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Monday, December 24, 2007

Have a Moderate Christmas

According to psychologist John Masterson, Christmas is the perfect day for moderation:
Christmas Day is the one day when you can indulge so many of your pleasures that you end up doing each in moderation -- a little gin and tonic, a little champagne, a little white wine, a little red wine, a little dessert wine, a little port...
That's my kind of moderation!

Have a Merry, but Moderate, Christmas all!

Thursday, December 20, 2007

From Every Mountain Top ...

I found this Walter Williams column of interest:
All too often defenders of free-market capitalism base their defense on the demonstration that free markets allocate resources more efficiently and hence lead to greater wealth than socialism and other forms of statism. While that is true, as Professor Milton Friedman frequently pointed out, economic efficiency and greater wealth should be seen and praised as simply a side benefit of free markets. The intellectual defense should focus on its moral superiority. Even if free markets were not more efficient and not engines for growth, they are morally superior to other forms of human organization because they are rooted in voluntary peaceable relationships rather than force and coercion. They respect the sanctity of the individual.

acts such as murder, rape, and theft, whether done privately or collectively, are unjust because they violate private property. There is broad consensus that collective or government-sponsored murder and rape are unjust; however, government-sponsored theft is another matter. Theft, being defined as forcibly taking the rightful property of one for the benefit of another, has wide support in many societies that make the pretense of valuing personal liberty. That theft, euphemistically called income redistribution or transfers, is often defended by lofty phrases such as: assisting the poor, the elderly, distressed business, college students, and other deserving segments of society. But as F. A. Hayek often admonished, “[F]reedom can be preserved only if it is treated as a supreme principle which must not be sacrificed for any particular advantage. . . .” Ultimately, the struggle to achieve and preserve freedom must take place in the habits, hearts, and minds of men.

Or, as admonished in the Constitution of the state of North Carolina: “The frequent recurrence to fundamental principles is absolutely necessary to preserve the blessings of liberty.” It is moral principles that deliver economic efficiency and wealth, not the other way around. These moral principles or values are determined in the arena of civil society.

For individual freedom to be viable, it must be a part of the shared values of a society and there must be an institutional framework to preserve it against encroachments by majoritarian or government will. Constitutions and laws alone cannot guarantee the survival of personal freedom, as is apparent where Western-type constitutions and laws were exported to countries not having a tradition of the values of individual freedom.

Societies with a tradition of freedom, such as the United States, have found it an insufficient safeguard against encroachment by the state. Why? Compelling evidence suggests that a general atmosphere of personal freedom does not meet what might be considered its stability conditions. As is often the case, political liberty is used to stifle economic liberty, which in turn reduces political liberty.

If we were to rank countries according to: (1) whether they are more or less free-market, (2) per capita income, and (3) ranking in Amnesty International’s human-rights protection index, we would find that those with a larger free-market sector tend also to be those with the higher per capita income and greater human-rights protections. People in countries with larger amounts of economic freedom, such as the United States, Canada, Australia, Hong Kong, Japan, and Taiwan, are far richer and have greater human-rights protections than people in countries with limited markets, such as Russia, Albania, China, and most countries in Africa and South America. That should tell you something.

Economics, politics and social order are all intertwined. Economic freedom can be foundational to advancing political freedom and human rights. These are all effected by culture and attitudes.

Wednesday, December 19, 2007

Skeptical Optimist Watch: You Pay for It!

As regular readers of this blog know, I have no problem with the government borrowing money in order to finance its spending, especially with the deficits relative to GDP at the current low levels. However, whether government spending is financed with taxes or borrowing, it has an immediate cost when the spending occurs. The cost is not deferred just because the money is borrowed instead of being paid for by taxes.

In a recent post, Steve Conover wrote:
... the false premise [is] that everything the government buys must be paid for right now with tax receipts or spending cuts, or else we shouldn't do it.
Everything the government buys incurs a cost right now. Every new program is paid for now by foregoing other potential consumption and/or investment. Either it's paid for by foregoing other specific government programs, or it is paid for by consuming or investing less in unforeseeable ways in the private sector. Just because you can't identify exactly what consumption and/or exactly which investments don't happen does not mean you're not redirecting current resources. It also doesn't much matter if taxes or borrowing are used to suck resources from the private sector into the government.

What I'm pointing out is the distinction between the financing of spending and the spending itself. I absolutely agree that financing by borrowing is perfectly okay, especially when in the range of just a few percent of GDP. However, the cost is immediate at the point of spending. Resources (labor, tangible capital assets, etc.) are now deployed because of the spending. When the government spends money, those resources are no longer available for other productive purposes.

Again, the financing method chosen in order to deploy the resources is immaterial. But when scarce resources like labor are deployed somewhere, they cannot also be deployed somewhere else. That is an immediate and unavoidable cost which we have no choice but to "pay" as we "go".

There are possible exceptions. If unemployment is quite high, then labor intensive programs don't necessarily have much of a cost since those resources were not deployed anyway. However, I believe that 4.7% is low enough such that incremental government spending on labor will transfer resource from the private sector to the government. The lower the unemployment, the closer to unity this effect will be.

I have no problem with the government spending money. But let's not pretend that there's no cost just because we use borrowing as the method of financing that spending. There is cost, and it's incurred at the point of spending (deploying the resources), unless those resource would not have been otherwise deployed.

No matter what, when the government spends money, you pay for it.

Wednesday, December 12, 2007

Cool New Warming Research

Though the global warming consensus is supposedly etched in stone (we're all gonna die!!!), there's been quite a bit of new research in the last few months that calls some of it into question (maybe we'll live after all).

Much of the general freakout is due to the belief that the 20th century was the warmest of the last millennium. This belief is based on reconstructions of past temperatures using tree ring data. However, Loehle recently combined a group of other, non-tree ring temperature reconstruction proxies and got significantly different results. As shown in the figure above, the 20th century wasn't anomalous at all according to Loehle's temperature reconstruction. Indeed, it was nearly exactly average for the last 2000 years.

Loehle's results were published in the lowly (according to the consensus scientists) Energy and Environment journal and have been mostly ignored. However, these results are different enough from the current reconstructions and his methods, while not perfect, are good enough such that at least some scientists are taking notice. I wouldn't be surprised if there are some revisions to climate theory due to Loehle's results.

In a second publication, Monckton asks:
The fact of warming tells us nothing of the cause. Yet the scientific consensus is that, though the rapid climatic warming from 1906 to 1940 was a natural recovery from the historically low temperatures of the Little Ice Age, it is we who are chiefly to blame for the equally rapid warming from 1975 to the present. Since some climatologists challenge this consensus, can we settle the debate by predicting with models and then detecting by observation a characteristic “signature” in the climate data that allows us definitively to distinguish between anthropogenic and natural warming of the Earth’s atmosphere?
The answer according to Monckton, as you may have guessed, is yes. Furthermore, the IPCC models seem to all agree on the "signature":
The UN’s fourth assessment report on climate change (IPCC, 2007) confirms that computer modeling predicts the existence of a unique and distinct signature or fingerprint of anthropogenic warming caused by our emissions of greenhouse gases. That signature is the instantly-recognizable tropical, mid-troposphere “hot spot” about 10km above the Earth’s surface. In the “hot spot”, the models predict that the rate of increase in atmospheric temperature, measured in degrees Celsius per decade, will be two or three times greater than at the Earth’s surface. In IPCC (2007), this predicted “hot-spot” signature of anthropogenic greenhouse warming is clearly visible on plots of modeled greenhouse forcing and of all forcings including the dominant greenhouse forcing, but is not visible on plots of solar, volcanic, tropospheric and stratospheric ozone, or sulphate aerosol forcings. The UN’s models accordingly distinguish clearly between greenhouse warming and other climate forcings: at least five separate general-circulation computer models of the climate all predict the existence of the “hot-spot” signature of anthropogenic greenhouse warming in the tropical mid-troposphere.
In other words, anthropogenic greenhouse warming should show different and predictable warming trends at different altitudes and latitudes. So how do the trends predicted by the models match real world data? Apparently, very poorly:
Yet in the plot from the Hadley Centre’s radiosondes, showing actual, observed temperatures in the troposphere, presented in the same altitude-vs-latitude fashion as the predictions made by the five computer models, the computer models’ repeatedly-predicted “hot-spot” signature of anthropogenic greenhouse warming is entirely absent. Indeed, very nearly all observational data on mid-tropospheric temperature trends over the past half-century show no tropical “hot-spot” at all; and, in the one record that shows it at all, the magnitude of the observed effect is insufficient to justify the UN’s choice of a very high central estimate of climate sensitivity to anthropogenic enhancement of the greenhouse effect. Our own small experiment also fails to demonstrate even the existence of the “hot-spot” fingerprint of anthropogenic warming, still less a magnitude sufficient to justify the IPCC’s high climate sensitivity. These surprising results present a very real difficulty for the conventional “global warming” theory – a difficulty that is not resolved either in CCSP (2006) or in IPCC (2007).
What Monckton is basically saying is that there is absolutely no sign of the greenhouse (or anthropogenic) component of global warming predicted by all of the models that have been used to predict catastrophic global warming.

