Double-dog-dare you to define my -ism

Arnold Kling wrote a silly little post about progressivism, or rather an idiot's misconception of progressivism. It makes no sense at all: What are "unfettered free markets"? Who are the "technocrats"? What is "optimal"? Such lazy indulgence in empty words deserves no attention.

But then Tyler Cowen took it a step further. He claims he tried to "cast progressivism in the best possible light". He probably did honestly try; he seems like an honest and often lucid thinker. Certainly one of the most lucid thinker of the "right" blogosphere these days. But is he lucid enough for this task? His points seem lame and inaccurate. For example:

1. There exists a better way and that is shown by the very successful polities of northwestern Europe and near-Europe. We know that way can work, even if it is sometimes hard to implement.

You've got to be kidding me. This is the first point of an ideology you are "trying to cast in the best possible light"? A better way for what? "There's a better way" is not basis for an ideology; depending on how you are disposed to interpret those generic words, it is either a truism (of course there is a better way for everything - we humans are imperfect) or mere nagging. And the rest of the two sentences suggests that progressivism is all about imitating "northwestern Europe" (a geographically-challenged characterization?), so why is it then not called "northwesterneuropeism"? Or how about:

4. The needs of the neediest ought to be our top priority, as variations in the well-being of other individuals are usually small by comparison, at least in the United States.

Um, "the needs of the neediest ought to be our top priority" is utilitarianism, which is compatible with progressivism, but by no means synonymous with it. That's something Tyler ought to know (and does know, but he is either too lazy or unable to come up with more precise wording). Or how about:

9. State and local governments are fundamentally to be mistrusted (recall segregation) and thus we should transfer more power to the federal government, which tends to be bluntly and grossly egalitarian, when it manages to be egalitarian at all. That is OK.

Oh, so progressivism is anti-federalism! ("Anti-federalism" is what the "founding fathers" called "federalism", but never mind.) Except it isn't - it's just that, for as long as the US has existed, anti-progressives have touted their fictional concept of "states' rights" whenever it has suited them, which is whenever the federal government happened to be more progressive than the states, which is probably roughly half the time. Whenever it doesn't suit them, those same people conveniently forget "states' rights". By the fallacy that there have to be two equal sides to each issue, progressives, who have no analogous fictional concept, are perceived as "anti-states' rights", whatever the hell that would mean.

Tristero says this is complete bullshit. That may be a bit too harsh, but, obviously, I agree it is not an intellectual exercise Cowen should be proud of. Tristero is also miffed that Yglesias took the bait, and it does seem that Yglesias bent over backwards to "cast libertarianism in the best possible light":

I think libertarianism is best understood as a kind of esoteric doctrine. There’s strong evidence to believe that people who overestimate their own efficacy in life wind up doing better than those with more accurate perceptions. It follows that it’s strongly desirable for society to be organized so as to bolster myths of meritocracy.

I understand that Yglesias is not necessarily endorsing any of this, but merely ascribing it to libertarianism, but the second sentence is written as a statement of fact, so either Matt agrees that it is true, or he is saying that the foundation of libertarianism is simply false. Now I hope he means the latter, but then, if that is the best possible light in which to cast libertarianism, why even bother? He could have said it more concisely as "garbage in, garbage out". Maybe libertarianism should be called GIGOism? But in case Matt actually believes the factual claim to be true, he may be demonstrating poor deductive reasoning.

As far as I know, there is evidence that the most successful people are more likely than average people to be prone to overestimating their own efficacy. However, that does not mean that the converse holds. People who overestimate their abilities may, in effect, be gambling in life, ending up disproportionately at both ends of the outcomes distribution. They will then tend to be overrepresented among the winners as well as among the losers. By observing that most winners are cocky, we learn nothing about the average effect of cockiness. Concluding that cockiness is useful on average is the same fallacy that critics of Larry Summers use to falsely accuse him of stating that men are smarter than women.

But there is an advantage of Yglesias' writing on any topic: he has smart readers, and some of them contribute sensible comments. Thus Keith M Ellis:

A more accurate version of libertarian theory is that it is based upon an idiosyncratic view of inherent (and arguably metaphysical) individual human rights that is strongly oriented to property rights and is extremely American in historical origin and flavor. Sitting atop this view of individual rights—which itself is sufficient and requires no utilitarian elaboration—is a whole bunch of utilitarian justification for a libertarian sociopolitical organization built around the notions that said organization results in the greatest overall material and psychological benefit.

