Don't Try to Make Income Inequality Irrelevent

At least not before you address the portion due to rent seeking. Income inequality is a problem if it is due to corporations or individuals using their government connections to secure more and strengthen current economic rents.

When income inequality is high, it's not a reflection of how it should be in a free market. Conservatives should be asking "Why is the market not evening out incomes more?". If one person can make 60 billion dollars on a product, why hasn't someone who is satisfied with making 50 billion tried to compete with them?

Absurd

We can't fix our high unemployment with inflation, because inflation is hard to get rid of once it's in the system. How do you get rid of high inflation? Volker did it by causing a huge demand glut, which caused unemployment.

So the problem of unemployment cannot be solved by increasing demand (and thus inflation) because if it works, we might overshoot and then have to do something that causes high unemployment again when the Fed reduces demand to get rid of it.

The problem I hope is obvious, if we do NOTHING we are GUARANTEED the bad outcome that would result in having to fix high inflation expectations, not just the chance of it. Everyone accepts that unemployment was necessary to bring down inflation expectations. Why can no one accept that higher inflation is necessary to bring down unemployment expectations?

Wow!

This is very promising.

One huge complaint I have as a "small time" investor is that my good investment choices are dwindling. Management of current public companies seem to be paying themselves rather than their shareholders. A good reason for this is the lack of will to go public given the paperwork nightmare.

Go Galt, Peter Schiff part 2

To make my point another way:

There's really no way to "Go Galt" with a result that in any way that will prove your point.

What Peter Schiff would most likely do is hand the reins of Euro Pacific Capital to a capable person, keep his wealth as equity in the company, and the employees would be fine.

Or he could sell Euro Pacific Capital and, Euro Pacific Capital being really just a fantastic collection of 150 employees, they'd still be fine.

If he was really really stupid, he would dissolve the company. If Peter Schiff laid off everyone at Euro Pacific Capital, he would lose an enormous amount of wealth. Why? Because a good part of the value of Euro Pacific Capital IS that it has a fantastic set of employees and will continue to add them and grow. In this case his employees would probably be hired elsewhere, and several would start their own firms to become billionaires so that they too can threaten to "go Galt".

CPI is Maddeningly Wrong

Matt Yglesias points out that CPI is justifiably different for everyone depending on what they view as better quality. Scott Sumner, in another inflation targeting smack-down, again points out the shelter component of CPI has been steadily on the rise even though actual housing has probably yet to bottom out.

It is a huge problem when people just assume CPI is right before they proceed to justify inflation targeting as a policy.

EITC is Good

Means tested welfare and EITC should be designed in a way that an incentive is created to get out of the safety net.

Say a single mom is on SNAP, section 8 housing, and Medicaid. If I were to pay her 30k, she would be worse off because she would lose access to all those means tested programs. If I were to pay her 36k she might not be so bad off. The only problem is she is inexperienced and not worth 36k. What if the government ponied up that 6k (but also didn't have to pay 6k worth of means tested benefits for a net cost of 0).

All of the sudden she has an incentive to get off welfare over an above her ethic, and two years later may even be making 50k because she's got some good experience under her belt.

(the numbers are not exact, but you get the idea. A good EITC would soften the implied marginal tax rates that are the result of losing access to a means tested benefit). It is a really bad policy to get rid of EITC instead of just streamlining it and the myriad means tested programs.

Go Galt, Peter Schiff

Peter Schiff employs 150 people, how many do you employ?

Fine. In my perfect world, Schiff would have 300 employees and enjoy less consumption because our tax system made it more advantageous to invest more and consume less, though.

But - he also said, if his taxes go up he may just decide to stop working and lay off those 150 people.

Peter Schiff is very wealthy. It is insulting to those 150 people to imply they are charity cases. In other words, a good deal of his wealth is due to the returns generated by a good portion of those employees. He is probably a very good judge of employees; so good in fact, that I'm quite certain they will find jobs. Several of them may even risk it all, venture out and grow their own 150 employee companies when faced with the loss of their cushy Peter Schiff job. They will almost certainly be fine without Peter Schiff, perhaps better off in some cases. Peter Schiff would probably be racing to invest in the startups of his most promising employees.

Steve Jobs died, yet the world kept turning. If we can survive without Steve Jobs, we can certainly live without a working Peter Schiff.

There's a Lot Of Rent Seeking in the 1%

My only problem with Brad Plumer's piece on whether online piracy is really hurting the industry is this word:

earning record profits overseas

Let's call it what it is: "rents", not profits. Let us not forget that a government granted monopoly should be balanced with the actual capital cost of creating and distributing the product. Technical advances have made content far cheaper to produce, and practically free to distribute, yet consumers do not see the benefits as copyrights have become more restrictive rather than the other way around. I do not condone piracy, but it is probably responsible for all recent legal innovations in distribution.

