Archive for the ‘economics’ Category

In Other News, Sun to Rise in East

November 15, 2011

In June 2010, Daniel Klein published a gratuitously silly piece in the Wall Street Journal’s gratuitously silly op-ed section, purporting to show that liberals are stupider than conservatives and libertarians, at least in terms of basic economics. This occasioned some amount of delight among conservatives and libertarians—vide Veronique de Rugy in the reliably obnoxious National Review Online (to be fair, not all conservative pundits fell for it). The “methodology” Klein relied on centered around a series of agree-or-disagree statements, things like “Third World workers working for American companies overseas are being exploited” and “Minimum wage laws raise unemployment,” most of which I would call at best “arguable,” all of which are pretty clearly politically charged in that they challenged various liberal positions, and all of whose “correct” answers were on the conservative/liberal sides of various issues. So, surprise! liberals did worse on the “do I agree with the conservative/liberaltarian author” test than conservatives and liberaltarian.1

To his (relative) credit, Klein eventually realized the problem, and he did a similar exercise with questions slanted the other way (“gun-control laws fail to reduce people’s access to guns”). To what should be no one’s surprise, this time he found that conservatives were the stupid ones. Read about it in the current Atlantic. Klein now thinks what both surveys demonstrate is “myside bias.” Really!

I feel a little sorry for Zeljka Buturovic, Klein’s (possibly more academic) collaborator. According to Klein’s Atlantic article, her goal wasn’t to prove anything about economic literacy, but rather to “[explore] the possibility that ideological differences stem more from differences in people’s beliefs about how the world works than from differences in their basic values.” There might be something to that, although I don’t know how to sort out the causality there (and I haven’t read the journal articles). Since she wasn’t the one who wrote either the WSJ or Atlantic articles, I don’t want to tar her with the same brush. Sorry, Zeljka!

Oh, another annoying thing. The questions and “correct” answers are reported in the most confusing way imaginable. From the Atlantic, citing the questions with the canonically incorrect answers in quotes:

Here’s what we came up with, again with the incorrect response in parentheses: a dollar means more to a poor person than it does to a rich person (disagree); making abortion illegal would increase the number of black-market abortions (disagree); legalizing drugs would give more wealth and power to street gangs and organized crime (agree); drug prohibition fails to reduce people’s access to drugs (agree); gun-control laws fail to reduce people’s access to guns (agree); by participating in the marketplace in the United States, immigrants reduce the economic well-being of American citizens (agree); …

So how many negatives to I have to wade through to figure out what an enlightened person thinks of gun control laws? I’m pretty sure Klein thinks they reduce access to guns (I think that too), but that’s more because that’s what you would ask if your goal is to prove conservatives are wrong than from trying to cancel out the “fail to” and the “incorrect response in parentheses.”

 

1. For what it’s worth, on the original set of questions I would probably have mostly given the “conservative” answers, but only if “it depends” wasn’t an option, and only if I had inferred the context that would be generally implied from the fact that someone was asking about that particular set of things and using that particular phrasing.

So if she weighs the same as a duck…

February 1, 2010

She does look very calm about it. From yesterday’s Boston Globe, here’s an article by economist Peter Leeson arguing that medieval trial by ordeal was really not so bad. The article is notable for its complete lack of anything resembling evidence, but there is a little—very little, but more than none—in Leeson’s academic paper here. I think the most interesting bit of that is the contention that men and women were treated differently: men, typically with lower body fat and hence more likely to sink when tossed in a pond, were more likely than women to be given an ordeal by cold water, in which sinking was interpreted innocence.

The basic theory (tarted up with equations in the paper) is that (i) people who actually believed in the efficacy of ordeals would submit to them only if they were indeed innocent, confessing or settling or running away if they were guilty, and that (ii) the priests who ran the ordeal process would rig the results in favor of the innocent accused. I’m not sure the first point would apply to capital cases, much more common then than now, given that a guilty person, presumably already condemned in God’s eyes, would have little reason not take his chances on the ordeal. And as for the second point, well, I am not convinced that medieval priests were universally known even then for their honesty and incorruptibility.

A couple of years ago Leeson wrote a book about economics and pirate democracy that I keep meaning to read. I hope it’s a bit more convincing than this…

More on Landsburg and the FairTax

January 12, 2008

It occurs to me that the unlimited IRAs Steve Landsburg advocates are really equivalent to keeping the income tax and eliminating the capital gains tax, albeit with a little more work for the taxpayer, and ignoring timing issues.  So why not advocate that?  Have I missed something?

