EconLog
Bryan Caplan and David Henderson

Good bye to tax competition

Alberto Mingardi

Tax competition may well be a thing of the past. The OECD tax conference in Berlin has ratified a new tax deal between fifty countries, to allow automatic exchange of tax information. German finance minister Wolfgang Schäuble rejoiced at this "joint contribution to more transparency and fairness in our globalized 21st century"(*). British finance minister George Osborne added that "tax evasion is not just illegal but immoral" because "you are robbing from your fellow citizens and you should be treated like a common thief". I find this a rather remarkable statement: the problem with theft is apparently one of magnitude. If all robbers were alike, what should we say of organizations that take money without their consent from millions of individuals at the time?

Yet that tax evasion rather than taxation itself is associated with theft sounds paradoxical only to libertarian ears. The OECD has long being pursuing the dismantlement of tax competition (see this 2013 paper by Cato Dan Mitchell). Advocates of closing loopholes have been constantly claiming the moral high ground. The argument is Osborne's: tax evaders are indirectly increasing the tax burden on everybody else, as they aren't paying their dues. It seems to me that behind such reasoning you find the idea that public spending is basically incompressible, and that governments shouldn't be forced to match spending to revenues.

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Now, tax evaders aren't necessarily a commendable category of people: surely there are a lot of criminals among them (if I don't obey the law when it prohibits killing people, am I really expected to comply with its fiscal provisions?). But I find rather convincing the idea that all those activities that run the gamut between fiscal arbitrage and outright tax evasion have had somehow the effect of lowering overall fiscal burden. The mere possibility of an ever greater erosion of their tax basis may have slightly slowed down that incredible increase in taxation which we have experienced almost everywhere in the West.

The best comment on the OECD conference came from a commenter on the WSJ website, Winthrop Smith: "And the same countries slam Google for making information on people public...". This is an interesting paradox. Apparently, our societies values privacy quite a lot. How to regulate people's posting pictures of their children on Facebook is a question regulators and governments are seriously pondering all over the world. But when we are talking money and bank accounts, "privacy" is deemed something just criminals and libertarian nuts may actually value.

(*) Schäuble seems at least to be aware of the fact that also the way in which you "fight evasion" or "crack down fiscal heavens" could raise ethical question. A few years ago, the German government bought CDs with names of German owner of bank accounts in Swiss banks. "Hopefully tax CDs will soon no longer be worth it", said Schäuble in Berlin, "I always found it problematic to cooperate with 'fences' to enforce the law". This would be a more interesting conversation to have. If the ends do not justify the means, and if the goal of "fighting tax cheaters" doesn't justify by definition all possible means, how should it be pursued?

CATEGORIES: Taxation

   


About That 97 Percent

David Henderson

I've posted before (here and here) about the John Cook study that purports to find that 97% of climate scientists believe that humans are the main cause of global warming.

Now Richard Tol, a professor of the economics of climate change, has written a further critique of the Cook study.

Some highlights:


Some have claimed that Cook et al. found a consensus on the dangers of climate change (Kammen, 2013) or on the need for climate policy (Davey, 2013). They investigated neither. Even some of the authors of the paper misrepresent its findings (Nuccitelli, 2014, Friedman, 2014, Henderson, 2014).

Cook et al. took a sample of the academic literature and rated its contents. The raters were recruited through a partisan website (Cook et al., 2013) and frequently communicated with each other (Duarte, 2014). Their sample is not representative of the literature (Tol, 2014a). The sample was padded with large numbers of irrelevant papers (Tol, 2014a). For example, a paper on photovoltaics in Kenya (Acker and Kammen, 1996) was taken as evidence that climate change is caused by humans as was a paper on the coverage of climate change on US TV (Boykoff, 2008). Three-quarters of the "endorsing" abstracts offer no evidence either way (Tol, 2014a). Their attempt to validate the data failed (Tol, 2014a). An attempt to replicate part of the data failed too (Legates et al., 2013). The data show inexplicable patterns (Tol, 2014a) while the consensus rate suffers from confirmation bias (Cook et al., 2014a, Tol, 2014b).


in sum, one of the most visible climate papers of recent years is not sound. Whereas previous critique could be interpreted as a lack of competence (Tol, 2014a), the later data release suggests that Cook et al., perhaps inadvertently, worked towards a given answer. This reflects badly on the authors, referees, editors and publisher. It also weakens the activists and politicians who cite Cook et al. in support of their position.

BTW, I'll be forever grateful to Richard Tol for coining the phrase "sunk benefit." (I assume he coined it.) He mentions it here.

HT to Robert P. Murphy.


   


When I scoff at group identity, critics often call me naive.  Won't anyone who heeds my advice to eschew identity politics end up being victimized by all the folks who do take their group identities with utmost seriousness?  Then rational self-interest requires identity politics in self-defense.

The rational self-interest version of this story is trivial to refute.  In modern, anonymous societies like our own, all forms of political action are, selfishly speaking, a complete waste of time.  This is basic Mancur Olson.  You're one person out of billions.  Selling your soul to identity politics is astronomically unlikely to noticeably change public policy.

Fortunately, there's a smarter version of the same story.  Sure, identity politics is individually fruitless.  But won't groups that embrace identity politics fare better than groups that don't?

Maybe.  But there are three big reasons to doubt it.

First, there's opportunity cost.  The time that members of your group devote to politics is time those members aren't devoting to personal advancement.  As Thomas Sowell pointedly observes:
Groups that rose from poverty to prosperity seldom did so by having racial or ethnic leaders. While most Americans can easily name a number of black leaders, current or past, how many can name Asian American ethnic leaders or Jewish ethnic leaders?
Second, ramping up your side's identity politics often has the perverse side effect of inspiring rival groups' identity politics.  Making your group angry and scary can yield lots of goodies if no other group reacts.  But the angrier and scarier your group gets, the more likely other groups are to respond in kind.  Net effect?  Unclear, as usual.  And if you instantly exclaim, "So we need to get really angry and scary to make our rival groups back down!" you've utterly missed the point.