The Redistribution of Wealth We Should Care About

The biggest wealth transfers in America occur between people without a lot of wealth to people with a lot of wealth. This is in the form of Social Security and Medicare.

The EITC is a very efficient way to redistribute consumption, it encourages the poor to work more instead of staying on welfare, and used to be championed by conservative economists.

The rhetoric on the Right wants to keep middle class wealth redistribution, and eliminate an efficient consumption redistribution. This is, in a word, stupid.

I Don't Have the Facts to Back This Up, but

I think Democrat's have underestimated how much benefits extensions and cobra subsidies are contributing to the unemployment rate. A lot of the unemployed have other options. For instance, a 17 year old would gladly collect unemployment benefits for the full 99 weeks while attending school. Same with college students, or people with working spouses who don't really need to work. I know some other people who regularly exhaust their benefits before even looking for another job.

The 5 unemployed for every opening argument is compelling, but are there REALLY 5 people actively looking for those positions and not just staying "unemployed" so they can continue to collect benefits until they are exhausted.

In other words, is the unemployment rate inflated because we are giving benefits to people who would otherwise not bother being counted as "unemployed"?

Yes, I realize this is exactly the opposite of what I said in a previous post.

Simple ShadowStats Smell Test

People who worry about inflation tend to point to shadowstats.com as a truer measure of inflation. They likely don't do this simple test to see how valid it is:

What was my income X years ago, what it is now, and is my standard of living reduced as much as this inflation measure says it should be?

I didn't move to the U.S. until 2003, and from a higher tax nation, so I'm going to start there. At that time my household income was about 100,000. Eyeballing the chart here, I can see what our income should be to keep up with the alternate inflation measure.

2003, 100,000
2004, +7.5%, 107,500
2005, +9.5%, 117,712
2006, +11%, 130,660
2007, +11%, 145,032
2008, +10%, 159,535
2009, +5.5%, 161,979
2010, +10%, 178,176
2011, +11%, 197,775

Our household income is much less than $197,775, which is what shadowstats claims we need just to keep up with inflation. Yet miraculously we feel much better off than we felt in 2003. That includes now having 2 kids we have to spend money on, and a larger house! Weird.

Incidentally, regular CPI says we need $123,309.24 a year to have roughly the same standard of living as in 2003. That seems more reasonable to me...

I'm The 99 and The 53 (part 1)

I'm the 99:
- Income inequality reflects a problem. Government granted monopolies in the form of licensing, copyrights, and patents have a specific purpose: to overcome the large capital costs involved with creating a new product or work. When huge technological leaps are made to make the creation of media or products cheaper and easier, it's time to RELAX these government protections ("rents"). Rent seeking accounts for a huge amount of income inequality.
- Equality of opportunity needs a safety net and redistribution of consumption is the best way to pay for it.
- Hating government in the abstract is not a good way get streamlined, efficient government.
- Suffering in the name of "personal responsibility" is necessary, but it can be excessive enough to be counter-productive in a laissez-faire system.

I'm the 53:
- I will never feel sorry for someone who willingly entered a contract that they had perfectly reasonable alternatives for and then complained about the outcome. You have to take responsibility for your own bad decision, lack of action, or dumb behavior.
- Bailouts that prevent you from gaining the wisdom that comes from learning from your mistakes will hinder you. Bad decisions need to have bad outcomes.
- 99ers should read "The Millionaire Next Door". When I did, I recognized that life needs to include SOME hardship or less people will choose to be exceptional out of necessity.

VAT and Flat Taxes are Not Equivalent

In the long run they are, but if immediately enacted, old capital is treated much differently. When a VAT is enacted and a saver switches to consumption, he still pays tax. In a flat tax, realized capital that is used for consumption is not taxed.

There are some "fairness" issues that are different depending on the version. For example, is it fair that a retiree who saved after tax income is now double taxed with a VAT? Is it fair that a trust fund kid pays 0 tax even if all he does is consume under a flat tax?

Inflation Protection

My neighbor asked me a few years ago what he should do with his money. He's a hardcore right-wing talk radio listener and I knew he just wanted me to say "gold". I thought then, and still think now that gold is a horrible idea, but I didn't have any better ideas either. I'm starting to come up with some now though:

- Invest in companies with large economic moats. That is, companies with the best ability to simply pass higher prices on to consumers. The most obvious of these are oil and basic materials companies who own quality wells and mines. As of today it seems some inflation is already priced in to these companies, but there will likely still be some buying opportunities ahead.

- Get Fixed Rate Debt / Pay off high interest debt. If you are carrying variable interest rate debt now is the time to get rid of it, if you can. Either pay it off or refinance to fixed rate debt.

- Become a landlord. This is counter-intuitive, I know. The thing is though, rents have not seen nearly the same decrease as property values (in fact they've been increasing), and rent vs. own ratios are very good in many cities. Remember that inflation cannot last without increases in wages. Wages won't increase until quality employees can no longer be picked up on the cheap. Multi-family properties are not being built, which will contribute to a shortage if inflation picks up. Once people are hired and getting raises I expect rental properties to be able to keep up with inflation.

