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Government is Not the Problem. Bad Government is the Problem.

August 27th, 2010

And the solution to bad government is … good government.

A lot of people — maybe even most Americans — think that making government smaller will make it better.

But that reminds of the time when I a little kid that I got in trouble for pouring water out of a glass down a heat register in our house.

Why down a heat register? I can only say that it seemed like a good idea at the time.

Why was I pouring water out of a glass? Because the water was warm, and I wanted cold water. I figured I could pour the hot part out. What can I say? The logic of children.

With the experience, wisdom, and sagacity of age, I’ve realized why that wouldn’t work. It’s like blood-letting, right? If you drain off the bad blood, you’ll get better!

For the last thirty years, the Republicans have been engaged in the political (and intellectual) equivalent of blood-letting.

Contrary to what the sainted President Reagan said, government is not the problem. Bad government is the problem.

The solution to bad government is not small government, but good government.

Pass it on.

Asymptosis Economics, Politics

Must. Make. Gubmint. Smaller.

August 27th, 2010

State Taxes and Prosperity, Revisited

August 16th, 2010

Iyer asked in the comments to a recent post on state taxes and prosperity whether the picture would change if we looked at a different period (1996-2006), because 2007/08 was so anomalous.

For many data series, it’s very easy (as demonstrated here) to cherry-pick periods that seem to “prove” a given thesis. Far better to look at a whole bunch of periods of different lengths and see if there’s any pattern.

In this case, there doesn’t seem to be:

Correlation between states’ income tax burdens as a % of state income (2008) and states’ change in median income, for the period:
Ending Years
Starting Years
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
1984 29% 41% 26% 26% 9% 15% 12% 14% 18% 17% 30% 11%
1986 28% -5% -5% -19% -9% -11% -8% -7% -9% 9% -16%
1988 -31% -28% -34% -24% -23% -23% -23% -25% -11% -29%
1990 -1% -17% -7% -8% -6% -4% -7% 13% -12%
1992 -19% -5% -6% -5% -2% -6% 13% -12%
1994 9% 6% 9% 11% 9% 28% 2%
1996 -4% -2% 1% -2% 13% -6%
1998 3% 7% 3% 19% -3%
2000 4% 1% 20% -5%
2002 -3% 20% -8%
2004 27% -7%
2006 -30%

Think of each number representing a scatter plot with a trend line, like the graph in the previous post. Negative correlations mean higher taxes/slower growth; positive correlations are the opposite.) I’ve used percentage here because I think they’re easier to grasp at a glance. 20%, for instance, means a correlation usually represented by .20.

Averages:
All periods: -.18%
Periods >9 years: -2%
Periods >19 years: 4%

Averaging may not be terribly valid, but it is a quick way to do what you were doing anyway: looking at the chart and trying to eyeball the average.

These are vanishingly small correlations; don’t even need to calculate a p function to know they’re deep within the range of randomness, chance.

Counts:
All periods: 42% of 78 periods show positive correlation.
Periods >9 years: 42% of 36 periods show positive correlation.
Periods >19 years: 66% of 6 periods show positive correlation.

Draw your own conclusions.

Asymptosis Economics, Politics

Washington 1098: Will the Wealthy Leave the State?

August 13th, 2010

You’re a Washington business owner making $500,000 a year.

You have millions, maybe tens of millions, in the bank.

You live in a big, gorgeous house on the water on Mercer Island, with sunset views and your sailboat and powerboat out front.

You and your family are actively involved in the community — arts, sports, non-profits, civic groups, and assorted commercial ventures.

Quite possibly, most of your family is here, and maybe has lived here for generations.

You have a large circle of long-time friends here that you love.

If you have school-age kids, they’re in schools that they love. (If the public schools don’t cut it where you are, they’re in great private schools.)

You have everything you want.

So…you’re obviously going to move your family to to Alaska or Wyoming to save $5,000 a year in taxes — for you, mere pocket change. (Note: if you’re only making a measly $400,001 a year, your extra taxes would be … five cents. And that’s not even considering the $4,000 a year your business[es] will save in B&O taxes.)

Yes, you could pretend that your legal residence is elsewhere. But if you’re like most of the people described above — I know, have known, lots of them, so I’m here to tell you — you’re also not willing to lie and cheat to save $5,000 a year.

While you’re thinking about it, check out Sightline Daily’s takedown of The Seattle Timesdeceptive math.

Asymptosis Economics, Family, Politics

Do Lower-Taxing States Grow Faster? No.

August 5th, 2010

Following up on yesterday’s post comparing state tax rates and prosperity (answer: higher-taxing states are more prosperous [or vice versa. <g>]), I wondered about the same comparison with prosperity growth.

Again I used median household income, because it’s a good measure of widespread prosperity, a.k.a. The American Dream.

Here’s the story:

In aggregate, there’s no discernible difference between growth rates for low- and high-taxing states, despite quite large differences in taxation levels. The correlation is -.03. That yields a two-tailed p value of .85, meaning that there’s 85-in-100 odds that the (tiny) correlation is just random chance.

