The Fearlessness of Faith
In my nightly Bible readings, I’ve worked my way up to the Book of Philippians, which is Paul’s letter from prison to the church at Philippi. Here’s an excerpt from the first chapter:
12 And I want you to know, my dear brothers and sisters, that everything that has happened to me here has helped to spread the Good News. 13 For everyone here, including the whole palace guard, knows that I am in chains because of Christ. 14 And because of my imprisonment, most of the believers here have gained confidence and boldly speak God’s message without fear.
…
20 For I fully expect and hope that I will never be ashamed, but that I will continue to be bold for Christ, as I have been in the past. And I trust that my life will bring honor to Christ, whether I live or die. 21 For to me, living means living for Christ, and dying is even better. 22 But if I live, I can do more fruitful work for Christ. So I really don’t know which is better. 23 I’m torn between two desires: I long to go and be with Christ, which would be far better for me. 24 But for your sakes, it is better that I continue to live.25 Knowing this, I am convinced that I will remain alive so I can continue to help all of you grow and experience the joy of your faith.
Whether or not you believe in the divinity of Jesus, surely you can appreciate the tremendous power that Paul’s faith gave to him. What the heck can the authorities do to someone, who relishes the opportunity to share the gospel with prison guards, and who views his continued life as a necessary chore before spending eternity with Christ in paradise? You can threaten to torture the guy, but that’s about it; and if in his opposition to you he’s been as harmless as a dove, that could be a public relations disaster.
I imagine some cynics will say in the comments, “Right, just like being promised 72 virgins can get people to do all sorts of ‘brave’ things. Give me a break.” But if you are tempted to say that, I respond: Exactly. Good extension of my point. I don’t know much about Islam, but if there really are young men who truly believe that with all of their hearts, then heck yeah they will be virtually unstoppable. From my extensive studies via Hollywood films and the TV show 24, it is my understanding that the Secret Service says it’s really hard to stop somebody who is willing to die.
In this post I’m not offering an independent argument for the existence of God. Rather, I’m commenting on (a) how courageous some religious people are, though not in a conventional sense, and (b) why religious faith is so hard to stamp out, even when dictatorial means are used such as in the former Soviet Union.
Krugman Almost Renders Landsburg and Me Speechless
On the issue of corporate taxation, Steve Landsburg recently declared that Krugman had rendered him “at a loss for words.” (Although I should add, Steve managed to find 543 words to put in his post.) In this post, Steve wrote:
But if his point is that you must claim a share of those profits in order to benefit from capital accumulation, then he really has stopped even pretending to be an economist. As Professor Krugman is surely well aware, the accumulation of capital is the primary driving force behind the growth of wages.
At the time–just as when Bill Anderson says similar things–I cringed a little, thinking Steve had gone overboard.
But Krugman’s antics today on the debt stuff make me feel Landsburg’s pain. I can understand what drove him to such rhetoric.
As many of you are well aware, some of us devoted basically a week of our lives hashing out the possible problems in Krugman and Dean Baker’s “the debt isn’t a burden to our kids” stuff. Some people were anxious for Krugman to weigh in on the debate; I know many emailed him, and even some of his associates (i.e. Keynesian-friendly bloggers) were tweeting him and Dean Baker, asking for their thoughts on the charges that Nick Rowe (and later I) leveled.
To be honest, I didn’t think Krugman would say a word more about it. In my mind, Nick’s little example–which I elaborated on, in a cute Excel table with lots of purty colors–epitomized the assumptions Baker and Krugman had been making, and showed precisely what was wrong with their logic. I knew there was no way Krugman could possibly comment on that demonstration without basically admitting that he had been wrong. (If you’re curious, I gave an example of how Krugman could try to punt on the matter, but even there, I had him admitting he had been wrong, in a Krugmanesque way.)
So in order to save face, Krugman had done the only possible thing–he didn’t talk anymore about the debt stuff. Until today.
