Thursday, May 31, 2007

Possible desirable effects of irrational exuberance

Gross 2007 argues that bubbles may be a good thing. Many people have read Gross 2007. I am not one of them, so maybe
I will repeat his arguments or maybe say something new.

There are clear cases of sectors where there was a huge amount of entry and investment and many firms went bankrupt. The classic
case is railroads in the 19th century and current interest is from the excess of fiber optic cable laid towards the end of the 20th. Gross probably
argued that, although a lot of investors lost their shirts, the country got a railroad system and an information superhighway. I am thinking about translating
the argument into math and considering irrational exuberance in the context of growth models.


This is a natural argument because endogenous growth models do not have the features which imply an irrational boom will lead to a crash. The argument against exuberance is that it leads to investment in unsound projects which is largely lost when they are scrapped. This is based on the idea that there are a limited number of socially efficient investments to be made at any given time. While models rule out silly investments for convenience, endogenous growth models do not have a natural limit on socially useful investment pretty much by definition.

In the oldest endogenous growth model (Rome 86, Arrow 62 some other guy in the 50s) capital has decreasing private returns to the investing firm but constant social returns, because of Marshallian spillovers of knowledge obtained by learning by doing. In this model, a period of irrational overinvestment due to over-estimates of the private return to capital will cause a growth path of capital and output which permanently stays above that of the rational expectations equilibrium. This causes increased welfare, since, due to the spillover, socially optimal investment is higher than privately optimal investment.

A similar simple result occurs in models of endogenous growth due to research and development. In this case innovation provides social benefits above private benefits because innovators are monopolists but can't price discriminate. Over-optimistic inventors cause an increase in growth and welfare.

This much is obvious. I think there are more interesting arguments.

The first concerns the phase after an invention when immitators jump into the market. This phase is preceded by a shakeout when all but a few firms go bankrupt. Such a pattern can occur even if everyone is rational as a position as a surviving firm in a growing market is valuable enough to balance the high risk of bankruptcy. Irrational entry of firms into a sector which is a natural monopoly can bring the price temporarily closer to marginal cost which contributes to efficiency. I think it is more important that after the shakeout, the monopolist (or oligopolists) will not find it optimal to scrap capacity which they would not have found it optimal to build. Thus there can be a long lasting effect on the price of the good or service lowering it towards the socially efficient competetive level. If the monopolist does not allow the capacity to depreciate (because a railroad with one rail is worthless say or one with a gap in the tracks) the effect can be permanent. This effect is different from and less obvious than the ones discussed above.

It is also possible that irrationally excessive entry can have permanent benefits if the temporary period of very low prices during the shakeout is useful to other innovators (say web content innovators benefiting from desparate need of hosts for content any content free please) . This can also occur, but to a lesser extent, if everyone is rational. the benefits can include increased welfare as well as increased growth as argued above.

If entrepreneurs underestimate the difficulty of an engineering problem, they may invest in R&D which proves fruitless to them. This may have a beneficial spillover due to increases in general non rival non excludable knowledge. It is generally agreed that pure R&D should be subsidised (that is what the NSF is for not to mention what DARPA used to do before the Bush administration). It is good to have useful pure research financed by irrational managers who think it is applied research.

Finally totally unsuccesful efforts at innovation (there are many like the superconducting supercomputer and the atomic airplane). ) show what not to do to rational innovators. This can be useful as a subsidy to other innovation.

Monday, May 28, 2007

Soak the Rich II dollars and no cents. Thousands, Millions, Billions and Trillions.

More information on what I mean in terms of dollars (and no cents I round)

The median household income according to the census was $46,326 in 2005 (Nationally, 2005 marked the first year since 1999 in which real median household income showed an annual increase.)

The 80th percentile was between 92,000 and 92,500

About 3% of households report income over $ 200,000.

Both facts from this *.pdf

the census does not give information on the richest 1.8% of households because their highest category is "over $250,000". They do this to preserve anonymity as otherwise it might be possible to guess who the respondents are given a specific very high income and all the other
information they collect (it's not just a rule it's an obsession).

To get information on the richest 1% one has to look at tax returns, which means one sees income after the rich have hidden some using tax shelters
The best source for such data is the web page of Emanuel Saez at UC Berkeley
It also means that one looks at families not households (unrelated room-mates are in the same household but not the same family
the census has a lovely category person of the opposite sex sharing living quarters (posslq) for girl(boy)friend) there are more families and, of course, less income per family.

He (and co-author Thomas Piketty) report that the richest 1% of families got 17% of total reported income in 2005 (total was about $ 6.8 Trillion)
and that the richest 0.1% got 7.45% or about 500 billion total. Confiscating all income over the threshold that puts one in the top 0.1 % (1.3 million) would give about 300 billion if one ignores the supply side incentive effects (which would be huge for confiscation come on).

The cutoff for getting in the top 5% of families is $ 130,000 of reported income. That is where I would begin to soak. I know some of you live in families with such income and don't think you are rich, but you are.
all information from the first link marked "new" in red on the web page (if I click it to get the URL it invokes excel instead).

you know I went to wikipedia first so I might as well admit it. This is the link

the $130,000 is the top 5%. The reason the number is low is that it is based on tax returns not the CPS and so unrelated individuals sharing housing and living expenses count as separate units. I'd say they are rich. I didn't say how hard I planned to soak them (because I don't know) but I certainly didn't imagine anything confiscatory (that would be dumb).

The idea would be to eliminate the income tax on the lower 50% have marginal tax rates slightly higher than currently up to the 80th percentile but low enough that they gain from having income up to median income taxed at 0 and then raise marginal tax rates from $130,000 on up to balance the budget.

People who make $131,000 aren't going to get hammered as only the top 1,000 is taxed at the high rate.
Effective tax rates (average not marginal) are 30% for the top 1% (incomes above roughly $300,000) going up to 35% for the top 0.01 % the rates are calculated on reported income (that is post much tax sheltering).

The top 1% of tax units (roughly families) get around 17% of reported income which was about 6.6 trillion in 2005 so they get over 1.1 trillion. raising the average effective rate on them from 30% to 55% would eliminate the 2006 budget deficit if there were no behavioral response (as of course there would be).

If the tax increase were applied only to incomes above the top 1% that would mean an increase in the effective marginal rate from around 30% to very roughly 67% always assuming no behavioral response (this calculation is from the cutoff for the top 1% is about half the average income from 99th percentile to the 99.9th and the 0.1 percentile is about 13 times the cutoff or stuff which I don't remember and I have been up all night.

To me that means that paying for the tax cuts for the non rich and balancing the budget and paying for more social spending etc etc means taxing families in percentiles 95-99 too.

I have only mentioned the income tax. Increases in the capital gains tax and the inheritance tax have a role too.
News From Newark

Mr. McCarthy has instructed commanders in the city’s four precincts to take on so-called quality-of-life offenses like public drinking and loitering
[big snip]

Tauron Hinnant and Angelo Montalvo, rookie beat partners, are reluctant to arrest teenagers who are violating the city’s 11 p.m. curfew, or toothless alcoholics with open pints of Thunderbird.

“Everyone drinks and a lot of these people have no place to go,” Officer Montalvo said one night after shooing a group of men from the front of a bodega. “My feeling is that if you arrest them, they might lose their job and then they turn to something worse.”

[snip]

They often function as much as social workers as crime fighters, offering advice to women who have been beaten up by boyfriends or lecturing teenagers about their blatant gang attire.


Now why is talking to women victims of aggravated assault a job for social workers not police officers ? It seems that in the Newark PD there is disagreement about whether to arrest "toothless alcoholics with open pints of Thunderbird" but all agree that a little assault and battery between boyfriend and girlfriend is no reason to bother a judge.

Guess it doesn't affect the quality of life.
Meet the new Republican candidates Same as the old Republican candidate.

Excellent article by Peter Canellos in the Boston Globe (via TPM).

Canellos notes that the top 3 Republican candidates for president are following the Bush deception plan of implying that we are fighting Bin Laden's followers in Iraq.

He quotes without comment a particularly dumb effort to explain what McCain meant so that the sophisticated don't think he is deceiving the rubes

A McCain spokesman said the senator did not mean to suggest in his debate comments that bin Laden was in Iraq. But aides to Romney and McCain, in interviews, insisted that the candidates are not exaggerating when they speak of bin Laden and the link between Al Qaeda and Iraq.

"The larger point shouldn't be in dispute," said Randy Scheunemann , McCain's foreign policy adviser. "If there's a territory where Al Qaeda is left unmolested, free to plan, conduct, and train for operations, they will do so."