As usual, this is just one slice of the data, analyzed in one way. It’s only worth paying attention to because it sings exactly the same song as dozens of other slices, analyzed dozens of other ways.

Update 8/16: To see the correlations for many more periods, click here.

Asymptosis Economics, Politics

Are Low-Taxing States More Prosperous? No. QTC.

August 4th, 2010

Regular readers will remember my posts comparing prosperous countries — tax rates versus prosperity and prosperity growth — and will remember that they’re largely uncorrelated: lower taxes don’t correlate with faster economic growth. (Follow Related Links at the bottom of this post and others to find many supporting posts.)

But what about states? Are low-taxing states more prosperous?

I decided to take a look at tax burdens compared to median (read: middle-class) household income. It’s a good measure of widespread prosperity, which is what The American Dream is all about. Here are the results:

Higher taxes, more (widespread) prosperity. The correlation is .22.

Is this statistically significant? The two-tailed p-value is .12, meaning there’s an 88% chance that something is causing this correlation. There’s only a 12% chance it would happen by chance.

Does this mean that higher taxes create greater prosperity? That would be quite a leap. But nothing here contradicts that possiblity.

We can say this, though: the numbers we’re looking at here give absolutely no evidence that lower taxes results in greater prosperity.

If anything, the opposite is true.

(While I’m here I can’t resist pointing out the one big outlier: Sarah Palin’s Socialist Utopia of Alaska up there in the northwest — thanks to its redistribution of oil revenues.)

median income: http://www.census.gov/prod/2009pubs/acsbr08-2.pdf

taxes: http://www.taxfoundation.org/files/f&f_booklet-20100325.xls, tab 2

Here’s the spreadsheet: http://www.asymptosis.com/wp-content/uploads/2010/08/state-median-income.xls

Asymptosis Economics, Politics

Stockman: How the GOP Destroyed the U.S. Economy | The Big Picture

August 3rd, 2010

The headline speaks for itself. The author is one of the smartest financial bloggers in the game, author of Bailout Nation.

I can’t resist quoting this:

I suspect brain damaged partisans of the left suffer from somewhat different cognitive deficits than brain damaged partisans of the right.

I would add that the brain damaged partisans of the left (there are plenty of them) don’t control the Democratic party. Contrary to what the brain damaged partisans on the right might believe (you know: the whole Republican/tea party gang, top to bottom), they’re mostly prattling over at Daily Kos.

Stockman: How the GOP Destroyed the U.S. Economy | The Big Picture.
By Barry Ritholtz

Asymptosis Economics, Politics

Washington State Income Tax (Initiative 1098): Who’s Affected?

July 31st, 2010

Updated. See below. Again, Aug 12.

There’s been some debate going back and forth recently on how many Washington State taxpayers will be affected by the proposed income tax. The two sides have done a good job of providing the source data (you can follow their links), but the debate’s been inconclusive because:

1. Single filers would pay the tax above $200K in adjusted gross income, and married filers pay above $400K in AGI.

2. We (I) don’t really know how many filers make more than $400k

Curious as always, I decided to run the numbers assuming that 30% of >$200K filers make more than $400K (probably a generous assumption). I’m also using the percentages provided by EOI in the debate: 85% of >$200K filers file joint returns.

Here’s the arithmetic that results (and here’s the spreadsheet [XLS]):

Washington Federal Income Tax Returns Filed
Total 3,371,086
With business income 520,565
>$200K with business income 54,306
>$200K 111,258

>$200 Filers with Business Income
Income % Estimate Number % affected based on marital status Number Affected
$200-399K 0.7 38,014 15% 5,702
>$400K 0.3 16,292 100% 16,292
Total 54,306 21,994

What Percent of Filers are Affected?
% of >$200K filers with bus income 41%
% of filers with bus income 4.2%
% of >$200K filers 20%
% of filers .65%

So, with the property-tax and business excise-tax reductions in 1098:

59% of >$200K filers with business income will have lower taxes.

80% of >$200K filers will have lower taxes or no change. (Anyone care to break this out?)

95.8% of  filers with business income will have lower taxes or no change.

99.35% of  filers will have lower taxes or no change.

Update: It turns out my 30% estimate was remarkably accurate — but not generous as I suggested. The actual number is closer to 33%. I’ve updated the spreadsheet, including the source link (XLS) for these calcs.

Top 1% of filers Top 3% of filers
AGI Floor $410,096 $207,560
# of Returns 1,410,710 4,232,129
% of Returns: Top 1% as % of top 3%: 33%
This alters the bottom line results, but only slightly:

What Percent of Filers are Affected?
% of >$200K filers with bus income 43%
% of filers with bus income 4.5%
% of >$200K filers 21%
% of filers .69%

57% of >$200K filers with business income will have lower taxes.

79% of >$200K filers will have lower taxes or no change. (Anyone care to break this out?)

95.5% of  filers with business income will have lower taxes or no change.

99.31% of  filers will have lower taxes or no change.

Update August 12:

The state Office of Financial Management estimates that 38,400 filers will be affected by the income tax — significantly higher than the 22,000 I estimated.

But still: 99% of Washington’s 3.4 million filers will see lower taxes or no effect under this initiative. The lower taxes will be primarily on small businesses.

