Asymptosis

In case anyone missed the NYT Op-Ed ten days ago by Col. Morris Davis, formerly chief prosecutor at Guantanamo, the opening paragraph speaks more volumes, more movingly, than I could ever hope to achieve:

Unforgivable Behavior, Inadmissible Evidence
TWENTY-SEVEN years ago, in the final days of the Iran hostage crisis, the C.I.A.’s Tehran station chief, Tom Ahern, faced his principal interrogator for the last time. The interrogator said the abuse Mr. Ahern had suffered was inconsistent with his own personal values and with the values of Islam and, as if to wipe the slate clean, he offered Mr. Ahern a chance to abuse him just as he had abused the hostages. Mr. Ahern looked the interrogator in the eyes and said, “We don’t do stuff like that.”

The Times has a piece on Col. Davis today:

Former Prosecutor to Testify for Detainee
Col. Morris D. Davis, once chief prosecutor at Guantánamo Bay, Cuba, and still with the Air Force, is now a chief critic.

Until four months ago, Col. Morris D. Davis was the chief prosecutor at Guantánamo Bay and the most colorful champion of the Bush administration’s military commission system. He once said sympathy for detainees was nauseating and compared putting them on trial to dragging “Dracula out into the sunlight.”

Then in October he had a dispute with his boss, a general. Ever since, he has been one of those critics who will not go away: a former top insider, with broad shoulders and a well-pressed uniform, willing to turn on the system he helped run.

I don’t think I need to comment.

Coming back to the Cox and Alm Cox article in the NYT, whose basic argument was that poor people spend 50% as much as rich people in America. Everyone’s good. Don’t worry. Be happy.

I don’t know why it took me so long to realize this, and I’m utterly at a loss as to why better-equipped souls like Paul Krugman didn’t realize it instantly. (He questions the quality of the underlying data when there’s an elephant in the room?) Cox and Alm do, after all, point out the fundamental failing of their whole analysis:

While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status.

Tens of millions of retirees—and the presumably gigantic gap between their collective (non)earnings and spendings—have to be a huge factor.  And, uh…students? Who are being supported by well- or at least better-off parents who are nevertheless not part of the "household"?

The sticky issue of "life stages" (my children earn nothing, but the little hoodlums sure seem to consume a lot) is basic to the most freshman-level macro-equity analysis. Why aren’t people who know better pointing this out?

Absent this "unclear" information, the whole Cox and Alm thing seems to tell us exactly…nothing.

If there’s (only) one thing that macroeconomists agree on, it’s probably that innovation and entrepreneurship are the driving forces behind the vast improvements in well-being that we have seen over the decades, and over the centuries. (It’s also what’s allowed for some of the most heinous acts imaginable. But still.)

I pointed out in a previous post that 1) wealth inequality is extreme in America, dwarfing both income and consumption inequality;  2) it varies greatly between OECD countries; and  3) in comparing those countries, over the long term wealth equality seems to correlate very strongly with growth in GDP per capita.

Why the correlation? In particular, does widespread wealth distribution promote innovation and entrepreneurship?

I’m going to punt on answering that question empirically because the paucity of data—and even more so, the difficulty of proving causation—is pretty insurmountable.

But I do have a personal tale to tell, one that some might find representative of a general rule, and hence somewhat convincing.

When I was 32—back when I still had the fire and drive for startups—my father died and I received a low-six-figure inheritance. It was nothing like retirement money, but it was a very comfortable cushion for someone earning in the mid-to-high five figures.

Within a year, I invested a nontrivial portion of that inheritance (along with a partner) into launching a new business. I also invested an insane amount of work that I could have devoted to guaranteed income. (Read: large opportunity cost.) It worked out very well for all involved.

Without that inherited wealth, I would not have had the financial or emotional freedom to start that business. (I had a new baby at the time, and a second one turned up within two years.) Having a solid nest egg in the bank gave me the confidence I needed to take a chance—not only risking some of the nest egg, but putting aside the reliable income I was generating (and reducing the likelihood of future reliable income), in return for a large possible upside.

