Saturday, December 24, 2005

David Friedman on libertarians & current politics

David Friedman (Milton's iconoclastic libertarian son) has a new blog. Sample quote:

"Libertarians still tend to identify with the Republican party. Save for historical reasons, it is hard to see why. The current administration, despite its free market rhetoric, has been no better--arguably worse--than its predecessor on economic issues. Its policy on public schooling, the largest governent run industry in the U.S., has been a push towards more central control, not less. Its support for free trade has been at best intermittant. Reductions in taxes have been matched by increases in government spending, increasing, not shrinking, the real size and cost of government. It has been strikingly bad on civil liberties. Its Supreme Court nominees have not been notably sympathetic to libertarian views of the law. Libertarians disagree among themselves on foreign policy, but many support a generally non-interventionist approach and so find themselves unhappy with the Iraq war."

Friday, December 23, 2005

Starve the beast, part 2

In my forthcoming book, which will be published by the Cambridge University Press, I address the “starve the beast” view at what I consider a more fundamental level.

BTW, the two leading candidates for the book’s title at this point are: (1) “The Abuse of Fiscal Language and the U.S. Government’s March Towards Bankruptcy,” and (2) “The Use and Abuse of Fiscal Language: Taxes, Spending, and the U.S. Government’s March Towards Bankruptcy.” I prefer # 2 aesthetically, but am inclined to accept counsel that # 1 is better commercially.

In the book, I address the problems with using deficits instead of long-term fiscal measures. But this is only Exhibit # 2 in how fiscal language has encouraged making things worse.

Exhibit # 1 is the use of the terms “taxes” and “spending” as proxies for determining the size of government. Thus, if the government were to give me $1 billion which I immediately handed back, simplistic idiots would say: “There’s just been a billion dollars of taxes and spending!” I would say that really nothing has happened.

No idle hypothetical – Social Security, for example, has aspects of this, although there is a greater time lag and the cash you get back may not equal, in time-adjusted value, the cash you put back. But this means it’s the aspects of non-equivalence, not the gross cash flows each way, that determine how significant the whole thing is.

The size of government, I’d say, is a concept that, in the budgetary realm, involves trying to quantify the effects of government policy, relative to some baseline that has to be specified, on allocation and distribution – on what we have and who has it. (I limit this to the budgetary realm because issues such as civil liberties operate in different dimensions.)

Once you take this perspective, the utter inadequacy of discerning how much the government is doing from the number of dollars associated with discrete and often offsetting cash flows becomes pretty clear.

Against this background, what does “starve the beast” accomplish even if there are large spending cuts in future years? (Note: there will almost certainly be large tax increases as well.) Point 1: It definitely increases redistribution, by handing vast sums of extra money to older generations at the expense of younger generations. (Older generations were huge net winners even before the whole exercise started.) Point 2: It probably increases government-induced economic distortion, what with the heightened disparity between tax rates in different periods, the instability and risk of fiscal crisis throughout the adjustment process (which may become chronic rather than coming to an end), etc.

If any “starve the beast” advocate whatsoever has actually tried to think through how the adjustment process is likely to go, and in particular why my analysis would NOT be correct, I certainly have yet to hear it. They are seemingly determined not to look past their own noses.

Starve the beast, part 1

In today’s New York Times, Paul Krugman addresses the “starve the beast” rationale for never-ending tax cuts, advocated by Republicans no matter what they do to the deficit or the fiscal gap:

“At this point starve-the-beast theory looks as silly as supply-side economics. Although a disciplined conservative movement has controlled Congress and the White House for five years - and presided over record deficits - public opposition has prevented any significant cuts in the big social-insurance programs that dominate domestic spending…

"In other words, the starve-the-beast theory - like missile defense - has been tested under the most favorable possible circumstances, and failed. So there is no longer any coherent justification for further tax cuts.

"Republicans have turned into tax-cut zombies. They can't remember why they originally wanted to cut taxes, they can't explain how they plan to make up for the lost revenue, and they don't care. Instead, they just keep shambling forward, always hungry for more."

Cute, but in my view Krugman under-estimates the unfalsifiability of starve-the-beast thinking. Counter-factual hypotheticals mean never having to say you’re sorry. No matter how fast spending keeps rising as tax revenues fall, one can always say: “Yes, but if not for the tax cuts, there would have been EVEN MORE spending!”

