I have only one quibble, and that’s that Greg is very sure we should eliminate the mortgage interest deduction in accordance with his first principle: “Broaden the Base and Lower Rates”. I think we should maybe keep it in accordance with his second principle: “Tax Consumption Rather than Income”. (Though I certainly agree that after the second principle has been implemented, it will be time for the mortgage interest deduction to go.)

How sad that so much wisdom is sure to go unheeded.

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(Slightly higher quality video here.)

Edited to add: There were apparently some problems with the video stalling somewhere around the one-hour mark (during the post-talk question period.) I believe this is fixed now.

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A mere two days after I lavished praise on Alex Tabarrok’s new book, which (among many other things) makes an eloquent case for patent reform, the U.S. Patent Office has proved that nobody’s listening by issuing patent #8,082,523 to Apple, Incorporated for a “portable electronic device with graphical user interface supporting application switching”. The abstract, in its entirety, reads as follows:

A portable electronic device displays, on a touch screen display, a user interface for a phone application during a phone call. In response to detecting activation of a menu icon or menu button, the UI for the phone application is replaced with a menu of application icons, while maintaining the phone call. In response to detecting a finger gesture on a non-telephone service application icon, displaying a user interface for the non-telephone service application while continuing to maintain the phone call, the UI for the non-telephone service application including a switch application icon that is not displayed in the UI when there is no ongoing phone call. In response to detecting a finger gesture on the switch application icon, replacing display of the UI for the non-telephone service application with a respective UI for the phone application while continuing to maintain the phone call.

In other words, anything you’d recognize as a smartphone seems to be covered.

Would anyone care to applaud this broad assertion of intelletual property rights? Would anyone care to jump in on the other side? Have at it!

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I learned this from Macaulay’s History of England, which I just pulled up on my Kindle, which of course gives me instant — and searchable! — access to pretty much everything that’s ever been published. But the Kindle, and its brother e-readers, are more revolutionary than that. Not only do they give us easy access to existing literature; they call forth entirely new literary genres, such as the Kindle e-book, which brings to market extended essays that are too long to be magazine articles but too short to be traditional books — and are priced to sell.

All of which brings me to Alex Tabarrok’s Launching the Innovation Renaissance: A New Path to Bring Smart Ideas to Market Fast, which is both a product and a celebration of the innovation revolution, along with a recipe, or rather a set of recipes, for nurturing that revolution.

This is a great book. It’s fast-paced, fun to read, informative as hell, and it gets everything right. At first I wished I’d written it— until I realized I could never have written it half so well.

Those of us who write about economics know that the search for perfect real-world examples can be excruciating. Readers crave them, but most of the time a given example ends up illustrating a point that’s close to, but not exactly, what the writer is trying to get at — and so ends up muddying the waters. Tabarrok’s got an amazing knack for finding exactly the right examples, so that we’re simultaneously enthralled by his storytelling and clued in to exactly what he wants us to understand.

His recommended policies — patent reform, prize funds, better education through better teachers, trade schools instead of colleges for many students, liberalized immigration policies for skilled workers, globalization — are all backed by formidable intellectual consensus. Among people who know what they’re talking about, almost none of this stuff is controversial. For the public at large, this book will explain why.

In fact Tabarrok is extremely careful to stick to those subjects where he’s surely right. For example, he mentions in passing that liberalized immigration for unskilled workers would also be a good thing — but that he’s chosen not to dwell on that because, compared to his other proposals, it’s not quite so widely endorsed by the cognoscenti.

My only quibble is that he left out one of my favorite hobbyhorses, namely tax reform and the urgency of reducing taxes on capital — another pro-innovation policy with a substantial but too-little-publicized intellectual consensus behind it.

I wish everyone in the world would read this book. It only takes a couple of hours, and it is by far the best introduction I know of to the topic that towers above all others in its importance for the happiness of human beings everywhere, now and in the future, namely how to foster and accelerate the kinds of innovation that lead to economic growth. It will, I hope and expect, make you an enlightened advocate for enlightened policies. And it will arm you with a bundle of fun facts and anecdotes to share with your friends. This book might turn you into a proselytizer, but it will surely not turn you into a bore.

