18 Nov 2017

Krugman, the Slippery One

Krugman No Comments

As the man who coined the term “Krugman Kontradiction,” I am familiar with how the Nobelist can write misleading things without technically stating a falsehood.

And yet, for a few moments I was scratching my head over a statement Krugman made in his latest op ed. While excoriating the Senate version of the tax plan–and by the way, I am sympathetic to Krugman’s overall take on it, believe it or not–Krugman wrote:

So in an attempt to limit that deficit blowout, Senate Republicans are proposing significant tax increases on working families. In fact, according to Congress’s own Joint Committee on Taxation, taxes would rise on average for every group with incomes under $75,000 a year, and would surely rise for many families even in higher-income groups. The only significant winners would be those making more than $1 million a year. Populism!

Yikes! That seems pretty crazy, doesn’t it?

The weird thing is, if you click the link and go look at the JCT analysis, it doesn’t seem to support Krugman’s claim at all. It was only after scrolling through the whole thing did I realize the trick.

Here is the breakdown of the JCT analysis, over the ten-year horizon of the Senate proposal:

==> In the year 2019, the bill would reduce federal income taxes (on average) for every single income group listed.

==> In the year 2021, the bill would reduce federal income taxes for every group except those making between $10,000 and $30,000. In particular, those making less than $10,000, and those making from $30,000 to $75,000, would see their taxes reduced.

==> In 2023, the groups making $30,000 and above get taxes cut.

==> In 2025, the groups making $30,000 and above get taxes cut.

==> In 2027, the groups making $75,000 and above get taxes cut.

Now, to be sure, I see the big picture of what Krugman is getting at here. Certainly for political, supply-side, and moral reasons, if I had the task of “design a tax change that will reduce revenues on a static basis by $1.5 trillion over ten years,” this is NOT what I would have produced.

Even so, Krugman’s description is wildly misleading. He’s leaving out what happens to most groups during the first 9 years of the analysis–which only has a ten-year horizon–and stating the result at Year 10, after a bunch of the broad-based tax cuts are phased out. Regular readers of Krugman would understandably think that their taxes were going up right away, rather than, “I will see a tax cut for several years–perhaps 9–and then a hike.”

18 Nov 2017

Potpourri

Potpourri No Comments

==> Just to give you a heads’ up, I have a post in the pipeline to come out at Mises.org, riffing off this Krugman blog about Martians trading with Earthlings. So if you want to read his post to get your imagination chugging, it might make my post (which will run next week, I presume) easier for you to digest.

==> An interesting David Stockman post on the young foreign policy advisor to the Trump team that is in trouble with the FBI. (The punchline: Stockman doesn’t think this in any way justifies the “Russia tainted our election!” claims.)

==> I’m not usually a big fan of her Bloomberg columns, but I liked Megan McArdle’s recent appearance on EconTalk to discuss internet shaming and online mobs.

17 Nov 2017

Jordan Peterson on Harry Potter, Jung, Rom Coms, You Name It

Jordan Peterson No Comments

As I’ve said before, it’s a shame that the pronoun controversy has overshadowed his academic perspective (though it obviously gave him a bigger platform). If you’ve wondered why everyone fanbois over JP so much, this is a great sample. It’s 20 minutes taken from one of his college lectures. I for one would not have skipped this class as a student.

15 Nov 2017

Murphy Twin Spin

Climate Change, Contra Krugman 63 Comments

==> Here’s the latest Contra Krugman, where we talk about corporate tax cuts and Krugman’s Kontradictions.

==> In this IER post, I come up with a car analogy to try to motivate deadweight loss, and give intuition for why a carbon tax–even if revenue-neutral–would reduce conventional economic growth. (To be sure, that by itself doesn’t mean it’s bad, but it *does* blow up the narrative being pushed in certain quarters.) An excerpt:

Suppose the government wants more revenue, and so decides to levy a $1,000 tax on every new car sold in America. Analysts come up with estimates that the new tax will raise such-and-such billion dollars in new receipts for the Treasury.

