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.
Sunday, August 21, 2011
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."
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.
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.
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.
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.
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.
or
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.
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