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Sunday, June 29, 2008

Quis custodiet ipsos custodes?

Mark Kleiman writes

This is an example of what Orwell calls a "dead metaphor," where the phrase has lost its original metaphorical meaning and become a pure idiom. ("Toe the line," which originally meant to stand properly in rank during military drill, is another such, as evidenced by the frequent misspelling "tow the line.") So how about using "restrain" or "control" or even "check" instead? Most of us don't ride horses.

This has been another official notice from the Language Police.

and helpfully links to the essay in which
In which George Orwell called "Toe the line" a dying metaphor and not a dead metaphor.

DYING METAPHORS. A newly invented metaphor assists thought by evoking a visual image, while on the other hand a metaphor which is technically ‘dead’ (e. g. iron resolution) has in effect reverted to being an ordinary word and can generally be used without loss of vividness. But in between these two classes there is a huge dump of worn-out metaphors which have lost all evocative power and are merely used because they save people the trouble of inventing phrases for themselves. Examples are: Ring the changes on, take up the cudgel for, toe the line, ride roughshod over, stand shoulder to shoulder with, play into the hands of, no axe to grind, grist to the mill, fishing in troubled waters, on the order of the day, Achilles’ heel, swan song, hotbed.

This has been an official notice from the Language Police's office of internal language affairs.

Saturday, June 28, 2008

Commenter Larry at Economists View has a hypothesis

I google to check. It is closer to true than I thought, or true if by significantly you mean not "economically significantly" but "we can be sure of the sign of the difference given the huge point estimate"

I have not seen a quantitative comparison of how much oil CAFE would have saved versus how much (Democrat-and-the-public-blocked) greater drilling would have produced, but I bet the amounts aren't significantly different.

Larry your comparison makes no sense. The reason is that the effect of Cafe would depend on the mileage standard. Requiring the kind of average mileage residents of Europe get would reduce US oil demand by ... I'll google (time now 3:47 pm here)

This is an edf pdf but it says that "moreover a focus on auto efficiency has been effective historically with a net 33 percent reduction in fuel use per mile yielding nearly 3 million barrels per day of oil savings." From context this seems to be US.

OK drilling


1.45 million barrels a day in 2028

Off shore

The 574 million acres of federal coastal water that are off-limits are believed to hold nearly 18 billion barrels of undiscovered, recoverable oil.,2933,368221,00.html

That would be equivalent to 6000 days of fuel efficiency improvement so far spread out over who knows how long. The ANWR number is the peak, not the average over so long as we drive cars.

Now possible future fuel efficiency gains which seem reasonable to me would be to get the US fleet like European cars. That means (see below) doubling economy standards so a gain equal to that so far (1 to 2/3 is like 2/3 to 1/3). However, as population and miles driven increase (miles per capita too I'd bet) the gain from economy grows.

The numbers are roughly similar only if you count peak ANWR production as average ANWR production and equate oil which has not been found or extracted with existing technology.

A fair comparison would be feasible cafe standards vs feasible oil drilling. and 60 miles per gallon are certainly feasible (that's what a Prius gets).

More importantly, if we don't drill in ANWR we will have the oil in ANWR. That is banning drilling now leaves open the optino of drilling later. Burning gas now does not leave the option of unburning it later. Only if you adopt an outlook which is both short term and "what if" are they comparable.

Given choices to date, ANWR and off shore won't help us for decades, then they will help us for decades, then the oil will be gone.

Below some quotes and links on what I think is easily doable by imitating Europe and getting rid of light trucks.

"The average combined MPG for all US cars and light trucks on the road today is 19.8 MPG. (Source: 2005 Highway Statistics from the U.S. Department of Transportation, Federal Highway Division)."

Some mess with calculations from this

European cars today average around 163 grams per kilometer, and the European Union is already shooting for a target of 130 grams per kilometer across all cars by 2012. In today’s mainstream market, the greenest cars achieve something like 28 kilometers per liter (65 mpg) and 100-120 grams of carbon per kilometer, says Nature.

65 mgp/1.6 > 40 mpg

So going from US mix of cars and light trucks to European cars, which seems feasible to me, would double mileage.

time now 4:13 pm elapsed time (including writing and believe it or not thinking) 26 minutes.
Use the google.
Barack Obama discussed the role of religion in public life in a keynote address at a call for renewal conference on June 28.

"James Dobson criticized Sen. Barack Obama, accusing him of "deliberately distorting the traditional understanding of the Bible to fit ... his own confused theology," of having a "fruitcake interpretation of the Constitution" and of appealing to the "lowest common denominator of morality.""

Peter Wehner criticized James Dobson in the Washington Post in a column which I have actually read (unlike the speech and Dobson's criticism which I have no intention of reading).

I am going to write a post about Wehner's column which is probably not worth reading.
Of course I totally disagree with Dobson as quoted by Wehner (although on one key point the disagreement depends on one key word). I don't disagree with any of the snippets of Obama's speech as quoted by Wehner. I disagree with much of what Wehner wrote. I will try to focus. First on the main point of Dobson's criticism as summarized by Wehner

The passage of the speech that prompted Dobson's "fruitcake interpretation of the Constitution" and "lowest common denominator of morality" comments was this: "Democracy demands that the religiously motivated translate their concerns into universal, rather than religion-specific, values. What do I mean by this? It requires that their proposals be subject to argument, and amenable to reason. I may be opposed to abortion for religious reasons, to take one example, but if I seek to pass a law banning the practice, I cannot simply point to the teachings of my church or evoke God's will. I have to explain why abortion violates some principle that is accessible to people of all faiths, including those with no faith at all."

Dobson paraphrased this as "unless everybody agrees, we have no right to fight for what we believe in."

Like Wehner I agree that Dobson's paraphrase is nonsense. My complaint is simple. To get where Dobson ended up one has to replace the word "accessible" with the word "convincing" then go on to abbreviate. The word "accessible" was carefully chosen.

Oddly, I think I am closer to Dobson on this point than Wehner is. I'm not so thrilled with Obama's use of the phrase "universal values" as I don't think people agree that much on basic principles of right and wrong. I hope what Obama means is statements of value that everyone understands and recognize have some importance even if, for example, we differ deeply in our views of the relative importance of justice and mercy.

The effort to reach practical agreement with people with whom one disagrees on important matters which are not settled by evidence and logic is not finished if religious people translate religious teachings to statements about ethics. I, for example, do not consider retribution a legitimate justification for the punishment of crimes. Thus I disagree on a fundamental moral point with, for example, Barack Obama. I think we could manage to reach agreement on most issues of criminal justice all the same (discussing in private -- like many people I assume that Obama agrees with me more than he lets on in public, because he can't be frank and elected President).

Dobson is also, quite frankly, outraged that Barack Obama describes what was written respectively in plain Hebrew and plain Greek in the bible. I think Dobson considers it an outrage against people of faith to claim that Leviticus Chapter 25 verses 44 through 46 read, in the King James translation

44 And as for your male and female slave whom you may have -- from the nations that are around you, from them you may buy male and female slaves.

45 Moreover yuo may buy the children of th strangers who sojurn among you, and their families who are with you, which they beget in your land and they shall become your property.

46 And you make take them as an inheritance for your children after you, to inherit them as a possession; they shall be your permanent slaves. But regarding your brethren, the children of Israel, you shall not rule over one another with rigour.

To claim that the bible contains such a passage is an intollerant assault on people of faith, even those people of faith who like to appeal to Leviticus chapter 18 vs 22

22 You shall not lie with a male as with a woman. It is an abomination

Can one argue that Christianity condemns both homosexuality and slavery ? Not as far as I can see.

In the USA there has been a deal in which no one criticizes the Bible and, in turn, the people who claim to follow it don't say what is written in it. Dobson et al have broken this deal, insisting on following the letter of the Bible (including the Old Testament. However, if someone quotes the part about slavery (or see below) it is an outrage.

I don't think that Obama can get along with many of his fellow Christian Americans, exactly because he has read the Bible and remembers it. It is un acceptable to say that the Old Testament sanctions slavery, even though it could not be more explicit.

Once I started quoting chapter and verse I had some trouble stopping. The Old Testament is really quite clear on what is important and what isn't. The main thing to do is to kill the enemies of Israel.

Religious right leaders in the US, such as Dobson, tend to glide over much of this (for one thing I strongly suspect that Dr Dobson MD knows much less about what is written in The Book than Barack Obama does). The Israeli religious right is much more honest, at least the extreme right wing of the Israeli religious right. They know what's in The Book and they advocate obeying the instructions.

Still even Kahane chose overlook some things (this is definitely true, I think, only of my first example).

Oh and how about Judges 11 verses 30, 31, 34, 39 and 40

30 And Jephthah made a vow to the LORD and said "If you will indeed deliver the people of Ammon into my hands,

31 then it will be that whatever comes out of the doors of my house to meet me, when I return in peace from the people of Ammon, shall surely be the Lord's and I will offer it up as a burnt offering.


34 When Jephthah came to his house at Mizpah, there was his daughter, coming out to meet him with timbrels and dancing; and she was his only child. Besides her he had neither son nor daughter.


