Shorter Version of Tyler Cowen’s New Book

From one of my comenters.

the chief anti-libertarian human tendency is the wish to minimize risk by distributing it which leads to all the “too big to fail” and social security and regulatory boondoggles. The bigger and richer the society the easier it is to fulfill this wish at least in the short-medium run

This sounds like the problem of the “complacent class,” as reviewed by Walter Russell Mead or Edward Luce.

The Economics of a Border-Adjustment Tax

Timothy Taylor writes,

Most countries around the world and all high-income countries other than the United States have “border adjustments” in their tax code, but a key point to recognize is that border adjustments are typically part of a value-added tax–not the corporate income tax.

. . .the Trump administration proposal for revising the corporate income tax is actually a first-cousin-once-removed of a value-added tax.

Taylor cites scholars of various political persuasions in support of this analysis. Greg Mankiw makes a similar point. If you prefer taxing consumption to taxing saving and labor, then you should get to know the economics of the border-adjustment tax in the context of a shift from taxing corporate profits to taxing corporate net revenue.

But John Cochrane points out

a tax system in which you tax $100 of sales, but offer $99 of deductions (costs, wages, earnings retained for investment), then tax only the last $1, then tax that $1 again as personal income, would seem to offer lots of room for shenanigans on just what gets deducted. Along with interesting financial engineering to “invest” more earnings and pay less dividends and interest.

The more radically you reform taxes, the more you risk creating new distortions, both foreseen and unforeseen.

Tyler Cowen has a point about politics.

I say anything complicated they will just screw up, and the lack of transparency in the plan means eventually it will lead to a tax hike and furthermore a good deal of favoritism and rent-seeking along the way. Best hope is simply that they cut the corporate tax rate and don’t do much else on that front.

It is true that lowering the corporate tax rate would reduce the malincentive effects of loopholes in the tax. Lowering the stakes involved would lower the rent-seeking. Also, simply lowering the rate seems less risky (see John Cochrane’s whole post.

The economic theory of how a border-adjustment tax should work is worth knowing. However, theory tends to apply to concepts in the abstract. In practice, a lot of tax policy turns on what gets defined as taxable and what does not. And those regulatory and legislative decisions are where the rent-seeking and the distortions kick in.

Defending those with whom you disagree

Tyler Cowen writes,

write occasional material in support of views you don’t agree with. Try to make them sound as persuasive as possible. If need be, to keep your own sense of internal balance, write a dialogue between opposing views, just as Plato and David Hume did in some of their very best philosophical works.

I can do that with macroeconomics. I used the dialogue method in my Memoirs of a would-be macroeconomist.

I find it more difficult to do with politics. The Three Languages of Politics sort of does it, although it looks more at the more simplistic and dogmatic arguments of progressives, conservatives, and libertarians.

In fact, what bothers me the most in political discussions is simple-minded dogmatism. As I watched people in my neighborhood head to the subway to the march against Trump, my head was filled with the Stephen Stills lyric, “Singin’ songs, and they’re carryin’ signs. Mostly say ‘Hooray for our side.'”

So, relative to my views, the most contrarian position I could take would be a really dogmatic view, whether it is libertarian, conservative, or progressive. But I cannot make dogmatism sound persuasive.

A better approximation of Tyler’s idea for me would be to champion central planning. To do that, I would argue primarily on grounds of risk aversion. That is not the usual progressive case, which is more utopian. I might suggest that having elites in control may limit the magnitude of mistakes. Even that is difficult for me to argue–probably the most formative experience on my political beliefs was the Vietnam War.

The Irrational Voter Decides

Jacob T. Levy writes,

The 2016 election exposed grave vulnerability and fragility in the American party system. One major party was successfully hijacked by an extremist outsider in the face of initial opposition from a huge portion of the party’s elites and elected leaders. The other party came surprisingly close (if still not objectively very close) to meeting the same fate

Pointer from Tyler Cowen.

My thoughts:

1. I would suggest that the Democratic Party was hijacked by an outsider in 2008.

2. It appears that being hijacked by an outsider works to a party’s advantage, at least in the short run. If the Republican elite had succeeded in putting in their candidate (Rubio?), the Republicans probably would not have picked up the Rust Belt states that went for Mr. Trump. In this alternate history, Mrs. Clinton becomes President. Given that Levy laments the weakening of the Republican Party elite, he implicitly prefers this alternate history. I do not. Yet.

3. As Levy points out, partisanship is high.

89% of Democrats voted for Clinton, 90% of Republicans for Trump. Those figures are down a touch from 2012—both major parties lost more voters to third parties than in 2012—but considering the year of headlines about how unpopular both candidates were, the result is stark.