In today’s post, Krugman approvingly links to Dean Baker. Did they take on me? No. But fine, I’m a punk. Did they take on Nick Rowe? No, which is far less excusable since he is a respected economist who doesn’t have knee-jerk right-wing policy prescriptions.
What did Baker and Krugman do, instead? They picked apart some goofball Wall Street guy who doesn’t even understand their original argument. Suh-weet. Then Baker and Krugman both repeat their original argument verbatim, as if there has been nothing interesting raised against it since they first spouted it.
For the record, here is their argument (from Baker):
debt itself is not an inter-generational burden. Since ownership of the debt will utlimately be passed on to future generations (ignoring the portion that is held by foreigners — which a function of the trade deficit), the debt itself is not a generational burden.
Nope. The statement was wrong when Baker and Krugman first made it a month ago, and it’s still wrong. Specifically, their mistake is in assuming that we “pass on” the debt by bequeathing it to the next generation. But if, instead, those of our children who are holding Treasury bonds had to invest in those bonds originally, when others of our children are taxed to service this debt, then the whole thing is a negative sum game. Some of the next generation is being taxed, just to give back to others of the next generation money that they had earlier lent (to people from our generation).
I suppose it’s possible that despite all the emails, tweets, posts on Nick Rowe’s blog, Daniel Kuehn’s blog (which Krugman and DeLong read, at least occasionally), the link from The Economist, the 4 consecutive posts on Landsburg’s blog (which Krugman has responded to I think at least twice in the past), the tweets from their admirers, etc. etc., that both Krugman and Baker honestly had no idea anybody had challenged their argument who had more competence than a Wall Street executive who can’t even recapitulate what their argument is.
But I can think of other explanations that are more likely, and less flattering.
Learn the Views of Mises on Money and Banking!
Admit it: You’ve had that copy of The Theory of Money & Credit on your shelf since October 2008. When TARP went through, you thought the end was near, and you needed to go back to the ancient texts to get guidance through the storm.
But then Mises started talking about “credit money” and you punted.
Well, this class is for you.
Follow-Up on Labor versus Investment Taxes
Steve Landsburg thinks he’s got Mate in One in the comments of my previous post, so before he declares victory let me write this follow-up post.
To set the context (again), I am dissatisfied when Steve (talking about Mitt Romney) uses a thought experiment to conclude, “people with investment income bear a higher tax burden, as a percentage of their income, than anyone else.” That statement is simply false, both in theory and (probably) empirically.
First, the theoretical issues: As a fan of the work of Bohm-Bawerk on capital & interest, I recoil in horror when somebody like Scott Sumner declares that “income is a meaningless concept.” It’s true, Steve Landsburg didn’t utter such profanity, but Sumner made that statement during a previous round of arguing over the proper way to calculate tax rates. I’m pretty sure Steve and Scott were tag-teaming each other back in that debate, so if nothing else, Sumner’s absurdity shows the danger of reasoning in terms of consumption and then working backwards. (To see a careful demolition of Sumner’s reasoning–and a defense of the very important concept of “income”–read my article.)
Now then, it is simply not the case that Steve has shown “people with investment income bear a higher tax burden, as a percentage of their income, than anyone else.” What Steve has shown is that people who have a large fraction of labor income, and then save and invest some of it, have a higher lifetime total income tax burden than other people who earn labor income but do not save any of it.
Yet I can just as easily come up with logically possible scenarios where someone facing our current tax code lives exclusively off of capital gains. For example, imagine some guy hundreds of years ago homesteads a big forest full of timber. Every year it goes up in price about 3% (adjusted for price inflation), and he sells 3% of it, in order to rent living quarters and buy food. (He’s not cutting down his own trees, mind you, he just sells off a certain amount of the property each year.) So he consumes the capital gain it yields every year. He passes it to his son, who does the same, and so on until today. Thus nobody in this dynasty ever worked a day in his life, and never earned a penny from selling labor. With the present tax code, comparing this dynasty to a different dynasty where the people all worked in factories, and looking at their consumption streams with and without taxes, we would conclude that the forest family pays 15% in taxes, while the factory family pays 35%.
