Another musical note

Raves keep appearing everywhere I turn for the new Arcade Fire album, which made both the NY Times Magazine and the front page of its Sunday Arts & Leisure section.

But I keep seeing the word "bombastic" here and there in references to the album, along with half-apologetic, half-aggressive comments that, well, if you're too set on irony and too unsympathetic to Springsteen-style sentiment-blasting it might not be for you.

I certainly don't think my own palette or palate is limited to irony, although it's a coloring or flavor that I like. The Wrens' Meadowlands, my favorite album of the last few years, certainly emphasizes feeling rather than irony. But I found the first Arcade Fire album simply too bombastic and a bit over-wrought; hence, I think I will sit this one out.

Smart Cat; or, The Mystery of the Mangled Meat

The other day, I came down to make breakfast and found 2 chewed-up pieces of steak lying on the ground. These were leftovers from my kids' dinner the night before, and I was quite sure I had left them in the garbage can with the lid closed, but life is busy and you just go on.

I also knew the most likely culprit - Shadow, aka the Big Fella (an honorific title; he's only 10 pounds). Normally the best-behaved of beasts, he is a bit gaga when it comes to cooked meats. I figured that perhaps the lid of the garbage can hadn't been shut.

Tonight I was removing meat from its packaging, in the course of making something for dinner, and Shadow walked up to the garbage can, pushed the lid up, and shoved his head inside. Case closed, so far as the other night is concerned. Of course, before we laud his intellect too much for figuring out how to get into the trash, we should keep in mind that there was no meat in there yet, and that I was right next to him watching. So he can forget about future opportunities to extract meat from the garbage overnight.

Still, impressive in its own way.

Oh, yes. Shadow is toothless by this stage in his career (he is going on 16 years old). I'm not sure what good any of this did him anyway.

More music appreciation

I've been greatly enjoying selected tracks from Andy Partridge's Fuzzy Warbles, volumes 7-8, available on ITunes so one can select judiciously. Partridge, the main figure in the apparently now-defunct XTC, has issued eight volumes of outtakes and home recordings (9 if you buy the entire package & get a bonus CD), many of which are either casual maunderings or demos of songs that sound better in the XTC released catalog. But if you use the 30-second sample feature on ITunes plus the customer reviews on ITunes and Amazon, you can figure out which ones are worth having.

One way of describing the good songs (and I gleaned 90-100 very good minutes out of the 8 Fuzzy Warbles volumes) is that it sounds like what Paul McCartney might have been doing over the last decade if he had kept his talent and not become so self-conscious and pompously silly.

New article posted

I have posted another article on SSRN, entitled Why Worldwide Welfare as a Normative Standard in U.S. Tax Policy? I actually wrote this article last August, and it will be appearing soon in the Tax Law Review, but I didn't realize until a friend pointed this out the other day that I hadn't posted it.

Fool me twice

It has been truly sickening and horrifying to watch the rollout of the Bush Administration's apparently planned war against Iran. You literally couldn't do more than these guys have to undermine their credibility by making such a reckless and false case for war in Iraq, followed by such stunning incompetence in the execution of the war. And you couldn't have more clearly demonstrated to the press that they should not simply be court stenographers, repeating what they're told as if it had any claim on being believed. Yet it is all happening again, with vague, undocumented, and less than credible assertions getting front page play all over the place.

Isn't it a little strange that, with the U.S. troops predominantly fighting Sunnis, the Bush Administration is blaming the Iranians? I'm not convinced Bush knows that the Iranians actually support the Shiites in Iraq, who control the government there and actually are fighting against the Sunnis, but you'd think others, including the press, would keep this point more clearly in mind.

I suspect that, if the Administration wanted to make a case for war against Saudi Arabia, it could come up with something fifty times stronger than what they are throwing at the Iranians, given the Saudis' position in the Iraqi civil war and where we stand in the middle of it. How many times have American troops been attacked with Saudi-supplied weapons, which of course need not have come directly from the Saudi government?

The nightmare that happens twice can be powerful artistically - think Hitchcock's Vertigo - but it is nauseating to live through.

UPDATE: As detailed here, Michael Gordon, the New York Times "reporter" who wrote Saturday's breathless, unsourced, and undocumented front-page story, both (a) was Judy Miller's co-author on some of the most egregiously false stories from the Iraq war run-up, and (b) is an avowed public supporter of the "surge."

New and old music

It's nice, and even downright encouraging, to see a pleasant little indie band like the Shins in the Billboard Top Ten - # 8 this week, after being # 2 last week. I like the album and have played it a number of times, although it seems to shut the door on the thought that the Shins might actually make it to the top ranks artistically. Hard to see why it took them so long (about the same time between this album & the previous one as between Sergeant Pepper and With the Beatles). But still, albums I'd actually listen to don't often land so high on the charts. Leaving aside Dylan's latest, which though tame is a tribute not just to his 1960s career but to the fact that Love & Theft (released in 2001) was so good.

Other recent listens show my vintage a bit more, I guess. I had never gotten a CD of the Clash's first album, although I had a tape for years & recall walking around the Bronx with my brother back in the day so he could find an import copy (this being before the US release). Still great. Stevie Wonder's Innervisions, another 1970s album I'd never gotten as a CD, is also pretty good if a bit more dated. The Velvet Underground Live 1993 is disappointingly tame. It's certainly odd to hear these guys strike up, say, Venus in Furs & hear the crowd cheering as if it had been some Top Ten hit of their youth instead of selling 2,000 copies or whatever. I decided to try the 1993 live album because the Velvets' three live double albums from 1969-70 (Quine, Max's, 1969) are all so great, but in those days they actually owned the songs rather than being a covers/revival band.

Law reviews vs. economics journals

One thing economists are always amazed about, when they talk to law professors, is the way that law review publication is handled. Leaving aside the special-topic faculty-edited journals (e.g., Tax Law Review at NYU, Journal of Legal Studies at the U of Chicago), the law reviews are of course student-edited. More specifically, by second-years who have newly been selected to editorial positions. Important decisions, in terms of junior law profs' careers, what gets read, who has the buzz, etc., then end up being made by these individuals, who, with no criticism intended, are not very far along yet in terms of the background needed to recognize serious, good, or important work.

Lucky for me, I've almost completely stayed out of the law reviews' way for almost a decade, what with books and invited pieces. But at the end of this month, when the new boards have been installed, I'm planning to submit "Beyond the Pro-Consumption Tax Consensus," significantly revised for greater clarity and readability since I posted it on SSRN (and linked it here) about a month ago. I actually do feel that this is an important article in the tax policy lit, and also a good one. We will see if this view ends up being shared by the people who get to decide.

Knowing that you have law review readers making publication decisions can have bad effects. It can simply be boring to have to go through the ABC's of ideas that your main target audience will already know about. But okay, it's actually a good discipline, up to a point, to force yourself to communicate more broadly. The problem is that it creates over-long detours. Sometimes it means you can't make an interesting & significant side-point since it would take 5 pages to set the stage for it. Worse is the incentive to have to sell articles' conclusions as extra-significant, and to tart them up in stupid ways so people who don't know the field that well will think they should publish it. "This is the first article to show that 1 + 1 = 2, a point that will transform the law and economics of arithmetic." One strategy I've heard about is putting these claims in the version you send out, then taking it out before publication so that your peers won't laugh at you.

Another bad incentive, the man bites dog scenario, isn't limited to law reviews. Perhaps it's even more true for professionally edited economics journals. If you can devise a study showing that 1 + 1 actually equals 3, you're in clover. The moment you get that finding from your regressions, but only if you get that result, you know you have a publishable paper. (Econ journals won't publish a paper confirming that 1 + 1 = 2.) Luckily, most reputable empirical economists are honorable, plus they do have to worry about reviewers asking for back up data runs.

Rare instance of thinking that the law reviews sometimes aren't as bad came from last Thursday's Tax Policy Colloquium at NYU, where Dhammika Dharmapala presented a paper (co-authored with Mihir Desai) finding that well-managed firms get more of a boost in stock price from tax savings than do poorly-managed firms, suggesting the possibility that the market expects the managers in poorly managed firms to loot or dissipate more of the tax savings. In some ways, the theoretical story wasn't that strong (since the effect would depend, not on total looting or waste, but on extra marginal looting or waste when extra tax savings emerge). Also, one could criticize the methodologies used for two key empirical components of the analysis. First, they tried to identify tax planning via gaps between tax and book income. But deliberate and systematic gaps between the two can reflect either tax planning or earnings management. It was unclear that their methodology for identifying the latter could do the job well enough. (Which is not to say that the authors overlooked a better way of doing it - the point is simply that they're very hard to distinguish). Second, the paper's proxy for well-managed firms, which was higher-than-average ownership by institutional investors, was theoretically questionable since it's unclear how much these investors actually improve governance. This device also causes big endogeneity problems (i.e., we might be picking up some aspect of how the institutional investors pick firms or directly influence stock prices).

In the paper as it stands, Dharmapala & Desai mention a robustness check for their governance finding, which is that the results are the same if one uses a governance measure relating to institutional mechanisms for managerial entrenchment. This, in general, is the really good thing about their paper - questionable though the results seem since they are so distantly and indirectly related to the underlying things of interest, the results are not only statistically significant but apparently quite robust to alternative specifications. So something has to lie behind their findings, and although we spent much of Thursday at the colloquium spinning alternative stories that would explain the data, in the end they really seem to have something.