Because this argument rests on a counterfactual, it cannot directly be falsified. True, it can be tested empirically in the sense of testing past correlations between revenue levels and spending levels. Unfortunately, the research that has been done suggests that tax cuts are associated with spending increases, and tax increases with tighter spending, apparently because both respond to whether fiscal discipline is prevalent at any given time.

For a nice example of blithe unfalsifiability, however, when economists would ask Glenn Hubbard, during his White House years, about the rationale for cutting taxes in the face of a huge fiscal gap, he would respond that the long-term impact on the fiscal gap was zero because otherwise there would have been spending increases instead. Or rather, exta spending increases with the same present value as the revenue loss from the tax cuts.

Whatever. But anyway, starve-the-beasters have a further fallback, likewise unfalsifiable This is what I call the “manana theory.” True, we haven’t done anything yet to cut spending, it goes. But wait until manana – then we’ll take care of everything.

The great thing about the manana theory is that there are always more mananas to wait for.

Since this post is already pretty long, I will post a second, separate one explaining why “starve the beast” theory is mistaken even to the extent that the fiscal gap does indeed prompt large spending cuts manana.

Tuesday, December 20, 2005

Pop music

I wouldn't say I hear new stuff comprehensively enough to purport to assemble a best-of list, but five of my favorite new albums of the year, in no particular order, were:

Silver Jews, Tanglewood Numbers

Fiery Furnaces, EP

Sleater Kinney, The Woods

New Pornographers, Twin Cinema

Go-Betweens, Oceans Apart

New 2005 albums that come to mind right now that I liked enough to play for a bit but not enough to put on the list include those by Spoon, Stephen Malkmus, and Broken Social Scene.

I would have included the Belle and Sebastian EP/singles compilation, Push Barman to Open Old Wounds (better than their last new album) except I already had all the tracks and thus didn't buy it.

Title troubles

I am trying to finish a book manuscript, in time for it to come out by the election season next year, but the question is what to call it.

My working title from the start has been "The Use and Abuse of Fiscal Language." But people whose interest in the matter matches mine, and who know more about the publishing biz than I do, suggest that this will mis-label or fail to describe the book, to its commercial and attentional detriment. So right now the best we have is "Fiscal Language and the U.S. Government's March Toward Bankruptcy."

Part of me says, who cares what it's called, I'd be willing to call it "Banana" if that were best for getting readers and attention to what it says. But I prefer my original title aesthetically, and who knows, maybe aesthetics can even be good for sales.

Perhaps the thing to do is come up with something better than either.

The Wall Street Journal explains its vision of limited government

Today's WSJ editorial headline: "Thank You for Wiretapping"

I think they are cribbing from Animal House ("Thank you, sir, may I have another?").

Monday, December 19, 2005

Highly recommended novel

J.G. Farrell's "Troubles," a comedy of futility and decay set in Ireland in 1919.

The incentive problems caused by journalistic "balance"

There's been a lot of comment on the blogosphere, especially on the left, concerning journalistic "balance," or the habit of treating everything as a "he said/she said" story with no effort at assessment even if one side is provably correct. Thus, if Cheney says up is down and Harry Reid disagrees, the headline will say "Cheney Vigorously Insists Up is Down," with Harry's disagreement in paragraph five.

(Of course, this is better than Bob Woodward-style journalism, which would simply report as unsourced fact, based on the best inside sources, that up is down.)

I saw another example of this journalistic idiocy in the Sunday NY Times Book Review for 12/18, where the reviewer of the book "The Republican War on Science" denounced the author for being too one-sided and shrill, despite (a) agreeing that in fact what the book said was accurate, and (b) recollecting an occasion when the author of the review had been forced to supply "balance" even though one side was demonstrably totally wrong. Some habits are too deeply engrained to shake even when the truth is staring you in the face.

But if you think a bit more about mindless "balance." you come to realize that the Bush Administration, in a sense, is not entirely to blame for how they have exploited it to make wildly false assertions that then can reported without demur. These people are simply responding to the incentives the press gives them - admittedly, a bit more aggressively than most of their precursors on either side of the aisle, but then again successful strategies evolve over time.