I don't expect any significant inflation for a few years. It will be especially hard to register much inflation in 2012 where gas prices have to be significantly higher than $4 a gallon to match the change from 2010 to 2011. I also don't see the Fed doing what I see as the best recommendation which would immediately boost demand driven inflation. Instead what I predict is small spurts of growth when oil prices are low, followed by a general slowing as speculation pushes oil prices higher. In essence, energy prices will function as our monetary policy lever.

Student Loan Forgiveness Is a Bad Idea

Eli Leher gets to half of the problem here:

This would amount to an open-ended subsidy that would benefit many of America’s largest corporations (the universities themselves) forever.

The other half was addressed in Josh Barro's post:

Consumers are not imposing discipline on the market in the way I would expect—they fail to shop around for the best education value, and sometimes they buy education products that are worth less than their cost.

Forgiving student loans prevents what needs to inevitably happen: We need to start getting our money's worth out of education.

Romney Has The Best Tax Plan For Me

Actually I'd do better under 9-9-9, but I'm not under any illusion that it could pass. Romney's plan eliminates taxes on capital gains and dividends for the middle class. The chief "complaint" is that the middle class realize very little of these types of income. This is actually a feature of the plan. People would shift their saving habits given the new incentive and it would cost the government very little in lost revenue for them to do so.

The problem with the analysis is that the middle class has alternatives (Retirement and Education accounts) that eat up most of their savings. Given the alternative Romney offers, I'd expect shifts from these specialized accounts to general investment accounts, all at very little cost to the government.

I would certainly ditch my 401k with it's ridiculous 2-3% expense ratios in favor of an account I could run myself for under 1%.

Student Loans For "Useless" Degrees

One of my favorite right of center pundits, Josh Barro says:

These are not people who got screwed. These are people who have gainful employment available to them and made follow-your-dreams life choices that reduce their incomes. That’s their prerogative; it’s not anybody else’s problem.

This is true, but the "following your dreams" part is not the bad part. Everyone who is capable of making money doing what they love and are best at should do that. What's dumb is to go into a huge amount of debt for an advanced degree that doesn't result in a suitably large change in income over a more basic or general degree.

Would Occupy Wall Street Protesters Understand What They Want?

To put it succinctly, I think they want policy that is not so supportive of rentiers. This means reduced copyright and patent protection, reduced licensing, and elimination regulations and tariffs that only serve to reduce competition and enrich the few. In addition they should ask for monetary policy that is not so afraid of inflation. These things would increase employment and decrease income inequality.

What they'll get instead is populist lip service on higher taxes for the 1% and "getting money out of politics".

Fire Your Bank: OMG Edition

Some time ago I fired my bank, Wells Fargo. The reason was twofold:

1) TARP - Instead of complaining about cronyism and the moral hazard of FDIC and bailouts, I decided to put my money in a bank that did not need a bailout.

2)The Fee Dance - I managed to avoid (most) fees by carefully paying attention to account types, minimums and add-ons. My father, who lives in Canada, decided to open a U.S. account to link to Paypal and did not pay attention to these details. They charged fees for "services" that cleaned out his initial 150 dollar deposit in less than 6 months, before he even had a chance to look at the account balance. Instead of whining about fees and carefully maintaining balances and watching for fee hikes, I just went to a bank with no fees on an interest bearing checking account, oddly enough there are plenty of these around.

When I see this story, the part that makes me sick is not the fact that he said they have a "right to make a profit". It's the part about "populist rage". The solution to this fee problem is easy: take your business elsewhere!

Stop being a doorstop for giant banks that assume you're too lazy to fire them. Search for "fire your bank" for more info and to get started on finding a better bank near you.

Acceptable Fiscal Stimulus?

A proposal we're not hearing very much any more is state and local pension buyouts. The federal government should offer to buy out state and local pension obligations (short term stimulus because more teachers and fire fighters will keep their jobs) in exchange for all new employees being put on defined contribution retirement plans (long term budget fix). It's bipartisan and it will work.

The Focus Need Not Be on Fiscal Policy or Lack Thereof

Ken Rogoff explains what the real problem is here.

It is a big mistake to say the Fed is out of ammunition when short term rates are 0. The Fed can purchase anything it wants. QE1 and QE2 were simply the purchase of longer term U.S. government bonds. What Bernanke really should do is commit to QE3 for an indefinite period until we've returned prices to trend. This means, and yes I know this is scary for bond holders (but so is default), higher than 2% inflation in the short term.

Redistribution of Consumption

Scott Sumner gets it right. It's too bad he's a flaming Neo-Monetarist with no credibility on the Right. Also, I'm not as big a fan of education vouchers as I am of charter schools.