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1) The tax rate on wages and/or consumption. A wage tax and a consumption tax are pretty much interchangeable; you can tax the money as it comes in or you can tax it as it goes out. So I’m treating this as one category. The “right” level for this tax depends on your forecasts for future government spending.

2,3,4,5 and 6) The tax rates on dividends, interest, capital gains, corporate incomes and estates. I believe these tax rates should all be zero. That is not a statement about how progressive the tax system should be. A wage tax and/or a consumption tax can be as progressive (or regressive) as you like. It is instead a statement that while all taxes discourage both work and risk-taking, capital taxes have the added disadvantage that the discourage saving. This simple intuition is confirmed by much of the public finance literature of the past 25 years. (Here is a good example.)

My personal preference is for a system substantially less progressive than the one we’ve got, but for purposes of this exercise I won’t penalize candidates whose preferences differ from mine. For the record, Romney, Huntsman and Santorum are the three who (as far as I can tell) want to maintain substantial progressivity, with Romney, uniquely among the candidates, preferring even more progressivity than we currently have.

Here, then, is a chart, with candidates ranked roughly in order of their willingness to exempt capital income from taxation. I prepared this chart with a few quick Google searches (this is a blog post, not a journal article) and it probably contains errors. I’ll be glad for (documentable) corrections and will update the chart as they come in. Asterisks refer to further explanations, which you’ll find below the fold.

If we care about efficiency, we’re looking for zeroes in the last five columns. On the face of it, Johnson is the clear winner. But Cain’s 9/9/9 plan has two arguments in its favor that don’t appear on this chart. First of all, people are a lot less likely to bother evading one of three 9% taxes than a single 23% tax; therefore we’d have a lot fewer evasion problems under Cain than under Johnson. Second, it’s pretty easy to imagine Congress raising a 23% tax to 24% or 25% or 26%, but it’s a little harder to break the psychological barrier of single-digit tax rates, so Cain’s 9/9/9 might be more politically stable than Johnson’s 23. Therefore I’m calling this a tie between Johnson and Cain.

But the top six are all pretty good, except maybe for Paul, who hasn’t revealed his key number. Santorum is bad, Romney is atrocious, and Bachmann (who, as far as I can tell, has not bothered to release a tax plan) is an enigma.

Some explanations:

1) Cain stresses that this is a transitional plan, ultimately to be replaced by an even better one.

2) Cain’s plan consists of a 9% VAT, a 9% sales tax, and a 9% income tax. A VAT and a sales tax are not exactly the same thing (they end up getting levied on slightly different goods) but they’re close enough for this rough exercise; therefore we can lump together the VAT, the sales tax and the part of the income tax that taxes wages. That adds up to 27%, but a slightly more careful calculation tells you that Cain will allow you to keep 91% of 91% of 91% of your spending power, which is to say about 75%. Thus this counts as a 25% tax, not 27%.

3) Gingrich wants a 12.5% corporate tax with 100% expensing. This is equivalent to a 0% corporate tax together with a one-time transfer of assets to the government, so as far as its effects on efficiency, I’m calling it the equivalent of a 0% tax. For several reasons, I’d prefer a corporate tax that really *is* 0%, but I’m trying not to impose my personal preferences on these rankings (beyond a preference for efficiency), so I am giving Gingrich credit for the equivalent of a 0% corporate tax.

4) Huntsman, Santorum and Romney all endorse multiple tax brackets; I’ve put only the top brackets in this chart. Huntsman’s 23 should really be three brackets: 8/14/23. Santorum’s should be 10/20/30. And Romney holds the remarkable view that our flawed political system has somehow settled on exactly the optimal system of six brackets, which he would preserve in its entirety.

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Here’s the one passage the WSJ didn’t have room for; one day our children will look back in wonder on an age when the length of an argument was constrained by anything so archaic it could be measured in square inches:

I know you’ve heard it said that spending is good for the economy. That might be true during a recession, if you subscribe to a broadly Keynesian view of the world. But the death tax encourages overspending year in and year out, which is not a good thing no matter what your point of view.

