Political Dis-Disillusion

I think if you were to put the volume of Palin's and Obama's experience on a scale they would essentially balance out. In this sense, I agree with the doubters.

The difference is in the substance of their experience. Obama's most unattractive quality is that he is a politician's politicians. He is a career academic and politician. Despite his many attractive features, his professional background and rhetoric embodies everything that repulses me about politics. This is the deal-breaker.

Palin is the most un-politician politician. She ran a small business. She raised a family (including having to make some very tough decisions). She obviously isn't afraid to get some dirt on her boots. She is unabashedly religious (I don't necessarily share her beliefs) in a way that appears sincere and down-to-earth (rather than the opportunistic faith that is so common in politics). In sum, I am not aware of a more authentic public figure. True, she may not have the most political experience. But I put infinitely more value in the non-political experience she has than the experience of someone like Joe Biden, or even John McCain, and *especially* Barack Obama.

I would also split some pretty thick hairs on substantive differences in political experience between her and Obama. Obama has no executive experience. Palin does...she's the only one on either ticket who does. Obama's biggest Senate accomplishment is co-sponsoring an uncontroversial ethics bill. Palin took on a state known for it's corruption. Obama's considered an expert in constitutional law, in all it's esoteric glory. Palin is considered an expert on energy, arguably the most important current domestic policy debate.

Will I agree with everything she says and does? No. Do I have a serious crush on her? Yes.

Taking Sides

From the UK's Telegraph, George Bridges:

"The choice is straightforward: whose side are you on - Malthus's or Monsanto's?"

What If Climate Change

Ignore for a minute everything you know or have heard about climate change.

Now, suppose its 1992 and an overwhelming scientific consensus has emerged that the Earth is on the brink of a drastic global temperature shift. We are about to enter a significant ice age brought on by totally natural, NON-anthropogenic forces. Experts are in agreement that, if unabated, this trend will have devastating consequences for the global economy and human welfare, as well as for biodiversity and ecological health.

What is the optimal response in terms of public policy and social responsibility?

Do we have a moral obligation to not interfere with natural climate change? Would it be permissible (or rational) to protect the current environment and existing species from the harshness of…the environment? Isn’t that an oxymoron?

Or, alternatively, is our moral obligation to preserve human welfare?

How skeptical should we be of the ability of science to predict and effectively respond to a totally natural phenomenon?

I’m not trying to make any particular point here. I’m just curious what the response would be. How much of the current response to climate change is due to the self-loathing of modernity and a general disgust for industrialization rather than environmentalism or good economics per se. In other words, how much of the political and societal response hinges on “anthropogenic” climate change?

Prompted by this article from Reuters:

"We know abrupt climate change happens," said Jim White, a paleoclimatologist at the University of Colorado at Boulder.

"We don't know why it happens and we don't know what to look for as a first early warning."

Marginal Inflight Service

At dinner last night there was discussion of the quality of (or lack there of) airline service. One individual complained about the consumer injustice of some airlines now charging for checking an additional piece of luggage. I made the observation that most of us at dinner were business travelers or light packers so, on average, we benefit from the policy through lower ticket prices. “But that’s ridiculous, ticket prices haven’t gone down,” everyone at the table scoffed. I tried, rather unsuccessfully, to explain:

A piece of luggage is additional weight and so adds to the cost of the flight. Absent pricing, the cost is distributed across all ticketed flyers. Unless you carry more than the average amount of luggage, you benefit from the policy by no longer splitting the bill with heavy packers. In fact, flyers will respond to the price signal, begin to pack lighter, on average, and the entire flight will become more efficient, so the cost should go down marginally for everyone, but more for lighter packers.

The same is true for airline food. Unless you really like airline meals, the policy of charging for snacks instead of serving free meals is a net benefit to you.

Of course, given the variability in airline prices and myriad other costs, it would be IMPOSSIBLE for a customer to observe this effect. But unless you think airline prices are set collusively, it HAS to be true.