Now further suppose that someone suggests tweaking the plan. “Look,” the guy says, “right now red cars constitute 20% of the overall market. So instead of levying a $1,000 tax on all cars, we can achieve the same outcome if we instead levy a $5,000 tax just on red cars.”

This is a very bad suggestion, from the point of view of textbook tax analysis. Most obvious, it seems arbitrary and unfair. Why should people who like red cars have to pay a $5,000 tax, when the people who prefer silver cars or brown cars get to pay nothing?

But beyond the arbitrariness and unfairness, there is the problem that with a narrow car tax—which only targets 20% of the market—consumers will adjust their behavior. People who originally planned on buying a red car might instead buy a silver car, and thereby avoid the $5,000 tax.

Because many people will respond this way, it means that the government won’t raise the same amount of revenue from the two possible approaches. If the tax is going to be concentrated just on red cars, then it will have to be made higher—maybe $6,000—to account for the fact that the proportion of red cars in the overall market will shrink, due to the tax. This of course only increases the unfairness of the burden that is being placed on the shoulders of red car enthusiasts.

Yet it gets worse. When the dust settles, there is a permanent loss to society from this onerous tax on red cars. Specifically, there are a lot of people—perhaps millions of them—who were induced to drive a non-red car, even though they would have preferred a red car in the absence of the new tax. So these people are definitely worse off; they’re driving a car with a color they don’t really like.

Unfortunately, there is no corresponding gain to anyone in society from their unhappiness. Remember, these particular drivers aren’t paying any tax; they switched to a non-red car in order to avoid the tax. So the government isn’t gaining any revenue from them, and their unhappiness (at having to drive a non-red car) is a pure loss. Economists refer to this type of outcome as deadweight loss. It is the drag on the economy—the missing out of “win-win” market exchanges—due to inefficient taxation.

13 Nov 2017

This Is What It Looks Like When Scientists Don’t Understand Something

Economics, Physics 19 Comments

Tyler Cowen linked to this Nature article, which I find unintentionally hilarious. The first sentence alone is magnificent: “Physicists are growing ever more frustrated in their hunt for dark matter — the massive but hard-to-detect substance that is thought to comprise 85% of the material Universe.”

I beseech you, please do not lecture me in the comments about how much more physicists know about cosmology than economists know about economic growth. I am not disputing that. (Here’s an earlier post I did on this stuff.) You would be hard-pressed to find someone on social media who mocks economists more than me. (Latest example: For a long time I didn’t know exactly what “total factor productivity” was supposed to be, but now I realize it means, “The portion of output that economists can’t explain.”)

12 Nov 2017

National vs. Individual Consequences of Sin

Religious 20 Comments

The book of Leviticus lists a string of punishments or curses that will befall the nation of Israel, if they violate the covenant they’ve made with God. (On the flip side, it also lists a string of blessings if they obey God’s laws.)

I was talking with my study partner about the subtle relationship between righteous actions and worldly success. On the one hand, it’s certainly true that bad deeds “eventually catch up with you,” but on the other hand, bad things can happen to good people–just look at Jesus. Furthermore, Jesus Himself refuted the notion that if someone is suffering, it must be because that person (or his/her parents) committed a sin:

9 As he passed by, he saw a man blind from birth. 2 And his disciples asked him, “Rabbi, who sinned, this man or his parents, that he was born blind?” 3 Jesus answered, “It was not that this man sinned, or his parents, but that the works of God might be displayed in him. 4 We must work the works of him who sent me while it is day; night is coming, when no one can work. 5 As long as I am in the world, I am the light of the world.” 6 Having said these things, he spit on the ground and made mud with the saliva. Then he anointed the man’s eyes with the mud 7 and said to him, “Go, wash in the pool of Siloam” (which means Sent). So he went and washed and came back seeing.