If the press is going to say "He said/she said" no matter what, with absolutely no effort to test either side's assertions for internal logic, consistency with known facts, etc., then one no longer has any incentive to be reasonable. (The usual incentive to be reasonable is that you will lose credibility otherwise. Better to claim and get half a loaf then to claim the whole thing and get zilch.) But if your side will be your side no matter what, then the only thing that benefits you is being as extreme and shrill as possible. Just like, in a tug of war, the harder you pull the better off you are.

A stupid, mindless, timid, self-serving, cowardly, incompetent, ignorant journalistic practice that emerged by itself as a useful professional norm turns out to be a great danger to democracy and public deliberation. I wish I had a cure to suggest other than the naive one of better, smarter, more honest and honorable people in the press, which is a tall order when you observe where even the vile Woodward started out.

Saturday, December 17, 2005


The brazenness is just so breathtaking.

Secret wiretaps were required for national security, when they could wiretap anyone they liked for 72 hours and get a court order to continue it?

National security has been compromised by the NYT article, when any terrorists operating here would know they might be wiretapped? The lack of court approval was supposed to throw them off guard?

My guess is that they were wiretapping people in the Executive Branch they didn't trust, or journalists, or prominent Democrats, or people like George Soros, or each other, or all of the above.

By the lights of John Yoo's constitutional "theory," I would assume that Bush claims the constitutional authority to declare martial law and suspend all civil liberties and elections, so long as in his judgment this is part of fighting the "war on terror."

Friday, December 16, 2005

The New America Foundation again

As I noted in an earlier post, the New America Foundation recently issued an interesting tax reform plan, a but bolder and more novel than what the Tax Reform Panel was able to do, although flawed by the peculiar administrative idea of subjecting taxpayers both to an income tax and to a progressive consumption tax. Having everyone file two returns instead of just one is not an idea I would expect to go anywhere. But still, the NAF is trying a bit harder than most other groups in Washington these days.

Now the NAF has issued a "Nonpartisan Social Security Reform Plan," devised by Maya Maguineas of the NAF plus economists Jeffrey Liebman and Andrew Samwick. Although some in the liberal blogosphere have been experiencing heart palpitations because both Liebman and Samwick have worked with conservative eminence grise Martin Feldstein, in fact Liebman is on the Democratic side of the aisle and worked for the Clinton Administration, while Samwick lines up on the Republican side (albeit with principle, not hackery) and worked for the current Bush Administration.

The NAF plan tries to balance left and right policy preferences by providing a mix of benefit cuts, revenue increases, and mandatory individual accounts that are funded half through new taxes and half through diversion of a slice (1.5%) of the existing Social Security payroll tax. King Solomon and slicing the baby in half, you see. But in fact this is the sort of plan that deserves attention, and the most serious one out there, so far as I am aware, other than the Peter Diamond-Peter Orszag plan that tries to be similarly balanced but leaves out the accounts and presumably has no prospects for acceptance on the right.

Liberal bloggers have been attacking the plan, however, because it has the accounts with a bit of a Social Security payroll tax diversion to help fund them. So to some of them it might as well be the Bush plan all over again.

It's funny how arbitrary details can affect people's perception of things. The NAF plan replaces two-thirds of the diverted payroll tax revenue through a progressive increase to the payroll tax (raising the ceiling on the tax, not the rate). So, if they changed the sequence of the cash flows, they could almost fully fund the accounts through the new taxes. This would probably cause the plan to be perceived differently, even though in substance it would be exactly the same.

Samwick has sounded a bit touchy, perhaps understandably so (none of us likes to be trashed) in discussing the plan in his own blog. Among other things, he says that the mandatory accounts with a bit of payroll tax diversion are indispensable to get conservative support for the plan, including his. But alas, getting rid of them may be indispensable to liberal support for the plan, and no plan has a chance politically without both liberal and conservative support. (When I speak of a plan having a chance, I mean several years down the road - obvously nothing is possible now.)

It's a shame that the symbolism of individual accounts and payroll tax diversion matters more than the substance of Social Security reform, to many on both the left and the right. In fact, whether or not there are individual accounts is really more of a fiscal language or descriptive detail than one with important economic substance. More on that at some future time.

