Ridiculous...

Eugene Robinson writes in the Washington Post, here.  The thrust of Robinson's argument is that the S&P downgrade of US debt is due to Republican's threatening to not extend the debt limit.  My belief is that Robinson is using a tried and true political practice to sway the opinions of people who don't take much care in forming those opinions.  What is the tactic?  Robinson claims that a reasonable position is absurd, then argues in favor of the stupid position. 

To see what I'm talking about, look here.

Should the U.S. Cut Retiree Benefits

Here is an enlightening article from Bob Samuelson.  Bob's first point is that the US over the past 50 years has undertaken a huge wealth transfer from working individuals to retirees.

This is unsustainable, but neither party addressed it in the recent debt negotiations; at least, it was not part of the public debate.

Parents' Values and Welfare

Don Boudreaux resonds to an angry emailer.

I loved Don's response.  I also loved the self-discipline he exercised in not responding to the emailer with sarcasm and disgust.  Soon, I'll post Greg Mankiw's "10 Statements that Most Economists Agree With"  But, for now, I'll just use one: people respond to incentives.

Imagine that you and your family are out of work, out of money, and nearly out of food.  Your options are to either take a job that you would never take during less trying circumstances, or apply for food stamps.  If I were given a choice between shoveling manure or collecting food stamps...I might just have a tough decision to make.  One thing we cannot deny, or ignore, is that the existence of food stamps increases the probability that we will not accept less favorable (difficult, embarrasing, etc) employment.

More on The Debt Crisis

I like Tyler Cowen's Post from Marginal Revolution.  I agree.

I have a friend in politics (minor politics) that I trust.  The impression I get is that both sides are done working on the debt deal.  Now, they are sitting around a table and going over the talking points that are necessary (from their perspective) to satisfy their constituents.  Both sides will come out and claim victory and present to the public why and how they defeated their opponents.  The debt deal is being revised, tiny details added, so that various members of the legislature can claim victory back at their geographical base.

This may seem obvious.  Why would anyone come out and say, "Yes, the Republican's/Democrats handed us our butts."  But most of the discussion in the blogosphere seems centered around why and whether the two parties can work together.  My guess, they already have.  Now they're just trying to solidify talking points.

The Debt Ceiling!

Russ Roberts interviews Keith Hennessey regarding the debt ceiling...

Debt Ceiling Podcast

Economics Rap Videos

The Fight of the Century...
Keynes vs Hayek

Just read...
An interesting article on overpopulation.

Check out...
These Exciting Visual Aids

Some Thoughts on Wealth

Today, while listening to a podcast about Keynes and Hayek and their philosophical differences, some thoughts surfaced regarding the many conversations I've had in discussions (classroom, among friends, online with strangers) regarding justice, fairness, and equity in taxation.

Is our system of taxation fair?  Should the wealthy, say a married couple making 380k or greater, be taxed more because they can afford it, because they should want to help the poor, because they won the lottery, genetic or otherwise?  In short, questions usually center around how can we make society more fair, more equitable.

To answer, I like to think of the opening chapter in Greg Mankiw's undergraduate Econ textbooks.  He outlines 10 principles that the vast majority of economists agree with.  The relevant one here is that society faces a tradeoff between efficiency and equity.  An efficient economy rewards the best users of wealth (those capable of earning the greatest return on that wealth) by funneling capital to them.  This results in quite a bit of inequality.  A society focused on equality divides up wealth equally among its citizens, and any return earned that is greater than average is redistributed to equalize the citizens yet again. 

Does the equal society sound good?  There's a catch.  The totally equal society provides no incentive for anyone to put forth effort into earning a return on capital.  In other words, if you know that any profit you make will be taken if you earn an above average rate of return on your capital, then your incentive to earn that rate is reduced, or gone completely (no incentive to innovate, to cut costs, increase efficiency, etc). 

In a society completely focused on equal distribution and redistribution of capital, there is no incentive to create more capital.  The overall wealth of that society will stagnate, and over time, fall.  Politicians in both parties should be up front and admit that neither wants a totally efficient or totally equal society.  The ramifications of either would be unbearable.

