11 Apr 2017

Interesting Pairs of Posts

Humor 10 Comments

In my efforts to annoy everyone else in the blogosphere, permit me two comments on recent pairs of posts:

==> When the media broke the story of the Syrian gas attack, Scott Adams doubted it was Assad, and went on to predict:

My guess is that President Trump knows this smells fishy, but he has to talk tough anyway. However, keep in mind that he has made a brand out of not discussing military options. He likes to keep people guessing. He reminded us of that again yesterday, in case we forgot.

So how does a Master Persuader respond to a fake war crime?

He does it with a fake response, if he’s smart.

Watch now as the world tries to guess where Trump is moving military assets, and what he might do to respond. The longer he drags things out, the less power the story will have on the public. We’ll be wondering for weeks when those bombs will start hitting Damascus, and Trump will continue to remind us that he doesn’t talk about military options.

Then he waits for something bad to happen to Assad’s family, or his generals, in the normal course of chaos over there. When that happens on its own, the media will wonder if it was Trump sending a strong message to Assad in a measured way. Confirmation bias will do the rest.

Literally the next day, Trump ordered the firing of 59 Tomahawk missiles in retaliation. So Scott Adams presumably could either (a) ignore this entirely or (b) admit he had been totally wrong the day before. But of course what we got was (c) a post in which Adams explained why this was yet another brilliant move by Trump, and linked it to his previous post, without acknowledging that his (Adams’) prediction had been falsified in just about the most undeniable way conceivable.

==> In other news, check out two recent posts by Scott Sumner on EconLog. First skim this, and then this. Scott makes a compelling case that tight monetary policy has promoted free trade and open borders around the world. It’s big of Scott to go wherever the evidence takes him.

11 Apr 2017


Potpourri 36 Comments

==> Larry Reed reviews the (awesome) movie, “Hacksaw Ridge.”

==> Since United is in the news, check out this 1994 piece from Julian Simon explaining the rise of voluntary compensation for bumped passengers. (And note his initial example of how bad it used to be in the 1970s, concerns a practice from United!)

==> George Washington’s Farewell Address is worth (re)reading. Look at this:

Observe good faith and justice towards all nations; cultivate peace and harmony with all. Religion and morality enjoin this conduct; and can it be, that good policy does not equally enjoin it – It will be worthy of a free, enlightened, and at no distant period, a great nation, to give to mankind the magnanimous and too novel example of a people always guided by an exalted justice and benevolence. Who can doubt that, in the course of time and things, the fruits of such a plan would richly repay any temporary advantages which might be lost by a steady adherence to it ? Can it be that Providence has not connected the permanent felicity of a nation with its virtue ? The experiment, at least, is recommended by every sentiment which ennobles human nature. Alas! is it rendered impossible by its vices?

In the execution of such a plan, nothing is more essential than that permanent, inveterate antipathies against particular nations, and passionate attachments for others, should be excluded; and that, in place of them, just and amicable feelings towards all should be cultivated. The nation which indulges towards another a habitual hatred or a habitual fondness is in some degree a slave. It is a slave to its animosity or to its affection, either of which is sufficient to lead it astray from its duty and its interest. Antipathy in one nation against another disposes each more readily to offer insult and injury, to lay hold of slight causes of umbrage, and to be haughty and intractable, when accidental or trifling occasions of dispute occur. Hence, frequent collisions, obstinate, envenomed, and bloody contests. The nation, prompted by ill-will and resentment, sometimes impels to war the government, contrary to the best calculations of policy. The government sometimes participates in the national propensity, and adopts through passion what reason would reject; at other times it makes the animosity of the nation subservient to projects of hostility instigated by pride, ambition, and other sinister and pernicious motives. The peace often, sometimes perhaps the liberty, of nations, has been the victim.