The response of the global warmenists is that the observed data must be wrong (or very noisy) but their climate models are valid. Monckton's response:
Thorne et al. (2007) have attempted to resolve this difficulty by suggesting that the error-bars in the observational datasets are so large that they could in theory encompass the model-predicted “hot-spot”, that the datasets are not designed to identify small temperature trends, and that the outputs are exceptionally sensitive to the choice of limiting dates. However, it is on the basis of the observed data that the models are contrived, and, if the observed data are inadequate for drawing conclusions about whether the characteristic fingerprint of anthropogenic greenhouse warming exists, then a fortiori the outputs from theoretical models founded upon those data will be inadequate, and no conclusion about the magnitude of the temperature response to anthropogenic enhancement of the natural greenhouse effect can be legitimately drawn.
In other words, garbage in - garbage out: either the models are based on faulty data and they are therefore crap or they are based on good data and are therefore crap (because they don't predict the good data). In either case, the models, upon which all catastrophic global warming is based, are crap, especially since there are alternative answers:
The very close correlation between anomalies in tropical outgoing long-wave radiation and anomalies in global lower-troposphere temperatures, taken with the near-total absence of correlation between monotonic increases in CO2 concentration and chaotic temperature anomalies, suggests that it is the computer models, not real-world observations that are likely to be at fault.
Maybe the seas won't boil after all:
On this analysis, “global warming” is unlikely to be dangerous and extremely unlikely to be catastrophic.
Other new research sheds light on parts of the climate models that might be crap:
The widely accepted (albeit unproven) theory that manmade global warming will accelerate itself by creating more heat-trapping clouds is challenged this month in new research from The University of Alabama in Huntsville.

Instead of creating more clouds, individual tropical warming cycles that served as proxies for global warming saw a decrease in the coverage of heat-trapping cirrus clouds, says Dr. Roy Spencer, a principal research scientist in UAHuntsville's Earth System Science Center.

That was not what he expected to find.

"All leading climate models forecast that as the atmosphere warms there should be an increase in high altitude cirrus clouds, which would amplify any warming caused by manmade greenhouse gases," he said. "That amplification is a positive feedback. What we found in month-to-month fluctuations of the tropical climate system was a strongly negative feedback. As the tropical atmosphere warms, cirrus clouds decrease. That allows more infrared heat to escape from the atmosphere to outer space."
Well, that'll make a difference. Using just the increase in CO2 expected over the next century, the corresponding expected temperature increase would be about 1.2 C. The current models assume a significant cloud amplification increasing the estimate over the next hundred years by about a factor of three. If Spencer's observations are right, then the warming due to anthropogenic greenhouse gases will actually be substantially less than 1.2 C. In other words, the current models might be over predicting warming by an order of magnitude.

I've guessed that the feedback loops involved with greenhouse gases would be negative feedback loops. If they weren't, it seems unlikely to me that the climate would've been stable enough so far for life to have survived to this point.

But here we are.

Friday, December 07, 2007

Manufacturing Again

Howard recently had a post listing the top 5 economic myths in the United States today. I want to focus on number 4: "America is de-industrializing, and manufacturing is dying." This myth is far, far more pervasive than the rest of them. Even those who are very positive on the economy often believe it and discount it by saying something like, "yeah, but advanced economies don't manufacture."

Well, yes they do. Especially so for the United States. Our manufacturing capacity has increased over virtually all time frames for at least as long as data has been collected. As I've written previously, "U.S. manufacturing output has actually increased dramatically, more than eleven-fold from 1940 to 2000." As you can see from the chart on the right (HT: Cafe Hayek), after a brief dip starting in 2000, manufacturing output continues up, up, up and may even be accelerating with the weakening dollar. Manufacturing output has even nearly kept pace with the growth of the rest of the economy.

We still manufacture more than any other country in the world, even China, which has more than four times as many people. We manufacture very advanced products (think Boeing's aircraft) while countries like China manufacture the plastic toys for McDonalds' happy meals.

Manufacturing is alive and growing in the United States and will continue to be an important sector of our economy for a long time to come.

Thursday, December 06, 2007

Giving up on Trackbacks

For someone reason our posts weren't loading for me due to waiting for Haloscan, the provider of this blog's trackback service. Since no-one has linked a trackback in years, I've disabled trackbacks for now.

Taxes and GDP

Depending on how you measure it, the United States the governments' (fed, state, and local) share of the annual Gross Domestic Product (GDP) is a bit less than 1/3. The governments' take is, therefore, around $4 trillion.

Let's quickly define what "share" and "take" mean. Consider a pie. The "share" (S) is simply a fraction of the pie. The "take" (T) is the weight of the given piece of pie. Given a pie that weighs W, the equation is T = S⋅W. Simple enough.

Clearly, for T to increase, either S or W need to increase (or both). However, in the case of the American pie called GDP, there is also a relationship between S and W. As the governments' share (S) of GDP increases, the pie makers (the private sector) make a relatively smaller pie, so W decreases. Therefore it's not clear if the governments' take will go up our down if they choose to increase their share. If GDP decreases faster than S increases, the take would decrease. If GDP (W) decreases slower than S increase, the take T would increase.

Let's say for a moment that the governments wanted to exactly maximize its take. To do so they would pick the share that maximizes the equation T = S⋅W and therefore the change in W would exactly offset the change in S if S increases or decreases. Let's say the governments have successfully done so and that the current share of 1/3 maximizes their take. If so, we would predict that for each percent increase (or decrease) of the governments' share of GDP, GDP would decrease (or increase) by approximately 3%.

Sure enough, according to a recent paper by Christina and David Romer of the University of California, Berkeley, tax revenue increases are a significant negative for the economy and the relationship between share of GDP and size of GDP happens to exactly maximize the governments' take:
Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.
Governments exist only to exert and extend their power via a parasitic relationship with their economic host. One-third GDP maximizes our governments' take so that's what they take. No more, no less.

Corporate Taxes

Over at the Market Center Blog via The Center for Freedom and Prosperity they draw upon this article and link to their youtube video.

Word is that the Bush Administration will soon propose a cut in the U.S. corporate income tax, following House Democrat Charlie Rangel's proposal this fall to cut the rate to 30.5% from 35%. As a new study makes clear, such a reduction would give a lift to the U.S. economy when it really needs it.

The study, from the National Bureau of Economic Research, looked at corporate taxes in 85 countries from 1996 to 2005. Economists from the World Bank and Harvard University calculated the effective business tax rate for each country, because some nations have so many tax loopholes that the rate paid by companies can be one-half to one-third the statutory tax rate. The study found that corporate taxes have a statistically significant negative effect on economic performance.

High business taxes were found to reduce a nation's domestic capital investment, the amount of foreign investment into that country, and its overall growth in GDP. The authors conclude that "corporate taxation reduces the return on capital and thus discourages investment" and "reduces the cash flow of the firm" in such a way as to reduce the after-tax capital available for reinvestment.

The researchers also found that high corporate levies reduce entrepreneurship, which drives new industries and job growth. In many nations the corporate tax rate is paid both by large corporations and small businesses. In the U.S., small businesses are often organized under Subchapter S of the tax code and thus pay the personal income tax rate.

Did they do a good job with the video? Is it an effective form of communication?