This theoretical basis has three great weaknesses: first, the notion of inherent individual rights is eminently contestable. Second, the almost exclusive emphasis on individual property rights is idiosyncratic and myopic. Third, the utilitarian arguments for the benefits of the resulting sociopolitical organization are extraordinarily simplistic and are as often as not disproved by empirical fact.

In practice, libertarianism is a political philosophy which emphasizes the notion of virtue in selfishness and has as its historical genesis the exceptional American experience. As such, it appeals mostly to white American males who are moderately above-average in intelligence, economically secure, independently-minded, and prefer simplistic theoretical constructs for making political and moral decisions. It validates their own affluence/privilege not by group affiliation, but by inherent individual merit; and it likewise superficially validates the poverty and lack of privilege of others not on the basis of group affiliation, but inherent fault. In this it mimics a meritocratic view, which allows the libertarian to congratulate himself on his lack of bigotry; but, in fact, it is a facade behind which his true bigotry hides.

Or Duncan Kinder:

The problem with libertarianism is that they tend to conflate liberty with possession of property.

This made sense 200 years ago, when owning a small farm or business meant that you were secure in the means of your livelihood. (...) However, due to economic shifts since then, owning property does not mean you therefore are secure in the means to your livelihood. Indeed, large property holders such as medical insurers are very much in the business of interfering with others’ means to their livelihood.

This means that libertarianism now is, in practice, a misguided and often cranky ideal.

Keith M Ellis also says something that especially resonates with me:

I write as someone who thought of himself as a libertarian in my late teens (a self-identification which quickly ended once I met actual, active libertarians)

I'll give Keith the final word:

American libertarianism could have foregone all its academic intellectuals and it would still be largely what it has become with them. Libertarianism is not an intellectual movement, it is a cultural movement. Libertarianism is essentially: individualism, good; property, good; commerce, good; government, bad. It’s a historically/sociologically related set of sentiments.

Farmers and steelers live twice as dangerously as police officers

There it is - America's most dangerous jobs in 2007:

Also note that police officers' most common cause of death on the job are car accidents, not confrontation with criminals. Police officers' rate of death by homicide - about 8 per 100,000 - is just slightly above the rate for the general population (6.2 per 100,000), and is lower than the rate for general male population (10.0 per 100,000) or male population ages 20-59 (about 11 per 100,000).

Mankiw bequeaths $7M to middle-aged kids for down payment on first home

I have several economists' blogs on my blogroll. I have a couple of conservative economists' blogs on my blogroll. Greg Mankiw's blog is not one of them, and for a good reason. Although Mankiw is undeniably a first-class economist in terms of his contributions to academic research, his public-policy positions could be charitably described as naive and simplistic, and most of the stuff he writes in his blog is just crap. (His position on Pigouvian fuel taxes may be a notable exception, but I take it more as a confirmation the issue is so non-controversial among economists that even right-wingers agree with the normal people.)

Did I say crap? Mankiw's recent post on his work incentives under McCain's and Obama's tax proposals makes crap look appetizing in comparison. He computes:

even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes. (...) Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.

and concludes:

The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place.

Jonah the Economist does some pretty good debunking of Mankiw's fallacies, showing that Mankiw uses wrong formulas and wrong parameters, as well as a misleading source for his numbers. But the problems with Mankiw's post don't end there; his underlying logic is fatally flawed. Even if the numbers were correct (they are not), his argument would not hold water.

Mankiw's main premise is that any extra dollar he might earn would be set aside, invested, and bequeathed to his children. That is the only way he gets to apply all taxes to it. And here is how he describes the goals he has for those bequests:

To a large extent, the beneficiaries of that extra effort are my kids. My lifestyle is, as a first approximation, invariant to my income. But if I make an extra few dollars today, I will leave more to my kids when I move on. I won't leave them enough so they can lead lives of leisure, but perhaps I will leave them enough so they won't have to struggle too much to afford a downpayment on their houses or to send their own kids to college.