Can you say "Northern Waziristan" Mr Scheunemann (can you say "Mr Scheunemann" Mr Waldmann ?) ? Remember the tribal area which the Pakistani military has agreed not to molest, where tribal leaders may or may not have had disagreements with al Qaeda but certainly haven't washed any of that dirty linen in public. And what exactly is the chance that, if we leave, al Qaeda will be left "unmolested" anywhere in Iraq. Shouldn't McCain's guy argue that, if we leave, there will be a civil war, which would tend to molest everyone ? Has he not noticed that Iraqi Sunni Sheiks have turned against al Qaeda ? Does he just completely dismiss everything he hears from Pundits the MSM and the US government (not necessarily such a bad idea unless you come up with even more obviously ridiculous nonsense on your own as he does) ?


Canellos shows some bloggers were over sophisticated when they objected to Romney's absurd statement

Former Massachusetts governor Mitt Romney identified numerous groups that he said have "come together" to try to bring down the United States, though specialists say few of the groups Romney cited have worked together and only some have threatened the United States.

"They want to bring down the West, particularly us," Romney declared. "And they've come together as Shia and Sunni and Hezbollah and Hamas and the Muslim Brotherhood and Al Qaeda, with that intent."


Canellos notes that Shia and Sunni are Islamic denominations not terrorist organizations and that Romney was suggesting that all Moslems (except maybe Alawites and Druze) are terrorists. The much much too sophisticated Matthew Yglesias noted that the Moslem Brotherhood is not a terrorist organization. That impressed me (I had thought that the Syrian Moslem Brotherhood was (in particular responsible for seizing the grand Mosque in Mecca) until Havez Assad killed them and everyone else within miles of them in Hama). But really Matt, the American people need to have it pointed out that "Shi'ite and Sunni" are not necessarily terrorists.

Of course it is also worth making the point that Shi'ite and Sunni terrorists are currently coming together only to kill each other. The idea that terrorists have come together "as Shi'ite and Sunni" is crazy, totally aside from the sloppiness of not explicitly noting that some Shi'ites and some Sunnis aren't terrorists (I hasten to add that many Mormons (for all I know all Mormons) aren't terrorists either).

Sunday, May 27, 2007

John at Ezra's place writes
writes

if he writes a chapter in his book where he goes over, in great detail, the historic and modern day problems with concentrations of great wealth and power, he'll be caricatured as a Cultural Revolution-era Maoist.

So as much as I'm enjoying the book, for the first time I really do think Gore's being entirely sincere when he says he doesn't plan to run. I think it's probably the only way he'd feel quite liberated enough to write the book he has.


I'm sure that if one "writes a chapter in his book where he goes over, in great detail, the historic and modern day problems with concentrations of great wealth and power, he'll be caricatured as a Cultural Revolution-era Maoist." but I am also sure that the voters want a more progressive tax system. They say so in every poll. I think the first politician who ignores the pundits and gets his money on the internet (or out of his pockets if he is a class war traitor) and runs on "soak the rich" will transform American politics.

Don't ask me, ask Gallup http://www.pollingreport.com/budget.htm
(search for "upper income people") since Gallup first asked in 1992, they haven't done a poll in which fewer than 63% of people say that "upper income people" pay "too little" in taxes. Since '04 they have asked about "corporations" with at least 69 % of people saying corporations pay "too little".

The American people are making their views clear. Why won't politicians listen ? The furious accusations about class war would only tell the people which candidate agrees with them on the issue.

full data stolen from polling report.

"As I read off some different groups, please tell me if you think they are paying their fair share in federal taxes, paying too much, or paying too little. How about [see below]?"


."Lower-income people"

_Fair Share_ Too Much_Too Little_Unsure___
_________%___ %____ %___ %___
_4/2-5/07_ 34___ 45___ 17___ 4___
4/10-13/06 36___ 46___ 12___ 6___
_4/4-7/05_ 36___ 51___ 10___ 3___
___4/04___ 35___ 49___ 12___ 4___
___4/03___ 36___ 49___ 12___ 3___
___4/99___ 34___ 51___ 11___ 4___
___4/96___ 40___ 48___ 9___ 3___
___4/94___ 43___ 42___ 12___ 3___
___3/93___ 37___ 51___ 9___ 3___
___3/92___ 32___ 57___ 8___ 3___

.
___"Middle-income people"______
_ Fair Share_Too Much_Too Little_Unsure___
_4/2-5/07_ 44___ 47___ 7___ 2___
4/10-13/06 50___ 43___ 5___ 3___
_4/4-7/05_ 52___ 41___ 4___ 3___
___4/04___ 47___ 46___ 4___ 3___
___4/03___ 51___ 40___ 7___ 2___
___4/99___ 35___ 59___ 4___ 2___
___4/96___ 34___ 58___ 5___ 3___
___4/94___ 39___ 57___ 3___ 1___
___3/93___ 39___ 54___ 5___ 2___
___3/92___ 36___ 57___ 5___ 2___

.
___"Upper-income people"______
_ Fair Share_Too Much_Too Little_Unsure___
_4/2-5/07_ 21___ 9___ 66___ 4___
4/10-13/06 21___ 8___ 67___ 4___
_4/4-7/05_ 22___ 7___ 68___ 3___
___4/04___ 24___ 9___ 63___ 4___
___4/03___ 24___10___ 63___ 3___
___4/99___ 19___10___ 66___ 5___
___4/96___ 19___ 9___ 68___ 4___
___4/94___ 20___10___ 68___ 2___
___3/93___ 16___ 5___ 77___ 2___
___3/92___ 16___ 4___ 77___ 3___
_________________

.
___"Corporations"______
_ Fair Share_Too Much_Too Little_Unsure___
_4/2-5/07_ 19___ 5___ 71___ 5___
4/10-13/06 18___ 5___ 70___ 7___
_4/4-7/05_ 21___ 4___ 69___ 6___
___4/04___ 19___ 5___ 69___ 7

update: More information on what I mean in terms of dollars (and no cents I round)

The median household income according to the census was $46,326 in 2005 (Nationally, 2005 marked the first year since 1999 in which real median household income showed an annual increase.)

The 80th percentile was between 92,000 and 92,500

About 3% of households report income over $ 200,000.

Both facts from this *.pdf

the census does not give information on the richest 1.8% of households because their highest category is "over $250,000". They do this to preserve anonymity as otherwise it might be possible to guess who the respondents are given a specific very high income and all the other
information they collect (it's not just a rule it's an obsession).

To get information on the richest 1% one has to look at tax returns, which means one sees income after the rich have hidden some using tax shelters
The best source for such data is the web page of Emanuel Saez at UC Berkeley
It also means that one looks at families not households (unrelated room-mates are in the same household but not the same family
the census has a lovely category person of the opposite sex sharing living quarters (posslq) for girl(boy)friend) there are more families and, of course, less income per family.

He (and co-author Thomas Picketty report that the richest 1% of families got 17% of total reported income in 2005 (total was about $ 6.8 Trillion)
and that the richest 0.1% got 7.45% or about 500 billion total. Confiscating all income over the threshold that puts one in the top 0.1 % (1.3 million) would give about 300 billion if one ignores the supply side incentive effects (which would be huge for confiscation come on).

The cutoff for getting in the top 5% of families is $ 130,000 of reported income. That is where I would begin to soak. I know some of you live in families with such income and don't think you are rich, but you are.
all information from the first link marked "new" in red on the web page (if I click it to get the URL it invokes excel instead).

you know I went to wikipedia first so I might as well admit it. This is the link

the $130,000 is the top 5%. The reason the number is low is that it is based on tax returns not the CPS and so unrelated individuals sharing housing and living expenses count as separate units. I'd say they are rich. I didn't say how hard I planned to soak them (because I don't know) but I certainly didn't imagine anything confiscatory (that would be dumb).

The idea would be to eliminate the income tax on the lower 50% have marginal tax rates slightly higher than currently up to the 80th percentile but low enough that they gain from having income up to median income taxed at 0 and then raise marginal tax rates from $130,000 on up to balance the budget.

People who make $131,000 aren't going to get hammered as only the top 1,000 is taxed at the high rate.
Effective tax rates (average not marginal) are 30% for the top 1% (incomes above roughly $300,000) going up to 35% for the top 0.01 % the rates are calculated on reported income (that is post much tax sheltering).

The top 1% of tax units (roughly families) get around 17% of reported income which was about 6.6 trillion in 2005 so they get over 1.1 trillion. raising the average effective rate on them from 30% to 55% would eliminate the 2006 budget deficit if there were no behavioral response (as of course there would be).

If the tax increase were applied only to incomes above the top 1% that would mean an increase in the effective marginal rate from around 30% to very roughly 67% always assuming no behavioral response (this calculation is from the cutoff for the top 1% is about half the average income from 99th percentile to the 99.9th and the 0.1 percentile is about 13 times the cutoff or stuff which I don't remember and I have been up all night.

To me that means that paying for the tax cuts for the non rich and balancing the budget and paying for more social spending etc etc means taxing families in percentiles 95-99 too.