But back to the law reviews versus econ journals. The authors may actually agree with us about the better way to test for well-managed firms, via the entrenchment measures that don't give rise to comparably serious endogeneity problems. But the reviewers at the journal that will likely be publishing the paper made them switch.

Not a problem one ordinarily has with student law review editors, with whom it's often more a matter of negotiating over whether you need a footnote for the claim made in passing that 1 + 1 = 2. So score one for the law review process.

The Urban Institute on Bush's healthcare plan

I would pretty much endorse the entire statement here, from the Brookings-Urban Tax Policy Center (easily available via google search). Much closer to my views than, say, Krugman's denunciation of the plan.

Anyway, herewith their summary statement about it (from the abstract for a longer discussion):

In his State of the Union address, President Bush will propose to replace most current tax exclusions and deductions for health insurance premiums and out-of-pocket costs with a new $15,000 standard deduction ($7,500 for single people) in the federal income tax-as well as an exemption from payroll taxes-for all taxpayers who obtain qualifying health insurance. The plan would eliminate the current bias in favor of health insurance obtained through employers, provide tax incentives for the purchase of health insurance in the private market, and reduce current tax incentives to over-spend on healthcare services. As designed, the proposal would be revenue neutral over ten years, after which it would generate a growing stream of revenue.

The innovative plan is a major step toward improving the efficiency of the market for health insurance. By severing the link between work and insurance, it would offer everyone the same tax incentives to obtain insurance coverage and limit spending on health care. Whether it would succeed in meeting its objectives in a fair way is less clear.

The new tax incentives will help some individuals to gain coverage. But they could also lead employers, particularly those in small firms, to discontinue health plans for their workers, some of whom would end up without insurance. Furthermore, by relying on tax deductions, the plan would continue to provide the largest benefits to high-income taxpayers and offer little or no financial incentive for low-income people who most need help paying for insurance. The plan would encourage states to shift existing funds to subsidize insurance for people with low incomes and chronic health conditions, but those funds could well be too small to be effective.

Changes to the President's proposal could improve its chances of success:

* Replacing the deduction with a refundable credit or voucher would provide more assistance to low-income families, increasing coverage and improving progressivity.
* Requiring that qualifying insurance plans offer community-rated premiums would help to assure the availability of affordable coverage for people regardless of their health status.
* Providing additional funds for complementary programs like Medicaid and SCHIP would help to provide coverage for low-income families and children.
* Explicitly mandating individuals to purchase health insurance, in combination with adequate subsidies for those with low incomes, would increase coverage and reduce adverse selection.
* Eliminating tax subsidies for health savings accounts would remove a bias in favor of those accounts that would otherwise exist.
* Indexing the deduction to the health CPI or even the rate of change in overall health spending would maintain its value over time, albeit at the cost of lost revenue.

Despite its limitations, the President's plan marks an encouraging step in the right direction. With appropriate modifications, it could expand health insurance coverage and improve market efficiency.

[BACK TO ME]: All this being said, it's just pure silliness for anyone to pay much attention to Bush's proposals on any domestic matters - as if he actually cared about any of this stuff, or had the clout to do anything even if he did care. You can't play the sorts of shenanigans he has over the past 6 years and then say "guess what, I'm turning over a new leaf and you guys should start voluntarily doing what I say." BUT, his healthcare proposal may matter in the future as a not-insane Republican guidepost that could actually play a role in a genuine policymaking process. Bad proposals certainly, but one would hope not entirely bad ones as well, never actually die any more than Michael Myers does in the Halloween movies.

Cost of the Iraq war

The New York Times has an article today based on the cost of the Iraq war, which to this point stands at $1.2 trillion. The article notes that people have a hard time really grasping big numbers, so it's difficult to evaluate what this actually means. But one can think of it in terms of alternative uses for the same funds.

For example, it would cost less than half as much to engage for ten years in: "an unprecedented public health campaign — a doubling of cancer research funding, treatment for every American whose diabetes or heart disease is now going unmanaged and a global immunization campaign to save millions of children’s lives."

Good point, but here's another way to make the dollar cost easy to grasp. It's a lot crasser, but perhaps all the more salient for that. Since the U.S. population is about 300 million and we are going to pay for it eventually (I call this the no-free-lunch principle), Bush's going to war is fiscally equivalent to his having charged each U.S. citizen an average of $4,000.

That's $16,000 for a four-person household such as mine, ignoring that we'll probably pay more than our per capita share due to being above the mean in affluence.

Glad to know that I have personally, in effect, paid more than $16,000 for all this.

A review of my (unpublished) novel

Hope I am not violating any confidences here, or being unduly self-serving. (The barest bit self-serving I see no need to apologize for.) Someone I know who read my unpublished novel "Getting It" sent me these thoughts, which I believe the writer does not plan to use and that I can pass on so long as he/she is not identified. Anyway, here goes:

Who’s not sick and tired of short stories, novels, sitcoms, and movies with or about lawyers? And then, here comes Daniel Shaviro with a fresh, amazing, and so literary novel entitled “Getting It.” I must say, reading it during the long MLK weekend – when we probably are not supposed to be so happy about the world - it really made my weekend!

First of all, the writing is flawless, and I suspect, in my total ignorance of his previous literary sins, that Shaviro made his way to such a skill through many other works that I don’t know anything about. [Not so, actually, unless you count books and articles on my law and policy interests. – DS]

OK, a novel that takes place in the environment of a leading law firm, with a lot of “legal lingo." However, Daniel makes it very easy for the lay person to understand even the most “professional” implications. Cleverly enough, he places his action in 1984, before Shepard’s was online—which gives him the opportunity to explain the reader what “Shepardizing a case” is. He does this in a very natural way, without creating too many asides from the plot, here and with other legal or legal research matters, explaining terminology and approaches as needed. Therefore the novel appeals to a variety of readers. As far as I was concerned, I couldn’t let it go, once I started to be captivated by the plot. Three associates (Doberman, Stellworth, and Porter) are running for the only open spot to make partner, and have to prove that they deserve it to one of the senior partners (Crossley). All this would be done through ways and means determined by their own qualities and shortcomings, by their distinctive personalities. Shaviro plays a kind of mathematical/geometrical game here. He describes his characters in a parallel way (e.g., the way each is perceived by the law firm secretaries; their arts interests and family values, etc), but then he cuts it short with an amazing couple of sentences: “Crossley hated everyone there, including himself. Doberman and Stellworth each hated everyone except himself. Porter hated himself.”

Well, this happens on page 11, and then there are more than 200 pages to prove it. And, yes, it’s true! Intrigues, hide-and-seek, manipulation, some remarkable women figures (Lyla, Gidget, Janet) -- everything develops at a very balanced pace, in a novel that goes beyond the inner circle of the players, attempting to say something more general about society, rotten characters, ambitions, but also about humble people (who may be full of potential, but not aggressive and ruthless, such as Porter) . The tone is sympathetically-cynical, in an original manner, reminding sometimes the best of Philip Roth or Thomas Wolfe. The sense of humor is dry, rather British, and involves references that range from the classics to popular culture. In the end, the most complex character proves to be Doberman, a unique texture of intelligence, ambition, ruthlessness, lack of feelings, and selfishness. He is the true hero of our times! Don’t forget, though, all this happened more than 20 years ago.

But, then, what is 20 years in History?

This novel that does not show the typical hesitations or uncertainties of a first-timer. The emotional tension is nerve-racking, the psychological insight deep and convincing. Shaviro masters both the colloquial dialogue and the parallel storytelling, which in the end is unified by the verdict. “As the ancient Greeks had the Mysteries of Eleusis, so Asby & Cinders had its annual partnership meeting.” [Plot details omitted - DS.]

No moral, whatsoever, but maybe a hint that manipulation, bad faith, selfishness, and egomania do not always pay in the end.

My favorite quote from today's NY Times

From the article about the PR roll-out of Bush's surge, AKA escalation, AKA the New Way Forward:

“It’s not just one speech,” the official said. “This is so complicated you couldn’t do it all in one speech. So there will be an ongoing and sustained effort to educate the American people.”

Wow. I'm really going to have to work hard to understand everything the Prez is doing. Hope he stays patient with us all. Maybe I should stay in tomorrow night, because if I miss The Speech, I'll be behind an' everything.

UPDATE: My wife says no problem; we can just ask for Surge Help on Thursday morning if we need it.

Two new articles posted at SSRN

I have posted two new articles at the SSRN download site. The first is a substantially revised version of a paper I posted some months back that, at the time, was mostly about income averaging. This time, I'm hunting somewhat bigger game. Title, link, and abstract are as follows:

Beyond the Pro-Consumption Tax Consensus.

In the last two decades, the dominant norm in fundamental tax reform has shifted from income taxation to consumption taxation, among academics no less than policymakers. Few have recognized, however, that the case for a consumption tax overlaps substantially with that for lifetime income averaging, an idea that has drawn considerably less support. Likewise, few have recognized that the grounds for unease about the case for income averaging (as an ideal system, leaving aside administrative concerns) apply equally to the case for consumption taxation.

Within a welfare economics framework, the case for both norms is close to irrefutable if one makes three key assumptions: that markets are complete, that individuals engage in consistent rational choice given their preferences, and that the only relevant information about taxpayer "ability" is that provided by an undifferentiated measure of lifetime earnings. Where these assumptions fail to hold, (1) allowing income averaging between periods may be undesirable, (2) the case for a consumption tax becomes less clearcut, and (3) as revealed by the "new dynamic public finance" literature in economics, there may actually be a strong rationale for taxing saving.