39 And it was so at the end of two months that she returned to her father and he carried out his vow with her which he had vowed. She knew no man. And it became a custom in Israel

40 that the daughters of Israel went four dayes each year to lament the daughter of Jephtah the Gileadite.

Sure sounds like human sacrifice to me and there is no hint that the LORD disapproved of Jephtah's act or would have been willing to release him from his vow.

How about 1 Samuel chapter 15 verses 1, 2, 3, 8, 9, 10, 11, 26, 27, 28 and 29.

XV Samuel also said to Saul, "The LORD sent me to anoint you king over his people, over Israel. Now therefore, heed the voice of the words of the LORD.

2 "Thus said the LORD of hosts: ' I will punish what Amalek did to Israel, how he laid wait for him on the way when he came up from Egypt.

3. 'Now go and attack Amalek, and utterly destroy all that they have, and do not spare them. But kill both man and woman, infant and nursing child, ox and sheep, camel and donkey.'"


7 And Saul attacked the Amalekites for Havilah all the way to Shur which is east of Egypt.

8 He also took Agag kinf of the Amalekites alive, and utterly destroyed all of the people with the edge of the sword.

9 But Saul and the people spared Agag and the best of the sheep, the oxen, the fatlings, the lambs and all that was good and were unwilling to destroy them. But everything despised and worthless, that they destroyed.

Saul Rejected as King

10 Now the word of the Lord came to Samuel, saying,

11 I greatly regre that I have set up Saul as king, for he has turned bck from following me, and has not performed my commandments." And it grieved Samuel


26 But Samuel said to Saul, "I will not return with you, for you have rejected the word of the Lord and the Lord has rejected you from being king over Israel."

27 And as Samuel turned around to go away, Saul seized the edge of his robe, and it tore.

28 So Samuel said to him, "The Lord has torn the kingdom of Israel from you today, and has given it to a neighbor of yours, who is better than you.

29 and also the Strength of Israel will not lie nor relent, For he is not a man that he should relent."

This is a rather important passage as said neighbor is David who is presented as a model of what a man should be ("except in the matter of Uriah the Hittite"). Saul did well killing infants and nursing children, but he is not acceptable because he neglected to kill King Agag and some sheep.

David by the way in 1 Samuel chapter 27 verse 9

9 Whenever David attacked the land, he left neither man nor woman alive, but took away the sheep, the oxen, the donkeys, the camels and the apparel, and returned and came to Achish

and 11

11 David would save neither man nor woman alive, to bring news to Gath, saying, "Lest they should inform on us, saying 'Thus David did''" And so was his behavior all the time he dwelt in the country of the Philistines.

(note David is doing all of this on behalf of a Philistine king).

According to the old testament from Joshua through 2nd Kings genocide is quite all right (and sometimes obligatory). The two intolerable sins are religious toleration and miscegenation. Actually from exodus through Ezra at least Chapter 9 verses 1, 2 and 3

... the people of Israel and the priests and the levites have not separated themselves from the peoples of the lands, ...

2 "For they have taken some of their daughters as wives for themselves and their sons, so the holy seed is intermingled with the peoples of those lands. Indeed, the hand of the leaders and the rulers has been foremost in this trespass."

3 So when I heard this thing, I tore my garment and my robe, and plucked out some of the hair of my head and beard and sat down appalled.

Friday, June 27, 2008

Karl Rove Knows This part II
Waldmann on Waldman

Krugman argues that speculation in oil futures can't have caused the current high price of oil because the future price is lower than the spot price.

Steven Waldman explains why this argument isn't rock solid. His argument is that oil demand isn't deterministic and, in the very short run, oil in different places can have very different prices. This means that the expected cost of having a tank full of oil isn't the storage cost plus interest, but the storage cost plus interest minus the "convenience yield".

What is this "convenience yield"? [snip+]

Oil is a "spiky" commodity. Every once in a while, someone really needs it, now, and will pay a premium for immediacy. The market for oil in Cushing, Oklahoma might be reasonably efficient, but what happens when someone in Peoria needs oil today? Opportunity! ... you build an oil tank in Peoria. Suppose that every month, there's a 10% chance a desperate client will offer a 5% premium for immediate delivery of all your oil, and that interest and storage cost you 0.2% per month. Then on average, you'd earn 0.5% (10% x 5%) each month from desperate clients, and pay 0.2% in expenses.

Actually I'm glad that Waldman isn't arguing with Krugman about the actual case of actual current oil prices, because I wouldn't want to disagree with another Waldman*.

He writes "I agree with Krugman that futures markets can't explain the recent skyrocketing oil prices." and "This is a disquisition, and ode, a homage and a tribute to the marvelous, mysterious, misunderstood and maligned convenience yield:"

The reason is that the convenience yield argument can reconcile one of Krugman's facts, the futures price is below the spot price, with the speculation hypothesis, but it can't explain the other -- inventories aren't growing.

In contrast, it is easy to explain the other -- the inventories in question are oil under the ground (although that should show up as a decline in production which I don't see but I only know monthly up to April). The point is that storing oil under the ground doesn't have a storage cost (you even save the interest on the cost of pumping it if you pump it later) but it does have an interest cost and it doesn't have a convenience yield.

Both facts together seem to make a solid case that the current price of oil is not due to futures speculators.
A Very wonderful e-mail which came with the *.pdf of optimal capital taxation attached
published with permission of an anonymous very nice guy (or gal or group of people or alien being who doesn't want me to tell you humans that he or she is on this planet)


I found your blog post on income taxation really interesting, but I had a hard time reading the math in plain text. So to read it, I converted it to latex and made a real article out of it. It was only to scratch my own itch, but I figured you might have some use for it. It's attached as a PDF and tex source file.

If you publish it on your blog or whatever, I'd prefer you to not credit me for conversion or anything. I did this while I really should have been working, .... . Feel free to do whatever you want to it, as long as you don't credit me (now that's an interesting license)
Like Paul Krugman, I am somewhat surprised that Republicans don't believe in the efficient markets hypothesis. However, I think I have a better explanation.

In today's op-ed the fact

Somewhat surprisingly, Republicans have been at least as willing as Democrats to denounce evil speculators. But it turns out that conservative faith in free markets somehow evaporates when it comes to oil. For example, National Review has been publishing articles blaming speculators for high oil prices for years, ever since the price passed $50 a barrel.

And it was John McCain, not Barack Obama, who recently said this: “While a few reckless speculators are counting their paper profits, most Americans are coming up on the short end — using more and more of their hard-earned paychecks to buy gas.”

On his blog, a hypothesis

I think that conservative belief that the market is always right is colliding with another, even more deeply held belief — that there are no limits, except for those imposed by tree-huggers.The idea that oil might really be getting hard to find, in spite of the magic of capitalism, is just unacceptable; so they insist that it’s all craziness in the futures markets.

Now I like the snark of how the magic of capitalism makes oil as in (with apologies to William Shakespeare)

Conservative: Capitalism can call oil from the vasty deeps.

Krugman: Ay and so can I or any man, but does it come ?

But I have a very slightly different way to put it (not worth a blog post but I've typed so far).

(with apologies to David Manning who writes somewhat less well than William Shakespeare)

"the intelligence and facts [are] being fixed around the policy."

There are hard core fresh water economists, many of whom are conservatives, who have consistent views about how the world works and draw policy implications. Most conservatives, however, start with the policy implications and work backwards to the view about how the world works.

If the market for oil were perfectly efficient (perfectly competitive even) then the US government could use its market power to the benefit of US citizens.

A gas tax in the USA with revenues redistributed to the citizens would, in this case, have a second order dead weight cost (assuming no global warming and that the money isn't used to pay for highways as it is) and cause a first order transfer from oil exporting countries to oil importing countries. Such a policy is anathema to Republicans so conservatives have to come up with an argument for why it wouldn't work. If they have to abandon the efficient markets hypothesis they will.

The claim that, if markets are efficient, then the best policy for the citizens of a given polity is laissez faire is correct only if 1) the polity is a closed economy, or 2) a tiny open economy which has no effect on world prices or 3)if world supply curves are horizontal or, finally (I think) 4) there will be retaliation for begger other countries policies.

I'm not sure prof. Krugman wants to talk about that so much as people might think that it applies to other goods as well. Such benefits from tariffs don't appear in standard trade theory for reason 3) with CRS production functions relative prices of goods depend on prices of factors and not on demand for specific goods since supply curves are horizontal (any quantity for the right price none for less) if production functions are CRS. Then factor mobility and I don't remember what ...

Anyway aside from psychoanalyzing psychopaths Krugman and I agree and, of course, he puts it better

Most of the adjustment to higher oil prices will take place through private initiative, but the government can help the private sector in a variety of ways, such as helping develop alternative-energy technologies and new methods of conservation and expanding the availability of public transit.

But we won’t have even the beginnings of a rational energy policy if we listen to people who assure us that we can just wish high oil prices away.

It's about the policy response.

