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

Fiscal Policy and GDP 2019 update

I think it might be time for an update on the crudest of tiny sample reduced form analysis of fiscal policy and the current recovery.

One reason for my continued interest is that there was a rather large tax cut enacted in 2017. Trump critics tend to argue that it failed to encourage investment, but did affect aggregate demand. I wonder if the noticeable increase in GDP growth is due to the tax cut or the spending increase from the 2017 omnibus spending bill.

So I look at GDP and G (government consumption plus investment) again. Both are annual changes in billions of 2012 dollars (Not logs). I subtracted 400 billion from the change in quarterly GDP (multiplied by 4 to give an annual rate). Also I multiplied G by 1.5 which is a common estimate of the multiplier (say by Blanchard and Leigh or Nakamura and Steinsson). Here an effect of the tax cut would appear as an anomaly — an increase in GDP not fit by the change in G times the multiplier (or the $ 400 Billion and year trend).

I do not see an anomaly either when the tax bill passed in 2017 or in 2018 when tax witholding changed. As I mentioned back in 2014 I don’t see an anomaly in either growth or government consumption plus investment when sequestration started in 2013 q1. The anomalies are high growth from 2014 q 1 to 2015 q 1 then low growth from 2015 q1 and q2 to 2016 q1 and q2, that is a level anomaly at a time when there weren’t policy shifts.

I notice again that theory and data both suggest that changes in G are more important than changes in taxes. Nonetheless the practice is to measure the fiscal stance with the full employment budget deficit, that is, to assume that the balanced budget multiplier is zero.

Comments (2) | |

Noah Smith, Mud Moats and the Two Paper Rule

I think this one year old brilliant as usual post by Noah Smith is well worth another read. I googled [noah smith mud moats] when I ran into a mud moat in a comment section flame war.

Click the link but I will attempt to summarize. First a very very common debating trick is to argue that the other guy really has to read the vast literature produced by some school of thought before daring to critique it. The vast literature gets critics bogged down, the brilliant metaphor is that this is like a mud moat around a castle which got attackers bogged down. The standard response is to refuse to read the literature and to abandon the discussion. This is not good.

Noah’s brilliant proposal is to demand that those who mention a vast literature cite two valuable articles in that literature. Reading two articles is not too burdensome. If the articles are weak, the literature can be dismissed as weak and weaker or the interlocutor can be dismissed as someone who hasn’t mastered the vast literature that he uses as a mud moat.

Noah says there are vast literatures which arenàt worth reading. He gives an example. He says there was a vast pre-Lucas critique macro literature which is now obsolete. You know where this is heading ?

In fact, I think the pre-Lucas macro literature is very valuable. For one thing, I think Lucas correctly made only very weak claims of originality in his paper “Econometric Policy Evaluation: A Critique”. He said (and with citations showed) that most leading macroeconomists were well aware of the problem. I think the revolution consisted of brilliant rhetoric setting up a straw man. I think the vast pre-Lucas macroeconomics literature is anything but a mud moat.

You know where this is going right ?

I now have to name two papers which will demonstrate that this is a vast valuable literature which should be read by all macroeconomists.

Clearly one is simple. The seminal paper which started the literature most directly critiqued by Lucas is Analytical “Aspects of Anti-Inflation Policy” Paul A. Samuelson and Robert M. Solow
The American Economic Review Vol. 50, No. 2, Papers and Proceedings of the Seventy-second Annual Meeting of the American Economic Association (May, 1960), pp. 177-194

I am on record saying it was a decade ahead of Lucas 1973 (really 13 years). See also the much better title and edited down version Robert Waldmann: Policy-Relevant Macro Is All in Samuelson and Solow (1960)

I have to think about the second paper. I am sure the author is James Tobin. I guess his AEA Presidential Address is an OK place to start (pdf warning). Actually best to start with Tobin Was Right (Implicitly Wonkish)

Two paper challenge accepted. Now I think Noah should re-read them.

