J. Bradford DeLong's Blog, page 444

Live from the Gehenna That Was The Old New Republic: Sham...

Live from the Gehenna That Was The Old New Republic: Shame on Franklin Foer and Andrew Sullivan for refusing to comment. Kudos to Charles Lane for talking on the record���but "no complaints from female staffers ever came to him... [because while] the editor was nominally the supervisor of Leon Wieseltier... that was not reality... Leon had total autonomy as literary editor and a very close, almost brother-like relationship with the owner at the time, Marty Peretz..." evades the important fact that no complaints came to him because nobody thought he would be any help. And he should examine his conscience. But he is a mensch here.

And for the rest who talk but not on the record? Kinsley, Hertzberg, Beinart, Just? Feh...

Jason Cherkis: 'I Was Blind And Complicit And Just, Like, Did Nothing': New Republic Staffers Speak Out: "'I accept I was blind and complicit and just, like, did nothing', one former top New Republic editor, who asked to remain anonymous to speak candidly, told HuffPost...

...���There was a bully, and I was not standing up to the bully to protect people.��� But he added that there were men and women in the office who did not know what was going on. They all should have looked out for each other more. ���It was kind of a collective failure. This sits heavily on me.���

In part, Wieseltier���s behavior went unchecked because there was no one in place to check it ��� or at least willing to. The New Republic had no human resources office where employees could safely lodge complaints about Wieseltier. It also didn���t have a clear organizational structure; it wasn���t always clear whom Wieseltier reported to or if he reported to anyone. ���If you asked me if I was Leon���s boss, I would probably answer, ���I���m not sure.��� Like I���m not even sure on paper if I was Leon���s boss,��� said the top editor.

Former owner Marty Peretz��could be quick to fire editors, and he was loyal to his friend Wieseltier.

Peretz claims no one ever complained to him about Wieseltier. ���I really had no inkling that Leon did anything remotely, remotely what other people have been charged with,��� he told HuffPost. ���He was, he is an intellectually and philosophically, an overwhelming character, and I don���t mean ���character��� in the pejorative sense. He���s a formidable person, absolutely formidable. You talk to him, you���re faced with a powerful intellectual and psychological force.

���I mean, I could see how he sometimes overpowered me and overpowered other people on the staff. But that was because of his cerebral capacity.���

This cult around Wieseltier helped protect him. He let it be known he held sway inside and outside The New Republic. In 1999, The New York Times called him ���a Wunderkind turned near-elder statesman���. part Maimonides, part Oscar Wilde.��� Years earlier, he quipped to Vanity Fair that they should refer to him as ���Oscar very Wilde.�����

If you got on his good side, he could make your career, several former staffers said.��If he turned on you, you felt it. In editorial meetings, Wieseltier had his own chair positioned at the end of a long table opposite the editor-in-chief. If anyone sat in his chair, he considered it a capital offense. Like Weinstein, he delighted in being cruel to others he perceived as weaker ��� which included the men on staff.

���He was perceived as the person who capped editors, who created editors, made careers,��� said the top editor. ���He was somebody that held really vicious grudges against people. He was just a very intimidating person to deal with.���

Several of the magazine���s former��editors refused to comment for this story, including Franklin Foer, who left as editor in 2014.��Andrew Sullivan, who edited the magazine in the early to mid-���90s, did not return an email request for comment. Charles Lane, who was at the helm from September 1997 through September 1999, told HuffPost that no complaints from female staffers ever came to him. But he understands why that was the case.

���I will tell you that the truth of the sort of reality of life at The New Republic was not what was represented on the masthead,��� Lane said. ���In other words, the editor was nominally the supervisor of Leon Wieseltier. But that was not reality, OK? I mean Leon had total autonomy as literary editor and a very close, almost brother-like relationship with the owner at the time, Marty Peretz, who, of course, was above both of us on the masthead and totally had complete untrammeled control of the magazine.���

���In reality I don���t think I was the place where the buck stopped, given how the place worked,��� Lane said. ���The buck stopped with Marty. I think he���s the person you need to be asking that question. I really do. I mean, if you want an answer from the person who was in authority, that���s it.���

But Wieseltier���s reputation concerning women was well known, Lane says. ���I was aware, as everyone in Washington was aware, that Leon had extramarital affairs. I think those are public knowledge. I���m racking my brain. I did not have specific knowledge of anything like what these people are talking about. Having said that, none of it surprises me.���

Former New Republic Publisher Chris Hughes told Politico, which first broke the story, that he heard about Wieseltier���s behavior only after a building manager complained that he tried to hit on one of the manager���s employees. ���We directed Mr. Wieseltier to immediately cease any communication with her, and I made sure he knew The New Republic had a zero-tolerance policy for sexual harassment of any kind,��� Hughes said.