Landsburg on the FairTax

January 11, 2008

In Slate, Steve Landsburg praises “Huckabee’s Innovative Tax Plan,” aka the FairTax (neither mentioned by name nor linked, and of course not Huckabee’s own brainchild at all). Landsburg’s specialty is coming to outrageous conclusions–things you know in your heart can’t be true–based on irrefutable economic logic. The fun part of reading his columns is trying to find where the problems are (kind of like a compass-and-straightedge construction “proof” I remember from the Journal of Irreproducible Results that all angles are equal to a right angle). And who knows, maybe he’ll turn out to be right! Not this time, though.

Landsburg writes:

In the long run, most people, or at least most families, do spend what they earn. (Why earn it if you’re not going to spend it?) True, some of us die with money in the bank, but usually our children or grandchildren step in to spend the remainder for us. So, as far as your dynasty is concerned, a 20 percent income tax and a 20 percent sales tax are equally painful.

Well, first of all, the richer you are the less likely you are to spend everything you earn, especially if you don’t factor in your descendants squandering your estate. A major problem with the FairTax is that it’s even more regressive than its flat rate makes it seem, for just this reason. And balancing present versus future values is, at least, tricky (I’ll mention one major problem below).

Landsburg then compares sales taxes to unlimited IRAs, and cites research to show that unlimited IRAs (with no withdrawal penalties) are Good.

Bottom line: Unlimited IRAs, coupled with somewhat higher tax rates, have advantages and disadvantages, but the advantages are bigger. And whatever can be said about unlimited IRAs coupled with somewhat higher tax rates can equally be said of a national sales tax.

Well, maybe, sorta, to first order. The popular exposition he cites, however, mentions a critical detail Landsburg omits:

First, even though the higher savings rate may boost the economy, so that in the long run other tax revenues would increase, in the short run there would be an unambiguous tax-revenue shortfall. Second, complete tax exemption of IRAs raises political-fairness issues, because some incomes would no longer be subject to taxes.

Taxing IRA money when it is withdrawn, as is done under current law (back-loaded IRAs), addresses the fairness issue. We could solve the revenue timing problem by taxing the money before it is invested rather than upon withdrawal (front-loaded IRAs). Though it may seem counter-intuitive, front-loaded and back-loaded IRAs are equivalent on a net present-value basis.

That is, waiting to tax your money until your grandchildren spend it is going to be a problem for the government’s revenue. The front-loaded IRAs that can address the problem are not equivalent to sales taxes.

Back to Landsburg:

Another alleged difference between sales and income taxes is that income taxes can be graduated, while sales taxes can’t. Maybe, maybe not. There might be a way to design a graduated sales tax. Your credit-card providers have a pretty good idea how much you spend each year, and the government could in principle use that information to set your tax rate. Yes, there are a lot of details to be worked out, and yes, it’s highly intrusive—but I’m not convinced it’s any more intrusive than what we’ve got now.

Is Landsburg really suggesting that the government enter into some unholy alliance with credit card companies? Maybe not, but for now I’m pretty skeptical that a graduated sales tax can be made to work. And it’s emphatically not what Huckabee and the FairTax folks have in mind.

But the good news is that the details don’t matter, because there’s an easier way to design a graduated sales tax. Namely, keep the graduated income tax and add a provision for unlimited IRAs. Presto, you’ve got the equivalent of a graduated sales tax.

That’s not necessarily desirable. You could well argue that a flat tax rate is a feature, not a bug. But that’s a topic for a different column. The point of this column is that the whole flat-versus-graduated issue is quite tangential to the sales-versus-income-tax issue. And the underlying issue becomes a lot clearer once you realize that a sales tax is a modified income tax.

And here we have the real problem with Landsburg’s column. He is not talking about the FairTax at all, or about anything that (as far as I know) any prominent political figure has proposed. The FairTax backers most assuredly do not see the flat-versus-graduated issue as tangential to the sales-versus-income-tax issue. And rightly so, I think; one of the few virtues of the FairTax is its simplicity. Landsburg’s unlimited IRAs might or might not be a great idea, but they have less to do with this year’s presidential politics than he says.

BTW: I can’t read Landsburg’s columns without thinking of Steve Landesberg, who played Dietrich on Barney Miller, beloved sitcom of my youth. Conflating the two kinda works for me.

Obanamics–I like it

January 8, 2008

This pleases me. Excerpt:

Senator Obama’s ideas, on the other hand, draw heavily on behavioral economics, a left-leaning academic movement that has challenged traditional neoclassical economics over the last few decades. Behavioral economists consider an abiding faith in rationality to be wishful thinking. To Mr. Obama, a simpler program — one less likely to confuse people — is often a smarter program.

The FairTax

December 30, 2007

Here‘s a paper by Bruce Bartlett arguing against the FairTax (via the Volokh Conspiracy‘s Ilya Somin, who has his own Libertarian reservations).

