Bad Evidence Leads To Wrong Conclusion

We have some longer or deeper things we are trying to work on but folks keep writing foolish things that need to be dealt with.  In this case it is Jeff Spross at The Week.  The Week appears to be a serious publication with, one would think, editors. How, then, did Jeff’s “How The Democrats Can Raise Taxes Without Technically Raising Taxes” end up on The Week?  We don’t know.

Jeff sets up the article by discussing that the The Donald’s administration decided not to index capital gains for inflation.  Then he says:

But Democrats — or anyone, really — should take a hint from Trump’s decision. It’s not just that capital gains shouldn’t be indexed to inflation; income taxes shouldn’t be either.

Doing away with that indexing would raise plenty of new revenue for the government. But more fundamentally, it would fix a basic misunderstanding about good macroeconomic policy.  [Emphasis added]

Jeff is serious.  And he is seriously wrong.

Sidebar One: Jeff has no comment on the standard deduction which is also currently adjusted for inflation.  End Sidebar One.

It doesn’t seem to us that “You are paying more taxes but we didn’t really raise your taxes” is much of a rallying cry for any party.  The more serious problem is Jeff’s understanding inflation.  Here is Milton Friedman explaining that inflation is a monetary phenomenon.  In the United States, Milton tells us, inflation is made in Washington DC.

Sidebar Two: If you want you can now discuss the extent to which the Federal Reserve, which controls the money supply and hence inflation is independent within the government.  You can come back to that discussion later as it might take a really long time.  End Sidebar Two.

Jeff doesn’t agree with Milton. Jeff thinks inflation is caused by supply-demand problems.   Jeff says that we need higher taxes as a brake on an overheated economy:

Here’s the problem with that logic: If your economy is experiencing high inflation, like what we went through in 1980, then it needs to slow down. Mainstream macroeconomics assumes that high inflation is evidence of an overheating economy: too much demand chasing too little supply. In which case, to cool inflation off, money needs to be taken out of the economy. And taxes are one tool for doing just that.  [Emphasis added]

There is a big problem with Jeff’s example.  We checked the economic data for 1980 at The Balance.com where they have unemployment at year end, GDP growth, and inflation by year on one page.   It was really easy to find and somebody at The Week should have checked.   At the end of 1980 the unemployment rate was 7.2 percent, GDP growth was negative signaling a recession, and inflation was 12.5 percent.  So Jeff’s example contradicts his theory.  Rather than the economy being overheated it was in recession.  How about Venezuela?  Nope.  Zimbabwe?  Nope and you can even use the same cite for that and more.

Few people have been more exactly wrong than Jeff when he says that indexing income tax brackets is pro-inflation:

By contrast, brackets that are indexed to rise with the price level are essentially pro-inflation. As the inflation rate increases, the rate at which the bracket thresholds rise increases as well. That’s a fiscal stimulus added to the economy right when it’s already running too hot. In fact, Russel Long, a Democratic senator from Louisiana at the time, made this exact point, arguing indexing would “make inflation worse by pumping more money into circulation at a time inflation is at its worst.” [Emphasis added}

Inflation is at best independent of real economic growth.  What makes Jeff so wrong is that the government (see Sidebar Two above) controls inflation.  To have the government benefit from inflation by increasing receipts from bracket creep is a really bad incentive for folks who want to avoid inflation.  Hint: that should be almost everyone.  Indexing brackets is strongly anti-inflation because the folks that control inflation, the government, have fewer incentives to inflate.  It is really important that inflation indexing for brackets and standard deductions stay.  It is also really important to check the data that you rely on.

 

 

Interesting Title Disappoints

We were intrigued by Paul Mason’s title at Unherd: Can [Jeremy] Corbyn Learn From The Greek Tragedy?  Jeremy is the socialist leader of the Labor opposition in the United Kingdom.  Because Unherd has a variety of voices it could have been interesting.  We thought the Greek tragedy was that they elected a socialist government and, as always, it turned out badly.  As always, the people eventually throw the socialists out if they can. Paul thinks the tragedy is the socialist lost.

We thought it was unlikely that Jeremy, a long-time socialist, would learn the lesson that socialism never works. We don’t know Paul so we were worried that Paul would suggest the obvious (but evil and often implemented) solution that the socialists need to get elected once and then take control of the media or the elections or both to maintain control.