Thursday, June 26, 2008

My faith in the internet and humanity is much increased by the amazing experience of a kind reader (who insists on anonymity) which converted my illegible post on capital income taxation to *.pdf format.
Hey there are two official languages in Norway

Norway has two official languages - Bokmal and Nynorsk. Both languages are very similar. In addition to the two versions of Norwegian, Sami is spoken in some communities in northern Norway.

Generally Bokmal is used in most websites, books and newspapers and it is the language used in most official documents. It is also the main spoken language in Oslo. Nynorsk is the more common spoken language outside Oslo and you'll hear it spoken most often outside the big cities, even though small town newspapers are usually printed in Bokmal.

In the language guide below, we indicate where the two versions of Norwegian differ.

Notice the list of important official documents "websites" and then "books and newspapers" How long is it going to be until I read "websites" and historical source material such as "books, newspapers, parchment scrolls, Papyrus scrolls, and cave paintings" ?

Henrik Ibsen is one of my favorite authors. I don't know if he wrote in Bokmal or Nynorsk or, shudder, Sami.
OK I admit it I'm a addict, but I did learn something staring at their red to pink to blue to indigo map. Thanks to Barack Obama, who is turning Virginia blue, I noticed that the westernmost point of Virginia
83° 37'W is to the west of the westernmost point in West Virginia 40° 40'N.

However I am comforted to learn that North Dakota is unambiguously to the North of South Dakota.

Do Y'all to learn something new every day too ?
This is a joke right


Too Much Hot Air

Bjorn Lomborg: Most rhetoric about climate change is unhelpful.
Milbank: Energy Creates Friction
RePosted: When Gas Was $1

* Robert Novak: The Rise of the Obamacons
* David Broder: What Really Distorts Our Elections
* George Will: Don't Deport the Tech Talent
* Richard Perle: When Good Coalitions Go Bad

I mean not even Fred Hiatt would have such an ultra right op-ed page I mean not even Paul Gigot would do something like that.

Oh it's not a joke ? Just shoot me with one of your newly legal in DC hand guns after the supreme court decision which shocked Italy.
Hell Freezes Over

I agree with Bill Gates about windows.

I go to my add/remove programs place to make sure it is there.

It is not there.

What is there? The following garbage is there. Microsoft Autoupdate Exclusive test package, Microsoft Autoupdate Reboot test package, Microsoft Autoupdate testpackage1. Microsoft AUtoupdate testpackage2, Microsoft Autoupdate Test package3.

Someone decided to trash the one part of Windows that was usable? The file system is no longer usable. The registry is not usable*. This program listing was one sane place but now it is all crapped up.

Quite. Pity Bill Gates can't do anything about it.

* Dear Normal windows user who is not a super genius like Bill Gates (read the whole e-mail at Brad's place).

This is a typo. There is no such thing as a "file registry". You can't edit it by searching for "regedit" (it is not c:\windows\regedit.exe) and double clicking.

In any case Don't. Ever. Do. This.

If you're like me, you really hate the fact that windows treats you like a dangerous idiot, who has to be prevented from modifying anything, or you will mess it up, but This. Time. They. Are. Right.

I never destroyed a computer editing the file registry, but I did come close once (I had saved the old one).

Bill Gates is so right. The "add/remove programs place" was functional. It just took windows 30 seconds just to open mine.

hmm do I really need Microsoft.NET Framework 1.1 Hotfix (KB928366) ?

I'll never know. I don't dare mess with add/remove programs anymore, because I have no way of knowing what the hell they are. Oh if you happen to know that Microsoft.NET Framework 1.1 Hotfix (KB928366) is a virus please tell me in comments.

Ah sigh, I just opened dos prompt and typed cd\ (why the hell does it send me to C:\Documents and Settings\rjw?)then dir autoexec.bat ahh dir dir dirrest autoexec.bat
it is empty. 0 bytes. But just seeing the filename brings tears to my eyes as I remember those sweet long long gone days when I knew what the hell was on my hard disk. I know I'm showing my age but once upon a time, back in the stone age, the stuff on our hard disks was DOS plus stuff we had put on it by using the command "copy " and these two cute little files "autoexec.bat" and "config.sys" which we edited with a text editor.
Gallup Anomaly III, this time it's personal.

Wednesday, June 25, 2008

The Last Contango In Paris.............comment at the Oil drum
(May 22 2008)


To the greatest extent in the history of oil futures trading, oil prices are now in continuous contango--that is, oil futures get progressively more expensive each year into the future.

Raw8 comments

ts not a lot of buyers. It looks like one..or a couple.

And with the IEA news this morning, we know why - but they said that in paris in April -guess the journalists weren't listening

0 Up Down
Comments can no longer be added to this story.

It's over
Milton Friedman Meets Robert Klitgaard

I encountered the writings of Robert Klitgaard twice.

I read "Tropical Gangsters" an excellent book on his experience working for The World Bank in Ecuatorial Guinea which is not to be confused with the epymenus epyminus (oh hell I'll never guess the spelling of that word ) CD by King Creole and the Coconuts.

Years earlier, when I was a freshman I think, I saw students protesting "The Klitgaard Report" to the president of Harvard, in which he noted the fact (it's a simple calculation) that African American students at Harvard had a lower GPA* than would be expected conditional on SAT scores. Brad DeLong, who actually read the report, says he detected no sign of racism in it.

Now obviously we all knew that average SAT scores of African Americans are lower than those of Euro-Americans (also known as honkies) so the SAT was presumably biased against African Americans (I mean if interpreted as a measure of smarts not assimilation in the dominant US cultural tradition). A justification for affirmative action which I personally liked a lot was that a reasonable prediction of performance would be standard measures (like the SAT) corrected for disadvantage. Thus I was most distressed by the Klitgaard report (not enough to go to the protest wehre Derek Bok talked to angry students as he often did because I mean he just did a simple calculation and the data ambushed him).

Now I understand. First lets assume that the cultural bias in Harvard grading is the same as the cultural bias in the SAT so race has the same effect on the expected value of the Harvard GPA as on the SAT score. Now note that an SAT score is the sum of the expected SAT score for that individual and a disturbance term which is specific to that test that day. The disturbance term includes did the student have a cold that day etc and also, if the student guessed on questions, did the student guess right. Fact is, if someone takes the SAT twice he or she will get different scores.

Given the fact that the distribution of SAT scores of African Americans is lower than that of Whites (first order stochastic dominance) if one has an African American and a White American with the same SAT score, one can rationally (and illegally) infer that the African American probably had a good day that day and the White American a bad day, that is that the expected value of the day specific disturbance is higher for the African American than for the White American.

Already this implies the Klitgaard effect even if the effect of race on expected SAT score and expected GPA is the same.

Of course that's not the half of it. Even without colds and lucky guesses and such, the SAT is correlated with GPA but they are not measuring the same thing (whatever it is and whether or not either has anything to do with one's real ability to contribute to the growth of human knowledge and the fullest flowering of humanity which they might because, hell, anything is possible). For example, in the SAT they gave us tiny little passages to read and it was wise to read every word. At Harvard professors don't bother to winnow their reading lists so you have to quickly decide what to skip and what to actually read (unless you are Brad DeLong and read 1000 words a minute and never learned that skill and is suffering from that lack now). So for the same SAT score, one would guess that the African American student has more ability to read every word and understand compared to his or her ability to decide what to read when he or she doesn't have time to read every word.
Ergo** Klitgaard effect.

Now even if the SAT has a particularly strong cultural bias so race has a bigger effect on expected SAT score than on expected GPA, the measurement error statistical discrimination bit can imply Klitgaard's result if it outweighs the SAT is biased effect.

OK now sticking with GPA as our end point, I note that even if 11% of people who would get a harvard GPA over 3.9 (Harvard is different 4 is the max) are African American, this won't be true of people admitted to Harvard if 11% of admitted students are African American. It's that disadvantage and cultural difference and stuff makes the predictors of performance less accurate. Getting a student with an over 3.9 GPA requires that there be such a student and that one detects him or her and that you don't have to choose between him or her and the son of a super rich alumnus who will give tons of money if you admit his son but it is neither gross class bias or bribery because Harvard is different and superior and you don't understand and an institution struggling to get by with an endowment of only I don't know how much more than $ 40 billion***
has to make some compromises.

*Harvard called it something else like a "cube" because Harvard is superior and so it has a superior measure of grades)

** I never heard a Harvard student use that word except when denouncing "Ergo" a really dumb libertarian student magazine published by people who claimed some affiliation to MIT.

*** I note that the person who will start managing all that money in one week, Jane Mendillo seems to be neither male nor anglo. Another glass ceiling broken. Now she can decide whether to bail out a firm run into the ground by Jenna Bush like a predecessor of hers did for Harken energy (high treason since Bush is a Yalie).
Over at Economists View Winslow R. says...

Robert Waldman wrote: "You know what else? Race exhibits a substantial, income-independent influence on consumption -- Black households consume less than White households with the same income."

Anne posted a article yesterday showing that blacks with the same credit scores, income etc. pay higher interest rates than whites. I don't believe subprime interest payments would be included in your consumption number.

It sure wouldn't be included. When I wrote consumption I should have written consumption of non durables and services so not even services from cars let alone houses.