The second article is a piece I wrote for a conference at tax and corporate governance that I attended in Munich last month. Title, link, and abstract are as follows:

Disclosure and Civil Penalty Rules in the U.S. Legal Response to Corporate Tax Shelters.

This paper, written for a European conference on tax and corporate governance, evaluates two aspects of the U.S. legal response to corporate tax shelters: the civil penalty rules and the disclosure rules. It argues that, while the disclosure rules do not impose undue burdens, their usefulness to the IRS is limited by the difficulty of steering between the twin dangers of under-disclosure (permitting taxpayers to conceal close cousins of reportable transactions) and over-disclosure (creating information overload for the IRS). Thus, expanded reporting requirements with respect to book-tax differences in income accounting are likely to prove more useful to the IRS.

With respect to penalties, the paper argues that the rules' main flaw is excessive reliance on taxpayer good faith, which induces shopping around for "penalty shield" opinions from tax lawyers. To address this problem and create a better set of incentives in the "audit lottery," the paper argues for no-fault civil penalties, with penalty insurance serving to address any concerns about the proportionality of sanctions imposed on risk-averse taxpayers who may have been acting in good faith.

Foolishness from the left

George Will raised hackles today around the left blogosphere with a Washington Post op-ed saying that the minimum wage should be abolished. I'd have to say, I lean towards his side on this one.

The reasons I only lean rather than definitvely stand that way are twofold. First, while I think one would basically have to be a moron not to favor trading in the minimum wage for government-provided wage subsidies if this were politically feasible, it isn't. Also, the minimum wage can improve distirbution. As a forced cartel of low-wage workers, it can potentially increase the overall income of the cartel participants. Only, rather than sharing the extra $$ among members like OPEC in its glory days, you get winners (people whose jobs end up with higher wages) and losers (thuse who lose jobs). Second, while from a standard neoclassical view the disemployment effect should be clearcut, in truth the labor market is a bit more complicated and has various odd quirks (e.g., employers choosing between lower-wage, higher-turnover and higher-wage, lower-turnover equilibria). I discuss a lot of this, along with the still-controversial Card-Krueger empirical work showing no detectable job loss, in a 1995 article that I published in the University of Chicago Law Review.

A couple of more points on the progressivity angle. The subsidy is geared to people based on hourly wage not household circumstances. So you get, e.g., teenagers from affluent households getting a lot of the $$. I think of it as conceptually a wage subsidy to low-hourly-wage workers, financed by a tax on commodities produced with low-wage labor. Not the design one would really want in a wage subsidy program that was being designed from any coherent set of criteria grounded in efficiency or distributional concerns. Note also that if, say, it ends up increasing consumer prices for commodities produced with low-wage labor (e.g., fast food), then it's a bit like a retail sales tax targeted at consumer goods that poor people disproportionately buy.

So I am not a big fan, and indeed I'm closer to George Will on this than that statement alone would suggest, although, yes, he is too simplistic about it.

But then again, look who's talking about simplistic if we bring the left blogosphere into this. Let's try Kevin Drum, who says, in supposed rebuke of Will, that workers aren't "commodities." This apparently is meant to be a moral statement of some obscure kind. Hard to rebut an ostensible argument that does not state anything coherent or rooted in consequentialism (i.e., in assessing what a minimum wage will actually do).

Kevin also says: "A rich society really has no excuse for not setting bare minimum levels of decency for all human interactions, including those between employer and employee."

Meaning, I suppose, that it's fine if someone doesn't get a job and is worse off due to the minimum wage - we regulate the job market interaction and care specially about it even if the consequences of our special treatment are Pareto-minimal, i.e., someone is left worse off and no one better off.

Not a very thoughtful post, from an individual I sometimes agree with. Makes me wonder a bit.

Irrefutable problem with his entire line of argument: he fails to recognize the central importance of an empirical, rather than logical, consideration: the question of what (and how great) are the disemployment effects of the minimum wage (at various levels). This remains inadequately understood. I really fail to see how anyone with half a brain can have so cocksure a view about the minimum wage without better knowledge about this question than any of us really has.

If history were art

Amusing link in popmatters.com to something that really should have happened:

From the Friar’s Club Roast of Donald Rumsfeld
Hoover Theater, Washington, D.C.

President George W. Bush: “… heckuva job, Rummy, heckuva job. I should’ve gone with my first choice for Secretary of Defense—a retarded Doberman! (RAUCOUS LAUGHTER FROM CROWD) Hahaha! Haha! Ha! When Don first came to me about Congressional oversight, I said—Donny! Bubalah! Forget about it! If I was worried about Congress, I’d have dissolved the whole branch after breakfast! (MORE RAUCOUS LAUGHTER) … I kid, though, I kid. Look, Rummy, I know how you feel. I once made a real big mess myself—woke up in south Houston with a Mexican hooker and a coke hangover like you wouldn’t believe. Luckily, I had Dad’s pals to bail me out. Hey, wait a second! We got ‘em this time, too! Hawhawhaw! Aha! Ah!"

Fun news for the day

There's nothing quite like grading exams to feed the urge to procastinate, hence more posts here lately.

With all the dispiriting news in the papers these days, it's nice to see this in the New York Times concerning a recent spacecraft probe of the Saturn moon, Titan:

"When the spacecraft conducted its first radar search above 70 degrees north latitude, Ellen R. Stofan, leader of the team, said in an interview, 'We saw a huge swath of the surface just covered with lakes, like Minnesota.'”

Kind of makes you want to go there, wandering hand in hand by the shorelines. True, these are methane lakes, and the temperature is a couple of hundred degrees below zero. But then again Minnesota is no picnic in January either.

Line item veto

Bush's silly op-ed in today's Wall Street Journal repeats the tired claim that, if only he had the line item veto, he could hold the line on spending. Bruce Bartlett handled this canard nicely in a NY Times blog some months ago (accessible to Times Select readers only, I believe), noting among other points that Bush has yet to veto any spending bill and that, at the state level, empirical data suggest that all the line item veto does is shift spending to match the governor's priorities more and the legislature's priorities less.

Ever since the election, Bush has of course discovered the earmarks issue, previously a matter of zero concern to him. But it's important, I think, to make the point that line item vetoes can easily increase spending, rather than reduce it. And under Bush that is exactly what I would expect. But perhaps not only under him.

Let's start with the naive static view, in which the legislature passes a bunch of stuff. Then the executive uses his line item veto, in which case spending declines, or else he doesn't use it, in which case spending is unaffected.

This would pretty much be it if all political actors' short-term memories were on a par with that of the protagonist in the movie Memento. (Leaving aside how that character ingeniously tries to act consistently in pursuit of long-term goals despite his short-term memory loss.)

But in fact everyone operates in the budgetary game with enough short-term and long-term memory to maneuver in the shadow of the rules, whatever they are. So the only clear effect of a line item veto is that it strengthens the executive relative to the legislature. If he wants higher spending than does the legislature, the line item veto helps him to get it, by offering him an extra tool to use in bargaining for votes. ("Support my new mega-program or I will line item veto your earmarks.")

The real issue, then, is what effect we should ascribe to its shifting budgetary authority, at the margin, from the legislature to the executive. Here there is a fundamental ambiguity. Legislatures tend to like more small bore piecemeal stuff than executives do, especially if the legislatures aren't tightly run by a leadership in parliamentary style (which can make them more executive-like). After all, there are 435 House districts just waiting to be outfitted with bridges to nowhere, Lawrence Welk museums, unneeded military bases, etc. But executives, while they have less incentive to do that sort of thing, tend to like doing more really big expensive stuff. They are looking for legacy-makers. This could mean a Star Wars missile defense, or national healthcare, or a costly foreign war, or whatever else tickles a particular executive's fancy. One way or another, the job creates powerful incentives to think big.

So here's my bottom line. A President is playing on a big stage and thus, I surmise, is likely on average to want more spending than the Congress does. (Governors aren't on quite as big a stage, so this aspect might show up less in the empirical data from that level.) Give Presidents the line item veto, and the predominant effect is likely to be that it helps them get more big stuff, even if they use it every now and then to reduce the small stuff.

Once again, therefore, Bush's proposed policy points in the direction of greater profligacy, certainly under him but probably in the long run as well. Good to know that he has zero chance of getting it, and is actually just preparing to play the blame game after he doesn't.

The "surge"

According to the BBC:

"[T[he speech setting out changes in Mr Bush's Iraq policy is likely to come in the middle of next week.

"Its central theme will be sacrifice.

"The speech, the BBC has been told, involves increasing troop numbers.

"The exact mission of the extra troops in Iraq is still under discussion, according to officials, but it is likely to focus on providing security rather than training Iraqi forces." [Note: This focus is necessary in order to avoid following the Iraq Study Group's recommendations.]

Silly me, I had always thought that you set objectives first, then decide what resources are needed to accomplish them.

Important article

Why isn't Cheney right about the importance of a totally unfettered Executive managing foreign policy and responding to security threats? Even people who are thoughtful and sane, such as Judge Posner in some of his popular writings on these subjects, take the point about the importance of Presidential discretion in terms of energy and effectiveness.

One counter-argument is that an individual's decision quality will likely be more variable, for bad as well good, than the actions of collective institutions such as the U.S. Congress. Obviously, this point seems especially forceful after 6 years with the worst President in U.S. history, a man who knows less, thinks less, reads less, and is less emotionally mature than my 10 and 13 year old children. But of course one shouldn't over-generalize from how bad he is to the Presidency as a long-term institution, except insofar as he so vividly illustrates the variance and downside risk.