However, to apply a 45% estate tax under Obama's plan, he must be assuming that the amount of his bequest will exceed $7 million (in today's dollars). His stated modest goals are totally inconsistent with bequeathing that amount. Moreover, as an economist, Mankiw ought to realize that inheriting millions would greatly reduce his children's incentives to work.

Mankiw's narrative is not convincing to any reader seeking more than to validate his own prejudice that Obama will raise taxes and destroy the economy. It is unlikely that, as a star professor who obviously loves what he does, he works primarily for money. Even if he does, he states explicitly that he doesn't want any more money for himself, but only for his children. I like how he describes the purpose of the bequests, but it doesn't add up chronologically. I don't know how old Mankiw's children are, but he is 50, and his calculations assume that he will live to 85. By then, I would think his children would be at least in their 40s. If one of the most successful economists in America believes that his children will need help with down payment on their first homes when they are almost his present age, he is either extremely pessimistic or full of shit.

The very end of Mankiw's post is perhaps its best part:

And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.

Whether he arrived at this conclusion by flawed logic or not, the outcome seems the best for all parties involved (especially if "poorer" means having only $7,000,000.00 instead of $7,000,001.85). He is actually implying that he and his kids will be better off under Obama's plan (and we will too, as Jonah the Economist concludes). Could anybody refute Mankiw's main point more effectively than Mankiw himself?

I picked the wrong week to quit cutting taxes

The world has changed a lot in the last month, so let me back off my appeal to the candidates to break their tax-cutting promises. This is not the time to think about long-term fiscal responsibility. That must wait until we are out of the recession.

However, I hope there will be many years of Obama presidency after we are out of the recession, and I hope Obama will have the wisdom to break his promise then, and the charisma to convince the American people not to hate him for that broken promise.

4 out of 5 economists recommend Obama

The Economist, a conservative publication, says so.

I'm bailing out on the bailout

Because of my professional qualifications, I probably understand the issues involved in the financial crisis better than, let's conservatively estimate, 98% of Americans.

But then again, because of my professional qualifications and because I understand them relatively well, I am keenly aware of just how much I don't understand.

That's why I am avoiding writing about it here. I am almost certain I'd come to regret parts of what I wrote, and, because of my professional qualifications, that regret would be much worse than if I were wrong about something about which I speak as an ordinary citizen.

That said, there are people whose professional opinion I am ready to endorse. Not because they are necessarily right (if I could tell, the preceding 3 paragraphs would make no sense), but because their knowledge and understanding of economic issues, and particularly of political economy - the way economics and social organization interact and influence each other - has consistently proven to be extremely deep and insightful. At the top of that list are Paul Krugman and Brad DeLong.

So here is a Brad DeLong interview that I find very useful for making sense of what's going on:

Q: What's the most important thing an ordinary person needs to know about the bailout plan Congress was considering this week?

A: It is not supposed to be a bailout plan. The idea is to make sure that the shareholders of banks and institutions that made stupid and unwise loans suffer enormously in terms of losses of wealth while still preserving the flow of funds through the financial sector to the real economy so that companies can create jobs.

Q: So they will suffer?

A: The CEO of Bear Stearns lost 95 percent of his personal portfolio in the forced merger of last March.

Q: What do you think of this plan? Is it what needs to be done?

A: I think the Paulson-Dodd-Frank plan as it is emerging is much, much less effective than it could be. But it is still much better than doing nothing, which is kind of like being poked in the eye with a sharp stick.

Q: Are there still things the government could do that would be more effective?

A: Yes, I think something like the Swedish Plan — by which the government invests in the major banks of New York and elsewhere and essentially takes them over and runs them for a few years, and then when they become profitable again sells off its stake to private investors — would be much more effective and a much better use of the public's money. Indeed, that's why the Swedes did it when they faced a similar crisis back in 1992.

Q: Some people are questioning whether there is really a crisis. Is the situation really as dire as it has been painted?

A: In the second quarter of 2007, $300 billion moved through financial markets into businesses. The businesses borrowed that money in order to expand employment. That number was halved by the second quarter of 2008. The third quarter of 2008 is sure to be less and the fourth quarter of 2008 may be zero. If you want to have an economy with a growing number of jobs, if you want to keep the jobs we have, you've got to keep the flow of funds through the financial markets from savers to businesses going. At the moment it isn't.