So likewise, a passionate attachment of one nation for another produces a variety of evils. Sympathy for the favorite nation, facilitating the illusion of an imaginary common interest in cases where no real common interest exists, and infusing into one the enmities of the other, betrays the former into a participation in the quarrels and wars of the latter without adequate inducement or justification. It leads also to concessions to the favorite nation of privileges denied to others which is apt doubly to injure the nation making the concessions; by unnecessarily parting with what ought to have been retained, and by exciting jealousy, ill-will, and a disposition to retaliate, in the parties from whom equal privileges are withheld. And it gives to ambitious, corrupted, or deluded citizens (who devote themselves to the favorite nation), facility to betray or sacrifice the interests of their own country, without odium, sometimes even with popularity; gilding, with the appearances of a virtuous sense of obligation, a commendable deference for public opinion, or a laudable zeal for public good, the base or foolish compliances of ambition, corruption, or infatuation.

As avenues to foreign influence in innumerable ways, such attachments are particularly alarming to the truly enlightened and independent patriot. How many opportunities do they afford to tamper with domestic factions, to practice the arts of seduction, to mislead public opinion, to influence or awe the public councils. Such an attachment of a small or weak towards a great and powerful nation dooms the former to be the satellite of the latter.

Against the insidious wiles of foreign influence (I conjure you to believe me, fellow-citizens) the jealousy of a free people ought to be constantly awake, since history and experience prove that foreign influence is one of the most baneful foes of republican government. But that jealousy to be useful must be impartial; else it becomes the instrument of the very influence to be avoided, instead of a defense against it. Excessive partiality for one foreign nation and excessive dislike of another cause those whom they actuate to see danger only on one side, and serve to veil and even second the arts of influence on the other. Real patriots who may resist the intrigues of the favorite are liable to become suspected and odious, while its tools and dupes usurp the applause and confidence of the people, to surrender their interests.

The great rule of conduct for us in regard to foreign nations is in extending our commercial relations, to have with them as little political connection as possible. So far as we have already formed engagements, let them be fulfilled with perfect good faith. Here let us stop. Europe has a set of primary interests which to us have none; or a very remote relation. Hence she must be engaged in frequent controversies, the causes of which are essentially foreign to our concerns. Hence, therefore, it must be unwise in us to implicate ourselves by artificial ties in the ordinary vicissitudes of her politics, or the ordinary combinations and collisions of her friendships or enmities.

Our detached and distant situation invites and enables us to pursue a different course. If we remain one people under an efficient government. the period is not far off when we may defy material injury from external annoyance; when we may take such an attitude as will cause the neutrality we may at any time resolve upon to be scrupulously respected; when belligerent nations, under the impossibility of making acquisitions upon us, will not lightly hazard the giving us provocation; when we may choose peace or war, as our interest, guided by justice, shall counsel.

Why forego the advantages of so peculiar a situation? Why quit our own to stand upon foreign ground? Why, by interweaving our destiny with that of any part of Europe, entangle our peace and prosperity in the toils of European ambition, rivalship, interest, humor or caprice?

==> CNN now mocks Sean Spicer for making a Hitler comparison in politics. Naturally, it took me a good 18 seconds to find an example of CNN anchors comparing Trump to Hitler.

11 Apr 2017

Two More Podcasts Up

Shameless Self-Promotion No Comments

I have to be brief, but here are the links:

==> In ep. 37 of the Lara-Murphy Show, Carlos and I talk about the perils of “tax reform,” including the real estate crash after the 1986 overhaul.

==> In the latest Contra Krugman, Tom and I talk about China. But the important thing here is the discussion starting at 18:50.

11 Apr 2017

Tom Woods’ Liberty Classroom

Tom Woods 2 Comments

Tom Woods is offering a special for the Master level of his Liberty Classroom–$200 off, plus some signed books. But you have to hurry up (for real); the offer expires soon.

My Part I of the History of Economic Thought course is already up there, and by early summer I will have posted all of Part II (which covers 20th century). You don’t want to miss it!

Use this link so I can redistribute some of the profits.

11 Apr 2017

Debt vs. Equity Finance and Interest Deductibility

Tax policy 6 Comments

In reaction to my Congressional testimony–where I said I didn’t think the federal government should tax interest payments, if they are retaining a corporate income tax–Roger Barris objected. He claimed that I was ignoring the lessons of Finance 101, and in particular the famous Modigliani-Miller theorem.

