Archive for the 'Bad Reasoning' Category

The Wrong Tool for the Job

Paul Krugman, defending the IS-LM (a/k/a “old Keynesian”) model of the macroeconomy as a non-rigorous but useful “scratchpad”, misses the point by a mile:

It’s a simplified model that more or less gets at what you think are the essentials of an issue, and is easy to work with, so you can use it to reach quick first-pass judgments about policy or whatever.

………

But IS-LM isn’t the prime example of a scratchpad. What is?

The answer is, supply and demand.

It is not easy to derive supply and demand curves for an individual good from general equilibrium with rational consumers blah blah. And it’s definitely not easy to justify consumer and producer surplus as measures of welfare. And there have always been some purists who condemn any use of the S and D curves we all grew up with, the use of triangles to measure welfare loss, and all that.

But for the most part nobody pays attention. The supply-and-demand framework is so convenient, while pretty much getting at what you want to get at, that it’s what almost everyone uses to get a first-pass analysis of economic issues.

Okay, look. Supply and demand (and, especially, triangles of welfare loss, etc) are not entirely rigorous, but they’re good useful simplifications that actually give useful (though approximate) answers to important policy questions. Sort of like Ohm’s Law for electrical circuits.

But IS-LM is not like that at all, because IS-LM does not even address the key policy questions in macroecomics. IS-LM can tell you, perhaps, how to fight a recession, but it can’t tell you whether the recession is worth fighting — not even loosely, because the model contains no individual utility functions and no social welfare function. It therefore does not allow you even to formulate the question of whether a given policy is worth its costs, because it provides no framework for weighing costs against benefits.

Continue reading ‘The Wrong Tool for the Job’

Share/Save

Charting the Tax Plans

Ezra Klein, quoted with approval by Paul Krugman, offers this chart of how the Obama and Romney tax proposals will change rates for taxpayers in various quintiles:

What we’re supposed to infer, according to Krugman, is that

we have an election in which one candidate is proposing a redistribution from the top … downward, mainly to lower-income workers, while the other is proposing a large redistribution from the poor and the middle class to the top.

But no such thing is remotely true. What we actually have is an election in which both candidates are proposing massive redistributions from the top downward, one slightly less so than the other. You’d never know this from looking at Klein’s chart because it illustrates changes in rates, whereas what actually matters is the rates themselves. It makes no sense to ask whether any particular group ought to be paying more or less without reference to how much they’re already paying.

Indeed, this is a classic example of what I once called the “Grandfather Fallacy” — by focusing on changes instead of absolutes, Klein’s chart conceals any existing inequities and hence treats them as “grandfathered in”.

Fortunately, Greg Mankiw has provided the numbers that allow us to make the requisite correction. Here, according to Mankiw, are the current tax burdens on various income groups (counting transfers as negative taxes, as of course one should):

Bottom quintile: -301 percent
Second quintile: -42 percent
Middle quintile: -5 percent
Fourth quintile: 10 percent
Highest quintile: 22 percent

Top one percent: 28 percent

That “-301 percent” means, for example, that a typical family in the bottom quintile receives $3.01 in net transfers for every $1 that it earns.

By adding these numbers to the numbers in Klein’s graph, we can construct a picture that actually depicts something interesting, namely the projected tax burdens for each group. It looks like this (the vertical axis represents percentage of income):

Note, for example, that, contrary to the impression you might have gotten from Klein’s and Krugman’s posts, both plans place the highest percentage burden on the top 1%, and both plans place a negative burden on the middle quintile — though Obama’s does both of these things to an ever-so-slightly greater extent than Romney’s does. There’s room for disagreement about which plan is fairer, but no room, I think, for disagreement about which chart is relevant.

Continue reading ‘Charting the Tax Plans’

And Everyone Who Supports Vaccinations is Motivated by a Desire to Stab People….

In an apparent case of libertarianism run amok, two cognitive scientists and one economist have declared (in effect) that proponents of income redistribution are always and everywhere motivated by exactly the same psychopathic impulses that lead people to scratch other people’s cars, break streetlamps, and engage in other forms of senseless destruction.

That’s not a conclusion; it’s their starting assumption. Then they do an experiment in which some subjects choose to engage in a mild form of income redistribution — and conclude that psychopathic behavior is frighteningly widespread.