Instead, Paul offers some coalition building suggestions.  He starts his suggestions with the problem for him and the mildly good news for us:

In general, overtly anti-capitalist Left parties have peaked below 20% as the memory of the financial crisis fades, while a shift to the Left by traditional social democrats has stemmed their own decline.

His main solution is to work with the Greens.  Does he think that they are not overtly anti-capitalistic already?  Paul then gives it away, climate change is a method to political power.  He says:

The sheer scale of the climate crisis will, as the 20^th century recedes and the IPCC’s decarbonisation targets become pressing, change the priorities of the Left. The far-Left is now either in reluctant coalition with its social democrat and Green allies, or resisting even that. For me, the 21^stcentury equivalent of the Popular Front would be an alliance of all forces prepared to commit to spending the hundreds of billions we’ll need to combat climate change, plus the absolute defence of democracy and the rule of law, plus the reversal of austerity. The renationalisation of energy and transport infrastructure is implicit in any radical plan to halve net carbon over the next ten years. {Emphasis added]

Sidebar: We don’t believe the sentence in bold above.  It is inconsistent with socialism and climate activism.  We do believe the work in bold (renationalisation) in the next sentence. It is clear evidence that the rule of law is already out.  End sidebar.

Folks turn Climate Change on its head to get political power.  The best solutions are inaction and mild action because of the high costs and low benefits.  We have often suggested a modest carbon tax combined with removal of “alternative” energy subsidies as a useful step to move us to a more market based economy.  Lots of people can learn from the Greek Tragedy even if Jeremy and Paul won’t.

A Little Disagreement With Deirdre

Deirdre Nansen McCloskey was one of our favorite people even before she became who she is now.  MWG was a grad student with a few toes in economics but more in accounting and The Rhetoric Of Economics really helped us understand the differences between the two disciplines.  Her insight into the significance of what she calls The Great Enrichment (Jonah Goldberg calls “The Miracle,”  we like Deirdre’s name) are priceless.  Deirdre is at work on NRO debunking the myth that Sweden is a socialist country.  Ian Burell is over at The Herd talking about the economics of soccer in How Football Raised Its Game.  It is a bit confusing because he calls soccer football and he is specific that he is discussing English soccer.

Sidebar: The English part of English soccer is not exactly right either.  England, Scotland, Wales, and Northern Ireland all have their own separate national teams but England and Wales are join together in professional soccer so Welch teams can play in the Premiership league.  Cardiff City did this year but was relegated.  End Sidebar

Deirdre takes those to task who use Sweden as an example of socialism starting right with her NRO title, Sweden Is Capitalist.  You must read it all but here is a taste of it:

If “socialism” means government ownership of the means of production, which is the classic definition, Sweden never qualified. When little Sweden’s economists were second in academic standing only to big Britain’s, in the early 20th century, they were “liberal” in the European sense: free-traders opposed to central planning and governmental ownership. None of Sweden’s manufacturing or extractive industries has ever been socialized, this in contrast, for example, to the experiment after 1946 in the world’s first innovative economy [that’s Britain], when the Labour party’s Clause IV nationalized the Bank of England, coal, inland transport, gas, steel, health services, and much else. Sweden never followed even the more modest example of America’s temporary nationalization of railways during the First World War. Sweden’s Systembolaget, the state liquor store, was sold off in 2008, as it has not yet been in all the U.S. Apoteket, the maddeningly inefficient Swedish-government drug-store monopoly, was privatized, too, praise the Lord.

We know Deirdre is right but we have a soft spot in our heart for the state liquor stores in New Hampshire.  Well, one in particular.  New Hampshire has made a few miles of I-89 a toll road so there is the New Hampshire State Liquor Store and Safety Rest Stop right on the highway.  It is a great way to speed you on your vacation.

