Friday, December 30, 2011

Quote On How Economists Measure and Compare

Don Boudreaux quotes David Friedman’s 1996 book Hidden Order:

Economists are often accused of believing that everything  – health, happiness, life itself – can be measured in money.  What we actually believe is even odder.  We believe that everything can be measured in anything.

There you have it: it isn’t about how we measure, it’s about the fact that we measure comparatively: everything is relative.

That actually might be a test for whether someone you’re arguing with is open to the economic way of thinking, or whether that mental door is already closed: do they object to making certain relative valuations?

In a nutshell, that’s the problem with our two measures of poverty: absolute poverty is measured by comparing to a standard of what someone had, while “relative” poverty is measured by comparing only to those we can see right now.

In a nutshell, it also addresses the political problem about how to interpret the scale of Obama’s stimulus package. Is it large relative to some standard stimulus package. Yes, so the Republicans are pushing something analogous to absolute poverty. But, Is the Obama stimulus large relative to recently observed stimulus packages (like Bush’s). Not so much. Thus, the Democrats position is more akin to relative poverty measurement.

Wednesday, December 28, 2011

Does America Tax the Poor Too Much?

Relative to other rich countries, the answer is no.

Not surprisingly, America taxes both the rich and poor less than other countries.*


The green panel on the left shows that America takes less from someone making $25K than any other G-8 country except Japan, and the difference there is $50 per year.

The panel on the right shows that America does not tax the rich as much as other countries.

You can also get some interesting information about progressivity from the two charts. A rough measure of that is the difference in the (average) tax rate shown on the two charts. A bigger difference shows a more progressive tax system:

  • U.K.: 22.3%
  • Italy: 21.1%
  • America: 20.7%
  • Canada: 20.1%
  • Japan: 18.8%
  • Germany: 16.6%
  • France: 16.2%
  • Russia: 0%

Not surprisingly, England tops the list: that’s why all their rock, movie, and sports stars live in other countries.

The original source data is here, and here’s the table of all 19 countries surveyed:

* This chart shows strictly income taxes. In Europe, the wide use of VATs changes the picture, while the wide use of sales taxes in the U.S. will do the same. Also, international comparisons like this are always fraught with problems because of the relatively larger burden placed by states in America, which if often not included in international comparisons.

Do the Rich Pay More Taxes?*

In America, yes they do.

And compared to other developed countries, the rich pay a bigger share here.

The chart on the left shows the proportions of taxes paid by each quintile of the income distribution: the share paid by the rich has always been big, and is getting bigger. This is mostly by reducing the share of taxes paid by those in the 20th to 60th percentiles: the lower middle-class.

The chart in the middle shows the share of pretax income by quintile. Yes, there is a moderate trend of the rich getting richer, but it is not as big a trend as that of “the taxed getting taxer” or … um … something catchier than that. There aren’t any big losers in income, but the biggest is the middle fifth of the population.

Those two charts establish my first statement. The chart on the right addresses the second statement. When we divide the share of taxes paid by a quintile by the share of income that it brings home, we see that the taxes are more disproportionately paid be the rich in America.

* There are a couple of caveats to this. First off, this is only income taxes. The rich pay a lot of other taxes too, but they also get their cash flow from a lot of other sources that aren’t taxed as income. Even so, most of our discussions about “making the rich pay their fair share” focus on income rather than cash flow. Second, this ignores that most of what makes the tax burden in America heavier on the poor is that our FICA is taken out of (primarily paycheck) income and has a cutoff in the low 6 figures.

Why Is Macro So Hard: The Bait and Switch About What Government Does

One of the big problems in 1) understanding macroeconomics, and 2) understanding politics, is getting a handle on the magnitude of the bait and switch going on.

More than ever government claims that it is “doing something”. But, more than ever that claim is just a fib: most of what our government does is send out checks to people.

This is drawn from David Wessel’s column in The Wall Street Journal entitled “Two GOP Leaders Differ on Spending to Fund Research”, but you shouldn’t regard the whole article as required reading.

Friday, December 23, 2011

Why Is Macro So Hard: Do Policymakers Care That They May Not Know What They’re Doing?

Karl Smith, writing at Modeled Behavior:

… Because, I am a soulless technician who will faithfully advise anyone and everyone who asks I see the back rooms of opposing lobbyists all the time.

Here at the state level I can safely say that virtually no one has any idea what they are doing. That is, for the most part the lobbyist do not know and indeed are not particularly interested in what is in the best interest of their clients.

