Saturday, December 18, 2010

Three popular fallacies

Have you noticed how some people discuss tax policy as though they were helping Santa describe who gets what toy or how many?  Give earners a break on their taxes by lowering the rate and, they think, they've just done them a special favor.  However, hike their taxes and, you are doing them no wrong, they should just be grateful you didn't take it all.

The discussion inevitably devolves into a claim of just how much said tax break "costs" Americans in "lost revenue".  There are three fallacies required to arrive at this distorted notion.
  1. That all income and property belongs first to the gov't and we are lucky for whatever they deign to let us keep.  The government is not protector of property, but owner of it from its inception.
  2. That government spending levels are a given and can be held hypothetically constant while we determine the contribution of tax rate changes to raise or lower the deficit. 
  3. Also presumed to be constant are the rates at which we earn money, most outrageously, that we work just as hard no matter what we earn after taxes. Incentives effect behavior in every aspect of human desire and endeavor except employment.
You have to believe every one of these fallacies or the arguments against lower tax rates fall apart.  Let's take them in reverse order.

3. Incentives matter, except when they don't
We get coupons in the mail. At the food store we're told that if we buy one box of crackers, we get another one free. Companies pay for all or part of your health care insurance, put money in your retirement account, allow you to purchase shares of stock at a discount, maybe even a bonus at Christmas time. We promise our kids ice cream if they eat their veggies. My mom wielded a special disincentive she called "the black belt" that put an end to a good deal of bad behavior when I was growing up.

We understand incentives. We use them because they work.  So why, in discussions of tax policy, do we pretend that people are immune to incentives (and disincentives) to work. We are supposed to believe that people will show up and work just as hard regardless of how the government increases or decreases their net pay by lowering or raising the tax rates.

Having been poor, I can well recall that the ever-present need for money led me to work extra hours just about any chance I got. And the threat that my unreliable car was going to break down in an unforeseen way provided a disincentive against turning down opportunities to sock away a little extra bread. Thirty years later with the wolf nowhere in the vicinity of the door, I am much more responsive to incentives and disincentives, as I have rediscovered along the way the joys of goofing off (especially when goofing off with the family I love). It takes something extra to get me off the couch and into the office (more often than not, that incentive is the work itself which I enjoy when it involves some new puzzle). We had two rounds of layoffs where I work; that's a strong disincentive against slacking.

It is never explained what makes decisions to work or stay at home immune from incentive. Never are we told what puts work beyond the reach of a the calculus that informs most of our other decisions large and small. Could it be that in fact incentives do apply and that lower tax rates would result in more hours worked, more wages taxed and that the decline in tax revenue would not be exactly proportional to the decline in tax rate?

Consumers are smart. People will switch credit cards when offered 2% cash back.  They will increase their spending when they get 5% cash back instead of 2% on rather small purchases. They will refinance their homes to lower their interest rate 1%/year on payments that comprise roughly one quarter of their expenses.  And we are supposed to believe that savvy earners will not respond to a 4% decrease in tax rates on every extra dollar they make.

2. Every penny of government spending is required
Some people will acknowledge that raising tax rates depresses GDP and that money the government leaves on the table can be used to build businesses and put people to work.
Every dollar released from taxation, that is spent or invested, will help create a new job. -- JFK

But then these people say, "O, how we wish we could let people keep their property, but because the government has to pay its bills, tax revenue must be raised. And borrowing is no substitute for taxes, it merely shifts the tax burden from one generation to the next. No," they say, "taxes must be raised; we have no choice."

But of course we have a choice. We could simply decide not spend the money to begin with.  To believe that tax rate cuts are "blowing a hole in the deficit" (what a strange and inaccurate way of phrasing the issue) one has to believe that it is solely a lack of revenue that creates the deficit rather than the excess in spending. But in fact, raising revenue or lowering spending each have an equal effect on the budget.

A small portion of federal government spending is not really necessary. Yes, a small fraction, but a fraction of a very large number represents some real cabbage.  The rule in our household is that we don't buy what we can't afford.  We don't pretend to have access to money we will never get.  Most of us live by that simple rule.