The phenomenon noted by Anne can perhaps, in part, be explained if banks are (illegally) using Friedman's logic. That is called statistical discrimination. The idea is that bankers rationally decide that if there is a Black and a White family with the same current income, the expected value of future income of the Black family is lower, so they are a more risky borrower.

This is just as illegal and unfair to the individual as discrimination due to hostility or irrational prejudice. There is a fairly large literature on the possible magnitude of statistical discrimination in labor markets. It explains a tiny fraction of racial wage differentials.

I would guess it is that way for interest rates too.

Statistical discrimination can be distinguished from discrimination due to hostility (taste) or irrational prejudice using, you guessed it, statistics.

With a lot of data, one can estimate foreclosure rates as a function of current income, credit score, and race. Then estimate interest rates as a function of the estimated foreclosure rate and race. The second coefficient on race is an estimate of discrimination other than statistical (hostility, irrational prejudice, whatever). The effect of the first coefficient on race on average interest paid by race is an estimate of statistical discrimination.

Statistical discrimination is just as illegal as discrimination due to hostility (note the phrase appears in the law) and it is just as immoral and unfair. However, it is economically rational in the sense that the bank benefits from its tort while a banker motivated by racial hostility will have to pay for the pleasure of shafting African Americans. Thus market selection will not eliminate statistical discrimination.
I just thought of something.

It was triggered by this "studies show that race exhibits a substantial, income-independent influence on school achievement," (don't blame Matt he's just the messenger and is making a very good point about something else).

You know what else ? Race exibits a substantial, income-independent influence on consumption -- Black households consume less than White households with the same income.

Few suggest this proves that Blacks are more prudent and patient than Whites. It is similar to the information on school achievement, Blacks have outcomes similar to poorer Whites.

The economics profession's favored explanation for the consumption fact is that consumption doesn't depend only on current income but also on permanent income (not at all on current income if people are not liquidity constrained and rational). Blacks are on average poorer than Whites. A Black household at say the 50th percentile of the income distribution is more likely to have had an unusually good year than a White household with the same income.

The income measure which is likely to explain school achievement and consumption is income averaged over a long period of time (lagged income for school achievement and, I suspect, consumption).

Now it is possible to construct a race specific mapping from current to permanent income (using the PSID say) and use that to see if there is a permanent income independent difference in school achievement. However, just using current income as a control is a mistake.

Another way of looking at is it that current income is permanent income plus noise so the coefficient of say achievement on current income is the coefficient of interest (achievement on permanent income) biased down by errors in measurement of permanent income. Thus one might impose coefficients higher than the estimated coefficients.

Milton Friedman first considered the effect of measurement error on estimates when arguing that the true elasticity of consumption with respect to permanent income is 1 even though the elasticity estimated with cross sectional data is less than one. He thus reconciled the cross sectional estimates with the aggregate time series evidence that the savings rate doesn't increase systematically with economic growth.

This suggests a constant correction factor which can be applied to other estimates where current income is used but permanent income is the variable which one wishes one had.

Tuesday, June 24, 2008

Optimal Capital Income Taxation

Update II: The internet is wonderful beyond belief. A reader who wishes to remain anonymous converted this post into a *.tex file (which I'm keeping for myself) and a *.pdf file so you don't have to read math in plain ascii.

I am very grateful to *********************************** and love humanity and the web and just never imagined something like this would ever happen.

update III the cover letter edited to remove identifiers and a phrase (my bold)


I found your blog post on income taxation really interesting, but I had a hard time reading the math in plain text. So to read it, I converted it to latex and made a real article out of it. It was only to scratch my own itch, but I figured you might have some use for it. It's attached as a PDF and tex source file.

If you publish it on your blog or whatever, I'd prefer you to not credit me for conversion or anything. I did this while I really should have been working, .... . Feel free to do whatever you want to it, as long as you don't credit me (now that's an interesting license)


update: Ask and ye shall receive. I begged Mark Thoma for a link to this post and he gave me two (scroll down to extreme end. Hmmm I don't want to admit that this will create a massive begging e-mail SPAM moral hazard problem, but it will. I will, however, attempt to make this post less ultra-wonky in exchange. Thus I add an

Abstract: It is well known that, in standard growth models, the optimal tax on capital income goes to zero asymptotically. Even some serious economists (cough
Glenn Hubbard cough) seem to have decided this means that capital income taxes should be eliminated right now. However, asymptotically we'll all be dead. One can tell more if one looks at the simplest cases of standard growth models: an aK model with optimizing consumers who have logarithmic utility or a Cass-Koopmans model with Cobb-Douglas production and logarithmic utility (OK that was wonky but it's about assumptions so I have to be honest). Consider such an economy in which the distribution of wealth is unequal at time 0. A utilitarian state would want to redistributed income. The first best way to do this is with a lump sum transfer. Let's rule that out by setting an upper limit on the tax on wealth (or an upper limit on the tax on capital income). What is the best policy ?

The best policy would be to tax capital income at the maximum allowed by the assumption and use the revenues to reduce inequality until perfect equality is achieved. After perfect equality is achieved, there is no more reason to tax and taxes are zero. Thus, as noted above, the optimal tax goes to zero in the long run. The reason is that it is optimal to tax as much as is allowed by assumption so long as there is any reason at all to tax. Then stop.

A simple minded application of the model to policy would suggest that we should tax as much as we can until everyone is perfectly equal. Now the model is not the world and this would be a terrible policy. However, the argument for roughly the opposite policy is based on the same silly model plus totally turning its implications upside down by pretending that time has already gone to infinity.

The assumption of logarithmic utility is not at all innocent. It makes a huge difference. A more general assumption (which is standard in the literature) is constant elasticity of substitution utility. In this case the optimal policy depends on the intertemporal elasticity of substitution of consumption *and* on whether the state can pre-commit to a policy that it would like to change later if it could.

If the state can't precommit, the implications are just like those for logarithmic utility described above: tax as much as possible so long as there is any reason to tax at all, then stop when everyone is perfectly equal.

With precommitment, if the intertemporal elasticity of substitution is less than one (as are all empirical estimates of said elasticity) the result is to tax even more, that is to tax as much as possible until the initially rich are as poor as the initially poor, then tax them some more.

These conclusions follow from analysis using standard techniques of the simplest case of the standard model. I think that they are not noted in the literature. I conclude, as always, that to the economics profession mathematical analysis of stylized models is taken seriously exactly so long as the conclusions fit the prejudices of economists. Thus when an economist says "Mathematical analysis which you wouldn't understand of my model shows that X is a bad policy" you should hear "I don't like X."

original ultra-wonky post follows.
It is a well known result that, in standard economic models, the optimal tax on capital income is zero in steady state, that is, that the tax on capital income should go to zero as time goes to infinity.

A very common response is to assume that time has gone to infinity and eliminate taxes on capital income. This conclusion is drawn by real economists not just Arthur Laffer.
Of course it doesn't follow. This post presents the simplest possible model of optimal capital taxation, motivated by a desire to redistribute income, to show just how much it doesn't follow. If one were the government of this model economy, the optimal policy would be to tax capital income at the highest possible rate until all inequality is eliminated.

Thus a dynamic model of capital income taxation can imply optimal redistribution which, in the long run, is much greater than that in a standard static model of taxation of labor income. Even though the tax is distortionary, the optimal policy is to tax as much as possible until all inequality is eliminated.

This special case is consistent with the general result, since the state which has eliminated all inequality at say time T stops taxing at time T. However, it does so not because it only has access to distortionary taxes, but because it has no desire to tax. If the lump sum tax fairy arrived (by surprise) after T and made it possible for the state to redistribute at will with no distortions, the state still wouldn't tax.

There are costs due to distortionary taxes, but with optimal policy the consequence is lower average consumption and not inequality.

This result is, of course, model specific and the model is extremely stylized even by the standards of economic models (I plan to solve it typing away here and have not yet written anything down). A key assumption is that utility is logarithmic, this makes things much simpler. For a general CES utility function, the optimal policy depends on the intertemporal elasticity of substitution in consumption. For elasticities lower than one (that is all the ones that fit any data) the result is even more extreme as the optimal policy makes those who start rich poorer than those who start poor (he who is first shall later be last for the income effect is stronger than the substitution effect).

The Model (I warned you it was simple)

Y1) = aK so r = a.

GNP is a constant times capital. No one works. This assumption is not critical similar results hold for a Cobb-Douglas production function with labor.

Agent i chooses Cit to maximize the present discounted value of the log of consumption subject to a lifetime budget constraint. The rate of time preference is rho.

2) rho= r = a

So with no taxes the consumption of each agent is constant. This is not needed for the results.

at time 0, there are two groups of people each with measure one of members: The rich who own the capital and the poor who own no capital. For simplicity only assume each rich person owns the same amount of capital.

From now on r is the representative rich person and p is the representative poor person so consumption at t is

3) Ct = Crt+Cpt

The rich own Krt and the poor own Kpt.