Now I too am generally skeptical of the impulse to redistribute other people’s income, but even I concede that redistribution is rarely entirely senseless and pretty much never entirely destructive. In particular, the experimenters consider a case where money has just been redistributed and subjects are given the opportunity to (partly or fully) reverse that redistribution. Those who exercise that opportunity are labeled “destructive”. So apparently, in order to avoid the “destructive” label, you must passively accept any arbitrary redistributions imposed by authority figures without ever feeling any impulse to redistribute in the opposite direction.

In the experiment, each subject is initially awarded 1000 tokens. The paper is so poorly written that it’s hard to be sure, but I think these tokens are ultimately exchangeable for money; it’s mentioned that the average subject earns the equivalent of nine British pounds. One subject is then given the opportunity to destroy some of the other subject’s tokens, thereby returning some funds to the experimenters or to the taxpayers who are funding this experiment.

Rather shockingly (to me) only about 15.5% of the subjects exercised this option; given the presumption of public funding, I’d have hoped for a higher number. The experimenters, however, want to conclude that these 15.5% are the sorts who are likely to key your car.

This stuff is infuriatingly stupid. Even more distressingly, Robin Hanson, who is much much much too smart for this, seems to have fallen for it.

Continue reading ‘And Everyone Who Supports Vaccinations is Motivated by a Desire to Stab People….’

Block Grants and Bad Faith

Paul Krugman on last week’s Supreme Court arguments:

I was struck, in particular, by the argument over whether requiring that state governments participate in an expansion of Medicaid … constituted unacceptable “coercion.” One would have thought that this claim was self-evidently absurd. After all, states are free to opt out of Medicaid if they choose; Medicaid’s “coercive” power comes only from the fact that the federal government provides aid to states that are willing to follow the program’s guidelines. If you offer to give me a lot of money, but only if I perform certain tasks, is that servitude?

Wrong question. The right question is:

If you take a lot of money from me and then offer to give it back, but only if I perform certain tasks, is that servitude?

Because, you see, the federal government is not handing out its own money to state governments — it’s handing out money that it takes from the citizens of those very states for the purpose of (conditionally) handing it back. (Of course “handing it back” isn’t exactly right either, because the payments go not to taxpayers but to their state governments — but it’s a lot closer to right than Krugman’s formulation.)

Continue reading ‘Block Grants and Bad Faith’

And the Winner Is….

The Supreme Court has been a veritable festival of economic ignorance the past few days, but if I had to pick a prize specimen, I think it would be Paul Clement’s response to Justice Kennedy’s observation that the uninsured — given our unwillingness to turn them away from emergency rooms — impose a burden on the rest of us. Mr. Clement (the plaintiff’s attorney) tried to argue that the same is true in any market:

When I’m sitting in my house deciding whether to buy a car, I am causing the labor market in Detroit to go south…

thereby blurring the key distinction between a pecuniary and a non-pecuniary externality.

The point is that Mr. Clement’s decision not to buy a car (and therefore to drive down the price) is bad for Detroit auto workers only to the extent that it’s good for other car buyers. It is therefore in no sense a net burden on the rest of society. Contrast that with the clear burden imposed by the uninsured fellow who wants you to pick up his hospital tab.

Continue reading ‘And the Winner Is….’

Some Questions for Uwe Reinhardt

First Greg Mankiw wrote a good piece in the New York Times about how there’s sometimes a hazy line between ordinary income and legitimate capital gains. Then Uwe Reinhardt wrote a puzzling (at least to me) followup in which he concluded that we might as well just give up and tax both at the same rate. I have some questions for Professor Reinhardt.

Question 1:

  1. Sometimes there is a hazy line between quotation and plagiarism. Does it follow that we should treat every quotation as an instance of plagiarism?
  2. Sometimes there is a hazy line between a pat on the back and an assault with intent to harm. Does it follow that we should treat every pat on the back as an intent to harm?
  3. Sometimes there is a hazy line between adolescence and maturity. Does it follow that we should treat everyone as an adolescent?
  4. If the answer to any of the above is no, what’s different about capital gains?

