Confessions of a Supply-Side Liberal

A Partisan Nonpartisan Blog: Cutting Through Confusion Since 2012

Noah Smith on Racial Politics →

January 05, 2018 by Miles Kimball

The Real Test of the December 2017 Tax Reform Will Be Its Long-Run Effect

January 04, 2018 by Miles Kimball

The Solow Growth Model is a mainstay of intermediate macroeconomics classes. A key lesson of the Solow Growth Model is that if the net marginal product of capital is above the growth rate of the economy, increasing the share of output devoted to investment can raise the long-run quantity of goods available for consumption.

As a cut in corporate taxes, the recent tax reform is intended (among other things) as a cut in the effective rate of taxation of capital formation through investment. (As examples of capital formation through investment, think of building factories or writing software.) Thus, it is hoped that it will raise the share of GDP devoted to investment now, leading to a higher capital stock later than what the path of the capital stock would otherwise be.

It is important to realize how slow this process is. In "The Medium-Run Natural Interest Rate and the Short-Run Natural Interest Rate" I wrote:

Introductory macroeconomics classes make heavy use of the concepts of the "short run” and the “long run.” To think clearly about economic fluctuations at a somewhat more advanced level, I find I need to use these four different time scales:

The Ultra Short Run: the period of about 9 months during which investment plans adjust–primarily as existing investment projects finish and new projects are started–to gradually bring the economy to short-run equilibrium.
The Short Run: the period of about 3 years during which prices (and wages) adjust gradually bring the economy to medium-run equilibrium.
The Medium Run: the period of about 12 years during which the capital stock adjusts gradually to bring the economy to long-run equilibrium.
The Long Run: what the economy looks like after investment, prices and wages, and capital have all adjusted. In the long run, the economy is still evolving as technology changes and the population grows or shrinks.

Obviously, this hierarchy of different time scales reflects my own views in many ways. And it is missing some crucial pieces of the puzzle. Most notably, I have left out entry and exit of firms from the adjustment processes I listed. I don’t know have fast that process takes place. It could be an important short-run adjustment process, or it could be primarily a medium-run adjustment process. Or it could be somewhere in between.

Suppose that after a cut in capital taxation the adjustment process brings the economy 10% of the way toward its new steady state each year. Then, after whatever the impact effect is, the gradual adjustment in the capital stock thereafter has on average only 37% percent of the effect in the first ten years that it will have in the new steady state. You can see some details of the calculation in my wonky Christmas Twitter thread here, but you can also see it visually in the blue graph near the top of this post. The area below the upside-down exponential curve for the convergence to the new steady state is obviously less than half the area beneath the line for the full steady state effect. Personally, I learned something I hadn't realized from doing this calculation.

Note that, among the effects tied to the increase in the capital stock are a large share of the dynamic tax revenue effects of the tax reform. The dynamic benefits for tax revenue should be more than two and a half times as big (1/.37 times) in the new steady state as they are in the first ten years, which is the bureaucratic window over which such things are often evaluated.

Now, what about the impact effect? Let's consider the impact effect on GDP first, then the impact effect on interest rates. Most of the supply-side improvement from the tax reform, if it has one, should only occur when additional capital formation has actually taken place. So aggregate supply shouldn't be that different in the short run. So if the Fed keeps output at the natural level, GDP also shoulnd't be affected all that much in the short run by the tax reform, even though it could be raised quite a bit in the long run if it works as claimed.

As for interest rates, remember that this tax reform changed the taxation of interest rates. One reason the Fed doesn't need to raise interest rates all that much to keep GDP at the natural level is that the tax reform itself raises after-tax interest rates. For example, in addition to some direct limitations on deducting mortgage interest, the standard deduction is so much bigger that many people won't want to deduct mortgage interest. That means that the same before-tax interest rate corresponds to a larger after-tax interest rate for many people. The Fed's interest rate is a before-tax interest rate. So if the Fed looks like it is standing pat, after-tax interest rates are going up.

For business investment, the after-tax rental rate on capital also goes up because it got a big tax cut. (The rental rate is the more general concept that in very simple models is equal to the marginal product of capital.) Investment per the Q-theory depends on the gap between the after-tax rental rate and the after tax interest rate. So given a large corporate tax cut and a reduction in interest deductibility and no reaction by the Fed, business investment can go up while housing investment goes down.

Contrary to the headline of Pedro da Costa's Business Insider article above, the bottom line is that the Fed not needing to react to the recent tax reform in a big way doesn't mean that the tax reform isn't working as intended to increase capital formation through investment. The real test of the tax reform is what it does in the long run, not what it does in the next few years.

