Confessions of a Supply-Side Liberal

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Why You Should Care about Other People’s Children as Much as Your Own

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Here is a link to my 53d column on Quartz: “Why You Should Care About Other People’s Children as Much as Your Own.”

This column doesn’t just say we should care, it gives a plan for getting there. In particular, how we handle long-run fiscal policy can make a big difference to the level of altruism in our nation. 

You can see links to all of my other Quartz columns lined up in reverse chronological order here, and in order of popularity here

Filed under columns longrunfiscal

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Reihan Salam: Miles Kimball’s Quixotic but Interesting Tax Proposal

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Link to Reihan Salam’s National Review essay ”Miles Kimball’s Quixotic but Interesting Tax Proposal”

I was pleased to belatedly run across Reihan Salam’s discussion of my proposal to provide key public goods with a minimum of tax distortion by expanding the non-profit sector rather than expanding government. In Reihan’s article, "Miles Kimball’s Quixotic but Interesting Tax Proposal," Reihan says it might not curtail growth in government spending, but then continued:

What Kimball’s proposal does do, however, is address the normative demands made by egalitarians for higher taxes on the affluent (the notion of paying your fair share) while not directly addressing this structural dynamic. This is arguably a feature of Kimball’s proposal and not a bug, as it undermines the most potent case for higher taxes (the rich should bear more of the burden of making the investments we need to help vulnerable people flourish) without effectively rewarding public sector inefficiency. 

Unfortunately, as Kimball would surely acknowledge, this proposal is wildly unrealistic, in no small part because it would drive a shift in resources from the public sector to civil society organizations that will embrace a wide variety of business models, not all of which will be incumbent-friendly. And over time, one assumes that incumbents will work to stymie empowering innovations in this space that prove threatening. That doesn’t change the fact that Kimball’s proposal is extremely interesting. 

Here is a Twitter discussion I had with Reihan about this, without realizing he had written a whole article. 

Filed under reviews longrunfiscal

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Odious Wealth: The Outrage is Not So Much Over Inequality but All the Dubious Ways the Rich Got Richer

Link to the Column on Quartz

Here is the full text of my 50th Quartz column, "Odious Wealth: The Outrage is Not So Much Over Inequality but All the Dubious Ways the Rich Got Richer," now brought home to supplysideliberal.com. It was first published on June 30, 2014. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© June 30, 2014: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved.

***********************************************************************

Concern about income inequality, and the even more striking inequality in wealth in the United States, is a key theme for the 2014 US congressional elections and has made Thomas Piketty’s book Capital in the Twenty-First Century a surprise bestseller. There are many reasons to be concerned about wealth inequality itself, regardless of the source of that inequality, but it is hard to pursue a discussion on the topic for long before someone makes a claim about whether the wealthy acquired their money in a deserving way. Partisans on the political left and right know which side of this argument they are supposed to emphasize: many who feel the government needs more revenue conveniently argue as if almost all wealth comes from underhanded, unscrupulous skullduggery, while many who feel the government needs less revenue conveniently argue as if almost all wealth were created by the likes of Steve Jobs, who brought us i-everything. But unlike these partisan stories, in every list of 1,500 or so billionaires, many deserve their wealth while others deserve very little of the wealth they have. While in some cases the principles for whether wealth is deserved or not are obvious, in other cases they are quite subtle.

To start with an easy category, wealth obtained by deceit is illegitimate. For example, given the way tobacco companies lied about the dangers of smoking,the gigantic legal judgments against them seem appropriate (though it is too bad how big a share of that money went into the pockets of lawyers). And although the magnitude of the crime might not be as great, GM’s recently outed behavior inhiding problems with ignition switches has a disturbing resonance with the earlier behavior of the tobacco companies. As these examples make clear, standard legal principles often make it possible to take away wealth obtained by deceit once that deceit is well established. But a greater hatred of deceit on the part of juries, judges, and legislators would help in further neutralizing this form of wealth.

If undeserved wealth always arose in cases where the logic was as simple as that for deceit, and were similarly reprehensible from a criminal or civil law point of view, then the issue of undeserved wealth could be appropriately handled in the courts.In an IMF paper, Harvard Economics professor Michael Kremer and Northwestern University Economics professor Seema Jayachandran make the intriguing proposal that debt incurred by a non-democratic government (after the appropriate international organization has declared that the debt is not in the interests of the people of a country) should be considered “odious debt” that later (and hopefully better) governments of that country need not pay back.