To say it another way that puts across what it actually felt like at the time: that nest egg gave me the psychological space to go off and do some really cool shit, without worrying that failure would hurt my family significantly.

So why does wealth equality correlate with growth? I think it’s because many more people have that space to take risks and innovate. In this case the “incentive” is actually a removal of limitations—the limitation being a widespread lack of wealth that is arguably encouraged by a free-wheeling, cut-throat, competitive economy. It’s hard to overestimate the power of millions of people who have that kind of space and freedom to innovate.

This data-free surmise is supported to some extent by the previous post on wealth inequality. In the short term, concentration of wealth seems to correlate with faster growth. That’s in keeping with traditional economic models. But in the long term—where even fairly modest generational wealth like my father’s can have its sway—widespread distribution of that wealth removes limitations on millions of eager young strivers, resulting in the kind of risk, innovation, and success that I am so lucky to have experienced.

I’m making no statements (here) as to what we might do to promote that kind of wealth distribution. But I am saying that it should be a goal, one that we should seek to effectuate when we can do so without significant short-term damage to our economy. Not only is it more fair; it makes us all better off in so many, many ways.

Give ten million, thirty million more American a place to stand, and they’ll move the world.

Greg Mankiw links, apparently approvingly, to a VoxEU post by Willem Buiter and Anne Sibert savaging an Obama-sponsored bill in the Senate. (Cloyingly titled the Patriot Employer Act.)

Felix Salmon has replied quite effectively, pointing out that the bill would not have the kind of disastrous effects the authors suggest, and that their objections are flawed, overblown, and largely trivial.

Mankiw pulls the money quote for his post title: the authors describe the bill as "reactionary, populist, xenophobic and just plain silly." They forgot "distortionary," which is their post’s main basis for fear-mongering.

I just want to point out a couple of blatantly disingenuous parts of Buiter and Sibert’s argument, which to me exemplify how frantic and reactionary the whole post is.

The bill provides a one-percent-of-revenues kickback to employers who fulfill a list requirements. One of those requirements (in Buiter and Sibert’s words, my emphasis) is that:

"[employers] must provide a defined benefit retirement plan or a defined
contribution retirement plan that fully matches at least five percent
of each worker’s contribution."

Putting aside the question about "fully" matching five percent, or the incredibly low bar that five percent represents: The authors attack this by attacking defined benefit retirement plans (a.k.a. company pension plans)—with some good basis for their objections. But they conspicuously ignore the "or"—the option for defined contribution plans. Presumably they can’t muster any objection to those.

Next, to receive the kickback under the bill, employers must:

pay at least sixty percent of each worker’s health care premiums

The authors’ objection:

tax incentives…that link health
insurance with being employed rather than with being alive, are
distortionary and unfair.

So…because the bill does not promote universal, single-payer health care, it’s a bad bill.

Is Mankiw really endorsing this argument?

The main point, though, is that employers aren’t required to opt in to this program. If they think they can fulfill its requirements for less than 1% of revenues, they can do so—with the manifest benefits (primarily to Americans) that would result for individuals, the companies, the government, and the general public.

Isn’t this exactly the kind of win/win incentive that government at its best (and only government) can provide?

Robert Reich has been talking up this idea recently, conceived by Bruce Ackerman (Yale law school), Ian Ayres, and some of their cohorts. They’ve been talking about it themselves for quite a while, notably in their 2004 book, Voting with Dollars and in assorted articles.

Simple idea: donations to political campaigns go to blind trusts set up for each candidate. Neither the candidate nor anyone else knows who gave what. It’s the opposite of transparency. Ackerman likens it to secret ballots, calls it “the donation booth.”

Merits: Obvious. It would impose serious friction on quid pro quo donations, especially bundled donations. And donors would receive the same kind of anonymity they get in the voting booth, with all the attendant public benefits.

What’s wrong with it: Reading comments across the web, the only objection I can see is that it wouldn’t work perfectly, or instantly solve the problems of money and influence. Well, yeah…

People could still tell candidates, over opulent lunches, that they’re making/have made donations. They could even wave the cashed check in front of them. (Though Ackerman has proposed letting anyone cash a check with these trusts, meaning a canceled check wouldn’t be real proof.) Bundlers, of course, wouldn’t have all the cancelled checks to wave around.

