Potpourri
* “Stuff” that libertarians say (HT2 Tyler Cowen). Some made me chuckle.
* Glenn Greenwald on Leon Panetta’s confirmation (not in so many words) that yes, Barack Obama is Emperor Palpatine.
* Speaking of which, did you actually read the details of what happened to those British tourists who were tweeting jokes about digging up Marilyn Monroe? It’s not like they were put back on a plane right away.
* This customer service call to Verizon–to dispute a billing charge–crystallizes for me 90% of human conflict. First of all it’s hilarious, as most arguments are. (I lost the links, but recently John Cochrane, a big-shot economist at the top school in the world, tattled on Paul Krugman for hurting his feelings. Then Nobel laureate Krugman responded that Cochrane had started it.) The kid in this call is obviously correct, and he’s understandably frustrated at the “idiots” at Verizon. But hang on–the kid actually didn’t do a good job explaining the problem. A few times he started down the right path, but then crucially he swerved away before driving home the lesson. Furthermore, he would periodically insult the people, while they could hear him. So of course the Verizon people–who must deal with thousands of people using bogus excuses to try to get out of their bills each week–aren’t going to really listen to him. Think of this way: If you’re the manager, and you’re talking to this kid after he’s been through 5 of your subordinates, you’re not thinking, “Wow I bet this kid is right, our whole billing infrastructure is based on a simple math error, and our staff are so stupid that 5 people in a row missed it.” No, you’re thinking, “This kid is a punk who doesn’t want to pay his bill. Yep! He just sarcastically said we don’t know math. Uh huh, I’ve dealt with wisealecks like this before.”
* Speaking of Krugman and civility, Richard Williamson noticed a contradiction (Kontradiction?) in Krugman’s views on this stuff. Incidentally, there is another Kontradiction: Krugman always complains that nobody takes him seriously, that all the “Very Serious People” believe in austerity. And yet, when justifying his rudeness to intellectual opponents, Krugman asks Cowen et al. to point to polite commentators who have more influence than he does.
* A former (online) student is working at FEE, and asked me to plug their summer seminars. Of course, if you can stand the heat, nothing beats Alabama in late July.
* Here’s the video (parts 1 and 2) of that PorcFest roast of Stefan Molyneux, but be careful this is the director’s cut. My part starts around the 20:00 mark on the second one, and the Uncle Sam girl to whom I allude in on the first one. BTW, word on the street is that we will probably have another roast at this year’s PorcFest (in late June in New Hampshire).
Heads EMH Wins, Tails Its Opponents Lose
More circularity posing as profundity from Scott Sumner on the Efficient Markets Hypothesis (EMH):
The past five years should have been an absolute gold mine for the anti-EMH types that supposedly dominates the hedge fund industry. Just think about it. Shiller says stocks are way too volatile, and the US stock market has been incredibly volatile since 2007. No need to worry about the market staying irrational for too long, the long run adjustments occurred quite rapidly. Then we had the mother of all housing bubbles in 2006, another great opportunity for people to rake in profits from market inefficiency. The year 2008 should have seen extraordinary profits to the hedge fund industry, with all that “irrationality” being corrected. Instead they lost more than they’d made over the previous decade.
OK, so if I understand Scott’s argument, it runs something like this:
(1) Hedge funds tend to be dominated by people who don’t believe in the EMH.
(2) If hedge funds do poorly, it means the EMH is true.
(3) Hedge funds did poorly in the last five years.
(4) Therefore the EMH is true.
So if that’s right, then if we could find a period where hedge funds did very well–as in, they beat other sectors of the market–then that should be an argument against the EMH.
Well, we do have such a period, from 2000-2007 or so. I know about it, because Scott discussed it about 3 paragraphs earlier in that same blog post.
As I pointed out in one of my favorite articles, “Economists Can Be Hilarious,” the EMH is a tautology, it’s a way of viewing the world. When Wall Street is doing great, believers of the EMH will say, “See? You can’t beat the market. These hedge funds have physics PhDs and supercomputers running crazy algorithms that squeeze every last ounce of arbitrage out of mispricings. Don’t even try to compete with these boys, just put your money in a mutual fund.”
Then, when the market crashes and all the hedge funds blow up, the believers of the EMH say, “See? What’d we tell you? It’s really hard to beat the market, even these billionaires can’t do it. Just put your money in a mutual fund.”