There is a utilitarian state which aims to maximize the sum of utils. Clearly it will do something as the poor consume nothing without its help so laissez faire welfare is negative infinity. Government consumption is zero, the state just taxes and transfers. It has wealth Kgt so

4) Kt = Krt+Kpt+Kgt

In the model Kgt will be positive so public debt is negative, that is, there is a public endowment. This is very important.

If the state can tax at will, it will immediately seize half of initial wealth Ko and give it to the poor and then never do anything again. This is the first best outcome with optimal lump sum taxation.

To make the problem interesting, assume that the state can't confiscate capital. In particular, I assum so for tax rate Tau_t with Tau_t less than or equal to 1, revenues are (Tau_t)r(Krt+Kpt). The exact maximum rate is not critical. It can be 50% or 200% and the qualitative results don't change.

I also have to assume that Tau_t is a integrable function of t and I will assume that it is continuous except at a finite number of points of discontinuity (one in the optimum). This last is a standard assumption in optimal control, but it is usually not stated.

The state uses the revenues to finance transfers to the poor subject to an inter-temporal budget constraint that the present value of tax revenues is equal to the present value of transfers.

In this model (and in the more general models studied in the literature) the optimal public debt is negative, that is the state builds up a public endowment (this is critical for the results including the result that Tau_t goes to zero.

The poor are liquidity constrained at time zero. The utilitarian state is very paternalistic and uses this fact to control the consumption of the poor, that is, to make it what it would be without distortionary taxation. Formally, the state can control the consumption of the poor and so it will be optimal.

Optimal consumption of the poor is constant (give rho = r) and equal to the present value of transfers from the state. This can only happen if the poor are liquidity constrained so the state makes sure that they are. Optimal Kpt=0.

The state gives a constant transfer to the poor who rationally choose to consume exactly all of it.

The non-trivial problem is how does the state get the money ?

Now the assumption of logarithmic utility has a very convenient property. The income and substitution effects of different after tax interest rates exactly cancel so consumption is a constant times wealth.

5) Crt = RhoKrt = rKrt

One very convenient implication of this is that there is no possible problem of dynamic inconsistency of the optimal policy. Threats and promises about future taxes have no effect on the rich so a state which can pre-commit to some tax plan will impose exactly the same tax plan as the state which can't.

This also means that the state can control Krt so long as the restriction Tau_t <= 1 is not binding and that the state can always change policy to increase Crt.

Now consider the effects of capital income taxation on capital formation.

6) dKrt/dt = -(Tau_t)(rKrt)

Krt is decreasing in Tau_s for all s less than t.

Cpt is chosen by the state.
Crt is increasing in Krt

So, for fixed transfers to the poor, C_t is decreasing in Tau_s for all s < t.

The standard argument shows that Tau_t goes to zero as t goes to infinity. In fact, there is a T such that optimal Tau_t = 1 if t>T and optimal Tau_t = 0 if t>T.

Recall that the state can control Krt so long as the restriction Tau_t <= 1 is not binding and Tau is continuous at t, and that the state can always change policy to increase Crt. The state's problem can be re-interpreted as maximize welfare choosing Cpt and Crt (except when the restriction is binding) subject to a social budget constraint that the present value of total consumption discounted at rate r is equal to Ko. This means that for any t1 and t2, if Tau_t is an integrable function of t with a finite number of points of discontinuity which don't include t1 and t2 and Tau_t1<1 and Tau_t2 < 1 then

7) 1/Crt1 = e^(-r(t2-t1))/Crt2

This is a standard result in optimal control.

Now given optimal savings by the rich

8) 1/Crt1 = e^(integral as s goes from t1 to t2 of -r(1-tau_s))/Crt2

So if Tau_t1<1 then for any t2 such that Tau_t2<1 then the integral of Tau_s from s=t1 to s=t2 is zero.

Given continuity of Tau at t1 if Tau_t1<1 then there is a Tau_2 very close to t1 such that Tau_t2 < 1 so Tau_t must be zero in the interval from t1 to t2 so, using continuity again, Tau_t1 must be zero.

Thus the optimal tax must be 1 for a while, the jump to zero and stay at zero for a while.

So far I haven't excluded the possibility that it is switched back up to 1. The math so far says that Tau_t must be zero or one.

This is standard optimal control (including the continuity except for a finite number of jumps assumption which is rarely stated explicitly).

Recall also that Tau_t can always be cut so the state can always cause Crt2 to increase. This means that if t2>t1 then the integral of Tau_s as s goes from t1 to t2 must be less than or equal to zero. Since Tau_s must be zero or 1, the only way this is possible is for Tau_s to be zero for all s t2>s>t1.

That is the optimal policy is of the form
There is a T such that if t < T Tau_t = 1 and if t>T Tau:t = 0.

So far this is standard analysis. Note that Tau_t does indeed go to zero as t goes to infinity. In this simple model it goes all in one jump from the maximum allowed to zero.

Now consider t>T so Tau_t = 0. It is possible to prove that for all t>T

9) Crt=Cpt.

This is actually easier than proving that Tau_t jumps down from 1 to 0.

The argument is very simple. If Tau_t is zero for t>T then the deadweight cost of introducing a tiny tax on (or subsidy to) capital income with |Tau_t|= epsilon for t3< t< t4 with t3>T and t4>T is second order in epsilon.

If Crt is not equal to Cpt and the tax revenues are given to the poor (or taken from them if the tax is negative) there is a first order in epsilon effect on welfare due to redistribution. Therefore, unless Crt=Cpt, there is some epsilon so small such that a tiny tax or subsidy is better than taxing exactly zero.

Thus the optimal policy is to set the maximum tax on capital income which is allowed by the assumptions and keep the tax at the maximum untill perfect equality is obtained.

Then, as noted by Judd and Chamley, the state stops taxing capital income. It does this because its aim was equality and it has achieved perfect equality as fast as possible given the upper limit imposed by assumption on the tax on capital income.


The math below will be even less rigorous and less comprehensible (if possible) than the math above.

The key assumption is that utility is logarithmic. This means that future taxes have no effect on behavior so there is no possible dynamic inconsistency problem. This happens because income and substitution effects exactly cancel. In a more general model the instantaneous utility is a CES function of consumption

10) ut = (1/(1-sigma))Ct^(1-sigma)

All existing empirical estimates of sigma are greater than one (and believe me I published a paper in which it would have been very very nice to be able to assume sigma<1 (Alessandra Pelloni and Robert Waldmann (2000) "Can Waste Improve Welfare ?"
The Journal of Public Economics. vol. 77 pp 45-79.)

This means that for someone who has only capital income, the income effects of future taxation of that income are greater than the substitution effects. That is if they know they are going to be taxed more in the future, they consume less.

I think the analysis that shows that Tau_t is 1 from t=0 to some T and then zero works fine for any CES utility function. Just substitute the marginal utility of consumption where you see 1/consumption and it all goes through.

It is also clear that, if the state can not precommit, then for t>T Crt=Cpt. That only depends on the utility function being concave.

However, if the state can pre-commit, it might pre-commit to a T such that Crt is not equal to Cpt for t>T. Define T1 as the t such that if tau_t is 1 if t< T1 and 0 if t>T1 then for s > T1 Crs=Cps.

In the model, the inefficiency due to the restriction on tax policy which rules out lump sum taxes and transfers is that the consumption of the rich is too high for all t< T. Choosing T slightly greater than T1 will reduce this consumption (income effect stronger than substitution effect). This will mean that, for t > T, the initially rich are poorer than the initially poor and Crt < Cpt. This imposes a cost which is second order in T-T1 while the benefit of making the rich consume less for t< T is first order in T-T1. Therefore, if Sigma>1, the optimal policy is more extreme than taxing the rich as much as possible until perfect equality is obtained. It is to tax the rich as much as possible until they are slightly poorer than those who were poor at t=0. Thus, for sigma>1, for optimal taxation of capital income, there is more than 100% redistribution. Optimally, he who was first shall later be last.

In contrast many of the other assumptions aren't critical at all. Below I return to the assumption that utility is logarithmic so the consumption of the rich is a constant times their wealth and the state has no reason to threaten to make them poorer than the poor in the long run.

As noted above, the reasoning of the last section is much more general than the model. It is not necessary to assume that the poor start with exactly zero wealth. If they start with some wealth, they consume all of it and then live on the transfers. The state would like to prevent this but it can't. During the period when the poor have privately owned wealth, the analysis that says Tau_t must stay one or jump permanently down to zero is based on them too, but it still holds. The analysis that after T Cpt = Crt goes through fine even if the poor still have private wealth at T.

Now go back to the assumption that the poor start with zero wealth.

The results obtained in the previous section obtain if there is a Cobb-Douglas production function and the poor are endowed with labor which they supply inelastically (and numerous enough compared to the rich to be poorer than the rich). In this case, for optimal tax and transfer policy, the poor consume their labor income plus the transfer. With a Cobb Douglas production function with constant labor supply wages are a constant times K so the consumption of the poor is a constant times K and there interests are served by maximizing K by minimizing the consumption of the rich. The way to do that is to tax capital income at the highest rate possible. In the Cobb-Douglas case, less redistribution is needed to achieve perfect equality so T is lower.