Short story, it would make those fundraising conversations a lot more uncomfortable.

Blind trusts wouldn’t do anything about “issue advertising”–PACs, 527s, and the like. But it would still throw some serious sand in the gears of the dialing-for-dollars political machine.

Is it time for some of our state “laboratories” to try this out?

Yesterday, I (I hope) drove a final stake into the heart of the myth that small government creates national prosperity. I hope I also brought some backwards progressives to understand that the conservatives are right in one regard: economic growth has been the main engine that has made the poor—and everyone else—much better off by any number of measures.

Today I’d like to look at another conservative demi-canard: inequality and growth.

The conservatives’ basic argument: in a perfectly egalitarian society, where everyone is guaranteed an identical income/standard of living, there’s no monetary incentive for people to work, innovate, get educated, take risks, and do other such things that contribute to the general growth in prosperity. Obviously (to progressives at least), people do these things for reasons other than money. But the argument, while weakened, still stands up quite firmly.

There are a lot of countervailing arguments. For instance, if inequality is too great, people at the bottom and in the middle won’t see a real chance to move up, so they’ll give up. In either case, incentives matter.

But all these arguments are theoretical (and more frequently than not, ideological and moralistic). And they’re often arguments of degree that are pointless absent data: what level of inequality are we talking about—none, total, or some actual point in between?

I was curious to look at the data, and see what’s actually true out there in the world. As in my previous posts, I’m looking mainly at developed, affluent countries like the U.S., for indicators of what does/can/might work well in the U.S.

The key questions: Does inequality correlate with economic growth? Can we have equality without sacrificing growth?

The short answer: in less-developed countries, equality and growth move together, with a pretty strong correlation. Less-equal countries grow significantly more slowly. In developed countries, inequality and growth move together—but with a much smaller correlation. Less-equal countries move toward prosperity somewhat faster than more egalitarian countries.

Implications and discussion below. First, how do we know this?

Economists have done dozens of studies of this very question over past decades. A 2006 study, “Growth and Inequality: A Meta-Analysis,” reviews and analyzes 22 of those studies, and 254 data conclusions presented in those studies. Before looking at that analysis though, I want to look at one very well-regarded study—Robert Barro’s “Inequality, Growth, and Investment.” (Barro,  a Harvard economist, is the world’s #2-ranked economist by number of citations, and has done several of the most authoritative empirical studies of national growth and what causes it.)

I want to show three graphs from Barro’s study, because 1) they capture at a glance the reality of equality versus growth, and 2) they agree completely with the 2006 meta-analysis.

For all countries studied, there’s not much correlation between equality and growth. (A high GINI coefficient means higher inequality.)

But the picture’s very different if you look at rich countries versus poor countries:

In richer countries, inequality does in fact correlate with faster growth (though not all that much). The meta-analysis agrees:

In accordance with Barro (2000), we found that the correlation between growth and income inequality is different in rich countries as compared to poor countries. The negative impact of an uneven distribution of income is higher in less developed countries.

Note to the more wild-eyed brand of conservatives: this does not mean that more inequality is always better. These studies looked at actual countries, where inequality fell within a fairly narrow range. Turn the dial to 11—as we’ve arguably been moving towards in the past seven years—and you’ll see very different results.

Nevertheless, this is a hard truth that American progressives will have to accept and deal with rationally. Some programs that enhance equality will counteract their own effects (to a greater or lesser degree) by reducing overall prosperity over the long haul. It may still be worth doing—it can take a long time for a .2-percent acceleration in GDP growth to raise the poor out of poverty. But pretending that the tradeoff doesn’t exist is not in anyone’s best interest, long-term—including the very people progressives most want to help.

Which equality measures contribute to or put a drag on growth? Means-tested transfers (if you make less money you get more money) appear to be among the worst offenders against long-term prosperity.