Last point: I’m not even saying the EMH is a bad pair of binoculars to wear, or that Sumner’s worldview is bad. I’m saying, Sumner thinks he is being empirical, when in fact no matter what happens, he will see his “theory” passing with flying colors.
P.S. Gene Callahan has a good critique of Scott’s post too.
Reminder About Mises Academy Class
Remember kids, my class on Mises’ first major work starts tomorrow; infomercial is here. As I said on Facebook: If you don’t have the money for it, put it on credit.
I don’t think we will have the time to talk too much about clearinghouses, but Mises does do a great job explaining that in his book. Why is it relevant? Because then you can solve Internet brain teasers, as David R. Henderson (quoting Jeffrey Rogers Hummel) shows.
The First (of Several?) Posts on Romans 13
Atheist libertarians love to quote Romans 13: 1-7 at me. I have been delaying addressing it for a long time, not because I have nothing to say, but because it’s such an important passage and requires a long answer. However, after at least 6 months of doing this, it’s clear that I’m never going to have time to “do it justice.” So I’ll fire off some of my thoughts on this post, probably argue with a bunch of you, and then presumably do follow up post(s) in the future.
OK so here’s the text:
1 Let everyone be subject to the governing authorities, for there is no authority except that which God has established. The authorities that exist have been established by God. 2 Consequently, whoever rebels against the authority is rebelling against what God has instituted, and those who do so will bring judgment on themselves. 3 For rulers hold no terror for those who do right, but for those who do wrong. Do you want to be free from fear of the one in authority? Then do what is right and you will be commended. 4 For the one in authority is God’s servant for your good. But if you do wrong, be afraid, for rulers do not bear the sword for no reason. They are God’s servants, agents of wrath to bring punishment on the wrongdoer. 5 Therefore, it is necessary to submit to the authorities, not only because of possible punishment but also as a matter of conscience.
6 This is also why you pay taxes, for the authorities are God’s servants, who give their full time to governing. 7 Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor.
Okay so here are my quick thoughts:
(1) On the surface, this is an admittedly odd passage. I understand why people are so bothered by it, because he makes very sweeping statements. So when I try to “explain it away”–as it will seem I’m doing to a lot of skeptics–let me at least admit to you, that I understand why this is so troubling.
(2) The thing is, we don’t even have to ask, “How could a decent libertarian support such statements?” No, the harder question is, “How could Paul himself believe such statements, if taken at face value?” Paul, remember, wrote four of his epistles (though not Romans) from prison. And moreover, it wasn’t like he slipped up and let his drinking get the better of him. No, he was in prison serving the Lord. So clearly Paul knew that it was possible for an earthly ruler to use his power to do evil.
(3) This isn’t really something foreign to the Bible. King Herod tried to have the baby Jesus killed, and an angel commanded Joseph to take Mary and his young Son to Egypt. Do we think it’s possible that Paul believed Joseph was doing the wrong thing by evading the ruler God had installed to implement His divine justice? Of course not.
(4) So now we have to ask ourselves: Does Paul really mean what a straightforward interpretation of Romans 13 suggests? If he does, then he apparently doesn’t understand his own life or any of the Bible. There are three main possibilities that I see:
(P#1) Paul is insane/illogical or the Bible is a bunch of nonsense stories and we shouldn’t be surprised at its blatant internal contradictions.
(P#2) Paul is speaking very broadly, in the sense that everything happening on Earth is a manifestation of God’s will. God is omnipotent, so everything that happens, occurs because God wants it to. For example: Why didn’t Pharaoh listen to Moses and let the Israelites go? The Bible doesn’t say, “Because Pharaoh had free will and was a bad guy, and God said, ‘Aww shucks now I guess I have to unleash some plagues.’” No, the Bible actually says “the Lord hardened Pharaoh’s heart.”