Third, activists' beliefs about the effects of public policies are often deeply confused.  So even if identity politics gives your group total power, the results could easily be disastrous for your group.  See the sad history of decolonization.

None of this proves that identity politics never pays.  My point, rather, is that identity politics is unreliable at best.  When you put your childish identity aside, you aren't just sparing yourself; you could easily be doing your former compatriots a favor, too.  As far as anyone knows, nobility is a free lunch.


   


Tyler Cowen often has posts entitled "A very good sentence." Here Tyler dishes up one of his own:

Yes, it is a big mistake to assume Say's Law always holds but it is an even bigger mistake to think it never holds.
I'd like to discuss the following sentences:
Supply slowdowns are bad for demand, and they likely are bad for credit creation too, which hurts demand further yet.

There is no contradiction in a model where both aggregate demand and aggregate supply curves shift in unfavorable directions! And in the medium run, each of these shifts pushes the other curve around too.


I think this is right, and in the past I've discussed how the AS and AD curves are "entangled" in practice. But it's also important to understand the mechanism(s), because there is nothing "natural" about this entanglement.

Let's start with the easiest entanglement to explain, the medium term. Suppose NGDP trends upward at 5%/year, with 3% RGDP growth and 2% inflation. Then we are hit by a supply shock that reduces growth to 0% for one year, assuming we stay at full employment. What happens next? If the Fed is targeting NGDP, then inflation probably rises to 5% and real growth falls to zero percent. Employment is roughly unchanged. No impact on demand. But let's say they are targeting inflation. Then NGDP growth slows sharply. And because nominal hourly wages are sticky, employment also falls sharply. Now RGDP is falling for two reasons, falling productivity (supply shock) and falling employment (due to a demand shock). RGDP turns negative. This isn't exactly what happened in 2008-09, but it does pick up some of what occurred.

Now let's move to the very short run. If the central bank is targeting interest rates in the very short run, a supply shock may lead to lower AD. For instance, a sharp rise in the minimum wage or oil prices might depress business investment. This reduces the demand for credit, depressing the Wicksellian equilibrium interest rate. If the central bank is slow to react (keeps targeting interest rates at the same level) then NGDP starts to fall. Thus AS and AD are entangled in both the short and medium run. But how about the long run?

The natural rate hypothesis says that it wouldn't matter if AS and AD were entangled in the long run, because AD doesn't matter in the long run. Thus long run stagnation cannot be a demand-side problem. Is this prediction of the standard model correct? The old Keynesians say no, as do new Keynesians who are increasingly drawn to the old Keynesian model (Summers, Krugman, etc.) It mostly hinges on how you feel about money illusion and wage stickiness near the zero level of wage increases. And at an empirical level, it depends what you make of the Japanese experience over the past two decades.

I'm agnostic on this question. Ironically, Krugman just presented some data that seems to slightly undercut his argument. He has a graph that shows the Japanese have not done as bad as people assume over the past few decades, if you adjust for growth in the working age population. First one small quibble with the graph; I'd like to know how many elderly Japanese are working before I assume the working age population is the right figure to use when adjusting GDP. Japan has a lot of old people, and their number is growing really fast. So Japan may have done worse than Krugman indicates.

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But let's put aside that issue, and assume Krugman's graph is basically correct. When I look at the graph I see a country falling well behind the US for about a decade, then partly catching up. Younger readers should keep in mind that the relative decline in the 1990s was a big shock to most Westerners. As late as 1991 Japan was viewed as a sort of turbo-charged super-economy, with a more efficient economic model than the West. So I think there is at least a pretty strong prima facie case to be made for the claim that it was the sharp slowdown in NGDP growth that triggered the underperformance. But Krugman's graph indicates that this underperformance lasted for about one decade, not two. This suggests that in the very long run AD shocks might not matter, or (more likely in my view) matter only a very small amount. It's hard to tell because the baseline (other developed countries) had their own problems more recently.

Returning to Tyler's great sentence, despite my constant bashing of the ECB, here's what I would say about Europe:

1. The sharp rise in European unemployment during 2008-09 and 2011-13 was due to tight money that slowed NGDP growth. Note that BOTH slumps immediately followed ECB tightening, by any measure you choose (NGDP, or target short term interest rates.)

2. The enormous difference in the performance of countries like Greece and Italy relative to Germany and Austria is a supply-side story. They face the same monetary policy. And in the long run that divergence may be the biggest story in the eurozone. The rise in unemployment is really important, but the long run failure of certain economic models is really, really important.

So why do I focus so much on monetary policy? Partly because it's by far the easiest problem to fix, structural reforms are much harder. Note how Abe quickly changed monetary policy in Japan, ending deflation, but wasn't able to enact structural reforms. And second, it's my area of expertise; prior to 2008 I had devoted my life to studying issues like the Great Depression, NGDP targeting, and the Japanese liquidity trap. There are lots of $100 bills lying on the sidewalk waiting for the ECB to pick them up. (OK, 500-euro bills.) I'm most useful to society if I point that out.

PS. NGDP growth (or growth expectations) is the proper way to measure the stance of monetary policy. In other words, M*V. But some commenters demand "concrete steps." So in response I sometimes point out that a certain slowdown in NGDP growth was triggered by a target rate increase at the central bank. Then commenters complain "but you told us interest rates weren't the right indicator." I can't win.


   


The Identity of Shame

Bryan Caplan
Every large, unselective group includes some villains.  Say whatever you like about the average moral caliber of Christians, atheists, Democrats, Republicans, plumbers, comic book fans, or Albanians.  The fact remains that each of these groups contains some awful people.  While this isn't logically necessary, it is an iron statistical law.  If X has more than a few dozen members, and you can join group X by (a) being born into X, or (b) saying "I'm an X," then X will have some unsavory characters.