We could similarly talk about “odious wealth”—wealth that is hateful in its origin. But our instincts about the merits of different means of acquiring wealth often go astray. Let me take two extreme examples: old songs that people love and the kind of “vulture capitalism” whose reputation helped sink Mitt Romney’s chances in the 2012 presidential election.

There is currently a dispute over whether songs recorded before 1972 should continue to earn royalties. By naming their bill to extend royalties to pre-1972 recordings the “Respecting Senior Performers as Essential Cultural Treasures Act or “RESPECT” Act, congressmen George Holdings and John Coyners are using the fact that the musicians who recorded songs before 1972 (that we still listen to 42 years later) inspire feelings of gratitude, since songs of lasting popularity give many listeners much more pleasure than those listeners have paid for the right to listen to those songs. But the prospect of that very gratitude, plus 42 years of royalties, would have provided more than enough motivation for musicians to work hard back in 1971 to make great songs, if they had the ability.

Forty-two years is a long time. And money coming in the near future looks (and is) more valuable than money coming in the more distant future. And even songs that last typically get more play in their early years. So at the time a musician is working hard on a song, the prospect of 42 years of royalties and undying fame should, to a surprisingly close approximation, be just as motivating as, say, 80 years of royalties and undying fame. So we don’t need to extend royalties to pre-1972 recordings to bolster the confidence of musicians making songs now that they will be properly rewarded for their efforts. And on the downside, charging royalties for pre-1972 songs has the potential to inhibit the development of internet and satellite radio—and in particular how often people get to listen to the best pre-1972 songs on internet and satellite radio. So there is a lot of  of downside, not much upside to extending royalties to pre-1972 recordings. But the folks who would earn those royalties, if they are still alive, are attractive recipients of the money, even in cases where they are relatively wealthy.

By contrast, few ways of getting wealth seem less attractive than acquiring companies and then making them more profitable by laying off many of the employees. In August 29, 2012, Matt Taibbi wrote in the Rolling Stone essay “Greed and debt: the true story of Mitt Romney and Bain Capital:”

A man makes a $250 million fortune loading up companies with debt and then extracting million-dollar fees from those same companies, in exchange for the generous service of telling them who needs to be fired in order to finance the debt payments he saddled them with in the first place. …

Instead of building new companies from the ground up, we took out massive bank loans and used them to acquire existing firms, liquidating every asset in sight and leaving the target companies holding the note.

This is what I am calling “vulture capitalism.” But vultures have an important place in the ecosystem. Just like literal vultures, who help clear away dead carcasses, vulture capitalists help in the difficult process of moving workers from making and doing things that people don’t need as much anymore to making and doing things that people are eager to pay for. For example, Mitt Romney helped unwind K-B Toys, whose toys could no longer compete with video games. This was enormously painful for the employees of K-B Toys, who were ultimately sent on their way in an arduous transition to new jobs (and some to early retirement). But an enormous amount of good work has been accomplished by former employees of K-B Toys in new jobs with efforts that would have been squandered on trying to make unwanted toys if K-B Toys had been kept limping along for a few more years.

Since they are unlikely to get much gratitude from their brutal but useful work, vulture capitalists have to be rewarded with money. Otherwise, who would want to do that task of dismantling companies and letting go of people and other resources that should be devoted to other purposes?

None of this is to say that the incentives for vulture capitalism are precisely right. It is unfortunate when, as is too often the case, the efforts of highly trained professionals are focused on transactions that make sense only because of quirks of the tax law. But the basic idea that the old must sometimes be dismantled to provide the human and non-human building blocks for new things is sound. And if something that painful is going to happen, it sometimes makes sense to say as Jesus said to Judas: “What you are about to do, do quickly.” The wealth earned by vulture capitalists may then look like the 30 pieces of silver Judas was given for betraying Jesus, but it must be considered legitimate, nonetheless, because the job needs to be done.

There are two points to take away. First, it is not right to treat all large fortunes as odious wealth (or as otherwise illegitimate in origin) or to treat all large fortunes as beneficent wealth. Second, without careful analysis, our instincts will often lead us astray about which is which.