Tuesday, November 27, 2007

That's a Lot of Data

Ever wonder how the amount of information available on the Internet compared to, say, the Library of Congress? Wonder no more:
The Library of Congress, which is larger than the New York Public Library, contains about 11 terabytes of information. That’s a huge amount of information. Yet it is dwarfed by the amount of information already accessible online through search engines, about 167 terabytes. This is about fifteen times as much as the Library of Congress, a figure which even Grafton admits is impressive. But the information available through search engines like Google in turn shrinks to a literal dot compared to the material for which no ready directory exists: the so-called Deep Web. Deep Web is that part of the Internet for which there is no street map. The University of California in Berkeley estimates the Deep Web to be 91,000 terabytes in size — 545 times larger than all the material indexed by search engines and 8,150 times larger than the holdings of the Library of Congress. The difference between paper and online holdings is the difference between a small chicken and a fully grown Tyrannosaurus rex. And if Google, Microsoft and others ever finish their plan to migrate books online it will simply mean that the T-Rex has eaten the chicken.
I still wonder, though, how unique each one of those 91,000 terabytes of information is. For example, the bytes in every copy of all Harry Potter books is something like 100 terabytes and that's for just one book series! Nonetheless, I'm sure the amount of unique information on the "Deep Web" T-Rex likely dwarfs the printed chicken.

Tuesday, November 20, 2007

Alarmism Satire

I found one of ScrappleFace's posts today both funny and a good example of the "truth" of satire sometimes being more true than reality:

UN: Millions Not Suffering AIDS Now Doomed to Drown

by Scott Ott for ScrappleFace

(2007-11-20) — Top United Nations’ scientists plan to acknowledge this week that they wildly overstated the size and the spread of the AIDS epidemic, but that all the millions of people who don’t actually have AIDS will soon drown in the rising tide caused by man-made global climate change. [...]

“No matter how you look at it, the news is tragic, and more funding is needed,” said Peter Piot, the Belgian scientist whose U.N. AIDS agency reports have driven fund raising. [...]

Now, Mr. Piot said, the fate of countless millions has gone from bad to worse.

“A man who might have died quietly in his bed of AIDS,” said Mr. Piot, “now faces the terrifying specter of watching his neighbors slip from their rooftops one-by-one, screaming until the rising deep muffles their voices, knowing that he faces the inevitable moment when his fingers slip from the chimney, the brine subdues his own shrieks and the sea becomes his tomb.”

Mr. Piot denied accusations that he makes alarmist statements to serve a political and fundraising agenda rather than following rigorous scientific processes.

“My alarmist statements have resulted in billions of dollars in funding for research,” Mr. Piot said. “I’m making sure scientists get paid. What could be more scientific than that?”

Indeed. What could be more scientific than that?

Monday, November 19, 2007

Affirmative Action and...

An outstanding column by Roger Kimball(excerpts):
What is your favorite bit of Orwellian Newspeak? Near the top of my list is “affirmative action.” It’s such an emollient phrase, so redolent of cheeriness (savor the word “affirmative”) and practicality (“action”). What it really means is “discrimination on the basis of sex, skin color, or some other item in the contemporary lexicon of victimology.” But you can—almost—forget that while the pleasing phrase “affirmative action” echoes in your recollection. seems an opportune moment to step back and reflect on the phenomenon of “affirmative action” and its ideological comrade in arms, multiculturalism. A favorite weapon in the armory of multiculturalism is the lowly hyphen. When we speak of an African-American or Mexican-American or Asian-American these days, the aim is not descriptive but deconstructive. There is a polemical edge to it, a provocation. The hyphen does not mean “American, but hailing at some point in the past from someplace else.” It means “only provisionally American: my allegiance is divided at best.” It is curious to what extent the passion for hyphenation is fostered more by the liberal elite than the populations it is supposedly meant to serve. How does it serve them? Presumably by enhancing their sense of “self-esteem.” Frederick Douglass saw through this charade some one hundred and fifty years ago. “No one idea,” he wrote, “has given rise to more oppression and persecution toward colored people of this country than that which makes Africa, not America, their home.”

The multicultural passion for hyphenation is not simply a fondness for syntactical novelty. It also bespeaks a commitment to the centrifugal force of anti-American tribalism. The division marked by the hyphen in African-American (say) denotes a political stand. It goes hand-in-hand with other items on the index of liberal desiderata—the redistributive impulse behind efforts at “affirmative action,” for example. Affirmative action was undertaken in the name of equality. But, as always seems to happen, it soon fell prey to the Orwellian logic from which the principle that “All animals are equal” gives birth to the transformative codicil: “but some animals are more equal than others.”

Affirmative action is Orwellian in a linguistic sense, too, since what announces itself as an initiative to promote equality winds up enforcing discrimination precisely on the grounds that it was meant to overcome. Thus we are treated to the delicious, if alarming, contradiction of college applications that declare their commitment to evaluate candidates “without regard to race, gender, religion, ethnicity, or national origin” on page 1 and then helpfully inform you on page 2 that it is to your advantage to mention if you belong to any of the following designated victim groups. Among other things, a commitment to multiculturalism seems to dull one’s sense of contradiction.

Had he lived to see the evolution of affirmative action, Tocqueville would have put such developments down as examples of how in democratic societies the passion for equality tends to trump the passion for liberty. The fact that the effort to enforce equality often results in egregious inequalities he would have understood to be part of the “tutelary despotism” that “extends its arms over society as a whole; it covers its surface with a network of small, complicated, painstaking, uniform rules through which the most original minds and the most vigorous souls cannot clear a way to surpass the crowd.”

Multiculturalism and “affirmative action” are allies in the assault on the institution of American identity. As such, they oppose the traditional understanding of what it means to be an American...

...developments are abetted by the left-wing political and educational elites of this country, whose dominant theme is the perfidy of traditional American values. Hence the passion for multiculturalism and the ideal of ethnic hyphenation that goes with it. This has done immense damage in schools and colleges as well as in the population at large. By removing the obligation to master English, multiculturalism condemns whole sub-populations to the status of permanent second-class citizens. By removing the obligation to adopt American values, it fosters what the German novelist Hermann Broch once called a “value vacuum,” a sense of existential emptiness that breeds anomie and the pathologies of nihilism.

The bottom line is that the traditional ideal of a distinctive American identity, forged out of many elements but unified around a core of beliefs, attitudes, and commitments is now up for grabs. One academic epitomized the established attitude among our left-liberal elites when she expressed the hope that the United States would “never again be culturally ‘united,’ if united means ‘unified’ in beliefs and practices.”
Right on the mark in dissecting the problem!

Seeing more clearly

Over at Bizzyblog we find Top 5 Economic Myths in the US Today (with supporting links and material).
Myth Number 5. The “need” for universal health insurance, or at least near-universal insurance for children.

Myth Number 4. America is de-industrializing, and manufacturing is dying.

Myth Number 3. We are in a recession (not heading for one, actually IN one).

Myth Number 2. Most people are just scraping by.

And the Number 1 Economic Myth in the America Today Is ….. Income inequality is growing, the rich are getting richer, and they aren’t paying their fair share of taxes.
Just a little perspective.

Friday, November 16, 2007

Abusing Language: Charity and Compassion

Recently there have been some calls for greater taxation in order to redistribute more income to the poor. I touched upon some matters relevant to this in the poverty, charity and safety nets post. The lessons presented in that material should not be ignored. I have little faith that people with great enthusiasm for more redistribution would be careful in this regard.

The primary thrust of this post involves the use of the words charity and compassion in regards to such programs. I would call it the abuse of such terms. Walter Williams expresses similar sentiments:
Politicians exploit public demands that government ought to do something about this or that problem by taking measures giving them greater control over our lives. For the most part, whatever politicians do, whether it's rent controls to produce "affordable" housing, or price controls to eliminate "price-gouging," the result is a calamity worse than the original problem.

Liberals often denounce free markets as immoral. The reality is exactly the opposite. Free markets, characterized by peaceable, voluntary exchange, with respect for property rights and the rule of law, are more moral than any other system of resource allocation. Let's examine just one reason for the superior morality of free markets.

Look at the morality of a resource allocation method that requires that I serve my fellow man in order to have a claim on what he produces and contrast it with government resource allocation. The government can say, "Williams, you don't have to serve your fellow man; through our tax code, we'll take what he produces and give it to you." Of course, if I were to privately take what my fellow man produced, we'd call it theft. The only difference is when the government does it, that theft is legal but nonetheless theft -- the taking of one person's rightful property to give to another.

