Consulting by RPM || Free Advice Blog

Correcting Hartmann on U.S. Tax History

My latest at Mises CA. On Facebook I saw a meme with 60,000 shares from “U.S. Uncut” that was simply awful. You don’t realize how awful it is until I walk you through it. Come, let us explore together.

Don’t Trust the Experts: Not in Physics, Certainly Not in Economics

Tyler Cowen has an amusing post (with which I largely agree) where he wonders how many economists truly understand various important results in economics. One might walk away from Tyler’s post thinking, “Human knowledge has become so specialized that we can really only trust a handful of world experts in each little niche.”

But that’s a very reckless strategy, because sometimes the experts in a very narrow field paint themselves into a corner, and they don’t even realize it because they’re the only ones refereeing each other’s articles in the academic journals. As a fan of Austrian economics, I am sure that this has happened with the more elite and prestigious economics that the “leaders in the field” use at central banks and in the most highly ranked universities.

Now when it comes to economics (or climate science, another obvious example of what I mean), there are political and cultural factors that might explain a lot of the bias, and why people disagree so strongly about something seemingly objective. Yet the problem is much more general, reflecting human nature rather than mere politics.

I saw a great example tonight when I was reading physicist Richard Feynman’s bestselling memoirs with my son. Feynman was telling the story of when he had come up with a new approach to modeling the behavior of subatomic particles while attending a conference in Rochester, but he had thought it was a dead end because at the time there was a well-known experimental result that didn’t fit. Later on, the experimental physicists at his own school told Feynman that new experiments had come in, challenging the old consensus, and eventually he realized he had discovered a new law of nature. Here’s what happened next:

I went to Professor Bacher and told him about our success, and he said, “Yes, you come out and say that the neutron-proton coupling is V instead of T. Everybody used to think it was T. Where is the fundamental experiment that says it’s T? Why don’t you look at the early experiments and find out what was wrong with them?”

I went out and found the original article on the experiment that said the neutron-proton coupling is T, and I was shocked by something. I remembered reading that article once before (back in the days when I read every article in the Physical Review–it was small enough). And I remembered, when I saw this article again, looking at that curve and thinking, “That doesn’t prove anything!”

You see, it depended on one or two points at the very edge of the range of the data, and there’s a principle that a point on the edge of the range of the data–the last point–isn’t very good, because if it was, they’d have another point further along. And I had realized that the whole idea that neutron-proton coupling is T was based on the last point, which wasn’t very good, and therefore it’s not proved. I remember noticing that!

And when I became interested in beta decay, directly, I read all these reports by the “beta-decay experts,” which said it’s T. I never looked at the original data; I only read those reports, like a dope. Had I been a good physicist, when I thought of the original idea back at the Rochester Conference I would have immediately looked up “how strong do we know it’s T?”–that would have been the sensible thing to do. I would have recognized right away that I had already noticed it wasn’t satisfactorily proved.

Since then I never pay any attention to anything by “experts.” I calculate everything myself….I’ll never make that mistake again, reading the experts’ opinions. (Surely You’re Joking, Mr. Feynman, pp. 254-255)

Now to be sure, if at any moment you have to make a guess, it’s generally reasonable to take the “expert opinion” of the people in the field. But my point is that very often, these experts overrate the strength of the evidence in favor of their view. I know for sure this happens all the time in economics, and I’ve seen plenty of examples of it in other fields too.

Joseph, the Law, and Infidelity

I have heard a certain passage from the Bible many times (once a year, at least) but this last Christmas I realized something new about it. In Matthew 1: 18-19 it explains that Joseph was originally (of course) disheartened to discover that Mary was pregnant:

 ¹⁸ Now the birth of Jesus Christ was as follows: After His mother Mary was betrothed to Joseph, before they came together, she was found with child of the Holy Spirit. ¹⁹ Then Joseph her husband, being a just man, and not wanting to make her a public example, was minded to put her away secretly.