Now I hope I’ve made my theoretical point: Steve can imagine somebody who earns investment income and pays a higher burden (under our current tax code) than somebody who earns exclusively labor income, and for my part I can imagine somebody where the opposite is true.
Great, we’re tied at this point, and I would argue that I still have a slight edge in clarity, because Steve is still having to invoke someone who gets hit with labor taxes and then wants to invest what’s left over. But let’s move on.
Empirically, which of our stories is more relevant? I don’t know. For sure, it’s ridiculous to talk as if Mitt Romney had nothing at the beginning of calendar 2010, then worked in a coal mine for twelve months, and then in the beginning of 2011 used some of his paycheck and got lucky on penny stocks.
On the contrary, there is a ton of wealth in the United States that throws off investment earnings year after year. A lot of that wealth could be traced back to “ultimate” sources that aren’t labor, for example gold and oil deposits, fish, forests, farmland, etc. I have no idea how much of today’s wealth is “congealed past natural resources” versus “congealed past labor effort,” but I’m pretty sure the answer isn’t “basically 0% / 100%,” which seems to be implicit in Steve’s position.
Now let me throw one other curveball: Even for that portion of current wealth that is due to past labor, we have to ask what the labor tax rate was when that income was earned. For example, the current heirs to the estates of Rockefeller, Carnegie, etc. are enjoying fortunes that were originally created before the federal income tax. So it’s simply not true to casually assert–as Steve does–that he can get his mechanism to kick in, by going back to earlier generations. Empirically that might be true in a lot of cases, but not all, and it’s possible that a huge chunk of today’s wealth was never taxed the way Steve’s thought experiment suggests.
Last point: I’m not doing this merely to be a stickler. I think that to a first approximation, we can understand the history of the U.S. federal tax code by realizing that there were a bunch of powerful people in the early 20th century who wanted their families to stay on top. So they put in place legislation that would kneecap any would-be entrepreneurs who wanted to follow in their footsteps. Since these titans had already made their fortunes, they wouldn’t be hit by the ridiculous marginal income tax rates on labor income that existed at various points since 1913. No, they had all sorts of tax shelters available, including setting up “100 year trusts” or “dynasty trusts” that just coincidentally expired around the time that there was a one-year window of no estate tax. (What a coincidence, those goofballs in DC must have no idea what they’re doing when they write random changes to the tax code.)
I think it’s a mistake to write as if the poor beleaguered guys like Mitt Romney are getting crushed by the federal tax code. No, it’s small business owners who get crushed. They might make hundreds of thousands per year, but when you add up the personal income tax, the employer/employee SS and Medicare contributions (and note that SS caps out, another mechanism to shield the super rich but stick it to the small-time business owner), etc. etc., it is a huge burden. Plus they have to hire accountants etc. to fill out stupid forms that are easier for big businesses to handle.
Yes yes, the average progressive who complains about the “rich getting off scot-free!” from the current tax code is misinformed, and I’m glad people like Scott Sumner and Steve Landsburg are trying to set them straight. But I’m worried that their particular styles of arguing (a) obscure the important distinctions between consumption, wages, and capital gains, and (b) ignore the fact that very rich people write the tax code to solidify their dominance.
Potpourri
* Bob Wenzel has some concerns about gold confiscation, if the feds get serious. In short: It’s hard to hide a bunch of metal, since there are detectors built specifically for that purpose.
* Russ Roberts interviews Nassim Taleb. I will always like Taleb, because he answered my emails back in the day and even cited one of my papers in one of his books. (I don’t mean I like him because he recognizes my contribution, I mean I like him since I was nobody and he must get a million emails.)
* Robert Higgs explains why he persists, even though he doesn’t see any hope in sight.
* Little kids put down some funny answers.
