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Archive for February, 2008

The Reality-Based Community: Why I want to pay higher taxes

February 22nd, 2008 No comments

Mark Kleiman responds nicely to Megan McArdle’s post saying that nobody wants to pay higher taxes.

I’ve already explained why I’m willing to pay (higher) taxes: because it made me rich.

And I want my kids to have the same opportunities I had.

Superdelegates Don’t Matter

February 22nd, 2008 No comments

The pledged delegates will decide it. Neither the Dem powers-that-be nor the superdelegates will dream of countering the popular choice. It would be a nuclear meltdown in which they would be immolated.

Why are the press and the bloggers spending so much time on this?

There’s only one situation in which the superdelegates might have to make a non-trivial decision: if one of the popular measures (primary votes, caucus votes, pledged delegates) disagrees with the other two.

If that were to happen, it would be a story worth discussing.

So 300 libertarians get on a commercial airliner

February 22nd, 2008 No comments

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That’s the whole joke.

Mankiw: Post Friedman Ergo Propter Friedman

February 21st, 2008 1 comment

Andrew Schleifer (PDF) and Greg Mankiw share in a paean to Milton Friedman and the glorious growth and prosperity he has brought to all the poor and oppressed of the world.

I'm kind of shocked, as I usually am when Professor Mankiw goes into Friedman adulation mode. Because he should know better than anyone:

1. The evidence that shows it just ain't so,

   and

2. The perils of attributing causation this way.

Mankiw's 1995 Growth of Nations (PDF) is one of the best pieces of economics writing I've ever read. (You feel like you're sitting in his Econ 10 classroom at Harvard, absorbing genius and wisdom with every word.) It takes a deep and incisive look at what we can know based on decades of theorizing and cross-country empirical analysis asking the seemingly simple question: What has caused growth? What policies should governments put in place to promote growth?

He lays out the theory in twenty-five magisterial pages, then finishes with a section on "Empirical Studies of Economic Growth." He lists off the (correlational) lessons that we've learned from that research (below), and delivers the best seven pages on the difficulty of attributing causation that you're ever likely to read. 

It's enough to get an economics/policy dweeb all atwitter.

Until you get to the end. His conclusion?

Policymakers who want to promote growth would not go far wrong ignoring most of the vast literature reporting growth regressions. Basic theory, shrewd observation, and common sense are surely more reliable guides for policy.

Wait. Did he really say that? Is the profession that Mankiw stands at or near the pinnacle of simply…pointless? Is it true (as our current fearless leader, now Mankiw's former boss, seems to believe) that everything we need to know we learned in kindergarten (or Econ 10)?

Acolyte, deflated.

But take heart. Earlier in the paper Mankiw utterly contradicts his own conclusion. (Phew!) Sez Greg:

correlations among endogenous variables can rule out theories that fail to produce the correlations, and they can thereby raise our confidence in theories that do produce them,…

Now that sounds more like the level-headed sage of Cambridge we thought were listening to. The first statement is especially declarative and unqualified (especially from an economist). If the correlational evidence says one thing, and a theory says the opposite, you can pretty much decide that the theory's wrong. Common sense says, "seems sensible."

Which gets us back to the beginning of the section, where Mankiw lists off most of the major bits of correlational consensus from all this research.

A low initial level of income is associated with a high subsequent growth rate when other variables are held constant. This is the finding of conditional convergence, discussed earlier.

The share of output allocated to investment is positively associated with growth.

Various measures of human capital, such as enrollment rates in primary and secondary schools, are positively associated with growth.

Population growth (or fertility) is negatively associated with growth in income per person.

Political instability, as measured by the frequency of revolutions, coups, or wars, is negatively associated with growth.

Countries with more distorted markets, as measured by the black market premium on foreign exchange or other impediments to trade, tend to have lower growth rates.

Countries with better developed financial markets, as measured, for instance, by the size of liquid assets relative to income, tend to have higher growth rates.