The different translations render it somewhat differently, for example some saying he was righteous, and some saying he followed the Law.

But what’s interesting is that the Law said Mary should be stoned. E.g. Deuteronomy 22: 13-21:

¹³ “If any man takes a wife, and goes in to her, and detests her, ¹⁴ and charges her with shameful conduct, and brings a bad name on her, and says, ‘I took this woman, and when I came to her I found she was not a virgin,’ ¹⁵ then the father and mother of the young woman shall take and bring out the evidence of the young woman’s virginity to the elders of the city at the gate. ¹⁶ And the young woman’s father shall say to the elders, ‘I gave my daughter to this man as wife, and he detests her. ¹⁷ Now he has charged her with shameful conduct, saying, “I found your daughter was not a virgin,” and yet these are the evidences of my daughter’s virginity.’ And they shall spread the cloth before the elders of the city. ¹⁸ Then the elders of that city shall take that man and punish him; ¹⁹ and they shall fine him one hundred shekels of silver and give them to the father of the young woman, because he has brought a bad name on a virgin of Israel. And she shall be his wife; he cannot divorce her all his days.

²⁰ “But if the thing is true, and evidences of virginity are not found for the young woman,²¹ then they shall bring out the young woman to the door of her father’s house, and the men of her city shall stone her to death with stones, because she has done a disgraceful thing in Israel, to play the harlot in her father’s house. So you shall put away the evil from among you.

So I think it’s interesting that the gospel account describes Joseph as righteous and then in the next breath says he is planning on ignoring the Law’s punishment for Mary. (Obviously this is quite similar to how his “son” would act when He grew up.)

As with most ideas I have, I googled it and saw this is old hat. Nonetheless, it’s interesting to ponder.

Potpourri

==> In my latest Mises CA post, I dig up an old Scott Winship article *defending* Piketty from the FT’s Chris Giles. Hilarity ensues.

==> Speaking of the man, Tyler Cowen links to this interview with Piketty who said of the FT critique: “I have responded in a very precise manner to every point they raised, and anybody looking at my response would conclude that they had an ideological viewpoint, but I let everybody form their own opinion.” I’m beginning to think that when Piketty says “everybody thinks” and “anybody thinks,” what he means is, “This is my strongly held view.” Perhaps there’s some problem with the translation.

==> The astute von Pepe sends us this ZeroHedge piece lauding the prescient Jim Grant, who predicted the Swiss move.

Potpourri

==> Tom Woods reports: My paper with Phil Magness on Piketty is the #1 downloaded in the past 60 days at Social Sciences Resource Network. If only truth were a popularity contest! (Oh wait, Piketty would be right then.) BTW, I should officially say that Phil did most of the laborious wading through Piketty’s spreadsheets, but I think my most important contribution was bringing in the point about the tax code changes in the 1980s (which I adapted from Alan Reynolds). Nothing new under the sun. Aristotle already covered this stuff.

==> Nothing fancy, but in this Mises CA post I explain why Canadians shouldn’t be afraid to be “vulnerable” to a commodity price drop, and tie in Austrian business cycle theory.

==> This was from early December, but I can’t remember if I posted it: Tyler Cowen relays the results from a paper about the impact of a natural disaster causing people to migrate to higher-paying jobs. Two things: (1) The comments are hilarious, at least the first 20 or so. (2)  I think many of the commenters were getting the study’s main finding backwards, thinking that Katrina victims saw an immediate spike in their income. No, the Katrina victims initially had $2,200 lower income, and only later did they surpass their control group.

==> Again, can’t remember if I posted this: A surprising TPM post on why progressives have overlooked deaths like Eric Garner’s for years.

==> The Institute for Faith, Work, and Economics has a student contest for short videos.

==> The Mises Institute is taking applications for summer fellowships. If you’re a fan of Austrian economics and are working on a graduate degree, I can’t think of a better way to spend your summer.

The Myth of a Secure Military

[UPDATE below.]

On NPR today they were talking about cybersecurity. The host made a throwaway remark along the lines that with private businesses, you couldn’t expect a full-throated response to the threats his expert guests were discussing, because they responded to the profit motive and it “wasn’t like Los Alamos.”

Here the host was referring to the famous lab where physicists and other scientists worked on the atomic bomb during World War II, and then continued to work on nuclear weaponry. His point, of course, was that the military engaged in state-of-the-art security to protect such critical secrets, whereas you couldn’t expect Visa to do the same thing for its customers.

This statement was immediately ironic, because the very discussion of the episode centered on the “hacks” of Sony and Target, yes, but also Centcom. So it’s clear that the U.S. military (if we take the press accounts at face value) was not immune to the very threats they were discussing on the show. To repeat, one of the news hooks for their discussion was the fact that U.S. Central Command’s twitter account had supposedly been hacked by ISIS.

Yet beyond that irony, there is the problem that Richard Feynman–a Nobel laureate in physics–recounts the famous tale in his wonderful memoir that he had discovered a huge security flaw while working on the atomic bomb. Specifically, Feynman had discovered that if someone left his or her office safe open (during the day while everyone was working), Feynman could “casually” read the combination from the interior of the exposed lock. Then he would go to his office and write it down, such that he had the ability to open the safes of a growing number of employees.

At one point Feynman visited the office of a colonel, and boasted that he could crack the colonel’s safe. Here’s how Feynamn tells the story:

“The only reason you think they’re safe in there is because civilians call it a ‘safe.’” (I put the word “civilians” in there to make it sound as if he’d been had by civilians.)

He got very angry. “What do you mean—it’s not safe?”

“A good safecracker could open it in thirty minutes.”

“Can you open it in thirty minutes?”

“I said a good safecracker. It would take me about forty-five.”

“Well!” he said. “My wife is waiting at home for me with supper, but I’m gonna stay here and watch you, and you’re gonna sit down and work on that damn thing for forty-five minutes and not open it!” (Surely You’re Joking Mr. Feynman, 145-146)

Feynman naturally cracks the safe (because he had read the combination while the colonel was looking at paperwork and the safe door was open), and astonishes the military man. Then he candidly explains the security vulnerability.

In response, guess what the colonel did? Maybe he contacted the company and had them alter the design for their huge client, namely the U.S. federal government? Nope.

Instead what he did was send out a memo telling everybody whom Feynman had visited, to change the combination on his or her safe.

One last thing: The Soviets did steal the secrets to the atomic bomb, and one of their spies was at Los Alamos. (Historians dispute the importance of the Soviet spy or spies at Los Alamos, but the Soviets definitely had spies and they definitely built the bomb faster than if they had had to rely on their own scientists.) So contrary to the NPR host, it’s probably good that private businesses rely on the profit motive, rather than the incentives facing State officials.

UPDATE: After I posted this, it occurred to me that I really don’t know what considerations the colonel and his superiors may have gone through, once Feynman alerted them to the security vulnerability. For example, it’s possible they considered sending a memo to everyone, warning not to leave the safes open during the day, but then rejected this plan because people wouldn’t obey it, and the memo would give the idea to would-be spies who were not as clever as Feynman. And I suppose it’s possible that they did contact the safe manufacturers, but Feynman had gone back to civilian life before seeing tangible results from his warning. In any event, as far as Feynman could tell (and as he reported in his memoirs), the only change the military made was to do a one-off reset of the combinations for the safes of people with whom he had had contact.

A Revised Brain Teaser on Tax Policy

OK you guys are getting too hung up on it being gasoline in the previous post. Let me start over. Now in the following, I’m not necessarily saying each arguments in any of the steps is correct. I’m just saying, you could easily see an economist going along with the chain of logic, and yet (as we’ll see) we wind up with a contradiction. So the point of this exercise is to pinpoint where the mistake comes in.