The good news: there are many types of programs that look like win-win solutions, both short- and long-term. Yes, they do exist. (The shallow slope of the trend line for developed countries suggests that this would be so.) Not surprisingly, education subsidies top most economists’ lists of Good Things To Do. The Earned Income Tax Credit—which incidentally was created and championed by Milton Friedman, the latter-day uber-god of free-market capitalism—also looks like a both-ways winner, quite possibly meriting expansion.

In some of my future posts I’ll be looking more and more closely at these types of programs and initiatives, asking: which ones should we be turning our attention and resources to?

In other words, where’s the low-hanging fruit?

Small-government conservatives’ most powerful economic argument—which progressives have failed to counter effectively in the minds of Americans—is that making government smaller results in faster economic growth. So, by this theory, small government makes all boats rise—rich and poor alike. It follows that progressives who argue for higher taxes and government spending are either foolish or churlish or both: they’re actually hurting poor people by denying them the benefits of economic growth.

This argument is powerful because part of it is undeniably true, at least in the long term. Over the last century, half century, quarter century, economic growth has yielded just plain outright spectacular gains in prosperity and well-being throughout the economic spectrum, and throughout the world. (Yes—by some quite reasonable measures—even in the U.S., even for the poor and middle class.) Progressives who deny this have their heads just as deeply in the sand as conservatives who use it to say, essentially, “why worry? be happy.”

The actual flaw lies in the other part of the argument: that small government contributes to this growth and prosperity. It may be true, to some extent, in developing countries. (One possible explanation: because the governments in developing countries are more corrupt, more government just makes things worse.) But in developed countries like the U.S., the empirical data is quite clear: there’s little or no correlation between government size and growth. That conservative belief is rooted on faith and ideology, not facts.

Progressives often counter the conservative argument with their own spectrum of beliefs. Two failings:

1. They often attack the growth belief—denying those very real facts—instead of rebutting the small-government belief.

2. Many of those progressive beliefs are themselves faith-based (everyone’s opinions are equally valid, right?), or are founded on pretty shaky evidence (there’s a lot of about economies that we just don’t know).

So their arguments have not been as effective as they could be. This is unfortunate, because there’s a much stronger reality/fact-based argument lying on the ground, waiting for progressives to pick it up.

Economists have been studying national growth and prosperity—and what causes/correlates with growth—for decades. In particular, they’ve done dozens of cross-country studies, using an endless variety of statistical techniques and economic models to analyze an endless variety of possible growth factors. They’ve come to consensus on a number of things. See, for instance Greg Mankiw’s list, reproduced in an earlier post.

What’s missing from that consensus list? Any correlation between government size and growth. (Again, at least in developed countries, within those countries’ range of taxation—23-49% of GDP.)

As I said, there have been dozens of studies. Some show a positive correlation between government size and growth, some show negative. In almost every case, the correlations are small to tiny. Only a handful of outliers showed any kind of statistically significant correlation.

One example, a 1996 study by Robert Barro (the world’s #2-ranked economist by number of citations), exemplifies how questionable the correlations are. He finds insignificant correlations between government size and growth for OECD countries  (positive) and “rich countries” (negative), but for all countries combined he finds a (barely) significant negative correlation. With these contradictory results in a single study—and across all the studies—what can you conclude?

Happily, we don’t need to review all those studies ourselves, because someone’s already done it. In 2003 Nijkamp and Poot delivered their “Meta-Analysis of the Impact of Fiscal Policies on Long-Run Growth.” Their stated goal is to examine the “conventional prior belief regarding the impact of fiscal policy on growth as the hypothesis that increases in government consumption, defence, or increases in tax rates, lower growth; while increases in government expenditure on education or infrastructure enhance growth.”

The abstract:

The issue of whether the public sector enhances or retards long-run economic growth has been debated passionately in recent years. We use meta-analysis to shed light on the issue. A sample of 93 published studies, yielding 123 meta-observations, is used to examine the robustness of the evidence regarding the impact of fiscal policy on growth. Five fiscal policy areas are considered: general government consumption, tax rates, education expenditure, defence, and public infrastructure. Several meta-analytical techniques are applied, including descriptive statistics, contingency table analysis and rough set analysis. On balance, the evidence for a positive impact of conventional fiscal policy on growth is rather weak, but the commonly identified importance of education and infrastructure is confirmed. The results are sensitive to several research design parameters, such as the type of data, model specification and econometric technique. The top two tiers of journals appear less supportive of the conventional priors with respect to government and growth than lesser-ranked journals.

