Marxist perspective.

This made me reflect on something I've mentioned before, how much the modern right resembles a kind of mirror image Marxism. Make Marx's villains heroes, add a sprinkling of nationalism and religiosity for flavor, and you can pretty much predict what the far right appears to believe, even down to the withering away of the state. It's something I find interesting that I still believe is under-explored, but not having lived through the shifts I'm probably not the best to remark on it in detail. It's something that also frightens me, Marxist thought, while valuable for researching certain topics, really wasn't able to grapple well with material reality. There's no reason to believe its mirror image would either. However, both Marxism and its mirror image seem well able to provide emotional fulfillment for their target audience. Probably something about their shared teleology and the certainty this provides, which must provide comfort even as it makes it harder to grapple with empirical reality (I don't understand why someone would adopt a teleological viewpoint like Marxism or modern conservatism so I won't bother pretending to).

What is also interesting is that the right's ranting makes a lot more sense if you assume they're shouting at an empty chair inhabited by the ghost of a left-wing liberal circa 1980. They really did sound like that once. But somewhere along the line the left managed to learn a few things and move on past that chair on to new, better arguments. Even the left fringe sounds different today, like in the last chapter of David Graeber's otherwise excellent Debt:The First 5000 Years.

The entirety of the Presidential race is just beginning to seem like two sides talking past each other, one modern, the other stuck in a timewarp to 1980. Heck, Romney even seems to think he's running against Jimmy Carter. What worries me is that the current ideology of the right wing has a hold similarly strong to that Bolshevism held in the Soviet Union. It bears so many similar characteristics, particularly with its power to justify and explain the world on a theoretical level (and, unfortunately, with similar accuracy).

Its kinda scary to consider arguing with an empty chair might win.

Arggh!!!! How Hard is it to Look Up Facts People?!?!

I try to read news from both sides. But sometimes I get a little explosion of frustration over the unexamined assumptions that pass for conventional wisdom. Today's discontent comes from reading the National Review, particularly this piece of drivel from Thomas Sowell.

I've covered at some length the fact that there is no evidence that government assistance creates dependency. If anything, the evidence is that state supports, by increasing the rewards from work, increase employment and activity in the market sector (not surprising, since people respond more strongly to losing what they have than loss of potential gains, providing a floor, and thus something to lose, then increasing upside gains is more likely to be successful given people's psychological responses than trying to beat them until morale improves since people at rock bottom tend to just grow resigned and stay there, despite popular movie stories to the contrary).

But, there is a linked idea that receiving government handouts increase voting for the Democrats. However, a quick search for ungated papers on the subject reveals that receipt of means tested benefits (if an explanation is necessary, aid targeted at the poor rather than middle class) decreases civic participation and voting. Since assistance targeted at the poor has a stigmatizing effect, it would be a rather boneheaded move to target programs towards the poor if the goal was electoral success. While one is free to take this as another problem with the welfare state, it does contradict the idea that hand outs to the poor are meant to secure electoral success.

Sorry, but there must be another explanation.

Seriously, More Carter Comparisons?!?!?

I don't really have many strong opinions to share on the US Presidential election so far. Most of the issues worth bringing up I have already brought up with regards to Paul Ryan months before he was a VP pick. I also can't say that I see the recent embassy attack has much worth commenting on (though I've been meaning to do a few posts contrasting Libya with Syria, I should probably get around to it).

But this Washington Post article stirred me enough to at least feel the need to point it out.

“There’s a pretty compelling story that if you had a President Romney, you’d be in a different situation,” Richard Williamson, a top Romney foreign policy adviser, said in an interview. “For the first time since Jimmy Carter, we’ve had an American ambassador assassinated.”

First, really? By what possible mechanism? Suspension of foreign aid? Sending a few ships to sit menacingly (and uselessly) off the coast? Bombing them? A stern talking to? What exactly is this unknown, but compelling, story?

Or should we be really pessimistic? Would Qaddafi still be in power and no US ambassadors on Libyan soil? That's the most plausible way to avoid this mess in alternate reality land.