The highly regarded Harvard economist Edward Glaeser has an interesting new National Bureau of Economic Research Working Paper, "The Political Economy of Warfare" (# 12738, available on line at www.nber.org but to subscribers only) that could hardly be more timely in illustrating one of the broader problems. His analysis is not new, as he makes very clear up front, but is vital and under-appreciated.

To quote from the introduction:

"Why do countries, both democracies and dictatorships, engage in massively self-destructive wars? ....

"This paper ... presents a model of warfare where leaders benefit from conflict even though the population as a whole loses. Warfare creates domestic political advantages, both for insecure incumbents like Napoleon III and flr long-shot challengers, like Islamic extremists in the Middle East, even though it is costly to the nation as a whole. Self-destructive wars can be seen as an agency cost problem where politicians hurt the nation but increase their probability of political success. This problem becomes more severe if the population can be falsely persuaded that another country is a threat."

The paper's analysis uses a political economy model plus the following historical examples: Napoleon III, Bismarck, the European participants in World War I, and the U.S. from 1896 through 1975.

This is not a paper that will be criticized on the ground that extending the period analyzed would change the empirical conclusions.

Designing institutions without regard to agency costs is not an intellectually defensible course.

Party politics

Interesting article by political scientist Morris Fiorina in the recently published essay collection by Alan Gerber and Eric Patashnik, Promoting the General Welfare.

In "Parties as Problem Solvers," Fiorina notes the argument that he had been making for many years (and that I personally have considered persuasive) to the effect that national politics would function better if the parties were stronger. Several strands to this argument. One is that interest groups are weakened if the parties in effect cartelize and thus reduce any one group's market power. A strand emphasized by Fiorina held that "unified political parties led by strong presidents were more likely to act decisively to meet the challenges facing the country, and when they took their collective performance records to the electorate for ratification or rejection, the voters at least had a good idea whom to reward or blame."

He notes that the 1980s were the high water mark of responsible behavior by relatively united political parties.

He then notes what has happened since:

“In 2002 a Republican administration ostensibly committed to free enterprise endorsed tariffs to protect the U.S. steel industry, a policy condemned by economists across the ideological spectrum. Also in 2002 Congress passed and President Bush signed an agricultural subsidy bill that the left-leaning New York Times decried as an ‘orgy of pandering to special interest groups,’ the centrist U.S.A. Today called ‘a congressional atrocity,’ and the right-leaning Economist characterized as ‘monstrous.’ In 2003 Congress passed and the president signed a special interest-riddled prescription drug plan that was the largest entitlement program adopted since Medicare itself in 1965, a fiscal commitment that immediately put the larger Medicare program on a steep slide toward bankruptcy. In 2004 congressional Republicans proposed and President Bush supported a constitutional amendment to ban gay marriage, a divisive proposal that had no chance of passing. After his reelection, President Bush declared his highest priority was to avert a crisis in a Social Security system he insisted was bankrupt, by establishing a system of personal accounts [that had zero relationship to solvency – my addition], while disinterested observers generally pronounced the situation far from crisis and in need of relatively moderate reform – especially compared to Medicare. In 2005 the Republican Congress passed and President Bush signed a pork-filled transportation bill that contained 6,371 congressional earmarks, forty times as many as contained in a bill signed by an earlier Republican president in 1987. Meanwhile, at the time of this writing Americans continue to die in a war of choice launched on the basis of ambiguous intelligence that appears to have been systematically interpreted to support a previously adopted position.

“The preceding are only some of the more noteworthy lowlights of public policies adopted or proposed under the responsible party government of 2000-05. All things considered, if someone wished to argue that politics in the 1970s [with its lack of party discipline] was better than today, I would find it hard to rebut them. Why?”

Fiorina argues that the reasons for the failure of strong-party government to deliver the anticipated benefits include:

1) The change made politics more conflictual, with winning vs. losing being much more clearcut and all-important, leading to permanent campaigning and the disappearance of any intermittent efforts at actual governance. Party positioning for the next election becomes all-consuming all the time.

2) Voters were offered clearer and more polarized choices than they actually wanted, leading to much less responsiveness to public sentiment in a heterogeneous society.

3) The parties now seek 50% plus one vote, not maximizing their votes, since once you have a majority you can pass almost anything you like (well, Social Security privatization aside) without having to claim a popular mandate.

I offer some explanations of my own for the failure of party government to improve the political process, including a variant of #3, in my new book.

This whole subject requires a lot more thought from political scientists and from everyone who is interested in the proper (or at least adequate) functioning of our government institutions. For now, the only clear takeaway is: Be careful what you wish for, or you just might get it.

Classic rock?

The new expanded reissue of Pavement's Wowee Zowee is enormous fun and well worth repeated listens. I had previously under-rated this album relative to Pavement's previous two and next one (Slanted & Enchanted, Crooked Rain, Brighten the Corners). Favorite new track: the minute-long, bizarre "Candy Lad," a tag-on to a live track on Disk 2. "Dad, you're into some messed-up music," my older son told me as it played.

Good appointment

Peter Orszag has just been named to head the Congressional Budget Office. Good news insofar as he is able to exert any influence, whether on policy or simply on measurement of policy.

Now available

After some delay, my new book, "Taxes, Spending, and the U.S. Government's March Towards Bankruptcy," is indeed available on-line.

Here are the links to it at Amazon and, with a better price, at Barnes & Noble.

I've just come back from a Tax and Corporate Governance conference in Munich, where I presented a paper on the U.S. disclosure and penalty regime for corporate tax shelters, which I will post shortly on SSRN.

A U.K. commentator of mine, hostile to my pro-government stance in the paper, apparently planned to compare me to the Bush Administration as an exporter of evil U.S. ideas that Europe ought to ignore. Luckily, he subsided on this comparison (at least orally) although his written comments may retain the reference.

It's a funny feeling to be an American abroad these days, if people consider you a representative of U.S. policy. One feels decidedly uneasy in a manner that has no precedent in my own lifetime experience as an American.

I told this commentator that his complaining (in connection with me) about the Bush Administration made me feel like Basily Fawlty, in the episode of Fawlty Towers where someone complains to him about Manuel's standard of service in the dining room, and Basil responds: "Do you think I don't know? You only dine here - I have to live with it!"

I do, however, feel a bit more entitled than Basil to dodge the complaint this way, as his power over Manuel somewhat exceeds my degree of influence over U.S. foreign and security policy.

Oedipus had nothing on this guy

Bush, discussing his father in a recent interview:

"I love to talk to my dad about things between a father and a son, not policy ...

[Does he consult with his father?] "No ... He understands what I know, that the level of information I have relative to the level of information most other people have, including himself, is significant ...

"I am the commander-in-chief."

Truly sickening speculation

Budget expert Stan Collender predicts the following nauseating sequence of events in budgetary politics next year:

"The Republican ... [current] budget strategy points to a number of things happening early next year.

"First, there will probably be a big confrontation between the White House and Congress on the budget early in the year. The fighting and rhetoric could be vicious. No matter what spending levels are approved by the Democrat-controlled Congress, the White House and congressional Republicans will try to label them as excessive and Democrats will respond that they are better than what Republicans would have produced....

"Second, although few people are talking about it yet, a government shutdown early next year is possible. The best way for Democrats to take away the advantage the veto will give the president will be to send him bills that he will have a very hard time not signing. The way to do this on the punt, pass and kick strategy will be to combine the remaining FY07 appropriations into a single omnibus bill and to send it to the White House just hours before the continuing resolution expires.

"That would force the White House either to agree with the spending levels or to take the blame for shutting down almost all federal domestic departments and agencies. That proved to be politically devastating in 1995 for a group of congressional Republicans who were far more popular, had a higher job approval rating and better fiscal credentials and spokespeople than the current administration. It's hard to imagine how a government shutdown in 2007 would turn out any better.

"Third, the [Republican's current] budget strategy is almost guaranteed to eliminate any possibility of increased political comity at the start of the 110th Congress. Instead, it means that there will be a series of bitter fights between longtime rivals and few will be shaking hands with their counterparts at the end of the game."

Sounds all too plausible to me. Indeed, it's hard to imagine, given who they are, why Bush and Rove wouldn't do this.

Current song fave

TV on the Radio, "Dirtywhirl."

Milton Friedman

I gather that Milton Friedman died earlier today.

Friedman was a great economist and will long be remembered. One of my favorite bits in his work is the discussion in his book Capitalism and Freedom of converting transfer programs into cash and effectively creating a negative income tax in lieu of the welfare system.

I didn't know him personally. He was long gone from the University of Chicago by the time I joined the law school faculty there, having exemplified the neoclassical rational actor model by moving to warmer and sunnier climes. I did get to know his son David, a very interesting and quirky thinker.

My favorite story about Friedman, told by a law prof at another institution who has an Econ Ph.D. from an earlier career, concerns Friedman's Presidential lecture at the American Economics Association, famously refuting simplistic versions of Keynesianism that were then widely accepted in the profession. A transmogrified Keynesianism has survived, but with a lot less cant and pretend certainty, and with better if still imperfect microfoundations. Keynesianism today is to some extent a behavioral economics concept, though none the worse for that. Anyway, the story goes that this individual, who had been trained in standard 1960s Keynesianism, walked out of the lecture in a daze, telling himself that everything he had thought he knew was worthless.