Tuesday, December 13, 2005

Heads we win, tails you lose

The European Court of Justice has just issued an opinion in the Marks & Spencer case, affirming an earlier opinion by its Advocate General, under which England (and other members of the European Economic Community) must allow resident companies to deduct the losses of their foreign subsidiaries, even though the resident companies are not required to include net income from their foreign subsidiaries.

The ruling is limited to cases where the subsidiary's losses can't be deducted in the country where it was resident. But this is a trivial limit. Given the universal nonrefundability of overall tax losses, all a European company has to do, in order to satisfy this requirement, is sell its foreign loss subsidiary.

This is going to be great fun for European tax planners. For a company that is resident in a high-tax country, one simple thing to do is establish a foreign sub in a low-tax country. If it's profitable, pay tax at the low rate. If it loses money, sell and get the loss deduction at the high rate. Companies can also probably gin up the losses, where they like, through inter-group games such as transfer pricing (have the foreign subsidiary pay too much and charge too little in inter-group transactions) and leverage (put lots of debt into the sub).

The ECJ was warned about this, but chose to disregard all such problems as mere concern about revenue loss, which can't carry the day since countries would never allow any deductions if this were all that mattered.

While supposedly charged with creating a single European market and preventing protectionism within the community, the ECJ is acting as if it wants to obstruct national revenue authorities and create open season for tax planners. But perhaps what it really wants to do is grab as much turf as possible. Reducing revenue while increasing economic distortion is evidently a small price (for someone else) to pay.

Monday, December 12, 2005

Tweetie triumphs again

The following is an e-mail message I received from home. You can fill in the earlier part of the story yourself, although I will note that the mystery lies in how the bird got in.

"The bird is out of the house. To sum up, it ended in Shadow's mouth, he put it down, I held the back door open, and it rallied and flew out.

"While this happened, Buddy was barricaded in the front. When I released him, he ran down to see what was up and, finding no bird, began meowing.

"I imagine they'll all need to sleep this off."

Friday, December 09, 2005

Is this why the Bush Administration is so keen on torture?

Today's New York Times had a front-page article revealing that one of the main pieces of evidence for an Iraq-al Qaeda link that the Bush Administration proferred during the run-up to the Iraq war came from a prisoner who the Egyptians had tortured to the point that he started fabricating what they wanted to hear. The Administration used this information even though, as early as February 2002, the Defense Intelligence Agency had warned that it was unreliable.

While torture's efficacy in getting people to provide true information is disputed, no one doubts that it works extremely well at getting people to say what the torturers want them to say. The likes of Cheney might be keen on this for either or both of two reasons. The first is that they are just trying to make a case, and don't care if the statements extracted through torture are true or not. The second is that they already "know" what is true, on ideological grounds, and thus regard all actual empirical evidence as false unless it confirms their fixed preconceptions.

Not only don't I know which rationale was more important to Cheney, but I'm not convinced that he knows the difference any more.

Phony numbers from the House of Representatives

The House of Representatives just approved tax cuts estimated at $95 billion over five years. So much for the much-touted deficit reduction from their earlier approving $51 billion of spending cuts over 5 years.

One thing I don't understand is why they didn't cut taxes by, say, $950 billion over 5 years. After all, the NY Times quotes a Republican House member, Jeb Hensarling of Texas, as saying that "tax relief is part of the deficit solution, not part of the problem."

Even the $95 billion number is phony, however. It includes $31 billion to extend, for just 1 year (not 5) provisions reducing the bite of the alternative minimum tax. Everyone knows, however, that there will be huge pressure to keep on extending the AMT relief year by year.

If we assume that Congress will keep on extending the AMT relief - who knows, but this is probably a better baseline estimate than saying it won't - and if the cost grows a bit each year, we are probably talking more than $200 billion of tax cuts over 5 years, if the House has its way, even leaving aside everything else they want to do.

A broader structural point: deferred adverse changes to current year law that will occur if Congress doesn't act again generally are not credible. Perhaps budgeting estimates should be prepared on the basis that current year law will continue when the law on the books involves deferred and discontinuous adverse changes. (By discontinuous, I mean something that isn't already phasing in at a steady rate.) That would take some of the juice out of sunsetting everything and then continually extending it a year at a time.