The logic is glaringly obvious. And yet it amazes me how difficult it is for otherwise exceptional bright people to grasp the concept. How has a species which appears to have selected for a general aversion to or incapacity for economic thinking achieved such prosperity?

Empowering Consumers

I sent the following letter to the NYT this morning in response to this article.

To the Editor:

Paul Krugman indicts poor regulation for recent food scares that have consumers worried about their groceries and have devastated some export markets (“Bad Cow Disease,” June 13). He’s right.

Where Krugman misleads is implying that more regulation is inevitably good regulation. It is the extent of the current regulatory regime that has entrenched big farm and food interests and hamstrung competition. The result? Companies have no incentive to self-regulate knowing USDA and FDA bureaucrats will ultimately be held responsible. And, it is nearly impossible for new companies to enter the market and feed consumers the products we want.

Not only do consumers have less choice, we also have less motivation to be informed buyers. A misguided willingness to trust fallible and poorly incentivized regulators helped create this situation.

If you want a safe food supply, then ease regulation, induce greater competition, and watch the power of reputation takeover.

That’s the guardian of free-market capitalism Milton Friedman espoused, not lawyers.

Kevin L. Richards

More Everyday Progressivity

Suppose you walk into your favorite restaurant and you suddenly discover all of the menu prices have been cut by 10%. Sweet! Then you turn the menu over and notice that the senior citizen prices have been cut by 20%. How nice, this price cut was progressive in favor of seniors. What a great restaurant policy.

But wait! You look closer and notice that 20% of the cheaper senior price is smaller in absolute value than 10% of the more expensive regular price. So, the menu change actually reduced the amount of the “senior discount”—the difference between the regular price and the senior citizen price. What the *&%$? Does that mean that this restaurant policy was regressive toward seniors? It must be that regular customers are gaining more at the expense of seniors! How unfair!

Of course, this is obviously ridiculous. Everyone benefitted from the price cuts. Seniors received the largest percentage reduction in their prices, but because they already paid a lower price, their prices are cut by a smaller amount. In the extreme, suppose seniors ate for free. Then if we cut prices, seniors wouldn’t be affected at all. Would anyone possibly suggest that policy was harmful toward seniors?

And yet, this is exactly the argument that is used to suggest tax cuts, even when they make the tax code more progressive, are unfairly benefitting the rich. When someone poses the argument it is hard to tell if they are completely confused or if they actually know what they are talking about and are intentionally demagoguing the issue to advance an agenda of bigger government and egalitarianism. If you prefer more government and less inequality then, by all means, argue that on its own merits. But don’t pretend a tax cut takes money from the pockets of the poor and gives it to the rich. The truth is quite, quite different.

I can’t decide which is misunderstood more by the public and mischaracterized more by populist political pandering: trade policy or tax policy?

Oh, What Do Economists Know

Hillary Clinton’s sit-down with George Stephanopoulos on ABC’s “This Week” quickly delved into her plan to suspend the federal gas tax during the peak summer driving season.

Stephanopoulos played a clip of Sen. Barack Obama criticizing the plan. Obama quoted New York Times columnist and Princeton economist Paul Krugman’s assessment that the idea is “pointless and disappointing,” and asked the New York Senator to name “a credible economist who supports the suspension.” Krugman has previously been favorable of Clinton’s economic proposals.

“Well I’ll tell you what, I’m not going to put my lot in with economists,” Clinton said, a response in line with some of the populist notes she’s been hitting in recent stump speeches on the gas tax.

Just when my misgivings on Obama are about to peak, Hillary finds a may to outshine him. Memo to Hillary: consider NOT trying to defend this ridiculous policy/pander.

Boo Alpha

It always brings to mind the last words Gary Chamberlain said in his econometrics class: "I didn't mention hypothesis testing, because I don't like it. And don't ever use those damned stars."