When you identify with a large, unselective group, you expose yourself to two dangers.  First, some of the villains in your group may take villainous actions that make you look bad.  Yet on reflection, that's a minor concern: Yes, the bad members of your group make you look bad, but the good members of your group make you look good. 

The second danger is more severe.  Once you identify with any large, unselective group, you will be regularly tempted to commit the villainous act of standing up for your groups' villains.  When they do wrong - as they inevitably will - your impulse will be to ignore, minimize, or justify their misdeeds.  To quote the underrated 8mm, "If you dance with the devil, the devil don't change. The devil changes you."

Look at any large, unselective group you don't identify with.  You see them clearly, do you not?  Some of its members are plainly bad people.  But getting the regular members to unequivocally condemn their bad members is almost impossible.  Evolution has honed their myside bias for millions of years, and that's not about to change.

Fortunately, there are relatively easy ways to avoid these temptations in the first place - to save yourself from all shameful identities.  Namely: Never identify with large, unselective groups!  Instead, restrict your identity to groups that are small, selective, or both.

The nuclear family is the classic small, unselective group; no other group is more deeply founded in human nature.  Fortunately, the moral risk of being part of such a family is usually small.  Even if you have five kids, there a good chance that none of them will be horrendous people.  Circles of friends are the classic small, selective group.  Pick your friends carefully, and you probably won't end up an apologist for evil.

Large, selective groups a riskier.  In principle, they can evade statistical villainy by carefully vetting and excommunicating questionable members.  Unfortunately, myside bias tends to gut the excommunication process.  Fringe movements like Jehovah's Witnesses expel members all the time, but not the Catholic Church. 

The best way to guard against this laxity is to define your large, selective groups in purely intellectual terms.  Identify with liberalism or conservatism, not liberals or conservatives.  This is the kernel of truth behind the "No True Scotsman" fallacy.  Once you insist that "No true libertarian believes in immigration restrictions," you'll feel little temptation to ignore, minimize, or justify libertarians who believe in immigration restrictions.  And this is precisely how you should feel. 

Can anyone really live up to my puritanical advice?  Yes.  Take me.  I identify with my nuclear family, with my friends, and with a bunch of ideas.  I neither need nor want any broader identity.  I was born in America to a Democratic Catholic mother and a Republican Jewish father, but none of these facts define me.  When Americans, Democrats, Republicans, Catholics, and Jews commit misdeeds - as they regularly do - I feel no shame and offer no excuses.  Why?  Because I'm not with them.


   


Prager University has published a beautiful graphic-filled video on the minimum wage with me as the "talent."

You can see it here or here.

CATEGORIES: Price Controls

   


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I still remember watching this interview with Mikhail Gorbachev in my high school journalism class.  When Tom Brokaw asked Gorbachev about Soviet emigration restrictions, the Soviet dictator self-righteously replied
What they're [the West] organizing is a brain drain.  And of course, we're protecting ourselves.  That's Number One.  Then, secondly, we will never accept a condition when the people are being exhorted from outside to leave their country.
This "brain drain" rationale was pervasive behind the Iron Curtain.  From Alan Dowty's Closed Borders: The Contemporary Assault on Freedom of Movement (1989):
Marxist states typically place great stress on rapid modernization and development, and achieving those goals depends on the services of highly trained professionals.  But few groups feel more threatened by Marxist governments than this one.  From a position of privilege and high reward, they are reduced to salaried servants of the state.  The Marxist commitment to egalitarianism undermines the incentive structure that professionals thrive on - and which is usually available in neighboring lands.

Thus, to prevent a brain drain, an open emigration policy might force a state to readjust its wage structure, at a cost to other economic priorities, not to mention ideology.  This was the conclusion, for example, of Zsuzsa Ferge, a Hungarian sociologist who studied the economic impact of her own country's relatively liberal emigration policies: as Hungary began to compete with the Western labor market, it was forced to increase rewards to professionals.  Representatives of Romania and Bulgaria, on the other hand, argue that they cannot afford to match Western salaries, and that, without a restrictive emigration policy, they "would become like Africa." [from Dowty's personal interviews with diplomatic representatives of Romania and Hungary]

To be sure, Communist fretting about "brain drain" seems hypocritical.  If they really cared about national well-being, their first logical step would be to end their brutal dictatorships.  But none of this shows that the Communist arguments against free emigration were false.  Allowing free emigration really could be worse for national well-being - especially if you stop counting your citizens' well-being the moment they jump ship to another country.

Now suppose you subscribe to the political philosophy of citizenism: You think that governments should maximize the well-being of their citizens, with little regard for non-citizens.  Is there any principled reason to reject emigration restrictions?  The citizenist could say, "I favor putting citizens' interests ahead of foreigners' interests, but not some citizens' interests ahead of other citizens' interests."  But immigration restrictions clearly do the latter.  Some citizens greatly benefit from doing business with foreigners; immigration law still tells them, "Tough luck."  In the real world, every citizenist has to make trade-offs between the welfare of different kinds of citizens.  

Question: If citizenism justifies immigration restrictions, why not emigration restrictions?  Or to put it more provocatively, tell me: If Gorbachev supported emigration restrictions after a sincere analysis revealed they advanced for the overall interests of the Soviet people at the expense of the high-skilled minority, is there any reason Gorbachev shouldn't be a citizenist icon for standing up to rootless cosmopolitanism

P.S. I am well-aware that leading citizenist philosopher Steve Sailer admits exceptions to his citizenist rule.  But to the best of my knowledge, he has never enumerated the main exceptions or even suggested general guidelines for making such exceptions.  What we do know is that, in his eyes, even tighter immigration restrictions than already exist are morally unobjectionable.  Status quo bias aside, then, why would the rights of emigrants weigh any heavier on the conscience of citizenist than the rights of immigrants?

P.P.S. If anyone knows a URL for the full Gorbachev-Brokaw interview, please post it in the comments.


   


Of course, it is.