I think the analysis also works, for the Cobb-Douglas production function, if the rich have labor income from inelastically supplied labor as well as capital income. I'm not sure of this but I don't see anywhere in the argument anything about the
rich not having labor income.

From now on I return to the aK model. In the discussion below I assume that no one works and that all production is pre-tax capital income.

Similarly, I think a similar analysis works if the state must make the transfer equally to all citizens and so must give back to the rich. Like wages in a Cobb Douglas model this means that the income of the rich is a constant larger than r(1-tau_t) times K, however they still get r(1-tau_t) on their savings. I don't see how this changes the result that tau_t must be one for a while and that if it falls to zero it stays there. I certainly don't see how it can change the result that if Tau_t = 0 then Crt=Cpt. I think the effect of the restriction that the transfer must be equal to everyone is that T is infinity, that is the state taxes capital income at the maximum possible forever.

Now go back to the assumption that the state can give to people it indicates by name but must tax a function of an observable quantity (this is what the US constitution says). Thus the state can give to the poor and not give anything back to the rich.

I don't know where to put this, but a radical change in the assumptions of the model has no effect at all on the analysis. It works if the tax is used to finance government consumption not transfers. Consider a model with all citizens starting with perfectly equal wealth. Individual utility is the log of individual consumption plus a concave function of government consumption. Note I assume that utility is additively separable in personal and government consumption. This is important. For one thing, it implies that individual wealth will remain equal. Note also that the shape of the function of government consumption doesn't matter much and doesn't have to be the same for different people. The argument that Tau_t is one for a while then falls to zero and stays there didn't depend at all on the reasons the state wanted the money. The conclusion that after T Crt=Cpt now becomes after T the marginal utility of individual consumption for each and every individual is equal to the sum over citizens of their marginal utility of government consumption. That is, if r=rho, the fact that the state can't tax lump sum and must rely on distortionary taxes has no effect on the constant value of Gt/Ct for t>T. For r = a > rho I need to know about the income expansion path of demand for G. The result holds if utility is the log of personal consumption plus a constant times the log of government consumption.

Now I go back to the model of redistribution. From now on G=0 and there are poor people who start out with zero wealth.

The assumption that the state can build up an endowment is critical. One might argue that such a policy would reduce economic efficiency as the state would meddle with management of firms it owns. This assumption is critical to the published analysis that leads to the conclusion that Tau_t must go to zero as t goes to infinity. However, I think the results hold even if the state is not allowed to build up an endowment.

I now assume a balanced budget constraint so that transfers the to the poor at time t equal capital income tax revenues at time t. This means that the state can no longer keep the poor liquidity constrained and control their consumption. That was the point of building up a public endowment. If Tau_t goes to zero (it will) then the poor must save. If they save their capital income plus a fixed fraction of the transfer, then their consumption is proportional to that of the rich so long as the transfer is positive. This means that it is optimal since so long as they save they have the same Euler equation as the rich. The fraction of the transfer which is saved must be positive if Tau_t goes to zero as t goes to infinity.

This means that, so long as the transfer is positive higher taxes on the rich imply a more rapid increase in Kt= Kpt+Krt. The argument that T must be 1 or zero works. The state has the same degree of control over their consumption that is total if Tau_t<1 and can increase the consumption of the rich and decrease the consumption of the poor if Tau_s = 1 for all s<=t. The first order conditions (7) and (8) for rich and the analogous equations for the poor are the same. if Tau_t1<1 and the integral from t1 to t2 of Tau_s is not zero for some t2. then the state can change policy in a way that satisfies its budget constraint and helps the rich and hurts the poor (the change which was good if the state can build up an endowment) or do the opposite and help the poor and hurt the rich. The second would increase welfare so long as the marginal utility of the poor is greater than that of the rich at time t1.

So I think the results hold even if the state is not allowed to build up an endowment. This restriction is very costly, because the poor like the rich will consume more than is optimal for t< T, but I think that the optimal policy is still there is a T such that Tau_t equals one for t< T and 0 for t>T and that for t>T Crt=Cpt. The effect of the balanced budget restriction is to reduce the consumption of both for t>T but it should still be equal.
A comment I [tried to make] over at Economist's view which is ironic given the post that will be above.

Krugman argues that increasing home ownership should not be a goal of public policy

Brad DeLong plays devils real estate agent's advocate

You can make a political-economy argument that local communities work best on a political level when a majority of the voters have a big equity financial stake in the health of the community via homeownership (as opposed to renting), and an economic-myopia argument that encouraging homeownership is one of the few tools we have to push personal savings up toward what they should be. But you have to make those arguments: you can't just assume that widespread homeownership is a very good thing.

Winslow R. comments up thread (don't even ask how the thread got to the topic)

I'm in favor of opening up the whole government grant making process to real competition. How about a $300 million prize for an economic model that matches reality?

I comment on Winslow R and don't buy Brad's second argument. In passing, the first is ancient and important and basically valid although one way that homeowners invest in the quality of the community is by keeping undesirables out and well NIMBY. A country of small communities which care only about their self interest, is not always better than one of rootless cosmopolite renters.

Winslow you are way too stingy. Given the amount of effort that would be needed to make an economic model which matches reality $ 300 million is chump change. Think like curing cancer or maybe flying to Mars. We are waaaay more than $300 million of effort from a realistic economic model. And that is assuming that it is even possible. Now if you offer me $ 300 billion, I might try but if you are only offering $ 300 million I'll stick to fun models which might clarify thought but don't fit reality.

Brad DeLong suggesting opening a debate on possible positive externalities of home ownership. The argument that homeownership causes increased savings which is good because people are myopic really depends on how easy easy financing is. In most countries, the minimum down payments on houses allowed by banks are a significant fraction of the price of the house (50% minimum is not unheard of). In those countries, promotion of home ownership would be promotion of saving.

However, if there are no money down loans available, then encouraging home ownership might shift consumption to consumption of housing services (if people buy bigger houses) and shift national accounts from consumption of durable goods to housing investment, but it could easily reduce the amount of money available for investment in productive capital.

Negative amortization loans and home equity loans have made it possible for people in the US to consume more than they could have consumed if they rented.

It is true that owners make consumption savings decisions facing the HELOC interest rate not the T-bill interest rate (higher rate as they are borrowing not investing). The evidence tends to suggest that interest rates have no noticeable effect on consumption savings decisions in the real world (shocking yes but that's the evidence). Now this is consistent with a substantial effect (for one thing it is basically impossible to isolate the substitution effect (the one that matters for the discussion) from the income effect. However, the effect can't be a game changer . Yes, if true, this would mean that not only supply side economics but also a lot of perfectly respected fresh water economics is hokey. So what else is new.

My honest guess is that the housing interest deduction causes less investment in productive capital than a similarly sized cut in income tax. Eliminating the mortgage interest deduction without any other changes would imply a huge increase in investment in plant and equipment (ignoring the huge recession from a sudden drop in consumption including consumption of housing services).
Wish I'd Said That

it would be so nice if someone could relate it [FISA] to the real world of the present day, rather than trying to make me believe that bearded religious nutters living in caves are more cunning and sophisticated than the Soviet Union. (Yes, the 9/11 hijackers did manage to escape the detection of the Bush administration. So did a class 5 hurricane.)
Dean Baker directs me to a misleading article by Lori Montgomery in the Washington Post

Montgomery claims to critique Barack Obama's tax proposals. However, she doesn't even describe them accurately. In particular she leaves out the proposal to extend FICA to individual wage and salary income over $250,000.

Here is all of her discussion of Obama's proposals

On the presidential campaign trail, Democrat Barack Obama promises to "completely eliminate" income taxes for millions of Americans, from low-income working families to senior citizens who earn less than $50,000 a year.


Obama has not made balanced budgets a priority. Instead, he promises numerous tax cuts likely to make the situation worse, including subsidies for education, child care, homeownership, "savers" and people who work. Obama also vows to extend the Bush tax cuts for families who earn less than $250,000 a year. According to an analysis by the Tax Policy Center, a joint project of Brookings and the Urban Institute, his tax plans would deprive the Treasury of nearly $900 billion in his first term, and increase the national debt by $3.3 trillion by 2018.

That analysis excludes some expensive proposals, including promises to close the gap in prescription drug coverage for Medicare recipients (estimated to cost about $400 billion over 10 years); to introduce government-funded health insurance for the uninsured (which the campaign estimates would cost as much as $65 billion a year); and to make large-scale investments in energy, education and infrastructure, which Obama dubbed his "competitiveness agenda" during a speech this week in Flint, Mich.

The analysis also excludes a possible reduction in corporate tax rates, which Obama first mentioned in an interview this week with the Wall Street Journal. Campaign officials said Obama would pay for the rate reduction by closing corporate tax loopholes.

Note there is no mention of the FICA increase. Now part of the blame belongs to the Tax Policy Center which performed a huge amount of analysis and left that little bit out.

The amount of money involved is gigantic -- roughly on the order of the cost of the making work pay tax cut ($500 per individual or $1,000 per family phased out so going to zero at family income over $70,000).