Liberals love to talk about this or that human right, such as a right to health care, food or housing. That's a perverse usage of the term "right." A right, such as a right to free speech, imposes no obligation on another, except that of non-interference. The so-called right to health care, food or housing, whether a person can afford it or not, is something entirely different; it does impose an obligation on another. If one person has a right to something he didn't produce, simultaneously and of necessity it means that some other person does not have right to something he did produce. That's because, since there's no Santa Claus or Tooth Fairy, in order for government to give one American a dollar, it must, through intimidation, threats and coercion, confiscate that dollar from some other American. I'd like to hear the moral argument for taking what belongs to one person to give to another person.

There are people in need of help. Charity is one of the nobler human motivations. The act of reaching into one's own pockets to help a fellow man in need is praiseworthy and laudable. Reaching into someone else's pocket is despicable and worthy of condemnation.

Warren Buffet has advocated the maintenance of the estate tax and higher income taxes. reported that Mr. Buffett said that the government should "take more out of the hides of people like me."

We've got lots of respect for Mr. Buffett's skill at allocating capital and for his performance on behalf of his shareholders. But he has his own motives here. He makes his money, in part, by buying family businesses that owners need to sell for estate-tax planning purposes. If he wants to give more out of his hide to the government nothing is stopping him from writing a big check to the U.S. Treasury. In fact, though, he has decided to give the bulk of his fortune to the Bill and Melinda Gates Foundation, judging that they are better at using money to help the poor than the federal government is. He's given other funds to foundations controlled by his children, foundations from which Peter and Jennifer Buffett have drawn salaries. As we've written before, on the estate tax, watch what Warren Buffett does, not what he says.

If you want more redistribution then say so. If you wish to encourage people to be more generous and charitable, great. However, if it's not voluntary, it's not charity. Let's not abuse the language!

Thursday, November 15, 2007

The Human Beast

The amazing Tom Wolfe (via this source) delivers the 2006 Jefferson Lecture. Text is here and audio/video links are on right side of text page (scroll down). Major excerpts:

Ladies and Gentlemen, this evening it is my modest intention to tell you in the short time we have together . . . everything you will ever need to know about the human beast.

I take that term, the human beast, from my idol, Emile Zola, who published a novel entitled The Human Beast in 1888, just 29 years after Darwin's The Origin of Species broke the stunning news that Homo sapiens--or Homo loquax, as I call him--was not created by God in his own image but was precisely that, a beast, not different in any essential way from snakes with fangs or orangutangs . . . or kangaroos. . . or the fang-proof mongoose. Darwin's doctrine, Evolution, leapt from the pages of a scientific monograph into every level of society in Europe and America with sensational suddenness. It created a sheerly dividing line between the God-fearing bourgeoisie who were appalled, and those people of sweetness and light whose business it was to look down at the bourgeosie from a great height. Today, of course, we call these superior people intellectuals...

...but by the time you and Darwin got hold of it, evolution had been irrelevant for 11,000 years. Why couldn't you two see it? Evolution came to an end when the human beast developed speech! As soon as he became not Homo sapiens, "man reasoning," but Homo loquax, "man talking"! Speech gave the human beast far more than an ingenious tool. Speech was a veritable nuclear weapon! It gave the human beast the powers of reason, complex memory, and long-term planning, eventually in the form of print and engineering plans. Speech gave him the power to enlarge his food supply at will through an artifice called farming.

No evolutionist has come up with even an interesting guess as to when speech began, but it was at least 11,000 years ago, which is to say, 9000 B.C. It seems to be the consensus . . . in the notoriously capricious field of evolutionary chronology . . . that 9000 B.C. was about when the human beast began farming, and the beast couldn't have farmed without speech, without being able to say to his son, "Son, this here's seeds. You best be putting 'em in the ground in rows ov'ere like I tell you if you wanna git any ears a corn this summer."

Do forgive me, Emile, but here is the tastiest of all ironies. One of Homo loquax's first creations after he learned to talk was religion. Since The Origin of Species in 1859 the doctrine of Evolution has done more than anything else to put an end to religious faith among educated people in Europe and America; for God is dead. But it was religion, more than any other weapon in Homo loquax's nuclear arsenal, that killed evolution itself 11,000 years ago. To say that evolution explains the nature of modern man is like saying that the Bessemer process of adding carbons to pig iron to make steel explains the nature of the modern skyscraper.


Weber was well known in academia for his essay "The Protestant Ethic and the Spirit of Capitalism," written after he toured the United Sates in 1904. It was the origin of the unfortunately non-Protestant cliché, "the work ethic." He introduced the terms "charisma" and "charismatic" in their current usage; also "bureaucracy," which he characterized as "the routinization of charisma." He coined the term "style of life," which was converted into the compound noun "lifestyle" and put to work as the title of a thousand sections of newspapers across the United States. But what caught my imagination was the single word "status." In a very short, very dense essay called "Class, Status, and Party" he introduced an entirely new concept.

I was by no means the first person to get excited over Weber's "status." The concept was well known within the field of sociology, although it was more often expressed in such terms as "social class," "social stratification," "prestige systems," and "mobility." Six years later Weber's terms "status-seeking" and "status symbols" began showing up in the press. Soon they were part of everyday language.

The great American sociologists of the 1950s, W. Lloyd Warner, the Lynns, August B. Hollingshead, E. Digby Baltzell, C. Wright Mills, David Riesman, were turning out studies of how Americans rated others and themselves, often unconsciously, according to race, ethnic group, address, occupation, vocabulary, shopping habits, bill-paying habits (personal checks in lump sums as opposed to installment payments in cash), bureaucratic status symbols (corner offices, fine wooden desks as opposed to metal ones, water carafes, sofas as well as chairs, speaker phones, etageres of brass and glass), education (the great divide existing between those who had bachelor's degrees from a respectable four-year college as opposed to those who didn't), even sexual practices. The upper orders made love with the lights on and no bed covers. The lower orders--in the 1950s--found this perverted. Sociologists never rejected Karl Marx's brilliant breakdown of society into classes. But his idea of an upper class--the owners of "the means of production"--and their satellites, the bourgeoisie, in a struggle with the masses, the working class, was too rigid to describe competition among human beast in the 20th century. Weber's entirely novel concept of "status groups" proved to be both more flexible and more penetrating psychologically.

Status groups, Weber contended, are the creators of all new styles of life. In his heyday, the turn of the 19th century, the most stylish new status sphere, no more than 30 years old, was known as la vie boheme, the bohemian life. The bohemians were artists plus the intellectuals and layabouts in their orbit. They did their best to stand bourgeois propriety on its head through rakish dishabille, louder music, more wine, great gouts of it, ostentatious cohabitation, and by flaunting their poverty as a virtue. And why? Because they all came from the bourgeoisie themselves originally and wanted nothing more desperately than to distinguish themselves from it. They seldom mentioned the upper class, Marx's owners of "the means of production." They seldom mentioned Marx's working class, except in sentimental appreciation of the workers' occasional show of rebelliousness. No, as the late Jean-Francois Revel said of mid-20th century French intellectuals, the bohemians' sole object was to separate themselves from the mob, the rabble, which today is known as the middle class.

Not all status groups are either as competitive as capital-S Society's and the military's or as hostile as the bohemians'. Some are comprised of much broader populations from much larger geographic areas. My special favorites are the Good Ol' Boys, as I eventually called them. I happened upon them while working on an article about stock car racing. Good ol' boys are rural Southerners and Midwesterners seldom educated beyond high school or community college, sometimes owners of small farms but more likely working for wages in factories, warehouses, and service companies. They are mainly but by no means exclusively Scots-Irish Protestants in background and are Born Fighting, to use the title of a brilliant recent work of ethnography by James Webb. They have been the backbone of American combat forces ever since the Revolution, including, as it turns out, both armies during the Civil War. They love hunting, they love their guns, and they believe, probably correctly, that the only way to train a boy to kill Homines loquaces in battle someday is to take him hunting to learn to kill animals, starting with rabbits and squirrels and graduating to beasts as big or bigger than Homo loquax, such as the deer and the bear. Good ol' boys look down on social pretension of any sort. They place a premium on common sense and are skeptical of people with theories they don't put to the test themselves.

Even before I left graduate school I had come to the conclusion that virtually all people live by what I think of as a "fiction-absolute." Each individual adopts a set of values which, if truly absolute in the world--so ordained by some almighty force--would make not that individual but his group . . . the best of all possible groups, the best of all inner circles. Politicians, the rich, the celebrated, become mere types. Does this apply to "the intellectuals" also? Oh, yes. . . perfectly, all too perfectly.