I'm glad that co-blogger Bryan Caplan has introduced us to Scott Alexander. I had never come across him before, but I found most of the long piece that Bryan referred to refreshingly thoughtful.

There is so much nonsense out there and so we have what my military officer students call a "target-rich environment." So now that Bryan and Scott Alexander have raised these issues, I want to discuss one piece of nonsense that has become commonplace.

After CNN reporter (I think she's a reporter although I'm not sure) Carol Costello did a disgusting segment in which she showed her glee at violence committed against Bristol Palin, CNN's Brian Stelter, to his credit, did a segment in which he pointed out implicitly how disgusting Costello had been. But, not content to leave it at that, he gave Bristol Palin the last word. And here's one of her statements: "Violence against women is never OK." Stelter doesn't challenge that.

But it should be challenged. Violence against women is often OK. A woman comes up to you with a gun. You have done nothing wrong. She starts firing at you. Fortunately, she's a bad shot, but you're not sure for how long she'll be a bad shot. I think you're justified in punching her lights out or even, if you have a gun, firing back. Does anyone care to say that punching someone or shooting someone is not violent?

This issue came up a few years at a meeting of the Peace Coalition of Monterey County, a coalition of groups, all of which purport to favor peace, and most of which do. I'm on the membership committee. One group--I've forgotten its name--applied to join. I asked someone at the meeting, someone who was supporting the group's application, what the group stood for. The answer: it was against violence against women. She went on to say that, of course, this was consistent with what we stood for because who could favor violence against women. Here's what followed.

DRH: I do in some circumstances. If a woman is coming at me with a gun, then I think violence is justified.
Woman supporting the application: Well, sure, but this group opposes violence against non-violent women.
DRH: But wouldn't it also oppose violence against non-violent men? Why single out men?

I don't remember what she said next.

By the way, as I've said on this blog a number of times, I am not a pacifist.

Possibly, at some point in the future, I'll discuss a time when I used violence against three women who were sexually attacking me. It was one of the proudest moments of my life.

CATEGORIES: Economics of Crime

   


Read Scott Alexander

Bryan Caplan
I find fascinating new things to read every day.  But it's been a long time since I found a fascinating new thinker to read - someone who makes me say, "Tell me everything."  Then about two weeks ago, I discovered the mind of Scott Alexander.  I've been reading him heavily ever since.

I've actually admired several of Scott's pieces before, especially his essays on anti-depressants and reactionaries.  I just never realized the same man wrote them, or thought to peruse his broader body of work.  Once I connected the dots, a benefactor referred me to Scott's page of top posts.  I've been devouring his voluminous writings ever since.  My original plan was to share random highlights, but his "I Can Tolerate Anything Except the Outgroup" is packed with more random highlights than most professors' life work.  Three of my favorites:

On the virtue of tolerance:

The Emperor summons before him Bodhidharma and asks: "Master, I have been tolerant of innumerable gays, lesbians, bisexuals, asexuals, blacks, Hispanics, Asians, transgender people, and Jews. How many Tolerance Points have I earned for my meritorious deeds?"

Bodhidharma answers: "None at all".

The Emperor, somewhat put out, demands to know why not.

Bodhidharma asks: "Well, what do you think of gay people?"

The Emperor answers: "What do you think I am, some kind of homophobic bigot? Of course I have nothing against gay people!"

And Bodhidharma answers: "Thus do you gain no merit by tolerating them!"

On the demography of Less Wrong:

On last year's survey, I found that of American LWers who identify with one of the two major political parties, 80% are Democrat and 20% Republican, which actually sounds pretty balanced compared to some of these other examples.

But it doesn't last. Pretty much all of those "Republicans" are libertarians who consider the GOP the lesser of two evils. When allowed to choose "libertarian" as an alternative, only 4% of visitors continued to identify as conservative. But that's still...some. Right?

When I broke the numbers down further, 3 percentage points of those are neoreactionaries, a bizarre local sect that wants to be ruled by a king. Only one percent of LWers were normal everyday God-'n-guns-but-not-George-III conservatives of the type that seem to make up about half of the United States.

On civility and proportion:

What would Russell Brand answer, if we asked him to justify his decision to be much angrier at Fox than ISIS?

He might say something like "Obviously Fox News is not literally worse than ISIS. But here I am, talking to my audience, who are mostly white British people and Americans. These people already know that ISIS is bad; they don't need to be told that any further. In fact, at this point being angry about how bad ISIS is, is less likely to genuinely change someone's mind about ISIS, and more likely to promote Islamophobia. The sort of people in my audience are at zero risk of becoming ISIS supporters, but at a very real risk of Islamophobia. So ranting against ISIS would be counterproductive and dangerous.

On the other hand, my audience of white British people and Americans is very likely to contain many Fox News viewers and supporters. And Fox, while not quite as evil as ISIS, is still pretty bad. So here's somewhere I have a genuine chance to reach people at risk and change minds. Therefore, I think my decision to rant against Fox News, and maybe hyperbolically say they were 'worse than ISIS' is justified under the circumstances."

I have a lot of sympathy to hypothetical-Brand, especially to the part about Islamophobia. It does seem really possible to denounce ISIS' atrocities to a population that already hates them in order to weak-man a couple of already-marginalized Muslims. We need to fight terrorism and atrocities - therefore it's okay to shout at a poor girl ten thousand miles from home for wearing a headscarf in public. Christians are being executed for their faith in Sudan, therefore let's picket the people trying to build a mosque next door.

But my sympathy with Brand ends when he acts like his audience is likely to be fans of Fox News.

In a world where a negligible number of Redditors oppose gay marriage and 1% of Less Wrongers identify conservative and I know 0/150 creationists, how many of the people who visit the YouTube channel of a well-known liberal activist with a Che-inspired banner, a channel whose episode names are things like "War: What Is It Good For?" and "Sarah Silverman Talks Feminism" - how many of them do you think are big Fox News fans?