Quote of the Day

Via Walter William in the Washington Times:

"Of all tyrannies a tyranny sincerely exercised for the good of its victims may be the most oppressive." -C.S. Lewis

No Really, Middle Class, Your Life Still Sucks

From KPC:

Of course one big downside to a lessening of the business cycle apocalypse meme, is that it will lead directly to an equi-proportionate increase in inequality hysteria.

This is a direct application of Will Self's "quantity theory of insanity" which posits that whenever insanity falls in one dimension, it rises in another.

Awww. Thank goodness there will always be some way to make people feel sorry for themselves.

What Gives?

Why is health care reform treated like it can only originate from the desk of the President? Congress ignores it in the media as if its not an issue they have control over....the opposite is true. Why don't members of Congress stop acting like they would be stepping on toes by bring it up and start suggesting their own proposals? Is it because there is pressure to let it be an election issue?

Is Walmart a Giffen Good?

A Giffen Good is the Holy Grail of consumer theory--it theoretically exists, but it has never really been identified in practice. A Giffen Good is defined by an upward sloping demand curve. That is, as price increases, demand increases. The requisite criteria for a Giffen Good is that it be inferior and comprise a large portion of total consumption (not to be confused with a Veblen or snob good). So, if the price of the average bundle of goods purchased at Walmart increased, would the average Walmart shopper start having to shop there more?

Tax Policy 101

After I suggested inconsistencies in how people apply the ethics of progressivity, a friend asked what it really means for a tax policy to be progressive. Depending on how you define and measure progressivity, you can come to vastly different conclusions using identical numbers. Below is an illustration that, while contrived, is on the same order of magnitude as the Bush tax cuts.

Suppose there is an individual who has $10,000 of income and is representative of the bottom income decile—the “poor”. Suppose this person pays 10% of his income ($1,000) in taxes, leaving him with $9,000 of after-tax income. Now, suppose there is an individual who earns $1,000,000 of income and is representative of the top decile—the “rich”. Suppose this person pays 50% of his income ($500,000) in taxes, leaving him with $500,000 of after-tax income. (Note that I use “poor” and “rich” here only for convenience and contrast. In practice, “rich” is certainly not a misleading title for the top tax bracket, but the bottom tax bracket is better characterized as “middle class”.)

In the next election, suppose there is a supply-sider candidate who wants to cut taxes to “stimulate” the economy. The proposed tax cuts would reduce the tax rate for the lowest earners by five percentage points (to 5%) and by four percentage points (to 46%) for the highest earners. After-tax income becomes $9,500 and $540,000.

Is this tax policy progressive?

Well, it depends how you analyze it.

1. If we look at tax rates we see that the rate for the poor was reduced by five percentage points, from 10% to 5%. The rate for the rich was reduced by four percentage points, from 50% to 46%. So, this tax cut widened the tax rate gap between the rich and the poor. The result is a more progressive tax code. This is the only definition of progressivity that does not require manipulating or interpreting the data in a favorable way.
2. Another way to view the difference in (1) is by noticing that before tax cut the rich paid a tax rate that was five times as large (0.50 divided by 0.10), now the ratio is almost 10 to 1 (0.46 divided by 0.05). Clearly, the tax code is more progressive.
3. The tax cut lowers government revenue by $40,500. The rich receive 99% of the tax cut—a monstrous $40,000. Meanwhile, the poor get a measly $500 back, representing only 1% of the total amount of the tax cut. This is what the media and many public officials who opposed the tax cut in the first place would deem “tax cuts for the rich.” But, this is just demagoguery. The fact is, the rich were already supplying 99.8% of government revenue. Any way you slice it, unless you start redistributing wealth, the rich are going to receive a larger piece of the pie from an across-the-board tax cut.
4. Looking at tax rates again, notice that the poor’s tax rate was reduced by 50% (5% divided by 10%) while the rich’s tax rate was reduced by only 8% (4% divided by 50%). In other words, the poor got 50% of what he was paying in taxes back ($500 of $1,000) and rich got only 8% back ($40,000 of $500,000). Here, the tax cut looks extremely progressive. This is how Conservatives might demagogue the issue (although the Right seems especially inept at articulating tax policy) and is only slightly less misleading than the previous example. In this case, however, the fact that a small difference in the percentage point change in tax rates looks big as a percent of tax rates is a result of an already progressive tax code.
5. Now look at after-tax income. The poor’s after-tax income increased by about 5.6% ($500 divided by $9,000) while the rich’s after-tax income increased by 8% ($40,000 divided by $500,000). So, despite the fact that the tax code became more progressive, it appears that the tax cut was actually regressive, slightly favoring the rich. This is the view favored by Brookings Institute’s Tax Policy Center. But this interpretation is unnecessarily intricate and misleading because it is entirely an artifact of existing inequality and an already highly progressive tax code. In fact, the only way to remove this effect would be to make the tax code much, much more progressive—essentially by only cutting taxes for the poor. In Brookings’ defense, they are emphasizing the “distributional impact” of a tax cut, but that is a measure of inequality, not progressivity.
6. Another alternative distributional measure is the percentage of tax liability. Before, the rich were paying 99.8% of taxes ($500,000 divided by $501,000). Now they are paying a higher percentage, 99.9% ($460,000 divided by $460,500). This is slightly misleading because it’s mostly a function of inequality and the rich’s high tax burden.