Professor Reinhardt goes on to instance the case of a person who buys a vacation home for $500,000 and sells it two years later for $1.5 million, suggesting that it would be unfair to let this person hang on to all of this gain, so it should therefore be taxed at the same rate as ordinary income. This brings me to the next questions:

Continue reading ‘Some Questions for Uwe Reinhardt’

The Analogists


    

Viagra analogies have been in the news a lot lately, both in connection with contraceptive coverage and in connection with state laws restricting abortion. I love good analogies and I hate bad ones, so I’d like to take a little time to sort out the bad from the good.

Because there are several scattered points to be made here, I’m putting them in sections and labeling them with Roman numerals, to make it easier for commenters to tell us just which section(s) they’re responding to.

I.

My insurance policy covers Viagra. I would prefer that it didn’t. Given the costs and the probabilities, erectile dysfunction seems to me like a crazy thing to be insured against. There are a whole lot of other things I feel the same way about. I’d prefer not to be insured against losing my eyeglasses. On the other hand, I’m very glad to be insured against needing chemotherapy or kidney dialysis.

Continue reading ‘The Analogists’

Letter to a Reporter

I suspect we’re all getting bored of talking about Sandra Fluke, contraception policy, alternative solutions, and the reaction thereto, but I’ve just had an email from a reporter who’s confused on a point so basic, I thought it might be worth clearing it up for a larger audience.

The reporter writes:

As you might suspect, I disagree with your assertion that “All she said, in effect, was that she and others want contraception and they don’t want to pay for it.” I was wondering if you happened to catch the part of her speech where she talked about wanting women whose doctors have prescribed birth control pills to treat medical disorders like endometriosis to be able to get such drugs without having to pass tests demanded by religious institutions? Is this an unimportant part of the debate?

Here is a slightly edited version of my reply:

Continue reading ‘Letter to a Reporter’

Contraceptive Sponges

todayOver the last week, we’ve heard a lot from the people who (with a hat tip to one Joker), I now call “contraceptive sponges” — people who want others to pay for their contraception because — well, just because they don’t want to pay for it themselves.

I don’t think we need to take those people seriously. But others have taken the trouble to make actual arguments, both on this blog and elsewhere. Some but not all of those attempts deserve serious attention.

Continue reading ‘Contraceptive Sponges’

Frank Redux

Thirteen years ago, in 1999, when I wanted to illustrate the astonishing march of progress, my Exhibit A was a new $250 stereo system that held 60 CD’s and could play tracks in random order.

My new Exhibit A is the fact that it’s been only thirteen years since this was a great example.

That was in an essay focused mostly on Robert Frank’s hypothesis that people care largely about relative position as opposed to absolute wealth. I was reminded of that essay following yesterday’s post, and I managed to dig out a copy, which I’ve posted here. Despite the dated examples, I still think it’s pretty good.

Click here to comment or read others’ comments.

In Which Paul Krugman Leaves Me At a Loss for Words

Okay, this one’s almost too bizarre for words. First, Paul Krugman makes an argument that ignores the existence of corporate dividends. Then, pretty much everybody in the world points out his error. Then, he admits his error, but, true to form, takes an irrelevant swipe at his critics. But in this case, the irrelevant swipe is: “Aha! You’ve just admitted that corporations pay dividends! So much for your past claims that corporations pay wages!”

Umm…Paul? They pay both. I’d lift Krugman’s own favorite dismissive phrase and say “That’s Economics 101″, but actually it’s probably standard knowledge among middle schoolers.

To review the details:

First, Krugman reposted (from the website of a left-wing advocacy group) a highly misleading chart purporting to illustrate the federal tax burdens borne by various income groups. The chart accounts for payroll and income taxes, but omits corporate taxes, thereby making the burden on high-income tax payers appear substantially smaller than it is, because corporate taxes reduce dividends which are disporportionately paid to high-income taxpayers.

Next, he got called on it by lots and lots of people, including, for example, Greg Mankiw.

Next, Krugman acknowledged his error. But, as always, he did so with the least possible grace, suggesting that his critics, by virtue of pointing out Krugman’s mistake, have somehow undermined their own principles.

In particular, his position is that by acknowledging that corporate profits benefit shareholders, “conservatives” have undermined their own ability to claim that corporations benefit anyone other than shareholders (e.g. workers). He relies, in other words, on the cockamamie notion that if something is good for group A, it can’t possibly also be good for group B.