I don't think he's being very fair to Matt in his post, though. Yglesias likes a progressive consumption tax which would encourage investment, and would likely agree with what he says about charity.

Meh

I knew this Monopoly rule existed but it never mattered because everyone I played with always bought every property they landed on.

My Brilliant Energy and Investment Idea

Right now we have 13 billion+ per year in energy subsidies. We also have a lack of investment. I propose the government give the next 10 years of those subsidies to the inventor of the next great energy source (after they invent it of course). Set a target of 1/xth cost of the current natural gas plant (the current cheapest I believe) in terms of capital / fuel / distribution / externalities etc. Th final prize winning design may not be patented.

In one stroke of a pen we’ll have tons of investment. At best we’ll hit the target, have cheap energy and get to end energy subsidies, at worst we’ll have jobs and a lot of good viable alternatives for energy – without the government picking winners.

Cross posted in the comments section here.

Productivity Gains and CPI

There is a lot of speculation about why median family incomes have stagnated, and why recent productivity gains haven't turned into higher real wages for workers as they normally would. I'll throw my hat into the ring with some possibilities:

Reasons it may not even be true:

1. Definition of "median household income" is faulty. The composition of a household has likely changed a lot over time. The median family of four income is actually surprisingly high and increasing nicely, but hasn't been measured since 2006.

2. a. CPI is likely overstated. The CPI doesn't take into account a lot of things that increase our cost of living. While we pay more for cars now, cars are much better than they were. The top of the line Toyota Corolla of today is a much better car than a Mercedes of the 1980's, yet we still compare its cost to a "compact car" from that era.

2.b. The CPI doesn't take into account free entertainment like Facebook and Google, or free software like Linux.

Why we aren't seeing gains in real wages:

1. Recent productivity gains are largely in rent seeking industries. The price to create and deliver old school media like music and movies has gone down to where it could be almost free, yet copyright holders continue to charge as if they haven't.

2. Workers might already have enough and are starting to work less. Once decent food and shelter are paid for, your entertainment is mostly low cost and free.

Anyway, these are all in a state of flux and there will probably be frequent updates and changes to this post.

Update:

3. Productivity gains are not flowing into big ticket things the middle class buys. This is largely because of government regulations. Early diagnostic devices are held back by bureaucracy. Capital costs to power plants are pushed up by regulatory studies lasting decades. College costs are being artificially pushed up because of subsidized loans and grants to incoming students. There are many examples of this, the worst being in healthcare.

3.b. College: I think we need to reduce the negative stigma of on-line learning. Attending a college amounts to 4 years of summer camp in reality. I would probably have done much better and skipped far fewer classes if I were able to watch a world-class lecturer's massed produced course for college credit. I learn far more in a five minute presentation by this guy than I learned in most of my engineering lectures.

Bravery in Politics

When Paul Ryan released his Medicare plan it was called brave. I don't think so. It's not brave to exempt over 55s, your main constituency, from any cuts. Republican Senator Tom Coburn's plan is brave. Paul Ryan's plan is calculated and cynical.

Yes! In Health Care It's the Supply Side

Karl Smith makes a good supply side argument.

We already have the most highly paid doctors in the world, yet it's not enough because we are still projected to have a shortage of doctors; short almost 100,000 by 2020 according to the Association of American Medical Colleges. We also can't continue to raise the pay of doctors while preserving access to health care for most Americans.

A good step in the right direction is to let Nurse Practitioners and Physician Assistants transition to primary care physicians after a few years working under a doctor.

I See Your Regression and Raise You A Part Time Job

Greg Mankiw wants to see if David Leonhardt's theory holds up.

I wonder if that UWO study has taken into account that lower income students likely have to have a part time job to afford college.

If you read The Millionaire Mind, one of my favorites, you might conclude that the low-income yet brilliant kids would do better if you didn't make it easier for them. The combination of brains, having to work really hard for everything, and knowing how to live frugally is a good formula for ending up wealthy.

Approach Every Financial Product As If They Are Trying To Screw You

I'm probably of slightly above average intelligence, yet I'm still baffled by credit card agreements and insurance contracts. I'm pretty sure that is purposeful and qualifies as "financial innovation". I characterize "financial innovation" as "how can I offer an inferior product, yet still charge you more for it". There are rare exceptions to this definition such as online billpaying and ATMs, but on the whole there is just far too much money in finance and insurance, and far too little of it benefiting anyone but those in finance and insurance.

This is why I'm inclined to believe this:
http://www.tnr.com/blog/jonathan-chait/89068/the-health-care-regulatory-race-the-bottom

For the most part I think "the market" is lazy, especially about things they don't understand. I have no data, but I bet less than 1 in 20 read the fine print of credit card or insurance contracts.

Can You Use Market Forces For Medicare Reform Without Being Cruel?

