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.

 

 

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Good Ideas, Bad Ideas, And Bad Claims

The left cannot claim to have all the bad economic ideas.  They have the worst as we see in Venezuela but they do not have exclusive rights to such ideas.  There are lots of ideas out there and some of them are good but to get them noticed folks often make extreme claims.  Thus, good ideas get dismissed because they are not quite as good as the claims suggest.

Our example of a bad idea comes from Cesar Conda at NRO.  He says:

President Trump should propose exactly what President Barack Obama did in 2011: a temporary reduction in the Social Security portion of the payroll tax from 6.2 percent to 4.2 percent.

Cesar Conda is:

a former Bush-Cheney White House domestic-policy adviser and senior aide to three Republican U.S. senators, is founding principal of Navigators Global.

He is writing at NRO.  It is not unreasonable to take him seriously.  We shouldn’t.  Part of his argument is economic growth and we are fans of the growth fairy.  Economic growth is critically important and we believe that governments can influence the growth fairy.  But the way to get the growth fairy on your side is through long-term policies.  Countries with policies that support economic freedom like enforcing the rule of law, having low corruption, low regulation, low taxes, and free trade are highly likely to be visited by the growth fairy.  Going in the opposite direction then the more likely the growth fairy won’t visit.

The best you can hope for with Cesar’s idea is to move growth around.  It was one of many bad ideas from the 44th president.  It is worse now given the deficit and the near insolvency of Social Security.

Sean Maskai Flynn at Market Watch has two really good ideas for improving health care and reducing or limiting the costs.  They are good ideas because they are long-term and make healthcare more of a marketplace than it currently is.  First, we need transparent health care prices:

The first policy—price tags—is a necessary prerequisite for competition and efficiency. Under our current system, it’s nearly impossible for people with health insurance to find out in advance what anything covered by their insurance will end up costing. Patients have no way to comparison shop for procedures covered by insurance, and providers are under little pressure to lower costs.

Absolutely.  And second we need health savings accounts (HSA) that revert to the owner or can be extended into future years.  We don’t agree with Sean that the employer needs to “gift” them and he is surely wrong that it is a gift.   Any such payment is surely part of compensation rather than a gift.  We are not sure of how such a payment would be treated by the IRS.  The tax treatment of HSA need to be part of the solution.  We think the important points are high HSA limits and the opportunity to move amounts among years.

The second policy—deductible security—pairs an insurance policy that has an annual deductible with a health savings account (HSA) that the policy’s sponsor funds each year with an amount equal to the annual deductible.

The details are important but the problem is that the headline says these two changes would reduce health care costs by 75 percent.  Nope.  The text says they will provide $2.4 trillion [yup, trillion] per year in savings.  Since health care spending in 2017 was $3.5 trillion this gets another Nope.  Still, transparent prices and HSA with high limits and methods to move amount into other years or revert to the owners are great ideas.  Temporary tax changes are not.  Realistic claims are another good idea.

 

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 20th 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 21stcentury 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.

Venezuela Reminder

There is a strange presentation to a column in the WSJ.  The column title is The Americas which is written by of one of our favorite columnists, Mary Anastasia O’Grady, it has her picture on the link, and at the end of the column it has her email address but her name is not displayed.  Perhaps it is caused by something in our technology.  The column is Mary Anastasia at her best.  You should, as is often said, read it all.  She weaves together the religious and political traditions of Venezuela that have led us to the current sorry state of affairs.  Mary Anastasia tells us:

Climbing out of this hole will take more than removing dictator Nicolás Maduro. The country is devastated, but Venezuelans haven’t abandoned the collectivist cause. Many popular opposition politicians still call themselves socialists, unwilling to defend the creative class and its members’ right to the fruits of their labor.  [Emphasis added]

It is an amazing deep hole that Venezuela finds itself in.  Devastation, if anything, is not a strong enough word for what has happened to Venezuela.  Here is an estimate that inflation will be eight million percent in 2019.  Of course, many transactions are barter now that the currency is virtually worthless. Mary Anastasia is exactly right.  Venezuela elected Hugo (Obama’s mi amigo) and then Nicolas.  Not all of the elections were fair but those two had substantial support in Venezuela.  External actors like The Donald might be able to help a little but it is up to the locals to fix this.  Mary Anastasia hopes that the Catholic Church can help.  We hope so too.

Fighting Socialism, Part One

Socialism is a really bad idea as shown currently by Cuba, Venezuela, North Korea, and many other examples through history.  Yet folks are often sloppy in the battle over socialism.  Catherine Rampell has a thoughtful article on the difficulties of fighting socialism.  We are not sure if she wants to fight socialism or not but we like her thoughtfulness in any case.

Catherine is talking about a specific problem of labels.  Some folks, and she specifically identifies The Donald, use socialism as a term to describe proposals they don’t like.  Catherine doesn’t make the connection but lots of folks use fascist to describe other folks they don’t like.

To be fair, the Media Darling (MD) and Act Naturally describe themselves as socialists. Although they may add a modifier (countries often add more than one) to socialism they are subject to the criticisms of the failure of socialism.  They should be asked to explain why they support socialism despite its numerous and continuing failures.

Catherine makes the point that capitalism and socialism are not a useful binary to describe countries.  She says “all modern economies” are mixed:

That includes the United States. We have public schools, public roads, subsidized health care for the elderly and other forms of social insurance. Yet we also have private property, and the government does not control the means of production [except as above]— which is, you know, actually how socialism is defined.