Continue reading ‘In Which Paul Krugman Leaves Me At a Loss for Words’

Mitt Romney’s Taxes

Mitt Romney says his tax rate is “probably around 15%”. It’s not clear what he means by that (marginal rate? average rate? federal rate? federal-plus-state-plus-local rate?) but the New York Times is quick to point out that he’s a beneficiary of the “fact” that investment income is taxed at a much lower rate than wages and salaries, leaving him with a lower percentage tax burden than the working-stiffs he employs.

For at least the eighth time on this blog, I want to point out that this widely believed “fact” is not true.

To understand Mitt Romney’s tax burden, you have to compare him to his doppelganger Timm Romney, who lives on a planet with no taxes. In the year (say) 2000, Mitt and Timm both earned (say) a million dollars. Timm invested his million dollars, saw it double over the past decade or so, and cashed out his investment this year, leaving him with two million dollars. Mitt, by contrast, paid 35% tax in 2000, leaving him with $650,000. He invested it, saw it double, and cashed out last year, paying 15% tax on the $650,000 capital gain. That leaves him $1,202,500, which is about 60% of what Timm’s got. In other words, the tax system costs Mitt almost 40% of his income.

By contrast, people on our planet without investment income collect their wages, pay 35% in taxes, and spend what’s left. The tax system costs them 35%, while it costs Mitt almost 40%. In other words, people with investment income bear a higher tax burden, as a percentage of their income, than anyone else — and that’s before you even start accounting for the taxes on dividends, interest, corporate income and inheritance.

Continue reading ‘Mitt Romney’s Taxes’

Off the Deep End

Paul Krugman argues that success in business is not, by itself, a qualification for making wise economic policy, and I agree. But then he goes all looney-tunes on us:

A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods.

So according to Krugman, it’s better for you and your spouse to earn $40,000 each than for one of you to earn $80,000 while the other stays home with the kids. I wonder how many two-earner families would agree with him.

Continue reading ‘Off the Deep End’

Alas, Poor Yoram

crazyskullThis just in: The study of physics makes people less compassionate. Data show that when cornered at a party by the inventor of a perpetual motion machine, physics majors are particularly unlikely to offer positive encouragement.

Also, the study of history leads to closed-mindedness. After taking an American history course, students become considerably less open to the idea that Millard Fillmore might have been Abraham Lincoln’s vice president.

Meanwhile, the study of chemistry makes people less ambitious. Chemistry students are particularly unwilling to invest in lead-to-gold conversion kits, even when they are conveniently offered over the Internet.

Geology students are just plain nasty. Among all majors, they are the least likely to participate in coordinated meditation exercises for the prevention of earthquakes — even when the organizers estimate that hundreds of thousands of lives might be at stake.

And economics majors are so greedy that they are particularly unlikely to donate to left-wing interest groups that seek to undermine capitalism.

Continue reading ‘Alas, Poor Yoram’

Why Not Bob Dole?

So Mitt Romney wants to exempt capital gains from taxation — but only for taxpayers who earn less than $200,000 a year. In Tuesday night’s debate, Newt Gingrich asked him (I’m paraphrasing) “Why the cap?”. Romney’s answer — that he’s looking out for the middle class because “the rich can take care of themselves” — was as incoherent as anything I’ve heard this election year.

Here’s why:

I interpret Romney’s answer to mean that he wants to cut capital gains rates not on efficiency grounds, not on supply side grounds, and not on philosophical grounds, but on redistributionist grounds. Well, okay, I myself don’t think very much of redistribution as a primary driver of tax policy, but Romney and I can disagree on that one. But where the incoherence comes in is this: If your goal is to redistribute from the rich to the middle class, why on earth would you do it by cutting the capital gains tax, as opposed to lowering income tax rates in the middle and raising them at the top?

To put this another way: If you care about efficiency, you’ll want to cut the capital gains rate to zero for everyone. If you care about fairness, and if you believe fairness mitigates against double/triple/quadruple taxation, you’ll still want to cut the capital gains rate to zero for everyone. If you care about redistribution, you’ll want to juggle the tax brackets. But I can’t think of a single thing you could care about that would lead you to laser in on cutting capital gains rates for middle income taxpayers only.