Okay, one should never speak ill of the dead, but I do criticize Friedman a bit in my forthcoming book for what struck me as an opportunistic (for his side in politics, not himself) Wall Street Journal op-ed stance on deficits. In the 1980s, when Democrats controlled at least one house of Congress, he was agin 'em. Fast forward to 2001, and he was full speed ahead for tax cuts, blithely stating in the face of 20 years of contrary evidence that the politically allowable deficit is fixed so the only way to cut the size of the government is by cutting taxes.

One of my points in response to this endorsement of "starve the beast" was that it was based on a simplistic misunderstanding of the size of government concept in economic substance, relying on observed gross cash flows to or from the government rather than on actual allocative and distributional effects.

I would like to think I could have persuaded Friedman to view these matters differently, had I known him and had the chance to discuss them with him. And I would certainly be curious to know what he thought about the U.S. government's budget policy as it unfolded over the last few years. To put it mildly, I rather doubt he would have been much enthralled with either the Medicare prescription drug benefit or the Bridge to Nowhere, not to mention ambitious nation-building in far-off and hostile parts of the world.

UPDATE: According to Brad DeLong's post today: "There's a story that at lunch at the White House in 2002 he told George W. Bush exactly what he thought about Bush's unpaid-for tax cuts. We will miss him."

Iraq

All knowledgeable people appear to agree that the outcome in Iraq is going to be an utter disaster, no matter what. The realistic choice lies between awful alternatives.

For politicians, of course, this means the key to success is to make sure the other guy gets the blame.

Now Bush reportedly wants to send 20,000 more troops there for "one last push." Anyone with half a brain should realize that the chance of this succeeding is zero - not one in a billion, but zero. I am not so fondly reminded of the serial escalations in Vietnam during the 1965 to 1968 period. Each time, we now had enough force. Only, Vietnam in truth was going much better than Iraq. There actually was a South Vietnamese government and army, and the mass murder was between organized political forces that could in theory agree to stop.

Joke I saw on-line recently: Q: "What's the difference between Iraq and Vietnam?" A: "Bush had a plan to get out of Vietnam."

Something else I read on line recently noted that you'd need 500,000 to 600,000 U.S. troops in Iraq for there even to be a chance of success. Even at that troop level, we almost certainly wouldn't succeed. But it would at least make the U.S. forces relevant. At lower levels, the U.S. troops simply do not matter so far as resolving the basic civil war issues is concerned.

Bush is cynical enough to play the blame game by making sure that he asks for more than he can get, so that when he doesn't get it someone else gets the blame.

But I gather he is delusional enough to think that the extra 20,000 actually will work, and thus to demand something that he can actually get. But when it doesn't work, I imagine he will be looking for ways to make sure that the Democrats get the blame.

It's not very edifying for the Democrats to respond by saying to themselves: We need to give him more rope, so he will hang himself instead of us. Probably the best they can do, however, at least until he ups the ante further.

Generally speaking, I think Bush's current strategy is one of deliberately trying to provoke the Democrats. That would be one interpretation of the Bolton renomination (sent to the Senate just 7 minutes after he finished meeting with Pelosi), and of his renominating all the most extreme judges that even the current Congress wouldn't approve. Bush is acting just like the little kid who pinches the boy next to him while the teacher isn't looking, with the plan of starting to screech if the other boy pinches back.

Childish, yes, but certainly more sophisticated strategically than anything he has tried in the Middle East.

There's a lot of stupidity in this country, with a disproportionately large share of it lying inside the Beltway. So it will be interesting, though painful, to see how all this plays out.

Medicare prescription drug prices

The question of whether the U.S. government should use its monopsony power on the consumer side of the prescription drug market to negotiate lower drug prices is truly a no-brainer. I verge on thinking that one has to be financially involved with the drug companies, or else woefully uninformed about the U.S. healthcare market, to think otherwise.

In a well-functioning competitive market, the exercise of monopsony power, no less than of monopoly power, leads to inefficiency, from suppressed transactions that would have created social surplus (i.e., value to the consumer in excess of cost to the supplier).

In the market for healthcare services including prescription drugs, however, we have a reasonably competitive market (subject to patents and the like) except for one little detail: consumers are not paying at the margin for what they get.

When you have a functioning market except that consumers aren't paying at the margin for what they get, it can be worse than not having a market to begin with. But certainly, in these circumstances, the argument that exercising monopsony power inefficiently suppresses demand has no credibility.

Significance of the election, part 2: the role and meaning of bipartisanship

One of the recurrent themes in this election cycle was "bipartisanship," which I have put in scare quotes for a reason.

Out-of-touch buffoons such as David Broder have this as their mantra, ditto Joe Lieberman, and they interpret it to mean such silly things as (a) if the Republicans commit crimes and election fraud (Abramoff, robocalls, etc.) we must say that both parties do it equally, and (b) if Bush wants to trash the Constitution while actually undermining public safety, and if he wants to say that anyone who opposes him is a traitor, we must be willing to go along with him so that we are not "partisan."

Defining bipartisanship relative to where the players actually stand gives them an incentive to go as far to the extreme as possible, since placating them becomes the norm without regard to whether they are being reasonable. One needs an independent definition of how reasonable each side is being, in order to create incentives to be reasonable.

Actual bipartisanship is needed in this country, however. On foreign affairs, since it's not my specialty I'll just say that we need a rational debate about the various choices we have that is not hamstrung by ugly aspersions. Domestically, we need a deal in which the Republicans agree to raise taxes and the Democrats agree to cut entitlements growth. Neither party can prescribe bad medicine by itself, even the one that it is more willing to prescribe.

This type of public-spirited dealmaking has happened before. Indeed, in the 1980s it happened repeatedly. The 1983 Reagan-O-Neill Social Security compromise is the classic example, but consider as well the 1982 and 1984 deficit reduction packages, Gramm-Rudman Hollings, and the 1990 budget deal. Not to mention the 1988 enactment of catastrophic coverage in Medicare, which, while a political disaster that led to its repeal the following year, involved responsible bipartisanship (the new benefit was fully financed not only in budgetary terms but generationally - seniors didn't get a freebie as in 2003).

You need responsible adults on both sides for this to happen, however. We don't know for sure if the Democrats are willing to be responsible adults, but we know beyond any possible doubt that the current Republican leadership is not willing to do anything even remotely fiscally responsible.

The most important thing about Democratic victories is the following. One can hope and pray that defeat leads the Republicans to reconsider their course, throw out the current cabal of incompetent, criminal lunatics, and go back to where they were with the likes of Reagan, Bush Sr., Dole, Baker, Darman, Stockman, etc.

This is a lot to hope for, and I don't know if the party's internal dynamics permit it. But one trigger of their march to madness (although there were surely deeper sociological causes) was the "lesson" of 1992, whether true or false, that Bush Sr. lost because he raised taxes, and then the "lesson," again whether true or false, that the other course led to their 1994 victories.

I don't know how many defeats it will take for the Republicans to get there. One bad set of midterm election results might not be enough. But a lot rides on whether the Republicans can once again become capable of responsible bipartisanship, so that at least there is a chance of rational policymaking. Just having the Democrats run everything is not the answer, due both to the flaws in their policies, such as their resistance to making the entitlements sustainable, and to the political difficulties they would face even if they tried to be responsible all by themselves.

In the interim, fake bipartisanship has nothing to offer either the Democrats tactically or the nation substantively.

Significance of the election, Part 1: the next 2 years

Obviously I'm glad about the election results, but more for negative than positive reasons. It should help to slow down the criminal, totalitarian cabal that had seized control of both the Republican Party and the country, each of which deserves better (in the former case, referring to honest conservatives). But a healthy political system that can deal with actual social and economic problems is still a long way off, and little progress is likely to be made in anything substantive over the next 2 years. So the good news amounts to, "If you're in a hole, the first thing to do is stop digging."

I have read speculation that the Democrats will restore the paygo rules in the Federal budget. This is a stated part of their public position; the speculative part is that enough Republicans will feel they have to go along. That would certainly be a constructive first step.

Bush's Social Security plan would appear to be dead for the next 2 years, which is fine with me although I hold no brief for the current system. His plan was at best a distraction from addressing Social Security's fiscal problems. It amounted to lending people money so they could buy stock and bond funds on margin. If you think this is a good way to address the fiscal problem here, you should also address your own future expenditure needs (such as saving for retirement) by buying lots of stocks and bonds on margin instead of actually saving anything. Not the course that I would recommend.

The expiring tax cuts need to be addressed at some point, if only so people will know what to expect. The Democrats will not want to extend them, and Bush is probably unamenable to anything else. So perhaps we can expect the chicken games on this to continue through the 2008 election, with everything still unresolved. Likeliest exception: I could imagine an estate tax compromise (much higher exemption amount, lower rate as part of a "permanent" new regime), but only if Bush will sign on to make it veto-proof. Meanwhile the AMT will be growing, and I don't see how they are going to be able to make a deal addressing this, especially with paygo rules in place.

On Medicare, just a wild guess: fix the donut hole in benefits even though it blows a further hole in the budget (with paygo suspended for this purpose), and make a small gesture towards paying for it by authorizing the government to use its monopsony power in negotiating with drug companies? (Which power the Administration might then make sure it did not use.) This of course would amount to digging the hole deeper.

Often I prefer gridlock to the alternatives. But here we have both the contrived crisis of the sunsetting tax cuts and the growing AMT, and the broader march towards insolvency. I will start a fresh post to address the question of how, as a political matter, we might get towards addressing those at some point past the 2008 window.