Q: How bad are things likely to get?

A: (With the Paulson plan the) unemployment rate will top out between 8 and 10 percent this business cycle. And (without it) the unemployment rate will be higher, but we don't know how much higher.

Q: What does that mean in terms of numbers of people who will be without jobs?

A: Each percentage point of unemployment is something like an extra 1.5 million people who have lost their jobs and can't find another one.

Q: What about the housing market? Is this likely to help stem the decline?

A: Housing prices are still a bunch higher than they were in 2000 and are probably coming down another 10 or 15 percent. The decline is likely to be a lot worse if the economy goes into depression than if it just stays in recession.

Q: Are we in a recession already?

A: I would say yes. Jim Hamilton at the University of California at San Diego, who is my guru in such matters, said there is a more than 95 percent chance that we are in a recession. And I think when they decide when the recession was, they will stay in started last December.

Q: There have been various ideas floated about how to stop the decline of the housing market. Why can't the government simply agree to take over the troubled mortgages that are currently in default?

A: This is indeed one of the plans, to revive the Federal Homeowners Loan Corporation that we had during the Great Depression. The problem is, it's very hard to design such a program that doesn't give away a lot of money to mortgage lenders who shouldn't have made the mortgages in the first place, or to home purchasers who didn't save but instead spent their incomes on other things thinking someone would rescue them if they got into trouble.

Q: Why not declare a moratorium on foreclosures?

A: If you do that, can I stop paying my monthly mortgage payment and still stay in my house? I could get an extra $2,000 a month to spend. ... It would create bigger problems than it solves because those mortgage payments ultimately flow back to investors of all kinds, state and local governments, pension funds and so forth.

Q: What steps can be taken to prevent this from happening again?

A: The first step would be to say you can't trade a derivative security without trading it through an organized derivative exchange. That is to centralize the market and make it transparent for finance, to re-regulate it in a bunch of different ways. The second thing is to say if you are a high-end financial professional or you are getting a high income from anybody, that you have to take a great deal of that income in the form of long-term stock in whatever company is paying you. So if you are giving the company bad advice, you shouldn't be away on the beach, happily living the life of Riley.

Q: Are taxes going to go up?

A: Taxes might go up a tiny bit. But our taxes are going to go up a lot more if the unemployment rate goes up to 10, and all the extra workers who now pay taxes don't and we have to shoulder their burden.

Q: So it sounds like it is actually not such a grim scenario. Unemployment goes to 10 percent and home values fall between 10 and 20 percent and then we start recovering.

A: It depends on whether you are one of those unemployed or not, if you are one of those foreclosed or not, how grim it is. Even if you are not unemployed, a labor market where there is 10 percent unemployment, you have to pay a lot more attention to your boss and accept a lot lower rates of real wage increases than you do when the unemployment rate is 5 percent. It is a different economy.

Q: Once the economy starts to grow again, will things get better?

A: Things are likely to get better. They always have.

The sensible bipartisan center is solidly Democratic

A must-read case for Obama (and against McCain) from Brad DeLong, economist and one of the smartest people in America:

What reason could there be not to vote against a candidate who says he doesn't know very much about economics? Not to vote against a candidate whose two chief economic advisors are Phil "What Problems with Deregulation, You Whiners?" Gramm and Carly "H-P Paid Me $21 Million to Go Away" Fiorina. All signs are that McCain economic policy is set to be much worse than even George W. Bush policy--unless Douglas Holtz-Eakin could win the fight inside the White House snakepit. But I don't think he could: McCain regards Gramm and Fiorina--not Doug--as peers to be deferred to. I would be happy to be proven wrong if we take the gamble, but it's not a gamble I want us to take.