I think the point is that social security taxes don't count as taxes (just like military spending doesn't count). That's how Reagan can be remembered as a tax cutter in spite of the huge FICA tax increase he signed into law.

This goes both ways. Since one isn't supposed to use the social security surplus to balance the deficit in the general fund, Obama's huge tax increase goes unmentioned.

I think there is also the fact that people assume that the income of the rich is capital income not labor income. This is simply false. In 2005 wage and salary income of the richest 0.01% was greater than their capital income (warning huge spreadsheet click the big read "UPDATED" and wait a while then go to figure 4)

Another huge chunk is "business income" including partnership shares and S-corporate income. Some of it is subject to FICA and some isn't. It isn't really even worth trying to figure out what fraction is currently subject to FICA, because if Obama's reform passes, less will be as lawyers and accountants figure out how to profitably redefine enterprises.

For tax units from the 99th through the 99.99th percentile it isn't even close. More than half of their income is wage and salary income.


Monday, June 23, 2008

I have not been able to post comments at in well ever I think.

My comment was

Like the 4th amendment, FISA does not distinguish between US citizens and non citizens. It protects US persons which include US resident citizens, US resident non citizens and US corporations. US citizens living abroad (such as myself) are unprotected. If I were to be protected from the NSA, I would have to be protected by La Repubblica Italiana. However said Republic does no such thing.

The amazing thing is that an Italian who lives within sight of the NSA listening station do not know what it is (I checked). The usual hypothesis is "It's something to do with air traffic control" which is exactly (except for the language) what my dad said about NSA central in around 1973 before the US public found out what it was.

The Italian public has been informed (that's why I know what the huge parabolic antennae near avezzano are).

Oh and, by the way, Jefferson was the one who talked about "a decent respect to the opinions of mankind." The phrase is in the declaration of independence not to be confused with the more modern declaration of "suck on this".

So why can't I post this comment ?

I have to log in to my typekey account to do so. is convinced that I am logged in. gives me the following error message

Internal Server Error
The server encountered an internal error or misconfiguration and was unable to complete your request.

Please contact the server administrator, and inform them of the time the error occurred, and anything you might have done that may have caused the error.

More information about this error may be available in the server error log.

Additionally, a 500 Internal Server Error error was encountered while trying to use an ErrorDocument to handle the request.
Apache/1.3.36 Server at Port 80
Useful Information

What is useful information ? This is likely to be debated quite a bit in the USA with increasing intensity after January 20 2009. The Bush administration has justified many of their crimes by claiming that they provided "useful information" about al Qaeda. This would not be a justification if it were true, but is it ?

One way to decide is to look at all of the data collected via torture, warrantless wiretapping, "enhanced interrogation," and torture outsourced through rendition and see if there is useful information in there. This is setting the bar too low, not just morally but also to decide what is and what is not useful information.

There is no law of conservation of useful information. If a mixture of useful information and falsehoods contained the same amount of useful information no matter how numerous the falsehoods, then we could get useful information out of chimpanzees hitting random keys.

This is obvious of course (hey you're reading it here). If the statement "P" is useful information so is the statement "'P' is true" however the two statements
"'P' is true" and "'P' is false" together amount to "'P' is meaningful" which we can determine just by thinking about "P".

No doubt given information on al Qaeda obtained via reliable methods, it will be possible to search the pile of data generated by the Bush administrations criminal means and finde similar statements. In this case the useful information was provided by the search (one of whose ingredients was the useful information).

Only if the cost of the miss-information and diss information in which the valid information is buried is considered can we decide if the mass of data was useful or not.

I'd guess that the fact that we learned via torture outsourced to the Egyptians of Ibn al Shaik al-Libi the falsehood that Iraq was teaching al Qaeda terrorists to use chemical and biological weapons by itself will outbalance all useful information actually obtained via illegal means.
Kevin Drum notes that the FISA "Compromise" doesn't just give retroactive Immunity it approves massive data mining.

The details are still murky, but what the NSA appears to be doing is very large scale data mining on virtually every phone call and email between the United States and overseas, looking for patterns that fit a profile of some kind. Maybe twice or three-times removed links to suspected terrorist phone numbers. Or anyone who makes more than 5% of their calls to Afghanistan. Or people who make a suspiciously large volume of calls on certain dates or from certain mosques. Stuff like that.

Then, if you happen to fit one of these profiles, your phone is tapped and an NSA analyst decides if you're really a terrorist suspect. This apparently happens tens of thousands of times a year and most are washed out. Perhaps a thousand or two thousand a year are still suspicious enough to pass on the FBI, and most of these wash out too. At the end of the year, five or ten are still of enough interest to justify getting a domestic wiretap warrant.

Is this useful? Maybe. But we're not listening in on al-Qaeda's phone calls to America. We're tapping the phones of anyone who fits a hazy and seldom accurate profile that NSA finds vaguely suspicious, a profile that inevitably includes plenty of calls in which one end is a U.S. citizen. But the new FISA bill doesn't require NSA to get a warrant for any of these individuals or groups, it only requires a FISA judge to approve the broad contours of the profiling software. This raises lots of obvious concerns:

As Drum argues, the algorithms must be based on hunches and guesses. If we had a large amount of data on the behavior of terrorists, we could use computers to find patterns. As it is, the patterns start as a human guess. The fact that there is a huge amount of number crunching between the guess and the referral to the FBI does not make the conclusion more reliable than the original guess -- that is no good at all.

Now there is a possible good final outcome. My guess (no good at all) is that the NSA data mining has not been useful. The Bush administration can hide that fact from the public and congress, but they won't be able to hide if from possible President Obama.

I hope that, roughly a year from now, President Obama says "I conclude that warrantless wiretapping and enchanced interrogation are not only crimes but also mistakes. So I will ask Congress to re-revise FISA and the MCA etc." Now the power based on having more information will be in his hand (of course the NSA and the CIA will leak hints that he is wrong, but he will be able to say that the leaks are both criminal and misleading). That would be OK.

That is, I hope (or wish I hoped) that Obama has just decided that he is better able to fight this as President than as a senator.

On the other hand, I admit that it is more likely that he will decide that it is OK as he will just prevent abuse with executive orders and not fight in congress to reduce his own power. Thus the laws and precedents will remain as an invitation to abuse by Obama or his successors.

Not to mention that while Obama assumes that he will be President soon, Clinton assumed that she would be the nominee. To increase his chances of winning a tiny amount, he is doing things that will be very damaging if McCain wins.

Thursday, June 19, 2008

Best News for John McCain in Months!

Rumsfeld repays McCain; declines to back candidate

I'm a bit worried about that "repays". I just hope McCain didn't violate any campaign finance laws paying Rumsfeld for this.

Clearly Rumsfeld is following the Paul Krugman strategy of bestowing criticism which is more valuable than praise.

I hasten to add that Krugman's criticism is valuable, because most Americans are confused and disagree with perfectly reasonable things that he says.

And really Rumsfeld's motives are a known unknown not to mention a who gives a damn unknown.
Biodiesel from Marine Algae. Three cheers for Shell Oil.

Productuion of Biofuels helps relieve energy shortages and fight global warming. However, it also worsens the world food shortage. A solution would be production of biodiesel using algae grown in areas which currently generate little food per acre (Oceans and deserts).

In this case, obviously, the problem is a shortage of fresh water. That means it is important to know if there are species of marine algae which can be used to make bio diesel. I don't think there are any marine algae as greasy as the fresh water algae currently being used to make biodiesel. However, I didn't know if there is current research on using marine algae to make biodiesel. So I googled and found that Shell Oil is working on it.

Shell Oil to grow biofuels from marine algae

Shell Oil formed a joint venture with HR Biopetroleum called Cellana and they plan to produce biofuels from marine algae. Shell, which owns a majority stake in the venture, will start production of a demonstration facility on the Kona coast of Hawai'i Island immediately.

The announcement is dated December 12 2007 and I have been thinking about this since long before then (of course HR Biopetroleum has been shopping this around for years).

Now back when Shell was collaborating with the evil dictator Sani Abache (you have received spam from fraudsters who claim to be his widow) to exploit Oil in the Niger delta and was thus involved in his repression, I attended a May 1 boycott Shell rally. Now they pollute and mistreat the locals in collaboration with a democratically elected President Umaru Yar'Adua (OK I googled that too but I remembered that his predecessor was O. Obasanjo) .

My boycott Shell pin is a treasured memento of my youth. I think I'll keep it, but I won't boycott Shell.

Also I drink Nestlés instant coffee every day.

Wednesday, June 18, 2008

No Compromise (in Italy)

Over in the USA people are upset about a a "compromise" on protecting telecom companies.

over here Parliament is taking bold action. The Italian Senate just approved the following amendment to a bill which says roughly that roughly all trials for crimes committed before June 30 2002 are to be suspended for one year, but appeals can go forward.

It is purely a coincidence that the trial of the prime minister, Silvio Berlusconi, for suborning perjury in an effort to hide the massive tax evasion by his firm* is nearing completion.