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Note that all of my remarks apply equally well to all forms of capital taxation. Entin did a better job of focusing on the particular shortcomings of the estate tax.

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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.

I’m guessing that an honest answer would have been something along the lines of “I wanted something that would sound good to Republican primary voters who aren’t paying too much attention to the details, and I knew that the phrase `capital gains cut` was like red meat to a lot of those guys, so I threw it in”.

If the Republicans want a nominee who will pander to the left, right and middle with no coherent philosophy and no coherent policy proposals, why not just drag out Bob Dole? At this rare historical moment when the country just might be willing to take a flyer on some truly radical changes, it saddens me deeply that warmed-over Dole might be the best the Republicans can manage to dish up.

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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?

First: Krugman tells us that

Externalities like pollution are one of the classic forms of market failure, and Econ 101 says that this failure should be remedied through pollution taxes or tradable emissions permits that get the price right.

Yes, that oversimplification is indeed sometimes taught in Econ 101. What Krugman doesn’t tell you is that it gets corrected in Econ 102, where students learn that taxing the source of an externality might or might not be efficient policy, depending on the available alternative remedies. It would, for example, be tragic to tax coal plants out of existence if it proved substantially cheaper to clean up their emissions after the fact, or to relocate the victims of those emissions.

I’m tempted to say that this is just Krugman being true to his principle that economics stopped advancing somewhere around the middle of the 20th century (something I certainly believe about music), so that just as Keynes had the last word on macroeconomics, Pigou had the last word on externalities. (Pigou, writing in 1920, is the source of the Econ 101 analysis; Ronald Coase, writing forty years later, advanced us to the level of Econ 102.) Except I know that Krugman knows better, because he once wrote a pretty good piece on green economics for the New York Times, where he made the Coasian argument tolerably well.

Second: the Times article is about Rick Perry’s past criticisms of the EPA, whereas Krugman is citing a brand new paper from the current issue of the American Economic Review. Apparently, his complaint is that Perry failed to account for this research before it existed. Perhaps he’s overestimated the import of fast neutrinos.

Third: I do not think it is beyond Krugman’s analytical powers to recognize that there is no inconsistency between the positions that a) some industries should be more heavily taxed and b) the EPA is often wrong.

Fourth: it is rarely the case that a single journal article is sufficiently definitive that it ought to dictate policy to the point that any dissension would be laughable. (Krugman’s comment on the whole affair is “Hahahahahahaha”.) One possible exception to that rule is Coase’s paper on social cost, which was quite definitive indeed in its refutation of Krugman’s argument from “Econ 101″.

Fifth: Even if we all agreed that the EPA is a paragon of economic efficiency, some of its policies might still be objectionable on some other grounds. Or does Krugman now want to retract every column and every blogpost in which he has appealed to compassion, equity, justice, fairness, etc., etc.?

Sixth: Krugman concludes that

What this tells us is that we are not actually having a debate about economics. Our free-market advocates aren’t actually operating from a model of how the economy works; they’re operating from some combination of knee-jerk defense of the haves against the rest and mystical faith that self-interest always leads to the common good.

What this tells me is that we are not actually having any sort of debate about policy. Krugman isn’t actually operating from a model of how government works; he’s operating from some combination of knee-jerk defense of redistribution and mystical faith that government always serves the common good.

After all, even if we all agreed that stricter environmental policies are desirable in principle, it would not follow that stricter environmental policies are desirable in a world where those policies will be formulated and enforced by politicians and bureaucrats with decidedly parochial agendas.

Krugman says:

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.

It would indeed be naive to believe that there are no market failures. It would be equally naive to believe that there are no government failures, which is what Krugman seems to be assuming.

The choice, all too often, is not between market failure on the one hand and government success on the other; instead it’s between market failure on the one hand and government failure on the other. That calls for some hard thinking about the costs and benefits of the various policy options, thinking that is not advanced by pointing one’s finger and saying “Hahahahaha.” Economists can contribute to this discussion with an honest attempt to illuminate the tradeoff. Tradeoff! Now there’s a concept Krugman ought to recognize. It is, after all, at the core of Econ 101.