TV notice

Gore Vidal once said that there are only two things you can never do enough. One is to be on TV, amd the other is - well, never mind that.

It's possible that I will be on Bloomberg TV this afternoon at 2 o'clock, speaking fearlessly on the election and entitlements as my remarks are beamed out live to a nationwide audience of hundreds.

Then again, maybe not - I may have gotten back to the bookers a bit too late.

UPDATE: No dice today; maybe at some point in the future.

I had brought my tie in to work, just in case, but at least I didn't get to the point of unnecessarily putting it on.

Blah versus evil

That, at least, is how I see Tuesday's elections.

Reporting without context

The media really has to do better than this brainless, context-less, "he said, she said" pseudo-"balanced" journalism that led them to treat the libelously false Swift boat allegations of the 2004 campaign, disseminated by the campaign of a deserter and draft dodger, as a straight-up news story.

This time around, the White House is gleefully, desperately jumping on Kerry for having said that, if you don't get an education, you could end up in Iraq. This supposedly insults the troops.

Let's start by noting that, beyond any possible dispute, the statement is objectively true. With less education you have less opportunities, and signing up for military service becomes much more relatively attractive. The military option, in turn, looked better in the days when it seemed that one would only risk combat if a genuine miliitary problem arose in the world, as opposed to an Iraq-style war of choice. So the Administration has taken one of the better options that people with low education previously had, and made it far less appealing.

Now we have Bush smirking about how Kerry has insulted the troops and needs to apologize, and the media report it straight up. Bush is the guy who sent the military to Iraq without a plan to establish security, and has had them there as sitting ducks, for several years now, without even giving them adequate body armor. Kind of him to be so protective of their dignity when Kerry makes a true statement about how he has wrecked one of the better opportunities that young people with limited high-wage employment prospects previously had.

Is it too much to ask that the media place this charge in proper context?

If Bush said that Kerry's statement was a code signal to warriors from the planet Zircon, telling them that it was time to invade Earth, and Kerry then denied this, would they report this, too, as he-said-she-said without pointing out that the Bush position was preposterous? No? Then we have established that judgment is needed at some point about which charges are too preposterous to report straight up without context. We are quibbling only about degrees. But degrees are quite important, and the Bush accusation is only a scintilla, if that, distinct from the planet Zircon scenario.

Same old bloody rubbish

I hate to call Bush French or something, but he certainly lives by the slogan: "Toujours l'audace."

He's up to an old trick today, denying that he ever said he wanted to "stay the course" in Iraq. Unfortunately, as Dan Froomkin points out in his Washington Post blog (which is hands-down superior to any print column that the Post regularly publishes), he actually did say "stay the course" repeatedly.

Word of clarification: by repeatedly I mean again and again and again and again.

Now it turns out that Bush, and by strange coincidence his aides, are out there denying in almost identical words that he ever said any such thing.

This brings back the nostalgia for me a bit, because I remember the Social Security debate. Recall that his plan, such as it was (since he disclosed it but declined to endorse it), for many years bore the label "privatization." I argued in my 2000 book, Making Sense of Social Security Reform, that this label was in fact a misnomer for a genre of proposal that in essence would lend people the money to make debt-financed purchases of government-selected stock and bond funds. But they called it privatization anyway, I think sincerely even if inaccurately, because this term had a positive valence in the conservative think tank circles where it spent a couple of decades gestating.

Once Bush was actually proposing it, this handlers started to focus-group the name "privatization," and found that it was a flop with the general public. So, as I discuss in what I considered one of the more amusing sections of my forthcoming book, the name marched ever onward from privatization to private accounts to personal accounts to personalization (this last one being too strained and ludicrous to catch on).

The amazing thing about this march of the fiscal language terms was how shamelessly and egregiously they would accuse anyone of bias who used a term that they had used last week but were no longer using this week.

We have always been at war with Eastasia, not Eurasia, or is it the other way around.

Tax Reform Act of 1986

Today is the 20th anniversary of the enactment of the Tax Reform Act of 1986. At the time, I had a seat near the action as a Legislation Attorney at the Joint Committee on Taxation. It was easy to be cynical about the political process that led to its enactment, and I was, but compared to today the word Pollyanaish seems fairly apt. Notwithstanding the sleazy "rifleshot" transition rules, exempting particular companies from adverse changes, that we put in, presumably, to buy individual votes. And notwithstanding the core reason for its enactment, which was the "dead cat" problem - few politicians actually wanted it, and they all came to understand fairly early on that the voters didn't really want it, but whoever let it die (Rostenkowski, Packwood, the White House) would have a "dead cat" rotting on his doorstep.

Still, at the time there was an actual policy process, with staffs that had ideals and institutional memories getting to play a role, and there actually were some powerful people who cared at least a bit about good policy (e.g., Don Regan and Dan Rostenkowski), and there was bipartisan cooperation, along with a notion that the voters would reward actual achievement (or at least punish its absence), and there was a sense of fiscal responsibility. It wasn't actually Pollyanna. But it was a functioning political system, sleazy and ignorant to be sure if one should be too high-minded about it, but far as yet from being utterly debased and dysfunctional.

The Mets lose

Well, they had a good year, and Oliver Perez apparently pitched well in Game 7, and the new Cardinal closer, Wainwright, has an absolutely vicious curveball.

Act now while supplies last

My book, Taxes, Spending, and the U.S. Government's March Towards Bankruptcy, is coming out at the end of next month (November 30 in-stock date). If I'm not mistaken, it has blurbs supplied by Bruce Bartlett, Richard Epstein, and Jason Furman. Here is the publisher's description:

What's in a word? Plenty, when it's a word such as “taxes,” “spending,” or “deficits” that pervades Washington political debate despite lacking coherent economic content. The United States is moving toward a possible catastrophic fiscal collapse. The country may not get there, but the risk is unmistakable and growing. The “fiscal language” of taxes, spending, and deficits has played a huge and underappreciated role in the decisions that have pushed the nation in this dangerous direction. This book proposes a better fiscal language for U.S. budgetary policy, rooted in economic fundamentals such as wealth distribution and resource allocation in lieu of “taxes” and “spending” and in the use of multiple measures (such as the fiscal gap and generational accounting) to replace misguided reliance on annual budget deficits.

Available for pre-order here from Amazon and here from Barnes & Noble.

At the moment, Barnes & Noble is offering a better paperback price.

Quote of the day about U.S. tax politics

From House Ways and Means Chair Bill Thomas, whose epitaph ought to be "There Were Plenty Worse" - and I mean this as high praise, all things considered:

"Don't think in this business that you're dealing with the best and the brightest. You're dealing with the available and the willing."

Sometimes it's fun to be wrong

Make that, A LOT of fun.

I admit it, I thought the Yankees' chances of beating the Tigers were somewhere in the range of 90 to 95 percent.

Fool or tool?

David Brooks' op-ed today, a thumb-sucker about how the Foley scandal reveals a "tear in our social fabric," contains the following astounding lines:

"In discussing the Foley case, the political class, with its unerring instinct for the aspect of any story that will be the least important to average Americans, has shifted attention from Foley’s act to Denny Hastert’s oversight of it. It has fled morality to talk about management."

OK, David, we understand that you won't get invited to as many cocktail parties if you don't try to help take the heat off the Republican Congressional leadership. I suppose that would make your life less fun, although perhaps you could use the extra time to do some actual research for your next sociological tract.

But leaving aside the impudence of Brooks' posing as not part of the "political class" but rather as one in touch with "ordinary Americans," does he really think Hastert is being criticized for bad management skills? Or perhaps I should say, does he really think he can con readers into thinking this is the issue being posed?

Deliberately covering up and enabling the actions of a vile sexual predator in order to help the Republicans keep control of Congress is not a "management" issue. If it isn't a moral issue, then I am not entirely clear on what is. Of course, I already know from what I have and haven't read in Brooks that torture isn't a moral issue either.

Also, why is Brooks so sure (or why does he pretend to be so sure) that "average Americans" don't care about the moral issue of supposed moral leadership types treating potential sexual abuse of boys as less important than their retaining as much power as possible?

Would Al Gore have prevented 9/11?

As I look at the public information that has dribbled out over the last few years, I increasingly think that the answer is Yes.

I should note that this is nothing particular about Gore. The sense I increasingly get is that just about anyone and everyone who has been a serious Presidential candidate in the last 50 years could also have prevented 9/11.

If this reasoning is correct, then 9/11 would have been prevented, not only by Al Gore, but also (for example) by John McCain, Bill Clinton, Bob Dole, George H.W. Bush, Dick Gephardt, Michael Dukakis, Ronald Reagan, Fritz Mondale, Jimmy Carter, Gerald Ford, Richard Nixon, George McGovern, Hubert Humphrey, Barry Goldwater, and Dwight Eisenhower, to name just a few.

Point 1: It has become clear that the U.S. intelligence community was very, very close to breaking the plot. If the FBI, CIA, and a few others such as local law enforcement had pooled their information a bit sooner and better, they had everything they needed to stop the attacks. The highest levels also fully realized how serious and imminent the al Qaeda threat was, and they tried desperately and repeatedly to get the Bush Administration to pay attention.

Examples include the infamous "Bin Laden determined to attack in U.S." memo, the CIA guys who went to see Bush at his ranch and were told "OK, you've covered your ass," and of course the most recently revealed briefing in which Tenet tried to get Condi Rice and several other top Administration officials to pay attention, but got the brushoff.