I get e-mail about buying banks

No, not the Nigerian bank; my spam filters catch those. But I got this interesting e-mail about what the government could do with $700 billion and have a few billion left over:

I did the math and discovered it would be cheaper for the government to simply buy all the major players in the industry based market prices as of 3:00 today. See below:

Financial Institution Market Cap
Wachovia Bank $36.00 Billion
Citi $109.00 Billion
Morgan Stanley $31.00 Billion
Merrill Lynch $42.00 Billion
Goldman Sachs $49.00 Billion
Lehman Brothers $0.13 Billion
JPMorgan $147.00 Billion
Bank of America $160.00 Billion
Washington Mutual $6.00 Billion
Wells Fargo $115.00 Billion
Total $695.13 Billion

Note: "Today" as mentioned in the e-mail means yesterday, September 22.

Burden

If you had $700 billion in $100 bills, how much would it weigh?

Approximately the same as all the people who ever voted for Sarah Palin.

Do we really need lower taxes?

It may be impossible to get elected in the US these days without promising tax cuts. Obama, the more fiscally responsible (or, more accurately, less irresponsible) of the two major-party presidential candidates, has promised not to increase the taxes of anyone earning less than $250,000 a year. I understand that low- and average-income people are hurting, but are families with incomes in the low 6-digits really that burdened with taxes that they can't pay more?

The usual response to this question is that higher taxes, and higher marginal taxes in particular - that is, higher rate of tax on the next dollar earned - reduce incentives to work and save, and thus reduce output and capital formation and slow down economic growth. Neoclassical economic models "prove" that low taxes are good for the economy (as long as government spending is also low, a detail often ignored by the passionate tax-cutters). But historical evidence hardly supports that theory.

People with good incomes faced higher marginal tax rates in the 1950s and 1960s, yet the economy was strong and growing fast, people worked just as hard as today, and saved more. As an example of a well-to-do, but not rich, families, I chose those whose income equaled the Congressional salary in each year. The blue line in the graph below shows the marginal tax rate (popularly known as the "tax bracket") that such a family, with two children and no itemized deductions, faced from 1955 to 2008.


Additionally, the orange line shows the tax bracket of a family earning twice the Congressional salary - a family just wealthy enough that its taxes would increase under Obama's plan. From a historical perspective, those people have paid ridiculously low taxes in the last two decades. And we are not even talking about multi-million-earning CEOs, who might have been in the 90% bracket during the Eisenhower administration.

So why would anyone think that a big tax hike on the well-to-do would kill the economy?

Priceless

Ken Lay: "The underlying fundamentals of our businesses are very strong."



You can't make this stuff up.

Obama: "Read my lips!"

I don't like this pledge not to raise taxes. You can't restore fiscal balance by taxing only the rich, and then not even them too much. Are Americans really that stupid and immature that they won't vote for anyone who doesn't promise to burden their children with huge debt cut their taxes?

Yes, Obama's plan is a lot better than McCains. Trillions better. The choice between the two is clear. But it is sad that we are not even offered the choice of a fiscally responsible plan. It's like a small car in the 1990s - there just isn't a market for that product in America. It took $4 gas for Americans to discover small cars; what amount of national debt will it take to discover fiscal discipline?

According to Tax Policy Center, Obama's plan would increase revenues by $600 billion over the next 10 years relative to "current policy", while McCain's plan would reduce revenues by a similar amount. Here, "current policy" means extending the Bush tax cuts; if we compare to current law, in which those tax cuts expire in 2011, we are talking about revenue losses of $2.9 trillion (Obama) or $4.2 trillion (McCain). And that's not even counting their health care proposals, which are harder to compare side-by-side (McCain's would lose another $1.3 trillion in revenues; Obama's would mostly affect the spending side).

My message to whoever gets elected: please, please break your tax promises!

Not every McCain idea is bad

With the McCain campaign banging pots and the media amplifying the noise, we haven't been able to hear much about the issues in the last few days. Maybe that's why Joe Klein reached for the old news and commented on McCain's plan to change the tax status of employer-paid health insurance premiums. His analysis is balanced, but in the punchline he focuses on the tax-increase aspect of it:

It is amazing to me that Obama campaign has let things go this far without pointing out that McCain--who opposes the energy bill because it would increase taxes on oil companies--is actually proposing a tax increase on health care benefits for American workers. But that is precisely what the Senator from Arizona is doing.

Ezra Klein goes further:

This is a tremendous tax increase, to the tune of $3.6 trillion over 10 years.

Although he goes on to qualify that statement, it is not a fair critique by any stretch of imagination.