Comments (1) | |

The Extreme Limits of Human Dishonesty and Stupidity

This is a follow up on my post on joy and sorrow. I feel great joy at having found the ultimate abyss of idiocy, but I fear Monday, October 30, 2017 Mysterious Ways

The competition for worst possible argument was provoked by the fact that former White House counsel Don McGahn told Mueller’s team that (sadly) current President Donald Trump twice told him to get Mueller fired and then told him to deny that “fake news” when it was reported.

Rudolf Giuliani attempted to surpass his previous accomplishments in dishonesty and idiocy by quibbling about an immaterial difference in wording

“I would ask, which of the three versions is McGahn standing by?” Giuliani told CNN’s Jake Tapper in response to McGahn’s lawyer’s statement, before listing several versions of the story.

[skip]

For example, while The New York Times used the word “fire” in its January 2018 report on the initial conversations between Trump and McGahn, McGahn himself did not use that word in interviews with Mueller’s team. Yet, Giuliani implied to Tapper that McGahn had used the word, citing the page number of Mueller’s report on which the New York Times article is described and saying: “The first version that he says is, ‘The President told me to fire him because he’s upset about conflicts of interest, and I told him I’d resign.’”

But there’s no such quote credited to McGahn in the redacted Mueller report.

It is impressive idiocy to base one’s case on the inconsistency between saying “Mueller has conflicts and can’t be the Special Counsel.” and “‘The President told me to fire him because he’s upset about conflicts of interest,” but it is truly outstanding idiocy to notice the difference in wording between McGahn’s testimony and a New York Times paraphrase of a leak.

One might expect that Giuliani’s denouncing someone for an immaterial difference between the words Giuliani put in his mouth and the words which actually came out of it would stand as the nadir of dishonest idiocy forever, or at least one day.

I put the following words in Kellyanne Conway’s mouth “hold my beer”.

She argued that we can tell that McGahn committed perjury for no compelling reason because

Don McGahn is an honorable attorney who stayed on the job 18 months after this alleged incident took place, and that if he were being asked to obstruct justice or violate the Constitution, or commit a crime, help to commit a crime by the President of the United States, he wouldn’t have stayed,”

Yes she said we know he is a felon who broke the law for no good reason, because we know he is honorable.

I really can’t even imagine dishonest idiocy which could top that, so I guess I will have to wait at least a day for Trump to outdo his minions.

Comments (4) | |

What Mueller Wrote about Obstruction

Josh Marshall explains it very well here. Mueller definitely did not write that he did not find proof without reasonable doubt that the President is a criminal.

I want to explain it in a way which is not so good, in fact bad, basically malicious, too petty to be evil.

Mueller clearly wrote that he accepted DOJ policy that he could not ask a grand jury to indict Trump *while Trump is President*
He added that he would not write that he would have sought an indictment except for that policy, because it would be unfair to accuse Trump yet not have a trial where Trump could present a defence, confront accusers and subpoena witnesses.

This means he clearly wrote that no matter how strong the evidence, a priori he had decided neither to seek an indictment nor to write that he would have done so except for the policy of not indicting serving presidents.

But Mueller didn’t stop there. He wrote that he wouldn’t write that Trump is clearly guilty of obstruction of justice. Then he noted that there are things he could, in principle, write which happen to be inconsistent with the assertion that Trump is clearly guilty. Finally he noted that he can’t honestly write any of them.

So he wrote to this effect “I won’t say that there is proof beyond reasonable doubt that the President is a criminal. I won’t say anything which contradicts the assertion (which I won’t make) that there is proof beyond doubt that the President is a crminal, because all such statements are false. All statements which contradict the assertion that there is proof beyond reasonable doubt that the President is a criminal are inconsistent with the available evidence. I stress again that I have not written that there is proof beyond reasonable doubt that the President is a criminal. Wink Wink. Nudge.”

Trump better hope that a majority of people can’t handle simple logic. I think he does hope that. I think he is right to hope that. But Mueller really made it very clear that he believes he has found proof beyond reasonable doubt that the President is a criminal and also he isn’t going to write that he found proof beyond reasonable doubt that the President is a criminal.

