Political economy of FASB decisions

I haven't as yet tried to use this site as a research tool, but perhaps I should, so here goes.

In the article I'm working on concerning tax and accounting measures of income, an important issue is the political economy of how the two income bases are set. I certainly feel up to speed on the general issue of Congress and tax policy decisions, but the manner in which GAAP standards are set for financial accounting is more opaque to me. Yes, I can easily learn more about exactly how the Financial Accounting Standards Board (FASB) operates, and I know a bit about the broader political setting - e.g., threatened Congressional interventions from the 1990s on concerning the treatment for financial accounting purposes of managerial stock options.

What I want, and am not at the moment entirely clear on how best to get, is a better feel for the real politics of the FASB process. For example, literature that I have seen gives me the overall sense that people think the process is better insulated from crass political intervention, e.g., by particular interest groups, than the process of determining taxable income. Of course, that sets the bar pretty low. I have also heard the view expressed that the accounting profession is pretty responsive, through FASB just as in client work, to the interests of managers as a group, leading to the kind of industry capture scenario that one would of course fear relative to the optimistic scenario where FASB responds more to official professional ideals by seeking unstintingly to serve investors and the cause of capital market transparency.

Any guidance that readers could offer me, be it anecdotal or systematic, informal or scholarly, would be most welcome, whether offered in the comments section here or off-line (my e-mail address is easy to find). Thanks.

Rutles anniversary

Yes, it was only 40 years ago today that the Rutles released "Sergeant Rutter's Only Darts Club Band," which remains a millstone in pop music history.

As you may recall, their first album was made in twenty minutes; their second took even longer.

The Rutles will be remembered long after Beethoven is forgotten - but not until.

My talk last week at the International Tax Policy Forum

Last Friday, I gave a talk on my worldwide welfare paper at the International Tax Policy Forum. This is a group, organized and funded by U.S. multinationals, that sponsors and disseminates research on international tax policy issues. Needless to say, there is a particular point of view that they strongly prefer, not entirely unrelated to the interests of the funders. But they are a high-brow group that takes an interest in good quality research, rather than hackery. Making this easier is a belief that the empirics, properly understood, genuinely favor them.

When I present a paper there that they don't agree with, as happened this time, the aim is to influence the author to think differently, not to attack. Certainly a savvy strategy, and I have to admit not entirely unsuccessful this time. Perhaps all the more successful here because my paper has the structure, in my mind, of "If A, then B," whereas they are arguing not A, and hence not challenging the paper's argument, which rests on saying: Let's assume A for present purposes, as it is a widespread and potentially plausible view, and see where it leads.

A, in this case, is the traditional view of international tax policy, dating back at least to Peggy Musgrave's work more than 40 years ago, in which the normative guideposts are:

(1) national neutrality (a country acting unilaterally benefits from merely allowing deductions for foreign taxes paid, and should address double taxation of cross-border investment only if other countries are willing to do so as well), and

(2) possible mutual welfare gains from cooperating to address double taxation, via the efficiency enhancements achieved by promoting capital export neutrality or capital import neutrality, which unfortunately counsel very different policies in particular settings.

Given this structure, my paper discusses how the choice between (1) and (2) involves a prisoner's dilemma, and what implications this has. Normally, prisoner's dilemmas require that the players can't witness each other's behavior, but I argue that it applies to setting international tax policy even though it takes place in broad daylight.

This is unambiguously the right way to look at the issues, I would argue, if we had a worldwide residence-based tax on individuals who were fairly immobile. But once you have entity-level taxation that turns on the fiction of corporate residence, the argument I was getting at ITPF was that the normative framework may radically shift. I agree with the logic of these arguments, and again one could view them as orthogonal to my paper except that, if universally and unambiguously true enough in practice, the logic discussed in my paper might not even be worth exploring. This is something I mean to take up more in the future.

A core empirical question, we agreed, is whether outbound investments by resident taxpayers that the home country is considering how to tax are substitutes or complements for investing at home. In the (counter-factual) case of a worldwide residence-based tax on individuals, they have to be substitutes. I have $X to invest, and unless I respond by saving more (which is probably not to be much expected in this setting), then every dollar I invest abroad is thereby not invested at home.

By contrast, a U.S. multinational that is trying to raise funds from people who can invest it anywhere and with anyone may well be in the world of complements not substitutes. A good cross-border investment opportunity may simply mean that they can raise more capital to play with. If the country in which the company is deemed a resident increases the tax, those who are ultimately the sources of the capital may simply respond by investing via another company in another country. And this in turn may affect the next move made by whichever company got the investment dollar. So the complementarity scenario becomes a plausible alternative to the substitution scenario.

These guys at ITPF are good. They've got me thinking. Or rather, since I was already familiar with the general intellectual landscape here, they've got me thinking a bit more.

Why do people become teachers?

This is not a question about academics such as myself. We're a different kettle of fish, as stuff happening outside the classroom, in particular scholarly and other writing, is so central to our career choice.

Rather, I'm ruminating here about K through 12 teachers, only slicing off the upper and lower ends. Those who work with very young children are also a distinctive group, while high school teachers remain as yet outside my experience as a parent.

For those who remain in the grouping, I have noticed three basic types. The first are the people who actually want to be teachers. Motivations may vary, but sometimes I discern a sense of "I'm going to be the sort of person I wish had been there for me, but wasn't." Obviously, this is the type one wants one's children to have. There are plenty of them, but they are unfortunately not as common as one would like - certainly below 50 percent, in my experience as a parent.

Those in Type 2 want a white-collar job, no hard physical labor, that sounds good when you tell people you're doing it. And they want something that doesn't take too much hard-core professional training, and that doesn't require specialized skills of a kind that are too easy to test for objectively. Their chief goal professionally is advancement with as little challenge and trouble as possible.

Type 3 wants inferiors, in size, age, and knowledge, from whom to demand admiration. This type is potentially even worse than Type 2.

Needless to say, Types 2 and 3 attempt to masquerade as Type 1. The best diagnostic I know is that Types 2 and 3 are generally humorless.

Ruminations of an anti-Yankee fan

In all of sports, my anti-Yankee sentiments are second only, and barely, to my pro-Mets sentiments. The two are of course tightly linked, and go back to 1964, when a pint-sized version of the person now typing this was the only Mets fan on his Bronx block. So the sentiments are pretty foundational; even the Mule from Asimov's Foundation series might have a hard time modifying them now.