These all seem like good input for policy makers. But what's missing here? Well to begin with, small government and low taxes. It's missing because every study worthy of Mankiw's consideration says the same thing: for developed countries, larger government and higher taxes aren't associated with slower growth. There's no correlation—even though tax rates among developed nations vary hugely. And many of the statistically significant correlations that we do see are positive.

I really hesitate to impute motivation. But I will anyway. Is it possible that Professor Mankiw, having worshipped so long at the Altar of Milt (I know how he feels—see my “genius and wisdom” bit, above), is just unwilling to accept empirical evidence of sartorial paucity?

It's the only explanation I can think of for his abdication to the likes of Irwin M. Steltzer and the Hudson Institute, who take such glee in ridiculing egghead economists.

Computers are the opiate of the economist masses. Because it is now so cheap to "crunch" huge volumes of data, economists can devise elaborate equations and plug in millions of numbers with ease. They can also produce publishable material, which is so much more important than old-fashioned, good teaching in determining who receives the coveted tenure that forever relieves academic economists from reliance on market forces for their livelihoods. No need to determine whether the data accurately represent what they purport to represent; no need to ask a question of any interest to practical men of affairs or to policy makers. And certainly no need to make the results intelligible to all save a few colleagues.

This is the opening paragraph from Steltzer's review of Barro’s 1996 Determinants of Economic Growth: A Cross-Country Empirical Study. Steltzer grudgingly allows as how Barro might be different, and quite predictably extracts a truncated, cherry-picked quote “proving” that Big Government is Bad For Growth. (Barro’s data on developed countries says otherwise.)

Why does Mankiw give aid and comfort to the enemy? I would be utterly deflated if I came to the conclusion that for Professor Mankiw, ignorance is not the enemy.

Facts and “Healthy” Conservatism

February 19th, 2008 1 comment

Jim Manzi makes what some might consider a questionable statement:

…healthy conservatism from Burke onwards has been the party of “facts trump theories”

Let’s look at the three legs of the conservative stool:

Supply-Side Economics: Based on a theory written on a napkin, contradicted by all the empirical evidence (read: "facts") as analyzed every which way from Sunday, by every leading economist. (Not a single leading university economics department is a supply-side shop.)

Religion. ‘kay, do we want to compare this theory to all the facts of biology, chemistry, and physics…?

Strong Military. This one’s debatable in the big picture, and in degree. But Iraq…well, regarding facts…’nuf said.

Maybe it just serves to point out how un-"healthy" the conservative movement has been at least since Nixon.

U.S. Poverty: We’re #2!

February 19th, 2008 No comments

Lane Kenworthy rightly chastises Paul Krugman, correcting the belief that the U.S. has the highest poverty rate among affluent countries.

We actually have the second-highest rate.

Mr. Kenworthy is right that “relative” poverty measures are (my word, not his) garbage. They’re based on a percent of median income in each country, so a wildly rich country could have “poor” people who are incredibly affluent by anyone’s standards. It makes cross-country comparisons meaningless.

You can correct for this by choosing one standard (say, a percentage of U.S. median household income), and using that as a yardstick for all countries. (You convert currencies to dollars using purchasing power parity—PPP, based on how much a “basket” of goods costs there in U.S. dollars, basically letting you compare, almost literally if somewhat approximately, apples and apples.)

The result is an only-somewhat-hopefully titled “absolute” poverty rate. Here are the results from one such study. (Smeeding, 2006. PDF here.)

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Hard to read, I know. Two columns for each—poverty overall, among children, and among the elderly.

The first column defines poverty as being below 32% of U.S. median household income. ($48,201 in 2006, so 32% is $15,424, or $296 a week, $1,285 a month.)

The second defines it as below about 40%—$19,280.

Using the first definition, the U.S. ranks #2 for overall, child, and elderly poverty. Only the U.K. is worse.

Is it significant that the former and current world empires are at the top (or is that the bottom?) of the list?

None of this, of course, addresses the consumption-inequality argument that Alm and Cox presented so persuasively recently in the NYT. (Nor does it address the far more disparate wealth inequality.) That piece seemed to be arguing that nobody’s really suffering much, so we should just stop worrying about it.