I’m not a prosecutor and I can write that the Mueller report clearly contains proof beyond reasonable doubt that the President is a criminal.

But Mueller didn’t (quite) write that.

Comments (28) | |

The Limits of Human Joy and Sorrow

In this post I will use revealed preference and assume people are rational. Sorry. I’m an economist and I can’t entirely resist.

I will argue that our joy and suffering is bounded, that we can’t be infinitely happy or infinitely miserable.

The first argument is standard, the second is something Peter Mollgaard thought of the instant I explained the first.

Both discussions are typically limited (as economists tend to be) to selfish swinish agents who care only about consumption. This has nothing to do with the argument.

The proof that we are not rational utility maximizers with utility unbounded above follows. It is called the St Petersburg paradox.

If we were capable of unbounded joy, for any positive epsilon no matter how small there is a lottery which we would rationally play which gave us horrible pain with probability 1-epsilon and good outcomes with probabilities adding up to epsilon. The trick is an infinite series of good outcomes. goodoutcome(i) for i a natural number. goodoutcome(i) occurs with probability epsilon/2 and gives us happiness 2/epsilon. Goodoutcome occurs with probability 2^(-i)epsilon and gives us happiness 2^(i)/epsilon

So expected happiness if we take the bet is (1-epsilon)(a very large negative number) + the sum from one to infinity of 1. That is infinite expected happiness.

We don’t make such bets. What if epsilon = 1/google that is 10^(-100) ? 10^100 is the original meaning of the word “google”. The company chose the word for that number exactly as the Apple corporation chose the name of a fruit.
what if epsilon = 1/(google plex)= 10^(-google) = 10^(-10^100). or one over a google plex plex and so on.

Similarly, we are not rational utility maximizers capable of infinite misery. For any X>0 no matter how huge and any epsilon >0 no matter how tiny, we would accept happiness of -X with certainty rather than + X with probability 1-epsilon and a series of increasingly horrible outcomes
getting -2/epsilon with probability epsilon/2 and -2^i/epsilon with probability 2^(-i) so if we didn’t take -X with certainty our expected welfare is minus infinity.

Again epsilon can be so low that if something happened with probability epsilon every millisecond, the chance that it has happened since the big bang is 1/(google plex). I guess I should call the second paradox the Mollgaard paradox, but I want to call it the Leningrad paradox, because Leningrad is St Petersburg and because the limits of human misery were well explored by the Stalinist purge of Leningrad followed soon after by the Nazi (and Finnish) seige of Leningrad. We are talking about two of the most massive losses of human life ever (and much slow death by borderline fatal malnutrition become fatal after long suffering). But it would be worth a 1/google plex risk of that happening again even if there were a series of risks of it happening once, twice, four times etc.

This has been another explanation of why the concept of infinity is pernicious following in the tradition of Zeno’s paradox but never reaching the end of the list of errors due to the concept of infinity (which list is infinite). Borges tried to catalogue them (he does that sort of thing) in “Avatars of the Tortoise.”

There is a concept which corrupts and upsets all others. I refer not to Evil, whose limited realm is that of ethics; I refer to the infinite.

Oh my look at the second google hit for [avatars of the tortoise]

I think it is also not needed. But I am confident with probability epsilon (not a type not 1-epsilon) that every counterintuitive result in mathematics has something to do with infinity and could not be explained if instead of natural numbers we started with the cyclical group with N elements (no matter how big N is) and then went on to define rational and real numbers as we do.

Comments (2) | |

There He Goes Again

On my personal blog, I mentioned that Tom Nichols is absolutely unwilling to discuss the run up to the US/UK?Australian invasion of Iraq. He is careless about facts and expresses contempt for even considering the official conclusions drawn by Hans Blix. He will not face evidence and has total contempt for expertise.

He asked me to stop replying to him and I did, but I have proof that he is wrong.

The man can’t handle facts and he refuses to listen to actual experts on the topics on which he makes assertions based on prejudice, stubborness and tribal loyalty.

Now I am here to mentoin that he’s done it again.

He has a little twitter exchange with Mike Gravel in which he demonstrates, again, his contempt for data and experts.