The Yankees have certainly had some bad luck this year. Do I feel sorry for them? Well, first of all, they need at least 10 or 15 more years of luck this bad before I will say it's evened out. Second, they've ended up on top too many times for me to be convinced they are really scotched for this year. In fact, for all I know they may win their next ten. Third, as of this April their payroll stood at $195M, versus $143M for the Red Sox and $117M for the Mets. They have since added Roger Clemons, which even with his late start should add $20M or so. So they are more than $70M ahead of the Red Sox in spending, and nearly $100M ahead of the Mets. To put it another way, there are more than 20 teams whose payrolls, added to the Mets', are still less than theirs. One certainly ought to be able to buy a bit of insurance that way. So no, I am considerably short of feeling sorry for the Yankees.

Nixon Frost

Last night I saw Nixon Frost, the play about the famous interviews, starring Frank Langella as the Trickster (updating his performance as Dracula?). Most enjoyable; Nixon is the gift that just keeps giving, and I feel sorry for those too young to have experienced him. The current parallels are of course unavoidable, e.g., the scandals and the view of Presidential power, but one can't stop thinking about how vile, stupid, uncomplicated, uninteresting, and unworthy current pretenders to the Nixon throne are compared to the man himself. Nixon had a lot in him, and some of it (like some of his presidency) was actually quite good. The rest may have been bad but was fascinating. None of this is true today, when we have venomous little scorpions instead of Macbeth.

Despite the innate appeal, I thought the playwright's recent movie, The Queen was in some ways more illuminating. Nixon is of course one of the all-time great real world characters, and has been taken in all sorts of directions involving varying degrees of poetic license. Here it was a bit linear, and the payoff was the famous moment in the Frost-Nixon interview on Watergate where he breaks down a bit into an on-camera catharsis, which the play suggests he at least half-wanted to do. This verged on being a bit too much of a typical final-scene chew-the-scenery Big Moment, although Langella did it well and I gather it actually happened. (I saw the interviews back when, but would have to see the big scene again to evaluate whether or not the play over-milked Nixon's emotional level here.)

Not to sound too harsh, though, and highly recommended, at a minimum to all Nixon fans.

Tax break for managers of private investment funds

There's been much controversy lately about the tax break for managers of private investment funds that is currently under review by the Senate Finance Committee. The basics, first brought to general public attention (and certainly mine) by U of Illinois law prof Victor Fleischer, who presented his paper on the subject at the 2006 NYU Tax Policy Colloquium, are as follows. Managers of these funds typically get a standard return equaling 2% annually of the money they are managing plus 20% of the capital gain they eventually generate. The former is taxed as ordinary income, but the latter is taxed as capital gain. As Victor pointed out, this means that much of the managers' labor income is being taxed at 15% rather than 35%, even though these are some of the highest-paid people in the U.S. today.

Economically speaking, the managers' 20% return is a mix of labor income and a risky return to saving. The reason they get compensated so richly for playing with other people's money is that they are at least believed to have the ability to make big bucks, such that the investors are happy even after giving away the "2 and 20." It would be pure labor income if the managers could lock in and be paid the expected value of the 20% interest right up front. (This is of course unfeasible on measurement and liquidity grounds along with its incentive effects on what the manager does.) But even for the true investment component keep in mind that they are getting the tax benefit of deferral until sale.

What are these funds doing, exactly? While I know nothing first-hand, I gather that they run the gamut from (a) the straight hedge fund that figures out clever strategies to exploit market inefficiencies and generate above-market risk-adjusted returns to (b) takeover firms that find under-performing companies and restructure them to be more profitable, and thus rapidly salable for a big turnover profit.

Economically speaking, (b) is generally more valuable to the economy than (a). While (a) may increase market efficiency, the private return from figuring out how to beat out other investors by buying and selling at just the right time exceeds the social return. Not that I have any problem with such activity, but it definitely doesn't need to be subsidized.

By contrast, (b) may have some broader social payoffs, although the question here, from the standpoint of incentives, is whether there are positive externalities - i.e., gain beyond that captured by the entrepeneurs who sell for a big turnover profit. Note also that one would be less bullish about this activity if the improved performance came, say, from improved tax planning strategies or the one-shot gain from implicitly reneging on deferred compensation arrangements with rank and file workers, rather than from, say, rationalizing production and marketing processes.

I raise these broader issues of the social value associated with particular types of economic activity, although often one can and should ignore such issues in setting tax policy, because incentive arguments are important to the debate concerning the taxation of the 20% carried interest. The incentive case for giving managers a low tax rate is limited to some portion of the activity in category (b), although even for the best case scenario it is unclear why we should expect substantial positive externalities, i.e., social returns that aren't captured by the remake artists who make so much money for having done such a good job. I'd certainly like to think that I create value when I publish or teach. And lots of other workers in our economy can say the same. But presumably I'm paid for the value I create, and I am sadly unconvinced that I can make a powerful case for applying a lower tax rate to myself than the one that everyone else bears.

A week or two ago, the Wall Street Journal published an editorial, unless it was an op-ed (what's the difference most of the time in the WSJ these days?) arguing against making the managers pay the ordinary 35% rate. What a surprise. No comment needed. But today the Los Angeles Times published an editorial to the same effect. I figure that this is a bit more noteworthy since it wasn't as crushingly obvious that the Times would take this tack. Hence, worth a response.

I did not find the editorial very persuasive. After inaccurately describing the tax break as for takeover firms, rather than for the broader category of private investment firms, it rolls out the usual hardware about enterpeneurship and risk-taking and creating jobs and how crucial all this is to the health of the economy. The main problem with this argument, other than the poor fit between the affected firms and the claimed external social benefit, is the poor fit between the capital gains preference and the aim of addressing risk-taking.

A flat rate tax system with full loss refundability at the generally applicable marginal rate would not discourage risk-taking. Even the positive expected tax on the risk premium could be offset by investing on a riskier pre-tax basis in order to get where one wants after-tax. Since we don't have such a system, the tax system actually does discourage risk-taking, which is unfortunate, even without an externalities story, as it imposes deadweight loss beyond that implicit in taxing productive economic activity. For the big-time entrepeneurs, graduated marginal rates, although they discourage risk-taking, are not very important. These guys are way into the top bracket anyway. What matters a lot more is loss nonrefundability, in particular at the business (as opposed to the investor) level. That is, companies pay tax on profits, but do not get any tax benefit from net losses if they don't at some point have sufficient profits from other operations. A recent paper by Alan Auerbach, presented at the 2007 NYU Tax Policy Colloquium (see here) suggests that this problem is growing increasingly important.