The human beast's belief in his own fiction-absolute accounts for one of the most puzzling and in many cases irrational phenomena of our time. I first noticed it when I read a book by Samuel Lubell called The Future of American Politics. Lubell was a political scientist and sociologist who had been as surprised as everybody else by the outcome of the 1948 presidential election. That was the election in which the Democratic incumbent, Harry Truman, was a president whose approval rating had fallen as low as 23 percent. Every survey, every poll, every pundit's prediction foresaw him buried by the Republican nominee, Thomas E. Dewey. Instead, Truman triumphed in one of the most startling upsets in American political history. Lubell was determined to find out why, and so he set out across the country. When he reached a small Midwestern town that had been founded before the turn of the 19th century by Germans, he was puzzled to learn that the town had gone solidly for Dewey despite the fact that by every rational turn of logic, every economic motivation, Truman would have been a more logical choice. By and by Lubell discovered that the town was still predominantly German. Nobody had ever gotten over the fact that in 1917, a Democrat, President Woodrow Wilson, had declared war on Germany. That had set off a wave of anti-German feeling, anti-German prejudice, and, in the eyes of the people of this town, besmirched their honor as people of German descent. And now, two World Wars later, their minds were fixed on the year 1917, because like all other human beasts, they tended to champion in an irrational way their own set of values, their own fiction absolute. The question Lubell asked was very much like the question that Thomas Frank asked after the election of 2004 in his book What's the Matter with Kansas? By all economic and political logic, the state of Kansas should have gone to John Kerry, the Democrat, in 2004. But it didn't. Had Frank only looked back to Samuel Lubell, he would have known why. The 2004 election came down to one state: the state of Ohio. Whoever won that state in the final hours would win the election. Northern Ohio, the big cities of Cleveland, Toledo on the Great Lakes, were solidly for Kerry. But in southern Ohio, from east to west, and in the west was the city of Cincinnati, Ohio went solidly for George Bush. And the reason? That great swath of territory was largely inhabited by the Scots-Irish. And when the Democrats came out in favor of gun control, the Scots-Irish interpreted this as not merely an attack on the proliferation of weaponry in American life but as a denunciation, a besmirching, of their entire way of life, their entire fiction absolute. Guns were that important in their scheme of things.


That a wound to one's status, not to one's body, not to one's bank account, not to one's general fortunes in life, that such a wound to one's status could have such a severe effect upon the psyche of the human beast, is no minor matter. It means that we have come upon a form of anguish that is somehow primal. Even the most trivial and the most unlikely circumstances can be colored by the beast's constant and unrelenting concern for his own status. Which is to stay, his own standing, his own rank, in the eyes of others and in his own eyes.

Even before I had left graduate school I had begun to wonder if somewhere in the brain there might be a center that interpreted incoming data and gave the human beast the feeling he was improving its status, merely maintaining its status, or suffering the grave wound of humiliation.

I turned to the literature of the physiology of the brain for the answer, only to discover that Sigmund Freud had stopped the physical study of the brain cold for 40 years. Freud had been so persuasive, had so convinced the scientific community and the academic community in general that he had found the final answers to mental disturbance in his theories of the id, the ego, the superego, and the Oedipal drama within the family, that it was rather pointless to go through the tedious, laborious business of determining what synapses, what dendrites, what circuits in the brain accounted for what one already knew anyway. The physical study of the brain didn't resume until 1969, thanks to the work of a Spanish physician and brain physiologist named Jose Delgado.

Delgado had also run tests of sensory deprivation on healthy young college students. He put them in sensory deprivation chambers that were absolutely soundless. The temperature was set so that the human body would detect neither heat nor cold. The room was well-lit, but the subject wore translucent goggles and could perceive light but he could make out no details. The subject wore special gloves that reduced the tactile sense to a minimum. Within hours, not days, the subjects, these healthy young people, would begin hallucinating, losing their minds. To Delgado, this was proof of his proposition that the human mind is in fact not the possession of the individual but more of a town square into which anyone can come, into which any animal can come, into which even vegetation can come. And what the human beast thinks is his mind is in fact--and these were Delgado's words--a "transitory combination of elements borrowed from the environment."

Delgado's theory of the mind as totally dependent upon the environment perhaps explains some of the more bizarre anomalies of recent history. In what became known as the Stockholm Syndrome, and in the case of Patty Hearst, young women were abducted and put into an environment totally controlled by their captors and closed to any outside influences whatsoever. In both cases, the young women emerged as friends and comrades of their captors; and in Patty Hearst's case, as their confederate in a bank hold-up. Having no other basis upon which to base their own status, they adopted an entirely new one.

Delgado stressed the role of culture. Culture referred to those things in human life that could not exist without speech, whether culture in the sense of the arts or culture in the sense of the manners and mores of a society. Delgado insisted that the brain and its genetic history and evolution was simply the substratum upon which culture wrought its effects. He did not know the precise neural path. After all, he was re-opening a field that had been dormant for 40 years. But just last year, barely 6 months ago, three neurobiologists may very well have discovered the answer, in a study of African cichlid fish published in an article entitled, "Rapid behavioral and genomic responses to social opportunity" in the journal PLoS Biology. Russell Fernald of Stanford, his former associate Sabrina Burmeister, now at the University of North Carolina, and Erich Jarvis of Duke studied the behavior of the fish in a laboratory tank. In the tank was an obviously dominant male and his subjects, male and female. The others were gray in color but the dominant male had swelled up within a skin of lurid stripes and was the only male who had access to the females. They then removed the dominant male in the dark of night. When light returned, another male, just as gray as before, noticed the absence of the ruler, whereupon he swelled up with a skin of lurid colors, and his gonads immediately grew to eight times their previous size, and now he had exclusive access to the females. The three neurobiologists determined that a purely social situation, a status situation, had caused changes in the brain of the newly-dominant male at the cellular and molecular level, set off by a gene, known as egr-1, located in the anterior preoptic area. They had established that a change in social status had caused a change in the brain. It was the opposite of the situation envisioned by Neo-Darwinists neuroscientists who assume is that the genetic inheritance triggers changes in status.


Book One, first verse, of the Book of John in the New Testament says cryptically: "In the beginning was the Word, and the Word was with God, and the Word was God." This has baffled Biblical scholars, but I interpret it as follows: Until there was speech, the human beast could have no religion, and consequently no God. In the beginning was the Word. Speech gave the beast its first ability to ask questions, and undoubtedly one of the first expressed his sudden but insatiable anxiety as to how he got here and what this agonizing struggle called life is all about. To this day, the beast needs, can't live without, some explanation as the basis of whatever status he may think he possesses. For that reason, extraordinary individuals have been able to change history with their words alone, without the assistance of followers, money, or politicians. Their names are Jesus, John Calvin, Mohammed, Marx, Freud--and Darwin. And this, rather than any theory, is what makes Darwin the monumental figure that he is. The human beast does not require that the explanation offer hope. He will believe whatever is convincing. Jesus offered great hope: The last shall be first and the meek shall inherit the earth. Calvin offered less. Mohammed, more and less. Marx, even more than Jesus: The meek will take over the earth now! Freud offered more sex. Darwin offered nothing at all. Each, however, has left an enduring influence. Jesus is the underpinning of both Marxism and political correctness in American universities. There was a 72-year field experiment in Marxism, which failed badly. But Marx's idea of one class dominating another may remain with us forever. In medical terms, Freud is now considered a quack. But his notion of sex as an energy like the steam in a boiler, which must be released in an orderly fashion or the boiler will blow up, remains with us, too. At this very moment, as we gather here in the Warner Theatre, you can be sure that there are literally millions of loin spasms and hip-joint convulsions that are taking place at this very instant throughout the world that would not be occurring were it not for the power of the words of Sigmund Freud. Today, Charles Darwin still reigns, but his most fervent followers, American neuroscientists, are deeply concerned about this irritating matter of culture, the product of speech. Led by the British neuroscientist Richard Dawkins, they currently propose that culture is the product of "memes" or "culturegens", which operate like genes and produce culture. There is a problem, however. Genes exist, but memes don't. The concept of memes is like the concept of Jack Frost ten centuries ago. Jack Frost was believed to be an actual, living, albeit invisible, creature who went about in the winter freezing fingertips and making the ground too hard to plow. Noam Chomsky has presented another problem. He maintains that there is no sign that speech evolved from any form of life lower than man. It's not that there is a missing link, he says. It's that there is absolutely nothing in any other animal to link up with. It becomes difficult for Neo-Darwinists to continue to say that structures consisting only of words are not real and durable. What accounts for the fact, to choose but one example, that Islam has directed the lives and behavior of literally billions of people since the eighth century?