Supply Side: Are We Winning Yet?

February 19th, 2008 No comments

Here’s how we’ve been doing versus the socialist welfare states over the last thirty-five years:

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I had no idea what results I’d find. (Though I’ll freely admit that I hoped to see Reagan and the Bushes looking rosy-cheeked.)

Not so much. Zealots will tout the biggest plus year (Reagan) and biggest minus (Clinton), but that’s typical meaningless single-year, single-statistic cherry-picking that both sides do. (I wish Krugman would stop it.)

What I see here is a lot of randomness. In particular, I don’t see a big swing towards the US in the 26 years since Reagan took office and supply-side theories took hold.

Total growth in GDP per capita, 1980 to 2006:

US: 67%
EU: 62%

Over twenty-six years, a 5% difference (7% multiplicatively). It’s not exactly the rocketship of prosperity that the supply-siders promised and predicted.

I know, I know—it’s because the europeans followed suit, radically cutting taxes. Except they didn’t—at least not the total tax burden. They’re at about 36% of GDP. We’re at 27%.

And in any case it’s hard to square that argument with the position that Europe still consists of a bunch of bleeding-heart, anti-growth socialist welfare states.

It looks to me like all the mainstream economists (plus me with my little spreadsheet full of OECD data—see post) are right: in developed countries with taxes in the 25-45% of GDP range, government size in and of itself has little if any effect on growth.

New Federal Budget Blog: Just the Facts, Ma’am

February 19th, 2008 1 comment

Here’s the kind of solid, factual information you can expect from rdavis:

Anyone who’s not familiar with his federal-budget web site should take a look right now. He does yeoman’s duty presenting current and past budget numbers in very useful formats—both tables and graphs. He also provides some commentary and opinion, but it’s mostly solid facts.

Mr. Davis has a new blog that’s worth subscribing to. Here’s hoping that we hear more of his incredibly well-informed commentary, and that enthusiastic traffic encourages him to give us more of the clearly-presented data that he’s so good at providing.

“Usual and Customary”: Macro Effects?

February 19th, 2008 1 comment

The NY State attorney general is investigating (NYT) health insurers for gaming the system on “usual and customary” charges. Turns out the database used to determine the charges is managed by Ingenix, which in turn is owned by UnitedHealth Group—one of the country’s biggest health insurers. The database is licensed to other insurers as well.

I can’t determine from press reports who crunches the database to determine the charges—Ingenix or the insurer. But in any case it’s to their advantage to set those charges lower rather than higher, so they pay less.

Wouldn’t this serve to ratchet down health care costs? Free market at its best? (Especially considering the impediments to individuals exerting any downward pressure on those costs.)

Well yes, except for all those “out of network” payments. The uninsured pay full ticket, and the insured going outside the insurer’s preferred provider network have to  pay (all or some percentage of ) full ticket minus the (gamed down) U&C amount.

Just theorizing here absent any empirics (you judge if it makes sense): If medical providers are getting less than they should from insurers, the natural incentive is to raise prices for everyone (else). This would also feed back into the (rather elastic) insurance loop, exerting upward pressure on the U&C payments.

Short story, the well-insured and the insurers do better, everyone else does worse. What‘s the net macro effect? I haven’t found any research to answer that, and I’m at a loss to answer it myself.

Fiscal Stimulus: $336,000 Per Job. But…

February 17th, 2008 No comments

This one really made me think twice. Greg Mankiw does the arithmetic: $168 billion in fiscal stimulus will create 500,000 new jobs (according to Edward Lazear, chair of the Council of Economic Advisors).

That’s $336,000 per job. You have to do some awfully long-term projections and assume some kind of mighty macro effects to justify that.

But thinking again: Mankiw’s in favor of monetary stimulus–maybe less than the Fed, but still. Monetary easing spurs inflation and/or weakens the dollar. (Though at the same time it can lower the short-term cost of servicing the national debt.) What’s the net cost? What’s the cost per job created?