Nice come back. At a level with “There you go again”*. But stupid. First the rate of opioid overdose deaths is vastly higher now than in 1980. The drug problem of the 1960s was minor compared to the current crisis. By 1980 the heroin epidemic had passed. It’s true that there was a crack epidemic during the Reagan administration. But the big drug in 1980 was marijuana which is no longer a problem, because our generation (the pot heads of the 70s) are making the laws and know it was never a big problem.

But Nichols really demonstrates his contempt for data and expertise by asserting that “poverty” and “1980” go together. There is a technical literature on poverty. The first statistic is the official poverty rate. That rate was low in 1980 and shot up as soon as Reagan was elected (I am not asserting causation — it had more to do with Volcker). Nichols has a vague sense that the country was in bad shape in 1980 then Reagan saved it. He can’t be bothered to look up the relevant official statistics before tweeting. He places his prejudice and conservative tribal loyalty above the calculations of subject matter experts, because he has no respect for expertise.

Comments (7) | |

I’m terrified

This scares me

I am not newly frightened by the proof that the POTUS is demented (that’s bad but it’s not news). I’m terrrified that the google adserver could tell that an ad about the warning signs of dementia was content-appropriate whenever there is a post about Trump and wind.

I know that google has decided not to be evil and that they will not use their almost infinite power to rule the world, but will rather respect US Democracy and allow the voters to decide.

That’s what scares me. I mean, Larry, Sergei, and Sundar, have you ever thought it might be about time to be a bit evil ? It’s not like the approach of respecting Democracy is working all that well.

Comments (1) | |

Tax the Rich

Dylan Matthews has a typically excellent explainer about taxing the rich. Just click the link.
I have one thought. Matthews is soft on capital income.

Matthews wrote

Saez and Diamond also argued that capital income — income from things like capital gains, corporate profits, dividends, etc. — should be taxed, which broke with previous models of optimal tax theory. (Our current capital gains top rate is 23.8 percent.) Those models had suggested the proper tax rate on capital income was zero, on the grounds that it discouraged savings: If you spend money on an investment, your profits are taxed, but if you spend money on food or a house or what have you, you don’t get hit with a capital tax — so a capital tax’s presence pushes you to spend more and save less.

This is a roughly correct description of the previous models, but it isn’t exact. In fact, the mathematical result is that as time goes to infinity the tax rate on capital income should go to zero. There is no justification for arguing that this means the rate should be zero in 2019 or 3019. The infinite jump from t goes to infinity to now is simply a dishonest rhetorical trick.

Another problem is that the academic literature on capital income taxation is not sound. The classic paper by Judd is simply mathematically incorrect. Yet it is still regularly cited. The key assumption which Judd made which makes his conclusion a mistake (a mistake like 2+2=5 not a mistake like taking a crazy assumption seriously) is that the state runs a balanced budget. Given Judd’s assumptions, the correct math shows a positive tax rate on capital income for all time.

It is interesting that a math boo boo could be so influential. One might almost guess that ideology and self interest are involved.

If the state is allowed to run deficits or surpluses, then the optimal policy involves building up a huge sovereign wealth fund so high that all desired spending is financed by the socialist profits on state owned means of production (this is just what the math says). At that point, the optimal tax on capital income is zero, because there is no reason not to tax. In particular if one wishes to tax capital income because one cares about inequality, the math suggests no compromise at all. In the simplest model it is optimal to tax capitalists until the richest capitalist has the national average income. With more reasonable assumptions, an egalitarian who also cares about efficiency would end up taxing the rich until they become poorer than average.

An egalitarian would accept that the tax on capital income eventually go to zero when the recipients of capital income are as poor as the average person or poorer. A class warrior who wanted the rich to starve but didn’t want to deprive workers of capital to work will would tax the rich till they starved.

A critique of the standard anti capital income taxation program should conclude “it is not until capital income ceases to go to the rich and goes to the relatively poor can we inscribe on our banner from each capitalist zero taxes and to each capitalist the full market income”

In contrast, if some have high labor income, it is best to let them end up with above average income. As is often argued, the equality efficiency tradeoff is different for capital income taxation, but it is different because less is optimally conceeded to the rich in the name of efficiency. Nothing or less than nothing should be conceded.