Although people complain a lot about wealth and income inequality, I suspect that a great deal of that anger comes from how the rich made their fortunes. An ideal version of capitalism—the version in the economic models taught in introductory economics classes around the world—would make it impossible to get rich without doing great good for society. There are certainly areas where doing great good for society is not understood and therefore not appreciated. But there are also many areas where the wrong things are rewarded because of market distortions, or where the government piles on rewards beyond those that are needed.

Among market distortions, lies and deception are a key category. But it is also a problem that the legal remedies available to deal with lies and deception are not matched by any ability to bring a legal tort claim for, say, raising the planet’s temperature by burning coal.

Among excessive rewards caused by the government, bailouts without increases in equity requirements big enough to prevent future bailouts are especially unfair. But actions by the government to protect the profits and business models of firms already in place by standing in the way of firms doing new things in new ways  can in the long run be just as damaging.  And in the digital age, copyright law is longoverdue for reevaluation.

Wealth and income inequality are a topic of perennial fascination. But the heat has been turned up not only by increases in such inequality, but also by the feeling that the 2008 financial crisis and the Great Recession suggest that something is fundamentally wrong with our economic system. Among the many reasons to redesign the monetary plumbing of our economic system to avoid a repeat of the Great Recession, one of the most important is to help us gain clarity on the many long-run issues we face, of which economic inequality is one of the most difficult to deal with.

Filed under fullcolumns longrunfiscal

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Charles Lane on Thomas Piketty and Henry George

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Link to Wikipedia article on Henry George

Charles Lane compares Thomas Piketty to Henry George in hi May 15, 2014 Washington Post op-ed,  

Thomas Piketty identifies an important ill of capitalism but not its cure.

Charles gives a succinct evaluation of both Thomas’s and Henry’s proposals:

Alas, Piketty’s global wealth tax and George’s single tax suffer from the same defect, and it’s not political impracticality — after all, George nearly got himself elected mayor of New York City in 1886.

It’s the inherent difficulty of separating the productive, untaxed component of the return on land or capital from the unproductive, taxed part. …

As a result, it’s hard to devise a tax on wealth that raises a significant amount of revenue but doesn’t discourage at least some socially beneficial saving or entre­pre­neur­ship. The potential for adverse unintended consequences — economic and political — is greater than Piketty seems to realize.

Quite distinct from this concern about incentives, Charles goes on to a positive note about having power in the hands of private individuals:

Great private fortunes can indeed entitle their owners to an undue share of society’s current income and political power. At times, however, private wealth can serve as a font of charity or, indeed, a bulwark against government overreach.

These are indeed the key issues to think about in relation to wealth taxation. 

I have always liked Henry George’s proposal, and pointed out how a carbon tax can be seen as akin to Henry George’s single tax in my post “‘Henry George and the Carbon Tax’: A Quick Response to Noah Smith.” And I like Noah’s application of Henry George’s idea to San Francisco. But Thomas Piketty himself points to the difficulty of getting enough revenue from taxing the value of unimproved land alone:

In particular, it seems impossible to compare in any precise way the value of pure land long ago with its value today. The principal issue today is urban land: farmland is worth less than 10 percent of national income in both France and Britain. But it is no easier to measure the value of pure urban land today, independent not only of buildings and construction but also of infrastructure and other improvements needed to make the land attractive, than to measure the value of pure farmland in the eighteenth century. According to my estimates, the annual flow of investment over the past few decades can account for almost all the value of wealth, including wealth in real estate, in 2010. …

… the fact that total capital, especially in real estate, in the rich countries can be explained fairly well in terms of the accumulation of flows of saving and investment obviously does not preclude the existence of large local capital gains linked to the concentration of population in particular areas, such as major capitals. It would not make much sense to explain the increase in the value of buildings on the Champs-Elysées or, for that matter, anywhere in Paris exclusively in terms of investment flows. Our estimates suggest, however, that these large capital gains on real estate in certain areas were largely compensated by capital losses in other areas, which became less attractive, such as smaller cities or decaying neighborhoods. (Capital in the Twenty-First Century, p. 197.)