The FairTax people have a rather ad hominem response here to a previous Bartlett article (in part about the FairTax and its roots in Scientology!).

Another incontrovertible piece of evidence that the FairTax is a bad idea: Mike Huckabee and Ron Paul are for it.

For the record, I too think our income tax system is appallingly, wastefully, hideously overcomplicated. But that’s not because it’s an income tax, or because it’s progressive (I’m talking to you, Steve Forbes).  Tax brackets are a trivial complication; it takes a few seconds to look something up in a table and you’re done. The problem is all the damned deductions and different income classes, which came about through a combination of well-intentioned social engineering (which mostly results in unintended consequences) and ill-intentioned special-interest lobbying.  Were I king, I would keep the progressive income tax but get rid of ALL deductions, including our beloved mortgage and state income tax deductions. Everyone would fill out a 1040-EZ.

[Yes, I just said some stuff with no supporting evidence at all. Finding some is left as an exercise. I’m too lazy right now.]

[Also, I admit I don’t know what to do about capital gains taxes, a major complication. Two options I see:

  • Tax capital gains as income. Yes, there are good reasons to encourage long-term investing over short-term. But see above.
  • Eliminate them, and raise corporate taxes commensurately.

I think I prefer the first option.]

It should go without saying that there is no chance at all of any of this happening any time soon, so the whole discussion is really only for theoretical and rhetorical purposes.

UPDATE: I should note that I have no idea whether Bartlett is right about the FairTax and Scientology, or whether that is a completely unfounded smear. The FairTax people say he’s very very wrong. But they would, wouldn’t they?

The Tall Tax

December 19, 2007

I’ve skimmed Greg Mankiw and Matthew Weinzierl’s “Tall Tax” paper , which has just been getting attention, most (but not all) of it sorta negative. The claim is that, based on what is apparently the prevalent Utilitarian theory of “optimal taxation,” (due mostly to 1996 Nobel laureates William Vickrey and James Mirrlees) we should tax tall people more than short people.

In all that follows, bear in mind I know nothing at all about economics and that nothing I say on the subject is to be trusted.  That said, here’s the argument, as I understand it.

  • We want to design a tax system to maximize “utility,” which I think of as something akin to the sum the happinesses of all the individual taxees.
  • Each individual has a certain amount of “wages” from external sources, and chooses to work at a certain level of productivity, or “labor effort”. Actual income is the product of wages and labor effort.
  • An individual’s Utility is a function only of after-tax income, or “consumption,” and labor effort. It’s increasing in income and decreasing in labor effort; i.e. we want to make lots of money by doing as little as possible.
  • The government can’t observe (and hence tax based upon) wages or labor effort, only income and other externally visible features, such as in this case height.
  • (This part that is based on observed data, not on the Vickrey-Mirrlees framework) Tall people make more money than short people, correcting for all other factors.

Based on that, it follows that tall people should be taxed more than short. Intuitively, short people have to work harder than tall people for the same amount of income, and giving them a tax break at the expense of the tall increases their utility more than it decreases that of the tall.

Now Mankiw, a former chair of the current administration’s Council of Economic Advisers, certainly doesn’t really approve of this sort of “from each according to his ability, to each according to his need” idea. Indeed,

Before proceeding, a note about our own (the authors’) interpretation of the results. One of us takes from this reductio ad absurdum the lesson that the modern approach to optimal taxation, such as the Vickrey-Mirrlees model, poorly matches people’s intuitive notions of fairness in taxation and should be reconsidered orreplaced. The other sees it as clarifying the scope of the framework, which nevertheless remains valuable for the most important questions it was originally designed to address. The paper presents both interpretations and invites readers to make their own judgments.

I agree with the second  view, presumably Weinzierl’s. Like any model, the Vickrey-Mirrlees framework ignores many things, and is valid only in a certain regime. (I am reminded of the economist’s analysis of dairy production: “Assume a spherical cow of uniform density…”).  In this case an obvious thing the model ignores is the sense of “fairness” that is deeply ingrained into the human psyche.  It may not be rational, but it’s there.  Perhaps it could be included in the V-M framework by making the utility function depend on relative tax rates, or in some other way.  Or not, and some other framework would be needed to analyze it effectively, I don’t know.  But that’s no reason to think the framework doesn’t work perfectly well in many applications.

On his blog, Mankiw says “It seems to me that if you are going to reject a logical inference from a model, you have to explain why. That is not so easy for a height tax, which is precisely the point of the paper.” He’s right about explaining why you have to explain  rejecting inferences from a model, but (I think) wrong about that not being easy for a height tax.