Developed economies, to use a different term, are fairly similar overall although there are big differences in the details.  The Heritage Foundation Index of economic freedom will tell you that the US and Denmark have almost the exact same degree of economic freedom, 76.8 versus 76.7 in 2019.  It will also tell you that there are 22 “repressed” economies with Cuba, Venezuela, and North Korea ending the list.  We are not sure where Catherine is drawing the line.

Sidebar: Catherine’s “all modern economies” is a great term.  We wish we had of thought of it.  Catherine is able to exclude some where from three to a quarter to a half of the world’s countries with one ambiguous phrase.  End Sidebar.

So socialism fails but we often accept a reduction of economic freedom in return for something else.  Eminent Domain would be an example that most people would support but debate the extent of (see Kelo).

Although socialism is a bad idea, Catherine is right that calling something socialism is lazy and not a real criticism.  It is, as we said earlier, like calling somebody a fascist.  It is saying I don’t like you or your idea but I can’t articulate exactly why.

We are with Catherine on her main point of articulating the issues.  Calling an idea socialistic is lazy.  You need to explain why it is a bad idea.  On the other hand, folks that call themselves socialists are subject to the deserved criticisms of socialism.  In the next post we will continue with some specifics from Catherine’s article.

Not Too Good To Be True?

The Green New Deal (GND) is hot.  You can just google if you have been off-planet but to give you a feel for it our newspaper recently had two front page stories on it: Cleaner Energy Adds New Jobs To State (above the fold) and Green New Deal: Kind (our local Congress critter) Urged To Support Measure.  The latter reported that about ten residents showed up to lobby for the GND.

Sidebar: We love the phase about ten residents.  We are pretty sure that reporters can count the exact number when it might be single digits.  End Sidebar.

Clearly foolishness is on the rise.  But not everywhere.  We have held back our joy at Clifton Ross in Quillette because it seemed too good to be true.  You should read it all several times to get the full impact.  Clifton appears to be a dyed-in-the-wool socialist that came to an informed decision that brought conflict to his mental processes and his life.  Very few people can challenge long-held assumptions but Clifton was able to do that.  He says:

An early supporter of the Revolution, I had traveled to Venezuela in 2013 to cover the April presidential elections. By the time I returned to the US, I was disillusioned and depressed. I decided I needed to start writing and speaking about what I had seen there. In an article I wrote for the radical magazine Counterpunch around that time, I argued that “the so-called ‘Bolivarian Revolution’ is bankrupt: morally, ideologically, and economically,” and I asked what we, as leftist solidarity activists, should do in response. “Should we continue to make excuses for incompetence, corruption, and irresponsibility and thereby make ourselves accomplices?” I asked. “Or should we tell the truth?”

He has a message for supporters of GND and The Donald.  Not only has Clifton rejected socialism in Venezuela but he has come to an overall conclusion on socialism:

I don’t like to admit that I once believed Jesus rose from the dead, but I did. I also believed that socialism would make everyone brothers and sisters and end what my comrades and I called “capitalist oppression.”1 The available scientific and statistical evidence (not to mention common sense) weighs strongly against belief in bodily resurrection from the dead. History has delivered a verdict of comparable finality about socialism.

Wow.  That is about as dramatic a change as you can make.  You can probably guess how he was received by his fellow travelers:

 As a result of my voltafaccia, former comrades and friends contacted my editors and publishers in (occasionally successful) attempts to have my articles spiked. I was denounced and slandered online and in print. Phone calls and emails to people I had thought of as friends now went unanswered. On those occasions when I encountered one of them in public, they looked the other way. Abruptly, I found myself excommunicated, and people I’d known for 30 or 40 years made it clear that they no longer wanted to be part of my life.

While it is a time to talk about foolishness like the GND or arguing over spare change for the wall in the US, Venezuela is trying to undo some serious foolishness.  Let’s let Clifton describe it:

If the Venezuelan regime falls—and I hope that it does—it won’t even be possible to credit (or blame) the United States. It is the Venezuelan people who finally are taking their destiny in hand and rejecting an intolerable status quo.

We hope that Venezuela finds economic and political freedom.  It is up to the Venezuelan people to do it.  The have an epic challenge in front of them but if Clifton reject socialism then so can Venezuela.  We wish them both good luck.

 

Venezuela Insight

As had been said, there is a lot of ruin in a country but the socialists in Venezuela have done it.  Annika Hernroth-Rothstein is Swedish journalist and political advisor.  She lists herself as a lover of freedom, meat, and smooth cigars.  If she could change the last word from cigars to whiskey she would be perfect.

Sidebar:Wikipedia weighs in on the distinction between whiskey and whisky.  The Scots would like us to believe that they have exclusive rights to whisky.  Perhaps.  That is why we use whiskey because we want to be inclusive, especially when whiskey is involved.  End Sidebar.

Annika showed up at NRO with: The Fight For Venezuela’s Soul.  Do read all of it but her ending quote from the Caracas coffeeshop reflects our view of the challenges:

“Guaidó is a great politician, but we have made the mistake before of believing that one man would have all the answers. Venezuela won’t be saved by one man, but by one people, and I won’t believe things will change until we realize that.”

It is not just true for Guaidó or Venezuela.  Perhaps we can discuss that with Annika over some meat and whiskey.