Relevant and even prescient commentary on news, politics and the economy.

Seymour Martin Hersh

Robert Waldmann

There is something which I genuinely don’t understand about US journalism. Why don’t US journalists cite Seymour Hersh more ? I have never heard anyone rank him as an investigative journalist lower than number one, yet his stories vanish for months or years until someone else reports them.

For example, yesterday the Wall Street Journal reported on page 1 that Cheney ordered the CIA to set up an assassination team to kill top al Qaeda leaders. This is sortof a scoop as people have been wondering what super secret program was hidden until late June not only from congress but from Leon Panetta, the director of the CIA.

Except for the fact that Hersh described this program months ago. The fact that he knew about a CIA program months before the director of the CIA tends to support his number 1 ranking of course.

But why didn’t people including, say, Leon Panetta, pay more attention to Hersh.
Has he made inaccurate claims in the past ? His articles report claims by anonymous sources and are not supported by official documents. One might assume that, given that sort of evidence, he is often wrong. I can’t recall a case in which he was wrong. I am almost forced to conclude that reliable investigative reporting is possible if one demands confirmation from multiple sources.

I am also forced to conclude that the very strong evidence about Mr Hersh based on his track record is being ignored by other reporters. This isn’t really surprising, since admitting that Hersh reports at a level above everyone else is humiliating, but reporters shouldn’t allow their pride to keep them from informing the public.

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The Fed and pumping money into the economy

by cactus

We all know the Fed has been pumping money galore into the economy lately. It makes sense, after all – the economy sucks right now and will for the foreseeable near future. Even if the NBER concludes in a few months that the Great Recession ended in the first half of the year, we aren’t about to see a booming economy in the near future.

Another reason for the Fed to pump money into the system is the CPI – right now, deflation seems to be a bit more of a risk than inflation.

There’s also one very bad reason for the Fed to keep shoveling money out of the helicopter door: the mistaken but widely held belief that the system is suffering from a lack of liquidity. (The lack of liquidity belief is clearly false – as it happens – as Dean Baker has noted a zillion times, that lousy business models can’t get funding any more speaks to the demise of a particular widespread delusion rather than a lack of liquidity).

But here’s the problem. As is often the case, what we all know is false. Wrong. Bull$#%&. The Fed has not been pumping money into the economy lately, at least if you define lately as being “since December” and going through May, the last date for which data is publicly available in FRED, the Federal Reserve Economic Database maintained by the St. Louis Fed. Check out the following graph from FRED, which shows M1, the narrowest of the monetary aggregates, and the one most perfectly controlled by the Fed:

Regardless, the peak in the graph came in December. Its not unusual for the Fed to prime the pump in December – that’s the Christmas shopping season, after all… but the timing seems awful this year, what with the fact that the Fed only seemed to realize the economy was in major doo-doo toward the end of last year.

So during one of the lowest points for the US economy in decades, only the North Korean counterfeiting machine was doing anything to keep the money supply loose. I don’t have a copy of Bernanke’s textbook handy, but I’m pretty sure I’d remember if “let Kim Jong Il handle it” was the recommended prescription for dealing with a recession. It makes me wonder what other stupidity surprises Bernanke has in mind.
__________________________________
by cactus

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Battle of the (Senate) Titans

by Tom aka Rusty Rustbelt

Battle of the (Senate) Titans

Senators Kennedy (Chairman of the Senate Health, Education, Labor and Pensions Committee) and Senator Dodd (Kennedy’s wingman while he fights cancer) are seemingly lined up as opposition forces to Senator Baucus (Chairman, Senate Finance Committee ) on some aspects of health care reform legislation. Various theories are evolving:

1) this is a real dispute
2) this is a clever ruse to allow a compromise that gives political cover to all types of Democrats
3) this is just some foreplay designed to allow Kennedy to be a hero one more time, while providing some serious cred to Baucus, a rising Senate power
4) some combination of #1 – #3

Any thoughts from my Democrat friends?

Kennedy and Dodd’s latest here.

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by Linda Beale

This is one of those weeks when almost everything has a tax angle. Let’s survey.

Michael Jackson’s funeral

Should taxpayers have to foot the bill for the extra security surrounding celebrity memorial services? Does an estate get to deduct the costs of gala receptions connected with a memorial as part of the funeral?