Thomas Piketty’s example of the unearned rise in the value of one’s urban land may seem like an opening for non-distortionary taxation, but in fact from the standpoint of efficiency these positive externalities suggest subsidizing all activities that create these positive externalities for land values, of which just as many are private activities as are activities of the government. (And many activities of the government do not raise land values.) Also, I worry that urban governments often make land prices for certain favored plots go up while reducing the total value of land (and social welfare) by putting tight restrictions on building. This is a concern that Matthew Yglesias raises in his book The Rent Is Too Damn High: What To Do About It, And Why It Matters More Than You Think.

Filed under longrunfiscal

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Timothy Dolan: The Pope’s Case for Virtuous Capitalism

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Cardinal Timothy Dolan with Pope Francis. Image from a book review for Life Lessons from Life with My Brother, Timothy Cardinal Dolan in the Catholic Sun

Cardinal Timothy Dolan is the Catholic Archbishop of New York, and was President of the United States Conference of Catholic Bishops from 2010–2013. So Timothy’s interpretation in his May 22, 2014 Wall Street Journal op-ed,  The Pope’s Case for Virtuous Capitalism of what Pope Francis has said about capitalism is of some interest.  

Defending Capitalism. In his op-ed, Timothy make this strong statement in capitalism’s defense:

… the answer to problems with the free market is not to reject economic liberty in favor of government control. The church has consistently rejected coercive systems of socialism and collectivism, because they violate inherent human rights to economic freedom and private property. When properly regulated, a free market can certainly foster greater productivity and prosperity.

And he writes that “The spread of the free market has undoubtedly led to a tremendous increase in overall wealth and well-being around the world.” Further, “One does not have to subscribe uncritically to the notion that ‘a rising tide lifts all boats’ to acknowledge that all people, including the poor, benefit from a general increase in the overall wealth of society.”

Why then does capitalism often have a bad name, and why does Pope Francis sometimes sound as if he is speaking against Capitalism? Timothy writes:

… what many people around the world experience as “capitalism” isn’t recognizable to Americans. For many in developing or newly industrialized countries, what passes as capitalism is an exploitative racket for the benefit of the few powerful and wealthy. Americans must remember that the holy father is speaking to this world-wide audience.

In other words, it isn’t American capitalism that is the problem, it is what passes for “capitalism” in countries that have not yet fully passed the acid test of true capitalism: making the people of a country rich, at least on average. 

In this passage, Timothy even sounds like an economic libertarian:

The church believes that prosperity and earthly blessings can be a good thing, gifts from God for our well-being and the common good. It is part of human nature to work and produce, and everyone has the natural right to economic initiative and to enjoy the fruits of their labors.

But this should not be overinterpreted, since he also writes “abundance is for the benefit of all people” and 

Fortunately, few people subscribe to an inhumane philosophy of radical economic individualism, and even fewer consider the “Wolf of Wall Street” to be a good role model.

The Duty to Take Care of the Poor. Timothy condemns fraud, which I hope even the most ardent apologist for unfettered capitalism would not try to justify. Beyond that, to the extent capitalism needs to be tempered, it is in order to take care of the poor and downtrodden, something that is also a central Supply-Side Liberal imperative, as I recently wrote in my second anniversary post “Three Revolutions.” Timothy states the imperative of taking care of the poor and downtrodden in these three passages:

1. … Pope Francis is certainly correct that “an important part of humanity does not share in the benefits of progress.” Far too many people live in poverty and have few opportunities to achieve prosperity. And so the pope, and many others, are deeply concerned about the development of a “throwaway culture,” an “economy of exclusion” and a “culture of death” that corrode human dignity and marginalize the poor.

It is in this context that the holy father’s earlier criticism of “trickle-down economics” can be properly understood. 

2. But the church certainly disapproves of any system of unregulated economic amorality, which leaves people at the mercy of impersonal market forces, where they have no choice but to sink, swim or be left with the scraps that fall from the table. That kind of environment produces the evils of greed, envy, fraud, misuse of riches, gross luxury and exploitation of the poor and the laborer. 

3. The great Renaissance humanist Erasmus once said, “He does not sail badly who steers a middle course.” This advice would be well worth keeping in mind. By maintaining a sound middle course on economic issues, Pope Francis is able to remind us that free economic activity should indeed be pursued, but the human dignity of our needy brothers and sisters must always be at the center of our attention.