Princeton anthropologist Clifford Geertz has written, "There is no such thing as a human nature independent of culture. Men without culture would not even be the clever savages of Lord of the Flies."

Now, at last, may we begin the proper study of homo loquax?

Income Mobility and Inequality

A recent treasury report of some interest is blogged about by Mark Perry here and here.
(additional good links in the comments)

Bizzyblog also deals here:

(The study shows) beyond doubt that the U.S. remains a dynamic society marked by rapid and mostly upward income mobility. Much as they always have, Americans on the bottom rungs of the economic ladder continue to climb into the middle and sometimes upper classes in remarkably short periods of time.

The study is also valuable because it shows that income mobility remains little changed from what similar studies found in the 1970s and 1980s.

….. The political left and its media echoes are promoting the inequality story as a way to justify a huge tax increase. But inequality is only a problem if it reflects stagnant opportunity and a society stratified by more or less permanent income differences. That kind of society can breed class resentments and unrest. America isn’t remotely such a society, thanks in large part to the incentives that exist for risk-taking and wealth creation.

The impressive mobility and income statistics in the report collectively remind us of three points that Old Media and too many politicians want us to forget:

  • First, that those on the bottom rungs of the economic ladder typically don’t stay there very long, i.e., being irretrievably “stuck in poverty” is largely a myth.
  • Second, since the poor are not the same people from year to year, and since the poor who replace the ones who just moved up are either new workforce entrants or people who have fallen from greater heights, it’s likely that they too will make or remake their way up the economic ladder in a relatively short period of time.
  • Third, the rich are also not the same people from year to year. To the extent that they still exist, high punitive tax rates single out different people each year, “rewarding” their newfound success with confiscatory tax bills.
Did I mention this?
The study is also valuable because it shows that income mobility remains little changed from what similar studies found in the 1970s and 1980s.

Will Franklin's take was also worthwhile:

When people talk about "inequality" today in the context of American politics, it often seems like people are using the same words but meaning vastly different things. As high school debate judges like to say, "it's like ships passing in the night."

We hear people talk about "the rich" and "the middle class" and "the poor" all the time, without any adequate definitions to guide us. The populists and class warfare hawks (like John Edwards) thrive on the fact that many people conceptualize "rich" and "poor" as fixed positions over time.

In the real world, those positions change with regularity. On the Forbes 400 list, for example, there are sources of wealth listed that did not even exist a decade or two ago. 270 of the 400 (67.5%) are classified as entirely self-made, while 74 (18.5%) inherited their fortunes. 56 (14%) inherited some of it, but made some of it on their own. The top of the Forbes 400 list is not populated exclusively by Rockefellers and Carnegies and other old wealth.

Similarly, people at the very bottom of wealth and income levels in America do not remain there forever, either.

Even more impressive is the increase in mean (rather than median) income of the lowest quintile (.pdf):


Appropriately, this 232.5% increase indicates that, while the median income of the lowest quintile almost doubled (the median part indicating widespread improvement), the impressive gains in the mean show that some in the lower quintile (like the ones who made it all the way to the top 1%) far outperformed others. Inequality in action.

You simply do not see these kinds of numbers in many countries, especially those with rigid pro-union labor laws and punishingly high taxes. Yet, many of those countries are moving toward flatter, lower taxes, while Democrats in America want to move us backward toward a frightening and stifling era of economic policy. As it should be noted any time equality is cited as a aspirational goal of public policy, let's pause here and recall that the heydays of income equality in America were the 1930s and 1970s.

Do we really want to emulate the policies of the 1930s and/or 1970s, the two worst decades for the economy in the 20th century, in order to achieve a greater level of equality? Yuck.

No wonder so many people are confused by the whole concept of equality (and inequality). Fortunately, my intuition tells me that most Americans "get" that when The Declaration of Independence declares "that all men are created equal," it doesn't guarantee Soviet-style equality of outcomes. America does guarantee, as John Adams wrote to Patrick Henry a month and a day before the drafting of The Declaration, equality under the law: "The decree is gone forth, and it cannot be recalled, that a more equal liberty than has prevailed in other parts of the earth must be established in America."

Equal liberty. In other words, the equal treatment, under the law, of all citizens, from the government. The equal opportunity to fail, middle out, or succeed.

Sticking it to successful people-- via graduated and progressive income taxes, for example-- seems inherently antithetical to the very concept of America.

Because incomes and wealth are always changing, inequality is fleeting. The fact that "the poor" and "the rich" are not the same people after ten years essentially makes inequality moot as a problem -- or symptom of a problem-- that needs attention. The constant harping on inequality in the political arena, meanwhile, will probably remain a peeve of reasonable people as long as populists need an easy backup plan to fall back on when nothing else is working.

I second that!

Update: from this article:

Those who are concerned with income inequality often present their argument as though there are two choices. One can either side with the market fundamentalists whose "blind faith" claims that the market will work itself out or they can side with "realists" who believe government intervention is necessary to correct for this market failure. However, this is a false dilemma. As Arnold Kling so eloquently explained, there are many of us who concede that markets fail, but we are much more concerned with government failure. And there is certainly reason to believe that the government will fail to equalize economic outcomes. For example, the most frequent solution to income inequality, and the one advocated by Krugman in nearly every interview about his book, is higher taxes on those at the top of the income scale. While this may give the appearance of lessening inequality, in actuality it does very little. Essentially, it is equivalent to twisting the ankle of the fastest runner in the world in an attempt to make other runners faster. In no way does this make other runners faster.

...income inequality is a poor measure of prosperity. In reality, economic growth and innovation will do more to help the poor and the middle class than any conceivable government policy.

Wednesday, November 07, 2007

Incentives and Time

In Howard's recent post "In Love with a Fantasy", he wrote:
If you spend some time perusing political and economic blogs you might read posts or comments by people who are enamoured with the Swedish economic/social model. Unfortunately their perceptions are detached from reality...
However, what's interesting is that for many years, decades even, those perceptions were not detached from reality. Sweden was one of the richest countries on earth while having very high tax rates and a high degree of socialism. It took a very long time for Sweden's adoption of socialism to catch up with them.

It's pretty straight forward to understand why there was such a large delay between the Sweden becoming a socialist country and the relative slippage of its economic growth by considering a fairly simple thought experiment. Let's consider a world where there are two career paths:
Career Path A: After graduating from high school at 18 you average $50,000 per year salary. Think of this career path as blue collar workers.

Career Path B: After an additional 10 years of school costing $250,000 (plus 10 years lost opportunity cost of $500,000) you average $200,000 per year salary. Think of this path as doctors and other professionals.
Let's also consider two possible tax structures:
Flat Tax Structure: 20% of all income.

Progressive Tax Structure: Income is tax free up to $50,000. Over $50,000, 80% is taxed.
Let's say that the tax structure starts out as the Flat Tax Structure. In this case, Path B takes 6.25 years after graduation to catch up with Path A (by paying off school costs and overcoming lost opportunity) which occurs at 34.25 years of age. That's quite a long payback time when you consider that most businesses won't consider an investment with a payback time that's much more than five years (unless it's a very low risk investment). Nonetheless, it's not a bad deal, because if you survive till 34.25, after that you are a lot better off.

Now let's say the tax structure is changed to the Progressive Tax Structure. This is somewhat similar to the tax structure in a country like Sweden.

Those who are in the middle of their careers and have already made their career path choice are stuck. Even though their after tax income has dropped from $160,000 to $80,000, those who chose Path B have little choice but to stick with their careers. It doesn't do them any good to drop their after tax incomes further to $50,000 by switching back to Path A. Perhaps they'll retire a little earlier, but perhaps some have debts and other obligations that force them to work harder and longer.