The obvious solution to that problem is greater loss refundability. But this involves a dilemma. The one good reason for nonrefundability is to limit the tax benefit from phony tax losses. But if you can't measure income accurately, then distinguishing between the real losses that we want to allow and the phony ones that we still want to limit is tricky indeed. So, while we may not be at the optimum today, especially if (as Auerbach's paper suggests) the problem of real losses is growing more important due to a change in business dynamics, it's unclear exactly where we ought to go.

But a special capital gains rate for some set of investment fund managers is very poorly focused indeed on this underlying problem.

The L.A. Times op-ed admits that the effectiveness of using capital gains rates to encourage socially valuable entrepeneurship is "open to some debate." However, the only response it deems appropriate is "a simpler tax code that defines clearly the behavior it is trying to encourage." Big internal contradiction here. A simpler tax code would not result from trying to define the true value-creating entrepeneurs, e.g., those who are enough by way of making companies more profitable rather than merely outguessing the market by five minutes. That would undoubtedly be a complicated rule, inevitably drawing various objective bright lines about control percentage, ownership period, etc., that would further distort economic behavior and benefit mainly the accountants and lawyers who were in charge of making sure that particular investments qualified for the low rate. Almost certainly a bad idea.

There actually is one good rationale for the capital gains preference. It relates to lock-in, or the tax discouragement of selling appreciated capital assets, given that one can avoid the current tax by continuing to hold them. In view of this problem, a capital gains preference can actually raise revenue relative to full taxation, although I gather (from my memory of disputes and dueling revenue estimates from the time of the Bush I Administration) that the revenue-maximizing rate is more likely to be in the range of about 30% rather than 15%. (Although note that the optimal rate is likely to be lower than the revenue-maximizing rate.)

Anyway, this rationale seems singularly inapplicable to the investment fund managers if the stuff their firms hold is generally likely, in keeping with their business model, to be turned over quickly in any event, and if the investors in the funds, who get the remaining 80% of the turnover profits, are indeed getting the capital gains rate.

Bottom line: the Senate Finance Committee should press ahead with some version of its proposal, although I suppose Bush will just veto it anyway.

Nobody likes a whiner

The above is a quote from Bill Murray's character in the delightful, though I gather little-known, "Quick Change."

Brought to mind by the release of the new Wilco album. Jeff Tweedy can indeed be a whiner. But worse, based on the admittedly limited evidence of 30-second samples on iTunes, his new release sounds downright boring. Which is just as pitchforkmedia.com, though not popmatters.com, would have it. It's hard to tell this way, but 30 seconds a song was enough to sell me on Yankee Hotel Foxtrot, back in the day.

By contrast, the new Elliott Smith release, New Moon, is excellent even though one would ordinarily be suspicious of multiple posthumous offerings.

These guys are good

That didn't take long. Today, the day after my 50th birthday, I got a letter from AARP, with membership card already printed in my name and dues card ready to go. What, they couldn't get it to me yesterday?

They bring to mind the Chinese restaurant a couple of blocks away. Order from them and the doorbill rings almost as soon as you hang up the phone. One wonders if they wiretap their customers' homes so they can have the orders ready.

If I do join AARP, which is unlikely at the moment, I wonder how much extra it would cost to get them to send the AARP Magazine in a plain brown paper bag. Don't want the neighbors seeing it & such.

Some random TV notes

Now that the summer has truly come in the main sense that matters to an academic - graduation was earlier today - I am plugging away on my tax & accounting article, which I feel is going well, but one needs to just do it for a while before stepping back and applying perspective. Between sections, or when a new part is thrashing around a bit before taking its proper shape, distractions, including self-created ones if nothing else comes up, are always welcome. So herewith a couple of notes prompted by TV viewing last night.

First, it's just amazing what the Pistons did to the Bulls in game 3 of their second round series. Detroit started the series with two unexpected blowouts, then the Bulls seemed to be making a counter-statement by pushing to a 19 point lead early in the third quarter, and it just didn't matter. The Detroit team of the last few years, along with the one that won two championships before Michael Jordan's breakthrough, is the best basketball team I've ever seen with no superstars. Or, they're the best I've ever seen at overcoming long stretches where they are pitifully unable to score. Somehow it just doesn't matter when they start to clamp down.

Second note pertains to Survivor, still the only network TV series that I have watched regularly in the past twenty-five years. My wife and I would have quit a few years back except that our kids wanted to keep watching, so it became a family thing to do. But after several years in the doldrums, it's actually taken on new life, whether or not anyone has noticed. The producers have made the tactical elements more complicated and tricky, for example by adding a hidden immunity item that one has to decide whether to play before knowing whether one needs to or not, and this has paid off dramatically at least twice this season. They've also managed to induce more fluid, less stable alliances. And the cultural norms of the contestants have evolved to accept greater opportunism towards alliance partners. Finally, the last two seasons have had greater racial and ethinc diversity in the cast, and this as well has paid off in terms of the range of interesting characters. So, while it's too late for this season if you're not already watching, and while who knows if next season will be any good, the current one (ending Sunday) has actually been one of the best ever.

Major landmark

Tomorrow I turn, ahem, 50 years old. This is a pretty big landmark, reached by most individuals no more than once. It's strange to have been young all one's life, strongly conditioning one's self-image, and then increasingly to find that one is no longer so. That being said, I weigh the same and am in better aerobic shape than when I was a college or law student. I also would make short work of my past self if we played, say, racquet sports against each other. But alas, all this requires eating a lot less and exercising a lot more. I also increasingly get all sorts of aches and pains that I didn't know as well back then. Some days you just don't feel that good, once you reach this stage. I now have to do regular exercise and stretching routines for nearly every body part that is potentially injurable in sporting activities. I also need reading glasses unless the print is large and/or the lighting great. And dessert now often inspires something of the same mute horror that I assume mice bring to thinking about cats.