I have only mentioned the income tax. Increases in the capital gains tax and the inheritance tax have a role too.
Untimely Ripped comments on my post below

This was over at dailykos where the post and comments are long buried.


Actually, I think Jefferson's ideal ... (0+ / 0-)

... would have been to have everybody's slaves be free.

And I doubt that either you or Drum can persuade me otherwise.

But that's by the by.

Others have observed that "rational" does not equal "good". If you want some more brilliant writing, I recommend to you the works of John Ralston Saul.

Over a series of books, Saul argues that there are a half dozen essential human qualities, which drive our individual and social existence. These qualities include Memory, Common Sense, Imagination, Ethics, Intuition and Reason. He goes on to argue that we have subordinated the first five of these to the last one, with predictably disastrous results for humanity.

Start with The Doubter's Companion.

I am further of the opinion that the President must be impeached and removed from office!

by UntimelyRippd

I concede

My claim about Jefferson's preferences was based on knee jerk economics think. I think he would have preferred all slaves to be free than to be the one last slave owner. Partly I think you are noting the same point made by Midland (see above). Mostly, I think it has something to do with our sense of shame, which is much much weaker if lots of other people are doing it too.

Personally, I don't own slaves, but I do drive an automobile. If everyone else bicycled or used public transportation (or even everyone other than parents with young children, the elderly, the physically handicapped and pregnant women) I would be too ashamed. Also I speed and (occasionally) run lights that have just turned red.

Also, as you will have guessed, I don't work very hard. In the USA this caused me great pain. I now "work" in the Italian public sector and feel much much better.


Actually, I have a better explanation of our shared guess that Jefferson would have preferred abolition of slavery to slaves just for him. Jefferson, a profound thinker and supporter of the constitution and the bill of rights understood the importance of clear simple rules, bright lines and avoiding slippery slopes.

Slavery is evil and illegal except if you are Thomas Jefferson is not a line that can be held for long. I now am convinced that, although he didn't free his slaves, he would have said no, if he had been given a chance to be the only remaining slave owner.

Saturday, May 26, 2007

Kevin Drum attempts to explain economics to economists.

I must be ironic right ? I'm not suggesting that this guy with a degree in communications* from Long Beach State has a better understanding of economics than most economists am I ?

I am.

The man is a genius but makes it easy to miss this because his genius lies not only in his understanding but in his ability to make things obvious.

He argues two things that don't need to be argued.

Rational is not a synonym for good.
Is he really suggesting that economists sometimes forget that ? He is and we do.

Sometimes people make better choices about what should be done with other people's money than with their own, because when deciding whether to give their money to, say, the hard working poor, they have, uhm, a conflict of interest.

Surely the possible problem that I have a conflict of interest when I am deciding whether to keep my money or use it to help humanity can't be news to anyone ?

Sure it can. It is a shocking idea to economists.

Drum does not understand how devastating his critique is (answer totally devastating). Neither did I, until Brad DeLong explained it to me.

Imagine we care about other people but not as much as we care about ourselves (shocking thought eh well a very very radical departure from standard assumptions in economics). This means that we might care a lot about a transaction or transfer which has no effect on our consumption, leisure or wealth. I am very glad that Bill and Melinda (and Warren) gave so much money and did it in such a very intelligent way (although I still hate windows). This is what we call in the biz an "externality" and it implies that the market outcome is not efficient. I don't especially like to pay taxes. I really really like the fact that rich people pay taxes to support social welfare programs (war in Iraq ? no thank you). Both desires count to a utilitarian. It means that an outcome enforced through the coercive power of the state can make everyone happier than the free market outcome, because of the externality due to altruism.

To consider with Drum the case of Thomas Jefferson, without anything odd (dynamic inconsistency) the position as a slave owner who advocated abolition of of slavery can be perfectly rational. The slave owner might hate slavery, but not hate the enslavement of his own slaves as much as he loves living in luxury off the sweat of their brows. His ideal outcome would be to have all slaves but his own free. A rational anti slavery slave owner knows he's not going to get away with that. Second best would be abolition of slavery -- the desire to free everyone elses slaves outweighs the desire to keep his own. Third would be continued slavery. Finally the outcome he likes least would be to free his own slaves and live in relative poverty in a slave owning country.

Perfectly clear. So why is it that my "explanation" of Drum is ugly and unclear while his essay was clear and brilliant ?

update: The last sentence was not a *deliberate* parody of bad writing. I didn't write "So why was my "explanation" of Drum ugly and unclear, while his essay was clear and brilliant ?" because it is a fact that being an over wordy writer is one of the aspects of being Robert Waldmann, who tends to be wordy.

update I.5: update 1 is corrected so that it no longer claims I wrote what I wished I had written but didn't write. Alright ?

update II: Tim Haab (who is not a jerk) definitely gets Kevin Drum's point as he clearly understands the fundamental difference between a) advocating policy which causes people to internalize externalities and b) listening to kids in the back seat squabble for hours. Also he doesn't own any slaves which puts him a big one up on Thomas Jefferson.

Further commentary here and right here.

An interesting example of rational co-operative behavior which is not in the public interest is link begging, where bloggers attempt to reward other bloggers for links by linking back. Not as repulsive as self linking, but the first sometimes enables a rational egoist to trick Google, while the second is just pathetic.

Update III:

Over there in comments calmo recommends a re-rewrite, so update 1 is now

I wrote "So why was my "explanation" of Drum ug and unclear, while his essay was clear and brilliant ?" because it is a fact that being an over word writer is one of the aspects of being Robert Waldmann, who tends to be word.

he (or she) kind wrote
your perfect[] serviceable and occasional[] brilliant prose. (Works well, but could use some lubricatin libation.)[Which is so much better than 'works well but needs constant supervision and revision.' or 'works well but is gravely offended by any criticism that improvement is possible.']
emphasis added.

And why don't you just take that adjective and shove it up your adverb.

*Drum specializes in communications on the internets.

Update CLXXXVIII "one hand" deleted (ouch).

Update no number an update without a number

From Gmail

I thought the three of you might be interested in this comment upon Kevin's post on rational behaviour. I think he rather proves Byan's point (but then being a bleeding heart classical liberal of course I would):

http://timworstall.typepad.com/timworstall/2007/05/the_myth_of_the.html


I don't know who the other two are or if Tim Worstall thinks I am one and three like, you know, That Guy.

Worstall criticizes Drum effectively. Mostly he argues that the minimum wage should be replaced by an increased EITC . I think the efficiency costs of the minimum wage were much over estimated in early research. More recent research suggests they are actually very small. However, I certainly agree with Worstall that the EITC is a better program than the minimum wage and that voters are irrational (look who's in the White House). I also think that economic agents act irrationally in the merketplace. The argument that we should use the coercive power of the state to eliminate the externality due to altruism has nothing to do with whether the coercive mechanism is the minimum wage or taxes used to fund the EITC. In either case threats which, if it comes down to it, are enforced with violence, can make everyone happier because the will of each can never be the will of all if there are externalities.

Also note in comments

We're born with a built-in conflict between our self interest and our interest in helping the group survive. I'd write a book about it if I could ever find a publisher.
http://makethemaccountable.com/balance/

Carolyn Kay
MakeThemAccountable.com


I assume that Worstall and Kay are responding to my thoughts on the externality due to altruism and not to anything I wrote in update III, but I can't help but note that they know my URL, and that I just linked to them and that, in principle, I oppose link begging but that ... come on do I have to spell it out ?
Big Surprise. I agree with an SUV Driver on Something

Via Mark Thoma
"Tim Haab at Environmental Economics explains why he drives an SUV:"

I'm packing up my big honkin' SUV tomorrow with my oversized family of 5 and driving 280 miles (one-way) to Lake Cumberland, Kentucky to visit with friends from Atlanta--who will be driving their oversized family of 5, 330 miles (one-way) in their big honkin' SUV. Based on the paltry gas mileage we will get--about 18 mpg--I'm figuring our family will consume about 31 gallons of gas.

At $3.50 a gallon that's $109.
[snip for "fair use"]

So I ask myself, am I willing to pay $6 per hour to have my 3 kids separated by 2 feet each--two in the middle row, one in the back--rather than be touching each other the whole trip.

Ummm...can I get a big 'Hell Yeah'?

*For those of you wondering who will pay for the externalities I create, that's an easy one...YOU. That's why they're called externalities. Voluntarily internalizing my own externalities would ruin my faith in rationality and cause me to have to completely reinvent economics. I'm just too lazy for that right now. Yes, I'm a jerk.


Mr Haab has a point there (no not the last statement he is just an ordinary person).

Unsurprisingly, I agree with Matthew Yglesias and many others that Gas in the US is waaaaay to cheap, although (rubbing my eyes with disbelief) I do believe it currently cost more than half as much in the USA as in Italy.