* David Beckworth agrees with Ron Paul that we are all Austrians now, sort of.
* An Irish blog from a guy who makes Mises Institute apps…
* Bill Maher has a pretty good critique of bloodthirsty Christians (that Daniel Kuehn sent me). Warning, some naughty words.
* John Carney continues to debate MMTers. I suspect next month he’ll start a land war in Asia.
* Rob Bradley reminisces about Joseph Schumpeter and energy.
* The Economist blog actually linked to my “The Economist Zone” opus. I keep staring at the phone, waiting for Harvard to call. I hope I paid my bill this month.
* Somebody was so bored that he made a YouTube playlist, featuring me. (I promise I’m not the guy.)
* Sheldon Richman responds to Matt Yglesias’ description of Austrian economics.
* And last but not least, another plug to Friend me on Facebook. This guy writes:
[Bob Murphy’s] status updates are hilarious:
“Robert Murphy was talking to a guy the other day who said a government policy was like a ‘suppository.’ I’m pretty sure he meant ‘placebo,’ but actually now I’m not so sure.”
“Robert Murphy got a link to my blog from the Economist magazine. I hate to disillusion the young kids out there, but I must be honest: I didn’t get any notice from the Economist until I took my top off.”
“Robert Murphy wore my Eugen von Bohm-Bawerk t-shirt to the gym. A guy asked, ‘Is that Karl Marx?’ Let’s just say, the pacifists can no longer call me one of their own.”
“Robert Murphy has written a One Act Play involving government deficit finance. I basically picked up where Tennessee Williams left off.”
“Robert Murphy resolves in 2012 to not get frustrated when people conflate ‘complimentary’ with ‘complementary.'”
Why the Ruling Class Fears the Internet
If you’re a would-be tyrant and you’ve got a network that allows creative cynics to generate a video like this, and distribute it to millions of people, within a few days, and where all of those people know that other millions are seeing it and think it’s hilarious…well, you’ve got a problem on your hands.
Steve Landsburg 2, English Language 0
I want to give a disclaimer that usually when I think University of Rochester economist Steve Landsburg is wrong on something, it’s not that his conclusion is mistaken, or even that the world is a worse place for him having advanced the argument. No, it’s more like, I think Steve tries to deliberately shock his readers by putting his viewpoint into a package coated with shards of broken glass. Yeah, it gets your attention all right, but it can be dangerous.
A recent example of this occurred when Steve–who was making a very important point in the “does the national debt burden our grandkids?” debate–decided to throw me off the trail by declaring, in spite of the English language, that whether U.S. Treasury securities were owned by American citizens or the Chinese government, in either case “we owe it to ourselves.”
Today we will go over another example of Steve being too cute by half. In discussing Mitt Romney’s personal taxes, Steve writes:
Mitt Romney says his tax rate is “probably around 15%”…[T]he New York Times is quick to point out that he’s a beneficiary of the “fact” that investment income is taxed at a much lower rate than wages and salaries, leaving him with a lower percentage tax burden than the working-stiffs he employs.
For at least the eighth time on this blog, I want to point out that this widely believed “fact” is not true.
To understand Mitt Romney’s tax burden, you have to compare him to his doppelganger Timm Romney, who lives on a planet with no taxes. In the year (say) 2000, Mitt and Timm both earned (say) a million dollars. Timm invested his million dollars, saw it double over the past decade or so, and cashed out his investment this year, leaving him with two million dollars. Mitt, by contrast, paid 35% tax in 2000, leaving him with $650,000. He invested it, saw it double, and cashed out last year, paying 15% tax on the $650,000 capital gain. That leaves him $1,202,500, which is about 60% of what Timm’s got. In other words, the tax system costs Mitt almost 40% of his income.
By contrast, people on our planet without investment income collect their wages, pay 35% in taxes, and spend what’s left. The tax system costs them 35%, while it costs Mitt almost 40%. In other words, people with investment income bear a higher tax burden, as a percentage of their income, than anyone else — and that’s before you even start accounting for the taxes on dividends, interest, corporate income and inheritance.