"Youth is wasted on the young" may be trite, but that doesn't mean it's true. (It's not.) Certainly it would have helped me, back in the past, to know some of the things I know now, but then again my tolerances have changed so as to remain age-appropriate. (Being a student was okay back then, but I'd hate to relive it now.) I'd say I'm a lot more contented now, albeit more careworn because I have more responsibilities. At and to this point, various life issues (personal and career) that were unpredictable thirty years ago have gone in what I feel were good directions. Who knows if this would still be true if one could turn back the clock and play it out again. If offered that deal, I would definitely say no and keep what I have.

I was lucky not to experience much death among people I was close to, for a very long time. Lately, not so lucky, as is inevitable when you keep going. Still, I'm hoping for a respite, and also for a very long time before my own decay gets too advanced. And with that cheerful thought, accompanied by a lot of genuine gratitude for so much of the past and present, I will close these reflections.

Finally

Yesterday afternoon, at about 2 pm, I finally got the chance to start my summer research & writing. No exams to grade, as I spent a good part of the semester grading weekly papers in my colloquium, but lots of underbrush that I had to clear before finally getting started.

My first project for the summer & fall (when I'll be on sabbatical but in residence here at NYU) concerns the issue of book-tax differences, permitting publicly traded companies to report low taxable income and high accounting income, in each case potentially through dubious manipulation. Many have proposed requiring book-tax conformity, a notion that has some real problems despite its appeal. Rather than just taking a particular stance, I am hoping to bring a bit more analytical depth to the issues that are raised.

Other topics on my agenda include penalties for taking ex post erroneous tax positions (I have an SSRN-posted paper on this, but hope to dig deeper), possibly something on the estate or inheritance tax/generation-skipping tax set of issues, and possibly something on generational equity, a topic on which I've heretofore focused on measurement issues while putting off consideration of the philosophical merits. That might even turn out to be a book, but then again it might not even end up being an article. On vera.

But all this may have to wait a bit. I'm off today to Chicago, where tomorrow at a tax practice-related conference (at Chicago Kent Law School) I will be discussing the economic substance doctrine in tax law, in terms likely to be more encouraging to the IRS people in attendance than to some of the Chicago practitioners, who I recall as a bit Wild West-style and anti-government compared to the New York practitioners.

Movie starring my three cats

I'm not expecting it to be made any time soon, but if it is, and if we can ransack the last 60 years of U.S. film history, casting won't be a problem.

Shadow would obviously be played by Spencer Tracy. Ursula, by Audrey Hepburn. As for Buddy, a.k.a. The Rascal and a Half (call him a rascal and you have told 2/3 of the truth) - I'm sorry to say this, fella, but while my wife suggested Jim Carrey, I am currently thinking more in terms of Frank Gorshin. You know, played the Riddler on the Batman TV show. Also a memorable performance (whether you want to remember it or not) in Where The Boys Are, a trasho early 60s beach blanket movie.

Frank's, I mean Buddy's, latest antics related to some tulips that a relative brought to a family gathering tonight. Buddy likes tulips - the greens, actually, i don't think the flowers do much for him. This time, I knew what to expect because I had brought home tulips (as a change from roses) on Valentine's Day. That time, it was just a big misunderstanding, really - I think he simply believed I had brought home the flowers for him, although told repeatedly by word and gesture, admittedly in a cooing tone of voice, that this was not in fact so.

Round Two to me, I think, based on where I put the tulips this time. But we will see tomorrow morning. Although they're in a hard-to-reach place he has the guts of, well, a cat burglar.

Of course, when he starts rolling around with his paws up in the air, it's hard not to agree to give him that extra close-up.

UPDATE (the following day): Upon further review, I think I need to withdraw that comment about Round Two going to me. Upon coming downstairs this morning, I observed a tulip on the floor, a second tulip still in the vase but with its stem broken, and signs of extensive gnawing on the tulip greens. Buddy had also upchucked some greens. This is so regularly the result of his gnawing on them that I wonder if it is the aim. (Does the neoclassical model apply to cats?)

Apparently a 3-1/2 foot jump onto a 4 inch landing proved less of an obstacle to ol' Budzo than I had anticipated. So the corrected tulips score is Buddy 2, Shaviro 0.

2008 Tax Policy Colloquium

My co-convenors for the 2008 Tax Policy Colloquium are now set. I will be conducting the colloquium with Kevin Hassett of the American Enterprise Institute for the first seven weeks of the semester, and with Mihir Desai of the Harvard Business School for the last seven weeks. Both will be fun and exciting, as well as very different, colleagues for myself and everyone else who is involved with our colloquium.

Time to accessorize?

Some very nice quilts are available here.

In offering this plug, which reflects my having actually seen the pictured items, I admit I'm biased, but no more so than Paul Wolfowitz, and raising, I think, fewer ethical issues than his actions have.

AMT maneuverings

According to today's Washington Post, the Democrats are planning to provide AMT relief through a package that would exempt from the AMT people earning less than $250,000, reduce the bite in the $250,000 to $500,000 range, and reclaim the lost revenues from people earning more than $500,000. (Importantly. how this would be done is left unspecified.)

Talking points in hand, the Democrats speak of restoring the original focus of the AMT, providing tax relief on a more progressive (or "middle class") basis than did President Bush, and getting rid of the AMT's "parent penalty."

Republicans respond that taxing rich people is a "job killer" and that the AMT is too esoteric for anyone to care, especially as it hasn't really hit yet, etcetera.

This probably isn't a problem for the Democrats, however. If they are thinking strategically, as I would think they must be, the idea has to be to pass the AMT relief, let Bush veto it, and then blame Bush when the AMT tsunami really hits. Sounds like a feasible political strategy to me.

Unfortunately, it's just one more example of the decline of U.S. politics, from a system that could actually address problems to one simply based on blame-shifting and chicken games.

It's hard to blame the Democrats for this, as they really have no alternative with the Bush Administation in place. But if things don't get better under the next Administration, which depends on both parties, things could get pretty grim.

Final NYU Tax Policy Colloquium of 2007

Yesterday (Thursday 4/19) was the final NYU Tax Policy Colloquium of the spring 2007 semester. We went out on a good note with a paper by Christina Fong of Carnegie-Mellon University, concerning reciprocity norms and the welfare system. (See the April 19 date here.)

I've had this experience several times before over the years - we invite someone not personally known to our group and who also does not start out knowing anything about our group (or mixed law school / public economics types generally), and it works out very positively for everyone, with more of a sense of moving forward than you can get with old friends. Christina is a serious and thoughtful economist with strong interests in behavioral economics, decision theory, reciprocity and other non-monetary goals, etc., much in the spirit of work in the tradition running from Herbert Simon to George Loewenstein (who is also at Carnegie Mellon).