This is a simple mathematical result based on standard assumptions.

Also the standard model assumes dynamic effiency. Matthews is very smart, but he accepts the assumption that we should encourage saving. This is an implication of the Ramsey Cass Koopmans model, which might or might not have anything to do with reality. It is possible to decide if a higher steady state ratio of capital to effective labor implies higher or lower welfare.

It has been argued that the standard case for more capital is valid if r>g where r is the expected return on capital (including the expected value of risky returns) and g is the trend rate of gdp growth. In fact, it is valid only if rf > g where rf is the safe rate of interest which has almost always been less than g. This isn’t a fringe claim. It is Public Debt and Low Interest Rates Olivier Blanchard — another Frenchman, January 2019.

He would have cited AngryBear if he had known about this post.

In fact, the math says we can benefit from lower saving. This means a higher debt to gdp ratio would be better if it crowds out saving. I have co-authors now, so I shouldn’t type more.

Comments (8) | |

Elizabeth Warren, David Leonhardt, Redistribution, and Predistribution

I just had an unusual experience. I was convinced by an op-ed. One third of the way through “Elizabeth Warren Actually Wants to Fix Capitalism” by David Leonhardt, I was planning to contest one of Leonhard’s assertions. Now I am convinced.

The column praises Elizabeth Warren. Leonhardt (like his colleague Paul Krugman) is careful to refrain from declaring his intention to vote for her in the primary. I am planning to vote for her. I mostly agreed with the column to begin with, but was not convinced by Leonard’s praise of Warren’s emphasis on aiming for more equal pre-fiscal distribution of income rather than just relying on taxes and transfers to redistribute.

In particular, I was not convinced by

This history suggests that the Democratic Party’s economic agenda needs to become more ambitious. Modest changes in the top marginal tax rate or in middle-class tax credits aren’t enough. The country needs an economic policy that measures up to the scale of our challenges.

Here two issues are combined. One is modest vs major changes. The other is that predistribution is needed in addition to redistribution, as discussed even more clearly here

“Clinton and Obama focused on boosting growth and redistribution,” Gabriel Zucman, a University of California, Berkeley, economist who has advised Warren, says. “Warren is focusing on how pretax income can be made more equal.”

The option of a large change in the top marginal tax rate and a large middle class tax credit isn’t considered in the op-ed. I think this would be excellent policy which has overwhelming popular support as measured by polls (including the support of a large fraction of self declared Republicans). I note from time to time that, since 1976 both the Democrats who have been elected president campaigned on higher taxes on high incomes and lower taxes on the middle class (and IIRC none of the candidates who lost did).

This is also one of my rare disagreements with Paul Krugman, and, finally one of my rare disagreements with Dean Baker (link to a book which I haven’t read).

After the jump, I will make my usual case. But first, I note Leonardt’s excellent argument for why “soak the rich and spread it out thin” isn’t a sufficient complete market oriented egalitarian program. It is phrased as a question.

“How can the next president make changes that will endure, rather than be undone by a future president, as both Obama’s and Clinton’s top-end tax increases were?”

Ahh yes. High taxes on high income and high wealth would solve a lot of problems. But they will be reversed. New programs such as Obamacare or Warren’s proposed universal pre-K and subsidized day care will not. Nor will regulatory reforms such as mandatory paid sick leave and mandatory paid family leave. I am convinced that relatively complicated proposals are more politically feasible, not because it is easier to implement them, but because it is very hard to eliminate programs used by large numbers of middle class voters.

I’d note that I had already conceded the advantage of a regulatory approach which relies on the illusion that the costs must be born by the regulated firms. Here I note that fleet fuel economy standards are much more popular than increased gasoline taxes. One is a market oriented approach. The other is one that hides behind the market as consumers don’t know that part of the price of a gas guzzler pays the shadow price of reducing fleet average milage.

OK my usual argument after the jump

Comments (10) | |