Now it might be that somewhere in Romney’s 59 point economic plan there’s an answer to this. If so, Herman Cain was surely right when he intimated that Romney himself can’t be terribly familiar with the contents of that plan. Because, when asked a simple question about the justification, Romney wasn’t able to come anywhere close to making sense.

Continue reading ‘Why Not Bob Dole?’

There He Goes Again

Paul Krugman’s latest venture into self-parody starts with a recent paper on the cost of air pollution, which finds that said costs are big and heavily concentrated in a few industries. Krugman then links to a New York Times article surveying Rick Perry’s past clashes with the EPA. With no further argument, he concludes that

Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science.

Where to begin?

Continue reading ‘There He Goes Again’

Recap

Some commenters still seem confused about the locus of disagreement in this week’s back-and-forth with Paul Krugman. I post today not to beat a dead horse, but to clarify the issues for those who are interested in understanding them. Please keep any discussion both civil and on-topic. I’ve numbered the points below for easy reference.

Continue reading ‘Recap’

Krugman Followup

What I like about people in academics is that when we disagree, we actually care about figuring out who’s right — and therefore we have a tendency to reach consensus, though it can take a while.

Anybody who blogs often enough (very much not excluding yours truly) is occasionally going to post something that, at least as written if not as intended, is objectively plain flat out wrong. Paul Krugman did that a couple of days ago, I responded, he’s responded to my response, and at least 4/5 of our disagreement is now resolved. That’s exactly as it should be.

Continue reading ‘Krugman Followup’

Panglossian Economics

PanglossIn a radical departure from his previous expressions of dissillusionment, Paul Krugman has implicitly declared in his latest blog post that we are now living under the best of all policy regimes. I presume he will now be able to retire with satisfaction from his career as a gadfly.

The context is Eric Cantor’s demand that any federal disaster relief in the wake of Irene be offset by spending cuts elsewhere. Krugman thinks this is silly, and proves his point with an appeal to the standard Ricardian theory of public finance. According to that theory, which all economists understand and accept, if you’ve got to bear a cost, it’s best to spread that cost out over as many activities as possible. So ideally, you’d pay for disaster relief partly through spending cuts, partly through (current) tax increases, and partly through an increase in the deficit. Therefore says Krugman, “the bottom line is that basic, regular economics says that Cantor isn’t making sense.”

Since Krugman has carelessly neglected to spell out an important detail of his argument, let me fill in the gap for him: The Ricardian conclusion does not come from thin air; instead it follows logically from certain premises, key among which is that you’re starting from an ideal policy regime.

Continue reading ‘Panglossian Economics’

A Consequential Study

By now you’ve probably encountered one of the various “do you push the fat man in front of the subway train to stop it from running over five innocent people trapped on the tracks?” puzzles that moral philosophers have been using lately to distinguish the consequentialists (who care only about ends) from the deontologists (who care also about means). (I invoked some of these puzzles, in a slightly non-conventional way, in Chapters 16 and 17 of The Big Questions.)

Now come psychologists Daniel Bartels and David Pizarro to report that choosing what they call the “utilitarian” solution (by which they mean the consequentialist solution, though one might have more faith in their scholarship if they’d used the accurate word) is correlated with higher scores on measures of psychopathy, machiavellianism, and “life meaninglessness”. Those who would push the fat man are more likely to agree with statements like “I like to see fistfights” or “The best way to handle people is to tell them what they want to hear” or “When you think about it, life is not worth the effort of getting up in the morning”. In other words, they are what we tend to think of as an unpleasant bunch.

But you see, here’s the thing: Bartels and Pizarro did the wrong test. Because in every one of the dozen or so moral dilemmas presented to the subjects, they asked: Would you shoot the crewmember? or would you execute one of the hostages? or would you flip off the switch to the ventilator? — which doesn’t get to the moral issues at all. The moral issue is this: In your opinion, should you shoot the crewmember or execute the hostge or flip the switch? The researchers never asked those questions, so we have no idea what the subjects’s opinions were.

Tell me a story about 20 children trapped in a burning building and ask me if I think I should rush in to save them. My answer is yes. Now ask me if I would. If I’m honest, I am very unsure I would do the right thing.

So what do we learn from this research? Here’s one interpretation: Maybe most people agree that you should push the fat man, and most people realize that they themselves would shrink from this moral duty out of squeamishness (just as most people agree that you should save the children from the fire, and most realize they might shirk this moral duty). Therefore they answer “No, I would not push the fat man.” But it’s only the psychopaths and Machiavellians who exaggerate their own moral virtues by claiming that they would rise to this particular occasion.