I must confess that his initial stance annoyed me; after all, I stated the “standard” position in my testimony, and then went on to disagree with it. So simply repeating back to me the standard position doesn’t seem to advance the ball much.

However, in email follow-up Barris and I had a nice conversation; apparently Twitter is not the best place to settle disputes.

Anyway, this may be a series of posts, but check out the following to see where I’m coming from. Because not just Barris, but some other people I respect have also told me that people distinguish operating costs from financing costs, I am open to the possibility that I am missing something here. However, as of right now, I still think I’m right, and that I’m adequately incorporating the perspective of the people who are arguing with me.


Scenario A

Joe puts in $100,000 of his own money. He sells half of the company to Sally for her $100,000.

The company spends $100,000 on materials and $100,000 hiring a worker. At the end of the year they sell the resulting product for $220,000. The materials and wages are deductible expenses. The company has net income of $20,000.

Without taxes, that would be a return of 10%. However there is a corporate income tax of 35%. So the corporation pays $7,000 in tax. Joe and Sally each get $6,500 in dividend payments, which are taxed as personal dividend income.

The $200,000 is available to repeat next year.

Scenario B

Joe puts in $100,000 of his own money. He issues $100,000 worth of (perpetual) bonds to Sally, yielding 6.5%.

The company spends $100,000 on materials and $100,000 hiring a worker. At the end of the year they sell the resulting product for $220,000. Out of this they pay $6,500 to Sally as interest on her bonds. The materials, wages, and interest are deductible expenses. The company has net income of $13,500.

Without taxes, that would be a return of 13.5% to Joe. However there is a corporate income tax of 35%. So the corporation pays $4,725 in tax. Sally earns $6,500 in interest payment, which is taxed at personal interest income rate. (She has the same rate of return as in Scenario A, but is happier now because she gets that same expected rate of return but with lower risk.)

However, now Joe earns $8,775 in dividend income, compared to the $6,500 he earned in Scenario A. The extra $2,275 is the amount of tax the company avoided in Scenario B relative to Scenario A. (The company paid $7,000 in corporate income tax in Scenario A but only $4,725 in B.) Joe is earning a higher rate of return in this scenario, but his risk is higher. Depending on his preferences, he might not wanted to have taken on debt-to-equity of 100%, in which case he could’ve borrowed a smaller amount from Sally and let her buy in with equity for the rest.

The $200,000 is available to repeat next year.


OK let’s stop to catch our breath. In light of the above two scenarios, it is standard for people to argue, “See? There are two ways for a company to obtain financing: it can pay dividends or interest. To put equity financing on an even footing with debt financing, the government should not allow corporations to write off interest payments on bonds.”

Now let’s consider two more scenarios:


Scenario C

Joe puts in $1,000,000 of his own money. He tells Sally that if she is willing to work full-time running the business, he will make her 40% owner.

The company spends $1,000,000 on materials. Over the course of the year it earns $1,100,000 in gross revenues. Without taxes, Joe would get $60,000 in dividends and Sally would get $40,000.

However, what they report to the government is net corporate income of $100,000. So they pay $35,000 in tax, and of the remaining $65,000, Joe gets $39,000 while Sally gets $26,000, and each then pays personal income tax at the dividend rate on this. (But this is 0% for Sally, since her total income is so low.)

Scenario D

Joe puts in $1,000,000 of his own money. He hires Sally to work full-time at the business, for a salary of $30,000, but she will only be paid it at the end of the year.

The company spends $1,000,000 on materials. Over the course of the year it earns $1,100,000 in gross revenues. The company pays Sally $30,000 in salary. Sally pays 15 percent income tax on this labor income, which would leave her with $25,500 after-tax, but actually when you figure in the standard deduction etc. she ends up with more after-tax income than the $26,000 she pocketed in Scenario C. Thus Sally prefers this scenario, especially since her payment is contractually locked in, rather than being the residual of the company’s profits.