Asymptosis Economics, Politics

Dang Those Bush Tax Cuts Really Worked!

July 27th, 2010

The Best Argument Against Climate Legislation — And the Best Answers

July 26th, 2010

I’ve long lauded Jim Manzi for his cogent and convincing arguments against carbon taxes. He’s the antithesis of the “1998 was really hot! Look: it’s cooler now!” school of head-in-in-the-sand self-delusionists. Rather, he takes the 2007 IPCC report as the best available consensus scientific knowledge we have, and uses it to think through a clear-eyed, long-term cost-benefit analysis of carbon taxes/cap-and-trade. Anyone interested in this subject should read this article (and note that it’s published in the regular “In-House Critics” column of the  decidedly lefty New Republic, which speaks volumes about which side of this debate is willing to tolerate and consider — and yes, publish — strongly argued dissenting views).

When I consider arguments in favor of climate legislation, Manzi’s thinking is what I measure those arguments against. Here’s his argument in small (my emphasis for easy skimming):

• “the cost of policies designed to limit the rise in atmospheric carbon dioxide to 450 parts per million (ppm) average a little over 6 percent of global GDP by 2100 (with a very wide range of estimates). That is, we would start paying a cost today that would rise to about 6 percent of world output by 2100 in order to only partially avoid a problem that would have expected costs of about 3 percent of world output sometime later than 2100.”

• “hedging your bets and keeping your options open is almost always the right strategy. Money and technology are our raw materials for options.the loss of economic and technological development that would be required to eliminate all theorized climate change risk (or all risk from genetic technologies or, for that matter, all risk from killer asteroids) would cripple our ability to deal with virtually every other foreseeable and unforeseeable risk.”

Yes, he addresses the uncertainty/risk/probability issues of global warming — notably those from Harvard’s Martin Weitzman.

It’s a compelling argument: given the risk scenario painted by the IPCC in 2007 — and its uncertainty — our best response is to promote economic and technological growth and development, so we have the resources to address problems in the future, when we have a clearer picture of what the problems are.

But the counterarguments are also very strong. If Manzi incorporated them into his thinking, I think he would come to very different conclusions. Respondents at The New Republic have offered several of them; I will steal from them unabashedly, and add a few of my own.

The 2007 IPCC report is getting long in the tooth — it’s based on the best research from four to six years ago. Recent research is (almost uniformly) far more alarming. Two examples: 1.The area of summer sea ice remaining during 2007-2009 was about 40% less than the average projection from the 2007 IPCC Fourth Assessment Report.” 2. One report posits a circa 5% chance that large portions of the planet will be rendered uninhabitable — including the eastern U.S..

The 2007 report specifically did not make projections for sea-level rise. The modeling of ice-sheet behavior was considered too difficult at the time. The economic costs from rising seas could dwarf all others combined. A cost-benefit analysis that doesn’t include those costs doesn’t tell us much.

A 6%-of-GDP insurance policy against those eventualities starts to sound more reasonable. But even the 6% estimate has serious problems.

• Manzi assumes that carbon taxes will add to, not replace, other taxes. Economists agree that consumption taxes and “Pigovian” taxes — taxing negative externalities — are more economically efficient (they result in greater economic growth and prosperity) than many of our current taxes, like those on income, corporate profits, etc. A carbon tax is a Pigovian consumption tax. If our tax base shifts in that direction, the result is more economic efficiency, yielding the very result — faster growth and development — that Manzi champions.

• He assumes the need for a global taxing regime, ignoring the benefits to the U.S. of a unilaterally imposed carbon tax. The long-term savings in national defense and security from reduced fossil-fuel consumption are darned hard to predict, but even most righties will acknowledge that we wouldn’t have invaded Iraq if there was no oil over there. That war will cost us trillions, all told — somewhere north of 25% of U.S. GDP for a year. And that’s before even considering the fuel that it poured on the fire of global jihad. That was one damned expensive insurance policy to ensure future oil supplies.

He ignores the threat that global warming poses to U.S. national security, as detailed by those left-wing nut jobs at the Pentagon in their Quadrennial Defense Review for 2010 (PDF): ”climate change could have significant geopolitical impacts around the world, contributing to poverty, environmental degradation, and the further weakening of fragile governments. Climate change will contribute to food and water scarcity, will increase the spread of disease, and may spur or exacerbate mass migration.While climate change alone does not cause conflict, it may act as an accelerant of instability or conflict, placing a burden to respond on civilian institutions and militaries around the world.”

He ignores the truly horrific, potentially even apocalyptic human impact of global warming, and a “mere” 3% decline in GDP, especially outside the developed world. (Quite resoundingly demonstrating Jonathan Haidt’s findings about libertarians’ lack of compassion.) As Nate Silver has pointed out (H/T Bradford Plumer) we could eliminate 43% of the world’s people and only reduce world GDP by 5%.

As I said, I greatly admire Jim Manzi’s thinking. But I have to say that his failure to include these points in that thinking gives the strong impression of confirmation bias.

Asymptosis Economics, Energy Independence, Foreign policy, Global Warming, Politics, Uncategorized