Continue reading ‘A Consequential Study’

Is “Legal Reasoning” an Oxymoron?

Our reader Jonathan Campbell has an excellent post on a bizarre example of legal “reasoning”. A defendant fires 95 shots into the woods; his friend fires 5. A man in the woods is hit by a bullet and dies. The defendant is 95% certain to be the killer (in other words, he is the killer beyond a reasonable doubt), but he is acquitted because the nature of the evidence is “statistical” and therefore cannot be the basis of a conviction.

This tends to confirm my suspicion that a legal “education” consists primarily of having your capacity for logic beaten entirely out of you. As Jonathan points out, all evidence is statistical in exactly the same sense that this evidence is. I put a bullet through your heart and you take five minutes to die. Did the bullet cause your death? Well, not certainly — there’s some small chance that you died of a heart attack that would have killed you anyway, thirty seconds before the bullet was able to finish its job. Is there a high probability I caused your death? Yes. Did I do so beyond a reasonable doubt? Yes. Is the remaining doubt of a statistical nature? Yes. So if there were any consistency in the law, of course I’d be acquitted. And of course I would not be. Which means, as has been noted in this space before, that the law is an ass. So, perhaps, are a substantial fraction of its practitioners.

Continue reading ‘Is “Legal Reasoning” an Oxymoron?’

Dakota Winds

thune ethanol

Here is Senator John Thune (R-SD), speaking on the floor of the United States Senate:

Ethanol producers have been ripping us off for a long time, and they’ve come to rely on that for a source of income. So it’s only fair to let them rip us off a little longer.

I’m quoting from memory, so I might have the wording slightly off, but that was the gist of it. Oh, wait, here’s the exact quote:

We have a lot of folks who made investments, you have people across the country whose livelihoods depend upon this. I think it makes sense, when we put policy in place and we say it is going to be in place for a certain period of time, that it be honored.

As you can see, my parapharase was accurate.

Senator Thune speaks in the great tradition of his institution. Back in 1848, senators by the score made exactly the same argument for preserving slavery. A lot of folks had invested in slaves, you know. And their livelihoods depended on it.

Continue reading ‘Dakota Winds’

D’oh — Second in a Series

homerThe problem with locavores — the breed of environmentalists who tout locally grown food, partly to minimize energy costs — is that they’re insensitive to the quality of the environment. A New York locavore spurns California tomatoes because of the energy spent trucking them across the country. But to focus on a small number of factors, like energy consumption, is to ignore a vast number of others: Do California tomatos, grown in locations where there might have been vineyards, displace California grapes? Do New York tomatos, grown in greenhouses where there might have been housing developments, lengthen morning commutes? What other useful services might California or New York workers provide if they weren’t growing tomatos? What are the alternative uses in each location for fertilizers, or farming equipment, or the resources that go into producing fertilizers and farming equipment?

Last August, Steven Budiansky, the self-described “Liberal Curmudgeon”, wrote a New York Times piece that I criticized on this blog for, essentially, making 1% of the right point and ignoring the other 99%. Now, having reread Budiansky, I think I was unfair to him. He had this right all the way through.

Continue reading ‘D’oh — Second in a Series’

D’oh — The First in a Series

homerWhen something is wrong on the Internet, bloggers love to pounce. But since no blogger is infallible, most of us can find ample fodder in our own past writing, if we go back and reread it with a sufficiently critical eye. Over the next few weeks, I plan to revisit some things I got wrong the first time around. (You’ll recognize those posts by the Homer Simpson logo.) I hope others will be inspired to do the same.

To lead off this series: In December, 2009 I blogged about space scientiest James Hansen, who prefers carbon taxation to cap-and-trade. His argument: A carbon tax allows for the possibility of additional carbon abatements through altruism. Under cap-and-trade, if I altruistically decide to buy a fuel-efficient car, someone else gets to buy an SUV. Whereas under a carbon tax, if I altruistically decide to buy a fuel-efficient car, less gas gets consumed.

Wait a second, though. Under a carbon tax, if I decide to buy a fuel-efficient car, I drive the price of gas down, which encourages someone else to buy an SUV. So altruism is equally ineffective under either policy, no?