What stimulated this line of thinking on my part was Condi's non-denial denial that it was "incomprehensible" that she could have gotten these warnings and paid no attention. Various anti-Bush bloggers naturally riposted along the lines of: "I couldn't have said it better myself."

Given the seriousness of the warnings, it is plausible that any of the above-named actual or hypothetical Administrations would have paid attention. Likewise, would any of them, if invading Iraq, have done absolutely no planning for the occupation whatsoever? And then made absolutely no effort to succeed, such as by bringing in competent staff rather than political hacks? Again, this is a wildly unique Administration. The resistance to making any inquiry into the al Qaeda threat is completely consistent, however, with how they've acted on other occasions before or since. They never pay attention to information that doesn't fit their biases, even when it is in their interest to do so.

Surmise 1, therefore, is that in any Administration but this one there would have been a serious nudge from the top to try to put all of the pieces together. And since we were so close to breaking the plot, Surmise 2 is that this would have done the trick.

So we have this buffoon with a fifth grade reading level, who "knows" that Iraq is going well even though he had never heard of the Sunnis and Shiites until about a year ago, who is campaigning for continued power on the ground that only he can make us safe. Yet not only has he made us much less safe with the Iraq misadventure, as his own intelligence officials have determined, but he heads the one and only conceivable U.S. government that could have bungled the job of preventing 9/11.

I always thought I liked irony, but this one is a bit too rich even for me.

My Public Economics class

Today's subject: social insurance.

xtIt's odd how leading economists, including very good ones such as Jonathan Gruber, the author of the textbook I am using, acquiesce to categories that have no economic substance. They could say that they're deferring to common usage, but don't always do so and may not always realize it.

Case in point: Gruber defines social insurance - following prevailing conventional wisdom - in terms of private insurance, which he says is characterized by (1) premiums, (2) event conditioning (i.e., it's paid when and if X happens), and (3) lack of income conditioning. This supposedly explains why Social Security is "social insurance" but the income tax and welfare system aren't.

In fact, insurance is a kind of bet one places to hedge other bets one is forced by circumstances to make with the aim of directing dollars to states of the world where they are expected to have greater marginal value in utility terms. One doesn't insure against horrific events, such as the death of a child, that don't make the marginal dollar more valuable. One does sometimes insure against good things, such as living longer & thus needing more money, or having an untreatable medical condition that becomes treatable.

Let's look at Social Security and the 3 supposed key features. It doesn't meaningfully have premiums absent arm's length exchange. What it has is the arbitrary designation of certain compelled tax revenues as ostensibly earmarked to pay over the long term for the program. Earmarking is an interesting issue, having to do with the effort to create political binding pre-commitment, but has nothing to do with premiums as such. If they ended the earmarking and folded the Social Security premiums into general revenues, absolutely nothing would change beyond bookkeeping unless (as is plausible) actual political decisions changed.

Event conditioning: OK, the Social Security life annuity addresses life expectancy risk and provides insurance against living "too long." Probably not a mode of insurance that the government has to provide on adverse selection grounds, the usual lead argument for government involvement. Rather, the argument is paternalism if people under-save and under-annuitize with a dollop of externalities if they would get public support in the absence of other resources.

But insofar as you expect to live to retirement age, a retirement benefit is not event-conditioned in the usual insurance sense - it relates to an event that just happens at a certain point, rather than one that is risky.

OK, lack of income conditioning. Well, it is pure formalism to say that Social Security isn't income-conditioned. Even leaving aside the payroll tax financing to focus exclusively on the benefit side, we could make it income-conditioned with no change in substance whatsoever if we simply reshuffled existing fiscal rules so that the effect of partial income taxation of Social Security benefits was formally made part of Social Security.

Also, why would anyone say insurance isn't income-conditioned? All insurance other than automobile insurance isn't automobile accident-conditioned. Likewise, insurance that isn't income insurance isn't income-conditioned. By definition, income insurance is income-conditioned and other insurance isn't.

We don't observe much income insurance outside of the fiscal system due to the adverse selection problem. (People expecting low income would disproportionately sign up.) This is why the government provides it through income taxation and welfare, among other fiscal instruments. As recognized in the Mirrlees tradition in optimal income taxation, income insurance via taxes and welfare is the government insurance example sine qua non.

Only, it doesn't have anything that we arbitrarily label as a premium, so the economic substance doesn't count.

Mark Foley and Iran

Anyone who doesn't understand that the Foley affair significantly increases the likelihood of an attack on Iran, as a way of changing the subject, doesn't understand these guys very well.

Non-denial denials

Responding to the Woodward book, Condi Rice calls it "incomprehensible" that she would have brushed off attack warnings from CIA director Tenet, and "ludicrous" that Rumsfeld wouldn't have been returning her calls.

In Washingtonspeak, the use of these terms is synonomous with admitting that the statements are true.

I think they meant "al dente"

A package of Italian pasta that I brought home gives careful bullet point pasta cooking instructions for ignorant Americans. Bullet point # 2 is "Drain pasta with tooth consistence."

Statutory mystery explained (?)

As a tax person, I am experienced at reading and construing statutes. So, despite my lack of legal background in the precise area of the military commissions legislation, I thought I would give it a careful read. Having done so, I must say that I am baffled and suspicious.

The stated purpose of the legislation is to "establish[] procedures governing the use of military commissions to try alien unlawful enemy combatants engaged in hostilities against the United States for violations of the law of war and other offenses triable by military commission." Section 948b(a).

Towards this end, the legislation contains two separate definitions of particular interest. One is "unlawful enemy combatant," defined in either of two ways. The first is as "a person who has engaged in hostilities or who has purposefully and materially supported hostilities against the United States or its co-belligerents who is not a lawful enemy combatant" (i.e., a member of regular armed forces somewhere other than the Taliban or al Qaeda). Section 948a(1)(A)(i). Many have noted how broad this language is. E.g., Vice President Cheney characterizes various forms of political dissent in terms that don't fall far short of this.

An "unlawful enemy combatant" is also defined as anyone who "has been determined to be an unlawful enemy combatant by a Combatant Status Review Tribunal or another competent tribunal established under the authority of the President or the Secretary of Defense." Section 948a(1)(A)(ii). Many have noted that this appears to be standardless. You and I are unlawful enemy combatants if Bush or Rumsfeld establishes a tribunal that so finds under whatever standards they happen to prescribe.

But here's where the plot thickens. Again, the legislation serves to to "establish[] procedures governing the use of military commissions to try ALIEN unlawful enemy combatants" (section 948b(a); emphasis added).

To meet that definition, you must also be an "alien," which is separately defined in section 948a(3) as "a person who is not a citizen of the United States."

By virtue of section 948c, "[a]ny alien unlawful enemy combatant is subject to trial by military commission under this chapter."

Thus, there is nothing in the provision that gives separate legal significance to the term "illegal enemy combatant" without the word "alien" in the front.

So the question is: Why does the legislation define a term, "unlawful enemy combatant," that has no legal significance under it whatsoever if not preceded by the term "alien"? Sloppy drafting is one possibility. Skilled tax statutory drafters, at least with the time to check their work, would never leave a freefloating term like that.

But strange times breed mistrust. Is there a reason for gratuitously defining "unlawful enemy combatant" so that it unambiguously can be met by an American citizen, even absent operative provisions in this legislation itself that turn on meeting the definition?

An additional ambiguity here is that the provision I read is a subchapter, and the definitions are stated to apply for purposes of the entire chapter. What are the other subchapters? This may be knowable, but I don't happen to know it.

The upshot: this legislation provides for the use of military commissions solely against non-citizens. But it apparently gratuitously defines "unlawful enemy combatant" in a way that would permit the Administration to determine that an American citizen is such an individual. Indeed, it's purely discretionary with the President and the Secretary of Defense.

It is easy to conclude that the Administration will treat this determination as legally relevant to what it can do to American citizens, even though on the face of the legislation it can't use it to try them before military commissions.

But why bother to try them anyway, especially if you believe that you are empowered to detain and torture illegal enemy combatants indefinitely without any requirement that they be subject to a specified set of trial procedures?

I therefore conclude as follows: The legislation is not directly relevant to the question of what the Administration can do to American citizens. But it provides a statutory basis for describing them as "unlawful enemy combatants," which I would expect the Administration to treat as having further independent legal significance.

UPDATE: Marty Lederman reminds me that the law of war is conventionally interpreted (including in the Supreme Court's Hamdi decision) to permit detention of enemy combatants for the duration of the war for purposes of incapacitation.

The statute therefore arguably provides quite important if indirect statutory support for Bush's claim that he has absolute power of arrest and detention over all citizens as well as non-citizens.

A prediction

Jack Balkin among others has been analyzing the increasingly astonishing torture and detention legislation that is marching through Congress. One important thing in assessing this legislation: one should NOT read it as a lawyer interpreting text in good faith to determine its best meaning. Rather, one should ask oneself two questions: (1) how will Bush Administration officials interpret it, and (2) what recourse outside of Administration channels, and beyond the Administration's control, will it leave to people who are taken into custody. The short answer is: You really don't want to know, especially if you like sleeping soundly at night.

I predict that, if this legislation passes and the Republicans hold Congress, there will be disappearances of American citizens in the next two years. My guess is that it will at least initially be people in the Noam Chomsky camp, rather than those less far to the left, and that it will be unclear whether anyone has actually been taken into custody.