The crazy SUV driving is not taking energetic Kids on long trips. It's commuting to work in one. I've seen single occupant SUVs in Italy (recall roughly $7 a gallon) and the idea of a very large, very heavy vehicle being driven by someone who is clearly insane makes me very very nervous.

I even saw a canary yellow hummer twice last Wednesday, at least I assume that it was the same canary yellow hummer. I mean there will be two canary yellow hummers in Rome the day before doomsday and it was Wednesday. I didn't sleep through the apocalypse did I ?

Friday, May 25, 2007

Pelosi is a Peloser

I'm sad to say. Everyone knows that congress caved and gave Bush an Iraq supplemental with no timelines. I was also disappointed by the ethics bill. Pelosi also caved in to the crook caucus of Democrats who don't want to have to wait 2 years to cash in as lobbyists. This is revealed in paragraph 7 of a generally enthusiastic article by Elizabeth Williamson in the Washington Post

Democratic leaders and some watchdog groups hailed yesterday's bill as the most sweeping ethics package since the post-Watergate era. Even so, it lost proposals such as disclosure of "grass-roots" communications campaigns orchestrated by lobbyists and an extension from one year to two of the time lawmakers must wait between leaving their jobs and lobbying former colleagues. Instead, the bill would require that lawmakers interviewing for private-sector jobs publicly recuse themselves from issues involving their prospective new industry.


The extension from one year to two was the point of disagreement between Pelosi and greedy democratic congresspersons. Politics is indeed the art of the possible, and I think it is all too possible that Steny Hoyer is taking over, because he is so uhm flexible.

"The legislative process is the process of the possible, not the perfect, and this is a bill that is going to pass," said House Majority Leader Steny H. Hoyer (D-Md.).


Now I think 2 years is totally inadequate. This bit about "interviewing for private -sector jobs" is beyond pathetic. Clearly lobbyists and crooked congressmen get down to the details of compensation etc only after years of deniable hints about how the firm considers the congressman a friend and likes to hire people who ... well frankly who are collecting bribes with a delay.

The rule should be that legislators can never take a job with any firm that benefited from their legislation. Giving ex legislators pensions generous enough to make the job attractive anyway would be cheap compared to letting them take bribes so long as they are called salaries.

Thursday, May 24, 2007

I Blame the Democrats

Democrats said this week they would have jeopardized their fall bargaining position if they had insisted on keeping withdrawal timelines in the current supplemental spending bill (HR 2206). Persisting now would likely have resulted in another veto and would have handed Republicans talking points for the Memorial Day recess about which party supports the troops in the field.

Democrats were particularly worried about the prospect of Bush declaring at wreath-laying ceremonies that "Democrats have stopped resources for the troops," said Rep. Artur Davis, D-Ala.

"The problem is that we have to provide money for the troops, and if we don't, the Democrats will be blamed," added Rep. James P. Moran, D-Va., a war opponent. "Bush has the bully pulpit, so he will define who is responsible."


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via Matt Staller at my dumb democrats
A Critique of Critical Criticism
or
For a ruthless critique of the ruthless critique of everything existing.

A tenet of liberalism is that all beliefs should be subject to criticism and evaluation in the light of brute and raw experience. I think that liberalism must condemn itself as it's central dogma is based on a utopian view of debate, discussion and discorsi (and like hell I'm gonna pretend that discourse is an English word).

First what do I mean by liberalism ? I write about liberalism it's own self, an ideology so pervasive that there seems to be no need to name it leading to absurd reinterpretations of the word. I mean the belief that free is, in general, not only good in itself but a means towards good ends and, in particular, the belief that free debate leads us towards the truth. I do not refer to the modern English usage that defines liberalism as follows: liberal is to leftist as pink is to red. And I certainly do not accept the continental defition that liberalism is the pro-market ideology defined as follows: Neoclassical economic theory is liberal ideology formalized. That is liberal means pro-laissez faire (don't try to convince me that the use of French to describe the ideology that dominates economic policy in English speaking countries isn't a deliberate joke).

As a liberal, I have deep faith that debate leads towards true belief and that all beliefs should be ruthlessly examined. Unfortunately, my ruthless examination of my liberal faith has caused me to lose it. I think that debate and discussion are not ... (can't finish the sentence it hurts to much). I think some things don't bear looking in to and some convictions should remain unexamined.

I believe that torture is wrong. I don't like the question of what I would do if there were a ticking atomic bomb and I had my hands on the person who knows where it is. There is another question which I like much much less. What if there is a ticking atomic bomb in New York, I am able to send video to the terrorist who knows where it is (I know what TV channel he is watching) and I have in my hands his much beloved totally innocent two year old child ?

Just a perfectly hypothetical situation in which I have done no more than note a possible situation. Notice I did not discuss any possible courses of action. I think that writing what I wrote was wrong, that people should not be encouraged to think about such situations. That such reflection is bad. That the partially unexamined life is worth living and better than the alternative.

After that, this discussion of "pluralistic ignorance" AKA "group think" is a bit pallid. The fact is that discussion does not always bring people closer to the truth. This has been demonstrated empirically by psychologists. Group average opinion is excellent compared to individual opinions provided that the group is not allowed to discuss and seek consensus (see Quarterly Journal of Economics vol. 111 pp 21-40 (February 1996) and references. People exposed to groups are so inclined to conform that they deny the evidence of their own eyes (Chico Marx should have asked "who are you going to believe us or your lying eyes ?").

Take a group of people. Poll them on a matter of fact. Quite often their ignorant errors will average out. Put them together so they can share information and discuss and debate. Their views will converge. They converge on the view of the most eloquent and confident and outspoken members of the group. Usually the average opinion after the discussion is further from the truth than the pre discussion average. The liberal ideology has been falsified by experimental evidence.

The internet makes it possible for people to assort in groups of like minded ideologues. It has made free speech and a free press a reality not an ideal. It has made a thousand flowers bloom and a thousand schools of thought avoid the need to contend. We have real freedom now. We use it to be free from debate.

Since I think debate is a bad thing, that's fine by me.

Wednesday, May 23, 2007

Spencer Ackerman All Wet

Trying to grasp a can made of soda
I get Shrill with Ezra Klein

Klein wrote

David Brooks gets this analogy right:

Harvard is tough to get into. To be admitted to a school like that, students spend years earning good grades, doing community service and working hard to demonstrate their skills. The system has its excesses, but over all it’s good for Harvard and it’s good for the students beginning their climb to opportunity.

The United States is the Harvard of the world. Millions long to get in. Yet has this country set up an admissions system that encourages hard work, responsibility and competition? No. Under our current immigration system, most people get into the U.S. through criminality, nepotism or luck. The current system does almost nothing to encourage good behavior or maximize the nation’s supply of human capital.


Our immigration system is unaccountably weird, relying, as it does, on family ties and lotteries. Just about all the discussion over the immigration bill has focused on the guest worker and citizenship programs, but the conversion to a points-based immigration system wherein applicants are judged across metrics of talent and economic potential is huge. Expect that system to expand in the House bill, where Silicon Valley Democrat Zoe Lofgren runs the relevant committee, and will undoubtedly jack up the allowance for high-skills visas.


I reply

That is actually the only thing about the bill which I don't like (yes I like the guest worker program *because* I assume the guests will overstay and become undocumented aliens without risking their lives in the Arizona desert). I think the USA can afford to train it's own high skilled technicians and professionals and shouldn't go out of its way to selectively admit those trained by poorer countries.

I think part of the appeal of the points based system is the sense that something valuable (an immigration visa) should be awarded on the basis of merit, because that is more fair. I don't think so. Harvard admitting people who demonstrate that they are smart and have served the community is fine as Harvard students have a high chance of being powerful and we have plenty of selfish powerful idiots (I did zippo for the community before going to Harvard and am totally powerless but hey even Byerley hall isn't perfect). That is, Harvard's admissions process has a sensible utilitarian basis totally aside from the question of whether someone deserves to be admitted.

The utilitarian effect of a points based visa system is that it takes from poor countries and gives to the USA. I think that is a terrible thing. I believe that highly trained people have the right to emigrate, but I don't think we should specifically aim to admit them and not their less advantaged country people.

I think Brooks's argument is useful, because it shows just how bogus arguments about incentives really are. Does Brooks really think that US immigration policy will have a significant effect on world wide "hard work [and]responsibility" or that Harvard's admissions policy has a significant effect on hard work, responsibility and community service in the USA (right now try to guess what fraction of American high schoolers understand that given financial aid at a university where middle class students are relatively poor they can afford to go to Harvard). This is nonsense. Brooks believes hard work and responsibility should be rewarded as a fundamental moral principle, not as a means to achieving useful incentive effects.

He's also clueless about the relative importance of hard work and responsibility and choosing the right parents, but that is not my point.