(P#3) Paul is conscious of the Romans trying to persecute Christians, and so he’s trying to be very subtle. When he says, for example, “Give to everyone what you owe them: If you owe taxes, pay taxes; if revenue, then revenue; if respect, then respect; if honor, then honor,” he’s being as coy as Jesus when He was asked if the Jews should pay the tax to Caesar. Jesus famously asked them to pull out a coin and say whose face was on it. They said Caesar, and Jesus said, “Give to Caesar what is Caesar’s, and give to God what is God’s.” So on the one hand, that sounds like He’s saying, “Pay your taxes,” but actually that’s not what He said. If you don’t think Caesar has any right to the coins you earned in commerce (say) then Jesus isn’t actually commanding you to pay. Paul might be doing something similar.
(5) If a typical American Christian tries to use Romans 13 against my libertarian/pacifist views, it’s shooting fish in a barrel. (I mean, it’s using nonviolent means to persuade the fish to stop swimming around the barrel.) I can ask him (of course it would be a guy arguing with me) if he supported the removal of Saddam Hussein, he would answer of course he did, and then I would ask why we had the audacity to send troops to remove the political ruler God had installed to punish Iraqi rapists and murderers. Oops.
(6) Another interesting point (HT2 Norman Horn) is to look at the preceding chapter. Right before Paul says the stuff that horrifies a modern Rothbardian who is an atheist, look at what Paul writes:
2 Do not conform to the pattern of this world, but be transformed by the renewing of your mind. Then you will be able to test and approve what God’s will is—his good, pleasing and perfect will.
…
14 Bless those who persecute you; bless and do not curse. 15 Rejoice with those who rejoice; mourn with those who mourn. 16 Live in harmony with one another. Do not be proud, but be willing to associate with people of low position. Do not be conceited.17 Do not repay anyone evil for evil. Be careful to do what is right in the eyes of everyone. 18 If it is possible, as far as it depends on you, live at peace with everyone. 19 Do not take revenge, my dear friends, but leave room for God’s wrath, for it is written: “It is mine to avenge; I will repay,” says the Lord. 20 On the contrary:
“If your enemy is hungry, feed him;
if he is thirsty, give him something to drink.
In doing this, you will heap burning coals on his head.”21 Do not be overcome by evil, but overcome evil with good.
Now are the atheist libertarians really so sure that if more and more people did that from Chapter 12, but then also (because of Chapter 13) paid their taxes and didn’t try to violently overthrow the government, that the power of government would grow? Hardly. If the majority of people molded their hearts to conform to his outline in Romans 12, the politicians wouldn’t get anywhere, promising to lock up bad guys or blow up threats to national security. And in fact, in that respect the two chapters are very compatible: Even if you think the government is practicing evil, don’t you stoop to the same level in trying to overcome it.
(7) Last point for tonight: Sometimes I think today’s Christian anarcho-capitalists (yes there are some of us) try to go for the gold and make it look like the people writing in the New Testament were describing a Rothbardian paradise, with very efficient capital markets and 95 different Private Defense Associations in the phone book. Of course they weren’t thinking like that. So in this post, I’m not saying Paul would have endorsed For a New Liberty if you showed it to him. I’m guessing he would have said something like, “Well of course it would be a better world if nobody used weapons to implement political institutions or to fund armies. But why stop there? It would be a better world if nobody hated his neighbor, and this fellow Rothbard talks nothing about removing the hate from our hearts.”
Look, Paul couldn’t possibly have been thinking about political institutions, law enforcement, the most efficient way to distribute food to the hungry, etc. in the way that a Rothbard or other modern Austro-libertarian does, because Paul didn’t have the benefit of all the advances in economics and political analysis that have been made since he wrote his epistles. By the same token, a “regular” American evangelical Christian nowadays believes strongly in democracy/republican government in the vision of the Founding Fathers, even though that notion might have shocked Paul. (At first I was going to say, “Today’s evangelicals think women should be able to vote, though this would have seemed inconceivable to Paul”…except I wonder how many of today’s evangelicals think women should be able to vote?)
I realize this will sound like a huge cop-out to the atheist libertarians who wanted to really “get me” with Romans 13, but so be it: The way I am picturing how a just society would deal with criminals, I think Paul would say, “That’s the government in your world.” And if Paul and I were locked up together for 6 months, maybe I could even get him to see why my vision was more compatible with the way Paul assumed government “had to” operate.
So in conclusion, I admit the beginning of Romans 13 is problematic. But it’s problematic not simply for the extreme libertarian, it’s problematic for anybody who thinks Hitler was a bad ruler. And once you figure out how (if you think it can be done) Paul’s words can deal with that particular ruler, then you can use the same technique on every other political ruler, if you so happen to believe that all political rulers commit injustice by their very position.