Also, partisanship is correlated with knowledge.

4. What this means is that a Presidential election is “swung” by a tiny number of voters who are only weakly partisan. My guess is that swing voters probably have the least ability to articulate a connection between the policies of their candidate and the outcomes that they desire. I would guess that if you interviewed voters in the counties that “flipped” from Obama to Trump, you would not be very impressed with their rationales behind either choice.

5. Pause and consider just how random this is. A few yahoos switch their votes, and this causes about half the country to be somewhat pleased and the other half to be bummed out of their minds.

6. What Levy seems to want to do is strengthen the parties, so that the elites can choose the candidates. He is nostalgic for the era of “the party decides.” Going back to that era would presumably produce candidates who rely less on personal charisma and more on the ability to get along well with party leaders.

7. If we go back to “the party decides,” one result would be to limit the potential impact of “swing” voters. The worst that they could do is pick the “wrong” establishment candidate, as opposed to going for an unreliable novice.

8. The outsider Obama leaves behind an unusually weak Democratic Party. It is not hard to imagine something similar happening to the Republicans under President Trump.

9. If you believe Martin Gurri, then the currents at work weakening the insiders are much deeper than nomination rules or other party mechanics.

Sports and Media

Ben Thompson writes,

The truth, though, is that in the long run ESPN remains the most stable part of the cable bundle: it is the only TV “job” that, thanks to its investment in long-term rights deals, is not going anywhere. Indeed, what may ultimately happen is not that ESPN leaves the bundle to go over-the-top, but that a cable subscription becomes a de facto sports subscription, with ESPN at the center garnering massive carriage fees from a significantly reduced cable base. And, frankly, that may not be too bad of an outcome.

Pointer from Tyler Cowen.

Read the whole post, which post surveys the media landscape. I used to pontificate on the topic, but now I am old and out of touch. The best way to forecast the media business is to observe young people. Years ago, I saw data that showed that young people were subscribing to newspapers at much lower rates than their parents had at similar ages. It was not hard for me to extrapolate from that.

I am surprised by Thompson’s optimistic outlook for sports. I think that pro sports on TV historically worked as a sort of focal point or lowest common denominator in households where the TV is always on in the background. People want something else to do while they’re chatting, so they turn on the game.

Nowadays, the TV is not the universal background noise. People have phones to keep them occupied. If you are going to watch sports, you have to be committed to it, and my sense is that young people are not as committed to sports as they used to be. Gambling on games, including fantasy sports, generates some commitment, but that is more of a niche than the sort of mass market that sports used to represent.

In recent years, when I have gone to baseball games, young people have been discussing homework, taking selfies, and watching the Jumbotron. I wonder if the passion for sports is something that is gradually fading away with the younger generation.

If ESPN is the future of TV, then TV may not have much of a future at all.

Different Types of Expertise

Something bothered me about the way that Tyler Cowen framed the issue of rule by experts vs. popular rule. He refers to David Levy and Sandra Peart’s new book, which I started reading. I think I am going to be bothered by their framing, also. Let me try to articulate my issue.

Last year, I was not happy with the way my bike brakes were working, and I took the bike into the shop. An “expert” diagnosed the problem as a worn brake cable and replaced the cable. The brake worked much better with the new cable, so as far as I can tell the diagnosis and the remedy were correct.

I believe that economics is fundamentally different from bicycle brake repair. We are not experts in the same sense that my bike mechanic was an expert. Let me try to explain why that is the case.

We know what a brake is supposed to do. It is much harder to give an account of what a financial system (or example) is supposed to do.

We can describe in complete and comprehensive terms how a bicycle brake should work. We cannot do that with a financial system.

A bicycle brake was built from a design. Knowledge of how it was designed can help us to fix it. The financial system emerged. There is no design specification to which we can refer.

When brakes are not working well on a bike, there are a limited number of possible causes. When a financial system does not work well, there are more possible causes than we can list.

Theories about brakes are easily tested under controlled conditions. Theories about financial systems are not.

The brake itself does not have beliefs that affect its behavior. The participants in the financial system do have beliefs that affect the behavior of the system.

It is possible to gain some wisdom from studying economics, just as it is possible to gain some wisdom from studying history. But it is not possible to attain the sort of expertise in economics that one can attain as a physicist, plumber, or bicycle repairman. To encourage such analogies is unwise.

Economists and Mr. Trump

Justin Wolfers writes (not Justin Fox, as I mis-typed earlier) that at the recent American Economics Association meetings,

Over three days of intense discussions, I didn’t encounter a single economist who expressed optimism that Mr. Trump’s administration would be good for the economy. The optimists were those who thought Mr. Trump would not have the energy to actually implement his agenda; the pessimists’ thoughts veered toward disaster.