Why I Am Not a Neoliberal—In Tweets →

January 03, 2018 by Miles Kimball

2017's Most Popular Posts

January 02, 2018 by Miles Kimball

The "Key Posts" link at the top of my blog lists all important posts through the end of 2016. This is intended as a complement to that list, in two categories: popular new posts and popular older posts. (You can see other recent posts by clicking on the Archive link at the top of my blog.) The numbers shown are pageviews throughout 2017 according to Google Analytics. My blog homepage had 34,833 pageviews in 2017. Total pageviews were 240,568 in 2017.

New Posts in 2017

Older Posts with Continuing Popularity

Many of the popular older posts are posts that turn up easily in Google searches.

The Inauguration Day Letter Barack Obama Left for Donald Trump

January 01, 2018 by Miles Kimball

Dear Mr. President -

Congratulations on a remarkable run. Millions have placed their hopes in you, and all of us, regardless of party, should hope for expanded prosperity and security during your tenure.

This is a unique office, without a clear blueprint for success, so I don't know that any advice from me will be particularly helpful. Still, let me offer a few reflections from the past 8 years.

First, we've both been blessed, in different ways, with great good fortune. Not everyone is so lucky. It's up to us to do everything we can (to) build more ladders of success for every child and family that's willing to work hard.

Second, American leadership in this world really is indispensable. It's up to us, through action and example, to sustain the international order that's expanded steadily since the end of the Cold War, and upon which our own wealth and safety depend.

Third, we are just temporary occupants of this office. That makes us guardians of those democratic institutions and traditions -- like rule of law, separation of powers, equal protection and civil liberties -- that our forebears fought and bled for. Regardless of the push and pull of daily politics, it's up to us to leave those instruments of our democracy at least as strong as we found them.

And finally, take time, in the rush of events and responsibilities, for friends and family. They'll get you through the inevitable rough patches.

Michelle and I wish you and Melania the very best as you embark on this great adventure, and know that we stand ready to help in any ways which we can.

Good luck and Godspeed,

source

John Locke Pretends Land Ownership Goes Back to the Original Peopling of the Planet

December 31, 2017 by Miles Kimball

*Source for this image of a Hittite chariot*

It only takes a little knowledge of history to know that most real-world land claims actually go back to either conquest or to some kind of squatting on land that someone else had a nominal claim to. Few real-world land claims go back to the original peopling of the earth. So there are problems with both halves of section 35 of John Locke's 2d Treatise on Government: “Of Civil Government” (in Chapter V "Of Property"):

It is true, in land that is common in England, or any other country where there is plenty of people under government, who have money and commerce, no one can inclose or appropriate any part, without the consent of all his fellow-commoners; because this is left common by compact, i. e. by the law of the land, which is not to be violated. And though it be common, in respect of some men, it is not so to all mankind; but is the joint property of this country, or this parish. Besides the remainder, after such inclosure, would not be as good to the rest of the commoners, as the whole was when they could all make use of the whole; whereas in the beginning and first peopling of the great common of the world, it was quite otherwise. The law man was under, was rather for appropriating. God commanded, and his wants forced him to labour. That was his property which could not be taken from him wherever he had fixed it. And hence subduing or cultivating the earth, and having dominion, we see are joined together. The one gave title to the other. So that God, by commanding to subdue, gave authority so far to appropriate: and the condition of human life, which requires labour and materials to work on, necessarily introduces private possessions.

What force John Locke's argument here had in the era when he wrote it comes mostly from his clever use of the Bible. Here two of the Bible verses he is alluding to:

In the sweat of thy face shalt thou eat bread, till thou return unto the ground; for out of it wast thou taken: for dust thou art, and unto dust shalt thou return. (Genesis 3:19)

And God blessed them, and God said unto them, Be fruitful, and multiply, and replenish the earth, and subdue it: and have dominion over the fish of the sea, and over the fowl of the air, and over every living thing that moveth upon the earth. (Genesis 1:28)

But even in John Locke's reading of Bible verses, there is a serious problem, akin to the problem I mentioned above. "Be fruitful, and multiply, and replenish the earth, and subdue it," which sounds the most like land claims based on the peaceful peopling of the earth, is a Bible verse from before the Fall. The verse requiring unpleasant labor is in the third chapter of Genesis, after the fall. The fourth chapter of Genesis moves toward the reality of where land-claims come from:

And Cain talked with Abel his brother: and it came to pass, when they were in the field, that Cain rose up against Abel his brother, and slew him. (Genesis 4:8)

The rest of the first five books of the Bible, where God promises land to the Israelites that they ultimately claim in bloody conquest, completes a more realistic picture of where land claims come from.