Further, this seems to stem from the fact that the clients are not particularly interested in what is in their best interests.

What they are very interested in is whether legislation is pro them or anti them. However, if you begin to talk about the economy as a complex system full of unintended consequences where anti legislation could be in their best interests their eyes glaze over.

Moreover, a very large number of business lobbyists are not even that interested in efforts that are pro or anti their business. They are more interested in legislation that is pro-business in general and that they perceive as being fair.

There are some notable exceptions but I will not name names.

My sense is that there is a huge but odd policy lesson here. I am still working to untangle what it is.

I like to think of this as the favorite team effect. For many people, correct and incorrect are not important when it comes to their favorite team: think about how Americans feel about their own Olympic sports teams.

In policymaking, what be most important to the positions people hold is whether they are perceived as being pro or con. Once the evidence, as perceived, starts to tilt towards the pro side, the task becomes to accentuate the pros and diminish the cons.

Thus, Republicans come to be in favor of essentially all tax cuts. And Democrats come to be in favor of essentially all social programs.

Thursday, December 22, 2011

Why Is Macro So Hard: What Passes for Expert Advice

I am not making this up.

After a marathon session of decorating cutouts for Christmas, my family — covered with specks of frosting and and stray jimmies — went to McDonald’s to scarf dinner. Because we were exhausted and surly we were blankly watching the TV news programs.*

Anderson Cooper 360 was on. This is, allegedly, a serious cable news magazine.

They were discussing the troubles Republicans and Democrats are having over extending the payroll tax holiday.†

So, they turned for expert advice to … wait for it … John Paul DeJoria … the man most people think of as “Paul Mitchell” after his haircare products.‡

And my wife blurts out … in McDonald’s … in front of the kids … “Are you f***ing sh***ing me!”

She has never taken a macroeconomics class, but is certainly aware that if you want expert advice on macroeconomic policy, you should probably talk to a macroeconomist or policy advisor first.

* I can see why the news is always on in airport concourses, but of all places, why is the news always on in McDonald’s?

† Macroeconomically, the payroll tax holiday is … kind of stupid. What are we most worried about: people who don’t have jobs or people who do? Most people say the former. And what do we think is the cause of people being without jobs: because no one is hiring, or because most people don’t want to work? Again, it’s the former. The payroll tax holiday addresses neither of those problems. It is a holiday on the collection of some taxes that are withdrawn from paychecks. So, it is only available to people who work, and then helps most the people who get their income primarily from salary and wages (which are the only kinds of income from which these taxes are collected) rather than net business income. So, it’s a tax that is labeled as helping everyone, when in fact it is a tax targeted to help people who already have jobs but who’s primary focus is not employing others. In sum, it’s a double fail. Having said that, like most tax cuts, I think the money is probably better spent by households than by government, so there are some positives to it. Interestingly, when the payroll tax holiday was originally proposed by macroeconomists, it was a tax break on the contributions that employers make on behalf of their workers, and it would have helped the two groups in trouble from the top of this paragraph. But, the idea has been perverted.

‡ In his defense, Mr. DeJoria is an extremely successful businessman, who has been trying to garner media attention as someone whose life experiences are indicative of someone whose perspectives and opinions should be taken seriously. Fair enough. I think he should be trying to get on Anderson Cooper 360. I just wish the show’s producers took their jobs more seriously.

European Debt and GDP Infographic

This graphic is easy to figure out, but the colors bug me (click it to enlarge).

Countries are ordered from smallest to largest, with the blue square indicating the size of the countries GDP.

The countries debt/GDP ratio* is then plotted as a red square, who’s area is the country’s ratio times its GDP. Orange blocks indicate countries who’s debt/GDP ratio exceeds 100%.

This does a good job of highlighting why Greece and Italy are problems. Portugal too. It’s not so good on Ireland (which has gotten better), Spain (which has also gotten better, but not that much), and Belgium (which isn’t really on anyone’s radar screen yet).

Belgium is an interesting story. Maybe they should be a problem that people talk about. But they’ve had an interesting problem: they have a parliamentary government, had an election, no one could form a majority coalition, and they went without a ruling party for almost 2 years. This makes me wonder if no one is worried about Belgium because there was no Belgian government to whine about how awful things were. That’s a scary thought.