In a way, Russell Brand would have been braver taking a stand against ISIS than against Fox. If he attacked ISIS, his viewers would just be a little confused and uncomfortable. Whereas every moment he's attacking Fox his viewers are like "HA HA! YEAH! GET 'EM! SHOW THOSE IGNORANT BIGOTS IN THE outgroup WHO'S BOSS!"

Brand acts as if there are just these countries called "Britain" and "America" who are receiving his material. Wrong. There are two parallel universes, and he's only broadcasting to one of them.

Last thought: Reading Scott is humbling.  Why?  Because he's better than me on several dimensions I deeply value.  He's calmer.  He's more patient.  He's probably more inter-disciplinary.  And ideas aren't even his day job.


   


One person who does understand economics and who frequently writes approvingly of Roosevelt's approach to politics is Paul Krugman. In The New York Times last Friday he had this to say:

"... the political right has always been uncomfortable with democracy. No matter how well conservatives do in elections, no matter how thoroughly free-market ideology dominates discourse, there is always an undercurrent of fear that the great unwashed will vote in left-wingers who will tax the rich, hand out largess to the poor, and destroy the economy."

Close. Take out the word "poor" and insert "every special interest group that can help in the next election" and take out "tax the rich" and insert "tax everybody and his uncle" and I think he's right on the mark. [Sometimes you wonder if Krugman is living on another planet. Does he really not know what happens when Democrats rule without constraints? Ever hear of Detroit?] Here is another gem from Krugman the political scientist:

"... if you worry that low-income voters will run wild, that they'll greedily grab everything and tax job creators into oblivion, history says that you're wrong. All advanced nations have had substantial welfare states since the 1940s -- welfare states that, inevitably, have stronger support among their poorer citizens. But you don't, in fact, see countries descending into tax-and-spend death spirals."

True. But the reason why "advanced" countries are "advanced" is that they have managed to resist what the "non-advanced" countries have not resisted: the natural tendency of democracy to descend into a sea of special interest gluttony, like sharks in a frenzy -- feeding on a dead whale.

And they have managed to resist such temptations by resisting the way of thinking that pervades so many of Paul Krugman's columns.


This is from John C. Goodman, "Why Is There Political Stability? Because Most Voters Don't Think Like Paul Krugman," at Forbes.com.

Above, I've quoted almost half the piece. Here's one of my other favorite lines from Goodman's article:

So far at least, Americans don't believe in arbitrarily taking from Peter and giving to Paul, even if they happen to be Paul.

Dwight Lee covers some of the same ground in this last quote, in more detail, in "Do the Poor Vote Their Self-Interest?", Econlib Featured Article, August 5, 2013.


   


Repeat after the economics profession: resources are scarce, and they have alternative uses. Thomas Sowell has said that this is the first rule of economics. He has also said that the first rule of politics is to ignore the first rule of economics, and this is perhaps nowhere more obvious than in discussions of state and local development policy.

The state of Alabama has given hundreds of millions of dollars in subsidies and tax breaks to auto manufacturers, and the city of Birmingham has been talking for a long time about building a domed stadium and expanding the convention center. I've seen $500 million listed as a price tag for this venture, but I don't know that the city's prospective commitment is that high.

"What else could we do with the money?" is the question too few people are asking. Questions about economic calculation are important, but given that governments are doing these things in the context of a market economy we can at least use a few benchmarks.

So how should governments evaluate their undertakings? Ignore public choice considerations for just a second and indulge a flight of fancy. There is a collective action problem that, in theory, could mean too few stadiums and the like get produced and that could, in theory, mean that government provision of stadiums and the like would make us all better off. If Alabama, for example, is a better place to live because a government spent $250 million to lure CarCo or to build a stadium, the indirect benefits should be reflected in higher real estate prices and, therefore, higher property tax revenues. The "intangible benefits" of "putting Alabama on the map" or "becoming a big-league town" are more tangible than they might at first appear because they will be capitalized into real estate prices. Hence, we could estimate the project's contribution to tax revenue in order to determine whether it's actually creating value.

Of course, there are a lot of ways to use $250 million. A government could fund a stadium, give it to a car company, cut taxes, pay for better schools, or simply invest it in stocks and bonds. What is the baseline to which we should compare government spending on economic development, and how should we evaluate the outcomes?

I'm tempted to say we should evaluate taxes and spending by comparing it to a program of investing in stocks, bonds, or a combination of the two, distributing the proceeds, and relying on entrepreneurs to provide the things governments currently provide. Essentially, we turn states into big mutual funds. Stocks, though, are too risky while risk-free bonds are too conservative. What benchmarks and metrics would you propose?

CATEGORIES: Public Goods

   


Here's a letter I had published in today's Monterey Herald. What's important is not so much the measure being debated and voted on, but the way the local school district used our money. It was the lead letter in the Herald and I like the title the Herald's editors gave my letter.

Compensate taxpayers for costly mailing

The Pacific Grove Unified School District has gone too far. It has sent out a mailing, at taxpayers' expense, telling why Measure A is needed. Measure A, if passed, would raise taxes on property in Pacific Grove. The employees and board members of PGUSD have every right to use their own resources to urge people to vote for the tax increase. But they have no right to use our money. This is especially galling for those of us who oppose the tax increase and yet are having to pay to be propagandized.

We hear that the tax increase is for education for the children. But the most important thing we can do for children is teach them right from wrong. PGUSD, it seems, does not know right from wrong.

By using our tax money, and probably breaking the law in the process, PGUSD has lost any claim to the moral high ground. Superintendent Ralph Porras and board members Debbie Crandell, John Paff, Bill Phillips, Tony Sollecito and John Thibeau, all of whose names are on the mailing, should resign in shame. And they should personally compensate Pacific Grove taxpayers for the expensive mailing.


   


The Germans have traditionally argued that the ECB should focus like a laser on their inflation target, paying no attention to unemployment. Fair enough. But how are they supposed to do this?