Yet flipping back the other way, I have no problem with Christians (or atheists, for that matter) who warn that Americans’ hubris and violence will spell the downfall of their empire, just as has happened with every other wealthy, militarist hegemon in world history.

I speculated with my Bible study partner that perhaps we can reconcile all of these threads by appeal to tendencies, rather than strict one-to-one mappings. So for example, robbing a bank is definitely a “bad idea,” even if we disregard abstract notions of morality. But any individual might be able to get away with it, with no apparent downside in terms of earthly consequences. Yet surely if a whole society started condoning bank robberies, there would be unavoidable and drastic consequences.

With that in mind, I was pleasantly surprised to see a similar take from Matthew Henry, who wrote in his commentary on Leviticus:

26:40-46 Among the Israelites, persons were not always prosperous or afflicted according to their obedience or disobedience. But national prosperity was the effect of national obedience, and national judgments were brought on by national wickedness. Israel was under a peculiar covenant. National wickedness will end in the ruin of any people, especially where the word of God and the light of the gospel are enjoyed. Sooner or later, sin will be the ruin, as well as the reproach, of every people. Oh that, being humbled for our sins, we might avert the rising storm before it bursts upon us! God grant that we may, in this our day, consider the things which belong to our eternal peace.

(By the way, Matthew Henry wrote in the early 1700s.)

11 Nov 2017

A Machine Puzzle (3 of 3)

Capital & Interest, Economics 44 Comments

Earlier I asked how it could be possible that one cryptocurrency appreciated at 10% a year while another appreciated at 20%, and several people in the comments correctly said that the dollar-price of a coin could adjust accordingly. So the rate of return *measured in dollars* for the two different cryptocoins could be equal, even though one of them grew at twice the rate of the other.

Then I asked how it could be possible for US Treasuries to yield 2% while Japanese government bonds yielded -0.1%. Nobody officially gave the right answer. The answer is that the purchasing power of the USD and the Japanese yen are changing at different rates, so that the exchange rate between the USD and the yen is changing over time. In a simple model where you hold a bunch of other stuff equal, “no-arbitrage” requires that differences in nominal interest rates are explained by counterbalancing expected changes in the exchange rate. So again, the return *measured in dollars* to an American investor is the same, whether he buys Treasuries or Japanese bonds, even though one bond grows at 2% while the other shrinks at 0.1%.

Finally, for our present post: Suppose Machine A can be used to make 10% of itself per period, while Machine B can be used to make 20% of itself per period. Is this possible in equilibrium? Wouldn’t investors dump Machine A and buy up Machine B, until the rates of return were equal?

But as we should realize by now, this way of thinking is faulty, which demonstrated the danger in reasoning from a physical conception.

Because the price of Machine A (and its products, like apples) can change relative to the price of Machine B (and its product, bananas) over time, the rate of return to investors *measured in dollars* can be equal, even though Machine A can make 10% of another Machine A while Machine B can make 20% of another Machine B.

NOTE: There might be more we can deduce about equilibrium conditions in a steady state, but the mere condition of “no-arbitrage” doesn’t pin things down as much as some of you were suggesting in the comments. And I’m not picking on the people who chimed in here on the comments; I think 95% of professional economists would have been falling into the same traps, because they use one-good models as their workhorses in this arena.

11 Nov 2017

A Sovereign Bond Puzzle (2 of 3)

Capital & Interest, Economics 4 Comments

Don’t worry kids, I’ll give you the punchline after this one. But I can see in the comments here that you people still aren’t getting what this has to do with Krugman on Kapital.

So, not a trick question: The 5-year Treasury yield right now is about 2%. The 5-year Japanese government bond yield is about -0.1%.

So how can this be possible? Do investors really think the US government is that likely to default? Why aren’t investors all over the world dumping Japanese bonds and buying US Treasuries, until the yields are equalized?

Or is there some other factor involved that would help explain why the rate of return could be different on different assets like this?