An Increasingly Common Misunderstanding

More and more often, lately, I hear people discuss wealth and income as if money is a finite resource that one can accumulate and restrict others from accessing.  Michael Moore, who I understand to be ideologically aligned with the left, argued that money is a national resource that should be controlled and distributed fairly.  During a recent Facebook discussion, someone lamented the plight of a country such as ours that allows one individual or group to accumulate great sums of wealth.

Moore’s explicit statement, and the Facebook discussant’s implication, is that wealth is something that can be horded, or accumulated, and once one does so, the effect of that money is removed from the economy, as if it no longer exists.

Why is this wrong?  Money is not some finite resource that must either go to citizen A, or citizen B, and once B possesses the money, A can not gain access to it.  Moore and FBGuy’s interpretation would have it so.  They might have a point, if B took vast sums of dollar bills and set them on fire, or put them under the bed.  But no reasonable person would allow their wealth to deteriorate (b/c of inflation) by holding money in bills under the bed. 

In short, money is constantly being created.  Person A may accumulate wealth, but that wealth is held in assets such as stocks, bonds, treasuries, or it is put in the bank.  Banks then lend out a portion of that money to individuals, person B for instance, who then find a good use for it (earning yet more money from a business, perhaps).  Person B then puts that money into stocks, bonds, treasuries, and a bank.  That bank then….and so on. 

This narrative conflicts with Moore’s and FBGuy’s views.  Money cannot be horded by wealthy individuals (unless they are fools, and typically they aren’t or they wouldn’t be wealthy) because they put their money in the form of assets that maintain value (stocks, bonds, interest bearing assets, interest paying bank accounts).  That money then funds corporations that conduct business (and hence pay employees), finances government spending (which often goes to helping those with low income), and allows banks to lend money to those who would like to purchase a home, car, vacation, or open a new business.

Even if wealthy individuals were as evil as some make them out to be, they would have no choice but to indirectly help those less fortunate than them by investing in assets and bank accounts that maintain the value of their wealth.

Increasing Taxes on the Wealthy Not A Panacea (Part II)

At the end of my previous post, I asked what should be taxed instead of luxury goods or services.  If a tax must be levied on a population (for whatever reason), ideally, it will be efficient.  That is, the tax will cause the least amount of deadweight loss (foregone economic activity) in society.  Generally, the most efficient tax is a lump-sum tax.  Why?  Look at what a lump-sum tax does to your incentive to purchase goods and services.  Can you avoid the tax?  No.  Does the tax make you substitute away from one good towards another?  No.  So, none of society’s resources are devoted to avoiding the tax.  You just pay it because you exist.

Margaret Thatcher toyed with implementing a “Head Tax” in Britain during the 1970’s.  It was met with strong resistance.  People found the idea of being taxed for literally having a head repugnant.  But, the tax was efficient, it would have caused the least amount of damage to society (did not distort incentives, did not cause deadweight loss) when compared to other taxes.  

Is there anything like the “Head Tax” in the United States?  Well…not exactly.  But, we do have an income tax.  While we do not get taxed for being alive, we do get taxed for trying to make that life enjoyable and not poverty-ridden.  However, as I’ll explain later, we still get a bit of deadweight loss associated even with an income tax, especially at higher levels of income.  

Increasing Taxes on the Wealthy Not A Panacea (Part I)

Public opinion is often in favor of increasing taxes on the wealthiest in society in order to, among other reasons, reduce government budget deficits, finance subsidies and transfer payments to the poor, and fund various public works programs.  Economists who oppose such increases are often painted in a harsh light and characterized as friends of special interests (Wall Street, particular industries, and perhaps even Republicans).  But, there are some fundamental economic principles at work that cause most economists to remain wary of looking to tax increases on the rich as a panacea for debt, reducing inequality, and public works funding.