Tuesday, May 22, 2007

Brad please check your e-mail at delong@econ.berkeley.edu. Please please ignore tojbd.pdf which I wrote overnight on a bet (with you although you may not have noticed the bet in comments on your blog). I currently think tojbd2.pdf is fine.

Others. This is the only way I can get his attention. Sorry to bother you, but I was really really embarrassed by this.
Excellent article on Columbia's Truth Commission by Juan Forero in the WAPO

Former commanders of the extremely violent right wing paramilitary AUC confirm that they were supported by generals, businessmen and elected officials. Not a surprise but it could be important.

I particularly liked the 4th from last paragraph which I believe to be a deliberate parody of the balance fetish. It has to do with the tiempo of the assertions.

Perhaps Mancuso's biggest impact came when he said that two current ministers in Uribe's government, Vice President Francisco Santos and Defense Minister Juan Manuel Santos, met with top paramilitary commanders in the 1990s. The two men, cousins in an influential family that owns El Tiempo, Colombia's most influential newspaper, had acknowledged long ago having met with the paramilitary members. Both said they did so to further peace in Colombia, not as part of a sinister plot, as Mancuso alleged.

Mancuso's allegations have prompted some commentators to note that the commander has besmirched as many people as possible while still falling far short of accounting for all of the crimes he has committed. "The strategy behind three days of testimony that tainted people, institutions and business must be understood," said El Tiempo in a Sunday editorial. "If the whole county is responsible, then no one is responsible."


Just a coincidence that Forero told us that el Tiempo is owned by a family two of whom are implicated by Mancuso immediately before reporting (for balance) that el Tiempo is, surprise surprise, unimpressed by Mancuso's testimony ?

yeah sure.

Sunday, May 20, 2007

Handicapping the Iraqi Presidential Elections

McSweeney’s Internet tendency has already done the USA

Abdul Aziz al Hakim

Pro: Has well armed and extremely violent militia. Has the Bobby Kennedy “I’m doing it for my assassinated big brother” sentimental appeal

Con: believes that politicians should submit to clerics. Limited appeal of his moderate Islamic fundamentalist mass murderer persona.

Grand Ayatollah Sayyid Ali Husaini al-Sistani

Pro: Once listed as most trusted person in Iraq. His photo on carried anti graven images slate to victory. Sometimes seems to be actually sane.

Con: Believes clerics should stay out of politics. Campaigning limited by refusal to leave his residence for past 30 years. Is Iranian and 300 years old.

Abu Musab al Zarqawi
Pro: 90 virgins willing to stuff ballot boxes
Con: Jordanian and dead

Iyad Allawi
Pro: once killed ax weilding Ba'athist agents with his bare hands
Con: Lost votes he needs, since only Ba'athists support him.

Jalal Talebani
Pro: Is currently President
Con: Things not going so good.

Moqtada al Sadr
Pro: famous name with appeal in Sadr city. Kicked US butt.
Con: Flip flopping between search for sectarian genocide and national unity.
Poor hair-style.

Ahmed Chalabi
Pro: Has had strong support from various allies including George Bush and Moqtada al Sadr. Has united Iraqi people.
Con: They all hate him.

Saladin:
Pro: Arab nationalist hero for defeating crusaders
Con: Dead for centuries. Actually a Kurd.

Ehud Olmert
Pro: more popular in Iraq than in his native country
Con: Native country is Israel.

Saturday, May 19, 2007

I am glad to say that I have always considered astrology ridiculous but
how else to explain the fact that Mark Kleiman and Matthew Yglesias have the same birthday, genius and command of the English language.

Also Kevin Drum got married on Matthew Yglesias's 10th birthday.

If I find that Bush and Nero were born on the same day I will just have to give up.

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I Strongly Support the Immigration Reform Bill

I find it odd that people with whom I usually agree are opposed or luke warm (or first opposed then luke warm because part of what makes Atrios so great is that he is eager to learn even from people even younger than he is)

Notice Kevin Drum is just luke, not even luke warm. I think Black's commentary on the law where he proves he is willing two write at 5:06 pm that what he wrote at
1:35 pm was wrong is about the most awesome contribution to political discourse since Areopagitica (sample quote "there can no greater testimony appear, then when your prudent spirit acknowledges and obeyes the voice of reason from what quarter soever it be heard speaking; and renders ye as willing to repeal any Act of your own setting forth, as any set forth by your Predecessors") and I absolutely seriously mean that.

Every sensible person decries the pointless hurdles set between undocumented aliens and citizenship but none (that I know of) put it as well as Drum
The path to citizenship for current illegals is good, though absurdly complex for dumb political reasons. (Note to Republicans: your base is going to hate this provision no matter how much you lard it up with idiocies designed to make it look like it isn't "amnesty." It's a losing game.)


The part that liberals hate is the "guest worker" program. Here the program is contrasted with more legal immigration as if that were the alternative. In practice guest workers would not be allowed in the USA at all. It is clear that many guest workers will overstay their temporary visas.

To me that is a feature not a bug. I support legal immigration but if people prefer to immigrate illegally rather than stay in their current coutries I am on their side and I would certainly rather that they enter legally then overstay than that they risk death in the Arizona desert.

So my unusually extreme pro-immigration position makes me eager to accept a hypocritical compromise dictated by the desire of exploitative employers to have non permanent resident employees, exactly because it is bound not to work as its promoters claim.

Friday, May 18, 2007

Get Yer Tinfoil Hat at Brad Blog
(Brad Blog exclusive Please Credit)

This has nothing to do with Debra Wong Yang former US attorney in Los Angeles who quit when she got an offer she wouldn't refuse from the law firm defending Jerry Lewis from her investigation.

In what he describes as "an attempt to get this story out there", Curtis told part of the tale on a website, www.justaflyonthewall.com where he has changed the names of some of the specific parties involved. (e.g. "Wong" is substituted for "Yang" on the site)


The scandals are getting way too numerous to keep track of. Googling Wong Yang won't work anymore.
Still Thinking about Mark Kleiman's post on Education.

Click the link and read it

Prof. Kleiman says he doesn't know if enrollment in Universities is too high or too low. There are arguments both ways. I argue it is too low below. I admit my evidence is weak so I want to argue in the alternative about what should be done in either case.

The regular reader will not be surprised by my policy conclusions (hint: I always want to soak the rich).

One point is clear from micro data. The private returns to higher education are very high compared to private returns to financial investments "the real rate of return on educational investment (including the opportunity cost of forgone wages) seems to run somewhere between 7% and 10% per annum, which is a healthy rate of return. (Capital-market imperfections help explain this: it's hard for most people to borrow against the future stream of earnings from the human capital they'd like to acquire.)"

Assuming that social returns are equal to private returns, this means that even greater subsidies to education would cause increased GNP. That is, if the only deviations from economics 101 are the capital market imperfections, the policy implication is for the taxpayer to bear an even larger fraction of the cost of schooling.

But maybe sending more people to university is not a good investment for the nation, because they are there to signal and not to learn useful skills. If this is so, a standard argument against progressive taxation -- that it discourages human capital investment -- is reversed. If the quest for high salaries involves waste due to dissipative signaling, redistribution from rich to poor via taxes and transfers can increase economic efficiency. It is easy to write simple models in which such policies cause a Pareto improvement.* If the problem were too high university enrollment, the solution would be to tax high income workers and give the money to people who do not go to university (this could be done with an expanded EITC financed by taxing high incomes).

In contrast, if university enrollment is too low one could cut taxes on high incomes or give cash directly to people who enroll (via increased subsidies). The fact that the return to going to university is much higher than the t-bill rate implies that increased subsidies are a more efficient way to increase enrollment. The present value (to the treasury) of a direct subsidy with equal effect on enrollment as a tax cut is lower, since prospective students discount at a higher rate than the treasury.

Of course another way to achieve efficiency if too many go to university is to cut subsidies raise tuition and use the money for the EITC but the efficiency argument for subsidies as opposed to tax cuts works the other way here as one is pushing the other way here. The USA can achieve the same goal with a big tax increase or a small tuition increase and the big tax increase is better for the deficit.

So I conclude that whatever Kleiman concludes on university enrollment he ought to support soaking the rich either to expand the EITC or to increase public subsidies to universities. In each case the justification has nothing to do with egalitarianism as each policy can increase money metric welfare.
Today's Same Facts Link is made with special enthusiasm as Mark Kleiman writes about one of my favorite topics -- private and social returns to schooling.

update: I have added references to my claims of fact in []s

He argues that there are social returns due to knowledge spillovers, the contribution of an educated electorate to the of Democracy and reduced inequality due to supply and demand for degrees which would make the benefit to society greater than the benefit to the student. However, to the extent that education works as a signal of something (intelligence, willingness to defer consumption and, maybe, other gratification or willingness and ability to sit quietly and submit to authority) it has private returns which aren't social returns.