I do think that people closer to the center, such as Frank Rich and Paul Krugman, will genuinely and seriously have to ask themselves (whether or not they write about it) whether they are at risk of being disappeared as well.

And on a lighter note ...

... our cats' main nicknames:

SHADOW: the Big Guy, Captain Goodfellow [he's simply too dignified for anything far beyond these].

URSULA: Baby Girl, Princesska, Honeykins, Ursula Wobble.

BUDDY: Squeaky McGee, Silly Whillikers, Buddy von Beastingham, Spudzilla.

Despicable

Senators McCain, Warner, and Graham have sprung the trap they appear to have been planning all along, and agreed to legalize and rubber-stamp torture along with Stalinist showtrials in which people are executed on the basis of secret evidence. The highly theatrical charade they conducted does nothing for the values they claim to have been defending, or for American soldiers who might in the future be taken prisoner abroad. But it does provide enormous political aid to Bush, to Republican candidates in the midterm elections, and to McCain's 2008 Presidential campaign. This presumably was the whole idea from the start. The Democrats have only themselves to blame for marching right into the trap.

In a just world, Senator McCain would get to relive his past and re-experience the torture that he has now endorsed. I remember people saying of Hubert Humphrey, a long time ago, that the hunger to be President had eaten away all of the good things that had once been inside him. But Humphrey can't compare to McCain - a man who has now endorsed and will soon have legally enshrined, not torture to save American lives, but needless, pointless, gratuitous torture in the face of a consensus by the experts who actually do interrogations that it is not a useful tool.

I increasingly think of myself not as an American, but as a New Yorker and East Coast resident. I am proud of my culture and society, and will put it up against anyone's. But it is that of my region, not of this country.

Why has Grover Norquist visited the Bush White House at least 155 times?

Today's New York Times reports that Grover Norquist has visited the Bush White House at least 155 times.

Sleazy Abramoff-related lobbying? Surely you jest. According to the article, "White House spokeswoman Dana Perino said ... [that] it was possible some of Norquist's meetings were with Karl Rove, the president's longtime confidant and political strategist.

"'He is one of a number of individuals who worked to advance fiscal responsibility, which is one of the key aspects of the president's agenda,' Perino said."

Grover Norquist is to fiscal responsibility as Jack the Ripper was to safer working conditions for London prostitutes.

Horizontal equity

I'm teaching a Tax Policy course this semester, mainly on distribution issues (my other course focuses on efficiency issues). One funky thing about teaching Tax Policy at NYU Law School is that, since it's a required course for tax LLMs, you can get a lot of people who don't really want to be there. This is no fun if you're the teacher, even if you are agnostic rather than self-righteous about whether, from their standpoint, they ought to care. I actually raised this issue in class on the first day, asking anyone who might have been there for that reason to be a good sport & give it a shot. One way or another, my sense has been that it's working, and that a lot of the people in the class are engaged and interested. I've tried to do my bit, both by encouraging discussion and by trying to pick provocative papers rather than those that are ostensibly (or actually) canonical.

One of today's readings is a well-known 1976 article by Martin Feldstein about horizontal equity. Interesting to me to read this piece now. Provocative and surprising though I would think it was when it came out, time has truly passed it by, which is part of what makes it fun to read.

Feldstein goes against the Haig-Simons orthodoxy (at least among lawyers) of the time, by defining horizontal equity in terms of legal continuity rather than, say, comprehensive income taxation. Thus, no HE violation if you don't tax municipal bond interest and the tax benefit is capitalized into the price, causing the after-tax return to be the same as that on taxable bonds. Pretty obvious once stated, although at the time not widely understood. (Boris Bittker had written about it, however.)

Less impressively, Feldstein's 1976 view of the economics of information seems to be that X is considered 100% certain, then there's a total surprise and it is replaced by Y, which now in turn is considered 100% certain. Meanwhile, he doesn't think of people as generally engaged in portfolio choice under uncertainty with reasonably complete financial markets and the aim of maximizing expected utility given a constantly updated set of expectations. (A jargon-laden mouthful, I realize, but it captures the way that an economist with Feldstein's training ought to conceptualize issues automatically, at least as a starting point. And the rational expectations school in macroeconomics had arisen by 1976.) Meanwhile, the fundamental political economy issue of how we ought to define the optimal scope of binding government pre-commitment - which obviously shouldn't be assumed to arise either in all cases or in none - isn't even in sight.

It's also amusing to see Feldstein in 1976 being so cautious about the case for consumption taxation. With an air of being daring, he says that maybe capital income should be taxed at a lower rate than labor income,. Of course, the modern consumption tax view is that the return to waiting (capital income stripped of risk premia and other such conceptually separate elements) should be taxed at zero.

Harold Wilson once said that a week is a long time in politics. Perhaps academics should be relieved that, for us, a long time is measured instead in decades.

Fish in a barrel

The moment I saw the NY Times front page, inexplicably treating Bush's staged 9/11 milking as screamer-headline news, I correctly guessed that the lead article would say he was "visibly moved." But I missed out on the extra credit - the inevitable mention of the "unscripted stop." Anyone want to bet on whether they scripted the "unscripted stop"?

My wife speculates that the "lessons of that day" Bush will "never forget" (as the Times breathlessly quotes him) must have come out of "My Pet Goat."

I added that Bush certainly seemed to have forgotten the lessons of 9/11 when he pulled all those special forces guys off the Osama trail in Tora Bora so they could head to Iraq.

He says, of course, that "I" not "we" will "never forget." All that the rest of us are supposed to do, in his scenario, is give him the votes to keep on doing what he likes.

I was literally there on the day, about a mile from Ground Zero and with a clear view of the Towers as they burned and fell. (It also happens to be my wedding anniversary, a horrific coincidence that we are finally getting over.)

I find it in bad taste to use 9/11 as an election trick aimed at heading off Congressional investigations of six years of crimes and malfeasance.

Heard on the street

Today, as I was heading home, a nanny was walking with a very little girl plus a baby in a stroller.

"How much is 1 plus 2?" she asked the little girl.

"3!!!"

"How much is 21 plus 2?"

"30!"

"Try again."

"20!"

I think we've found the next Treasury Secretary.

Crasser than ever

Sending Khalid Shaikh Mohammed and the others to Guantanamo and suddenly demanding showtrials as a pre-U.S. election stunt is low and cynical even by Bush's warped standards. He certainly is willing to advertise his priorities to anyone whose eyes are open.

I guess I'm just naive. To me, the question of what we do with the likes of Khalid Shaikh Mohammed actually matters for its own sake. I don't see it as just a subject for political trickery.

Pluto

Everyone realizes, of course, that the question of whether Pluto is a "planet" is not a well-defined scientific question, since "planet" is not a well-defined concept in the sense of proton and electron or even species (defined in terms of fertile interbreeding) and star (defined in terms of nuclear fission). It's a term of convenience that we like using to group together the "major" objects circling a star, inherently having fuzzy boundaries.

That being said, I thought Pluto should be excluded from the club, or more precisely that my sense of how the term "planet" is most conveniently used suggests excluding it. In addition to all the differences between it and both the rocky inner planets and the gas giants, the fact that a whole bunch of other objects, not easily distinguished from Pluto, may be out there, suggests to me that we would have too many planets from a convenience standpoint if we didn't give Pluto the old heave-ho. And calling the asteroid Ceres a planet, as the earlier definition would have done, seemed a real violation - again, just of useful and familiar language categories although not of any scientific principle (one can define "planet" however one likes).

But I see a serious flaw in the latest approach taken by the scientific panel, even though I agreed with the result. The problem was how they did it, which brings to mind a judge getting the "right" result in a case of first impression by creating new law that is bound to function poorly in future cases. They emphasized the idea of "dominance," meaning that the would-be planet must be much bigger than anything in its neighborhood.

The problem is that local dominance really doesn't capture what makes us think of some objects as planets. If the Moon were bigger, would we think the Earth wasn't a planet? If Jupiter were a double planet, would we want to boot it from the club? For that matter, does Charon's size have anything to do with the reasons for thinking that maybe we don't want to call Pluto a planet?

If some inexorable law of solar system formation dictated that anything we really wanted to call a planet would fortuitously have the characteristic of local dominance, the spurious use of this special factor to get the "right" result would be harmless error (resorting to legal jargon once again). But I see no reason to think this must be so, even if it generally tends to be. True, in our solar system the inner 8 planets are locally dominant. The Earth is by far the closest to being an outlier (and of course wouldn't be classified as locally dominant if we made the definition more demanding), and this is thought to reflect an extraordinary event - collision with a Mars-sized planetoid in the early years of our solar system. But again this bit of history only goes to show that strange things can and will happen across a range of solar systems (which we are getting ever better at detecting in outer space).

Use of the local dominance factor may have anomalous results as we learn more about the outer reaches of our solar system. E.g., suppose there are 20 locally dominant iceballs out there with eccentric orbits, barely Pluto's size, and one more that's 50 times the size of Earth, less eccentric in its orbit, and closer in, only it's a double planet. Would it be the only non-planet of the bunch? Plus, with all the other solar systems we may detect, the definition is unlikely to consistently give us what we "want."

Given the term "planet's" peculiar linguistic usage and status, it's probably a mistake for scientists to try to come up with a tight definition, even though this ordinarily is the way they do business. They've designed a rule (as in "the speed limit is 55 mph") when what they need is a standard ("unreasonably fast under the circumstances").