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Most absurd use of "Most"

(Dan here…Lifted from Robert’s Stochastic Thoughts.  Just a comment.)

by Robert Waldmann

Most absurd use of “Most”

Two of the bees in my bonnet are the Headline writer(s) and the abuse of the word “most.” In a bit of a shift*, I complain about the headline:

“Most Americans Oppose Health Law, Poll Finds”

I clicked the link and read “In the latest poll, 47 percent said they oppose the law while 36 percent approve, with the rest having no opinion. “
OK lets go slow. 47<50 therefore 47%<50% therefore 47% is not most.
I don’t like the word most because it ambiguously means “more than half” and “approximately all.” It is a 4 letter automatic equivocation.

I add that the article has changed since the first time I read it (the New York times has always updated within the day — the newspaper of record becomes the record at midnight). In the older draft (trust me) the 47% = most was in the first paragraph.

Interestingly the new first paragraph notes that two thirds of respondents want the Supreme Court to declare parts of the law (mostly the mandate I guess) unconstitutional. This shows how much the US pubic hates judicial activism. Think of how few must have the view that laws which they don’t like shouldn’t be overturned by unelected courts.

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Health Care Thoughts: How Old is Too Old

by Tom aka Rusty Rustbelt

Health Care Thoughts: How Old is Too Old

Former VP Dick Cheney had a heart transplant according to several news sources today.

I will refrain from making “he never head a heart before jokes.”
Serious question though – Cheney is 71, how old is too old to receive a heart transplant?

71? 75? 80? Or is there no upper bound?

Hearts are rare and the procedure costs a lot of money. How old is too old? Or not.

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The Central Flaw in Krugman’s Argument Against Keen

The key failing in Krugman’s response to Steve Keen’s response to Krugman’s paper (PDF) is here:

If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand.

Krugman assumes here that people have to save (spend less) in order for other people to borrow. It’s actually the fundamental assumption, the sine qua non, of his paper (and of Krugman’s beloved IS-LM — the linch-pin of “New” Keynesianism — created by Hicks to subsume Keynes into neoclassicism, and later disclaimed and discredited by Hicks as a “classroom gadget”; see my post, and Philip Pilkington here).

But that’s not how things work (and it’s the very assumption that Keen is disputing). I tried to explain this in clear and simple terms here:

Think about it:

You get $100,000 in wages. Your employers’ bank account is debited, and yours is credited. Your bank can lend against your higher balance; your employer’s bank can’t. Net zero.*

You spend $75,000. It’s transferred from your account to other people’s/businesses’ bank accounts. Their banks can lend more, yours can lend less.

Is the total stock of loanable funds affected by whether the money is on deposit at your bank, your employer’s bank, or the banks of people you bought stuff from? No.

Meantime, you don’t spend $25,000. You “save” it. The money sits there in your checking account. If the action of spending — transferring money from one account to another — doesn’t change the total stock, how could not transferring money do so? Your bank still has the money, which it can lend out. Other banks still don’t, and can’t.

So here’s how the argument plays out:

Krugman assumes that people need to save in order for others to borrow.

Keen points out that they don’t.

Krugman explains that Keen is wrong by … assuming that people need to save in order for others to borrow.

And so the world goes round.

Cross-posted at Asymptosis.

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As Goes Obamacare, So Goes Romneycare … and State Laws Requiring Auto Insurance?

I’ve written repeatedly now on AB that the challenge to the constitutionality of the ACA’s minimum-coverage provision (a.k.a., the individual-mandate provision) is not really a Commerce Clause challenge but instead a challenge under the Fifth Amendment’s due process clause, under what is known as the “substantive due process” constitutional law doctrine.  The Fifth Amendment’s due process clause limits what the federal government can do vis-à-vis individuals.  A clause in the Fourteenth Amendment is nearly identical, and identical in substance, to the Fifth Amendment’s due process clause, except that it limits what state governments can do vis-à-vis individuals.  

SCOTUSblog’s Lyle Denniston’s early report suggests that I was right.  The outcome of the case, he predicts, will depend on whether Kennedy believes that the Court can uphold the mandate provision without opening the door to unlimited congressional mandating of purchase specific things, not because Congress lacks that power under the Commerce Clause but instead because it violates liberties protected under the Fifth Amendment’s due process clause. Denniston does not mention the Fifth Amendment, but, whether or not the justices themselves did specifically, that is the upshot.