Oddly this happens to be almost exactly what I wrote in my one and only newspaper column (in Il Corriere della Sera).

He reaches an inconclusion not knowing it expansion of schooling would be socially beneficial.

I actually went on and got to an a conclusion.

I agree that it is very hard to tell based on theory or micro data. Sad to say, this leaves us with crude macro data on enrollment and welfare in different countries or states. My impression is very strong that this evidence suggests that no country, state or other political entity has ever spent too much on public education (I admit that the case for university level education is weaker than for secondary and especially primary)[I also admit that this is my "impression." my understanding is that this means I am OK even if someone can come up with such a case]. The countries with bizarrely high enrollment given current income are well known growth miracles (Taiwan. Singapore and especially South Korea)[everyone knows that]. The first states to have high enrollment in high school (midwest in the 19th century) went on to become relatively much richer than they had been (kids in New England were lured off to the then high tech textile mills and New England suffered relative economic decline until the mills went South, kids studied and they got going on the new high tech (the Reagan defense buildup helped a lot too))[Larry Katz told me all this].

Crude -- sure. Too crude for someone who doesn't depend on such data to get publications -- yeah guess so. Enough to convince me that more money should be shoved into education -- hey a flipped coin that comes up either heads or tails would be enough to convince me.
Wait did the Republicans Retake Congress in a Coup

ThinkProgress writes "House Minority Whip James Clyburn (D-SC)" aaaaiiiiiiii

Oh I see James Clyburn is House Majority Whip
Whew

Thursday, May 17, 2007

I too want it to be over

Below I wrote " each of the four miracle preceding ... were implemented by anti-leftists who wanted to get it over with."

This gives me great hope for the World Bank and the USA as it seems anti-leftists are real eager for a lot of things to be over.

The pivotal turn in all of this came when the White House decided to essentially drop its support for Wolfowitz, with one senior administration official telling me the situation looks grim. "We want it over


and

Many of these congressmen believe that Rove should have quit when he was ahead as manager of the two Bush elections and left in January 2005. However, they do not want to see him limp out of Washington with his scalp hanging on Henry Waxman's belt. "We're not hostile to the administration," one prominent conservative House member who did not want his name used told me. "We just want it to be over."



Both via TBogg

Novakula seems a bit hostile himself -- to Rove and the concept of metaphor. Frog march is nothing compared to "limp out of Washington with his scalp hanging on Henry Waxman's belt." Think someone's irritated over disgracing himself outing Plame ?
Land Reform in Venezuela

My personal thought is that it's about time. This article is interesting but I think it is slanted against the land reform which is described as "brutal and legal" because

The violence has gone both ways in the struggle, with more than 160 peasants killed by hired gunmen in Venezuela, including several here in northwestern Yaracuy State, an epicenter of the land reform project, in recent years. Eight landowners have also been killed here.


Sounds to me that the resistance to land reform is roughly 20 times as brutal as the land reform effort. The disproportion between quotes of supporters and opponents is much less extreme.

The part that irritated me (and makes an alternative title "why do people hate economists") is that "economists" appear to be all opposed to land reform.
"Economists say the land reform may have the opposite effect of what Mr. Chavez intends, and make the country more dependent on imported food than before." "agricultural economists say the government bureaucracy, which runs a chain of food stores, is also rife with inefficiencies" Finally economists get a name

Carlos Machado Allison, an agricultural economist at the Institute for Higher Administrative Studies in Caracas [snip]


“The double talk from the highest levels is absurd,” Mr. Machado said. “By enhancing the state’s power, the reforms we’re witnessing now are a mechanism to perpetuate poverty in the countryside.”


SIMON ROMERO notes, in his own voice, that "Top-down land redistribution projects have a troubled history in Latin America" which is true. However, Latin America is not the whole world. Consider some countries which have had massive Top-down land redistribution projects : Japan, Taiwan, South Korea and Italy. Italy might seem to be l'uomo dispari fuori (odd man out) but experienced an economic miracolo from the year of the reform 1953 through 1962.

Key feature of successful land reforms include enough compensation of landowners that they don't fight (the Italian land reform was designed by Count Antonio Segni) and clear rules. The Venezuelan approach based on the initiative of squatters does not work (in fact the Italian boom could also be timed as following the end of the occupations of land organized by the Communists successfully trying to force the Government to approve a land reform). More generally, each of the four miracle preceding land reforms I mention were implemented by anti-leftists who wanted to get it over with.

I do fear that Venezuela will follow the path of Peru, Mexico or Zimbabwe exactly because the struggle is politically useful to Chavez. However, the facts about the ground make it possible that a land reform has great potential to cause increased GDP both because

But Venezuela, unlike many of its neighbors, has long imported most of its food, and uses less than 30 percent of its arable land to its full potential, according to the United Nations.

A good part of the reason is the havoc that its oil wealth plays on the economy, with a strong currency during times of high oil prices making it cheaper to import food than to produce it at home. Meanwhile, vast cattle ranches take up large areas of arable land.


This suggests that agriculture less integrated into world markets will suffer less from exchange rate havoc and, more importantly, that production is kept low because landlords have less fear that cattle will get uppity than that tenants will become squatters. The pattern of low productivity land use reminds me of what I heard from an extremely elderly Italian once.

But why oh why did Simon Romero have to make these obvious arguments in his own voice. Has no economist in Venezuela noticed the costs of the current pattern of ownership ?
Dan Eggen and Amy Goldstein have a blockbuster article on the Pearl Harbor Day Massacre

Justice Weighed Firing 1 in 4
26 Prosecutors Were Listed As Candidates



Their source provides information which is news to Josh Marshall. I think they are worthy of working on the TPMuckraker team (highest praise for journalists I can think of) but probably wouldn't like the cut in pay and circulation. I am very very glad they work for the Washington Post.

They report Kyle Sampson's lists included a total of 26 US attorneys considered for possibly wanting to spend more time with their families. This means that my guesses as to the three then maybe 6 redacted names become guesses about the 18 who were fired on days other than December 7 1996 and aren't Cummins. Each guess has a 25% chance of being, in this sense, correct so I shouldn't boast that I'm batting 1000, but I did guess that Chistie was on a list which included Iglesias
"Reached last night, Christie said Elston contacted him in mid-March. Elston told him that he had put Christie's name on a Nov. 1, 2006, list, along with four other U.S. attorneys, and that a redacted copy was being turned over to Congress."

We already know my guesses on Biskupic and Meehan were both correct if charitably interpreted as applying to any of the versions of the list
(if you click you see that I backtracked on Christie in that one oooops). I also speculated correctly that Debra Wong Yang was on a list.

Wednesday, May 16, 2007

I'm gonna have to agree with my fellow economist on this one.

Mark Thoma's patience and good humor has been rewarded with a well deserved flurry of links. Also he linked to me once. The problem is that he is discussing one of the few issues where I buy into the economics profession orthodoxy -- free trade. I must stress that I think rich countries should not protect because I care about workers in poor countries, so I may not be totally convinced that free trade is part of an optimal set of policies for every country.

However, Thoma uses the magic acronym EITC

Thoma "Here's what I mean. We say we need to use some of the gains from trade to help workers hurt by globalization, but beyond the broad acknowledgment of that point, we don't have much specific to offer. There's the usual list, unemployment insurance, wage insurance, job retraining, help with relocation, food stamps, minimum wage, EITC, etc., etc., but most of these have been around for awhile and don't generate much excitement or interest."

Guy saying economists suck (GSES) "That's because things like job retraining don't work, though they seem to make people who still have jobs feel better, and the rest of the things on the list just help you put off taking a worse job than you had before."



Wrong. GSES you were doing OK with the bit about economists, but you are clueless about the EITC. In addition to being a transfer to the poor it encourages people to not put off taking a job they can get.

Thoma goes on the explain that what this country needs is a balanced tax program, that is soak the rich and spread it out thin. He does have very odd views on politics however.

"Most of the ways we've dealt with this in the past have, as I talked about before, been targeted at groups of people demonstrably hurt by globalization. That has two advantages. First, when you can point your finger at a particular person it draws sympathy and support. Help is easier to get when there's an identifiable victim. But when the effect is, say, to lower the wages of low-skilled workers generally by, say, 5% or 10%, it's harder to find that particular group or person to single out as an example of the harm from globalization. The politics behind the problem are very different. In addition, there is a second advantage to targeted help. When help is given to specific groups of individuals, those getting the help understand what the help is for and those giving the help can see that it is going to the affected parties. This is different from, say, increasing taxes to transfer money from higher to lower income individuals. The reason for the income transfer may be to compensate the losers from globalization, but the disconnection between the income transfer policy and the reasons for it - compensation for the costs of globalization - will make such a policy difficult to implement and sustain."


Huh ? Why ? Taxing the rich and sending the cash to US workers will be a very very popular policy. People demand it whenever they are polled. It is a political mystery that the rich have managed politically so far. I think it has more to do with Democrats fearing the disapproval of pundits than any Rovian political genius.