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For example: Suppose a guy with no health insurance and no assets shows up at a hospital emergency room with an urgent life-threatening condition. Should you let him die? Ordinary compassion says no. The heightened compassion of the economist says, at the very least, maybe.

First, a policy of providing emergency health care to everyone is pretty much the same thing as a policy of providing emergency health insurance to everyone. It was specified here that this was a guy who didn’t want health insurance. So let’s recognize for starters that such a policy runs counter to — I am tempted to say runs roughshod over — the guy’s own revealed preference. It’s an odd sort of compassion that forces people to buy things they don’t want.

Now you might object that nobody’s forcing this guy to buy emergency health care; we’re trying to give him emergency health care. Not so fast. Here’s the first place where a little economic training goes to hone one’s sense of compassion: The emergency health insurance we’re foisting on this guy has a cost. We can spend that money on emergency rooms or we can spend it on a myriad of other things the guy might prefer. How is it compassionate to give him one thing when he prefers another?

This is particularly true if the guy happens to be very poor. Poor people have a lot of problems, and emergency health care is only one of them. They need better education, they need better transportation, and they need a little help buying groceries.

There is room for lots of debate and lots of disagreement about how much we as a society should be spending to help poor people. That’s not the issue here. The issue here is: Given that you’ve decided to spend an extra such-and-such many dollars a year helping poor people, why would you spend it in this particular way rather than one of the many other ways they could use it? For God’s sake, why not at least ask them if they’d rather have the cash?

There are many good economic arguments for subsidizing health care (there are also many good counter-arguments). That’s yet another important debate that’s largely off-topic here. I want to focus attention on the narrower question of what compassion demands.

Here’s my answer: If your compassion is constrained, blind or posturing, you’ll say “Of course we should save lives at the emergency room”. If your compassion is broad, perceptive and genuine — if you grasp and care about the underlying trade-offs — and if you believe you’re being baited by a constrained, blind, posturing journalist — you might very well burst forth with a (com)passionate “Let him die”.

There’s yet another facet to this compassion business, which I’ll mention only briefly because Robin Hanson got there first: Of the many commentators who have jumped in to decry the “lack of compassion” among the debate audience, I’ll wager that nearly all are perfectly comfortable with the American government’s current policy of providing American style health care only to Americans, as opposed to, say, Kazakhs. In other words, they too are perfectly fine with a policy of “let him die”, as long as he dies far enough away. At this point, we’re not arguing about principle; we’re arguing about where to draw an arbitrary line. Once you’ve admitted that there are limits to compassion, it’s fair to ask: Why is it okay for Americans to ignore the plight of Kazakhs, but not okay for Texans to ignore the plight of New Yorkers, or for rural Pennsylvanians to ignore the plight of Philadephians? Maybe there are answers to those questions, but if so, those answers are surely not to be found in the mindless cry of “compassion”.

There are deep and troubling issues here that deserve to be addressed, and economics has a lot to contribute to that discussion. That’s why it’s so very disappointing to see Paul Krugman, yet again, using his platform in the New York Times to bray with the yahoos instead of calling attention to deep and difficult trade-offs. None of us have all the answers, but that’s no excuse for pretending there are no hard questions.

There’s another side to compassion, and that’s a willingness to admit that your adversaries might occasionally have legitimate or even lofty motives, and that their positions are sometimes worthy to be engaged, not simply pilloried. In pursuit of a narrow political agenda, Krugman betrays a failure of compassion not just toward those he disagrees with, but, more importantly, to the many Americans (including many of the desperately poor Americans for whom he so often and so self-righteously claims to speak) who stand to benefit from the wiser policies that just might follow from the more informed public discussion to which I know Paul Krugman could contribute brilliantly if he so chose. Instead we have the sad irony of an embittered polemicist wasting his talent by spewing vitriol against everyone who dares to struggle with the difficult policy choices that he has decided are beneath his notice — all in the name of compassion.

Note: You’ll find more on the economics of compassion in Chapter 15 of my book More Sex is Safer Sex.

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