Income and Consumption: It’s OK to Be Different
You kids know me, when Steve Landsburg has a new post up with which I find myself in 99% agreement, I have to focus on what I don’t like. (It’s not a grudge or anything. I’m actually testing the Coase Theorem’s prediction that Steve will efficiently offer me $10,000 to leave him alone.)
Anyway, both Landsburg and Scott Sumner (with whom I agree only about 15% of the time, but that’s because he spends 85% of his posts talking about one topic) have lately been hitting their familiar theme of the evils of income taxation. (1, 2, 3) Of course, I totally agree that the government shouldn’t be taxing people’s income, and I also agree that the income tax screws up the intertemporal allocation of present vs. future consumption, and thus inefficiently penalizes saving.
Nonetheless, the way Landsburg and Sumner go about making their case, disturbs me. To give a 30,000 foot view, they often come across as saying: Investment income is really just deferred consumption out of prior wages, and so it’s not fair to tax people more heavily just because they are quirky and happen to enjoy a lifetime consumption stream that’s biased to the right. I don’t have the time to go hunting and make an airtight prosecution. My only pieces of evidence are: [UPDATE: Upon re-reading, I understand what the commenter was saying and why Steve agreed.] (A) a commenter at Landsburg’s site says something that is arguably wrong, depending on how it is interpreted (as my example below demonstrates), and Steve merely says, “Point extremely well taken.” (B) Sumner actually wrote a post saying the very concept of income was “meaningless, misleading, and pernicious.”
Before jumping into my example, here’s my basic message: As the title of my post indicates, consumption and income are different terms, and that’s OK. They are both important. Just because consumption is a more useful concept than income for certain questions, doesn’t mean we should therefore jettison the latter. (So Sumner is wrong.) Furthermore–and this point is less obvious–the standard way that a lot of free-market guys critique the income tax, obscures exactly what the concept of income does for civilization. In short, accountants aren’t fools; there’s a reason they construct Income Statements. (Have you ever heard of a Consumption Statement?)
Without further ado, here’s another Excel chart. (Don’t worry, there are no apples in this example.)
So here’s what’s going on in the table above:
There are two brothers, Paul and Freddy. They each work at a job and earn a single paycheck of $100,000, in the beginning of period 1. Paul blows the whole paycheck on consumption that period. Freddy, in contrast, only consumes half of that paycheck. He saves the rest in a bank account, where it earns 5% 10% interest every period.
The middle column tracks Freddy’s consumption through five periods. The accounting in this example is discrete (not continuous), so I have Freddy earn his interest income at the beginning of period 2 from the $50,000 in wealth that he held at the “end of period” (eop) 1. (Just to reiterate, Paul and Freddy only get labor income of $100,000 at the start. Then neither of them labors another second.) You can see the vagaries of Freddy’s wealth, as he changes his consumption from period to period. During period 5, Freddy consumes his remaining wealth, and so ends with nothing, just as Paul had done by the end of period 1.
Now here is what Steve Landsburg and Scott Sumner want us to take away from this demonstration: Both Paul and Freddy put in the same labor effort in period 1. They each earned $100,000 in salary or wages. Paul is prodigal, and consumed it all immediately. Freddy, in contrast, deferred his enjoyments, and spread the consumption out over 5 periods. However, if you calculate the present discounted value of Freddy’s consumption from the perspective of period 1 then you find over his lifetime, Freddy will consume exactly $100,000 worth of goods and services, just like Paul.
So Landsburg and Sumner argue that because of this phenomenon, clearly it would be unjust to have an income tax, or at least to have a tax on capital income (as opposed to labor income). In the table above, if there had been an x% income tax every period (that didn’t distinguish between labor and capital income), then Freddy would clearly pay more in taxes during his life. In period 1, he would pay the same in taxes as Paul, but then in periods 2 – 5 he would get dinged on his interest income too. Even in present value terms calculated in period 1, Freddy would pay more in taxes during his lifetime, and not because he was “richer” than Paul–so Landsburg and Sumner would argue–but merely because he decided to spread out his consumption.