I don't like McCain's vision for health care and his non-reform "reform". I think he wants to take it in the wrong direction and will only make the problems worse. But this tax proposal is actually not bad at all. It would remove a major tax distortion and most people would be better-off (well, sort of - as taxpayers, they'd have to pay it back eventually).

Currently, employer-paid health insurance premiums are not counted as taxable income to employees, but are fully deductible as expense to the employer. In effect, the government subsidizes the premiums at the employees' marginal income tax rates. And because income tax rates increase with income, high earners get a bigger subsidy than low earners.

This is unfair to low earners - it reduces the progressivity of the tax code in a non-transparent way. But it also distorts the health insurance and labor markets, because people who pay for their own insurance get no subsidy. That makes the current system unfair to the self-employed and to workers whose employers don't offer a health benefit. It also discourages entrepreneurship by making self-employment more expensive.

McCain's plan would treat employer-paid health insurance premiums as cash income for tax purposes, but would offset the added tax cost with a refundable tax credit of $2,500 per year to individuals and $5,000 to families. "Refundable" means you get the full amount even if your total federal income tax for the year is less than that - the government writes a check to everybody who has health insurance. If you have family coverage and your employer pays $8,824 per year for it (the national average), counting it as income will increase your tax from $882 (if you are in the 10% bracket) to $3,088 (if you are in the top, 35%, bracket), but with the refund, your tax will decrease by $1,912 to $4,118. (If Social Security taxes also apply, the numbers are less favorable, especially for lower earners, but it is still a net gain for the employee in each case.) The only way you lose is if you have a high income and high premiums (which means you live in an expensive area and your employer offers good benefits).

That actually looks like a big tax break, and it is: the Tax Policy Center estimated it would increase the deficit (or cost taxpayers) 1.3 trillion dollars over the next 10 years. Free money isn't cheap.

It is fair to criticize McCain's plan for burning another hole in the budget. It is also fair to point out that it is a tax change, not health care reform. It generally won't help the uninsured. And, perhaps most importantly, some people will lose in indirect ways. Employers will have no incentive to offer health benefits and some will surely choose to compete for workers by increasing wages and dropping health insurance. That means some people will lose their employer-provided insurance and some of those will get lost in the vagaries of the individual insurance market. The plan doesn't seem to provide adequate ways to deal with such risks.

It is even fair to point out that it is another instance of "more of the same" because Bush has been proposing a similar plan for the last two years. (By the way, it hasn't passed; why would McCain expect his plan to pass now that the Democrats are almost sure to fortify their control of Congress?)

But it is not fair to call it a tax increase.

Dude, where's my 14 million dollar house!?

From the department of I-told-you-so:

Wait a minute. Who will buy those houses? At 6% annual interest rate, a 30-year mortgage on an average home would require payments exceeding three-quarters of an average household's income. And that's just mortgage payments - no property tax, insurance, maintenance, or utilities. Even at the entirely unrealistic zero interest, mortgage payments would equal 36% of income. Prices can be astronomical in a limited area, where only the region's elite can afford to live, but the study refers to the entire Washington Metropolitan Area, which, according to the article, will then span from Baltimore to Richmond and have a population of 9.9 million. If only the top 5-10% can afford housing in the area, where will the other 9 million live? There is a violation of the law of supply and demand in the study's results.

That study is yet another example of the dangers of extrapolating exponential growth rates over long periods. If you calculate the annual growth rates implicit in the study's results, they look reasonable: housing prices increasing 7% per year, and incomes 4.6% per year. Assuming 3% inflation, the real (net of inflation) rates are 4% and 1.6%. I might use those numbers myself if I had to predict prices and earnings 2-3 years from now.

The problem is that the difference in growth rates of 2.4% compounds to a factor of more than 3 (in other words, a difference of over 200%) over 50 years. What makes sense over short periods doesn't necessarily make sense in the long run.

On the bright side, we will not all be Pentecostals by 2075.

Dog bites man: miles per gallon edition

A Duke University study, published in Science and reported in the Consumer Reports, found that miles per gallon are misleading and that consumers would make better decisions if fuel consumption were posted in gallons per mile.

Well, duh. Shouldn't that be obvious?