Pointer from Mark Thoma.

It is possible that they are correct. However, I doubt it. While I disagree with Mr. Trump on immigration and trade, and I condemn his interventions with individual business decisions, I think that these will cause relatively little harm. This harm could be more than offset by reining in regulations, replacing Obamacare, and/or tax reform.

What is true is that Mr. Trump and the professoriate have an adversarial relationship. Mr. Obama takes his world view from the faculty lounge of the sociology department, and he very much respected academic credentials. Mr. Trump is the opposite.

I think that credentialed economists deserve a bit more respect than what we receive from Mr. Trump, but much less than what many American Economics Association members seem to think we are entitled to. I think that Justin Wolfers’ colleagues are fantasizing about a scenario in which Mr. Trump causes an economic disaster so that the status of academic economists shoots up. But I do not think see this as a very likely scenario.

On the generic topic of academic expertise in government, Tyler Cowen writes,

when it comes to the nuts and bolts of governance, typically I would prefer to be ruled by the Harvard faculty, even recognizing the biases of experts. They understand the importance of applying expertise to complex problems, and they realize many issues do not respond well to common-sense fixes. The citizenry usually cannot make good decisions, or for that matter expert appointments, when technocracy is required.

I tend to focus on what I call the knowledge-power discrepancy. Joe Citizen may have less knowledge than Professor Jones, but Professor Jones could be more dangerous. That is because Professor Jones may over-estimate his suitability for telling other people what to do.

Compared with academics, business executives and military leaders have more experience with the challenge of implementing ideas. A good business executive would not take it for granted that a web site is going to work. A good general would emphasize all of the difficulties and risks of trying to shape the Middle East.

The Protectionist Spirit

Tyler Cowen concludes,

it has become harder for insiders to capture the gains from building more, opening up or liberalizing systems. And so they are closing off opportunities and limiting potential gains for everyone.

I have just started reading The Innovation Illusion, by Frederik Erixon and Bjorn Weigel. They take the view that capitalism’s main strength is its ability to adopt new and better methods while discarding what is inefficient. They also take the view that this strength has diminished in recent decades. If you read Tyler’s entire essay, you will see that his point is that the benefits from capitalism are tending to go toward people with less political power and the displacement from capitalism is tending to affect people with more political power.

WaPo Watch, Week 4

I was away most of last week, so I did not see much of the actual newspaper. Two stories stood out in my mind.

First, there was a story claiming that Trump’s Cabinet choices were selected in part on the basis of how they look on television.

First off, consider the double standard. Did the Post go back to previous Presidents and find officials whose looks were off-putting? Who were the bad-looking people that President Obama appointed to top spots in his Administration?

A much more interesting and balanced take on the Trump team comes from Ray Dalio (pointer from Tyler Cowen.) An excerpt:

the people he chose are bold and hell-bent on playing hardball to make big changes happen in economics and in foreign policy (as well as other areas such as education, environmental policies, etc.). They also have different temperaments and different views that will have to be resolved.

I think this is much more important than their looks. Note that President Obama’s most important domestic initiative, the Affordable Care Act, was overseen by Kathleen Sebelius, a career politician who clearly was not appointed for her management skills. She was nominally in charge of the infamous Obamacare web site.

The second story that struck me was the one about the Obama Administration’s decision to abstain on the UN Security Council resolution that caused an outcry in Israel. What struck me was that the lead story was completely free of editorializing, even though the Post‘s editorial page decried the decision. This made me want to go back and give more bias points to the story that the Post wrote about Mr. Trump’s phone call with the President of Taiwan. There, the editorializing dominated the front page.

Does Protectionism Protect the Trade Balance?

Tyler Cowen writes,

If you tax imports and subsidize exports, the nominal exchange rate adjusts so that those policies don’t end up improving the real exchange rate at all, and thus the trade balance will not improve.

Consider the macroeconomic accounting identity that governs the trade deficit:

Net private saving plus government surplus/deficit = trade surplus/deficit

If you do not change net private saving (household saving plus business saving minus investment) or the government budget, then you cannot change the trade surplus. In order for a tariff on, say, Chinese goods, to reduce the trade deficit, it has to do something to domestic saving. One can come up with channels by which this would happen, but those may or may not operate. If they do not operate, then what you get is a movement in the exchange rate that offsets the effect of the tariff. The design of the tariff might cause the composition of consumption and production, but the overall trade deficit will not be affected.

Which is fine, because there is not much reason to care about the trade deficit in the first place.