* The debt/GDP ratio is a popular, but problematic, measure. National debt is like the balance on your credit card or mortgage. GDP is like the size of your paycheck. You’d never compare the two for a household because the one is a stock variable and the other is a flow variable. For example, my debt/GDP ratio is much higher than the typical student’s because I have a mortgage on a house big enough for a family. It’s better to do a stock to a stock comparison (like debt to assets on a balance sheet) or a flow to a flow as on income statements (like debt payments to GDP). If you dig through the news, the details are always about Greece’s or Italy’s debt payments that are coming due.

By Severino, via Information Is Beautiful.

The Eurozone Bubble

This tool is more fun than informative. It shows every country in the Eurozone as a “water balloon”, and the Eurozone itself as a box. Bigger bubbles indicate countries with more debt for their size.

When you push the small water balloons with your mouse, not much happens. Now try pushing Greece.

Via Information Is Beautiful.

Slide Show Explaining the Ongoing European Crisis

This is from The Financial Times: it’s a brief slide show explaining why we’re so worried about Greece.

Wednesday, December 21, 2011

Interactive Debt Crisis Chart

You have to click through to play with this one from Krist at the University of Maryland.

Krist is a computer science major, so this is heavy on programming difficulty, but a bit lighter on economics.

The chart shows three variables: debt/GDP on the horizontal axis, deficit/GDP on the vertical axis, and real per capita GDP by the size of the bubble. All of those are explained below the chart, but not too clearly.

If you click on either a flag or a bubble, the chart maps out the movement of the country through the years.

Alternatively, you can use the slider at the top to play a movie.

This year’s problem countries are Greece and Italy, and it’s pretty easy to see that they are away from the pack of other countries. The problem countries of previous years: Spain, Portugal, and Ireland have at least toyed with being part of the pack.

In a nutshell, the current problems in Europe is that the countries in the pack are having enough trouble managing their own fiscal problems, but they are tied to countries that are trying to play by different rules, and this isn’t helping.

Economically, I think the vertical axis variable is fine.

The horizontal axis variable is popular, but not one of my favorites. It actually shows something like a household’s credit card balance divided by paycheck size. That’s interesting, but not as useful as credit card payment divided by paycheck size. For Greece, the problem since summer has been the size of their payments, not the size of their debt (even though the latter isn’t good).

The bubble size is also somewhat misleading in that Luxembourg has the highest value (the biggest bubble). Technically, this is true, but that is mostly because of rich French and German citizens parking their money just over the border.

Via Information Is Beautiful.

Sunday, December 18, 2011

PIGS Corruption

The PIGS are Portugal, Italy, Greece, and Spain.*

You can spot the PIGS on this map of corruption perceptions.

* If you see a second i as in PIIGS, they are including Ireland. This was in vogue in 2008-9 when Ireland was in the same sort of trouble, but is out of vogue now that Ireland seems to have made good choices which have led to good results.

“Economics Is Organized Common Sense”

That’s a quote from Jerry Kenley, the TA who inspired this year’s Nobel Prize co-recipient Tom Sargent as an undergraduate at Berkeley.

Saturday, December 17, 2011

Scott Sumner Uses the Asymmetry Argument

Chris Fawson at Utah State convinced me several years ago that taking two sides of an argument that are symmetric, and claiming they are asymmetric is both a common failure and a common justification for bad policy analysis.

Scott Sumner makes precisely this point about the (largely private)financial crisis in America and the (largely public) sovereign debt crisis in Europe.

Banks pour huge amounts of money into one particular asset class.  They are encouraged to do this by public policymakers, although there is some dispute about whether that was the main reason for their decisions.  These assets have a long tradition of doing well, although a close look at the evidence would have raised red flags.  The asset market in question suddenly takes a big dive as default risk increases sharply.  This drags down many large banks, forcing policymakers to provide assistance.

What have I just described?  The sub-prime fiasco or the PIGS sovereign debt fiasco?  I’d say both.  I’d say these two crises are essentially identical.  (I should clarify that by “essentially identical” I mean in essence, not in every detail.)

Of course the sub-prime crisis came first, so let’s consider the dominant (progressive) narrative of the sub-prime crisis.  If you read the mainstream media you will see it described as a sort of morality play; the evils of deregulation, which allowed the greedy big banks to take highly leveraged gambles with other people’s money, and then off-load the risk on to both taxpayers and unsuspecting buyers of MBSs.  Or something like that.