Another way of seeing this important point is to imagine that there are extensive derivative markets to deliver future goods. (The casual reader probably wants me to call these “futures markets,” but that’s actually not right. Really what we’re talking about here is Freddy using all of his income in period 1 to buy call options with a strike price of $0, on the consumption items dated periods 2 – 5 that he desires.) So in period 1, Paul buys a steak dinner for $100, but Freddy buys an airtight claim to a steak-dinner-delivered-in-period-3 for $90.70 $82.64. (This assumes the spot price of a steak dinner will still be $100 in period 3.)
If this is how Freddy arranged his affairs in period 1, in order to set up his desired lifetime consumption stream using that paycheck from period 1, then gosh it really does look like Paul and Freddy are both spending all of their paychecks in period 1–it’s just that they have different tastes. Paul likes burgers-with-pickles, while Freddy likes burgers-with-onions. Fine; the government shouldn’t be taxing the latter but not the former, because that wouldn’t be fair. Yet by the same token, if Paul likes to eat “steak-in-period-1″ while Freddy likes to eat “steak-in-period-3″ then why the heck should Freddy suffer a higher tax burden?
Now we can finally see why Scott Sumner hates the very concept of income. As the table above shows, even though Paul and Freddy have the same lifetime consumption (measured in market value in period 1), Freddy nonetheless has a higher lifetime income–even if we measure everything in PDV terms in period 1. (This has to be true, since Paul and Freddy both have $100,000 in labor income in period 1. So the further interest income that Freddy earns during periods 2 – 5, no matter how highly discounted, will still in period 1 push Freddy over the top in terms of lifetime income.)
For the purists, another way of seeing the injustice that so irks Landsburg and Sumner is that even doing the derivatives trick would still ding Freddy, so long as the IRS properly measured people’s accounting income. Specifically, if Freddy buys that claim ticket to a steak in period 3 that we discussed, it had a market value of $90.70 $82.64 in period 1. As time passes, that asset appreciates in market value. Maybe the government won’t ding him on the capital gain until it is realized, but when he exercises the claim in period 3, presumably the IRS will say, “Ah! You just exercised that option, which currently has a market value of $100. So you owe us tax on that capital gain from the asset you purchased at a lower price in period 1.” My point is, Freddy can’t help but earn income, even if he avoids banks and the stock market, if we do the accounting right. Because of the positive interest rate, in period 1 he can lock in consumption goods in the future, for a lower price than what their spot values will ultimately be at the time of consumption. That’s the source of the growth in Freddy’s wealth over time (offset by his consumption) and his income.
We now come to my main point: Thus far I’ve just been saying how smart Landsburg and Sumner are. So what the heck is my deal? Well, you might get the idea from those two guys that income is, I don’t know, a meaningless or useless concept. But that can’t possibly be right; of course we need income.
Specifically, Freddy can use the notion of income to guide his decisions through time. In any period, Freddy’s income tells him, “This is how much you can consume this period, without reducing your wealth below last period’s level.” Put differently, if interest rates are expected to remain constant, then your (net) income in a period tells you how much you could consume, if you wanted to maintain that level of consumption forever.
To see how that works, look again at Freddy’s numbers. In period 2, he consumed exactly his income of $5,000. That’s why his wealth at the end of period 2 was the same as it was at the end of period 1. If Freddy continued to consume $5,000 per period, his wealth would remain constant at $50,000 and he could tread water like that perpetually.
But Freddy got impatient. In period 3 he consumed twice his income. So he consumed $5,000 of his wealth or capital; he dissaved $5,000. That’s why he ended up with only $45,000 in wealth at the end of period 3.
So what? Who cares if wealth goes down? Well, that means (with constant interest rates) that in period 4, his income is now only $4,500. That means, just to tread water, Freddy now has to settle for only $4,500 in consumption. Put differently, his one-time splurge of living above his means in period 3, would forever condemn Freddy to $500 less consumption per period, if he just wanted to maintain his wealth at its new, lower level.
Then, just to round out the discussion, I have Freddy consuming all of his wealth in period 5.
In simple little thought experiments like this, Freddy might not care about such questions as, “Did I live beyond my means last period?” or “How much can I consume this period without reducing my opportunities in the future?” But in the real world–especially when things change all the time, from period to period, and we learn new information–we have to continually update our plans. In such a world, the concept of income is crucial.