How is it we have convinced ourselves that money spent by Congress is hallowed and money spent by those who earned it is tarnished by greed? Some have invented the notion that money spent by government helps the economy to a greater extent because of a multiplier effect: $1 spent by the government becomes $1.40 through a kind of magic that defies intuition. The theory is that the government is giving this dollar to people who will spend it immediately, putting back in circulation more quickly. This, of course, completely ignores the cost of distributing this boodle. Congress and all its agencies, the Executive and all its agencies, those who hand out this dough do not work for free.

And what is the cost of not taking the money? Zero.  It actually costs nothing to let people keep their own money. It's not hard to understand this, but what is hard to understand is why the state spenders refuse to rate the value of our spending as highly they rate their own.

Congress can avoid the half a trillion dollar deficit that high tax proponents claim to hate by not spending that half a trillion dollars. The real cost to the American people when spending exceeds revenues by a half a trillion dollars is the excess spending, not the constraints on revenue.

This points to another trick -- when they talk about the "cost" of a tax policy, by convention, they talk about its cost over 10 years. It would be difficult to find $500 billion to cut out of a single year's budget, but that is not the challenge. The challenge is to find a mere $50 billion in each of ten years. That's less than 1.5% of the budget (and about 1% of the proposed 2020 budget of $5 trillion).  Over the last 5 years the unemployment rate has gone from around 5.5% to around 9.5%, a 4% reduction of the workforce.  If the employers of this country, in aggregate, could of necessity cut back on its workforce by 4%, don't you think we could find 1.5% of the federal budget to cut?

Imagine going to your boss with the following argument: "Boss, I just bought a $50,000 car that I cannot afford.  I figure that given the high monthly payment on this car, I will run a monthly deficit of $500.  Thus, I figure that over the course of the year, the meagerness of the salary you pay me will cost me and my family $6,000. In short, you are costing me $60,000 over the course of 10 years.  What are you  going to do about this?"

1. It's our money, not yours
We're told we have to raise tax rates on high earners or it will "cost" Americans half a trillion dollars. We'll "lose revenue". Balderdash! The dollars are inanimate and agnostic. They don't care where they go.  The dollar resides in one account or the other. Nothing ever gets lost.

People who complain of "lost revenue" are suffering under the illusion that they have money that never really belonged to them to begin with. Despite rhetoric to the contrary, as the law is written today, each person actually owns all of his own money -- every cent of it.  And he deserves every cent that he has earned because whoever has paid him has done so in an even exchange of some sort.

At no point does this money belong to the government, nor to the American people in aggregate. So they have no call to say they lost some of this money.  In fact, the royalist notion that our government was instituted to possess our property rather than to protect it is the reverse of the idea that inspired our founders to declare us an independent nation. It is as un-American as any idea you could name.

So tax rate cuts for high earners are not giveaways to the rich, because the money has never been ours to give away.

Bear in mind these fallacies and read this article by economist Alan Blinder who claims that anything other than a tax hike on high earners is tantamount to Scrooge beating Tiny Tim to death with his own crutch.

Time to update the blog design

I just ran across a bunch of new templates from  Time for an update of the design.

Sunday, August 22, 2010

Do the people rule or are they ruled by their betters?

I forced myself to listen to Ted Olson on Fox News Sunday defending the judge who overturned California's Prop 8 that prohibited gay marriage.  He must have won most of his cases by boring his opponents to death.

Somehow, I managed to stay awake (until the very end).  He kept talking about how the Supreme Court has said 14 times that marriage is a fundamental right in America.  I don't know anyone who disagrees. Not all rights are specifically enumerated in the Constitution.  The question is whether the definition of marriage is so broad as to include the union of same-sex couples.  The question is not whether same-sex couples should live together.  That they do and our constitution protects that.  The question is whether such couples can be married.

I personally believe that they should be allowed to marry, however, the people of California voted to prohibit the gov't from equating the formal union of same-sex couples with the formal union of monogamous, opposite sex couples. It has been quite a while since the US has tolerated plural (non-monogamous) marriages, but even when it did, such couples were composed of opposite sex members.  Two women were allowed to marry one man, but not each other.