I'm sure it is only a matter of time. I would guess about 2 years till the President signs the bill.
Now I know that George Bush has really and truly destroyed the reputation of the USA.

I got this spam at gmail (hey isn't gmail supposed to stop spam) ?

Dear Sir,
I have managed to sneak out this email to you from my confinement here in one of our military bases in Germany.My name is Col. Jason Taylor of The US Army. I was based in Iraq until recently,I was sent back to Germany because of the Iraqi prisoner abuse scandal in which I was unfortunately implicated. I am still under House Arrest,pending the outcome of investigation.
During my sojourn in Iraq, I was able to successfully smuggle US$ 21.7m out of Iraq to a location in Europe. ...


So the spammers think that the reputation of the US armed forces has sunk to the level of Sani Abacha's widow or something. OK OK they also think I wouldn't have noticed the imprisonment of a colonel in the Abu Ghraib scandal (and I am naive enough to think a colonel would be prosecuted).

Still grim grim news.
Thanks For The Link Mr Reasonable Yourself.
Brad DeLong Notices Something I Posted Days Ago
and I get a link from Michael Froomkin, Santa Monica (It's like reality but different), and a link from Enderfem. Do I even know these people ?

I forgot Nforget

Tuesday, May 15, 2007

Robin Hood and The Minimum Wage

What is the effect of the minimum wage on economic efficiency ? First when people say "economic efficiency" they tend to mean money metric welfare. The change in "economic efficiency" due to a reform is equal to the sum of the cash transfers which people would find equally pleasant or unpleasant as the reform. This rules out any role for egalitarianism.

The economics 101 answer is that the minimum wage reduces economic efficiency creating a decline in money metric welfare (or dead weight loss) equal to the roughly triangular area between a labor supply curve, a labor demand curve and the minimum wage line (this is called a Harberger triangle). Egalitarian economists like to argue that such triangles tend, in practice, to be small and dwarfed by the welfare benefits of redistribution. I want to argue that the minimum wage can increase money metric welfare.

The economics 102 answer is that this is possible if there is imperfect competition, in particular monopsony in the labor market (firms don't take market wages as given).
In this case, a minimum wage can caused increased employment. I will assume that this is not the case.

It is also possible in efficiency wage models with endogenous monitoring effort by employers (that would be economics 103). I will ignore this too.

The point, if any, of this post, is that it is possible if there are people choosing between seeking a minimum wage job or criminal activity. There are such people and they say so when asked. If there is a large transfer to disadvantaged workers and a small dead weight loss from the minimum wage, it makes looking for a minimum wage job more attractive (a slightly smaller chance of finding such a job times higher pay if one finds one makes it more attractive to search). It certainly makes quitting a minimum wage job less appealing.

This has efficiency benefits if the alternative to work includes crime not just leisure.

How does economics 101 miss this argument ? In economics 101 it is assumed there is no crime.

In fact it is rare in economic research. The work of Hershel Grossman is an exception.

Monday, May 14, 2007

Dan Eggen and Amy Goldstein have a pretty good article on Rovian voter fraud fraud
in today's Washington Post. However, they do feel the need for a little Ballance writing "Ever since the contested 2000 presidential election, which ended in a Florida recount and intervention by the U.S. Supreme Court, both political parties have attempted to use election law to tip close contests to their advantage" and, then, proceeding to provide no evidence at all that Democrats do so. The form "both parties" seems to be allowed, indeed required, no matter what the facts are.

Also when they write "The Justice Department demanded that one U.S. attorney, Todd P. Graves of Kansas City, resign in January 2006, several months after he refused to sign off on a Justice lawsuit involving the state's voter rolls, Graves said last week." they neglect to mention that the Justice department lost the lawsuit, that is, a judge found that Graves was right and the people who fired him were wrong.

Also a mention that his successor indicted 4 people for allege election fraud 5 days before an election might have been mentioned in the context of the "strict rules against investigations shortly before elections" which are alleged to have an unwritten exception.

Still an excellent article by the standards of the Washington Post. I almost hope that I will live to see the journalistic standards of the Washington Post improve so much that a comparison to Talking Points Memo might pass the laugh test (at least with a mildly humor deprive tester).

update: Sorry I was unfair to Eggen and Goldstein. They have a scoop. There were complaints about alleged voter fraud in Nevada where Bogden used to be US attorney. I knew this was news to me (so what ?) but it is also news to Josh Marshall and Paul Kiel (What ?!?). This means that the article is much better than pretty good. This is excellent too.

Sunday, May 13, 2007

Mark Kleiman commented on my blog !

He confirms that, in the end, I understood what he was saying about trade and morality.

Sorry. I didn't make myself clear. Reciprocity isn't the highest form of cooperation; unselfish altruism is nicer. But reciprocity is an important form of cooperation. If you're part of a group whose norms involved doing good things for other members of that group -- a group that embodies collective social capital -- you ought to obey those norms unless the damage to those outside the group is great. No, I'm not confusing positive and normative propositions. The positive proposition here is that cooperation is useful, and communities that share collective social capital enable it. The normative proposition is that it is right to maintain and build those communities, even at the expense of an absolutely universal altruism.
# posted by Mark Kleiman : 4:11 AM


I think Professor Kleiman's original post was actually clear enough. I did, after all, in the end get the point.


I do have remaining thoughts on who we should pretend to be when we right. Kleiman is discussing the proper policy for the conscience of a nation which isn't as altruistic as one might wish. This is an interesting issue. However, sad to say, Mark Kleiman is not the conscience of the USA.

I guess I will have to settle for his being a commenter on this blog, which is a waste of his time but, for me, a great honor.
The Miracle of Asset Price Inflation (and the nightmare of widening inequality) imply that we have millionaires of relatively modest means these days

Giuliani left office on Dec. 31, 2001, with relatively modest means. His final ethics report to the city listed gross assets of between $1.16 million and $1.83 million in 2001;
.

This is a cost of inflation that I hadn't considered. To be rich these days your wealth has to be in the tens of millions. Mere millions are upper middle class (unless it's all in the house where you really live and which didn't cost much when you bought it, in which case it is perfectly possible to be a blue collar regular guy working class stiff millionaire). So what do you call the rich ? tensofmillionaires ? dozensofmillionaires ? I think the technical term would be decamillionaires which does have a nice alliteration with decadence.

Saturday, May 12, 2007

Where is Karl Popper when you need him ?

A small point on Klein on Klein

Ezra Klein is too kind to Joe Klein
who discovers a remarkable tautological regularity.

There have been six elections in which control of the presidency has switched parties during the television age. In five of those six, starting with John F. Kennedy's victory over Richard Nixon in 1960, the less experienced candidate won. The other four were: Jimmy Carter over Gerald Ford in 1976, Ronald Reagan over Carter in 1980, Bill Clinton over Bush the Elder in 1992, Bush the Younger over Al Gore in 2000. The one exception to the rule was a toss-up: Nixon and Hubert Humphrey had similar levels of experience in 1968.


Joe Klein's result is almost perfectly tautological as incumbency of one's party and experience are almost perfectly correlated (perfectly correlated if one claims that 5 = 8 as he does in the case of Nixon and Humphrey). Thus, since 1960, we have known before election day that a switch of party would logically imply the election of the less experienced candidate. The observation that, surprise surprise, after election day, it became clear that when there was a switch of party the less experienced candidate won adds nothing to our knowledge whatsoever. Joeseph Klein has presented an un-falsifiable hypothesis and drawn conclusions from the failure of the data to refute it. He demonstrates only that he does not reason well, but we already knew that didn't we ?

The answer to the question in the title is "taking credit for ideas due to Charles Sanders Pierce and Rudolf Carnap by inventing a neologism more snappy that 'abduction' which did not set a very high standard".

Friday, May 11, 2007

Kevin Drum points to an absolutely excellent web page arguing against repealing the estate tax.

The page is full of facts and convincing to any honest person (that wasn't enough in 1993 we needed a majority in congress).

However, I think that www.responsiblewealth.com is a bit vague on the way in which given names are passed down from generation to generation in one of our newer ultrarich dynasties

"William H. Gates Sr., father of Microsoft's chairman, William H. Gates III.

Not Kim Jong Ill territory, but still embarrassing given the topic.

To pretend to be mature, I note that this amazing fact

"Even one of the leading advocates for repeal of estate taxes, the American Farm Bureau Federation, said it could not cite a single example of a farm lost because of estate taxes."

A claim so misleading that it can not be supported by a single anecdote is extraordinary even for Republicans. Wow.
Who do Robert Frank and Mark Kleiman imagine they are ?