This was the Colloquium's twelfth year, and the second full one since the tragic death of David Bradford. What's exciting for me is the feeling that we've built an ever-changing yet somehow stable community that is serious but open-minded and permeable, as well as strongly opposed to any rigidity or orthodoxy, even (or especially) those consonant with our own views. Many thanks to Rosanne Altshuler and Alan Auerbach for their efforts in co-teaching it with me this year. They were both delightful colleagues and made great contributions.

Every year is different, but I am confident that next year will be great as well. I hope shortly to have word on whom I will be doing it with.

Alternative minimum tax

As per an earlier post, Lee Sheppard was kind enough to quote me in her article in the 4/16/07 Tax Notes concerning the AMT. So why don't I repay the favor, or alternatively add to it, by quoting her.

"'Given how irresponsible the Bush tax cuts were, it is just as well that they were not all realized,' commented Daniel Shaviro of the NYU School of Law. 'We're paying for the Bush tax cuts in installments.'

"Shaviro's comment is important. The panelists agreed that, to a great extent, the revenue from the AMT is masking the true cost of the Bush tax cuts ...

"'Should we have just one tax system? Should we repeal the regular income tax?' Shaviro asked rhetorically. He emphasized that what matters is not what the system is called but what it looks like. [Note: This is my rebuttal of Michael Graetz's in my view misconceived talking point about how we should repeal the regular tax rather than the AMT.] Shaviro pleaded guilty to having worked the technical aspects of the AMT while at the [Joint Committee on Taxation] during the 1986 tax reform. The drafters did not expect that the inclusion of personal exemptions, credits, and miscellaneous deductions in AMT preferences would become so important.

"'What do you do with the big items?' he continued. Shaviro, a Manhattan resident, argued that while personal exemptions, credits, and miscellaneous deductions should not be limited, there was a case to be made for the AMT's 'partial indirect repeal' of the state and local tax deduction. Other big items that require further consideration are the mortgage interest deduction and the exclusion for employer-provided medical coverage - both of which the president's tax reform panel had to propose cutting back to repeal the AMT and preserve the Bush tax cuts."

Moth-eaten comments

Until today, "moth-eaten" was a word I mainly used metaphorically. But today, it became startlingly literal.

I was getting dressed in my hotel room for the AMT panel on C-Span 3 that I mentioned in my previous post, just 20 minutes to go and with a 5-minute walk to get there, when I realized that my suit pans were, well, no longer feasible to wear in public. They're from a summer suit I had't worn since early last fall, and evidently I didn't check before hanging them in my garment bag. Certainly a grim moment when one is on the road, about to be televised, and has no time to go to a men's clothing store.

Luckily, as it turned out, we did the panel seated at a table that left viewers none the wiser that I was wearing rumpled jeans. And, for what it's worth, a co-panelist told me that William Bennett has been known to do panels looking splendid from the waist up and decidedly less so below. (Maybe he lost his dress pants at the craps table?)

On the panel itself, I tried to be lively enough to hold the TV viewership (all 30 of them). I suppose the word "moronic" doesn't frequently turn up on televised PowerPoint slides, but it did this time, in reference to having a tax system with gratituously built-in instability. (I used it to describe a situation, not any particular actors.) And I did not stint on the pessimism about our political system's capacity to respond to problems these days - this not to be lively, but because it's how I currently see things.

Cheap publicity stunt

Get your TIVOs and DVD recorders primed and ready now, if not sooner. It turns out that the AEI conference on the alternative minimum tax, at which I will be appearing, is going to be televised on C-Span 3. That's Monday, April 16, at 9 am. I am the second speaker, after Len Burman, and should be on at around 9:20 or 9:30, complete with Power Point slides. My remarks will include some reasonably lively bits.

I also gather that Monday's Tax Notes Magazine will have an article by Lee Sheppard concerning the NYU panel on the AMT on which I spoke last Tuesday. Lee features a couple of things I said in the middle of the piece and at the end. Bad form to thank her, I suppose, but I like how her article comes out although we're not 100% in agreement. (Then again, maybe not far below 100%.)`

He's gotta dance to keep from crying

Received earlier today from a friend:

"This is one of the best lines I’ve ever seen in a review about an aged rocker (from the NY Times on 4/11):
 
'How [Iggy Pop] re-enacts fear, rage, sex, abject boredom, universal love and lethal cynicism, while dancing with originality, remembering lyrics and maintaining the delicate middle-state between having pants on and not having pants on, is why he is he, and you are merely you.'”

Hey, it's a thankless job, but someone has to do it. Evidently Iggy is soldiering on notwithstanding the brutal 1.0 (on a scale from 0 to 10) that pitchforkmedia.com gave to his reunion album with the Stooges.

Shakespearean sonnet

For no particular reason, I'll take this opportunity to post a Shakespearean styled sonnet I wrote as a joke many, many years ago about a friend. (Some friend, huh? But it was all meant in good fun. Or else as a formal exercise.) To protect the guilty (myself), I have changed the individual's name to "Johnson," which bears no resemblance to the actual name. So any actual Johnsons out there, please don't tell me you think I wrote it about you.

I find the Johnson tedious and slow
If his wit sparkles, why then, so does mud
His glance is vacant, and as if to show
His foolishness, he sounds like Elmer Fudd.
His ignorance is like the vasty deep
And yet presumes he far beyond his ken
Resentful is he, envious and cheap
He slobbers more than ordinary men
He is morose, and gloomy as a Turk
The women find him duller than a stone
To talk with him is hard and joyless work
Speak fair, and he will answer with a groan.
And yet the sight of Johnson brings me bliss
For, next to his, how great MY happiness.

Alternative minimum tax discussions at NYU and AEI

This afternoon at 4, I'll be participating in a panel discussion at NYU Law School, with economists Len Burman and Rosanne Altshuler along with colleague Lily Batchelder, concerning the alternative minimum tax (AMT). Then Len and I, among others, will be discussing the AMT at the American Enterprise Institute in Washington next Monday (April 16) at 9 am.