Minimizing the Need for Government Control by Realizing that Most People Do Care, and Can Be Encouraged to Care More. If government control is not the answer, then how will the poor be taken care of? Timothy emphasizes the kind of altruism that motivates voluntary efforts to help the poor. He is not clear about when a failure of individual altruism to take care of the poor would justify government intervention. My answer is a public contribution system that insists that those who are well off do in fact contribute to public goods, including especially taking care of the poor, but allows individuals to choose within broad parameters exactly how they will contribute to public goods. (Ordinarily, those contributions would be made through the nonprofit sector. A few might choose to give to particular arms of the government. This is not a libertarian solution, since if someone in the relevant income range refused to make contributions—which few would—they would be taxed the equivalent amount.) I believe such a system would be much less distortionary than the equivalent in taxes because most people really do care about others. In addition to creating less distortion, and allowing for creativity (and therefore technological progress) in providing public goods, one of the great advantages of a public contribution system is that, over time, it will encourage people to strengthen their altruism and public-spiritedness. They may grumble at the requirement to contribute, but then their minds will soon turn to the choice of exactly which cause to contribute to, and many will come to love the causes they have chosen and the people they are able to help with their contributions. 

Although I am much too small a fish for Timothy to be likely to take any notice of my proposal without support from heavier hitters, I hope that if he did become aware of it, that he would favor the kind of public contribution system I am advocating. Although direct contributions to churches would not be part of this system, associated humanitarian organizations, such as Catholic Relief Services, would be included (with the usual fights about whether church-associated humanitarian organizations are pushing religion too much in the course of their humanitarian activities). I believe that a public contribution system would do a lot to foster exactly the kind of virtues that Timothy calls for. I want you to consider that as you read these passages:

1. From media reports, one might think that the only thing on the pope’s mind was government redistribution of property, as if he were denouncing capitalism and endorsing some form of socialism. This is unfortunate, because it overlooks the principal focus of Pope Francis' economic teaching—that economic and social activity must be based on the virtues of compassion and generosity.

2. … as the pope continually emphasizes, the essential element is genuine human virtue.

3. The church has long taught that the value of any economic system rests on the personal virtue of the individuals who take part in it, and on the morality of their day-to-day decisions. Business can be a noble vocation, so long as those engaged in it also serve the common good, acting with a sense of generosity in addition to self-interest.

4. … Pope Francis recalled the story of Zacchaeus, in which Jesus inspires the repentant tax collector to make a radical decision to put his economic wealth at the service of others. This reminds us that a spirit of sharing and solidarity with others, in the words of Francis, “should be at the beginning and end of all political and economic activity.” 

In his final paragraph, which I will not quote here, Timothy loses focus. To summarize the message I want to get across, I instead like Timothy’s third-to-last paragraph:

In other words, virtuous people, acting justly, compassionately and honestly, are the foundation of good economic or business activity that can produce prosperity for all, and not just for a few.

Filed under religionhumanitiesscience longrunfiscal

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Matthijs Lof and Tuomas Malinen: The Growth and Sovereign Debt Correlation

It is close to the anniversary of the revelations of problems in the Reinhart and Rogoff data, which also inspired many substantive reanalyses. The article linked above cites my column with Yichuan Wang, "After Crunching Reinhart and Rogoff’s Data, We Found No Evidence High Debt Slows Growth." For more links, see my followup column with Yichuan: "Examining the Entrails: Is There Any Evidence for an Effect of Debt on Growth in the Reinhart and Rogoff Data?"

See also Salim Furth’s article "Reinhart, Rogoff and the Spreadsheet Error a Year Later," noting how few economists seem to have publicly admitted to changing their minds. In a tweet, Salim specifically exempts me from that criticism, in view of my column "An Economist’s Mea Culpa: I Relied on Reinhart and Rogoff" and my work with Yichuan, inspired in part by my chagrin at my mistake. 

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Capital Budgeting: The Powerpoint File

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Writing “One of the Biggest Threats to America’s Future Has the Easiest Fix" with Noah Smith about capital budgeting inspired the seminar presentation I am giving today at the Congressional Budget Office, Here is a link to my Powerpoint file for the presentation:

The Applied Theory of Capital Budgeting

It is quite technical, and is a work in progress. If you do want to brave it, I recommend that you first read ”One of the Biggest Threats to America’s Future Has the Easiest Fix.”

Update: I learned today that the Congressional Budget Office put out a document on “Capital Budgeting” in 2008. I hope they now put out a new document on capital budgeting!

Filed under longrunfiscal