In summary, the only reasonable and consistent measure of progressivity is the tax rate gap—the difference between the percentage of income paid by high and low earners [illustrated in (1)]. Any other definition is intended—intentionally or otherwise—to advance a particular point of view or it’s an idiosyncratic result from a specialized example and should be taken with a HUGE grain of salt.

The bottomline is that everyone should favor simplifying the tax code—if you don’t, then you are likely a bad person, a member of Congress, or both. Whether or not a person favors tax cuts at all or prefers a more or less progressive tax code probably depends on their ideological bent or where they fall on the income distribution....and perhaps a little bit ignorance, but that is by no means limited to one side of the issue.

Obama on Regulation

Yesterday KLR wrote about Richard Posner and Gary Becker's discussion regarding regulation and deregulation. This week on Fox News Sunday Chris Wallace asked Obama where he felt the traditional Democratic platform falls short of Republican ideas. Here is an interesting bit of his answer:

OBAMA: Well, I think there are a whole host of areas where Republicans in some cases may have a better idea.

WALLACE: Such as?

OBAMA: Well, on issues of regulation. I think that back in the '60s and '70s a lot of the way we regulated industry was top-down command and control, we're going to tell businesses exactly how to do things.

And you know, I think that the Republican Party and people who thought about the markets came up with the notion that, "You know what? If you simply set some guidelines, some rules and incentives, for businesses—let them figure out how they're going to, for example, reduce pollution," and a cap and trade system, for example is a smarter way of doing it, controlling pollution, than dictating every single rule that a company has to abide by, which creates a lot of bureaucracy and red tape and oftentimes is less efficient.

That's encouraging forthrightness. And a good sign for policy.

Transcript of the conversation here. HT: Michael Moynihan

The Best Intentions

Arnold Kling contrasts some consequences.

Here are some more comparisons to consider:

1. The total death and illness caused by all of the chemical pollution ever created vs. the death and illness caused by the ban on DDT.

2. The GDP lost due to consumption of illegal drugs vs. the GDP lost due to the drug war.

3. The deprivation and suffering caused by predatory lending and other subprime mortgage shenanigans vs. that caused by biofuel mandates.

I think that as the world gets more complex and interdependent, we will see government activism cause ever-greater harm, because the unintended consequences become harder to predict, or even to trace when they do occur.

I came to DC to learn about good public policy, but my views increasingly favor the government sitting on its hands. Admittedly, my philosphical tendencies are strongly individualistic and rationalistic. But under any ethical paradigm there is no denying that people in power can produce pretty nasty outcomes. Even (especially) if that power appears benign. Despite what people might think Chevron, Microsoft, and Walmart are essentially powerless.

Update: Exhibit B