A simple, often used, example of a justifiable tax on the rich is the imposition of a luxury tax on the purchase of yachts.  The justification is simple: if you can afford to buy a yacht, you can afford a 10% luxury tax.  The proceeds of the tax will then go to help the poor who can barely afford basic food staples, let alone a yacht.  Who would oppose such a tax?  Well, perhaps no one, not even the rich.  The problem: wealthy people do not have to purchase yachts.  Luxury items are easily foregone.  The wealthy, when faced with a 10% increase in the price of their luxury item, can easily forego the purchase of a yacht and instead will purchase some other luxurious item such as expensive vacations, more days off of work, nicer vehicles, jewelry, etc.  If the wealthy do this, substitute away from yachts in favor of some other luxury good, what will be the effect on the amount of revenue the government raises from the luxury tax on yachts?  The simple answer is that they will earn less than forecast.  Should this bother policymakers?  There is still some revenue coming in from individuals that could not live without a yacht, so why worry about it?  We should worry about it because of the amount of deadweight loss this causes in an economy. 

Deadweight loss is the amount of economic activity wiped out of an economy due to the imposition of a tax.  It is a measure of the inefficiency of a tax when compared to that most efficient of taxes, the lump-sum tax (a topic for later).  We know that the more easily someone can substitute away from the taxed item, the greater is the deadweight loss to society (the more inefficient the tax).  The wealthy are particularly good at finding the greatest use of their dollars (there are some exceptions of course, like some heirs and heiresses) and they also have the opportunity to substitute away from the taxed item due to the level of resources at their command.  Thus, luxury taxes often result in less revenue generation than predicted, result in relatively large deadweight losses (great inefficiency), and end up hurting the companies and labor involved in providing the good or service that is taxed.

What should be taxed instead?  There are still plenty of questions to ask, and answer, regarding this topic, which I will post on soon.

Gambling with Other People's Money | Mercatus

This is a great read.

Gambling with Other People's Money | Mercatus

Greg Mankiw Points Out A Powerful Evil Force In the World Emanating from New York

Below is from Greg Mankiw's Blog

A Dastardly Clever Scheme

At a faculty lunch yesterday, I heard about an ingenious scheme used by some universities in New York, where much rental housing is rent controlled.  Here are the three key elements, as it was described to me by one of my colleagues:

1. The university buys a rent-controlled building.  The purchase price is low, because the existing landlord cannot make much money renting it.

2. The university then rents the apartments to its own senior faculty, who view this as a great perk.  In essence, the difference between the free-market rent and the controlled rent is a form of compensation for the professor.  As a result, the university can reduce the professor's cash compensation by an equivalent amount.  The university is effectively earning the market rent for the apartment.

3. But it gets even better.  The implicit rental subsidy is a form of non-taxed compensation.  Normally, if an employer gives an employee a perk like this, the subsidy is taxable income (unless the perk is deemed a working condition required to do the job, like a hotel manager living in a hotel).  But here, the university can claim there is no subsidy: It is only charging what the rent-control law requires.  Because of this tax treatment, the implicit subsidy is worth even more to the professor than the equivalent cash compensation.  This fact allows the university to reduce the professor's cash compensation by an even greater amount.  Thus, the university effectively earns even more than the free-market rent on a real estate investment purchased much lower than the free-market price would have been.

In the end, the goal of the rent control laws is thwarted (the low rents are enjoyed by well-paid tenured faculty rather than the needy), the income tax laws are thwarted (a sizable part of compensation is untaxed), and all this is done by a nonprofit institution (the university) whose ostensible purpose is to serve the public interest.

"Jim, they're dying." "Let them die."

James T. Kirk and Leonard McCoy were referring to Klingons, but the same conversation applies to housing prices. Here is a link to Tyler Cowen's post on his blog, Marginal Revolution: http://www.marginalrevolution.com/marginalrevolution/2010/09/should-we-let-housing-prices-fall.html

Also, the President just proposed that businesses be able to write off all business investment for the next year. Is this a good idea? Will it stimulate the economy? I think it's a fantastic idea, and so does Greg Mankiw: http://gregmankiw.blogspot.com/2010/09/small-step-in-right-direction.html

The question I have is whether the banks who are holding cash will have any extra incentive to loan it out? Has the Federal Reserve stopped paying interest on bank reserves yet? If not, then most banks would probably prefer guaranteed money from the Fed over risky money from loan interest.