One of the points I plan to make across the two sessions (where my remarks will be quite differently focused) is that there actually is a case for having an AMT, but only in what turns out to be an alternative political economy universe. I wrote about this back in the day (1987 in Taxes Magazine, and a 1989 U of Chicago Law Review article called "Selective Limitations on Tax Benefits"), making the following two points:

(1) If a provision like the AMT mainly denies tax benefits that ought to be disallowed generally, one would have to be craxy NOT to want to trade it in for straightforward base-broadening and no special rule or back-up tax system. E.g., if the AMT denies half the tax benefits from stupid provision X, replacing the AMT with straightforward, across-the-board 50% reduction in the scope of X is likely to be much better policy.

(2) If such a trade-in for the indirect base-broadening effects of the AMT is not politically feasible, then having it might be better than repealing it, depending on the relative magnitude of the distortions it reduces by cutting back X and the new ones it creates via its specialized method of operation.

At the time, I thought it plausible that this line of thought might make a decent case for having some sort of AMT, albeit based purely on the political economy problem of trade-in's unfeasibility. But 20 years later the AMT doesn't seem to be functioning that way, except via the historical legacy of its denying itemized deductions for state and local taxes. Its denying the full benefit of, say, the 2001 rate cuts is not quite the same proposition. Its hit on personal exemptions and on the so-called miscellaneous itemized deductions makes the effective composite tax base worse, not better.

The question now is simply how to get rid of it without making the fiscal gap even bigger or overall distribution less progressive. And here the answer is simple: there is no way to do this until we have two responsible political parties capable of bargaining with each other, reasonably and in good faith and with a shared commitment to solving problems. 2009, anyone?

Musical oldies and newbies

I recently sprung (via an Amazon affiliated seller with a good price) for the 3-disk expanded reissue of "The Kinks Are the Village Green Preservation Society," released in 1968 and long since renowned as the Kinks' best album notwithstanding its initially being a flop. I had resisted this record for a long time, and then bought only the basic disk, on the view that nostalgia about meat pies and apothecaries isn't really my thing. But apart from its musical merits, which are very strong in the mid to late 60s hard-driving folk-rock vein, it's really not an exercise in insular English nostalgia as most accounts would have it, but rather a portrait of nostalgia's failure to make the narrator (Ray Davies) feel any less miserable. This certainly makes it more interesting than it would otherwise be, and the reissue has about a full CD's worth of good additional material that was not otherwise widely available.

On a more contemporary note, I'm seeking more information about whether Blonde Redhead's newly released "23" is worthwhile.

Interesting tidbit

ABC News is reporting that the U.S., for the last two years, has been advising and funding a "Pakistani tribal militant group responsible for a series of deadly guerrilla raids inside Iran." The group "has taken responsibility for the deaths and kidnappings of more than a dozen Iranian soldiers and officials." Their preferred M.O. is to kidnap people, then execute them on camera, though it's unclear whether they did this in a recent slaying of "at least 11 members of the Iranian Revolutionary Guard riding on a bus in the Iranian city of Zahedan." All in all, they sound like really nice fellas.

This means that the U.S. is a state sponsor of terrorism. It also means that the U.S. has committed acts of war against Iran, predating and so far as we know exceeding anything the Iranians have done in Iraq.

I doubt it will be more widely reported or kept in mind, however.

Shadow's fifteen seconds

Thanks to my wife's efforts, our cat Shadow is now enjoying (?) his moment of Internet stardom.

Silly-ass McCain

After his stunt at the Baghdad market, John McCain is certainly America’s premier buffoon, at least outside the Bush Administration. He has all the moral seriousness of Bertie Wooster without Jeeves. He’ll soon be challenging Bello for top billing at the Ringling Brothers Barnum & Bailey Circus. Or maybe he’ll end up touring county fairs, biting the heads off chickens and sitting on the ducking post. Remake of “The Blue Angel,” perhaps? He’d be good as Emil Jannings in the final scene.

At least this stunt is just farce, albeit not at all funny to the Iraqis who regularly spend time in the market he proclaimed safe after visiting it for ten minutes with his body armor, 100 soldiers in Humvees, 3 attack helicopters, 2 Apache gunships, and sharpshooters stationed in the buildings all around (all on top of the pre-dawn sweep and diversion of traffic). McCain only recently did much worse than farce, back in fall 2006 when he pretended to negotiate with the Bush Administration about the torture legislation and then promptly caved on the whole thing, thereby betraying his own personal history and anything honorable that he had ever seriously stood for.

The saddest things about McCain are twofold. First, despite all the hype about the “Straight Talk Express” and such, I think he actually had some integrity at some point. It simply has all been consumed by his ambition and desperation. I am reminded of Hubert Humphrey, who embarrassed himself in the 1972 Presidential campaign, trying halfheartedly to do George Wallace Lite, because the ambition and desperation had eaten up everything else, like one of Sauron’s victims bearing a lesser Ring of Power. Second, if you sell out and torch your integrity and honor in order to win, it kind of helps if you actually do win – at least that saves you from being ridiculous. To sell out and still lose badly, as I suspect McCain will, is to lose everything. I wonder, once it is all over, if (unlike Bush or Cheney) he will actually be able to grasp the totality of his humiliation.

I actually met the man once, in circumstances that certainly embarrassed me more than him. It was probably the year 2000, and I had a book out recently (probably Making Sense of Social Security Reform). I was halfheartedly trying to get it media exposure. (The problem is that I’m always more interested in writing my new project than promoting my old one.) I got a call from a booker on Good Morning America, ostensibly giving me a chance to appear on a segment with Senator McCain and to mention my book. The booker, some sort of junior intern who (it turned out) was just trying to get 60 people or so to agree to show up in Midtown NYC before 6 in the morning, told me that I would definitely get to ask him a question. She would have said yes if I had asked whether, by showing up, I would get to host the show for a few weeks.

When I got there, it transpired that I was just one of 60 people who could submit a question on an index card, about 3 of which (the more vacuous the better) would be read by the host to the Senator. But by the time I realized that I should just leave I had already been herded with the rest into the studio for the live gig. I did get to look anonymously disgruntled on national television for a second or two when the camera swept past me a couple of times.

When it was over, McCain worked the crowd shaking hands. Somehow it transpired that, although I had already shaken his hand once, he was heading towards the exit and I was still standing nearby. Thinking that I wanted a second go, he said to me angrily: “I already shook your hand!”

I ended up with a Good Morning America t-shirt plus a story to tell my Tax class a few hours later.

Payback is sweet, Senator, even if it wasn’t your fault.