Sospensione dei processi penali relativi a fatti commessi fino al 30 giugno 2002
L'emendamento salvapremier approvato
(Ddl Senato 692 Emendamento 2.0.800

Sospensione dei processi penali relativi a fatti commessi fino al 30 giugno 2002. E' quanto prevede l'emendamento al decreto in materia di sicurezza, approvato dalla maggioranza in Senato, il 18 giugno. Pd e Idv hanno lasciato l'Aula al momento del voto. La sospensione riguarda processi penali relativi a fatti commessi fino al 30 giugno 2002 che si trovino in uno stato compreso tra la fissazione dell'udienza preliminare e la chiusura del dibattimento di primo grado, sono immediatamente sospesi dalla data di entrata in vigore della legge di conversione del presente decreto per la durata di un anno. (18 giugno 2008)

Also all udienza preliminare are suspended.

An udienza preliminare is in front of a judge but the outcome is either the subject is cleared or indicted, so they are like grand jury procedures.

In Italy both prosecution and defense can appeal on the merits of the case (and without claiming there is new evidence) so all trials are double. Double jeopardy is normal practice for people acquitted of extremely serious crimes in their first trial. I think that all defendants except for indigent defendants with irresponsible court appointed lawyers appeal convictions.

*This tax evasion resulted in a fine of roughly $ 150,000,000 at then current exchange rates and zero but no criminal conviction for Mr Berlusconi, because the relevant law on criminal responsibility for false accounting was changed by parliament the last time he was in power.

is the full text of a comment I posted in answer to Paul Krugman's question
"lower and middle-income Americans would be substantially better off under the Obama plan. But where is the money for health care reform?"

Then I couldn't resist adding a long boring explanation as my next comment

To explain my brief answer (which is not work safe in Italy where Fica means ... what John McCain called Cindy McCain*), there are two puzzles in Obama's proposals
1) how does he plan to pay for both health care reform and his middle class tax cut ?
2) why is he raising the social security tax even though it is probably not needed to pay old age and disability pensions ?

I think the two questions answer each other. I think that Obama is planning to pay for health care reform with the donut FICA increase (taxing individual labor income over $250,000).

The numbers add up to, what is for a candidates fiscal promises, rounding error -- the middle class tax cut will reduce the present value of tax receipts by about $ 700 billion and the FICA increase will raise the present value of tax revenues by $ 600 billion .

(I know senator Everett Dirkson said "a billion here a billion there and soon your talking real money" but that was decades ago).

The TPC did not consider the FICA increase in scoring Obama's bout with the deficit (sorry tag tame match Obama and the deficit against the concept of a sustainable fiscal policy).

warning pdf

My personal guess about our kind host (over at that other blog which linked here once) is that prof. Krugman knows exactly what Obama is up to, and is denouncing him for an irresponsible middle class tax cut and buying Republican lies about social security being in crisis, because he knows that such criticism is will gain Obama more votes than any possible praise.

I trust that you progressive wonks who read down into the comments thread can keep a secret.

* of course I was kidding everything is work safe in Italy.

No I didn't google myself (haven't done that in ... weeks)

In a comment at Krugman's blog I claimed that the present value of increased revenues from Obama's proposed donut increase in FICA is roughly equal to the present value of lost revenues due to his make work pay income tax cut and that the two reforms are part of a disguised effort to make the payroll tax progressive (stealth class war).

Krugman just wrote a post in which he wonders where Obama will get the money for health care reform. I was about to write a one word comment "FICA" when I panicked and decided to check that my claim was about right. I googled : obama payroll tax donut revenue present value. I got a great sounding hit right at a very authoritative source

Omigod Krugman has already noted it. Blush. So I clicked and found my comment its own self.

So I have confirmation from myself that my guess is correct.

Oh and another hit, the money from FICA roughly balances the cost of making work pay (hundred billion here hundred billion there) according to James Pethokoukis who, like me, suspects that the social security tax increase has little to do with pensions.
Megan McArdle "whacked over the head by two-by-fours." by Kathy G

Read the whole post. It is awesome.

Actually I like the substantive discussion of the union productivity effect more than the total takedown of McArdle.

Tuesday, June 17, 2008

Yes We Can

No you Cunt

The non work safe version without the bleeps is even funnier.
Wow Donpedro at Economists for Obama objects to Obama's proposed FICA increase

He writes

On Social Security, my view is that Krugman is right--we have bigger priorities right now than worrying about the possibility of a long-run shortfall in the Social Security Trust Fund. But he and I are in the minority among liberal-minded economic policy watchers. The same Tax Policy Center gurus that Krugman cites fault Obama for not doing enough to address Social Security.

OK Pedro, let me ask you a rhetorical question "have you learned nothing in the past 28 years ?" Reagan and both Bushes have proven beyond any doubt that one does not have to choose between adding to the social security trust fund and other priorities.
There is no lock box. The money in the trust fund can and will be spent to pay for health care reform. Putting money in the trust fund makes does not imply limits on other uses for the money.

Now I can see that Obama's almost open declaration of willingness to consider the tust fund to be free cash on hand might displease those angry with Reagan and the Bushes for doing the same thing. Obama is saying the money is going into the trust fund, because he has noticed that US voters will accept even an increase in the taxes they personally pay so long as the money goes into the trust fund. He is using a trick discovered by Reagan. However, he is using it to try to make it possible for everyone to get health insurance.

The willful blindness of people who claim not to see what is going on is comprehensible only if they are strategically trying to convince voters that Obama is more centrist than he is.
Sometimes Inacurate Criticism in More Helpful than Accurate Praise

I have decided that Paul Krugman has found the perfect strategy to help Barack Obama -- attack him from the "left".

Obama has to convince people that he is a centrist (this is the general election).

He can't flip flop and openly run as a progressive in the primaries then tell swing general election voters that it was a trick to win the primaries and tell his Democratic supporters that his current flop is a trick to fool the centrist independents. He has not in fact flipped or flopped. I think he has successfully dressed up radically progressive proposals as centrism.

Krugman has been arguing that he really is a centrist and always said so. He attacks Obama's soak the rich and spread it out thin proposals as Bush lite.

I am honestly beginning to suspect that Krugman is in on the scam.

Criticism from Krugman is more helpful to Obama than is praise.

OK now Obama has a problem. The National Journal calls him the most liberal senator (for some reason the Democratic candidate for President is always called the most liberal senator by The National Journal). This is nonsense and some unabashadly liberal senator should say so.

What Obama needs is for some senator to say "I'm way to the left of Barack Obama I think he is Bush-lite".

OK any volunteers ? Anyone ? Buelor your not a senator.
yes Berney yes Your the one ? Thank You for not really risking your safe seat by noting that you make Barack Obama look like Bob Dole.

I seriously think that Bernard Sanders (D-VT) should say that, while he will vote for Obama, he really thinks that the country needs a real liberal progressive and that the centrist not liberal enough senator Obama is just the least bad option.

McCain has been helped by the attacks of the loony right which make him look moderate.

Sad to say, there is not a similarly loony left. We're going to have to fake it.
I have Paranoid Delusions of Grandeur

Look obviously Paul Krugman doesn't care much about me and doesn't even know who I am.
I'm sure that to him I count as one of the 7 billion people whose interests matter to him. Clearly he is not using his column and his blog to tease me. There must be some other explanation for these three posts which I will present in reverse chronological order in Shorter Paul Krugman form.

1. For some strange reason Obama thinks we can afford a tax cut for the non rich which will cost $ 700 billion in present value.

2. For some strange reason Obama proposes an un-necessary tax increase on the rich which will increase revenues by $ 700 billion in present value and the press doesn't think this is newsworthy.

3. If the world wishes to be deceived let it be deceived.

and yet he doesn't mention the hypothesis that strange policy proposals 1 and 2 are a deliberately disguised stealth offensive in the class war.

Oh and in 3 he suggests that soaking the rich and spreading it out thin is centrist moderate and not appealing to "The Nation".

I'm sure he is not teasing me. Why would he ? But you got to admit that the hypothesis that his main aim in life is to drive Robert Waldmann completely around the bend fits the facts.

Seriously, I am semi seriously toying with the following hypothesis which I posted as a comment over at Krugman's blog

Dear Prof. Krugman

At this point I am beginning to semi seriously suspect that your last 3 posts have a secret meaning which you wish to hide in plain sight. ù

In particular I am not managing to doubt that the title of this post is an effort to communicate to some people and not everyone (and I don't mean Latin speakers).

In chronological order we have
1. why does Obama think he can affort a tax cut for the middle class and working poor which costs 700 billion
2. Why didn't the press notice a huge tax increase on the richest 2% (which by some strange coincidence will balance the effect on the unified overall deficit of policy 1.)
3 mundus-vult-decipi-ergo-decipiatur

I think you are telling the alert elite that you are in no the scam.

Obama is fighting a stealth counter-offensive in the class war. He doesn't want the establishment pundits to notice. He claims he is a centrist taking ideas from Republicans.

What he really needs is criticism from a leading leftist who accuses him of being insufficiently leftist, populist and egalitarian.

If not Paul Krugman who. If not now when ?