I ultimately agree with Steve’s conclusion on all this stuff–namely that it’s ridiculous that the government levies any taxes on capital gains at all–but I have to conclude that his above discussion is simply wrong. Rather than demonstrating that “people with investment income bear a higher tax burden, as a percentage of their income, than anyone else,” what Steve has really shown is that if you add two different taxes on two different types of income together, the burden is higher than if you just look at the first tax. Yes, I will agree that (a+b)>a, where a,b>0. (That’s for Steve’s mathematical sensibilities.) But I didn’t just demonstrate that b>a.
In Steve’s example, Mitt first earns $1 million in wage income, which is taxed at 35%. Then, of the post-tax $650,000, he invests it and earns $650,000 in interest, dividends, or capital gains or however you want to define it. (Steve doesn’t actually specify.) That $650,000 of investment income is then taxed at 15%. Mitt ends up with $1.2 million, compared to the full $2 million that his doppelganger Timm enjoys.
So yes, Mitt suffers about a 40% effective average tax rate, compared to his no-tax doppelganger Timm. But how in the world does Steve blame this 40% burden on the tax on dividends? No, what Steve has shown is that the wage tax and the dividend tax act together to yield an average rate of 40%. Well, right, but I don’t think anybody doubted that. By the same token, if Mitt and Timm spent all of their wealth ($1.2m and $2m respectively) on gasoline, we’d end up concluding that motorists pay more in taxes than either wage earners or hedge fund managers. Would that make any sense at all?
This isn’t a little nit, this is the whole issue. Forget taxes for a minute. Suppose an intro to accounting professor asks his kids this question on a test:
Over a certain period, Mitt earns $1 million in salary and $1 million in interest. How much of his income is due to his investment earnings?
(A) 100%
(B) 50%
(C) 0%
(D) It depends on the point Steve Landsburg is trying to make with this example.
If I still haven’t convinced you–maybe you’re getting hung up on the “double taxation” thing–then I’ll go the other way: That clown Landsburg isn’t going far enough. Sure, in order for you to have any income to buy investments with in the first place, you need to have earlier earned some labor income. But Landsburg forgot that workers don’t operate on solar power–it takes food to keep them going. So in order for Mitt to have even had the ability to earn that $1 million salary in the first place, in the previous period he had to earn $50,000 in salary, out of which the government took 35%. Then Mitt had to buy groceries and pay his mortgage with it, subject to an 8% sales tax (depending on his state of residence) and property taxes. I mean, you can’t be a worker if you don’t have food or shelter! So really, when you do the math correctly, you see that compared to the no-tax Timm, Mitt the Investor is actually paying something like 60% of his income in taxes.
Does everybody see what I mean? You can play this framing games all day long. The only non-arbitrary approach is to say, “What portion of my income was actually due to my ownership of investments? Now how much on the margin was that taxed?” And the answer is 15%, which means it is perfectly correct to say, “Investment income is taxed at a lower rate than labor income.”
To conclude, I am not saying that issues of fairness or whatever dictate that investment and labor income should be taxed at the same rate. (I happen to advocate that they be so, at 0%.) All I’m saying is that it is needlessly confusing, as well as just plain wrong, to have someone earn two different types of income, add those taxes together, and declare that the total is due solely to the tax on investments.
Paul Krugman’s Been Hanging Around in Bars
…though we have no proof that he puts on women’s clothing.
Some of you may recall that in May 2011, Chicago economist Casey Mulligan wrote a critique of New Keynesian economics. He wrote:
Our labor market has long-term problems that are not addressed by Keynesian economic theory. New Keynesian economics is built on the assumption that employers charge too much for the products that their employees make and are too slow to cut their prices when demand falls. With prices too high, customers are discouraged from buying, especially during recessions, and there is not enough demand to maintain employment.