Five commentators not in search of an author

Now that the brutal winter weather has finally passed, I made the mistake the other week of – well, the fates must have considered it crowing on my part – that, in twelve years, the NYU Tax Policy Colloquium has never once lost a session due to speaker unavailability. The obvious threat being that winter storms would prevent someone from coming in. (We meet from January through April.) We have had some close calls, and quite a few storms would have canceled us if they had come on the wrong day of the week (or if we’d had an out of town speaker in a given week), but never once a cancellation.

Sure enough, no sooner did I laud this fact then something happened. Our scheduled speaker this week was Kirk Stark of UCLA Law School, with a very interesting paper (if still in preliminary form) on fiscal equalization, or national programs transferring resources from rich states to poor states. He says that nearly all federations in the world other than the U.S. have such a program, and the U.S. at least formally doesn’t. (Which is not to deny that we might have the effective equivalent via differently labeled programs.) To see the paper, check out the March 29 date here.

Anyway, on Tuesday night Kirk contacted me to say that he unfortunately couldn’t come because he has the flu. One can certainly sympathize. I am just getting over a horrendous cold, which I would assume was rather like what he had only minus the fever, and even in my state I wouldn’t have wanted to board a transcontinental flight. With a fever it would have been unthinkable.

My first thought was that we would have to cancel today’s session. But then it occurred to me (with the help of my co-convenor, Alan Auerbach) that we could go on anyway. The NYU colloquium has an unusual format, in which the author doesn’t actually present the paper. Instead, we do and the author responds to our critiques of various issues. So one could say (it was the obvious joke that several people independently thought of) that this is simply the perfection or logical culmination of our method – no author whatsoever.

Not true, of course, and we would rather have had Kirk here. But with the help of several special commentators I enlisted to ensure multiple perspectives (Rosanne Altshuler, Jack Mintz, and Brian Galle), we actually had a pretty good session. Hence (counting Alan and me) the five commentators not in search of an author, from my title for this posting.

Bottom line conclusion of the session, without Kirk there to defend his view: to start with a bit of background, the paper proposes fiscal equalization based on tax capacity (i.e., potential revenue at a given level of “effort”) to respond to a fiscal federalism problem of inducing migration from poor to rich jurisdictions if public goods are like lump sum grants in their incidence but are financed by means-based taxes. This is merely a subset of the general fiscal federalism case for keeping redistribution to the highest level of government and having lower levels stick to providing competitive tax-benefit packages, with user fee style financing, a la the Tiebout model (named for Charles Tiebout’s famous 1956 paper).

We were unpersuaded that the paper’s proposed cure, payments to poor states (effectively financed by rich states) that seek to equalize taxing capacity fit logically with the diagnosis. Migration depends on fiscal effort, not fiscal capacity. (People move to Greenwich, CT, if the paper’s analysis is right, to get nice parks that richer people pay for, based on what Greenwich does, not what it could do.) And we thought the case is much stronger for equalizing, say, education outlays (where there is a positive externality plus an agency cost problem if parents don’t fully represent the interests of their children) than for government-provided consumer goods generally.

The paper offers an intriguing if preliminary political analysis, suggesting we don’t have fiscal equalization in the U.S. because (a) Blue States don’t want it since it transfers $$ to Red States, and (b) Red States don’t want it because their elites are anti-government and don’t want $$ given to their poorer citizens. But it’s hard to see why unrestricted cash grants to their governments wouldn’t appeal to Red State elites. Why not take free money? Better explanations, we thought, involved (a) path dependence – the U.S. started from a more decentralized status & so the thing would have had to be affirmatively introduced, plus (b) those who might have wanted it had more direct and appealing routes to getting the same thing (e.g., farm subsidies instead of $$ that depend on a complicated fiscal formula that could go the other way next year). Even the claim that we don’t currently have it, while other federations do, might conceivably be truer in form than in substance.

Anyway, not to tempt the fates yet again, but we still haven't lost a session due to speaker unavailability.

Ironic waiver?

One of the interesting threads in the attorney scandal is that White House officials did lots of their communicating via Republican National Committee e-mails rather than White House e-mails. E.g., there is a report that Rove does 95% of his e-mailing via the RNC address.

Trivial though this may sound, there is also reason to believe that a lot of this has been done deliberately to evade legal requirements pertaining to recording and retention of official communications.

How does this play into the executive privilege claims? The natural analogy is attorney-client privilege, which is easily blown by the parties who want to claim it in various circumstances where they failed to treat a communication as confidential and as within the attorney-client relationship. Plus, there is no privilege where the attorney is providing not legal advice but something else (e.g., investment or tax accounting advice). It's a truism among knowledgeable practitioners that far less is actually covered by the privilege than lawyers tend to think while they are going about their daily business.

Obviously, there is next to no legal precedent on the boundaries of executive privilege, compared to the centuries of cases et al regarding the attorney-client privilege. But the privileges are similarly motivated cousins, and analogies from the latter are by no means irrelevant to thinking about the former. And if you think there's a special public purpose to letting the president get confidential advice, there's also a special public purpose to preventing him from evading oversight.

The easy and obvious point is that anything Rove sent out in an e-mail from his RNC address is not privileged. Call it a foot fault, if you like, but that's just tough, and doesn't call for sympathy given his likely unclean hands in using the RNC address.

A further interesting question is the extent to which using RNC e-mails to communicate stuff about meetings with Bush et al should be viewed as a further waiver of other executive privilege claims, at the limit on everything pertaining to the meetings and topics discussed in the RNC e-mails. On this point I would have to defer to those more knowledgeable than I am about how the attorney-client privilege is interpreted and applied.

But it strikes me as possible that we have an argument for a total waiver situation, even leaving aside the point that the attorney-client privilege does not cover criminal activity (relevant here given the strong inference of obstruction of justice as the cornerstone of the entire caper).

I certainly hope these arguments will be fully raised and vetted both in public debate and in any litigation on Bush's privilege claims.

Interesting literary series

One Sunday when I was uncharacteristically free to wander around a Barnes & Noble (actual not virtual), I spotted a very interesting fiction series, "Femmes Fatales," published by the Feminist Press at the City University of New York. The series consists of selected pulp or genre novels written by female authors in the 1930s through the 1950s. So far I've read two, both of which were made into famous (but much less interesting) movies: Dorothy Hughes' "In a Lonely Place" and Vera Caspary's "Laura." Both are among the best detective/mystery/murder genre fiction that I've ever read; usually I find the genre tolerable but boring.