Because Sally’s wage payment is a deductible business expense, the company’s pre-tax net income is $70,000, so it pays the IRS $24,500. Thus the company saves ($35,000 – $24,500) = $10,500 on corporate income tax by going this route with Sally’s compensation. Joe is the sole owner and pays himself a dividend of $45,500. That’s $6,500 more than he earned in Scenario C. Now, it’s riskier, so maybe Joe wouldn’t want to fully exclude Sally’s equity. But it shows the possibilities.


Now notice we can make an analogous analysis for Scenarios C and D, as we did for A and B. To wit: “There are two ways a company can obtain labor services: it can pay dividends or wages. To put equity labor on an even footing with wage labor, the government should not allow corporations to write off wage payments on labor contracts.”

Does that sound right? Or would that screw everything up even more?

10 Apr 2017

Disrupting the Equilibrium on Rizzo’s Discussion

Economics, Mario Rizzo 23 Comments

The March 2017 “Liberty Matters” discussion was very nice, featuring contributions from several Austrian economists who are all my acquaintances/friends. Mario Rizzo was my dissertation chair at NYU.

Because my time is brief, I am not going to talk about the more important issues everybody discussed. Instead I am going to quibble with one little point that Mario made:

Ludwig Lachmann criticized Kirzner’s approach in a number of respects. First, purposiveness in the broad sense does imply alertness and learning. But this does not mean that people learn what is appropriate to move the system toward “equilibrium.” Second, entrepreneurs seek to make profits by exploiting price inconsistencies. However, this is not the same thing as moving the system toward equilibrium with respect to the underlying data. Consider that an entrepreneur can make money by exploiting the incorrect beliefs of others that a certain resource is undervalued. He will sell the resource to the party who overvalues it – thus making money but not correcting the error. Economists know that there can be bubbles and herd behavior. These are empirical issues.

I have retained the full paragraph so you can see the context, but I just want to focus on the part I put in bold. I think it’s wrong. Even in Mario’s example, the entrepreneur who realizes the stock is overvalued and sells it, is indeed moving the price in the right direction–relative to what otherwise would have happened. And that is surely the only relevant criterion.

First let’s make sure you get my modest point. Suppose Wise Willy knows that the “correct” price (and let’s put to the side the thorny issue of defining that concept) for Acme stock is $100 per share. But Bullish Billy comes along and is quite certain that Acme is undervalued; Billy thinks Acme should be priced at least at $130. So Billy enters the market and starts buying shares, bidding up the price of Acme.

Now as the price moves up, Wise Willy sees a growing profit opportunity. Now let’s be realistic here: Because of transaction costs, risk, borrowing constraints, a desire for a diversified portfolio, etc., it’s not the case that Wise Willy will short an infinite number of shares at any price above $100.01, or that Bullish Billy will buy an infinite number of shares at any price below $129.99. Rather, in the real world it is more accurate to say that each party will take on a certain exposure to either a short or long position (relative to their original holdings), based on how far the prevailing price is from what each believes is the correct price.

In that context, then, suppose that if Wise Willy does nothing, then Bullish Billy ends up pushing Acme’s price up to (say) $125 before he stops acquiring shares. In contrast, if Wise Willy decides to profit from what he perceives as a gross mispricing, then he sells into that counterfactual situation such that he and Billy stop adjusting their holdings when the price of Acme settles down at (say) $115.

So yes, Mario’s point is true if we take it to mean that profit-seeking entrepreneurship, even when correct, doesn’t move prices to their final equilibrium positions. However, it moves them in the right direction, relative to what would have happened in the absence of the action.

In my Acme example, it’s not correct to say that Wise Willy pushed prices away from equilibrium due to his correct entrepreneurial forecast. No, what happened is that Bullish Billy pushed prices away from equilibrium due to his incorrect anticipation of the future, and fortunately Wise Willy was there to mitigate the damage.

Israel Kirzner never argued that even incorrect forecasts would equilibrate the market. Cases like the above are hardly counterexamples to Kirzner’s views.

UPDATE: I’m not denying that there could be more complicated situations that would be better examples of what Mario is trying to get across. For example, in 2005 an investor might have thought, “I know housing is in a bubble, but I think I can flip this condo and get out before everything crashes.” In principle you can even have models where everybody is a perfect Bayesian and yet herd behavior forms if a few people early on get a bad signal; that’s presumably what Mario is talking about.