Commentators offer advice to some entity and pretend that they actually have influence. It is common to advise "America" meaning the people of the USA to do something which the commentator thinks would have good effects if all US citizens followed the advice. Sometimes the commentator imagines advising the government or the Democratic party or the Republican party or a single person.

Kleiman and Frank give excellent advice to the conscience of a nation full of fallible people who are tempted to be selfish. That is if the spirit is willing but the flesh is weak, what should the spirit will. Since, unfortunately, the conscience of the nation doesn't take instructions from Kleiman and Frank, I think they are open to criticism.

Below I argue with Mark Kleiman who thinks that it is unsound to tell Americans that they have to care as much about foreigners as their fellow citizens.

Now Robert Frank Joins the discussion arguing in support of Kleiman that we ignore our moral sentiments at our peril. He contrasts "consequentialist" ethics (which used to be called utilitarianism until thought experiments (monster barring) convinced utilitarians to fudge a little) with our inate sense of right and wrong. He seems to believe that consequentialist statements about right and wrong are true, but he argues that a coherent consequentialist will keep his beliefs to himself "The twist, then, is that consequentialist prescriptions that treat moral intuitions as irrelevant may not lead to very good consequences."

I certainly agree. I want to criticize Frank, but, to be Frank, I am intellectually intimidated. I recall the advice my PhD advisor gave me once. He said "read "Choosing the Right Pond" by Robert Frank. Smart guy. Major leader in the effort to convince economists to think about economies populated by actual human beings.
But, sad to say, not the conscience of the nation.

One way for a mere individual to contribute is to write frankly as oneself expressing one's opinions and saying what one thinks is true not what one thinks could usefully be said by a powerful adviser or the conscience of a nation. This has the advantage that it leads people to inject new ideas into the discussion. Another is to imagine what can usefully be achieved with limited influence. This means pulling views a tiny bit in this or that direction. It requires strategy in two ways. First it is wise to understate one's uncertainty. To make strong claims. Second it is unwise to make extreme claims. In the case at hand, I think there is no risk that we will abandon patriotism or innate revulsion to participating directly in violence. Thus I see no risk in arguing for equal concern for all people in the world.

Frank, even more than Kleiman, makes it clear what he is and is not saying. He is reflecting on what norms work given human nature. He is honestly expressing his intelligent and wise thoughts on the subject. Still he is not really able to chose norms so he is pretending to be something which he isn't during his thought experiment.
I think that Matthew Yglesias and Ezra Klein might want to agree on a definition of populism or use other words before wasting their highly valuable time arguing the extent to which Bill Clinton ran as a populist in 92.

This started with a critique of Mark Penn.

Clearly Yglesias is right that Clinton's support for welfare reform has nothing to do with Penn's claims that Americans don't want redistribution from the very rich or corporation bashing. That is, American's opinion about redistribution depends from whom you take to give to whom (obviously).

Penn must know something I learned from a deputy assistant secretary of the treasury who I will paraphrase anonymously. The Clinton '92 campaign asked people if they wanted an increase in rich people's taxes to support x (x was health care reform, more education spending etc) and kept getting a large majority for yes until the pollster got frustrated and asked Americans if they wanted to raise rich people's taxes to fund more waste fraud and abuse and a plurality answered yes. This is raging loony class war populism.

Also during a debate Clinton vs Bush in 92 there was a continuous time studio poll in which people could push a button for "agree" for "disagree" or for "neutral". The studio audience was made of Clinton supporters, Bush supporters and undecided voters. When Clinton said "under the Republicans only the rich have gotten tax cuts" a majority of all 3 groups pushed the "agree" button. That is, the complaint about rich people getting off easy was well received by declared Bush supporters. Such an event is, of course, very rare.

I doubt that opinion has shifted against soaking the rich since then.

A simple heuristic works. Most Americans support tax and transfer programs which would increase the after tax income of the household with median income if the programs cause 0 deadweight loss.

Mark Penn must know this. He chooses to lie.

Thursday, May 10, 2007

Oprison to prison ?
He who knows and knows that he knows is a Teacher. Learn from him.
He who knows not and knows that he knows not is a student. Teach him.
He who knows not and knows not that he knows not is a menace. Avoid him.
He who knows and knows not that he knows is our Attorney General. Impeach him.

Even Rumsfeld didn't think of unknown knowns which we don't know if we know and that he would loose his record as most dishonest loyal Bushie ever.
Not bad for her first week on the job

our new reporter-blogger, Laura McGann, started at TPMmuckraker.com on Monday. And in the post linked above, she was, to the best of my knowledge, the first to report on the firing call Graves received back in January 2006. The Times followed a short time later with more details -- jmm.
International Trade and Morality

In today's link to samefacts, I find that I absolutely totally disagree with Mark Kleiman, which is rare, and his logic in this post doesn't make sense to me, which hasn't happened before.

It is neither irrational nor morally wrong for me to be more eager to benefit, and more reluctant to harm, those with whom I cooperate more, because they are my relatives, because they are my neighbors or my co-workers or my fellow-members of other groups that embody collective social capital, or because they are my fellow-citizens.

The sovereign state has the capacity to pay for public goods by compulsory taxation, thus avoiding the free-rider problem. Wages or profits earned by people or firms that pay U.S. taxes are more important to me than wages or profits earned by those who pay taxes elsewhere, because I get a share of those wages or profits in the form of greater expenditure on public goods or reduced taxation.


Kleiman seems to mainly argue that patriotism is not irrational, yet he is addressing the question of whether it is moral. In the quote (from which I have deliberately removed relevant context and I admit it) "and morally" appears to be tacked on as a minor aside.

First I will try to understand what Kleiman is saying. I think his point is that, in fact, given human nature, the choice opinion leaders face is not whether to encourage patriotism or universal brotherhood but rather whether to encourage patriotism or a mix of motives in which selfishness is always alarmingly powerful, hence "We are all members of multiple moral communities. And we can't make ourselves better members of the larger ones by making ourselves worse members of the smaller ones." This clearly described the real world trade-off which Kleiman imagines. I can't help adding that it fit's oddly with his concluding sentence "Think globally, act locally."

I am aware that I may have been unfair when I slipped the phrase "opinion leaders" in. I am insinuating that Kleiman's logic is, pardon my use of a dirty word , borderline Straussian. As I attempt to understand it, the logic is based on the idea that the people are not capable of universal brotherhood, so we should tell them that patriotism is morally fine, because it is the best we can do. Avoiding scare words, my problem is that I can not honestly say that favoring one's fellow citizens is morally acceptable. I have no fear that I have unleashed a wave of pure selfishness as I am definitely not an opinion leader. I have, of course, guaranteed that I will never be an opinion leader (as an aside I am grateful to Kleiman for not even hinting at a silly but common argument based on the need to win elections in which neither he, Tabarrok or DeLong is a candidate).

Another way of putting it is that I believe in absolute moral truth and, thus, see a sharp difference between true statements about right and wrong and useful statements about right and wrong.

I also think that it is relevant that we must decide what sort of community we want to be. I wish the USA were a liberal community in which the expression of minority views is appreciated. Tabarrok and DeLong are challenging a principle which is almost universal. I think this is valuable in itself.

As a practical matter, people like DeLong and Kleiman who have some influence on the debate must assume that they can only move it a tiny bit in this or that direction. Thus the question is not whether it would be good if people thought of the USA like the community of left handed people, but rather if US citizens were a little more concerned about foreigners. If we should, the correct rhetorical strategy is to argue as hard as one can for universal brotherhood without appearing to be a total nut case.

I have a sense that I know where Kleiman is coming from. His point is partly that even open minded economists like DeLong and Tabarrok are slightly allergic to sociology, and tend to ignore norms, community, solidarity and social capital when not talking specifically about those issues. There is a tradition in economics of taking motives as given and figuring out how one would optimize. This is often the assumption that people are selfish, but also has a lot to do with benevolent social planners and possibly perfectly altruistic agents.

Kleiman gives examples of cases in which we should be more concerned about some people than others -- our families and his university department. I agree on the examples, but I think the analogy with patriotism is invalid. I think the important factor is the value of continued direct personal interaction with people we trust and the resulting emotional bonds. Citizens of the USA (like citizens of all countries even Sweden) do not interact in such a way. We are connected by laws and the principle of solidarity with one's countrymen (the point at stake here). This is all abstract. The point is that we could feel about all people the way we feel about our fellow citizens as patriotic feelings do not depend on personal contact and repeated interaction. A sense that we should all be citizens of humanity is perfectly possible, a sense of universal brotherhood must always be an ideal towards which we strive but which we do not approach.

update: Robert Frank agrees with Mark Kleiman. I am actually a bit intellectually indimidated.

Also, as Anne clearly shows in comments, I don't really know anything about Alex Tabarrok.

Wednesday, May 09, 2007

And Naysayers deny that Bush is a Uniter not a divider

The US House, the US Senate, the US people and the Iraqi Parliament are united.