So at first, there is little negative impact on the economy in this hypothetical world and there are a couple of benefits. The poor Path A people are now better off. Their after tax income has increased from $42,000 to $50,000. In addition, the government can now provide free services like health care to everybody using the windfall in revenues from taxing the rich Path B folk at a much higher rate. So the Path A folk are even better off. These benefits can continue for quite some time, as long as the composition of the work force remains more or less the same.

However, now the career path investment choice looks much different. It now takes 25 years after graduation for Path B to overcome costs of school plus lost opportunity which pushes the break even point to age 53. Thirty-five years is a very, very long time to break even. What's clear is that, at the margin, fewer people are going to invest in themselves and follow Path B. Even if the school costs are subsidized, the lost opportunity costs still make Path B quite onerous.

So, over time, fewer and fewer people will choose Path B and instead will go with Path A. Tax revenues will drop accordingly. Benefits to the poor Path A people will strain the system. Overall, the economy is worse off with fewer high skilled workers and more lower skilled jobs. Sounds a bit like Sweden, no?

But isn't it still true that the poor Path A people pay no taxes and the wealthier Path B professionals bear more of the burden? Not necessarily. Since there will eventually be many fewer Path B people, they will be in much higher demand relative to supply and can therefore charge far more for the goods and services they provide. Perhaps they now make $500,000 instead of $200,000. The delta of $300,000 is essentially a tax on everybody to incentivize enough people to choose Path B to meet demand. The Path A people pay this indirect tax just like everybody else. If they paid $10,000 for Path B services under the Flat Tax Structure, they now pay $25,000 and 80% of that ends up being paid in taxes by the Path B workers. Essentially, the indirect tax on Path A people under the Progressive Tax Structure exceeds the direct tax under the Flat Tax Structure so everybody pays more taxes, the economy is smaller, and everybody is worse off.

There's little doubt in my mind that progressive tax structures provide disincentives to people trying to become progressively wealthier by investing in things like education and training and that limits overall wealth creation. Furthermore, the working poor still bear a similar share of the burden of government expenditures via increased costs of higher salaried people.

The government can't help the working poor via taxing the rich - the government can only hurt them in the long run. Just like Sweden.

Tuesday, November 06, 2007

In Love with a Fantasy

If you spend some time perusing political and economic blogs you might read posts or comments by people who are enamoured with the Swedish economic/social model. Unfortunately their perceptions are detached from reality:

If Sweden left the European Union and joined the United States we would be the poorest state of America. Using fixed prices and purchasing power parity adjusted data, the median household income in Sweden in the late 1990s was the equivalent of $26,800 compared with a median of $39,400 for U.S. households - before taxes. And then we should remember that Sweden has the world´s highest taxes.

The Swedish Research Institute of Trade, who made the study, underlined that Afro-Americans, who have the lowest income in the United States, now have a higher standard of living than an ordinary Swedish household.

That story came as a shock to many about a month ago. But mostly to foreigners, not to Swedes. Since the 1970s, we are used to news about Sweden lagging behind the rest of the world in wealth and income. It was more of a shock to Americans and Europeans who used to think about Sweden as the perfect example, the exception that could combine the big welfare state with a productive economy. If this social model was a part of the US, it would be considered a social problem. How did this come about?

To understand this, we have to understand that Sweden was never an exception to the rule that wealth can only be created by free men and women, on a free market.

After more than 30 years of high taxation and an expanding welfare state, Sweden is not the 4th richest OECD-country any longer, but the 17th [Update 2005: 15th]. This hurts the least well off most. Between 1980 and 1999, the gross income of Sweden´s poorest households increased by just over six percent while the poorest in the United States enjoyed a three times bigger increase.

Free markets and free trade were the basis for the Swedish miracle. Sweden was not an exception, and therefore it is no surprise that the shift away from free markets undermined the miracle.

In 1934 the two Swedish social democratic ideologues Gunnar and Alva Myrdal explained that there were extremely beneficial conditions for a welfare state in Sweden - considering our wealth, the homogenous population, the protestant work ethic and the good education. If the welfare state didn´t work here, it couldn´t work anywhere in the world, they thought. The rest of the world should seriously ponder the fact that the Myrdals were right in that prediction.

see also(drawing upon above article and others):

If Sweden Left The EU and Joined the US, It Would Be the Poorest U.S. State, Below Even Mississippi

EU vs. USA Smackdown: EU Still Below Mississippi

Friday, November 02, 2007

Market Design

The term market failure is often used when we don't like the market outcome. Markets are dependent on the rules and constraints in place. Incentives, transaction costs, information and regulation all matter in producing particular outcomes. Sometimes we know enough to improve the rules and sometimes we don't. One section of this Arnold Kling column, So You Want to be a Masonomist deals with the matter:

At the University of Chicago, economists lean to the right of the economics profession. They are known for saying, in effect, "Markets work well. Use the market."

At MIT and other bastions of mainstream economics, most economists are to the left of center but to the right of the academic community as a whole. These economists are known for saying, in effect, "Markets fail. Use government."

Masonomics says, "Markets fail. Use markets."

Somewhere along the way, mainstream economics became hung up on the concept of a perfect market and an optimal allocation of resources. The conditions necessary for a perfect market are absurdly demanding. Everything in the economy must be transparent. Managers must have perfect information about worker productivity and consumers must have perfect information about product quality. There can be nothing that gives an advantage to a firm with a large market share. There cannot be any benefits or costs of any market activity that spill over beyond that market.

The argument between Chicago and MIT seems to be over whether perfect markets are a "good approximation" or a "bad approximation" to reality. Masonomics goes along with the MIT view that perfect markets are a bad approximation to reality. But we do not look to government as a "solution" to imperfect markets.

Masonomics sees market failure as a motivation for entrepreneurship. As an example of market failure, let us use a classic case described by a Nobel Laureate, which is that the seller of a used car knows more about the condition of the car than the buyer. Masonomics predicts that entrepreneurs will try to address this problem. In fact, there are a number of entrepreneurial solutions. Buyers can obtain vehicle history reports. Sellers can offer warranties. Firms such as Carmax undertake professional inspections and stake their reputation on the quality of the cars that they sell.

Masonomics worries much more about government failure than market failure. Governments do not face competitive pressure. They are immune from the "creative destruction" of entrepreneurial innovation. In the market, ineffective firms go out of business. In government, ineffective programs develop powerful constituent groups with a stake in their perpetuation.

I was thinking about the relevance of this because recent winners of the Nobel Prize in Economics focused on Mechanism Design. Economist Peter Boettke give us these posts,
Explaining Mechanism Design Theory and here

Leonid Hurwicz (along with Roger Myerson and Eric Maskin) have been named the 2007 Nobel Prize winners in economics for their foundational work in mechanism design theory.

Mechanism design theory ---- which seeks to find rules of the game so that the institutional structure operating under those rules will produce social optimum ---- was a by-product of Hayek's informational and incentive challenge to socialism and market socialism in the 1930s and 1940s. Mathematical economists who took Hayek's challenge seriously set off on the path to provide the appropriate mechanism design that would meet Hayek's challenge.

Surely mechanism design theory has its problems --- don't all intellectual efforts? --- but its original motivation (to answer Hayek's challenge), and its subsequent development (focus on rules, incentives and information) is very useful for studying firms, markets, politics, and ultimately economic systems.
Alex Tabarrock explains further:

Mechanism design is a very general way of thinking about institutions. An institution or mechanism takes as input "messages" or "signals" from agents and it responds with an outcome. The idea of mechanism design is to create institutions that produce a desirable outcome while respecting the fact that agents have private information and are self-interested. It turns out that designing mechanisms that work well while respecting information and self-interest constraints is very difficult.

Ironically, the market, an undesigned mechanism, is the best example of a powerful incentive-compatible mechanism. Thus, in their explanation for the prize the Nobel committee wrote:

"These results support Friedrich Hayek's (1945) argument that markets efficiently aggregate relevant private information."

Mechanism design, however, is not simply a mathematical apparatus justifying the insights of Hayek. Leonid Hurwicz, the godfather of the field who is now in his nineties, was influenced by Hayek and by his opponent Oscar Lange. One can think of Hurwicz as trying to prove when the goals of Lange could work even taking into account the objections of Hayek.

It's long been known that markets are challenged by externalities, public goods, asymmetric information and so forth. Standard public finance theory says "thus government"—a clear example of the nirvana fallacy.