My focus here is on land claims in John Locke's before-the-Fall model and land claims in what believers would call our actual fallen world. But it is worth also pointing to the Bible's contrast between labor after the Fall, as described in the third chapter of Genesis and labor before the Fall, as described in the second chapter of Genesis:

And the Lord God took the man, and put him into the garden of Eden to dress it and to keep it. (Genesis 2:15)

Reducing human violence—which Steven Pinker talks about in The Better Angels of Our Nature—is much more important, but it would be a great advance in human happiness if we can figure out how to make the experience of work more like dressing and keeping the Garden of Eden than eking out survival from thorny ground by the sweat of our brows.

Don't miss other John Locke posts. Links at "John Locke's State of Nature and State of War."

Percentage of Women in the Labor Force in Countries around the World |HumanProgress.org →

December 30, 2017 by Miles Kimball

Why I Am Not a Physicist

December 29, 2017 by Miles Kimball

Link to "Why Can't We Find the Theory of Everything? Einstein, Rogue Genius, String Theory | Eric Weinstein" on YouTube."

Above is a very interesting peek into the world of theoretical physics. Theoretical physics are making mathematical progress, but are stalled out in an effort to better understand reality, despite being an incredibly smart and highly-skilled group of people.

At one point in my youth, I said to everyone that I wanted to someday be a physicist. (And my interest in physics was great enough that I took a full two semesters of the most advanced freshman physics course at Harvard.) But at some point I realized just how stiff the competition would be because of how smart and highly-skilled the community of physicists is. So I decided to go into a field where the competition wouldn't be so stiff: economics. By comparison with physics, economics is still the Wild, Wild West, and it is much easier to make a real contribution in economics.

It is not lost on me that thinking about how much competition there would be in physics demonstrated some tendency to think like an economist. All the more reason I still think it was the right decision for me to become an economist rather than a physicist.

Noah Smith: Must-Reads of 2017: Monopolies, Sexism and Economics →

December 28, 2017 by Miles Kimball

Monetary Policies in the Age of Uncertainty

December 27, 2017 by Miles Kimball

Miles's presentation on negative interest rate policy begins right after the 35 minute mark.
Eric Lonergan's presentation on helicopter drops is right after MIles's presentation, beginning not long after the 52 minute mark
Q&A begins right after the 1 hour and 22 minute mark.
Eric Lonergan's answer in the Q&A begins at the 1 hour and 41 minute mark
Miles's answer in the Q&A begins 5 seconds before the 1 hour and 59 minute mark

Powerpoint file for Miles's Presentation

Link to the video above on YouTube

I was invited to speak at an October 2, 2017 Bruegel conference with the title "Europe and Japan: Monetary Politicies in the Age of Uncertainty." My presentation starts right after the 35 minute mark of the video above.

The great thing about this session was the Eric Lonergan's advocacy of massive helicopter drops made my advocacy of deep negative interest rates as a key tool look moderate :) For my views on helicopter drops, see my post "Helicopter Drops of Money Are Not the Answer."

I think many of you, my readers, will find the parts of this video I bulleted above quite interesting. For example, for the Bruegel presentation, I boil down my views on negative interest rate policy to 17 minutes. For the 5-minute version, see my CEPR interview posted here in "How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide." For the 87-minute version, see "18 Misconceptions about Eliminating the Zero Lower Bound (or Any Lower Bound on Interest Rates): The Video." (Those 87 minutes includes excellent Q&A. The video quality is tolerable, but not great.)

See Jan Musschoot's blog post "Carrot or stick? The Lonergan-Kimball debate" based on what you see in the video above.

Also: I added some of Eric Lonergan's tweets about the conference to the end of my story "Miles Kimball, Roger Farmer, Stephen Williamson and Joe Little on Recent Japanese Monetary Policy."

Chris Frith on Free Will →

December 26, 2017 by Miles Kimball

Miles's Recipe for Success

December 25, 2017 by Miles Kimball

The thing I would recommend for success is pretty simple. Try every day to get smarter. Learn something. Think. Think hard about some math. Try to figure things out.

If every day you try to get smarter, you are going to find that you are—certainly ten years later, twenty years later, thirty years later. If you really keep thinking, thinking, thinking all the time, it's also going to keep your mind in better shape when you get older.

People often, in our society, have the attitude, "You're born smart—or not smart." I think that is a terrible attitude to take. You can make yourself smarter by trying. One of the key things is to have patience with it. People say they can't do math. Math is something you need a lot of patience with. Almost everybody learns math slowly. That is true of a lot of other things, too. Just keep working on it, and you'll find that you do get smarter and smarter.

Update: Nelson Mark shares this on my Facebook page for this post:

I think it was Sherwin Rosen who told us that the “economic intuition” that the faculty tried to teach us is familiarity. Totally consistent with your recipe. Keep working at it and thinking about stuff.

The same can be said about intuition for many other pursuits.

Hal Boyd:  The Ignorance of Mocking Mormonism →

December 24, 2017 by Miles Kimball

You might also like some of my other religion posts. Here are my UU sermons I have posted:

Here some religion posts beyond those sermons, leaning towards posts related to Mormonism:

Noah Smith also did a series of religion posts on my blog. Please help me to persuade him to do more! Here they are in chronological order:

The World of Debt

December 23, 2017 by Miles Kimball

Source: visualcapitalist.comh/t World Forum for Economists Facebook group — *Source: visualcapitalist.com*
*h/t World Forum for Economists Facebook group*

I found it interesting how dominant US and Japanese debt is in the world of sovereign debt and how small a part of the whole the debt of individual European countries was. However, added together, European debt is quite important.

David Beckworth—The Safe Asset Problem is Back: Negative Interest Rate Edition →

December 22, 2017 by Miles Kimball

21 Experts Tell Us What the Future Looks Like for Cryptocurrencies and Blockchain

December 21, 2017 by Miles Kimball

I was one of the "21 experts" in the FocusEconomics article "21 experts tell us what the future looks like for cryptocurrencies and blockchain." My bit reads as follows:

Governments will retain control of currencies. But the blockchain technology is very exciting. What is most exciting is the possibility that the credit-card/debit card oligopoly might be disrupted so that fees come way, way down.

Many central banks are working toward issuing their own digital currencies. The simplest way is to give fintech entrepreneurs low-cost access to a central bank clearing mechanism with streamlined regulations for fintech accounts that are 100% backed by central bank reserves. Some central banks are thinking of giving individuals the equivalent of a central bank reserve account.

There are two big effects on the world economy and financial markets. The first is that a 1 percentage point reduction in credit card/debit card fees from disruptive digital competition is like a 1 percentage point reduction in distortionary taxes. The second big effect on the world economy and financial markets is that when a bigger and bigger fraction of transactions are electronic, central banks will see a smaller political cost to modifications in paper currency policy that allow deep negative interest rates. See "How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide" for a discussion of possible changes in paper currency policy that keep paper currency in the picture but allow deep negative interest rates.

Visit Miles' blog Confessions of a Supply-Side Liberal and follow him on Twitter here.

We can see what the other experts say in the article.

Is Having the Young Pay for the Old 'Insurance'? →

December 20, 2017 by Miles Kimball

How Sugar Makes People Hangry

December 19, 2017 by Miles Kimball

Low blood sugar can put people into a bad mood and make them aggressive. But let me argue that the implications of this fact are a little different than some might naively think.

A big cause of low blood sugar is when you have eaten sugar, refined carbs or some other food with a high insulin index a couple of hours earlier. When sugar, refined carbs or something else high on the insulin index causes insulin to spike, that insulin causes blood sugar to be removed from the bloodstream (some to the muscles and some to be stored as fat in the fat cells). It is like waking up from being asleep at the wheel, seeing you are drifting off to the right, and then overcorrecting to the left.

So, a good way to reduce the chances of blood sugar low enough to make you "hangry" is to avoid sugar, refined carbs and other foods high on the insulin index. If you do avoid sugar, refined carbs and other foods high on the insulin index, you will find that you don't need food handy in order to avoid being hangry. Indeed, if, when you do eat, you eat foods low on the insulin index, you can skip meals entirely and still have a reasonable level of blood sugar because keeping insulin low leads your body to make blood sugar from the fat in your fat cells.

Many, many people in the US think of skipping a few meals as if it were torture. And that is the way skipping meals will seem to you if when you do eat, you eat sugar, refined carbs and other foods high on the insulin index.