The “substantive due process” doctrine holds that there are certain incursions into personal autonomy and certain impositions on individual liberty beyond which the Constitution allows the government to go.  It is this doctrine by which the Court has stricken down such laws as state laws barring the sale and use of contraceptives, state laws prohibiting abortion under all circumstances (Roe v. Wade),  and state laws criminalizing sodomy.

But based on Denniston’s early report about the nature of Kennedy’s concerns, I don’t see how, absent an utterly artificial Commerce Clause-based ruling, a ruling that the mandate unconstitutionally infringes upon person choice, upon personal liberty, would not also mean that Massachusetts’s “Romneycare” law, and state laws that  require drivers to purchase auto insurance, would be constitutionally permissible. 

Kennedy likes to wax eloquent, as he did last year in an opinion in a case called Bond v. United States, about how divisions of power among various governments—by which he means state governments vs. the federal one—protect individuals from tyranny. (He’s usually less interested in constitutional checks than on balances to state power—especially to state-court power—but that’s another subject.)  In Bond, he said, rightly, in my opinion, that a person indicted under a federal criminal law has legal “standing” (the legal right) to argue that the federal statute unconstitutionally infringed upon an area of criminal law reserved solely for the states to address, because the federal statute impinged (literally, in that case) her personal freedom.  So if the problem with the insurance mandate is that it exceeds Congress’s authority under the Commerce Clause, then a ruling that the ACA, a federal statute, is unconstitutional would not affect state statutes.
But that’s a separate issue from whether the mandate is an unconstitutional violation of personal liberty irrespective of whether or not the Commerce Clause power would allow Congress to enact the law.  And under the Court’s longtime Commerce Clause jurisprudence, Congress does have the authority to legislate the mandate to buy health insurance, given the impact on the healthcare market of the uninsureds’ usage of health care.  A ruling to the contrary would be transparently artificial. Which probably won’t matter to Kennedy.

This will be cross-posted later today to the Firedoglake blog.

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To the general public, all that matters are the headlines, reflecting the bottom line.  The universal consensus among reporters who attended the 90-minute Supreme Court argument yesterday on whether an 1867 law called the Anti-Injunction Act bars the Court from considering challenges to the constitutionality of ACA’s individual-mandate provision was that the justices will decide the constitutionality of the mandate provision despite the AIA.  

But law geeks like me know that what also matters is how they conclude that the court has “jurisdiction”—legal authority—to decide the constitutionality of the mandate provision. That’s because federal judges are incessantly, and often spontaneously, throwing lawsuits out court, claiming that they lack jurisdiction to hear the case—a trend begun in the 1980s and accelerated exponentially, explicitly and by malignant (as opposed to benign) neglect to reverse lower appellate court rulings, by the conservative legal movement to which a majority of the Roberts and Rehnquist courts adhere. 

A key part of the conservative-movement’s federal-courts-have no-jurisdiction-to-hear-any-constitutional-claims-except-the-ones-that-conservatives-want-them-to-hear jurisprudence is that federal-court jurisdiction either exists or it doesn’t, and if it doesn’t it can’t be waived by the parties.  So even if neither party claims a lack of federal jurisdiction, the judge, judges or justices in each case must raise the issue themselves if they believe jurisdiction may be lacking. Under the Constitution, Congress decides what types of cases the federal courts have jurisdiction to hear, by enacting “jurisdictional” statutes that either grant or remove federal-court jurisdiction in specific categories of cases, subject only to requirements or prohibitions in other parts of the Constitution.  (Actually, the Supreme Court has created several legal “doctrines” out of whole cloth that remove federal-court jurisdiction in various cases, but I’ll leave that for another day.)

The AIA  provides that “no suit for the purpose of restraining the assessment or collection of any tax may be maintained in any court by any person.”  The ACA’s individual-mandate provision does not become effective until 2014 and the penalty for failure to obtain the minimum insurance will not be assed until April 2015, through income tax filings.  Early on in the ACA litigation, the Obama administration claimed that the ACA penalty was a tax and that the AIA therefore removes federal-court jurisdiction to hear the challenge to its constitutionality until 2015, but it soon retracted that claim and now argues that the penalty is, well, just a penalty, not a tax, and that therefore the AIA doesn’t remove federal-court jurisdiction to decide the constitutionality of the mandate and penalty for non-compliance with the mandate until 2015; the Court can decide the issue now.  

Three of the four lower federal appellate court panels that have issued rulings in ACA litigation, including the one in the case that the Court is hearing this week that ruled the mandate unconstitutional, agreed. The Supreme Court, in deciding to hear the AIA claim anyway, appointed a private lawyer to argue that the AIA does apply here, because the Justice Department joined the ACA’s challengers in saying that it doesn’t.