One the biggest criticisms of Paul Ryan's approach to Medicare is the inadequacy of the vouchers. It is possible to use the "magic of the market" without inadequate vouchers. For instance you could keep Medicare largely the same, but offer higher deductible alternatives. These could be in same form as Medicare with much higher deductibles and co-pays, or a similar regulated plan from the private insurance market. You then give any senior who takes a cheaper alternative a cash payment for the difference.

If a senior qualifies for Medicare but decides to go the higher deductible route, they ration their own care in much the same way they would in Paul Ryan's plan. Then we can use the "magic of the market" without putting health care out of reach of low income seniors.

Fox Entertainment Network

Read the following story at Fox News and tell me what's missing:

http://www.foxnews.com/politics/2011/05/10/obama-urges-congress-pass-immigration-reform/

I see a lot of "Obama said!" and "Republicans fired back!".

What I don't see is any easily locatable figures to say who is right. This is entertainment, not journalism. Just because you give equal time to two false or misleading opinions and say "you decide" doesn't mean you can call it news.

Ok, Now I've Read Keller's Piece

I've read it, and I don't think he's consistent in what he's complaining about. On one hand there's the increased use of tools giving us more brain rotting leisure time. But this:

My father, who was trained in engineering at M.I.T. in the slide-rule era, often lamented the way the pocket calculator, for all its convenience, diminished my generation’s math skills

Is ridiculous. Tools like Matlab have advanced mathematical analysis far past what was achievable in the slide rule days. You know whose math skills suffer? People who never use math anyway. In the meantime they are coming up with incredible things in the arts because they don't have to waste time doing their taxes on a slide rule. The point is people who want to use these conveniences for an incredible, previously unachievable result far outweighs the negative effects of people who use the convenience for more leisure time. He uses the invention of the printing press as the first step in eliminating memorization:

Until the 15th century, people were taught to remember vast quantities of information. Feats of memory that would today qualify you as a freak — the ability to recite entire books — were not unheard of. Then along came the Mark Zuckerberg of his day, Johannes Gutenberg.

Then later he makes this point:

But my inner worrywart wonders whether the new technologies overtaking us may be eroding characteristics that are essentially human: our ability to reflect, our pursuit of meaning, genuine empathy, a sense of community connected by something deeper than snark or political affinity.

Shouldn't the whole Renaissance after the invention of the printing press thing disprove his point? The time when everyone was memorizing stuff and there was a lack of leisure time for arts and invention was called the Dark Ages. The time after the printing press was a great time for reflection and pursuit of meaning. I just verified it on Wikipedia!

Memory Will Matter Less and Less

That's human memory, not computer memory.

Dylan Matthews, writing at Ezra Klein's blog, addresses a complaint by Bill Keller about the lack of need to memorize in an internet age. I haven't read Bill Keller's piece and I generally agree with Mathews that when you look something up you tend to remember it.

But I want to stress that memorizing will increasingly become more pointless, and we will be better for it. It will likely be within my lifetime in fact that constant connection to the internet, beamed directly onto my retina will be possible where my speech and that of those around me is constantly analysed. What becomes most important then, is not someone's ability to remember anything, but their ability to analyze and draw conclusions from that information.

There are plenty of analytical people who have horrible memories. Up until now these people have been left out of professions that require both great memories AND analytical minds such as doctors, lawyers, and pharmacists. In the future, the ability to call up the name of a disease based on a set of test results and symptoms will be accomplished by software instantly in exactly the same way it is called up from memory now. Picture a Terminator-like heads up display that's constantly on, listening to your patient, updating a list of diseases with probabilities in realtime as they describe whats wrong with them.

In the future, only the analysis will matter. Students in math class who know when to apply an equation and can recall it, will be indistinguishable from students who know when to apply the equation only. This is not a bad thing for the simple fact that memorizing takes a lot of time away from more analytical experiences where memorization happens in the more natural manner that Matthews describes.

I keep thinking of scenes in Scrubs where Kelso asks questions on the proper treatment for some obscure disease. Is it really a bad thing if they all know the answer right away just because it's packed in an always on, head mounted computer doohicky?

Is Anyone Fooled by This Argument?

An "argument" I hear often enough that I want to comment on it goes something like this:

"Say I make a million dollars, if the government raises my tax rate by 4% that means I'd be out 40,000. I could hire a person with that money!"

I heard something just like that on Glenn Beck a few months ago. This is of course, ridiculous. This implies that if only the government wouldn't take that 40,000, Glenn would hire someone out of pure charity with the cash. First of all, this ignores that he gets to write off 39% of the cost of employing that person. But the main point is this; if that person wasn't going to make him any more money than it costs to hire them, he wouldn't hire them no matter what the tax rate.

The decision to hire someone is not based on how much money Glenn has, but how much he can expect to make by having that person either a) do something Glenn can do, but he can make far more money doing something else (or enjoy more leisure time), or b) do something Glenn can't do, but can make Glenn more money than he is paying that person.

