Arthur Laffer Call Your Office

It should come as no surprise to anyone familiar with the Laffer Curve that France's 75% top tax rate raised barely enough money for an Alex Rodriguez contract.

Hollande first floated the 75-percent super-tax on earnings over 1 million euros ($1.2 million) a year in his 2012 campaign to oust his conservative rival Nicolas Sarkozy. It fired up left-wing voters and helped him unseat the incumbent.

Yet ever since, it has been a thorn in his side, helping little in France's effort to bring its public deficit within European Union limits and mixing the message just as Hollande sought to promote a more pro-business image. The adviser who made the "Cuba" gag was Emmanuel Macron, the ex-banker who is now his economy minister.

The Finance Ministry estimates the proceeds from the tax amounted to 260 million euros in its first year and 160 million in the second. That's broadly in line with expectations, but tiny compared with a budget deficit which had reached 84.7 billion euros by the end of October.

 Sure, class warfare can fire up the voters, but it won't balance the budget.

Redefining Adam Smith

I'm a big fan of philosopher and the father of modern economics Adam Smith, I have three copies of his seminal Wealth of Nations, including a rather interesting Depression Era edition.  So I was rather annoyed to read this "reinterpretation" of Smith by a Harvard researcher named Jonathan Schlefer. H/T Don Boudreaux at Cafe Hayek.

Adam Smith, often called the father of classical economics, told a very different story. Smith believed that each society sets a living wage to cover “whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without.”

Except, as Boudreaux points out, Smith isn't referring to a "living wage", not even parenthetically,but about social customs and what are considered luxury goods. Here is the sentence in context.

Consumable commodities are either necessaries or luxuries
 V.2.148
By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty which, it is presumed, nobody can well fall into without extreme bad conduct.

I don't suppose they teach academic ethics at Harvard, do they?

Das Kapital in the Twenty-First Century

I finally finished Thomas Piketty’s envy economics bestseller Capital in the Twenty-First Century, which according to those fine people at Amazon, is actually an accomplishment in itself. I was debating for sometime whether to buy the thing, the irony of shelling out nearly $30 for a mass produced book to someone who already makes more than me decrying income inequality was certainly a factor, but was curious as to what all the fuss was about and don’t like criticizing something I haven’t read based purely on other people’s opinions.

The short story, it’s not too terrible, actually fairly readable for a voluminous book on an arcane subject. Did I find it world changing? No. Were there plenty of parts that left me shaking my head? More than a few.

First of all, the books has received a fair amount of criticism for playing fast and loose with the facts. Most famously from the Financial Times. In the scope of things, that probably isn’t the worst of his sins. The most egregious is where he completely reverses the history of minimum wage hikes in the United States. This is bad since it could not have happened as the result of a typo or misplaced cell on a spreadsheet. The only reasonable explanation is that Piketty either falsified the facts intentionally, or just neglected them in an attempt to fit his political biases. He also does a similar thing when he falsely claims that the top marginal tax rate under Herbert Hoover was 25%.

In the end, this is really what the book is about. While it makes some interesting points on investments, his research into investment returns in university endowments actually interested me enough to research further, the book is basically a political tract to rally against income inequality. Marxist references aside, the book really shouldn’t be named Capital, as capital is only incidental to the real theme of the book, income inequality. Piketty makes no analysis of capital whatsoever, aside from how he thinks it contributes to income inequality. To him it is just one amorphous blob completely devoid of distinction, which grows ad infinitum until it consumes the entire universe, leaving impoverished widows and orphans in its metaphorical wake.

This is perhaps the greatest weakness of the book. Despite its nearly 700 pages it is quite weak in the details and makes an incredible amount of logical leaps without even a theoretical support. For example he bases his predictions of the future of capital growth on the assumption that all capital gains taxes will go to zero.

Wha…? Now I know many countries are reducing capital gains rates to spur investment, and some libertarian economists have proposed reducing rates to zero, but I know of nobody who actually thinks it will be, much less that will be the global standard for the next century. It seems nothing more than a convenient way for him to apply his argument than any rational expectation.

Also in this line of thought Piketty just starts with the presumption that income inequality is not only bad, but that it is the economic measure that all others revolve around. In the introduction, he mentions that mankind has greatly improved it average economic well-being over the last 200 years, but then the subject is promptly dropped. The entire rest of the book rests with the sole concern of economic inequality, with no thought whatsoever to changes in overall well -being. Without even the slightest analysis all reduction of inequality is presumed to be good, all increases bad.

Piketty also gives no thought whatsoever to investment decisions or the behavior of the “capital class”.  Ironically, he even repeatedly refers to Bill Gates amassing great wealth as a classic example of the reason steps need to be taken to eliminate the wealthy, with only a passing parenthetical reference to the fact that Gates is giving his money away voluntarily and doing an incredible amount of good with it . In Piketty’s mind all wealth is equal. It almost reaches cartoonish levels, where he almost seems to imagine wealthy people piling their ill gotten gains in a giant vault and diving into it Scrooge McDuck style, cackling evilly. One example of this is his repeated references to the movie Titanic as an example of class distinctions in early 20th century America. Seriously? I was half expecting him to use Unobtanium as an example of resource consumption and the exploitation of native cultures.

This brings me to yet another issue with his analysis, his conflation of capital, wealth, and consumption. Piketty, like many left wing economists employs a static zero sum analysis where any wealth, especially in the form of capital, is seen as being stolen from the poor, in fact he even says at one point that wealth is partially based in theft. Piketty calls for a series of taxes; on both income and wealth so that society may take back this stolen loot. Ironically, he fails to even make a moral argument for why society is justified in confiscating property. It is just accepted as good. He doesn’t even limit this to the rich, although he argues for the elimination of their wealth, but he also calls for massive tax raises on the middle class in the United States, even though that has actually nothing to do with the subject of the book as far as capital or income inequality go. He just throws that in there because he thinks government should confiscate wealth.

His biggest fallacy though is that invested capital does not detract from society, it provides the investments needed for society to improve itself. In Piketty’s superficial view it is bad though. His logic essentially argues that a billionaire who blows through his money wastefully consuming large amounts of resources, wrecking sports cars, buying off abused girlfriends and running yachts ashore in the Mediterranean is benefiting society by reducing his capital. Meanwhile that same billionaire who lives frugally in a three bedroom  house in Omaha and builds a successful and profitable business, is detrimental to society and must be punished.

So is the book worth reading. Yeah, if you have the time and interest. Is this next word in economics? Unfortunately no, it actually takes us back a couple of generations, to a superficial understanding of the way the world works.

Hot Off the Presses!

My first novel, now available on the Amazon Kindle and in paperback.

Enough With the Soccer Politics

OK, I wasn't too surprised by Ann Coulter, like her or hate her she pretty much lives to be incendiary, it's her raison d'etre, but enough of the conservative commentators trying to make soccer political. Bernard Goldberg from the National Review:

But it’s not just because it’s so dull that I don’t like soccer. Another reason I don’t like it is because of the Americans who do like it. Most of these sports fans — a term I use with no regard for either word, “sports” or “fans” — wouldn’t know a fumble from a first down, a hit-and-run from a double play. But every four years they show up at bars and go wild when the American team ties the Tunisians zero-zero, or nil-nil, as they call it.

OK, I'm a veteran, college graduate and libertarian leaning conservative, I have been a football fan since I was 7 (although admittedly it is easy being a football fan in Seattle right now). I used to go to 20-30 Mariners games a year, back in my college days when I had more free time, but now I am a Sounders season ticket holder and a big supporter of the national team (and Liverpool FC when Luis Suarez isn't biting people). It's a fun game with lots of complexities. I enjoy watching it. It doesn't mean I want national healthcare or amnesty for illegal aliens. Although I do have to admit I love the Mexican announcers.  Gooooooooooaaaaaallllll!!!!!!

It's a game. Move on.

Book News

I've decided to publish my first novel "The Team" on Amazon Kindle, and had this excellent cover commissioned by Brandi Doane McCann. Finishing up the final formatting issues, and should be available next week. Targeting July 8th!

A Few Thoughts on Inequality by Age Group

The subject of economic inequality has raised a lot of interest lately, with Obama making it the centerpiece of his hold-the-senate campaign, and a book on the subject by an obscure French economist named Thomas Piketty (more on that in a future post) hitting the bestseller lists. While I think this is a fine topic for debate, I have not been very impressed by how informed the debate has gone. One thing I have been disappointed about is that nobody is discussing the terms and what they mean by inequality, everyone is just throwing out terms they don’t understand, particularly with regard to what measures are relevant, and how much inequality is not only expected, but beneficial.

In this I am largely referring to inequality across age groups. Most discussions of this subject just use vague statistics like “the top 1% have X percent of the wealth” or “the top 10% of households have more income than the bottom 50%” without defining who makes up those households. This is particularly troublesome when comparing for long periods of time, when the make-up of the demographics might change significantly and in fact the same people often move between groups at different stages in their lives.

Here is a simple example. Just to keep things easy, we will measure individual income, and leave out children and such in the small fictional country of Elbonia, of Dilbert fame.  Each 10 year period of Elbonians has an equal population of 1,000 citizens. Elbonians enter the workforce at the age of 20. They start at the low, low pay (these are low skilled Elbonians after all) of $10,000 per year, but receive a healthy 50% raise every ten years (not so much on a yearly basis really but it keeps the math easy.)

Oh, and Elbonians have a mandatory retirement system into which they are required to pay 10% of their income, at a 5% interest rate, compounded every 10 years. And when they retire, they get their retirement paid out in 20 equal installments, until they die at the mandatory age of 80 (it is a very strict country).

Now keep in mind, this is a country with absolutely mandatory inequality. Every single person in each demographic gets paid absolutely the same wage and receive exactly the same return on their pension.  There are no Warren Buffetts or impoverished unemployed Appalachians. Now let’s see how the numbers work out.