However, I thought it important to clarify that Mario’s particular illustration doesn’t work. And then once we start with that, we might extrapolate to the more exotic cases and see that even there, adding in more and more entrepreneurs who have perfect foresight is a good thing, relative to their absence.

09 Apr 2017

Internet Atheists on Science vs. Religion and Women’s Rights

Religious 26 Comments

I recently came across this meme on Twitter, from the “Atheist Republic” account:

Science vs Religion

Now I grant you this is somewhat untestable, since I probably don’t think to tell you all the times my hunches are wrong, but for what it’s worth, I had a very strong suspicion when I saw this picture, that the woman on the left would be religious.

And sure enough, it looks like I was right. First, through some amazing sleuthing that would have impressed Bruce Wayne, I identified the woman as Dr. Tracy Caldwell Dyson. (She has a PhD in physical chemistry from UC Davis.) If you check out her Wikipedia entry, you’ll see that her image is the one they used for the meme above.

Then I found a short statement from her (total of 10 paragraphs) from her bio on NASA’s website. Here are the final two paragraphs:

Through the ten years astronauts have been living in space, NASA has gotten smarter about how to keep them happy and healthy. Much of that involves keeping in touch with family. Naturally, it’s a greater challenge from orbit, even greater when your husband is at the same time deployed on a naval carrier, flying jets, and helping to defend our country. Though we made contact almost every other weekend, there were often long periods of time when we didn’t hear from each other. With jobs like ours, we just kept faith in God that each other were safe. Time spent with him during family conferences certainly made for some of the most personally meaningful moments of my life on orbit.

One of the greatest lessons I’ve learned on my journey of becoming and serving as an astronaut for NASA, is to not give away my self-confidence. I believe it’s a lesson I’m still learning. You come into this world with a set of God-given talents, and who are you to shy away from them? It’s a strange fear that you’re not good enough. Add on top of that whatever experience you’ve gained in life to complement your set of skills and personality, and it’s the tumbles you make on the path of life that seem to stand beside you like a coach yelling from the sidelines. I’ve learned there’s a way to deafen that voice in your head that chips away self esteem and makes you hesitate. The easy road shelters you from failure so you don’t make a mistake. The road you want, though, takes belief, determination, and balance (there’s such a thing as too much confidence). Best course is to know yourself and like who you are. Understand what it is you enjoy doing and don’t worry if it doesn’t match what motivates “everyone else”. You are the best at being you (and not someone else) and are at your best when what you do makes you happy. Great is what you’ll be and confidence is the bag you carry it in. [Bold added.]

So notice, not only is the Atheist meme totally wrong, but it has things backwards. Dr. Caldwell is who she is, in part because of her faith in God. Yes, there are barriers to women in science (and the business world, etc.), even in “liberal” Western societies. But if you believe that you are a daughter of an omnipotent Father who loves you infinitely, then it’s easier to stand up to jerk bosses or crude colleagues.

I will also point out that someone in the comments at the original tweet complained: “Don’t use Abrahamic religions as representative of all religion.”

Well, boatloads of very accomplished women in science and other fields have come from Judeo-Christian societies. So really what this person should be saying is, “Don’t conflate Islam with all religion.” But of course that sounds too close to Fox News, so the person I’m sure sincerely believes that the problem is the God of Abraham.

People are horrible sinners, and men have done terrible things to women over the ages. Yet in response to these awful abuses, certain versions of modern feminism and progressivism teach that men are literally equal to women, in all respects, and that we must wipe out any specialized rules from our institutions and social norms. This extreme view of “equality” is clearly wrong. If you start with this notion of equality as your foundation, everything will fall apart.

The strongest women I know are Christians, and have very “old fashioned and patriarchal” views on marriage. The reason they are so strong is that they fear God, not men.

04 Apr 2017

Murphy Wearing Flowers On His Scalp

Shameless Self-Promotion 2 Comments

I’ll be speaking (along with Patrick Byrne and others) for the Independent Institute in San Francisco this Friday