So the notion that same-sex couples can be married is a very new one.  It is doubtful that any of the justices who previously ruled on the matter had in mind same-sex couples.  If this is not the case and the record contains references to alternate definitions of marriage, Olson did not mention them.

In particular, Olson referred several times to Loving v Virginia, the ruling that overturned anti-miscegenation laws in this country.  His point was that this case established the principle that the state cannot dictate who can marry whom, for example, that a black person cannot be prevented from marrying a white person.

Again, I do not think that anyone disagrees with that point.  The question is really whether the state must regard the union of a same-sex couple as a marriage.  Once this redefinition of marriage exists in the law, then the state has no say in who may marry whom.  For example, the state could not prevent a black man from marrying a white man.  Clearly, the justices who decided Loving v. Virginia did not rule that same-sex unions are the equivalent of marriage or they would have written so at the time.  Olson seemed to believe that Loving v. Virginia did establish this kind of equivalence, but the evidence and history contradicts him.  Surely someone in the 42 years since that case was decided would have been able to point to where the justices redefined marriage to include same-sex unions.

What the justices did conclude, unanimously, was "The Fourteenth Amendment requires that the freedom of choice to marry not be restricted by invidious racial discriminations. Under our Constitution, the freedom to marry, or not to marry, a person of another race resides with the individual and cannot be infringed by the State."

They pretty clearly limited their observations to racial differences between opposite-sex mates.  There is no mention of the sex of those being married and certainly they presumed such a marriage to be composed of one man and one woman.  As for the race of the man and woman, take your pick.  In fact, they wrote, "Marriage is one of the 'basic civil rights of man,' fundamental to our very existence and survival...."  What makes marriage fundamental to our very existence and survival?  No doubt this refers to sexual procreation.

Let me clear: I support gay marriage.  I want all my gay friends to find someone they love enough to marry.  I hope that my fellow citizens care enough to allow them to marry.  But I am disgusted at the notion that arrogant judges overturn the expressed desire of the people.  Prop 8 did not prevent loving gay couples from living together.  It prevented marriage from being defined to include such unions.

Loving v. Virginia also stated this, "To deny this fundamental freedom on so unsupportable a basis as the racial classifications embodied in these statutes, classifications so directly subversive of the principle of equality at the heart of the Fourteenth Amendment, is surely to deprive all the State's citizens of liberty without due process of law."  I can't help but think of sexual orientation as equally unsupportable as a basis for classifying couples and think that to deny gay people the privilege of state recognition of their unions is also not treating them equally.  I hope that some day a majority of my fellow Americans will vote to redefine marriage, or at the very least establish its equivalent for gay couples.

Saturday, July 03, 2010

The Good Old Days of Economic Shambles

From Jim Geraghty at National Review Online:

I went back and found this golden quote from a February 2008 Democratic debate: “Our economy is increasingly in shambles. And the families of Texas and all across America are feeling the brunt of that failing economy.” Well, that “failing economy” had a national unemployment rate of 4.8 percent. Captain Kickass’ first term will probably never see as many Americans employed as what he labeled a “failing economy.” If that was shambles, what is this? . . .

Wednesday, May 05, 2010

Politicians since Roman times have overpromised

According to this article, since Roman times politicians have been over-promising benefits to win the favor of the voters. Problem is, once elected they find they cannot keep their promises.  But by then it is too late, they are already in office.  What advice did the spinmeisters of Roman days give to politicians?  Say anything that sounds good just to get elected.

The only way to put a brake on BS politicians is to require them to be honest or lose their eligibility to serve.  I measure their honesty primarily by whether they control spending. There is an incentive to promise, to spend to keep the promises -- but none to pay for the promises!

Here's the problem: you may have the right to vote for whoever you think may best serve your interests. But I want to restrict your right to vote for somebody who takes money out of my pocket. In other words, I have the right to protect myself from your self-interest. Entrenched politicians too often stay in power by over-promising and they are not about to voluntarily give up on a working formula.