Age	Income	Savings
20's	$10,000	$0
30s	$15,000.0	$15,000.0
40s	$22,500.0	$45,000.0
50s	$33,750.0	$101,250.0
60s	$5,062.5	$50,625.0
70s	$5,062.5	$0

This is obviously an extremely simplistic representation, but let’s see what happens when we compare the demographics in this completely “equal” society. For simplicity's sake once again, we will assume each 10 year group has the same population.

Age	Percentage of Income	Percentage of Wealth
20's	11%	0%
30s	16%	7%
40s	25%	21%
50s	37%	48%
60s	6%	24%
70s	6%	0%
Average	$15,229	$35,313

Now what we find is that one demographic, those in their 50s, have 37% of the income, and more than those in their 20s, 30s, 60s, and 70s combined! Conversely, if we look at wealth, those in their 50s have nearly half the wealth. Combined, those in their 50s and 60s have over 10 times the wealth of those in their 20s, 30s and 70s, combined. And this is in a country where everyone is on the exact same payscale.

Now what would make this worse? Well, obviously if some Elbonians drew larger paychecks than others, or made more on their investments. But what else would make it worse that had nothing to do with economic inequality as we normally see it? Notice that in our example each demographic is the same size, but in a normal country with a high birthrate there are far more young people than older people, there would also be a greater disparity in income and wealth. Also, if people merely lived longer, and thus were able to work and save longer, there would also be greater disparities. These are not bad things, a growing society with healthy people who live to a long age is supposed to be good, but critics of inequality would fret over this development.

This does not mean, of course, that all inequality is good, but it does mean, that we need to look into the details of things, and realize that changes in life, getting an education, getting married, having a family, saving for retirement, and finally retiring, have a huge influence on these statistics for reasons other than some form of economic discrimination by the rich and powerful, and we need to consider this.

Paul Krugman is an Economics Genius

Yeah, wonder when he is going to walk back this previous statement.

Well, I know about a health care system that has been highly successful in containing costs, yet provides excellent care. And the story of this system's success provides a helpful corrective to anti-government ideology. For the government doesn't just pay the bills in this system -- it runs the hospitals and clinics.

No, I'm not talking about some faraway country. The system in question is our very own Veterans Health Administration, whose success story is one of the best-kept secrets in the American policy debate.

An Ode to the OED

I was just a young undergrad in Russian and East European studies at the University of Washington when I first discovered the Oxford English Dictionary, in the hallowed stacks of the reference section of Suzzallo Library. Suzzallo, for those of you unfamiliar with it, is an absolutely massive library even by the standards of major universities.  There are over half a million items in its Russian collection alone. Although I had no academic use for it, the OED always held some sort of fascination for me. Whenever I passed by its score of volumes I would always grab one at random, turn to an arbitrary entry, and read through its remarkably detailed and descriptive histories of words, marvelling at the ridiculous effort it must have taken to compile it, its OED OCD, if you may.

Years later my interest only became stronger when I read Simon Winchester's fascinating history of the writing of the OED The Professor and the Madman, a rather entertaining recitation of the 8 decade long development of the first edition. It was then that I truly understood the depths of the obsessive personalities, and the sheer love of language that had gone into creating this remarkable history of the English language.

Because the OED, for those who have never spent much time reading it, is not a conventional dictionary, with a pronunciation guide, a list of definitions, and an entry for its etymological origins, it is rather, a history book of the English language, with citations for words going back a thousand years, covering the development of the word and all its meanings, connotations and subtleties.

So it is with this in mind, that I stumbled upon a 1973 compact edition of the OED in a used bookstore in Seattle the other day. Naively, I didn't even realize that this existed. How could you shrink a telephone booth sized collection of massive tomes costing as much as a mortgage payment into just two volumes and keep even a fraction of the content? I pulled it from its cardboard sheath and discovered how, they had shrunk the typeface so that each page was 4 regular pages, and had even included a cheap plastic magnifying glass, to aid those without superhuman vision.

Years removed from my OED experiences, I didn't purchase it immediately, despite the discount price, but it nagged me for weeks, so the next time I was in the neighborhood, I dropped by the used bookstore, ostensibly to look around, but really with only one target in mind.

I snatched it up and returned home, only to discover the cheap plastic glass, was in fact too cheap and too plastic. I was only with difficulty able to make out the text. A venture the next day to Cost Plus World Market though, and I was set. I returned with an old fashioned style magnifier. An item perfect in both presence and practicality.

It was now that I could pour over the text. A discussion with my significant other lead to looking up the first word, panache (movie reference: "Really, I had to look it up."). Original meaning, not flair or flamboyance, but feathers, then became plumage in military caps. Who knew?

Is it practical? Probably not. I could look up just about anything I wanted on the Internet, and wouldn't have to strain my eyes or my arms, lifting 10 pound volumes and balancing it on the edge of my desk peering through a magnifying glass, but that isn't really the point. Sometimes you just have to do something for the love of it, and because it represents something that is important to you, in this case the beautiful history of the English language, as represented in the hallowed tomes of the Oxford English Dictionary.