International relations and UBS

The Swiss have announced that they may seize the 52,000 account records that UBS holds in Switzerland for what are likely many American tax cheats if the federal court in Florida orders the bank to turn them over in response to the government summons. I’ve already written about that on A Taxing Matter, here. This is a game of chicken, where either the US or UBS/Swizterland will blink. UBS has substantial assets in this country in connection with its banking license here. The US has jurisdiction over UBS for various reasons and UBS has already admitted to criminal violations and given up about 250 names. Looks like UBS clearly violated its qualified intermediary agreement with the US. If I were betting, I’d bet that the Swiss will be the ones to blink, if the US only has the backbone to stand firm.

Health Care Reform

Democrats are wrangling over how to pay for much needed health care reform. On the Senate side, they are apparently taking very seriously the proposal by Citizens for Tax Justice that the Medicare tax be extended to all types of unearned income, not just compensation. (This proposal, of course, has been around, and I’ve made it quite often myself. CTJ has a specific version, and provides state-by-state figures on what it would mean.) Obviously, since the top quintiles own most of the capital assets, this would be primarily a tax increase on them (resulting in a slight increase to the capital gains rate from 15% max for most types of gains to 16.45%).

Defense of Marriage Act

Back in the 1990s, Congress caved to the “values” lobby (i.e., the group that wants to impose its “values” on all the rest of us, and whines about having others’ values imposed on it if it thinks anybody wants to do anything differently from the way it thinks they ought to want to do it) and passed the so-called “defense of marriage act” (DOMA). DOMA says the terms “spouse” and “married” in federal law can only refer to legal ties between a man and a woman –i.e., “traditional” marriage. Of course, there are lots of references to spouses and marriage in the Internal Revenue Code–spouses can transfer property to one another without tax. Spouses can receive alimony when they divorce. Spouses can file joint returns. Spouses can exclude medical benefits from their spouse’s medical insurance. And etc. When DOMA was passed, no state permitted gay marriage. Now, several states do. And finally, one of them is challenging the law as unconstitutional (which, you won’t be surprised, in my view it clearly is) because it “interferes with the Commonwealth’s sovereign authority to define and regulate marriage” and “constitutes an overreaching and discriminatory federal law.” See complaint; AG files first suit challenging DOMA, Mass. Lawyers Weekly, July 13, 2009. Good for Massachusetts.

Developers and tax-exempt bonds

A retirement community in Central Florida may owe millions in back taxes. The Villages is made up of “community development districts” that have been used to pay for roads, sewers and water lines that are essential to the developers’ being able to sell their developments. The IRS examiner has concluded that $64 million of bonds issued in 2003 shouldn’t have been entitled to tax exemption because the board members were all affiliated in one way or another with the developer, and the developer (an ardent Republican, natch) had gotten about $60 million from the district for golf courses and small parks that cost the developer less than $8 million to build. A pretty solid return, in a period of not so solid returns for people conducting their business without the aid of the US government. Other bonds are also being investigated. See Fineout, Florida Communities Pay Attention to a Tax Case, NY Times, July 10, 2009.

Banks, TARP purchases of toxic waste, derivatives regulation (or not)?

Obviously, the entire economy is impacted by the credit crunch and the huge amounts of money the federal government has put on the line for banks, including its plans for “partnerships” with private equity to buy up toxic waste, with the government standing to get a pittance of the up side (if there is any) but to lose most of the downside (which there will likely be a good deal of). Meanwhile, proposals for regulation of derivatives are tepid at best. “Standard” derivatives would be sort of regulated, but “exotic” ones (the ones, by the way, that have been customized to use in tax shelter deals, or to fool accounting regulators) won’t be. You can create a customized derivative to do anything the standard one would do, so who would do a standard derivative if both options exist? (nobody) And why do banks need to be doing exotic derivatives in the first place? (they don’t). Derivatives have been just one other way to manipulate tax burdens and get the right bundle of features at the right point to claim the right application of a particular part of the Code. Swap away the taxes. But here we are, letting banks continue without restructuring, aiding them with more US dollars on the line, and doing it in a way that allows big aid recipients in the bailout (like GE) to get bigger on more bailout-related dollars from the government, while continuing to engage in the same behavior as before. What part of this makes sense?

More tax shelter enablers biting the dust

This week, another of the BDO Seidman “tax solutions group” (that ended up being a euphemism for tax fraud promotional group) pled guilty to various charges in connection with the son of boss type deals done with defunct law firm Jenkins & Gilchrist. You can read all about that on A Taxing Matter here and more about the shelters and other cases, here and here. Will these guilty pleas help put a stop to the overzealous “tax minimization” norm. For a little while, I suspect. And then the race will be off again in a new cycle of tax shelters.

And being in Michigan, I can’t leave out Ave Maria (hat tip to Paul Caron at Tax Prof)

Ave Maria Law School, a Catholic school founded and funded by Tom Monaghan (of Domino’s Pizza wealth), is being moved lock, stock, barrel and faculty to a new city and campus in Florida. A number of tenured faculty objected to the apparent high-handed way in which Mr. Monaghan was able to control the school’s decision making on the matter. They are no longer at the school and are contesting their termination. Monaghan claims that they are Catholic ministers and therefore the school is exempt from suit in civil court under the First Amendment religious protections. See Baldas, Ave Maria claims ‘ecclesiastical abstention’ over termination of three law professors, National Law Journal, July 9, 2009. As one commenter on the Tax Prof posting on this noted–so do the faculty take the ministerial housing allowance exclusion?

Enjoy, and have a great weekend…..

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Nails: The 2012 Republican candidate for President?

From Lenny Dyksytra’s letter to friends about his bankruptcy filing yesterday:

William McKinley filed for protection while serving as Ohio’s governor in 1893. He was in debt to the tune of $130,000 (an insurmountable sum in those days!) before some friends eventually helped to bail him out. Three years later, he occupied a desk in the Oval Office. [emphasis mine]

That seems much clearer than declaring you’re “not a quitter” while wearing hip-waders while your lawyer claims your multimillion dollar book deal (and private fortune) aren’t enough to deal with the cost of ethics charges against you.

Also, Jim Cramer may want to avoid Lenny for a while:

Ulysses S. Grant went bankrupt after leaving office when a partner in an investment-banking venture swindled him. (I can certainly identify with this one.) [emphasis mine]

Good thing Dykstra doesn’t pretend to be an investment advisor.

Oh. Well, at least no one ever sang his praises in the mass media, right?

Oops.

Dykstra in 2012, on a platform of Fiscal Responsibility. “Returning to the Glory of the McKinley Era.”

Seems as likely to work as anything else.

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Reversed Psychology: Tax Cuts and Work

by Bruce Webb

In comments to his last post A Response to Megan McArdle, Again Cactus put the following up as a summary of the Economic Right’s approach to tax cuts:
1. tax cuts mean people are encouraged to work harder
2. people work harder
3, growth

Another version of this was posted, without apparent irony, on a MY post on the soda tax. How to Think about Public Health Taxes (bolding mine but actually echoed when MY later quoted himself)

Think about the case for taxing income, via the income tax and FICA. Why do it? Well, to get the money. That’s how we finance Social Security, the Department of Defense, Medicare, interest payments on the national debt, Medicaid, federal aid to schools, veterans’ health care and benefits, the FBI, etc. Now what’s the case against taxing people’s income? Well, it’s that it discourages work and it discourages investment. And that’s bad for the economy. Now we go back and forth over whether any given expenditure has a value that outweighs the economic costs. Liberals, like me, tend to think that a relatively high level of expenditure is justified whereas folks on the right tend to disagree.

But that simply shows, and not for the first time that some of our progressive wunderkinden have simply internalized the central tenet of supply side voodoo, the idea that income taxes are a tax on work and capital gains taxes are a tax on investment, and that like proposed taxes on soda or existing taxes on liquor and gasoline the more you tax something the less people are inclined to expose themselves to that tax.

This I think is a profound misunderstanding of the psychology of work and investment. Those who care about why I would think that and those who are just dying to mock the whole idea can follow me below the fold.

Now there are some people who work just for the sake of work itself. In fact a lot of people will spend many hours on work that comes with no monetary compensation at all. We call these people ‘hobbyists’ and ‘unpaid volunteers’. And I suppose if you taxed these people directly on their time there would be some tendency to reduce that time, or at least the time reported to the tax man. But most people do not approach work as some sort of dispensable hobby, instead work is the means to some other desired end whether that end be subsistance, or fame, or fortune with its attendant material objects, or in some cases simple sociality (e.g. some people live to organize office birthday parties). Mostly though people are one way or another working for the paycheck.

But even the paycheck amount is not an end in itself, at least not for everybody, and particularly not for those people who work outside the hyper-competitive world of Wall Street, not every clerk dreams of being office supervisor, not every framer dreams of being site superintendent. some times what you have is good enough.

And when we examine history we can see that in most times and most places this is the norm, sure there are always strivers and always some measure of economic mobility but particularly in largely pre-industrialized societies people tend to end up at some equilibrium. And that equilibrium point is mostly established by a desired level of consumption.