When the financial crisis hit in 2008, the New Keynesian “sticky price” story had some plausibility because economic conditions were, in fact, deflationary (although I have my doubts about other aspects of their theory). That is, the demand for safe assets surged in 2008, which means that those assets had to become expensive or, equivalently, goods had to get cheaper in order to clear the market.
Mulligan then went through an argument seeking to demonstrate that “[t]he low employment rates we have today are too persistent to be blamed on price adjustment lags,” and hence that New Keynesianism offers little guidance.
Enter Paul Krugman. For the ultimate point he wanted to make, Krugman could have said something like, “I understand why a hard-core market-clearing guy like Mulligan would think New Keynesianism is all about sticky prices, and how that gives rise to the necessity for activist fiscal policy. But, in this particular crisis at least, sticky prices aren’t really the issue, because blah blah blah.”
But no, Krugman didn’t say that. Instead, in a post entitled, “Why Casey Can’t Read,” Krugman claimed that Mulligan
should try reading a bit of Keynesian economics — old or new, it doesn’t matter — before “explaining” what’s wrong with it. For the doctrine he’s attacking bears no resemblance to anything Keynesians are saying.
This is fairly typical of freshwater economists. They know that what the other side is saying is obviously stupid, so there’s no need to read it; they picked up enough about it talking to some guy in a bar, or whatever, to criticize it.
At the time, I was flabbergasted that Krugman would take such a hard line. I explained (can’t find the link right now) that I literally was taught at NYU that a defining feature of New Keynesian economics was its insistence on the empirical reality of sticky prices (and wages), and the relevance of that fact to policy prescriptions. And I was taught this…by New Keynesian economists. I also pointed out that when self-described New Keynesian Greg Mankiw scoffed at my laissez-faire position, he cited sticky wages and prices as the problem.
Then Noah Smith jumped in, politely pointing out to Dr. Krugman that an entire class of New Keynesian models was based on exactly the mechanism Mulligan had in mind. But nope, Krugman rejected poor Noah’s appeal to human decency and sanity, and repeated his line about Mulligan learning about New Keynesianism from a guy at a bar. At that point, I checked Wikipedia for its entry on New Keynesianism, saw that it said sticky wages/prices were a defining element, and wrote a post titled “A Bunch of Drunks Must Have Edited Wikipedia.”
Now at the time, I knew Krugman was full of it, because I could vividly remember Krugman himself writing a post talking about the importance of sticky prices/wages, and how it was hilarious that Chicago types could deny the reality staring them in the face. But I couldn’t dig up that exact post. It was also true that Krugman had been a careful blogger for a while, and had been stressing that even falling wages wouldn’t solve our current mess, since we were in a liquidity trap and had massive debt overhang in the private sector. (It was rhetorically important for him to do this, because if the interventionist position rested on sticky wages, it gave right-wingers a great card to play in smashing unions, cutting the minimum wage, etc.)
But just like the killer in an episode of Columbo, Krugman thought the danger was over, let his guard down, and said something that seemed innocuous at the time, but would ultimately spell his demise. Today in discussing the passing of Mike Mussa, who had studied the movement of exchange rates during and after Bretton Woods, Krugman wrote:
All this amounts to the single most compelling demonstration that prices are indeed sticky, with all that follows from that observation — in particular, the case for activist monetary and fiscal policies to fight slumps.
I guess we can forgive Dr. Krugman for hanging around in bars. After all, within the past month Nick Rowe and now Scott Sumner* have totally blown up his positions with irrefutable numerical illustrations, in two different arguments where Krugman had been treating his opponents as second graders. That would drive anybody to the bottle.
* I hadn’t followed the Savings=Investment argument too closely, and at first I didn’t understand what Sumner was saying. But this post made it clear to me that his limited point was right, and that Krugman et al. had made an invalid argument in responding to John Cochrane’s (own) invalid argument against fiscal stimulus.
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