The exact target is kind of vague, below 2% but close to 2%. It's a really bad idea to define the inflation target that way, which makes it seem obvious that it was a political compromise. Most pundits seem to assume the actual target is somewhere around 1.8%.

The ECB's tight money policy since 2007 has led to extremely slow NGDP growth, and just as in Japan the eurozone has fallen into a zero rate trap that looks semi-permanent. Also note that this is partly because of the German influence at the ECB. They favored higher interest rates in 2011, which is precisely the sort of policy that drove them deep into the zero rate territory. As a practical matter, the long run zero rate environment is a German policy.

(Ironically, they were concerned about their savers receiving low returns. Just one more reason to be skeptical that "self-interest" explains monetary policy screw-ups. Even most experts have no idea how monetary policy actually affects the economy.)

But this raises an interesting question, and one I have not seen discussed in the blogosphere. If the Germans insist on a policy that leads to ultra-slow NGDP growth, and the resulting zero interest rates, then the ECB cannot use a Taylor Principle-type approach to inflation targeting. The standard tool of almost all central banks. So what policy instrument do the Germans want the ECB to use, if not short-term interest rates? One obvious choice is negative rates on reserves, but I recall reading that the Germans are opposed. Another is QE, but I recall reading that the Germans are opposed. So over the next few decades when the eurozone is stuck at zero, what sort of policy tool do the Germans want the ECB to use in order to hit its 1.8% inflation target?

These things don't just happen by accident.

PS. Over the years some commenters have told me that they "don't favor using monetary policy." If the Germans take that approach they may be in for a nasty surprise. You may not care about monetary policy, but monetary policy most certainly does care about you.

CATEGORIES: Monetary Policy

   


Who Will Build the Roads?

David Henderson

Dollarphotoclub_59262923.jpg

Is that even the right question?

Often, when believers in economic freedom advocate economic freedom, questioners and skeptics ask us, "But if you didn't have government doing it, who would build the roads?" My guess is that most such questioners are sincere. They've grown up in societies where the government has had the primary responsibility for building roads and so they have trouble conceiving of a society in which individuals and companies build, maintain, and operate roads. That's the tyranny of the status quo, to use a term that Milton and Rose Friedman used as a title of one of their books.

But in a recent case in Britain, where a road was closed by a landslide, drivers had to take a 14-mile detour. And the government was taking its sweet time cleaning up the mess. Enter Mike Watts and his wife, who decided to build a road only 400 meters long to get around the landslide. They put a 2-pound toll on it. The road was built in 10 days.

And it's working. People are using it and it's bringing in substantial revenue.

There is one fly in the ointment: government. Government virtually never likes people competing with it. And so the local authorities, although they haven't regulated the road out of existence, have made Watts and his wife apply for "retrospective planning permission." [There does appear to be one possibly legitimate reason: their concern that construction and driving on the road would affect the part of the road where the landslide had happened.]

HT to Stephanie Slade.


   


Here's the next installment from "An Unintended Case for More Capitalism," my long review in Regulation of Thomas Piketty's Capital in the Twenty-First Century:

How does Piketty handle this serious problem? [The problem that his proposed tax on capital would hurt labor?] He doesn't. The only behavioral response to a tax on capital that he discusses at length is that owners of capital would move to lower-tax countries. And to avoid that happening, he puts a lot of thought into how to form, essentially, a tax "cartel" in Europe. He would have countries in the European Union agree to tax capital, making it harder for people to move to lower-tax countries.

Even an economist who likes Piketty's book and favors his tax on capital has pointed out its bad effects on economic well-being. In his New Republic review, MIT economist Robert Solow, who won the Nobel Prize in economics for his pioneering work on economic growth, wrote:

The labor share of national income is arithmetically the same thing as the real wage divided by the productivity of labor. Would you rather live in a society in which the real wage was rising rapidly but the labor share was falling (because productivity was increasing even faster), or one in which the real wage was stagnating, along with productivity, so the labor share was unchanging? The first is surely better on narrowly economic grounds: you eat your wage, not your share of national income. But there could be political and social advantages to the second option. If a small class of owners of wealth--and it is small--comes to collect a growing share of the national income, it is likely to dominate the society in other ways as well.

Translation: if capital is taxed heavily, workers' well-being will not improve, but because a tax on capital will likely stem the increase in the share of income going to owners of capital, wealthy people will dominate the society less than otherwise.

For Piketty and, presumably, Solow to calmly countenance the possibility of stagnating real wages just to keep capital's share from increasing, they would have to see some large problems with increasing inequality. Solow does not point out any such problems, which makes sense because his review is short. But Piketty, in over 600 pages, does not make a clear statement about why increasing inequality is a problem in a society where almost everyone's lot in life is getting better and better.

So let's fill in the gaps. How big a problem is wealth inequality? In my opinion, if people came by their money without cheating others and without getting special government favors, then there is no problem with those people becoming very wealthy. What really matters is inequality in consumption and, here, the differences between poorer Americans and wealthier Americans are probably as low as they have ever been. Most lower-income people have color televisions, cell phones, refrigerators, comfortable clothing, and three square meals a day. That was not true 60 years ago. Or take a longer view: In the mid-19th century, the poorest people in American were probably slaves. That was, of course, awful. The largely rich people who "owned" them could treat them very badly if they wanted to. And even if they did not want to, let me repeat that these poor people were slaves.

Or consider finer differences between the middle class and the wealthiest. You would have to look carefully--at least, I would--to see the difference in the quality of clothing that billionaires and those with a net worth of "only" $100,000 wear. Both can travel by jet, but the wealthier person can get there more quickly and easily on his private jet. The rest of us have to share space. The private jet is certainly nicer, but is that really a major social problem?