(0) Initially the government raises $1 trillion by levying a percentage tax on labor income. There are 100 consumer goods in the economy that initially have equal sales (by revenue).

(1) The government enacts a percentage tax on Consumer Good #1, and reduces the percentage tax on labor income, so that when the dust settles the Treasury takes in $10 billion from the tax on Good #1, and $990 billion from the (now lower) tax on labor. I.e. it was a revenue-neutral tax swap of $10 billion.

Many economists would probably go along with the claim that this move would increase the deadweight loss to the economy from the tax code. Clearly if the government did a complete tax swap–i.e. raised the entire trillion dollars by taxing the heck out of Consumer Good #1 while not taxing anything else–that would be very destructive compared to the status quo. (The intuition is that the tax base on Consumer Good #1 is much smaller than all of labor, so the percentage rate would have to be much higher on Good #1 than for labor.) So if doing a full tax-swap would be awful, then presumably a 1-percent tax swap would be bad too, just not as bad.

(2) Now if you buy the argument in step (1), then the case is even stronger that doing another $10 billion tax swap–this time for Consumer Good #2–would add to the deadweight loss. This is because the starting labor tax percentage here is lower than it was in step (1), since at this point the tax on labor only needs to bring in $990 billion. So on the margin, the benefit of cutting taxes on labor by $10 billion is lower than it was originally, while the harm of imposing new taxes of $10 billion on a consumer good is at least as high as it was before.

(3) If you bought the logic in Step (2), then it clearly applies for further $10 billion tax swaps for Consumer Goods #3…#100. Each $10 billion tax swap ought to impose incrementally higher deadweight losses on society from the new tax code.

==> However, what if we initially implemented a revenue-neutral flat consumer tax swap deal, to raise $1 trillion from a uniform levy on consumer goods, while eliminating the tax on labor altogether? This is the ideal of standard tax policy reform analysis. In a simplified model where there is no leisure or other forms of income, at worst this move would be a wash. But in a more realistic model, this implementation of a consumption rather than a labor tax would be a net positive.

==> So what the heck is going on here? If we do the sequential tax swap deals, one consumer good at a time, we end up with raising all of the government’s revenue from taxing the consumer goods while phasing out the labor tax, and yet we seemed to show that this would be awful. Yet we have a standard result that putting in a revenue-neutral consumption tax and eliminating labor taxes is great.

(Just to reiterate, I am deliberately feigning ignorance above, because I see at least some of the flaws in the breezy presentation. But it took me a minute to get my bearings, and it’s possible I’m still overlooking some subtleties.)

A Brain Teaser for Economists

This post is aimed at professional economists, but those of you with real jobs should feel free to chime in as well…

I’m working on a response to Charles Krauthammer’s call for a $1/gallon hike in the gas tax, and I am making the point that (absent negative externality issues) it increases the deadweight loss to enact an increase in a specific product tax coupled with a revenue-neutral reduction in payroll taxes. The reason is that the tax base on gasoline is much narrower than on labor, and so raising a given dollar amount in revenue through a gas tax is more harmful than raising the same revenue through a tax on labor.

Of course, make sure you agree with that first step in the argument. But assuming you do, then…

==> The same logic applies to another $1/gallon tax swap, this time with (say) milk. Starting with the situation after we just enacted $1/gallon tax on gas and used the proceeds to reduce payroll taxes, I would argue that once again it distorts the economy even more to add a new $1/tax on milk, and use the revenues to further cut payroll taxes slightly.

==> However, if at step 1 we implemented an across-the-board tax on consumption goods, and used the revenue to reduce payroll taxes, that would *reduce* the deadweight loss.

==> So does this mean the incremental harms of doing the individual-excise-tax-and-slight-payroll-tax-cut go down, and with some specific product–perhaps the 54th one–it flips to reducing the deadweight loss?

I think I know how to resolve all of this, but I want to see what you think. And it should go without saying that I’m using conventional tax analysis here, not libertarian theory about taxes being theft.