Our disagreement with Deirdre comes from the last two words of this:

Like the Land of 10,000 Lakes [that’s Minnesota], Sweden is a place of private ownership and thrusting [that’s what it says] inventors, Swedish bachelor farmers and pretty generous social provision, pretty good schools (with vouchers) and terrible weather. [Emphasis added]

We would agree that Minnesota can get a little hot in the summer but Sweden sounds like a lovely place.  The southern part is close to perfect for us:

In Götaland, where you’ll find the cities Gothenburg and Malmö, winters are shorter and milder, while daytime summer temperatures normally range from 15 to 25 degrees Celsius.

Malmo is almost 56 degrees north (a little south of Juneau, Alaska) so the sun isn’t too intense.  It is as close to perfect as weather gets for us.

Ian is trying to generalize from soccer to all labor markets

Clearly there are costs to progress. Yet ultimately we should give thanks to the power of globalisation in transforming our national game, which has been revived by the free movement of labour and capital – and bear in mind the wider lessons for other parts of the economy as we cheer on these teams.

Another comparison of European countries and the US is that the teams in European soccer leagues have much more economic freedom than American teams.  European teams do not have restrictions like salary caps so the rich teams almost always win.  They also play in multiple competitions.  There are exceptions as Ajax almost broke through in the Champion’s League this year and Leicester City won the Premiership in 2015-16 but such events are rare.  More common is that Bayern Munich has won the Bundesliga the last six years and is poised to make it seven next week.  The poor teams are often fighting relegation.  Relegation means that the better teams from the lower leagues are promoted consistent with economic freedom.

Top soccer players and coaches, as Ian explains, are extraordinarily talented.  The players are also extraordinarily expensive costing teams (called transfer fees) as much as €222 million to buy their contract.  Ian’s argument supports restricted immigration for talented individuals rather than open borders.  That’s the wider lesson.

We have four lessons about Sweden and soccer.  First, capitalism makes countries and the individuals in them rich.  The same capitalism makes soccer great and soccer players rich.  Second, Sweden is both rich and capitalistic.  Both Deirdre and Heritage agree that Sweden and the US have about the same degree of economic freedom.  They both agree that there are differences but some are in one direction and some in the other.  Thirdly, the impact of importing extraordinarily talented soccer players might tell us to bring in similar folks in other lines of work but it does not suggest that we have open borders.   Lastly, weather preferences are personal.  The weather preferences for Deirdre and MWG don’t seem to match.

 

A Second Thought On Carbon Tax

We were considering what we said about carbon taxes and Marlo’s No True Conservative.  We are also aghast that we misread his name.  We offer our sincerest apologies for the error.

Our second thought is about markets.  Both Marlo and MWG are friends of markets.  We think that the current price of carbon products plus a modest carbon tax is a better market price.  That is, the additional cost of using carbon that is not reflected in the market price is at least half of a modest carbon tax.  Since we are eliminating the gas tax we need to pay for roads out of that amount too.

It is a subject of controversy and there is a need for research but we think a modest carbon tax makes for a better market price.  So would the elimination of subsidies for “alternative” energy sources.

Fooling Fifth Graders

Eric Zorn, a writer for the Chicago Tribune, showed up in the La Crosse Tribune with an oddly title op-ed, A Lesson On How Progressive Taxes Really Work.  Our former governor, Scott Walker has taken the Media Darling (MD) to task for her suggestion a top marginal rate of 70 percent.  It is epically foolish for exactly the reason Scott states, it is not fair if you earn ten dollars and you parents take seven dollars.  Here is a more technical explanation.

Eric tries to make two points.  One is technically correct but only a distraction.  He says that marginal rates and average rates are different.  Yup.  The question Eric and the MD don’t address is why they want to give such bad incentives to anyone.

Eric’s second point is that rates in the US and elsewhere have been much higher. George Harrison, as part of the Beatles, sang as part of The Taxman:

There’s one for you, nineteen for me
Cause I’m the taxman

to point out the foolishness of the 95 percent margin rate in the UK.  JFK and Ronald Reagan revived the US economy and the UK was revived by Mrs. Thatcher who recognized the foolishness of such high marginal rates.

Why are such rates foolish?  Because they cause folks to spend their time figuring out ways to avoid such taxes.  Bjorn Borg and others moved to Monaco.  Lots of financial advisors got rich.  Flatter tax rates like we currently have eliminate lots of wasteful activity.  They are also extremely progressive because income is more likely to be reported.  Here is a 2014 report showing that the top one percent pay more in federal income taxes than the bottom 90 percent.