Give the Feminist Press credit, even if their forewords and afterwords are a bit predictable in exactly the academic vein would expect. The female writer's perspective in these two novels genuinely makes them much more interesting than they would otherwise be. (Plus, these appear to be particularly inspired outings by generally capable writers.) "In a Lonely Place" is far darker than the Humphrey Bogart movie - narrated by a male serial killer of women but not the misogynistic genre exercise one would expect from that. Also one of the best uses I can remember of the unreliable narrator device. "Laura" is less extreme, but also much fuller than the admittedly atmospherically effective Preminger film. Good use of multiple narrators, interesting twists even if one knows them from the movie. Laura is a single woman pursuing a career, not getting married as soon as she is supposed to, and surrounded by manipulative, immature men. The murder plot is a device (although a very good one) rather than the subject of real interest, notwithstanding the twists and suspense.

I like to vary my reading, so at the moment I'm embarked on the Rory Stewart book about walking through Afghanistan, but I will probably return to this series soon.

Cover-up

It's the old Watergate playbook. Bush's response leaves little doubt in my mind that he was personally involved in obstructing justice, both negatively by shutting down the Lam investigation and positively by seeking unfounded indictments of Democrats on sham charges.

Why not just send them all to Gitmo as enemy combatants?

More feline excitement

Yesterday Buddy ambled into the dining room with a gray object in his mouth that, upon inspection, proved to be a live mouse rather than an inanimate cat toy. With a little encouragement, he agreed to carry it back into a small, unoccupied bedroom for further proceedings.

Buddy and Shadow then caucused with the poor creature for a couple of hours. It spent a lot of time in their mouths, but they would drop it every now and then, only to swat at it and pick it up again as soon as it showed signs of life. Pretty much like tag team wrestling, only it didn't have a teammate. Poor thing must have thought it was at Guantanamo or something, and I felt quite sorry for it though agreeing that its life should be forfeit under the circumstances.

They eventually lost interest when it stopped moving for good. At this point I deposited it in the trash outside. Unclear whether an autopsy would have identified shock, internal bleeding, or heart attack as the cause of death. But the grand jury would have had a clear basis to indict for first degree murder.

Buddy and Shadow then headed to their food bowls for refreshment (they had no interest in eating the mouse), and remained too stirred up to nap for a couple of hours.

Two movies I always think about when I observe this type of activity are (1) The Incredible Shrinking Man (Grade B 1950s sci fi in which a man, hiding in his daughter's dollhouse, is attacked by his cat once he has shrunk to being a few inches tall), and (2) the Nightmare on Elm Street [CORRECTION - thanks to a reader!] movies. Freddy Krueger is rather cat-like, from a mouse's perspective, what with his playfulness and retractable razor blades on his fingers.

Later on, Buddy was purring, kneading with his paws, and rolling over as I thanked him for the trouble-free vermin removal. As they say in the NBA, you can't teach size.

More on law school academic culture

Today I was in Philadelphia, at Penn Law School, presenting my paper "Beyond the Pro-Consumption Tax Consensus." One anthropological question I got, from an economist in attendance, is why law profs' papers often over-claim, e.g., by generalizing a particular economic model with restrictive assumptions to serve as a source of very broadly stated real world conclusions. (I should note that this is what I was critiquing in my paper, not exemplifying; the question in a sense was why my paper needed to be written.)

I think it's partly from the nature of law review publication, where you need to make big claims in order for student editors to figure they should publish it. A second cause is the enthusiasm of the convert, where law profs are coming into another discipline in order to make use of it. A third is that simply using a given economic model, even if one over-claims from it, can represent an advance if people in law were unaware of it.

In conversation at dinner following the dinner, I emphasized the law review element, but with an internal feeling that I was indeed over-claiming for this explanation. As I was rightly asked, aren't people calculating past publication to their peer readers. (And I noted in an earlier post the strategy I've heard about whereby you over-claim so the law review will accept your piece and then take out the offending language once you're in the door.)

Upon reflection, there's also something distinct in law school academic culture (possibly derived in part from the law review editing experience, which so many law profs had) that applies to judgments by one's peers, as opposed to student editors. This is the paradigm of shifting the paradigm, often in Yale Law School type form to trumpet a cute little syllogism as a universal precept in lieu of more serious and careful analysis.

I remember in my days on the University of Chicago Law School faculty, when lateral hiring prospects were up for consideration, when the question would be asked of someone who evidently had done good work: "Yes, but has he/she shifted the paradigm for anything?"

At which point I would always think: "Fine, but what if the previous paradigms were just as good or better?"

Lock him up and throw away the key?

I'm bemused by all the sympathy for Lewis Libby now that he has been convicted. One actually should feel some measure of sympathy for him, and indeed for all convicted criminals, even murderers, if the consequences of the verdict will cause them to suffer, even deservedly. (As Libby no doubt will, at least psychically, if he goes to prison, even if it's relatively soft time.) Sympathy for human pain should be universal, whether or not one always acts on it.

The sympathy for Libby appears to be comparative, however, as if he, compared to other convicted felons, especially deserves a break. This view I cannot share.

The perjury and obstruction here were part of a conspiracy by a cabal to take the United States to war on false pretenses, and meanwhile to bully and besmirch all whistle-blowers and critics. It was part and parcel of the most gratuitous foreign policy disaster in U.S. history. (Vietnam, by contrast, was more or less bound to happen given the broader public mindset at the time, although it's true that the Gulf of Tonkin episode has elements in common with all this.) The harm these people have done is incalculable. And the conspirators, while hyping phony evidence about WMD, were prepared to undermine actual U.S. intelligence about WMD around the world by outing an important CIA specialist on this topic.

My article, Beyond the Pro-Consumption Tax Consensus

Readers may recall that I posted this article here. I have since rewritten it to make it, I hope, a lot more accessible and reader-friendly, as well as to make some of the conclusions a bit crisper and more general.

The piece has now been accepted by the Stanford Law Review. Joe Bankman will be writing a brief reply, reflecting that my article is in part a critique or response to his article in Stanford (co-authored by David Weisbach), entitled "The Superiority of an Ideal Consumption Tax Over an Ideal Income Tax."

My personal feeling is that the Bankman-Weisbach article significantly advanced the legal tax policy literature and that mine does as well.

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.