Obviously it would be impossible to tell a similar story for the sovereign debt crisis.  No regulator in his right mind would ever contemplate telling big banks not to buy European sovereign debt because it’s too risky.  Indeed the previous attempt at regulation (Basel II) encouraged banks to put funds into those “safe investments.”  Blaming the euro crisis on deregulation doesn’t even pass the laugh test.  The criminals were the regulators themselves.  Is the term ‘criminal’ hyperbole on my part?  Not at all.  Suppose Enron executives had used the same accounting techniques as the Greek government.  They’d all be in jail.  And as for Berlusconi, what can one say about a leader who continually passes laws exempting the Prime Minister from the very crimes he was accused of having committed?  As Keynes said:

Words ought to be a little wild, for they are the assaults of thoughts on the unthinking.

So here’s what I wonder.  Assume the eurozone crisis was obviously not caused by deregulation and greedy bankers.  Then if the sub-prime crisis was basically identical, at least in its essence, how can deregulation be the root cause of the former crisis?  I’m not saying it’s logically impossible, but doesn’t it seem much more likely that there’s a deeper systemic problem, which transcends this glib cliche?

To return to Fawson, it’s very unlikely that the solvency problems that are so nearly symmetrical in the two financial situations can be attributed so asymmetrically.

Unless, of course, the morality play is really important to your ulterior motives. Gee … ya’ don’t think.

Hat tip to Café Hayek for publicizing this point.

P.S. Love the Keynes’ quote.

Thursday, December 15, 2011

New Unemployment Claims

As recently as early fall we were hearing a lot of nonsense about a double-dip recession.*

Now, new unemployment claims have started dropping fairly consistently. I know enough not to immediately claim that the job market is going to improve substantially and soon. But, I also know enough to point out that we are in the right range of time since the run-up in claims for there to be substantial and sustained improvement. Check it out:

  Hat tip to Angus for the chart.

What I want you to look at is not the height or steepness of the peaks … that’s when we were in panic mode.

Instead, look at the width of the bases of the “mountains”. Here, the most recent recession matches up nicely with the last four recessions, and also with the regional quasi-recession of the mid/late 80’s (not everyone remembers that one, but it was pretty rough from Louisiana up through Idaho for a couple of years there).

I am not a charter! I do not look for patterns and then create explanations. Having said that, there is an explanation laying around that will produce that pattern. There’s good psychological reasons to think that any business fluctuation induced unemployment, by either nominal wage rigidity or zero marginal product, might take a few years to start clearing out as individuals’ self-image adjusts to reality.

* Duh … it can’t be a double-dip if the recession is already over. It might be a second recession close on the heels of the first one … but that’s a lot harder for clueless journalists to state.

Economics (from Despair Inc.)

And the really good economists gets bitched out for making those explanations even earlier (e.g., Milton Friedman).

Buy the poster and other goodies at Despair Inc.

Monday, December 12, 2011

Do You Get the Metaphor?

Does this help you understand the events of the last few months?

You meet an employed professional with a $300,000 house, $100,000 in the bank, a nice car, a few (illiquid) Renaissance paintings, and very nice shoes.  His name is Fabio.

He is $60,000 in debt, which is about equal to his yearly income.  An unanticipated ARM reset requires him to pay off that debt at a faster pace than expected, which means he must restrict his consumption.

He threatens to mistreat his longstanding girlfriend Angela, unless she works harder to maintain his previous level of consumption.  Angela refuses to help much, citing a false economic theory in defense of her position.

Fabio’s brother relentlessly attacks Angela’s false theory.  His cousin in Naples claims that Angela is obliged to help because she has benefited from being in the relationship.

Via Marginal Revolution.

How Arnold Kling Became an Austrian*


… I did not study the sacred texts [me neither]. I spent the prime of my career outside of the academy, experiencing the behavior of organizations. I saw first-hand the challenge that large organizations have in dealing with innovation. I saw the tenuous grasp that bosses have over their organizations. Above all, I saw how impossible it is for top management at firms to have the sort of information and control that is casually assumed in mainstream economic models. It is a relatively small leap from that insight to the insight that government officials also lack the information that they need to exercise the sort of control that is casually assumed in mainstream economics.

I came to Austrian economics because that is how business in the real world felt to me.

I’m not Austrian (yet), but I’d admit to moving in that direction because of – what I view as – an increasingly realistic view of human failings: I like people more, but I trust their decision-making less. That may be why I like them more: they know not what they do.

* Arnold Kling has a Ph.D. in economics from MIT, but didn’t go into academia. He worked on housing research for Freddie Mac before founding an early internet firm.