Sumner is mad at the concept of income because it makes Freddy seem richer than Paul, and hence gets hit with a bigger tax burden. But that’s because Sumner is using a hammer to tighten a screw. The relevant concept is wealth, and yes, given our assumptions in this scenario, Paul and Freddy both have the same wealth in the beginning of period 1, as a result of that paycheck.
Now Sumner might complain, “OK, but in period 2 Paul has no wealth, and Freddy still has a bunch. So this is misleading.” No, it’s not. Who the heck said we should forever be condemned to calculating things from the perspective of period 1? In period 2, looking at Paul and Freddy, it really is the case that Freddy is richer in material terms, and can enjoy a higher standard of living.
We can go ahead and acknowledge these obvious facts without thereby endorsing an income tax (let alone a wealth tax). Look, I can use Sumner’s own logic against him: Take two identical twins, Lazy Larry and Workaholic Will. Larry cuts lawns once a week, and spends all $100 on consumption. Will cuts lawns every day, and spends all $700 on consumption. Under Sumner’s call for a progressive consumption tax, Will not only pays more in absolute terms, he actually pays a higher percentage of his potential consumption to the taxman. And why? Simply because Will has quirky tastes and prefers to exchange more of his leisure for other goods and services. How arbitrary is that, Sumner? What do you have against work? I think we can all see that “consumption” is a meaningless, misleading, and pernicious concept, since it gives ammunition to silly calls for a consumption tax, which is really just a penalty on work.
Last point: As the government debt debate made very clear, an important fact of life is that many people work and invest not to consume, but to pass on an estate to their heirs. That’s yet another reason that people in the real world ask their accountants to keep track of their assets and income.
Irony Alert
I was reading my favorite Keynesian’s blog today, and happened to glance at the right side, where it has links to his actual NYT columns. Here were the blurbs for his second- and third-most recent ones:
Taxes at the Top
By PAUL KRUGMAN
As Mitt Romney dances around calls for him to release his tax returns, a question about U.S. tax policy comes up: Why do the rich bear a startlingly light tax burden?How Fares the Dream?
By PAUL KRUGMAN
Martin Luther King would see a nation that judges people by the size of their paychecks.
Ludwig von Mises 1, Abba Lerner 0
I am working on my article for this month’s Lara-Murphy Report. (Carlos had mentioned that he been reading Human Action lately, and noticed that Mises talks matter-of-factly about people saving via insurance policies, so I’m elaborating on that phenomenon.) I came across this passage (pp. 843-844) which made me feel dumb:
In the process of the unhampered market economy Bill saves one hundred dollars and deposits it with a savings bank. If he is wise in choosing a bank which is wise in its lending and investing business, an increment in capital results, and brings about a rise in the productivity of labor. Out of the surplus thus produced a part goes to Bill in the shape of interest. If Bill blunders in the choice of his bank and entrusts his hundred dollars to a bank that fails, he goes emptyhanded.
In the process of government interference with saving and investment, Paul in the year 1940 saves by paying one hundred dollars to the national social security institution. He receives in exchange a claim which is virtually an unconditional government IOU. If the government spends the hundred dollars for current expenditure, no additional capital comes into existence, and no increase in the productivity of labor results. The government’s IOU is a check drawn upon the future taxpayers. In 1970 a certain Peter may have to fulfill the government’s promise although he himself does not derive any benefit from the fact that Paul in 1940 saved one hundred dollars. Thus it becomes obvious that there is no need to look at Soviet Russia in order to comprehend the role that public finance plays in our day. The trumpery argument that the public debt is no burden because “we owe it to ourselves” is delusive. The Pauls of 1940 do not owe it to themselves. It is the Peters of 1970 who owe it to the Pauls of 1940.The whole system is the acme of the short-run principle. The statesmen of 1940 solve their problems by shifting them to the statesmen of 1970. On that date the statesmen of 1940 will be either dead or elder statesmen glorying in their wonderful achievement, social security.
In fairness to my younger self, Mises doesn’t go through and spell out exactly the Nick-Rowian-OLG-endowment-economy point; Mises couches the discussion in terms of capital accumulation. Still, everything he says above is right, including the nonsense of the “we owe it to ourselves” line.
Recent Comments