The details on government size and growth:

They found 41 studies that analyzed the correlation between growth and “Government consumption or ‘size’’. Here’s the breakdown for those 41 studies.

Bigger government correlates with slower growth: 29%
Bigger government correlates with faster growth: 17%
Bigger government has an inconclusive correlation with growth: 54%

They comment on the high percentage of inconclusive findings overall (35.8%), saying “our sample undoubtedly suffers from file drawer bias or publication bias in that significant findings are likely to be more prominent in our sample than in the excluded papers (Begg 1994).” In other words, there are a lot of inconclusive studies out there than never got published, which would push that already-high 54% number even higher.

Their conclusion based on these results:

It is then easily calculated that the 95 percent confidence interval for the proportion of studies that support the null hypothesis is (0.15, 0.43). This interval lies far away from unity. Consequently, we conclude by means of our sample that the relative distribution of economic activity between the private and public sectors across countries and regions appears to have no clear impact on long-run growth at the macro level.

In other words, what I said above: (at least in developed countries like the U.S.,) there is no correlation between government size and growth.

This is all correlation, of course. It can’t “prove” that X, Y, or Z causes growth. But it can disprove it. As Mankiw says (again, see previous post):

…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,…

Since there’s no correlation between government size and growth, we can rule out theories that claim that there is a correlation—much less causation.

Two more quotations that I think are especially important:

With respect to government consumption of resources, the composition of this claim on resources may be more important than the level. For example, public expenditure on education, R&D and health care are forms of capital accumulation rather than current consumption and therefore sources of growth, but current consumption expenditures that ensure the right institutional environment (in terms of property rights and safety) may also be growth enhancing (e.g. Barro 1997). Moreover, public funds allocated to environmental policy may also benefit growth in the long run (e.g. Bovenberg and Smulders 1996).

Short story, which makes all the sense in the world: money can be spent effectively or ineffectively, either enhancing or impeding long-term growth. Looking at the data can help us figure out which is which.

At the same time, it has been increasingly recognized in growth studies that the way in expenditures are financed matters too. For example, Kneller et al. (1999) define a range of taxation and expenditure variables and explicitly take account of the budget constraint. By means of a panel of 22 OECD countries, 1970-95, they find – firstly – that distortionary taxation reduces growth, while not-distortionary taxation does not, while – secondly – productive government expenditure enhances growth, but non-productive expenditure does not.

This supports the very well-reasoned post offered up by Matt Yglesias the other day  (seconded and enhanced over at the Reality Based Community). It’s the combination of policies that enhance prosperity and well-being, not any single factor in isolation. (i.e. “cut taxes.”)

I’m hoping this post gives progressives the kind of evidence they need to counter the conservatives’ most telling economic argument, on its own terms. It’s obvious to us that government can do a lot to promote both prosperity and widespread well-being; they’re not mutually exclusive, or a zero-sum game. (Though of course they can be with specific policies.) One big step to attaining those ends is effectively countering the faith-based belief that has dominated economic discussion since Reagan.

It’s time to stop playing on the conservatives’ home field by arguing about whether tax cuts pay for themselves by stimulating economic growth. Because the fact is—except in the very short term—they don’t stimulate economic growth

At risk of plagiarizing from Reagan, but in hopes of “changing the trajectory,” we need let Americans know that “small government is not the answer.”

It seemed like I’d noticed Obama significantly outperforming the polls since February 5. Which led my curious mind to wonder if he might do so in Texas and Ohio as well.