How many times have you heard someone lauding a politician as a "public servant"?  My former sister-in-law remarried a politician who recently retired.  His retirement announcement was a boastful list of all he had done in his career.  Good stuff, but he did not pay for these programs himself.  No mention was made of the taxpayers who paid for the good programs he championed.  They are the true heroes.  

His programs may very well have been successful (I certainly hope so -- they dealt with child advocacy). But how many programs meant to solve an awful problem remain intractable, unsolved by the government programs meant to eliminate them? The politicians can still claim credit since they made an effort to solve the problem, but how many retiring politicians are honest enough to say, "I did my best, but I failed.  Despite our best efforts, the problems persist."  As Jesus said, "The poor will be with you always."  There's an honest guy and look what they did to him!

That's why I propose to marry term limits to a balanced budget requirement. You can elect whomever you please, but if he does not vote to balance the budget, he loses his vote in Congress. In other words, you lose your voting rights in Congress if you elect a representative that steals my money.

In time, the most seasoned, powerful and senior people will also be those who squeeze every dime of taxpayer money.

Sunday, February 28, 2010

Yield curve voodoo

This author of this article, Larry McDonald, points out that a certain economic phenomenon known as an "inverted yield curve" signals recession. Right now, the curve goes the opposite way, indicating recovery.  In fact, he points out, the ratio of 2-year to the 10-year treasury yield is at a historical high.  Wow!  Should be a gangbusters economy this year, right?

He then seems to scratch his head at this strange phenomenon: Banks are not lending.  Despite being able to borrow cheap and lend high, they are not lending.  Commercial lending has contracted 10% over the last 12 months.  The previous record (since the 70s) for such a contraction is 2% in the 1990s.

The yield curve does not explain this.  The author scratches his head and wonders how this can be.  Why are banks refusing to make a profit?

To which I reply:  Duh! It's because a lot of people have been making war on profit, promising to punish wealth-builders (the "evil rich"), vigorously attacking the incentive to earn.

As I have said before, the most convincing argument I have ever heard to explain what ended the Great Depression was that FDR finally stopped waging war on profit and started waging war on Nazis.  It's all there in his speeches.  He scared wealth-builders into seclusion until 1940 when he called a truce to get them to build warships and tanks.  It makes no sense to say that borrowing tons of money to build things that you are planning to blow up is somehow an increase in "production". If wartime was so productive, why were people rationing every staple in sight?  Ultimately, war is destructive -- literally so. 

What you'll never get Paul Krugman and his crowd to admit is that the people's incentive to earn is essential to economic recovery.  Guess who is at war on wealth-builders today?  Just as FDR unwittingly and ineptly prolonged the Depression, so Obama keeps this economy depressed.  That's my theory, at least.

Bunning's Perfect Game

Friday, Senate Democrats tried to pass a bunch of spending by unanimous consent and the only Senator to put a stop to it was Sen. Bunning. Only one nay was required to stop it from being unanimous. Democrats can still pass these bills, they just have to go through a normal Senate vote and explain to the American people why they are increasing the size of the Federal gov't and the national debt (the proposed spending was not "paid for" by taxes or other spending cuts).

This pissed off the Dems to no end and they berated him hour after hourSenator Durbin told Bunning, "It is simply unfair for one senator to attempt to hold the Senate hostage on this issue."  From his seat the Senator muttered, "Tough sh*t".

I love it.

Senator Bunning used to pitch in the major leagues.  In 1964, he pitched a "perfect game" -- the first perfect game in the National League in 84 years.  The definition of a perfect game is when, one after one, the opposition sends a batter to the plate and the pitcher sends him back to the dugout: no hits, no walks, no hit batsmen.  When Phillie pitcher Bunning defeated all those New York Mets, 27 up-27 down, I'm sure they were frustrated. However, none of them whined about how "unfair" it was to not even allow at least one of them to get on base, or that it was unfair for one player to frustrate the will of so many other players.

Thank you, Senator, for another perfect game.

Read more about it here: