The Flat Tax, The Head Tax and the Size of Government: A Tax Parable

As Axel Leijonhufvud wonderfully spoofed in “Life Among the Econ,” one of the bread-and-butter tasks of a working economist is to build and study economic models. Some of these models are meant to be a reasonable representation of some aspect of the economy, while others are meant to be only what one of my favorite philosophers, Daniel Dennett would call “intuition pumps”—parables that give us the pregnant analogies and intellectual workouts needed to raise our economic IQ for thinking about the real world. In this post, I’ll tell you a tax parable. It is not meant to have any immediate moral for the real world, but only to provide food for thought. 

Economic models are inhabited by creatures called “agents.” Agents are stand-ins for people. The key ingredients in economic models are

  1. what the agents want,
  2. what the agents know, and
  3. what is possible for the agents to do.

In this model, the agents are all identical (more identical than real-life identical twins), and want three things: consumption C, leisure time L and a public good (think of city parks or Mars landers) labeled G to stand for government purchases. They know everything going on in the model, and the key thing they can do is divide up their time between making consumption goods C, enjoying leisure L, and making the public good G. Let’s measure the amount of each good by how much time it takes to make it or enjoy it. All the different uses of time have to add up to all the time the agents have. Since all the time they have is 1 day per day, measuring everything in time equivalents enables us to say that   

          C+L+G=1.                  (Only So Much Time in a Day Equation)

You might want to think of this as waking time being divided up, with sleep time off limits to the model. You also might find it helpful to imagine that a stripped-down central bank has no other job than to keep the wage at $1 per (waking) day.

The details of how much the agents want each of C, L and G are governed by the preferences and utility function most beloved of economists: Cobb-Douglas preferences, represented by a Cobb-Douglas utility function. Because I, like many economists, love logarithms (in particular the natural kind), I will use logarithms to write down the utility function.  But since many readers will not have the same love for logarithms that I have, I am giving you fair warning to avert your eyes from the following utility function:

          (1/3) log( C ) + (1/3) log(L) + (1/3) log(G)             (Utility Function)

You can escape having to think any more about logarithms, if you know just one thing: Cobb-Douglas preferences make agents want to devote a fixed fraction of their spending to each individual good. (That is the way to maximize utility.) In this case, if C, L and G were ordinary goods, the agents would want to devote 1/3 of their spending to each. Update: If you want to learn more about logarithms and why this utility function tends to lead to equal amounts spent on each good, see my posts “The Logarithmic Harmony of Percent Changes and Growth Rates” and “The Shape of Production: Charles Cobb’s and Paul Douglas’s Boon to Economics.”

The closest we can come to treating consumption, leisure and the public good in this model as ordinary goods is if we imagine a social planner. In the real world, free-market economists are not at all fond of social planners, seeing them as chauffeurs on Friedrich Hayek’s Road to Serfdom. But as long as they are confined inside of economic models, free-market economists love social planners best of all. The reason is that–as long as there are no distortionary taxes or other more complex distortions–the free market delivers the same outcome as a wise and benevolent social planner. In other words, the social planner I am talking about is not a fallible human, but the Invisible Hand. The one limitation to the benevolence of the Invisible Hand is that the Invisible Hand sometimes favors some individuals over others, making some rich and some poor. But in this model, all are alike to the Invisible Hand, and there is equality.  But there is another complication for the Invisible Hand. The Invisible Hand knows just how hard the agents should work once the amount of the public good G has been decided, but needs a government to decide how much of the public good G to make. Fortunately, since everyone is identical in this model, as long as the principle of equality is maintained, there are no political disagreements in this model, and the Invisible Hand plus a democratic government would yield the same result as an all-wise, benevolent social planner committed to equality: each agent would spend a 1/3 of her time making consumption goods, 1/3 of her time enjoying leisure, and 1/3 of her time making public goods. (“Agents” are traditionally female ever since the dawn of political correctness, and I will hew to that tradition here.)

Recall now that to bring forth the Invisible Hand in all its power from Aladdin’s lamp, the taxes must be non-distortionary taxes.  Non-distortionary taxes are taxes that do not create perverse incentives, which means they need to be taxes where the amount does not depend on what the agents do.  Since all the agents are being treated equally, that means a head tax: each agent pays exactly the same amount, regardless of how much she earns.  To show that with a head tax the Invisible Hand does the same thing as a benevolent, all-knowing social planner, think of things this way. Once the political decision is made to have the amount of the public good that 1/3 ofeveryone’s time can produce (financed by the head tax), each individual then wants to divide up the remaining time equally between the two private goods: consumption and leisure.  Since 2/3 of the time remains after the public good G is produced, dividing it equally between consumption and leisure leads to 1/3 of everyone’s time being devoted to consumption and 1/3 to leisure, exactly as the social planner would have done.   

Whatever time the agents are not spending at leisure, they spend working. So spending 1/3 of their time at leisure means they spend 2/3 of their time working. With the amount work produces worth $1 per waking day of work, that means that output (GDP) is 2/3 of a dollar per person per day, or 66 and 2/3 cents per day:  

          Output = C+G = 1-L = 2/3.    (GDP Per Person Under a Head Tax)

So far so good. Now, suppose that in order to have a tax system more like other worlds, this economy switches over to financing the public good by a flat tax on labor income. (The government is only going to raise enough taxes to pay for the public good G.) Think of the agent’s decision of how much time to spend working under the flat tax. She is working when she isn’t at leisure, so she is working 1-L per day.  If the tax is at rate t, then she takes home (1-t)(1-L) dollars each day after taxes if the wage is $1 per day. Firms have to pay the whole before-tax wage of $1 per day, so with competition, prices end up at $1 for a day’s worth of consumption goods and $1 for a day’s worth of the public good.

We haven’t yet figured out the best size of government (amount of the public good G) is when there is a flat tax. But whatever G is, if the agent sees G as fixed, to maximize the rest of her utility she will want to “spend” an equal amount on the other two goods: leisure and consumption. But what is the “price” of leisure she sees that we should use in figuring out how she thinks of herself as spending on leisure? If she works a bit less, she only has to sacrifice the after-tax wage $(1-t) per day’s worth of extra leisure. So let’s think of her total spending on leisure as (1-t)L dollars per day. Spending the same amount on consumption as leisure (as the Cobb-Douglas preferences lead her to do) then means that

          C = (1-t)L.        (Equal Shares Equation: Flat Tax)

But she also has to be able to pay for the consumption. Since she takes home (1-t)(1-L) dollars per day, the amount she can afford is

           C=(1-t)(1-L).     (Budget Constraint: Flat Tax)

There has been a debate online about how much algebra students should be taught in high school. (One of the best pieces in that debate is this one.) One of the arguments in favor of learning algebra is that one never knows when the urge to analyze an economic model might strike. Combining the Equal Shares Equation and the Budget Constraint, 

          (1-t)L = C = (1-t) (1-L)       (Combination Equation: Flat Tax)

The tax rate is less than 1, that is, less than 100%, so (1-t)>0 and we can divide by it to find that 

          L = 1-L.          (Equation to Solve for Leisure L: Flat Tax)

This one is easy to solve: L=½. That is, under the flat tax, an agent always spends half of her waking time at leisure and the other half of her time working.  

Being at leisure half the time means the agents work the other half of the time. So

          Output = C+G = 1-L = ½.    (GDP Per Person Under a Flat Tax)

That is, GDP under the flat tax is 50 cents per person per day under the flat tax instead of the 66 and 2/3 cents per person per day it was under the head tax. Since ½ is equal to ¾ of 2/3, imposing a flat tax instead of a head tax has caused GDP to fall by ¼ or 25%.   

It is time to think about the size of the government–in this case, the amount of the public good G.  Let’s imagine that the government in this world experiments with various levels of G for a little while before they settle on the best amount.  The agents in this world will notice something interesting: the size of the government has no effect on GDP! As long as the budget is balanced, with the flat tax just paying for G, time worked, and therefore output, will stay constant at ½.  What is going on? As I wrote in two passages of my post

“Can Taxes Raise GDP”: 

… what about a consumption tax that is a certain percentage of everyone’s consumption?  On the one hand this makes people feel poorer so they want to work more, but on the other hand, what someone can buy with an extra hour of work is less, so they want to work less.  The standard view is that these two effects will roughly cancel each other out.  So the amount people want to work—and thus GDP in this simple model—will stay about the same. …The basic argument for the standard view is that to households, a consumption tax looks a lot like a wage cut.  And we have a lot of information about what higher or lower wages do to desired work hours.  Among people who have to live on their own wages, there is surprisingly little difference in how many hours people want to work based on whether they have high wages overall or low wages overall over the course of their lives.  

In the model at hand, it is easy to see how a tax increase looks like a wage cut: the after-tax wage is 1-t.

With G having no effect on the fraction of time worked and therefore no effect on GDP, the  amounts of consumption and the public good have to add up to the constant GDP of ½:

          C+G = ½.

Equivalently,

         C = ½ - G.

Thus, more of the public good G comes at the expense of consumption, one for one. So even though a larger government does not reduce GDP, it does cost something.  It has an

opportunity cost

in reduced consumption.

What is the right size of government if it is stuck with financing G with a flat tax? Again, the Cobb-Douglas preferences help. Holding leisure fixed at ½, Utility is maximized by equalizing the amount spent on consumption and the amount spent on the public good. Since the two amounts add up to ½, to equalize them, the quantity of consumption and the quantity of the public good must both be ¼. Here again, as under the head tax, this happens through the political process, but with everyone identical and treated equally, there is no reason for any disagreement. Since half of output was to be used for the public good, the flat tax rate had to be 50%.   

As in all standard economic models, all of the agents in this model understand the economics of the model perfectly. But let’s pretend that some of the children, too young to be agents making economic decisions in their own right–while eating their portions of their mothers’ consumption–ask questions about taxes: “Mom, in the olden days when our people experimented with different sizes of government, it seemed that the size of government and the level of taxes had no effect on output. Does that mean that taxes don’t matter?” And the mothers all carefully explain to their children that in the truly ancient days (before they had begun to follow the customs of other worlds), when there was a head tax instead of a flat tax, output had been higher: 66 and 2/3 cents per person per day, instead of 50 cents per person per day. And in those truly ancient days, agents had had both more consumption and more of the public good (with the same 50-50 shares of output in C and G as now). So, they told their children “Taxes do matter for output.”

But one bright and brave girl said “Mom, in those truly ancient days, people may have had more consumption and more of the public good, but they had less leisure. Are you sure they were better off?” That led to an algebra lesson. Her younger sister averted her eyes in fear of the equations. But this bright and brave girl learned (with her mother writing with big spaces in between equations to make things less fearsome) about utility functions. She learned that utility functions only had more and less but otherwise had no meaning, so that any increasing function of a utility was as good as the original utility function. And she learned that 

exp(3*[ (1/3) log( C ) + (1/3) log(L) + (1/3) log(G)]) = C L G,

so that one could compare how well-off people were in the truly ancient days to how well-off they were now by looking at C L G just as well as by looking at

(1/3)log( C )+(1/3)log(L)+(1/3)log(G).

In the truly ancient days, under the head tax, C L G was

(1/3)(1/3)(1/3) = 1/27.

Now, under the flat tax, C L G was 

(¼)(½)(¼) = 1/32.

In order to compensate for the effect of the flat tax, current consumption C would have to be increased by the factor 32/27, holding L and G constant, in order to make agents as well-off as in the truly ancient days under the head tax. Since 32/27 is about 1.185, it would take an 18.5% improvement in the technology for producing consumption in order to have the same effect on agents’ welfare as it would to switch back to the head tax, her mother told her.    

But the bright and brave girl was not finished with her questions. “Mom, what if when I grow up I am not as good at making things as the other agents and so have a lower income? Would I still be better off under the head tax than under the flat tax?” Her mother first reassured her “In all of our world, no one has ever been any different from anyone else in productivity once they were grown. But let’s look at your question as a math problem.” After setting up the problem as a cubic equation, the mother left her daughter to do the problem as math practice. Assuming she was less productive than others (A<1, where A was her relative productivity) the bright and brave girl could see that, under the flat tax she would pay only A/4 in taxes (and others would pay ¼), while under the head tax she would pay 1/3.  But under the flat tax, G would be only ¼, while it was 1/3  under the head tax. Also, under the flat tax, the annoying incentive to work less and the smaller income effect from taxes would mean she would have leisure of ½ and consumption of A/4, while under the head tax, both her consumption and leisure would be [A-(1/3)]/[1+A]. Though the bright and brave girl was not completely certain her answer was correct, the number she came up with was that as long as she was at least 86.4% as good at making things as all the other agents when she grew up, she would still be better off under the head tax.  

But even then, once she had solved the cubic equation, the bright and brave girl had one more question: “Mom, why do we have to follow the customs of other worlds and have a flat tax instead of a head tax?”

Jonathan Portes and Others on the Mystery of Why Americans are So Unhealthy

In my post “The OECD Compares Health Care Systems” earlier today, I posed this question:

To what extent is the bad performance of the U.S. in life expectancy really a failure of Medicaid—the government medical program for the poor? If we did Medicaid right, while keeping the rest of the system the same as it was before the Affordable Care Act (Obamacare), could we dramatically reduce mortality while at most modestly increasing Medicaid expenditures?

Jonathan Portes answered “probably no” by email, saying “this paper and predecessors is the best comparison of health outcomes (not just mortality, but quite a few more which may be more directly related to health system quality) between US and UK”:

James Banks, Alastair Muriel and Jim Smith: “Disease Prevalence, Disease Incidence and Mortality in the United States and in England." 

I know Jim Smith from a joint University of Michigan-RAND project on "Internet Interviewing” that we are both involved in (the origin of Arie Kapteyn’s amazing American Life Panel), and have the highest respect for him. Jonathan zeroes in on this description that James Banks, Alastair Muriel and Jim Smith give of their previous work:

In a recent widely cited paper, we compared disease prevalence among middle age adults 55-64 years old in England and in the United States (Banks et al. 2006). Based on self-reported prevalence of seven important illnesses (diabetes, heart attack, hypertension, heart disease, cancer, diseases of the lung, and stroke), Americans were much less healthy than their English counterparts, differences that were large along all points of the socioeconomic status distribution. Moreover, using biological markers of disease, we found similar health disparities between Americans and the English, suggesting that these large health differences are not simply a result of differential reporting of illness in the two countries. They also exist with equal force among both men and women (Banks et al.2009). Since we purposely excluded minorities (African-Americans and Latinos in American and immigrants in England), these differences were not solely due to American health issues in the African-American or Latino populations or the growing immigrant population in England. Finally, these disparities in prevalence of chronic illness were not the consequence of differences between the two countries in conventional risk factors such as smoking, obesity, and drinking. Health disparities were essentially unchanged when we controlled for different levels of these risk factors in America and in England.

Jonathan summarizes this by saying

The key point here is “Americans were much less healthy than their English counterparts, differences that were large along all points of the socioeconomic status distribution.” I.e., it’s not just about the poor. Equally, it’s certainly not just about the health system either–public health more generally, income distribution, the rest of the welfare state, etc, all probably play a role.

James Banks, Alastair Muriel and Jim Smith emphasize that the lower health in America applies across the board, for both the high and low of society. But the differences between different socieconomic groups in America are remarkable too. Jim House, my colleague in the Survey Research Center at the University of Michigan told me this fact: in the United States, the gap between the health of those who have college degrees and those who don’t has been growing dramatically. In particular, in recent years it has become apparent that those with college degrees tend to live a long time and then have only a short period of bad health in the period right before death–a pattern significantly less common for those without college degrees. Here is one of his academic papers backing up that claim.

The OECD Compares Health Care Systems →

In response to his Twitter comments related to my post “Miles Kimball and Noah Smith on Balancing the Budget in the Long Run”–which inevitably focused on health care, since that will be the biggest ticket item in the government budget in the future–I begged Jonathan Portes to point me to something relatively brief that I could read to educate myself about the variety of different health care systems in Europe and other advanced countries. He sent me a link to this user-friendly article by the OECD:

Health Care Systems: Getting More Value of Money.

Pay particular attention to the diagram at the bottom of page 7, which lays out the basic varieties of health care systems. Also, though I have heard this fact before, the way in which the U.S. falls below the norm in ability to (on average) transform health care spending into life expectancy in the graph on page 4 is striking.

The question I would like to pose is this:

To what extent is the bad performance of the U.S. in life expectancy really a failure of Medicaid–the government medical program for the poor? If we did Medicaid right, while keeping the rest of the system the same as it was before the Affordable Care Act (Obamacare), could we dramatically reduce mortality while at most modestly increasing Medicaid expenditures?

Note: The OECD or “Organization for Economic Co-operation and Development" is highly respected among economists. It is more or less an organization of the richer countries in the world. 

Update: After I announced this post by tweet, I was tweeted this link to a Commonwealth Fund brief:

Explaining High Health Care Spending in the United States: An International Comparison of Supply, Utilization, Prices, and Quality.

Victor Fuchs and Zeke Emanuel on Health Care Reform

Alan Goldhammer’s (pen name Orange14) comment on my post “Miles Kimball and Noah Smith Discuss Balancing the Budget in the Long Run” is important enough that I am reprinting it here. Appropriately, Noah and I, and the many others who joined the Twitter discussion had focused on health care as the key issue for long-run budget balance. So Alan’s comment is about health care policy:

Interesting exchange but the two of you seem to not know that this has already been proposed for the most part by Victor Fuchs and Zeke Emanuel in the New England Journal of Medicine back in 2005.  Emanuel later extended the proposal to a book, “Healthcare Guaranteed: A Simple, Secure Solution for America.”  It basically does what you want, establishes a global budget for all health care that is paid for by a VAT set by Congress.  Everyone (including those on Medicare and Medicaid) get a voucher to buy an insurance policy to cover their health care.  After market insurance would be available for those who want more than the basic package (the same as is the case with Medigap policies today).

I was involved in this debate going back to 1990 and have tracked almost every proposal that has come along.  This one always made the most sense to me for a variety of reasons:  1) everyone is insured, 2) employers are off the hook and do not have to cover employees which means a better balance sheet, 3) the Medicare and Medicaid problems are solved, 4) we don’t automatically conclude that private sector delivery is bad, and 5) a global budget is established for all of health care which is responsive to the public (through Congress).

In addition, a portion of the VAT is set aside for technology assessment research to determine what works and what doesn’t so that paid for procedures/products are assessed.

Of course the only problem is getting this thing passed by Congress and signed by the President.  No small hurdle there.  The two of you should read the book.  Unfortunately, the NEJM article is still gated.

Alan also sent me the following link by email: 

“Solved!” the Washington Monthly Article by Ezekiel Emanuel and Victor Fuchs on Universal Health Care Vouchers.

Miles Kimball and Noah Smith on Job Creation →

This short Twitter discussion with Noah about “job creation” came out of his reading of “Rich People Do Create Jobs: 10 Tweets” In our discussion, we identified 4 senses in which rich people or entrepreneurs can create jobs (that is, increase labor demand) in companies they fund or lead. In this discussion, I was thinking of labor demand warranted by the extra output the firm will be able to produce if it has another hour of a worker’s effort. Economists call that extra output from another work-hour the marginal product of labor.

  1. Putting in time and effort to organize the firm’s activities in a way that raises the marginal product of a worker.
  2. Taking risks that could turn out badly for the entrepreneur or rich person, but could also turn out well and then have the potential to raise the marginal product of a worker.
  3. Providing funding from their savings that makes machines, factories, training, brand-awareness, or some other form of capital for the firm possible–all of which raise the marginal product of labor.

In addition, members of the government who make wise decisions about economic policy can be said to create jobs.  

In our discussion, we talk about three possible ways an entrepreneur or rich person might approach risk and uncertainty:

  1. In a fully rational way, which I call “Bayesian”.
  2. In a way that is especially averse to uncertain situations where the odds are hard to know. This is called “ambiguity aversion” or aversion to “Knightian uncertainty.” Many economic theorists (both abstract theorists and applied theorists) are interested in ambiguity aversion these days.
  3. In an overoptimistic or overconfident way.

Noah makes what I think is an unwarranted leap that the combination of ambiguity aversion and overconfidence is similar in its effects to being a rational and sensible Bayesian with no ambiguity aversion. Or at least that is how I interpret his word “exactly.”

There is one technical error in our discussion. When there is too much capital, it is possible that more capital could be a bad thing overall, since keeping the capital stock up in the face of depreciation costs more than what the capital produces (the gross marginal product of the capital). But even in that situation, extra capital normally raises the value of having extra labor. The extra capital is a bad thing, but less of a bad thing if there is more labor, so the extra capital raises labor demand. 

Update: Isomorphismes tweeted a link to this wonderful article about the principle that it is the consumption of the rich we should worry about, not their income or wealth:

Tyler Cowen on My Little Brother Jordan's Wisdom →

Tyler Cowen likes my younger brother Jordan Andrew Kimball’s plan to have free clinics for all we can afford as a nation and have people pay for the rest themselves. I talk about this plan in “Miles Kimball and Noah Smith on Balancing the Budget in the Long Run.” In one of the storified tweets, I write: 

I have to credit my brother Jordan Kimball, a radiologist, for the proposal of free clinics for all we can afford, no more.

I hope I have defended and fleshed out my brother Jordan’s plan in a way he would approve.

Note: My wife Gail and I named our son Jordan Matthew Kimball (who is now an undergraduate at Ohio State University studying economics) after my brother Jordan and her father Matthew Cozzens.

Isomorphismes on Enclosures →

Click on the title or here for a fascinating post by isomorphismes about the isolation caused by the way we conceive of real estate in our culture. There are great pictures and a BBC audio link, too.

I had no idea that so recently people roamed about each other’s land, no fences dividing the farms and folds.

The modern structure of towns, like so many things, is an outcome of economic structure.

  • When shepherds no longer roamed freely through the hills
  • and it became efficient for homes to be built in a rotary array around some kind of centre,
  • then pubs (public houses = free houses) became the meeting place

This is one of the most influential things I’ve heard, period. Think about how much longer you have to walk and how much lonelier life became once you don’t cut across another person’s land.

My pessimistic image of the culture that I live in is

  • city people all in their separate flats, with their separate computers, or separate televisions, on separate couches, alone in the space they’ve paid for with the career they fought to dominate
  • going out to a restaurant, pub, or coffee shop to experience the unexpected bumpings into people
  • so everything costs money. It costs money to have friends, costs money to hang out, costs money to flirt, costs money to meet people, costs money to put yourself in a place where people will happen to encounter you–unless you do it over the internet–and then people wonder why nobody makes friends after college…
  • suburban people the same, except also having their own pools instead of sharing a few community pools
  • having their own medium-sized lawns – big enough to keep the neighbours from peeping in the window, or seeing you on the porch and say hello – instead of sharing a large park cutting all the medium lawns down to small lawns (not that they individually choose this – the decision is made by real estate developers)
  • country people even more isolated because land tracts are so huge
  • and nobody, but nobody, knows their neighbours.

Miles Kimball and Noah Smith on Balancing the Budget in the Long Run →

Not surprisingly, a lot of our discussion ends up revolving around health care.

Update: Matt Yglesias, Stephen Bronars, Matt Stambaugh, Tyler Cowen, Modeled Behavior and Jason Becker joined the part of the debate about health care, and I flagged John Cochrane’s excellent suggestions about health insurance. Noah and I also flagged articles about Japan’s current situation, which gives a flavor of the future budget issues the U.S. faces. 

The Matrix and Other Worlds: The Videos

In my post “Teleotheism and the Purpose of Life,” I wrote

There are at least two ways in which the standard scientific worldview is consistent with the possibility of a superbeing.These possibilities are both common themes in hard science fiction.Hard science fiction is science fiction that focuses on things that are genuinely possible given what science we know.One of these hard science fiction themes is reminiscent of traditional Christian theology, while the other is reminiscent of Mormon theology.

Traditional Christian theology, put into a hard science fiction straightjacket, is like the idea that we are all software programs inside a superbeing’s computer.There is no way to know this is not true.If it is true, miracles would just be a special case in the programming.The normal laws of nature could be as simple and regular as they are simply because that was easier than programming more complex laws for the default case.

Mormon theology, put into a hard science fiction straightjacket, is reminiscent of the idea that we are watched over by benevolent aliens from an advanced civilization.Not only is this plausible, it is even possible to argue that it is likely.There are a lot of stars in the Galaxy, but even at a fraction of the speed of light, it would take only a small fraction of the time since the Big Bang to get from one end of the Galaxy to another.If evolution often favors intelligence, why couldn’t intelligent life arise several times in our galaxy?If any intelligent life has arisen before us, chances are it arose many, many millions of years before us, simply because it has been billions of years since the Big Bang.So it is not a big stretch to have aliens from an advanced civilization reach Earth.The big issue would be Fermi’s paradox:“Where are they?”“If they are here, why they are hiding themselves from us?”and whether they are benevolent or not.If they are here, they don’t seem to have destroyed us, which is something.

To me these are important religious questions, but science fiction is not always recognized for the serious theological speculation that it often is.

I found some excellent videos on these speculations, which have some great graphics. The first is about the possibility that we are inside God’s computer. The other three are about the possibility of intelligent aliens. 

  1. Are We Just Simulations? Through the Wormhole: Episode 1
  2. Are We Alone? Through the Wormhole: Episode 6
  3. A Solution to the Fermi Paradox
  4. Alien Planet: Full Documentary

(wikipedia’s definition of the Fermi paradox is: "The Fermi paradox (or Fermi’s paradox) is the apparent contradiction between high estimates of the probability of the existence of extraterrestrial civilization and humanity’s lack of contact with, or evidence for, such civilizations.[1]“)

The Paul Ryan Tweets →

In honor of Paul Ryan being chosen as Mitt Romney’s running mate–a big event no matter what your political leanings–here is a record of a Twitter discussion I had about Paul on July 27, some handicapping in the last few days of whether he would be Mitt’s pick, and my selection from the Twitter traffic about Paul today. The other participants are Noah Smith, Adam Sulewski, Matt Bruenig, Matt O'Brien, Mike Konczal, Casey Thormahlen, and indirectly, Howard Gleckman, Ezra Klein, Andrew Levine, Mike Sax, Jonathan Bernstein, Matt Williams, John Podhoretz, Betsey Stevenson, Josiah Neeley, Matt Stambaugh, Evan Soltas and Brad DeLong among others.

Don’t miss the discussions of long-run fiscal policy and health care. The video of Paul begging Congress to pass the bank bailout (TARP) that I link to at the end shows that he met an important test of seriousness. The bank bailouts are not popular now, but they were necessary in order to avoid a much worse economic outcome than the scathing economic outcome that we have actually had.   

In my mini-bio at the sidebar, it says

Politically, Miles is an independent who grew up in an apolitical family. He holds many strong opinions—open to revision in response to cogent arguments—that do not line up neatly with either the Republican or Democratic Party. 

In these Twitter discussions, you will see me considering and responding to arguments and coming out of the discussions in a different place than where I entered them–on several dimensions.   

To untangle the different discussion threads, I had to depart from chronological order.

Rich People Do Create Jobs: 10 Tweets →

This is my answer to a TED talk by Nick Hanauer, “Rich people don’t create jobs.” In the context of his TED talk, “rich people” means “entrepreneurs.” You can see my 10 tweets here, as well as by clicking on the title of this post. Let me explain a little background on a couple of these tweets.

  1. It is when rich people consume that they use resources for themselves. If they save and invest their money, they are influencing how resources are deployed, but not using those resources up. If they give their money away, then the choice is in the hands of those they give the money to. If it is to their children, let’s hope their children also save and invest or give most of the money away so that they don’t use too many resources on themselves.
  2. When I say that the efforts of entrepreneurs are complementary with those of other workers, I mean that extra effort by workers in a company produces more additional output the harder the entrepreneur is working to organize things.  
  3. In the short run, higher labor demand leads to more employment, but in the long run, higher labor demand leads mostly to higher wages, not to people working more. This is because, even if people are offered more jobs, there is a limit to how much they want to work. But almost all political rhetoric about labor demand is discussed in terms of “jobs." 
  4. One of my biggest themes on this blog is that despite the ways in which current policy is flailing around, that getting enough aggregate demand is not, in principle a hard problem. The hard thing is to foster the combination of more long-run growth and a fairer long-run distribution of the resources people actually use for themselves by consuming them.
  5. Although having a large middle class providing a market for new goods probably is quite a good thing for technological progress, I think that trying to get a larger middle class by redistributing from the rich to the middle-class would backfire. That’s not the way to do it. What is a good way to bolster the middle class? How about breaking the public quasi-monopoly on education with vouchers and charter schools? Or failing that, how about doing what I propose in "Magic Ingredient 1: More K-12 School.” Also, let me repeat here my statement about rich, poor and middle-class, from my post “Rich, Poor and Middle Class”:

I am deeply concerned about the poor, because they are truly suffering, even with what safety net exists. Helping them is one of our highest ethical obligations. I am deeply concerned about the honest rich—not so much for themselves, though their welfare counts too—but because they provide goods and services that make our lives better, because they provide jobs, because they help ensure that we can get good returns for our retirement saving, and because we already depend on them so much for tax revenue. But for the middle-class, who count heavily because they make up the bulk of our society, I have a stern message. We are paying too high a price when we tax the middle class in order to give benefits to the middle-class—and taxing the rich to give benefits to the middle-class would only make things worse. The primary job of the government in relation to the middle-class has to be to help them help themselves, through education, through loans, through libertarian paternalism, and by stopping the dishonest rich from preying on the middle-class through deceit and chicanery. 

6. Successful entrepreneurs create jobs in their own firms, but also typically destroy jobs in competing firms. That is part of how economic progress happens. We can block this competitive creation of new jobs and destruction of old jobs only at the cost of long-run stagnation. I doubt Nick Hanauer meant to argue for blocking progress in that way.  

7. Outsourcing and offshoring also create jobs. People in other states or other countries getting jobs counts, too. They are human beings, just like us.

"Wallace Neutrality" on wikipedia

Link to the “Wallace Neutrality” article on wikipedia

Two months ago, I proposed a public service project for the readers of this blog, in this post:

A Proposal for the supplysideliberal Community’s First Public Service Project: a wikipedia Entry on “Wallace Neutrality”

Thanks to Fudong Zhang, the wikipedia article on “Wallace Neutrality” is up on wikipedia!

I hope that many of you will try your hand at editing it further. For example, I think it is true that in some models with Wallace neutrality, when the nominal interest rate is already zero, the only way to stimulate the economy by monetary policy is to make people expect higher output gaps in the future, after the economy is no longer at the zero lower bound, as discussed in my post “Should the Fed Promise to Do the Wrong Thing in the Future to Have the Right Effect Now?” If it were possible to pin this point down better theoretically and explain exactly how Wallace neutrality figures into the result, that would be a great addition to the wikipedia article.

For the theoretically inclined, a good place to start in thinking about the “Should the Fed Promise to Do the Wrong Thing in the Future to Have the Right Effect Now?” dilemma is Ivan Werning’s continuous-time model of monetary and fiscal policy at the Zero Lower Bound when Wallace neutrality holds: “Managing a Liquidity Trap: Monetary and Fiscal Policy.” More generally, references to ways in which Wallace neutrality has explicitly or implicitly entered into real-world discussions of monetary policy would be of interest in the article.  

I very much appreciate Fudong’s efforts and am glad to see this project on its way. Let’s not stop here.

The True Story of How Economics Got Its Nickname "The Dismal Science" →

Comments to my post “Dismal Science Humor: 8/3/12” corrected me in my claim that the nickname “the dismal science” was a response to Malthus. It turns out that only the word “dismal” was a response to Malthus.  

David Levy and Sandra Peart tell a more interesting story about Thomas Carlyle’s motives in coining the phrase “the dismal science” in “The True Story of the Dismal Science. Part I: Economics, Religion and Race in the 19th Century.” Carlyle called economics “the dismal science” in response to John Stuart Mill’s arguments against slavery. So the true history of the phrase “the dismal science” means that all economists can answer to the nickname “dismal scientist” with pride.  

Should Everyone Spend Less than He or She Earns?

Question: exjunior asked

I’ve always thought Kant’s categorical imperative was a good guide for ethical behavior. But then I pose the question, should I spend less than I earn? Following Kant, I consider what would happen if everybody spent less than they earn all the time. Insofar as I understand modern macroeconomic theory, the result would be a depression. But spending less than you earn is manifestly a good thing. Has economics proven Kant was wrong?

Answer: I disagree with your statement that “spending less than you earn is manifestly a good thing.” In order to save for retirement, spending less than you earn is a good idea when you are young. But it is totally appropriate for retirees to be spending more than they are currently earning. In the long run, looking past business cycles, retirees spending more than what they earn during their retirement years (as they should) balances out for younger people spending less than what they earn (as they should).