Freshman Econ Reading List

This is Greg Mankiw's freshman class seminar reading list.
Link: http://gregmankiw.blogspot.com/2010/09/this-years-freshman-seminar.html

I haven't read all of these myself.  But, I would like to.  I've read a few.

Crowding Out the Crowding Out Argument?

On CNBC the other day, Steve Leisman told Larry Kudlow that he was going to 'crowd out' his 'crowding out' argument.  Last I checked, the textbooks still say that increasing government deficits lead to temporary (short-run) increase in GDP, which disappears when prices adjust in the medium term.  But, sadly, we ARE left with a higher rate of inflation and a higher interest rate in the medium-term.

The higher interest rate obviously leads to less private investment.  Thus, stimulative fiscal policy increases budget deficits which increases the interest rate which decreases private investment.  This is what crowding out is.  So, I'm not sure why Leisman says that he can crowd out Kudlow's crowding out argument. 

I guess I should go back and watch the exchange with more attention.

Vegas Return, and Paul Krugman

Upon my return from Vegas I read Greg Mankiw's blog regarding Paul Krugman's feelings on fiscal stimulus skeptics.  To sum, Krugman thinks they're stupid, or with more nuance, Krugman wants to persuade his readers that stimulus skeptics are stupid.

My opinion of Krugman declines weekly.  I think he started off as a brilliant economist, was immensely rewarded for his work, then decided to eschew sound economic reasoning in favor of promoting his agenda.  The easiest way to demonstrate Krugman's lack of intellectual honesty in his columns is to point out an example of great honesty.  On his blog Wednesday, Mankiw outlined Krugman's argument that fiscal stimulus skeptics are illogical.  He then points out a few ways in which skeptics may be right.  But he doesn't stop there, he goes so far as to say what particular belief Krugman holds that enables his continuing belief in stimulus.

"...he does not believe that the distortionary effects of taxes are particularly large and so they do not figure much into his policy analysis. "

Krugman also points out a correlation between low investment and a weak economy, concluding that investment is down because the economy is weak.  Here, Krugman wants you to believe that fiscal stimulus is required to bring the economy back to life and thus restore investment.  Mankiw points out that no one has yet proven the causal relationship between investment and the business cycle.  It could be that investment slows down for other factors, which leads to a weak economy.  Fiscal stimulus packages may not fix the problems that led to decreased investment to begin with.  Krugman, a Nobel Prize winning economist knows this, but he is willing to mislead his many readers in the New York Times to garner support for fiscal stimulus that many economists think have an enervating effect on future private business investment.  

Reading Mankiw's blog leaves a person informed about differing beliefs on economic phenomenon.  Reading Krugman's articles misleads and indoctrinates.

(For those of you who saw Get Him to the Greek, Krugman had a cameo.  Classic.)

New Financial Regulation

I'm not sure what to make of the new financial reform package being ushered through the House.  In this past Friday's WSJ, an analyst at Moody's 'Economist' said he expects the bill to shave off about .3% per year from the United States' Gross Domestic Product (GDP).  Others say the reforms will restore confidence in the U.S. Financial sector and encourage investment.  I have no exact predictions of my own, but I fear the reforms add bureaucracy in areas where none is necessary (thus reducing efficiency and profits in the financial sector), discourage innovative investment practices, and aim the spotlight at hedge funds instead of at the strange brew of government incentives encouraging sub-prime lending.

Unfortunately, as with most government policies, we must sit and wait to see the real economic effects of the regulations.

Try Again

Building new skills is necessary.  To that end, I will try a third time to click on the link button, type in the link, publish the post, and then observe the results.Mankiw's Article

Posting the link, second attempt.