Where taxes actually factor in is whether the extra money he can make doing a) or b) is worth the effort after taxes. If we're talking about a DIFFERENCE in marginal tax rate between 35% and 39%, the analysis of making this decision is probably pretty similar. Similar enough that it's unlikely to significantly change any of his investment decisions, such as hiring someone.

I'm not advocating a 39% marginal tax rate - I'd rather keep it at 35% and eliminate some deductions to raise the same revenue- but let's be more realistic about the consequences. A 39% tax rate on the rich will slow long term growth by a small amount due to a slightly higher investment disincentive, but is unlikely to cause any kind of massive destruction of the economy.

Murkowski's Got it Exactly Backwards

Senator Murkowski (R-AK) claims the Democrats are "punishing" oil companies for making a profit. The real problem is that the tax code punishes everyone else to give tax breaks to a small group of companies. Here's how it works:

A government needs a revenue amount, say 20% of GDP. To arrive at this figure, the most efficient method would be to set a flat tax on everyone such that they arrive at 20% of GDP. If Congress decides to give a break to say, oil companies, and want to keep 20% of GDP in revenue, then everyone else's taxes necessarily go up. Not only that; we have artificially lowered oil prices while raising the price of any viable alternative. So really, it is Republicans who are punishing everyone else except the oil companies.

This is a clear cut case of Congress being able to stop "picking winners and losers", which happens to be a Republican mantra I wish they would stick to; even when it applies to their base.

When is a Mandate Not Really A Mandate

Tyler Cowen frames the PPACA mandate as "forcing you" to buy insurance. Let's recall that the "mandate" is a tax penalty, around 700 bucks if I remember correctly - a number a lot of people feel is far too small to be an effective mandate. It's equivalent to raising taxes by 700 bucks a person and then offering a $700 tax credit if you buy insurance - insurance that will likely run you way more than 700 bucks, even after subsidies.

I've said this before, but I'll repeat it. If the end result of the health care mandate is that you pay more tax if you refuse to get health insurance, it does not make it a giant intrusion of government into your life if the deduction for mortgage interest is not. They are both exactly the same end result!

So, just because it is named a "mandate" doesn't actually mean it is one. If you do not feel compelled to have a mortgage again when your house is paid off, then you similarly are not actually compelled to buy overpriced health insurance just because you'll pay more tax than if you didn't. I would never re-mortage my house, throwing away money to the bank, solely to keep the tax deduction. It's the same "bribe me with my own money" any deduction is.

The real problem with the PPACA "mandate" is that it's not mandaty enough. And that the word used to describe the mechanism to reduce free riders has a nastier connotation than its limited function.

Goosewinkle Thinks His Vote Matters

Goosewinkle is saddened by the U.K's decision to keep first past the post voting. I guess he hasn't read the Freakonomics piece on why your vote does not matter anyway.
For anyone sick of Republicans and Democrats and feeling like you're locked into voting for the lesser of two evils this is great news! Vote third party, the chances are astronomically small your vote will be the one that makes the "bad guy" win.

Why Doesn't Paul Ryan's Plan Go Into Specifics On Taxes

Paul Ryan's plan specifies he will have 19% of GDP in tax revenue. Currently taxes are in the vicinity of 16.5% of GDP. The wording of Grover Norquist's tax pledge, which most GOP freshmen have signed says they will not raise taxes, and they must match, dollar for dollar, any reduction of tax expenditures with rate reductions. This means that Paul Ryan's tax plan does not actually jive with Norquist's tax pledge.

The other reason is that Ryan would like to avoid saying that if the top rate is coming down so much, a large section of the middle class will see their taxes raised. I'm actually o.k. with this - as the writer at theglitteringeye.com is fond of saying "if it's worth doing, it's worth paying for"- but it seems to me to be deliberately misleading on Ryan's part.

American Exceptionalism

I believe in American Exceptionalism. At least I believe the possibly wrong interpretation I read where God chose America to be the dominant democracy over the last few hundred years.
What I take exception to is that we deserve it. Americans should be humble, not proud. A system was put in place at the founding of this country that let us succeed in spite of ourselves. It's misplaced to be a proud American, flaunting our superiority and encouraging isolationism.
The downfall of America won't be the expansion of the welfare state, it will be declining morality. This can manifest itself in corruption and isolationism when we move to the right, or free-riding in our welfare state if we move to the left.
As long as we are in moral decline, our exceptional status is in jeopardy.

Marginal Tax Rates Matter

Even for me they matter. Consider this decision I recently had to make:

Should my family hire a cleaner or do the work ourselves? My wife has the option of working more or less in a given week depending on or other home tasks such as cleaning and taking care of the kids. Economic efficiency dictates that everyone in the economy should do what they are best at. This means the decision of whether to hire cleaners should come down to whether my wife could make more money doing work she enjoys than we'd spend on cleaning.