People often blame bad nutrition on eating "processed foods." There is a lot of truth to this, if only because most processed foods contain a lot of sugar or some kind of flour or starch that your body quickly converts into sugar. It is easy to verify the high sugar content of most processed foods by looking at the ingredients on the side of the package if you know all the different names for various kinds of sugar. Googling "top types of sugar in processed foods" I came immediately to an post by "Dr. Axe" with this useful list of different types of sugar you might find on an ingredient list:

Corn syrup or high-fructose corn syrup
Dextrose or crystal dextrose
Fructose
Maltose
Lactose
Sucrose
Glucose
Evaporated cane juice or fruit juice
Caramel
Carob syrup
Brown sugar
Raw sugar
Dextrin and maltodextrin
Rice syrup
Molasses
Evaporated corn sweetener
Confectioner’s powdered sugar
Agave nectar
Other fruit nectars (for example, pear nectar)

For most processed foods, the sugar content is high enough to cause enough harm that it is not so easy to tell whether there is also something else in a particular processed food that also causes substantial harm.

Of course, it isn't sugar per se, but anything that spikes insulin that is the problem. To learn more about which foods are high on the insulin index, see "Forget Calorie Counting; It's the Insulin Index, Stupid." To learn more about the insulin theory of obesity, see my post "Obesity Is Always and Everywhere an Insulin Phenomenon."

You might also be interested in these other related posts:

Also see the last section of "Five Books That Have Changed My Life."

Katherine Ellen Foley—Candy Bar Lows: Scientists Just Found Another Worrying Link Between Sugar and Depression →

December 18, 2017 by Miles Kimball

In addition to the link above, for more contrarian discussion of nutrition, obesity and chronic diseases, don't miss:

John Locke: Land Title is Needed to Protect Buildings and Improvements from Expropriation

December 17, 2017 by Miles Kimball

The importance of land is often not the land by itself, but the fact that something valuable can be done to the land or something valuable can be built on the land. It is important that people be able to get title to land in order to make such improvements or to build such buildings without fear that those improvements or those buildings will be taken away. John Locke makes that argument in section 34 of 2d Treatise on Government: “Of Civil Government” (in Chapter V "Of Property"):

God gave the world to men in common; but since he gave it them for their benefit, and the greatest conveniences of life they were capable to draw from it, it cannot be supposed he meant it should always remain common and uncultivated. He gave it to the use of the industrious and rational, (and labour was to be his title to it;) not to the fancy or covetousness of the quarrelsome and contentious. He that had as good left for his improvement, as was already taken up, needed not complain, ought not to meddle with what was already improved by another’s labour: if he did, it is plain he desired the benefit of another’s pains, which he had no right to, and not the ground which God had given him in common with others to labour on, and whereof there was as good left, as that already possessed, and more than he knew what to do with, or his industry could reach to.

I have several miscellaneous thoughts about this:

1. Hernando de Soto became famous for talking about how important giving slum-dwellers title to the land they live on can be for economic development. When this advice is followed, it is an interesting example of "squatters" usurping land title when the land was mostly unimproved, and then being given land title after building a shack on a (small) piece of land.

2. Often what stands in the way of building is not the difficulty of getting standard legal title to a piece of land, but the political monopoly over how a piece of land may be used that local governments have. If a local government holds sway over too large an area, the urge to stifle competition and fear of congestion can often lead to a political failure—and political obstruction in the way—of delivering on the social justice imperative I enunciate in "Building Up With Grace" that every substantial city have a district with essentially no height limits and excellent bus service to the rest of the city, so that people of modest means can afford to move to attractive cities—cities that work, cities that have jobs and amenities.

3. In the modern world, very often, a great part of the value of a piece of land has to do with the other buildings and streets that it is near. One of the themes of "Density is Destiny" is about cities as the key element of a socially increasing-returns-to-scale technology. If it were possible to create more cities that work, cities that have jobs and amenities, on land that is now far enough away from other things that it is inexpensive, that would be great. Overall, great cities are underprovided. Part of the answer is letting existing attractive cities grow more; but ideally (and this is not excuse for those existing cities not to grow), it would be good to also have new, attractive cities arise. Here, I think there is an externality. If someone made a wonderful city come into being, shehe would capture only a small share of the value generated.

4. One case in which it is easier to get a city to arise is when that city has a significantly better legal structure than the surrounding cities. Think Shenzhen. This is Paul Romer's idea of a charter city. In addition to the value of a charter city in helping make the transition toward a better legal structure in a particular country, a charter city is also valuable simply because it is an additional city.

5. There is a severe shortage of land in the world available for conducting high-level political experiments. That is, you can buy land, but you can't easily buy the right to set up your own nation on a patch of land. To me, this seems unfortunate. The ability to create space colonies—either on space stations or asteroids—may change this in the next century or two. Expect a flowering of new political experiments. Now is the time to develop the ideas for those political experiments.

Don't miss other John Locke posts. Links at "John Locke's State of Nature and State of War."