Near the end Eric comes to the real progressive point which is envy:

Conservatives who have pushed down top marginal tax rates and expressed nonchalance about the subsequent massive growth in the wage gap have so far kept such initiatives at bay.

Progressives want to attack the rich.  Conservatives want to enrich everyone.  The envy card has been effective for progressives.  We’ve recently seen that seventeen year-olds can be heroes.  Hopefully the fifth graders and everyone else can see through Eric and MD.

Stating The Obvious

We have had a hard day enjoying the Grand deGloves (ages 1, 3, and 5) while driving through the Minnesota snow.  It isn’t snowing hard but combining a little snow with some wind and open places makes driving challenging.  Thus, when we saw Kevin D. Williamson give the following obvious solution to Brexit at NRO:

Here, the United Kingdom has an opportunity to reclaim a very old — and very British — solution: unilateral free trade.

Our immediate reaction was: didn’t we say that first?  We’re sure we have made the point that we favor unilateral free trade but we’re not sure about the example of Brexit.  It is just we are too tired to look it all up.  So, we will support Kevin.  Instead of stressing the UK economy by some convoluted agreement the government could improve the UK economy by reducing stress.

Yes, there will be some losers in the new system but there are always losers in the economy.  Always!  By reducing the stress on the UK economy and energizing the growth fairy there will be more resources to help the downtrodden.  Kevin is a noted skeptic of the growth fairy.

Sidebar: Yes, we have very (!) limited cites today.  Trust us or you can do the work and read our previous posts.  End Sidebar

But even he seems to be drinking the Kool-Aid (and we have a previous post on drinking the Kool-Aid without a cite) on the growth fairy:

Great Britain in fact grew vastly wealthy while maintaining trade arrangements that paid relatively little attention to reciprocity even in principle. British territories, notably Hong Kong, grew wealthy while following much the same model.

The way you get vastly wealthy is through economic growth.  We wonder if he is willing to admit to the long-term existence of the growth fairy?  For sure, we are both in agreement on this simple and easy solution to Brexit: Unilateral free trade.

The Green New Deal And 2005

Both Jonah Goldberg and Jim Geraghty’s Jolt are on the Green New Deal this week.  At first glance it seems like a real waste of talent (leave the low hanging fruit for MWG!) to deal with an obscure and silly document from the Green Party of all places.

Sidebar: As Jim says, you should read it.  See the cite above.  It is much worse than you could imagine.  End Sidebar.

But as MWG recently warned, folks are going to try to ignore the important issue of entitlement reform and replace it with climate change.  Jonah and Jim are on the case because of a new press favorites has supported it.

We suppose there is some chance that the Congress could pass something as foolish as the Green New Deal but the more likely problem is that the pressure put on by the crazies will cause Congress to feel that it must do something.  We see a situation similar to 2005 that led to the Energy Policy Act of 2005  and to the ethanol mandate.  Although W and the GOP held both houses (well, they added four in the Senate) of the Congress in 2004, there was pressure to do something about what was then called global warming but we now call climate change.    Evidence of the pressure is Al Gore winning the Nobel Peace Prize in 2007.  We did not make that up.

We are of two minds about the 2005 Act.  As a binary choice we would vote against it.  The ethanol mandate interferes with markets.  As we would have predicted, it has caused problems for both gas and corn.  But it wasn’t a binary choice.  There was lots of pressure to do something about climate.  Our view is the the 2005 Act took the wind out of the extremist’s sails.  Without the 2005 act it is possible that something really nasty would have passed Congress.  In 2018, the situation is even more troubling as the Democrats control the House.

Therefore, it is good that Jim and Jonah are out in front giving the Green New Deal the opprobrium it deserves.  It is just as important that Kevin is on the entitlement beat again and again.  MWG tries to help.  We think the events of 2005 are likely to recur and Congress will feel great pressure to do something.  Unfortunately, we have The Donald rather than W.  Conservatives may have some difficult decisions about what is the least worst option.  Our best chance is to make it clear what a really, really bad idea the Green New Deal is and the importance of dealing with debt and entitlements.  Thanks to Jim, Jonah, and Kevin for a good start.