Unfortunately this decision is greatly distorted by our marginal tax rate:
the decision pre-tax is easy:
1 hour of work = $35
1 hour of housecleaning = $25
Our AVERAGE federal tax rate (including payroll taxes) is only about 23%, but the tax rate on each ADDITIONAL (those subject to marginal tax rates) hour of work my wife does is much higher, more like 36%

so our decision is now between spending the same $25 or making $35*(1-.36)=22.4

What if the government, instead of giving us a bunch of deductions just charged us our average tax rate on every hour of work.

Well then the decision is between $25 or making $35*(1-.23)=26.95.

Now we make the decision to hire a cleaner, the cleaner gets work, we work more, and the government makes more money.

This is the biggest thing I see wrong with Obama's speech tonight. A whole lot more economic efficiency could be had if we just lowered rates and eliminated deductions in a revenue neutral manner - even if we choose the baseline of revenue from Clinton era rates on the rich we could still do it with lower rates.

What Drives Healthcare Costs

Fully 3/5ths of health care is paid for by the government today. The most expensive is health care for seniors. If we want to lower health care costs for seniors, we have to stop covering some procedures. Ezra Klein criticizes Paul Ryan's proposal to privatize Medicare, saying that seniors will be less and less able to afford care because of the slower growth of the subsidy provided to buy insurance. How much does Medicare drive up health care costs today, though? What Klein ignores is that today we throw a huge amount of money at a finite resource to keep up the quantity of Medicare, which drives up costs for everyone. What happens when we decrease the this amount over time? Won't health care costs grow at a slower rate? How much slower? Yes, people with less money will have have more basic care, but what is the alternative?

Any solution has to involve a decrease in quantity of care. Whether you believe, as Ezra does, that a technocrat can decide for the whole country what care we should or shouldn't have, or you are with Ryan and think that people should decide on their own what they do and don't want covered is the argument. Klein seems to be framing the argument as the unsustainable version of Medicare we have today vs. what Ryan wants, which is misleading.

Hyperinflation Continued

David Leonhardt re-iterates - no hyperinflation without wage inflation. What's more likely is some short term inflation which hopefully brings real wages down a little bit, and diminishes the real value of debt on the books a little bit. Just the way uncle Ben designed it.

Krugman and Taylor Talk Past Eachother

This exchange between Krugman and Taylor is interesting:

http://johnbtaylorsblog.blogspot.com/2011/03/investment-and-unemployment-reply.html
http://krugman.blogs.nytimes.com/2011/03/30/more-on-unemployment-and-investment/
http://johnbtaylorsblog.blogspot.com/2011/03/investment-and-unemployment-over-longer.html
http://krugman.blogs.nytimes.com/2011/03/31/two-slumps-in-business-investment/


But they miss each-others points I think.
Taylor concludes that business investment causes employment. I think this is absolutely true - we know new and growing businesses are the biggest drivers of employment. But I don't think Krugman is arguing against this. Taylor does not address WHY businesses would invest when they have excess supply. Also, why do employment (his latest graph seems to present coincident data for investment and employment) always lag the economy overall.

But Taylor doesn't dismiss these either, his prescription is just to remove impediments to business investment. Of course this can't hurt, but what this argument comes down to is what IS the impediment to business investment. I suspect it's a range of things, but there are probably SOME things they can both agree on that we should absolutely do - reduce corporate tax rates and pay for them by removing market distorting credits like those for ethanol producers, remove barriers to trade, clean up and simplify regulations.

Instead this argument comes down to just another tired back and forth about whether government deficits are always bad, or whether they are good in a slump.

Update:

Justin Wolfers makes a pretty convincing case that the correlation is a relatively recent phenomenon - and that Taylor is cherry picking a little bit. Intuitively Taylor's position makes more sense to me, though I'm not sure I agree with his prescription.

Conservative Wishful Thinking

Scott Sumner discusses Progressive dismissal of the Laffer curve. Specifically he states:

Instead they argue that the lower European GDP/person represents mysterious cultural differences, a preference for leisure,

I've long thought the effect of taxation on work was overblown. If we taxed 40% of GDP for military and nothing else, people would work far more than if we taxed 40% of GDP and fully funded health care and pensions. Once health care and retirement are taken care of, people will work less. There is evidence for this in the CBO report for ACA (from factcheck.org):

In fact, CBO did not predict a 650,000 job loss. The Republican report cites a CBO report from August, which actually said that the economy will use less labor primarily because many people will choose to work less, or retire early, as a result of the new law. (See Box 2.1, pages 48 and 49.) What CBO projects is mostly a reduction in the supply of labor, which is not the same as a reduction in the supply of jobs.

In other words, it's not so much taxes discouraging work, as the benefits taxes pay for discouraging work. I don't consider myself atypical, and I can tell you for certain that I would retire earlier, or change to a more leisurely, lower paying profession if I didn't worry about paying for healthcare. Healthcare is the largest uncertainty in my future spending.