So I threw together an utterly unsophisticated spreadsheet to see what’s happened, and what might happen. It pretty much speaks for itself. The poll numbers are pollster.com’s last estimates for Obama before the primary/caucus. Where they hadn’t compiled an estimate I averaged the recent poll numbers that they did show. Some states missing because there were no recent polls.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

	Polls	Actual	Over/Underperformed
WI	59	58	-2%
WA	52	68	32%
VA	55	64	16%
MN	28	66	140%
MD	54	60	11%
DC	63	75	19%
AL	44	56	27%
		Average:	35%
			Projected
OH	40		53
TX	46		62

Update: Mainly in response to comments over at DailyKos. First, this is just a Sunday-morning lark. If it’s even vaguely correct I’ll be totally amazed. Second, if you remove Minnesota it comes out: Texas 54, Ohio 47. 

Harold Myerson today in the Washington Post bemoans America’s dependence on our own shopping as an engine of the economy. Household consumption accounts for 70% or our GDP. I checked his numbers and he got them right:

Britain ranked second among nations in the Organization for Economic Cooperation and Development, at 61 percent, then came Italy, at 59 percent, with Japan, Germany, France and Canada all hovering around 55 percent.

The average for OECD countries minus the U.S. is 56%. The U.S. percentage hasn’t been below 65% in the last thirty years. Long-term, our real competitors in this game are those thriving engines of prosperity, Greece and Portugal.

Myerson’s argument makes all kinds of sense to me, and to many others: If we want high-wage jobs, we need to be creating value that we can sell to others, rather than running on our own (not-so-little) treadmill fed with pellets from China.

It may seem obvious, but I never trust my idle intuition. So I grabbed the OECD data and plotted it out.

(CHE is OECDese for Switzerland. Note that—since I was trying to evaluate what’s good for the U.S.—I selected OECD countries that are most like the U.S. I’ve lagged consumption period by three years because presumably it would take some time to affect the economy. Ditto for the table below.)

The data seems to bear out Myerson’s (and my) intuition. Countries that generate more of their GDP from domestic consumption seem to generate prosperity more slowly than their less-consumptive counterparts. The slope isn’t very steep. It has a correlation of .24—pretty good by SocSci standards, but with only twenty countries it’s not “statistically signficiant to the tenth percentile.” .29 would make the grade.

But it gets more interesting—and more significant—when you look at a lot of different periods. (Who says the periods above are definitive?) Here are the correlations for different periods. Red means bad: that higher household consumption percentages correlate with slower growth.

	1980	1985	1990	1995	2000	2005
1975	-.18	-.46	-.15	-.21	-.23	-.24
1980		-.55	-.18	-.26	-.28	-.23
1985			.14	-.03	-.05	.04
1990				-.23	-.23	-.01
1995					-.08	.10
2000						.24

Starting years on the left, ending years along the top. Not huge numbers or high statistical significance for each result (more so in aggregate), and it doesn’t prove causation, of course. But if someone were to tell me that a high household-consumption percentage was good for growth—except in the short term—I’d be hiring a new economist.

Again, it probably seems obvious. But the percentage differences between countries aren’t anything like the differences in tax rates. And those tax differences don’t seem to affect growth much at all. These much smaller differences seem to affect growth quite a bit.

I know you were all wondering…

Without actually using the word “hypocrite” Megan McArdle makes the following assertion in her latest post on people who are in favor of higher taxes, Tax me more.

In other words, they don’t so much want higher taxes on themselves, as to purchase the good “State coercion of other affluent people”.

I posted the following as a comment on FreeExchange but find I’m so self-admiringly fond of it (not a pretty sight, I know) that I’m offering it here as well.

Megan ties herself in contortionate knots to explain (or…obfuscate?) a rather simple and rational piece of individual reasoning:

If I enter into a contractual relationship with others, agreeing that we’ll all contribute to a public good, we can all have that good. If that “good” is ICBMs, school districts, or monetary policy, there’s no other way we can get it.

I and the other individuals aren’t buying the good of being able to coerce other individuals into buying a good. (Phew! ‘djyou follow that?)  We’re buying…the good itself.

The contract is negotiated and re-negotiated through the sadly fumbling and inept methods of democracy. (Note to self: don’t quote Churchill here.)

(Is contortionate a word? Oughtta be. Contortuous?)