   


Back in the 1980, I believed the Fed needed to target inflation or NGDP, and if they did so the problem of high inflation could be solved. These views were widely mocked by people on both the left and the right, for different reasons:

1. On the left they mocked Milton Friedman, who they claimed was obsessed with the view that money was the key determinant of inflation. They thought it obvious that the guns and butter policy of the 1960s ignited inflation, and that the peak periods of inflation represented supply shocks. They believed that the only way to control inflation was to control budget deficits. (That was before inflation plunged in the 1980s, during a period of very high peacetime deficits.)

2. On the right they talked about the "time inconsistency" problem with fiat money. Inflation was the inevitable result when you had governments facing re-election that had to worry about the unemployment rate. Of course the past 5 years provided a near perfect test---we had a government very worried about unemployment, which faced re-election in 2012. And inflation stayed low.

In the 1980s the government did bring down the rate of inflation, although even in the late 1980s it was still running in the 4% to 5% range. Then in the 1990s they focused on a 2% inflation target, and choose the PCE inflation index as their target. So I decided to compute the actual average rate of PCE (headline) inflation over the past 24 years. And it turned out I was wrong; the Fed did fail to hit their inflation target. Here's the actual PCE inflation rate over the past 24 years:

Screen Shot 2014-10-25 at 9.02.37 AM.png
Now what would the old Keynesians of 1980 say? Here are some possible explanations:

1. Since 1990, the Newt Gingrich/Nancy Pelosi/John Boehner regime has expertly steered inflation at roughly 2%, by skillfully adjusting the fiscal deficit.

If you've stopped laughing, let's proceed to the next explanation:

2. Luck.

The Fed got very lucky, and even more amazingly, the central banks of other major countries were also able to luck out at almost exactly the same time.

In contrast, those on the right seem to think 1990-2014 didn't happen. Here's something from the comment section of my previous post:

This is a pretty naive view of self control. Libertarians like to stress the imperfection and inevitable ignorance of man right up until their favored policy choices require Herculean efforts of virtue and restraint. At that point people are suddenly near perfect.
Silly me, for believing that central banks could improve their performance.

People on the right are stuck in the "bumblebees can't fly in theory" rut, and liberals don't even understand that central banks are steering the nominal economy. Liberals should have been bashing the Fed for tight money since 2008 and conservatives like Charles Plosser (who think it's the Fed's job to control inflation, not unemployment) should be smiling like the cat that swallowed the canary.

I'd also like to clarify a few issues that were raised in the comment section.

1. Some people like to compare the classical gold standard with the fiat money period. That makes no sense. Either compare the entire gold standard to the entire fiat money period, or leave out the bad gold standard of 1918-33, and leave out the (bad) pure discretion period of 1968-90. The price level has been more predictable (both short and long term) under the inflation-targeting regime since 1990 than it was during even the classical gold standard (1879-1914). If you had forecast the September 2014 price level back in September 1990, under the assumption the Fed would hit its 2% inflation target, you would have been less than 1% off. That was not true under the classical gold standard, when the price level was roughly a random walk.

2. People get dates wrong. The classical gold standard began in the US in 1879, and went up to 1914. The interwar gold standard lasted from 1918-1933. The quasi-gold standard lasted from 1934 to 1968. Nothing meaningful happened in 1971. We had already completely left the gold standard in 1968, when the market price of gold was allowed to float and foreigners could not longer redeem dollars for gold.

[Broken formatting fixed.--Econlib Ed.]

CATEGORIES: Monetary Policy

   


You can take the boy out of Canada, but you can't (completely) take Canada out of the boy

As a U.S. federal employee, I'm going through a security clearance for the first time in years. The guy who came to interview me a few weeks ago seemed particularly concerned about my Canadian connections and wondered why on earth I would want a Canadian passport. I told him that it seemed like a good idea. He then asked me--I can't remember the exact wording--whether I considered myself an American. "I'm 98% American," I said, "and 2% Canadian. The 2% is when Canada plays the U.S. in Olympics hockey." [Notice that I didn't say "ice hockey."]

But I think I have to revise those percentages. Yesterday morning I watched a video that Canada's government broadcaster, the CBC, shared on YouTube showing the tribute that the Canadian Parliament gave Sergeant-at-Arms Kevin Vickers, the man who shot the gunman who had run into the Parliament building. My wife, who was upstairs, heard the applause and asked me what it was for. I choked up as I told her and started crying. When she came downstairs, I told her that the American/Canadian percentages were 90/10. "But you were just responding to his bravery," she said. "I know," I said, "but if this had been, say, a story about Poland, I probably wouldn't have to the same extent."

I know that among many of my libertarian friends, it's not "cool" to have any nationalism or even any patriotism in you. But one of the hardest lessons I learned early in life was not to disown my feelings. Under the influence of Ayn Rand's weird ideas about love, I told my brother that I didn't love him, in the last real conversation I had with him before he committed suicide. Of course, I did love him, but I had adopted Rand's and Nathaniel Branden's idea that you couldn't love someone who didn't share your philosophical views. And, boy, did my brother ever not share my philosophical views.

So, even if it's not cool and even if get criticized for, gasp, celebrating as a hero a government worker who was, gasp, protecting other government workers, I won't disown that feeling.

Here's the video, which CBC is making easy to share on web sites:


   


WARNING: CONTAINS FROZEN SPOILERS.

My daughter is four years old, which means we consume a lot of Disney Princess merchandise: movies, toys, etc. As one might expect, everyone in our house basically knows every word to every song from Frozen. It's a great movie, of course, but I'd love to see an anarcho-capitalist take on the Disney Princess narratives. Where did the resources come from that paid for the castle? In one of the songs in Frozen, Anna sings "who knew we had a thousand salad plates?"

Who paid for those thousand salad plates?

Perhaps Anna and Elsa's parents were the pictures of wise and benevolent rulers, trading protection of property rights for tax revenue, but who had their dreams deferred in order to pay for a thousand salad plates collecting dust in the palace?

The "benevolent ruler" view comes into question toward the end of the movie when there is a royal proclamation that the kingdom of Arendelle will no longer do business with "Weasel Town." Granted, the Duke of Weselton is a scoundrel, but why should the queen stand between her subjects and willing trading partners in Weselton? How is the edict to be enforced?