I'm not saying it's right to fully fund healthcare and pensions, in fact I would lean toward only partial funding in the interest of more growth, but to ignore the benefits provided by European countries compared to the U.S. and put all the blame on taxation is simply wrong.

Easy Fix: What About Immigration?

Not the illegal kind, mind you. Consider the bulk of our current issues:

1. We have far too many housing units.
2. We have far too many old people. (putting immense pressure on the old people entitlements: social security and medicare)

Shouldn't we be importing young people with means at a mad clip to fill these housing units and re-balance our aging population?

Fixing Copyrights

Copyrights are a deliberate economic inefficiency whereby an author of a work can make money on a large investment despite the ease of which it can be copied. The problem is, despite distribution basically becoming free, distributors still want the same high cut of the proceeds they used to get from stocking cds or books on bricks and mortar stores.

The other problem is, large companies (Disney in particular) make enough money that they can influence the copy protection mechanism well past its useful life for the benefit of only a few copyright holders such as themselves. Do we really need to copyright material 75 years past the author's life for an author to want to produce a new work? Not likely.

There are two solutions to rent-seeking in general - progressive taxation which is inefficient, or simply reducing the rent-seeking activity. For copyrights I propose to combine them - make companies pay to extend their copyrights. And make them pay more to renew copyrights for every year past the author's death. Those that are not worth extending go to public domain and no longer hurt technological advancement in media delivery. Feel free to extend this idea to lucrative patents as well.

It will not be long before distributors are supplanted by trusted critics simply pointing us to the author's websites directly. Along the way they've made the road rocky for people who invent extremely efficient distribution techniques (p2p, media compression etc.) which are supposed to help overall economic efficiency. We should be as happy about the death of music distributors as we are the death of iceboxes and steam engines. They are simply not required anymore.

Interesting

The tax foundation releases an interesting statistic showing that the rich in the U.S. pay the largest share of personal and payroll taxes of any OECD country. I don't think it includes VAT, which would likely increase the progressiveness of the U.S. system since it has none.

This sentence is also interesting:

Interestingly, countries with top personal income tax rates that are higher than in the U.S., such as Germany, France, or Sweden, have ratios that are closer to 1 to 1. Meaning, the share of the tax burden paid by the richest decile in those countries is roughly equal to their share of the nation's income.

I know this can be shown in the U.S. over time as well - when top marginal tax rates were lower, the highest earning 10% earned a smaller share of overall income. So keep in mind that there seems to be a reverse correlation between the actual average tax rates the rich pay and their share of the overall burden. In other words, they are not actually hurting to pay this large a percentage of overall taxes even if sometimes these comparisons are meant to show how unfair our system is.

h/t Greg Mankiw

----------------
Update:

Matt Yglesias points out that it also doesn't include US regressive taxes - State and Local (he's wrong that it does not include payroll though). And he fails to mention it does not include VAT.

and Karl Smith comments.

About Unions

The Wisconsin situation has most of the blogs I read talking about unions. I think that unions have largely outlived their usefulness - but I appreciate them for what they've done for us in the past. That said, at worst I see them as a source of economic inefficiency and rent seeking. If you must complain about unions, also consider complaining about all forms of rent seeking: American Dental Association, American Medical Association, hairstylist licensing, lobbying etc.

All of these things, and unions, have a common thread - using the political system to limit the pool of people in their profession or industry, which raises their compensation and costs for the rest of us.

Now, I'm not saying we should do away with medical licensing. But there should be an easier path from say, an experienced physician's assistant to doctor. You should be able to get your teeth cleaned and berated for your flossing habits by a hygienist without them needing to be supervised by a dentist.

I'm all for increasing efficiency, but we should not fool ourselves into thinking removing the last few teeth from public sector unions are the only answer.

Obama's Budget

Keith Hennessey is getting a lot of attention for his graphic of the Obama budget.

The complaint boils down to it's not a serious budget proposal because it doesn't address long term Medicare and Social Security cost growth. What everyone should remember is that congressional Republicans are piecing together a budget as well, and it does: exactly nothing about the long term cost growth of Medicare and Social Security. Also keep in mind that a big part of the CURRENT deficit was signed by Republicans in the extension of the Bush tax cuts with the payroll tax holiday.

So for the Republican proposal you could essentially take Obama's blue line and shift it down by .6% of GDP (they propose to cut the budget 100 billion from Obama's, but only from non military discretionary spending). Almost indistinguishable at the resolution of his graphic.

Hennessey is proposing that his argument is with Democrats and Obama when it's really ALL politicians.

Hyperinflation part 2

Karl Smith tackles the hyperinflation question with more technical accuracy than I could.

The key point to bring up is how will you get this easy money the Fed has "printed". Suddenly it's not such easy money is it? If it's not easy for you to get, it's not easy for you to contribute to hyperinflation.