I first came across a formalized version of this in Chayanov’s The Theory of Peasant Economy. I just now ran across a pretty good version of Chayanov’s overall thesis here Russian History Encyclopedia: Peasant Economy

Perhaps the greatest theorist of the peasant economy was a Russian economist named Alexander Chayanov, who lived from 1888 to 1939. Chayanov published a book entitled Peasant Farm Organization, which postulated a theory of peasant economy with application for peasant economies beyond Russia. He argued that the laws of classical economics do not fit the peasant economy; in other words, production in a household was not based upon the profit motive or the ownership of the means of production, but rather by calculations made by households as consumers and workers. In modern terminology, the family satisfied rather than maximized profit.

According to Chayanov, the basic principle for understanding the peasant economy was the balance between the household member as a laborer and as a consumer. Peasant households and their members could either increase the number of hours they worked, or work more intensively, or sometimes both. The calculation made by households whether to work more or not was subjective, based upon an estimate of how much production was needed for survival (consumption) and how much was desired for investment to increase the family’s productive potential. Those estimates were balanced against the unattractiveness of agricultural labor. Households sought to reach an equilibrium between production increases and the disutility of increased labor. In short, households increased their production as long as production gains outweighed the negative aspects of increased labor. This principle of labor production in the peasant economy led Chayanov to argue that the optimal size of the agricultural production unit varied according to the sector of production at a time the official policy of the Communist Party of the Soviet Union was pushing for large collective farms. As a result of this disagreement with Marxist economists and the Party line, Chayanov was arrested in 1930 and executed in 1939.

Chayanov came to his understanding not from a position of armchair theorist but by doing some serious data analysis of the surprisingly (to us) abundant documentation of peasant work life in Czarist Russia. And the result was that he found some very large divergences in work effort over the course of the standard peasant work-life with the peasant couple stepping up their work hours during some periods (for example while children are small and when setting up children with their own holdings) and then dialing it back.

Now even in the Peasant Economy there are strivers who undertake to raise their equilibrium point, your German ‘kleinbauer’ maybe wanting to rise to the status of ‘bauer’ and your ‘bauer’ to ‘grossbauer’, but equally the shift could go the other direction in any given generation, but the whole effort was not particularly driven by the profit motive but instead by the desired outcome.

Which is where supply siders get their psychology reversed. They see the income tax as a tax on work and as such a disincentive to work itself. Just as they see a tax on capital gains as a tax on capital and so a disincentive to invest. The historical reality generally shows the exact opposite, the higher the tax the more you have to work to achieve your desired consumption outcome, and similarly the same is true for investment, more tax means more intensification of investment activity. Now certainly there are limits to how far this process can go, if you tax labor output down to subsistence and sub-subsistence levels you risk your serfs and/or wage employees simply running away, and contrawise if you tax capital at rates up to 98% it is no wonder that the Beatles ran away from England as well. But there is no evidence that current levels of taxation are actually above the sweet spot where taxes mean more work and more capital investment rather than less.

Meaning we need to redraw that Laffer curve to include consumption equilbrium points for various income levels. If a person’s current income is above his own personal equilibrium point he might well react to a tax cut by reducing his hours of work. If instead a tax increase takes him from above equilibrium to below he might react by increasing hours. And the same is true for the investor. If as a group a society’s top 5% or top 1% are living large at current returns and rates, a tax cut might just lead to them commissioning artists or patronizing writers and scholars. Traditionally aristocracies have sought to reduce or eliminate their overall tax burdens, and it was not because they had a burning desire to spend every day working their fingers to the bone. Instead that tax exemption enabled them to maintain or even expand their consumption.

Supply side psychology treats ‘work’ and ‘investment’ as ends subject to direct incentives or disincentives from taxes. But historical reality shows they the are instead means to other ends that include such things as consumption and display. Calculating the impact on any given tax change on any given group requires some deeper understanding of the sociology involved among that group. History is full of instances where people scraped and scrapped behind the scenes simply to maintain appearances at Court or its socio-economic equivalent (think ‘Sunday Go to Meeting Clothes’ among the working classes).

How hard are you willing to work to keep that Bass Boat and the Lake Cabin even as the taxes on them are “killing you”? Are you really going to cut back your overtime in response to a tax increase if it means giving up your Season Ski Pass?

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Morgan Stanley Plans to Turn Downgraded Loan CDO Into AAA Bonds

by divorced one like Bush

Well, well, well, seems our Robert will have some more thinking to do. Via C & L to Radamisto who want’s to know if we have ADD or what comes the Bloomberg story that the money from money machine is being restarted.

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Gee, Morgan Stanley, Goldman Sachs? Two totally separate companies, just happen to be mentioned together implimenting the same strategic plans.

8/18/08 Morgan Stanley, Goldman link lending to their own creditworthiness

The Financial Times is reporting that Morgan Stanley is implementing systems that tie the prices of credit insurance on their own debt to their commitment to provide financing to their hedge fund clients. The shift would allow the bank to pull out from its funding commitments should it run into a crisis of confidence like that which wiped out Bear Stearns in only a matter of days. Goldman uses a similar arrangement that ties its lending commitments to the firm’s own bond prices.

9/21/08
WASHINGTON (Associated Press)

The Federal Reserve said Sunday it had granted a request by the country’s last two major investment banks – Goldman Sachs and Morgan Stanley – to change their status to bank holding companies.
The decision means that the Goldman and Morgan Stanley will be able not only to set up commercial bank subsidiaries to take deposits, giving them a major resource base, but they will also have the same access as other commercial banks to the Fed’s emergency loan program.

3/9/09 UPDATE 2-Barclays cuts price targets on Goldman, Morgan Stanley

March 9 (Reuters) – Barclays Capital cut its price targets on Goldman Sachs (GS.N: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research) and said it expects the former investment-banking giants to post losses for December, mostly due to asset markdowns, investment losses and “very subdued” core earnings.

5/19/09
Goldman Sachs and Morgan Stanley have formally asked the Federal Reserve for permission to repay a combined $20 billion in federal bailout money.

6/17/09 JPMorgan Chase, Morgan Stanley cut ties with government

In separate statements, Morgan Stanley and JPMorgan Chase said they will not issue bonds backed by the Federal Deposit Insurance Corp. The banks are striving to show they can raise funds without help from the government. Goldman Sachs and other financial institutions might follow suit.

Continuing the July 8, 2009 Bloomberg article:

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”

While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

Jennifer Sala, a spokeswoman for Morgan Stanley, and Gregory Mount, a Greywolf partner, declined to comment.

Banks are using re-REMICs to protect against losses on residential-mortgage securities during the worst housing slump since the Great Depression…Re-REMIC stands for “resecuritizations of real estate mortgage investment conduits,” the formal name of mortgage bonds.

Nice to know We the People have their backs huh?

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A Response to Megan McArdle, Again (by cactus)

by cactus

Megan McArdle responds to a post I wrote:

So Obama doesn’t count because he’s not really a Democrat. But Bill Clinton was. But Richard Nixon–the chap who implemented price controls and massively expanded Social Security and Medicare–was definitely a Republican. Jimmy Carter, who deregulated like mad: definitely a Democrat.

What are these policies that neatly define Democrats to exclude only the ones who happen to have crappy growth? On what metric does Barack Obama register as farther to the right than Bill Clinton? Because from what I remember of the 1990s, I spent most of the decade listening to my genuinely left-wing friends weep that he’d betrayed them. Remember Edelman’s resigning in protest of welfare reform?

I thought it was unnecessary at this point to explain the one thing I’ve pointed out time and again differentiates Republicans from Democrats. I think the first time was here. (I tend not to break out JFK from LBJ, or Nixon from Ford because JFK and Ford only served a short time, but the post that is attached is illustrative of behavior, not performance.)

The difference is the tax burden – that is, the percentage of people’s income that gets collected in taxes. Not the marginal rate – the amount people actually pay divided by the amount they make. And there is a difference, a big difference. As an example: George Herbert Walker Bush famously raised marginal rates. It might have cost him an election. But GHW Bush also quietly lowered the tax burden. He did it through the people he appointed to the IRS, through the degree of compliance he sought, through the way his IRS interpreted existing rules and regulations and through how the body of tax rules and regulations changed while he was in office.

Going back to 1952 at least, every Democrat, every single one, has increased the tax burden. Every single Republican raised lowered [h/t Bruce Webb] them. The data in the attached post is from the IRS and goes back only to 1952, but one can wander over to the BEA’s NIPA Table 2.1 and compute the tax burden ourselves with National Income data going back to 1929, and whaddaya know, the rule also works for Hoover, FDR, and Truman. Just barely for Truman… but then he is the exception on performance too, right?

Now, I doubt you could find a single person on the right of the political spectrum who would tell you that taxes don’t affect economic growth. They all believe taxes affect growth. Of course, the story they tell is that cutting taxes produces faster economic growth. The fact is, however, the Presidents who cut tax burdens tended to produce slower economic growth than those who raised taxes. (I’ve discussed why in a number of other posts, and I don’t feel like rehashing or looking for those posts now. I also note this isn’t just true of Presidents. My fellow Angry Bear, Spencer, once pointed out that there are a lot of people out there who seem to think we’d all be better off if the country was Alabama than if it was Massachussetts.)

Unfortunately, tax burden data, like any other bit of real world data, fluctuates somewhat from year to year, so its really going to be a while before we know what direction they’re really headed over O’s administration. As in, several years. And most of us are impatient. So we’d like to have some leading indicators, so to speak, of what Obama is going to do, of where he’s going to fall on the one R v. D divide that really matters. And right now, he’s behaving like the folks who have cut tax burdens in the past. He’s also talking like them. His bail-out is identical to GW’s, and when he talks about taxes, it doesn’t sound like Clinton, it sounds like GW. So its reasonable to wonder whether he’s going to stick to the R v. D rule. And the next test coming up is healthcare; a D would be putting his political capital on the public option right now. An R wouldn’t. What’s it gonna be, we’ll soon see.

More below the fold.

Now, in Megan’s post, she refers to “Cactus and his merry band of madmen.” I’m not sure the merry band of madmen over here truly have a leader, much less that I’m the one (Dan is the official grand poobah in charge of the blog, after all!!) but I’m guessing you aren’t a part of that merry band of madmen if any of the following apply to you:

  1. You do not believe that since 1929 at least, every single D has increased the tax burden and every single R has decreased the tax burden, despite the fact that the data shows precisely this, and despite the fact that it fits the caricature of Ds and Rs to a T, so to speak.
  2. You do not believe that since 1929, Ds have generally outperformed Rs when it comes to real economic growth, despite the fact that the data shows precisely this.
  3. You do not believe that administrations that cut the tax burden have also generally been the administrations that grew more rapidly, despite 1. and 2.
  4. You do not believe that the tax burden could possibly have anything to do with growth.

If you do believe these things, if you believe what the data shows , I’m sorry to say but you’re one of us, one of the merry band of madmen. On the other hand, if you fit these rules, there are a whole lot of folks out there, Megan McArdle included, who would consider you sane.

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Who are You and What Have You done with Kevin Drum ?

Robert Waldmann

The absolutely brilliant and almost reliably reasonable Kevin Drum quotes the very smart and usually reasonable Dan Drezner and writes

In a speech today in Russia, Barack Obama said that “the pursuit of power is no longer a zero-sum game.” Dan Drezner isn’t so sure:

If he had said, “The pursuit of prosperity is no longer a zero-sum game,” I’d be fine with the passage. I still think power is a zero-sum concept, however. The two ideas are linked but hardly the same.

I suppose that’s true. Even in a Thomas Barnett-ish world where all the big players gang up to police the world, it’s prosperity and security that are positive sum, not raw power. Anyone care to try and come up with a counterexample?

Power is not at all a zero sum game. If different powers are united in one pair of hands, there isn’t the same total power. Instead there is much more power.

Consider an obvious mild example. If there is a competitive market no one has power over me. If you refuse to sell to me, I just buy from someone else at the same price.
But if you are a monopolist I just can’t get the product if you refuse to sell to me. If you have a monopoly on, say, water, I must beg you on bended knee or die of thirst. The total amount of power in the world is completely different if many many people have water or if only one does.

More generally the whole point of, say, the US constitution is to reduce total political power by dividing it. If the President, congress, the supreme court and the armed forces worked together, then together they would have absolute unlimited power. The US goverment had much more power over people in the US in 2006 than in 1996. That was what was so terrible about 2006.

If we take Obama literally, he is saying that he will cooperate with Putin to dominate the world which would be relatively free if they didn’t cooperate. I trust he was lying. I really have no choice. If the quest for power ceases to be played as a roughly zero sum game, we will all be slaves.

What the hell is going on ? I think that Drezner and Drum are using “zero sum” to mean harsh, red in tooth and claw, not suited to utopian dreams. Their view is that cooperation can’t make the outcome of the power game better for everyone. That doesn’t mean that it can’t make things worse for almost everyone.

Worse even than disagreeing with Drum, my argument is a clumsy verbose attempt to paraphrase an argument made by Hayek. Pro Hayek, contra Drum — what is happening to me ?

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