Second, Carter? Sorry, but this isn't 1980. The closest parallel to that is the attack on bin Laden being compared to Carter's attempt to rescue the embassy personnel with special forces. And unlike Carter's helicopter mission, those birds flew.

This is about as forced as a narrative gets. Don't know who is advising Romney, but I'd be telling him to sweep this under the rug as soon as possible. I don't think these birds are gonna fly.

The Welfare State and Filial Duty

Something that I believe is not sufficiently acknowledged in public discourse but that is essential to understanding the function of the welfare state is that every welfare state was originally constructed when the voting block of the elderly was relatively weak. This means that large numbers of younger people necessarily had to have some incentive to be willing to pay more today, supposedly in return for some benefit. Now, it is possible that they had some future benefit in mind, but I find it hard to imagine most young people were that much more forward thinking in the 30s to 50s than they are today. Rather, there must have been some current benefit they had in mind (or they could have been far more altruistic, I find this implausible as well).

So what is this benefit? Two passages from this Economist article are instructive.

Some of the national leaders who unleashed those tiger economies would be shocked and disturbed by the development. To them the welfare state was a Western aberration that would serve only to undermine thrift, industry and filial duty. Those virtues, they argued, underpinned their economic miracles and won envious admiration abroad, not least in Western countries bent under the weight of their social obligations. That is not to say that Asia boomed in the complete absence of welfare provisions. But its arrangements took a distinctive form which Ian Holliday of Hong Kong University has termed “productivist”.

This welfare model assumed that Asia’s tightly knit families would take care of the social responsibilities its governments refused to shoulder. But asked to tutor their children, care for their parents and supplement their husband’s income, women have rebelled. The Singaporean women interviewed by Shirley Hsiao-Li Sun, a sociologist at Nanyang Technological University in Singapore, “want more direct and universal state subsidies, especially for education and health care,” she writes.

This is fine so far as it goes, but raises the question of why rebel now? These duties have been done by women as far back as we have recorded history, to stick with China, back when taxes were collected in kind (so before the Ming single whip reforms) there were separate tax requirements for the work men were engaged in, primarily grain, and women's work, such as silk. Child and elder care are central to the Confucian ethos, these are hardly new requirements.

In addition, the western social safety net came into being under similar pressures (Patterson's America's Struggle Against Poverty in the 20th Century is as good a place to start as any on the subject). Given the universality of these demands, that they occur even in system's such as China's that are not terribly responsive to public demands, and that they only seem effective at fairly high levels of development there must be something more going on here than the wealth effect.

Some Thoughts on "Why Nations Fail"

I recently finished Acemoglu and Robinson's Why Nations Fail. I also recently finished Graeber's Debt: The First 5000 Years (more on that later).

My reaction was similar to Fukuyama's (response from Acemoglu and Robinson).

I'd just like to add a few things.

First of all, the bit on Rome I found unconvincing. Building on what Fukuyama already said, it is also possible to look at the transition from Republic to Empire as being a result of new economic realities and creative destruction. Arguably, the "new men," such as Cicero, had interests in businesses different from those of the old Senatorial class and particularly in different areas, outside of the immediate area of Rome and out in the provinces. While the Roman Constitution gave at least some rights to those within Rome itself, it did a very poor job of representing the interests of provincials; the Imperial system may have provided more access.

This raises some important questions regarding putting inclusiveness on an axis. Can it really be represented this way, or are the questions of who is represented, to what extant, and how separate questions? For the Roman case, which was more inclusive; a system that opened elections (to some extent) to many different economic levels but was dominated by a largely closed class of aristocrats and excluded those that could not be present in the city itself, or a system that granted access to the elites throughout the provinces, providing at least some access to the provincials in those provinces, even if less access for all economic groups within the capital itself? How much did representation by tribes matter? How much does indirect vs. direct representation matter for putting a society on this access? I'm not convinced we can meaningfully get policy recommendations or enhance our understanding along such an undefined axis.