Mechanism design theorists at least take their challenge seriously, and thus try to design institutions that work under the same constraints as the market—i.e. institutions that respect information and self-interest constraints. The results have been mixed.

More realistically, I see mechanism design as a tool to make markets more powerful. In some situations, for example, mechanism design shows that public goods can be voluntarily provided. In other situations, mechanism design can make government more effective, but it will do so by making government more "market-like."

Overall, mechanism design increases our appreciation of markets, if only by showing how difficult it is to produce good outcomes while respecting the constraints that markets must satisfy. In a sense, mechanism design is to markets what genetic algorithms are to life. Theorists may one day design a better market mechanism or a better genetic code but for now the gains will come from using our deeper understanding to gently improve something that's already pretty marvelous.

This paper by Al Roth, a colleague of Greg Mankiw, offers some general ideas on market design as well as some specific cases he has dealt with in the fields of education and in organ transplant exchanges:
To work well, marketplaces have to provide thickness, i.e. they need to attract a large enough proportion of the potential participants in the market; they have to overcome the congestion that thickness can bring, by making it possible to consider enough alternative transactions to arrive at good ones; and they need to make it safe and sufficiently simple to participate in the market, as opposed to transacting outside of the market, or having to engage in costly and risky strategic behavior.
Here is a video covering the same material.

Hey, if instances in which markets have problems can really be improved upon... then again I'm reminded of a Hayek statement, "the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Thursday, November 01, 2007

Those Darn Beliefs

In the poor inheritance post I presented material from Doug North which described the role of beliefs, attitudes and behaviors and the institutions to which they give rise as being significant in determining what kind of progress a society could achieve. While being generally positive about the role of globalization in lifting more people out of poverty, we should not be surprised by uneven results. In a column by Robert Samuelson, The Global Poverty Trap he explains why this is so:
One of the big debates of our time involves the causes of economic growth. Why is North America richer than South America? Why is Africa poor and Europe wealthy? Is it possible to eliminate global poverty?

Comes now Gregory Clark, an economist who interestingly takes the side of culture. In an important new book, " A Farewell to Alms: A Brief Economic History of the World," Clark suggests that much of the world's remaining poverty is semi-permanent. Modern technology and management are widely available, but many societies can't take advantage because their values and social organization are antagonistic. Prescribing economically sensible policies (open markets, secure property rights, sound money) can't overcome this bedrock resistance.

"There is no simple economic medicine that will guarantee growth, and even complicated economic surgery offers no clear prospect of relief for societies afflicted with poverty," he writes. Various forms of foreign assistance "may disappear into the pockets of Western consultants and the corrupt rulers of these societies." Because some societies encourage growth and some don't, the gap between the richest nations and the poorest is actually greater today (50 to 1) than in 1800 (4 to 1), Clark estimates.

What distinguished England, he says, was the widespread emergence of middle-class values of "patience, hard work, ingenuity, innovativeness, education" that favored economic growth. After examining birth and death records, he concludes that in England -- unlike many other societies -- the most successful men had more surviving children than the less fortunate. Slowly, the attributes of success that children learned from parents became part of the common culture. Biology drove economics. He rejects the well-known theory of German sociologist Max Weber (1864-1920) that Protestantism fostered these values.

Clark's theory is controversial and, at best, needs to be qualified. Scholars do not universally accept his explanation of the Industrial Revolution. More important, China's recent, astonishing expansion (a fact that he barely mentions) demonstrates that economic policies and institutions matter. Bad policies and institutions can suppress growth in a willing population; better policies can release it. All poverty is not preordained. Still, Clark's broader point seems incontestable: Culture counts.

Capitalism in its many variants has been shown, he notes, to be a prodigious generator of wealth. But it will not spring forth magically from a few big industrial projects or cookie-cutter policies imposed by outside experts. It's culture that nourishes productive policies and behavior.

By and large, nations have either lifted themselves or have stayed down. Societies dominated by tribal, religious, ideological or political values that disparage the qualities needed for broad-based growth will not get growth. Economic success requires a tolerance for change and inequality, some minimum level of trust -- an essential for much commerce -- and risk-taking. There are many plausible combinations of government and market power; but without the proper cultural catalysts, all face long odds.

It's hard to make progress if the culture is averse to wealth creation and the supporting beliefs, habits and institutions. Even mimicking the incremental steps of another society provides no guarantees.

Wednesday, October 31, 2007

Resilience vs. Anticipation

I really enjoyed this Virginia Postrel column from awhile back via Instapundit and Ed Driscoll:

Boston's winter is a natural disaster, but its predictability changes everything. As Hutchinson suggests, New Englanders know winter is coming. Bad weather is annoying but easy to plan for: You build snow days into the school year, buy a car with four-wheel drive, get used to scraping ice and shoveling snow. You make sure you have a coat, hat, and gloves. Snow, says Hutchinson, is no big deal: "You just put on boots." Life has a regular rhythm.

Good weather plus earthquakes creates an utterly different environment. On a day-to-day basis, you can concentrate on your goals, with no need for contingency plans. Your softball game, your picnic, your wedding won't be rained out. But everything could change in an instant. You can't anticipate earthquakes, can't plan for them, can't even predict when and where they'll strike. Instead of providing the certainty of seasons, nature promises a future of random shocks. All you can do is develop general coping skills and resources. There is nothing familiar about the aftermath of an earthquake, and no one survives it alone.

IN HIS 1988 BOOK, SEARCHING FOR SAFETY, the late UC-Berkeley political scientist Aaron Wildavsky laid out two alternatives for dealing with risk: anticipation, the static planning that aspires to perfect foresight, and resilience, the dynamic response that relies on having many margins of adjustment: "Anticipation is a mode of control by a central mind; efforts are made to predict and prevent potential dangers before damage is done. Forbidding the sale of certain medical drugs is an anticipatory measure. Resilience is the capacity to cope with unanticipated dangers after they have become manifest, learning to bounce back. An innovative biomedical industry that creates new drugs for new diseases is a resilient device. . . . Anticipation seeks to preserve stability: the less fluctuation, the better. Resilience accommodates variability; one may not do so well in good times but learn to persist in the bad."

Here, then, is the basic difference between the valley and the Hub: Viewing the world as predictable and itself as the center of the universe, Boston has encouraged strategies of anticipation. People try to imagine everything that might go wrong and fix it in advance. But in Silicon Valley, there are no certainties. The future is open and subject to upheaval. Resilience is the strategy of choice. People do the best they can at the moment, deal with problems as they arise, and develop networks to help them out.

But anticipation doesn't work when the world changes rapidly, and in unexpected ways. It encourages two types of error: hubristic central planning and overcaution.

Resilience, however, is less a guarantee of corporate success than it is a way of reducing the risk for individual careers and the regional economy. A strategy of resilience means not that companies won't fail but that resources--including human resources--are more likely to move to better uses more quickly, with less trauma. Indeed, the willingness to abandon losing projects is fundamental. The idea is to adjust quickly, on a small scale, rather than all at once: to be like grass bending before the wind, then springing back, rather than a solid oak that comes crashing down in a storm. In a resilient economy, employees have choices, and they move around.

"On the East Coast," says Mundy, "it's the building of the thing that's most important. And on the West Coast, the sharing of it is relatively more important. Getting things out to the light of day seems more important there."

Once they hit the light, no one can anticipate just where innovations will lead--or whether they will in fact succeed. It is by trusting the search, permitting experiments whose results no one can know, that we allow advances to occur. In a 1979 paper, Wildavsky prefigured his discussion of anticipation and resilience with a meditation on the sources of progress. It depends, he suggested, on spontaneity and serendipity, on discoveries no one can predict or foresee: "Incessant search by many minds...produces more (and more valuable) knowledge than the attempt to program the paths to discovery by a single one....Not only markets rely on spontaneity; science and democracy do as well....Looking back over past performance, adherents of free science, politics, and markets argue that on average their results are better than alternatives, but they cannot say what these will be....The strength of spontaneity, its ability to seek out serendipity, is also its shortcoming--exactly what it will do, as well as precisely how it will do it, cannot be specified in advance."

Nowadays it seems that every place wants to be like Silicon Valley--to discover its secrets and copy them. Here, then, is a secret that can be copied, even in places with lousy weather and stable ground: Don't ask for answers in advance. Don't try to create a life without surprises. Trust serendipity.

Read it all, it's worth it. What would you expect from Virginia Postrel?