That’s the argument I made in December, 2009. I now believe that:

  • Under a plausible interpretation of Hansen’s argument, I was wrong.
  • But Hansen is still unconvincing, though for somewhat subtler reasons.

Continue reading ‘D’oh — The First in a Series’

Friday Quotes

Paul Krugman, economist:

This insight illustrates a general principle of the economics of taxation: the incidence of a tax — who really bears the burden of the tax — is typically not a question you can answer by asking who writes the check to the government.

Paul Krugman, blogger, remarking on a straightforward application of that principle:

There are multiple things wrong with this claim, but the most fundamental, I think, is that it represents a remarkable misunderstanding of the reasons why we have taxes in the first place.

(Edited to add: My response to Krugman is here.)

Click here to comment or read others’ comments.

Dead Man Followup

Since even Paul Krugman manages to be completely confused about this and this, allow me to summarize:

1) A tax imposes a burden.

2) If a tax has no effect on a man’s lifestyle, then it imposes no burden on him.

3) Therefore, if a tax has no effect on a man’s lifestyle, then it must impose a burden on someone else.

That is the argument that Krugman things betrays “no coherent picture of how the pieces fit together”. I would like to know more specifically whether he disagrees with 1), disagrees with 2), or disagrees with the logic that leads from 1) and 2) to 3).

In more detail:

Continue reading ‘Dead Man Followup’

You Can’t Tax a Dead Man

On Monday, I wrote about the man who can’t be taxed. There were many comments, some confused, some insightful, and (at least) one brilliant. Let me highlight that brilliant comment, then beat the point to death a little, and then draw a large moral.

Our commenter Ken B invited us to imagine a dead man, with, say $84,000,000 in his bank account (and a will that requires this bank account to be maintained forever). And let’s suppose the government confiscates, say 82 of those 84 millions, thereby allowing it to reduce other people’s current or future taxes —making those people richer. They buy more stuff. They eat more, they burn more gas, they occupy more space. Where did that stuff come from?

(Alternatively, instead of lowering someone else’s taxes, the government takes the opportunity to spend more, in which case the government claims more stuff. We still have to ask where it comes from.)

It certainly did not come from the dead man, who was eating nothing, burning no gas, and occupying no more space than he continues to occupy. Instead, somebody else must decide to consume less.

But initially nobody wants to consume less. So people, collectively, are trying to consume more stuff than is available. This excess demand for stuff pushes up prices and/or interest rates until people are willing to cut their consumption.

There is no meaningful sense in which the dead man paid the tax. Instead, the tax burden is borne by those people who were hurt by rising prices and/or interest rates.

Continue reading ‘You Can’t Tax a Dead Man’

The Man Who Can’t Be Taxed

Nothing makes my job easier than a journalist who writes about something interesting and gets it 100% wrong.

Thanks, then, to Elizabeth Lesly Stevens for her column in yesterday’s Bay Citizen. Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.

Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.

Continue reading ‘The Man Who Can’t Be Taxed’

Subtraction Distraction

Paul Krugman, getting less serious by the minute, on the budget deal:

It’s worth noting that this follows just a few months after another big concession, in which [Obama] gave in to Republican demands for tax cuts. The net effect of these two sets of concessions is, of course, a substantial increase in the deficit.

Well, no, actually. The net effect of these concessions is a (small but not insignificant) cut in spending coupled with a (somewhat larger) set of tax cuts.

To sum that up by saying that the “net effect” is an increase in the deficit is like saying that if a woman gives birth to twins and then murders her husband, the “net effect” is to increase the population. We’re entitled to care about more than just the bottom line.

Continue reading ‘Subtraction Distraction’

Unhealthy Reasoning

Paul Krugman on the Ryan budget proposal:

And then there’s the much-ballyhooed proposal to abolish Medicare and replace it with vouchers that can be used to buy private health insurance….

…The House plan assumes that we can cut health-care spending as a percentage of G.D.P. despite an aging population and rising health care costs.

The only way that can happen is if those vouchers are worth much less than the cost of health insurance.

Well, this is just plain illiterate. In fact, the only way that can happen is if the voucher system affects people’s health care choices. Which is, you know, the whole point.

Continue reading ‘Unhealthy Reasoning’