Thursday, December 08, 2005

Making us proud

From Steve Clemons, a nice little reminder of what sort of government we have (a more forgiving way to put it than "what sort of country we've become"):

El-Masri, a German citizen of Lebanese descent, was kidnapped while vacationing by American intelligence agents. He was transported and "questioned" -- allegedly roughly -- by American authorities in Afghanistan. Along the way, these investigators finally figured out he was innocent and reported back to CIA Director George Tenet. Tenet had him held ANYWAY for another two months.

And then. . . you might ask, could it get worse? Well, yes.

We dumped him blind-folded in the deep forest, mountainous triangle area between Albania, Serbia and Macedonia. He had to walk out with no money, no identification.

He got to a border guard station -- and because of his inability to identify himself and because of how "outlandish" his story sounded to the border guards he met, he feared that the entire process would begin.

We dumped him blindfolded in a forest in one of the roughest regions nearby. Were U.S. authorities hoping he'd just be shot by someone else?

Wednesday, December 07, 2005

Two-way FOIA madness

William Frenzel, one of the members of the Tax Reform Panel, is quoted in a recent edition of Tax Notes as saying that one of the Panel's biggest problems, in terms of presenting reasonably detailed plans, was that the 9 members could not meet privately with each other to discuss anything. Under the Federal Advisory Committee Act (OK, it's not really FOIA despite my heading), no more than 4 of the 9 panelists, to avoid a quorum, could meet together without its being in public. (It's a good thing no one had a birthday party.) They also faced restrictions on the use of documents that weren't made public.

As a result of this rule, as I myself have heard elsewhere, the sub-committees (sub-panels?) on the Panel could not discuss what they were doing with each other until the end of the process, when they had a public meeting. So there was next to no coordination between the parts in some important respects. Hence. perhaps, the fact that the so-called consumption tax prototype in the Panel's report was in some ways more of an income tax and less of a consumption tax than the so-called income tax prototype.

The problems the Panel faced suggest a sarcastic response, then a more serious response. The sarcastic response is: Why didn't the Administration just have Cheney appoint the same people as a Vice Presidential panel? Presto, no disclosure requirements and lots more political credibility.

More seriously, both this result and the fact that Cheney didn't have to reveal anything about his 2001 dealings with the energy lobbyists who wrote his "energy plan" seem inexcusable and indefensible. Couldn't Congress enact a more rational and uniform set of disclosure rules, so that groups such as the Panel just have to reveal their contacts and so that Cheney and his working groups or panels would have to do so as well?

I realize I'm being politically naive here.

Tuesday, December 06, 2005

Message to Jon Stewart's writers: don't look back, someone is gaining on you

Courtesy of a reader, I note a New York Times article, quoting Bush, almost in the same breath, as first demanding the extension of his tax cuts and then, in re. his Social Security plan, saying: "When you get elected to office in Washington, D.C., you have an obligation to confront problems, not pass them on to future generations and future Congresses."

Memo to Bush: Here is some straight math for you (I know you hate the fuzzy stuff). The infinite horizon estimated cost of extending your tax cuts is $13 trillion. The infinite horizon Social Security fiscal gap that you claim is so disastrous is $10 trillion.

Free plug

The New America Foundation, one of the more interesting (indeed, most interesting) D.C. thinktanks with a focus on tax and budget policy, just announced its own comprehensive tax reform plan.

Its elements are:

1) Replace the payroll tax with a progressive consumption tax.

2) Corporate integration, albeit by unspecified means.

3) Get rid of many or most tax expenditures.

4) In lieu of the estate tax, treat amounts inherited as taxable income.

5) Use environmental taxes, such as through a gas tax or system of tradable carbon permits, to raise revenue while also reducing economic distortion.

If I had to quarrel, just to get a discussion going, I'd say #1 would be more unwieldy than what we have now if the income tax remains in place, for #2 the choice of means is important, and #4 would create bad tax planning issues if applicable to bequests but not gifts made while the donor is alive. (Estate or inheritance taxation also raises lots of tougher issues on which I am agnostic, leaning towards opposed, if we assume that it can be traded in for other progressivity.) 3 and 5 are hard to quarrel with, by my lights.

But more importantly than any of this, the New American Foundation is to be commended for trying to put interesting ideas on the table at a time when the intellectual and political vigor of reform efforts seems so low. (With apologies to friends who worked on or with the Tax Reform Panel, and who were hemmed in by their mandate.)