Is it any surprise that people calculate better with direct quantities than with inverses? Miles per gallon is an inverse measure of the cost of fuel, so one doesn't have to be a rocket scientist to figure out that consumers will have more trouble making rational decisions based on that measure than based on a direct measure of fuel consumption, such as liters per 100 kilometers, which is used in Europe and pretty much the rest of the world.

Most people don't realize (at least not immediately) that driving 45 mph from Startington to Endington (distance: 60 miles) and 80 mph on the way back takes more time than driving 60 mph both ways. But they do realize that a 80-minute trip and a 45-minute trip together take longer than a two-hour trip. Similarly, people don't realize that going from 12 to 16 mpg is a greater saving than going from 24 to 32 mpg, but they would recognize immediately that going from 20 to 15 l/100 km is more significant than going from 10 to 7.5 l/100 km. Elementary, my dear Watson!

A Tale of Two Douglases

If I remember correctly, in my first microeconomics textbook, The Theory of Price by George Stigler, there was a box about Paul Douglas, whom most economists associate primarily with the Cobb-Douglas production (and later also utility) function. Never missing a chance to jab a liberal, Stigler described Douglas as an economist who was "later reduced to a U.S. Senator". Although I never agreed with Stigler's opinion, I've always found his way of expressing it quite amusing.

Unfortunately, we are now witnessing a reduction of another fine economist named Douglas. This time, however, Douglas is his first name, and he is being reduced not to an elected official, but to a campaign hack. And this case is not amusing, but sad. I know Douglas Holtz-Eakin, or at least knew him when he used to put professional and personal integrity before partisan politics. He used to say, I think only half in jest, that his job was to give honest advice to politicians who would ignore it. But since he became McCain's adviser, he's been more and more an expedient damage-control spokesman who couldn't care less about the truth.

Honesty is obviously overrated: it's a win-win situation for Holtz-Eakin. If his boss wins, he will probably be the next Secretary of the Treasury (and eventually probably hailed as one of the rare competent people in that administration), and otherwise he'll get a comfortable position in a conservative think tank.

John McCain Is An Absolute Disgrace

So, John McCain thinks that the Social Security system is, and has been since its beginning, a disgrace. Moreover, he is lying: it is not true that

you will not have the Social Security benefits the present-day retirees have unless we fix it.

Even with the projected shortfall, after the trust fund is exhausted, real Social Security benefits are expected to be higher than they are today. Scheduled benefits increase with wage growth, which in the long run is at the rate of overall economic growth. With the economy growing, per capita, 1.6% faster than prices, 78% of scheduled benefits in 2041 is over 30% more (after adjustment for inflation) than the full scheduled benefits in 2008. John McCain ought to know that. If he doesn't, Douglas Holz-Eakin ought to tell him. Speaking this kind of nonsense is inexcusable.

At Least Saddam Can't Use Air Conditioning Any More

Solar Power Rocks has an amazing graph comparing R&D investments in energy to the cost of war in Iraq.

Since you won't be able to see the whole thing on the screen at once, you may be left with the question "Wholy shit! But how do those things compare if you don't have to scroll?" Answer: imagine a dog house next to Sears Tower. And make sure it's a small doghouse.

Tax the Churches!

A CPER paper analyzes tax exemptions for philantropy and arrives at a conclusion I like: contributions to churches should not be tax-exempt.

Contributions in areas that have a direct effect on the private asset base of the poor (such as basic health, education, housing, technologies that raise demand for low-skilled labour, etc.) can be seen as substitutes for income redistribution, whereas contributions to public goods that have little income-augmenting effects for the poor (such as churches, museums, sports facilities, parks, private schools and hospitals, etc.) should be seen as complementary to income redistribution. The case for exempting rich philanthropists from expropriation should not be accepted as a matter of course.

Laffing My Ass Off

Today's Wall Street Journal editorial has the most idiotic Laffer curve I've seen yet. You need subscription to read it, but the absurd diagram is available via Economist's View:

So that's how AEI and WSJ fit curves to data: Take a bunch of points, draw the curve you want through 2-3 points that are the most convenient to tell your preconceived story, and ignore the rest. Oh, yes, and assume your readers are complete morons, so you don't even have to hide what you've done.