Everyone, certainly including me, assumed that the outcome of this “jurisdictional” issue—of whether or not the AIA barred the Court’s consideration of the challenges until 2015—would depend upon whether the Court thinks the penalty is a penalty or instead a tax.  And that may prove accurate.  But, stunningly (in my opinion), the Court, at the urging of Roberts, might instead say that it doesn’t matter whether the penalty is actually a tax, because the government has waived the jurisdictional claim. “It’s a case quite similar to this in which the constitutionality of the Social Security Act was at issue, and the government waived its right to insist upon the application of this [Anti-Injunction] Act,” Roberts said, referring to Helvering v. Davis, the 1937 case in which the Court upheld the Social Security Act.  “So,” Roberts asked, “are you asking us to overrule the Davis case?” 

Hmmm.  I thought they already had done that.

SCOTUSblog’s incomparable Lyle Denniston provides invaluablereportage and analysis of the different options that emerged from yesterday’s argument on how the Court will remove the AIA as a bar to deciding the constitutionality of the mandate provision. 


This will be cross-posted later today to the Firedoglake blog.

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Senate Dems unveil their tax cut proposal

by Linda Beale

Senate Dems unveil their tax cut proposal

Senate Democrats, led by majority leader Harry Reid, unveiled a $26 billion tax-cut bill on March 26, 2012. See, e.g., Richard Rubin, Senate Democrats Said to Prepare $26 Billion Tax Cut Measure, San Francisco Chronicle (Mar. 26, 2012).

The proposal revives the lapsed 100% expensing provision for capital investments, extending it through the end of 2012 and would provide a tax credit for businesses that expand their payrolls this year.

The expensing provision is foolish, but it looks like Senate Democrats are more interested in playing the bipartisanship game than they are in good legislation. Why is it foolish? For several reasons.

1) there is already a (temporary) bonus depreciation deduction of 50%.

2) an expensing provision that applies retroactively to already-purchased capital equipment cannot, by definition, have incentivised the purchase of that equipment.

3) providing this kind of additional break to large corporations is a corporate subsidy that has little to do with creating jobs and nothing to do with good tax policy. It has little to do with creating jobs because corporations will simply accelerate purchases to garner the benefit but may not increase production correspondingly. It has nothing to do with good tax policy because accelerated depreciation already allows deductions faster than economic lossm amounting to yet another pure tax subsidy for businesses.

4) Companies that need to purchase equipment in order to compete will make the appropriate decision to purchase based on company revenues and expenses, without needing a subsidy from the tax code. For businesses where some investment in capital equipment is expected eventually, it is likely that the provision will subsidize an acceleration of an investment that would have been done anyway, amounting to a mis-allocation of resources to garner the extra tax break, while temporarily available.

The subsidy for payroll expansion is at least more directly connected to a desired social goal of creating more jobs to reduce the unemployment problem and something that both small and large businesses can benefit from. The proposal calls for a 10% tax credit for the first $5 million of payroll expansion in 2012, capped at half a million. Payroll expansion can be either new hires or wage increases.

Meanwhile, the GOP-led House is planning about double that amount as an outright giveaway to business. Cantor sponsored a 20% tax cut for all businesses with fewer than 500 workers. Those businesses are not necessarily “small” and the provision is not linked to payroll expansion, as Schumer noted. Id.

crossposted with ataxingmatter

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Obama Bucket Shop act

Yves Smith  points us to information on our notions of new business and venture capital:

Amar Bhide, who has written the classic, The Origin and Evolution of New Businesses, has decisively debunked the idea underlying the Obama Bucket Shop act, which is that public stock offering are an important source of funding for new businesses.

The problem is, as Bhide explained, is that academics focus on the easy to study but relatively inconsequential venture capital funded companies which look to IPOs as an exit. Bhide found that only 1% of new and young businesses were funded by venture capital. Similarly, his multi-year study of Inc 500 companies found that a comparatively small portion had VC backing, and even then, many got VCs in at a late stage, not because they needed the money but having the “right” VCs would lead to a much bigger premium when they went public.

Bhide found that most new businesses are based on an insight about an business opportunity that the founders discovered as employees (ie, they saw a market niche that incumbents were ignoring).
These ventures were funded by savings, friends and family, and credit cards.

Similarly, the idea of venture capital or stock promoter funding as some sort of boon for entrepreneurs is wildly overstated.  The value added of venture capital is questionable. It produces stock-market type returns with more volatility. A colleague who founded a successful venture capital firm left when it went to do a second round of funding (the junior partners stayed on). He gave a long form, compelling analysis as to why: when you actually went through the numbers, the returns to the entire asset class depended on the returns of a very few firms, and even at them, of a very very few deals

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Subprime and the crisis

Financeaddict comments on a St. Louis Fed study:

Their research asks whether there’s evidence that lenders changed their behavior to meet CRA, Fannie or Freddie-mandated goals by:

  • making more subprime loans than they otherwise would have?
  • lending to riskier borrowers than they otherwise would have?
  • charging risky borrowers less than they otherwise would have?

…If the banks were strongly influenced by their desire to meet affordable housing targets then they should have made more of the kind of loans that would qualify and less of the kind of loans that would not qualify. These relative changes should show up as anomalies in an otherwise continuous data pattern, but the researchers’ examinations of 722,157 securitized subprime mortgages made in California and Florida from 2004-2006 found no evidence of this. The same held true for the other two research questions. Hernández-Murillo, Ghent and Owyang did not find that lenders gave lower (i.e. better) prices to borrowers falling inside the threshold vs. those falling outside. Nor did they find evidence that lenders lent more often to qualifying riskier borrowers (those who would go on to be seriously delinquent within the first two years after receiving the loan) than they did to riskier borrowers whose loans would not qualify.
So, to recap, the subprime story went something like this: foolish borrowers borrowed and foolish lenders lent. The evidence appears to show that lenders did not change their behavior in order to hit the affordable housing targets that the government imposed on them. While the government’s programs to encourage affordable housing may have other flaws they did not, at any rate, directly cause the subprime crisis. Myth busted.

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Health Care Thoughts: Innovation is Good Except

by Tom aka Rusty Rustbelt

Health Care Thoughts: Innovation is Good Except….

…. when it is not politically correct. For a long time large employers have used self-funded insurance plans backed up by stop-loss insurance for large claims. I have worked with employer plans down to the 100 employee size. Now small employers are trying to cope with fast rising conventional premiums by using self-employed plans with lower dollar stop-loss coverage. Insurance companies are crafting plans for smaller businesses.

Well! California politicians and bureaucrats want to outlaw these plans, not because the plans are necessarily bad for small business or employees, but because the plans do not meet the spirit and needs of PPACA. This insurance coverage is not politically correct. Some big insurers support the state because they might lose market share in the small business market (the holiest of motives of course).

Prediction: Eventually small business employers will get sick of this and dump employees on state exchanges, assuming the exchanges can be organized and operated. Writing legislation is easy. Implementing PPACA is not so easy.

HT: L.A. Times

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Tax Base Broadening ?

Below Dan pulled a post questioning Jon Chait’s claim that US economist’s generally support a broader tax base and lower rates. I am expert neither on taxes nor economists, but I will write at length on the question after the jump.

Before the jump, I must note that Chait made many of the points I try to make below. His main point is that it is easy to propose base broadening in the abstract but hard to eliminate actual deductions. I slipped into criticizing something he wrote in passing in the post Dan pulled over here, and I do it again after the jump.

First I note that many prominent economists support a sharply higher top marginal income tax rate. The figure 70% is not rare. I am not prominent, but that happens to be the top marginal income tax rate which I support (from nostalgia — that was the rate during my childhood in the 60s a period of notoriously slow economic growth).

Second, I think the consensus is a villager VSP consensus about what economists say (or should say or what economic theory implies or something). Similarly the VSPs are sure that economics tells us that social security pensions should be cut. Oddly many actual economists disagree.

Third, I support gradually eliminating the mortgage interest deduction, so, I personally also support base broadening (in addition to raising the top rate). Here I will generally argue against base broadening, but I stress that I am making a case against it and not totally opposed.

Now for some discussion of actual policy.

I think that it is easy to oppose tax expenditures (deductions, credits, exclusions etc) in the abstract for the same reason it is easy to support lower government spending in the abstract. All are costly, but the justification for each is specific, so when one just thinks of the whole mess, one thinks of the costs and not the benefits.

I don’t think that Chait thinks that most economists want to eliminate the earned income tax credit. I’m sure he doesn’t. That’s a tax credit, but it isn’t what he means at all. Same for the child tax credit.

My guess is that he wants to tax employer provided health insurance as income, but only a part of a transition to single payer. Certainly, he isn’t for repealing the ACA and eliminating the deduction. The logic of a broad tax base is to minimize distortions due to decisions made to avoid taxes. But the huge distortion here is the problem of free riding by the uninsured. Employers who pay for health insurance pay for the care of employees of employers who don’t. Chait supports a mandate — that is an additional tax incentive to get health insurance.

Some economists might want to eliminate tax incentives to save such as IRAs an Keoghs (does anyone remember what Keoghs are ? My dad has one). But wait the problem with running deficits is that is that the illusion of wealth causes higher consumption which crowds out investment (only if the economy is not in a liquidity trap).

Loopholes in the corporate tax code are proportionally much more important than loopholes in the personal income tax code. But many make a whole lot of sense. Surely we prefer corporations to reinvest profits rather than paying dividends (again the problem with just running deficits is crowding out investment). We should especially like investment in R&D since the investing corporation does not capture all of the benefits.

Hmm I think I have covered a significant fraction of total tax expenditures. So what is the cause of the near consensus for a broader tax base and lower rates(among VSPs at least). Clearly a lot of it is that they don’t find the alternative attractive — that is if one is convinced that high tax rates have high dead weight losses, then one is morewilling to eliminate tax expenditures. The alleged costs of high rates include avoiding genuine income to avoid paying taxes — reducing labor supply, reducing human capital investment and reducing saving. The evidence for a large effect on labor supply is miniscule. The human capital argument is that people study less if the increased salary mostly goes to taxes. Again the evidence is very weak. The remaining issue relates specifically to taxation of capital income and capital gains. I think the special low rates are considered loopholes by the critics of loopholes. I know some economists claim to have calculated significant dead weight losses due to genuine avoidance of genuine income. I know how much they had to torture the data too. But I don’t think that anyone is really convinced.

Rather, the problem with high rates is that they encourage tax avoidance for given gross income by making deductions and shelters and such like more valuable. So we are back to deciding if such avoidance (which is often explicitly encouraged) is desirable. It is generally the product of a political choice to encourage something. If this was a mistake, it is a mistake for low tax rates too. If it is a good policy, high rates make it more effective.

In any case, a higher tax rate does not imply that deductions must be more valuable. It is possible to cap deductions (as Obama has repeatedly proposed) so, for income over $250,000 the deduction of x is replaced by a credit of 0.35x. The incentive to find it is the same as now. The new top tax rate can be anything. There is no reason at all taxes have to be calculated by adjusting income then applying the tax function. The almost universal conflation of the marginal tax rate and the marginal benefit to the taxpayer of a tax expenditure is not an error — it is a trick used by those who want low tax rates to suggest that lowering rates is the only way to reduce incentives to find deductions and shelters and such.

OK now for my one field of expertise — lazyness. I am not the world’s top expert, but people even lazier than me are too lazy to type. I suspect that pundits (and some economists) consider the current tax code inefficient, because they personally would have to work rather hard to commment on it intelligently (my solution as seen above is to comment on it based on guesswork). The efficiency is dollars raised per page of tax code. The wasted effort due to complexity is their effort. I think this is a factor.

I think another factor is the desire to find common ground. A compromise based on lower rates and fewer loopholes appeals to lovers of bipartisanship. They have nostalgia for the distant memory of Bill Bradley and Jack Kemp working together. In particular, the argument against high rates based on incentives for tax avoidance leads invevitably to the proposal that the loopholes be eliminated. This is a way to increase revenues which supply siders must embrace if they don’t want to be revealed to be total hypocrites. Decades of experience have not taught many VSPs that supply siders don’t mind broadcasting their total hypocrisy.

Finally, I think advocacy of a simpler tax code appeals to people because it seems more horizontally equitable. The logic is not utilitarian. The idea is that it is fair for people with the same gross income to pay the same amount in taxes. I don’t have any patience for this argument (I don’t care about horizontal equity — I care about equality). It is based on the asusmption that, because it seemed once long ago that income was a good measure of ability to pay taxes, it is the only fair measure. If you think the argument makes sense, think of the marriage penalty. Should the marginal tax rate depend on individual income or family income ? They can’t both have some fundamental link with fairness.

I think the extremely strong appeal is that everyone thinks of the clever sneaks who are paying less than we are (not of those even less sophisticated than ourselves who are paying more). The thought that someone somewhere has more money to spare, yet pays less in taxes, is infuriating. This is not a rational basis for public policy.

But by all means get rid of the mortage interest deduction, slowly, with plenty of warning, when the economy is back to normal.

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