I suspect there are much darker histories behind the princes and princesses than Disney (or the original authors of the fairy tales on which Disney movies are based) is willing to admit. What happened before "once upon a time"? How did the royal families get their power? And how, for that matter, would they respond to competing providers of security services in their jurisdictions?

A friend once said a fish doesn't question the water in which it swims, so we can perhaps expect Anna and Elsa to be oblivious to the (likely) immoral ways in which their ancestors obtained power. One would hope, though, that if they were truly the paragons of virtue the movie makes them out to be, they would seek to make amends for the sins of their fathers post-haste.


   


Using compulsory attendance laws to estimate the causal effect of education on outcomes has been hot in economics for over a decade.  But I was always a skeptic.  The idea that minimum schooling leaving laws are exogenous is bizarre, yet the political and social processes that generate these laws are fuzzy at best.  Hence, these laws are bad instrumental variables.  Disagree?  How far would this literature have gone if it readily reached the "wrong" conclusion that education is a waste of time?  

Even worse, recent compulsory attendance laws don't even predict attendance!  Raw data from Philip Oreopoulos, one of the IV's biggest champions:

oreopoulos.jpg

As a result, researchers have to make a bunch of statistical corrections before they can even begin to use compulsory attendance as an IV.  Not good.  IV's chief rhetorical purpose is to sequester doubts about the complexity of the world - not foster new doubts aplenty.

Until recently, though, I was under the impression that virtually every active researcher in labor economics was against me.  When suddenly... the American Economic Review published Stephens and Yang's crushing critique of the entire compulsory attendance IV literature.  Highlights from their "Compulsory Attendance and the Benefits of Schooling":
These state-level changes in schooling requirements are used as instrumental variables to examine the impact of increased schooling on a wide range of outcomes including wages, mortality, incarceration, and the social returns to schooling Acemoglu and Angrist 2001; Lochner and Moretti 2004; Lleras-Muney 2005; Oreopoulos 2006). Identification of these effects is achieved by exploiting variation in the timing of the law changes across states over time such that different birth cohorts within each state have different compulsory schooling requirements. Key to this identification strategy, typically implemented in specifications that include state of birth and year of birth fixed effects, is that all other changes which occur across states during this period are uncorrelated with the law changes, educational improvements, and the outcomes under investigation.

[...]

In this paper, we examine the importance of the common trends assumption for estimates of the benefits of schooling when using schooling laws as instruments. In samples commonly used in the prior literature (the 1960-1980 US censuses) and across a number of outcomes including wages, occupational status, unemployment, and divorce, we find statistically significant causal effects of increased schooling when using the baseline specification which includes state of birth and year of birth effects. However, these estimates become insignificant and, in many instances, "wrong-signed" when using specifications in which the year of birth effects vary across the four US census regions of birth.
Stephens and Yang go on to point out a big pile of other compatible papers I've hitherto overlooked:
As a point of comparison, the recent empirical literature which estimates the returns to schooling using compulsory schooling law changes outside of the United States finds either small or zero returns. Since, unlike in the United States, these reforms affected a substantial share of the population, we view many of these studies as providing compelling evidence of the impact of compulsory education. Black, Devereux, and Salvanes (2005) find returns to schooling of 4 and 5 percent for men and women, respectively, due to Norwegian schooling reforms in the 1960s. Devereux and Hart (2010) find that the 1947 schooling reform in the United Kingdom yields estimated returns of 7 and 0 percent for men and women, respectively. Meghir and Palme (2005) find an overall small and insignificant return to schooling due to Swedish schooling reforms in the 1950s although they do find evidence of heterogenous returns by father's education level. Pischke and von Wachter (2008) find zero returns to schooling in Germany following a post-World War II schooling expansion and Grenet (2013) finds no returns to schooling following a 1967 education reform in France. Although the identification strategies in these studies either exploit variation across states, similar to the United States, or variation induced by a national reform, our estimates of the rate of return to schooling are comparable to the growing body of international evidence on the returns to education.
If you're tempted to remain agnostic, consider this: Top economics journals almost never publish critiques.  To get through the refereeing process, Stephens and Yang almost certainly had to overcome strong resistance from a series of elite referees who authored the very research they're taking down.  If these meta-considerations don't win you over, nothing will.

HT: I owe my view of the quality of critiques in top econ journals to Tyler Cowen.


   


I was on the road from Sunday a.m. to late last night and thus my sparser than usual blogging. I taught classes in Patuxent River, MD on Monday, Norfolk, VA on Tuesday, and Arlington, VA on Wednesday, with lots of driving in between and a flight home last night. I'm one tired puppy.

Now to an interesting study that caught my eye.

Our study is the first to use data on minimum wage changes for over 2400 counties in China. We combine the information on minimum wages changes with employment data from the Annual Survey of Industrial Firms, which covers over 70 percent of China's manufacturing employment. While China instituted a minimum wage system in 1994, enforcement of compliance with the law was significantly tightened only in 2004; the results described below are based on post-2004 data.

So what does the evidence show? On average across all firms, we find that an increase in the minimum wage leads to a small decline in employment: a 10% percent increase in the minimum wage lowers employment by a little over 1% percent.


This is from Prakash Loungani, "Does Raising the Minimum Wage Hurt Employment? Evidence from China," October 23, 2014.

Loungani concludes:

But if raising the minimum wage lowers employment, and ends up excluding low-wage workers from employment prospects, it may have adverse effects on both welfare and efficiency.

Why does he say "may?" If "raising the minimum wage lowers employment, and ends up excluding low-wage workers from employment prospects," it will "have adverse effects on both welfare and efficiency." For that matter, why does he say "If?" Does Loungani not believe his own results?

Notice, by the way, that the results he gets accord with the consensus view among U.S. economists for the United States circa 1981.

HT to Mark Thoma.


   


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