One woman who was on the New Republic staff decades ago attributed Wieseltier���s harassment to the magazine���s male-driven culture. What was so shocking, she said, was just how long it had been going on: ���That���s a long fucking time, and that���s some bad judgment.���

Basic Econ 1-Level Tax Incidence Primer: Owen Zidar Requests MOAR Tax Incidence Model Blogging

Invocation

Over on the Twitter machine, the learned and incredibly sharp Owen Zidar writes, about the picky model-based incidence analysis points:

@omzidar: On Twitter: The number of tweets needed to describe this issue suggest more clarification/ a detailed step by step post would be useful...

My view is that in the end all this���Krugman (2017b) and (2017a); DeLong (2017d), (2017c), (2017b), and (2017a); Bernstein (2017); Furman (2017); and Mankiw (2017)���when unpacked, boils down to Econ 1-level tax incidence, and an algebraic mistake in calculating overelaborated and overcomplicated versions thereof.

People interested who haven't gotten it yet either (a) have no control over Econ 1-level models, (b) have forgotten how to simplify to boil the key issues down to Econ 1-level, or (c) are working really hard not to get the point. Twitter is, as Owen says, a disaster: totally unsuited for this kind of discussion.

But I owe Owen, and he asks. And besides, Pat Kline politely expressed interest when he raised the topic at lunch���but I am sure that he either regrets doing so or soon will regret doing so. They ask. So I answer. I think there are no mistakes (on my part) left in what is below. But I could be wrong. Corrections welcome:

Mankiw's Model

Weighing into the debate about the effects of corporate tax cuts on wages, Greg Mankiw presents a model of:

a small open economy, with a fixed required rate of return r and a potentially unlimited amount of fully mobile international capital available at that priced
only one other factor of production, labor, available in fixed supply.
a tax on before-tax profits per worker, levied at a rate t on gross profits.
only three claimants to output: labor, which earns a wage w; internationally mobile capital, which earns after-tax profits per worker �� = kr* where k is the amount of capital per worker deployed in production; and the government, which receives tax revenue TR.

The question Mankiw asks is this: When the tax rate t changes, what is the ratio of the change in the wage w to the change in government tax revenue TR?

Krugman's Diagram

The most straightforward, clearest, and most intuitive way to analyze this is in Krugman (2017b):

First, reduce the risks of algebraic error by defining �� to be the tax wedge between the after-tax rate of profit r* and the pretax rate of profit (r* + ��). Since the pretax rate of profit subject to a tax rate t needed to get an after-tax rate of profit of r* is r*/(1-t), the tax wedge �� is:

$ �� = \frac{r^\ast}{1-t} - r^\ast = \frac{r^{\ast}t}{1-t} $

Now detour into baby analytic geometry to guide you in doing Econ 1-level algebra by drawing Krugman's "simple marginal product of capital diagram", with the pretax and after-tax rates of return on the vertical axis, capital deployed per worker on the horizontal axis, and a downward sloping marginal product of capital line MPK, aka the demand for capital by workers. The area above the x-axis, to the right of the y-axis, below the MPK line, and to the left of capital deployed per worker k0 is output. And:

rectangle A is initial profits �� = r*k0
rectangle B is initial tax revenue TR = ��k0
the integral from 0 to k0 of [MPK - (r* + ��)], the area C, is the initial wage

Now consider a small change d�� in the tax wedge ��. (Note that Paul has drawn d�� as negative: this is a tax rate cut after all.) After the economy reaches its new long-run equilibrium���after the capital stock k has had a chance to adjust:

production and income y have grown by the amount x + v + z.
z has gone to increase profits.
v has gone to increase tax revenues.
x has gone to increase wages.
And the rectangle q has been transferred from tax revenues TR to wages w.

What are these areas?

Well, first, triangle x goes away. All the other areas are proportional to d��. x is proportional to (d��)2. As d�� -> 0 x becomes infinitesimally small relative to q, v, and z. We throw triangle x away.

We then see that profits ��, tax revenues TR, and wages w change by:

$ d�� = r^{\ast}dk $ :: area z

$ dTR = kd�� + ��dk $ :: area q (with a minus sign) and area v (with a plus sign)

$ dw = -kd�� $ :: area q

And so:

$ \frac{dTR}{dw} = -\left(1 + \frac{��dk}{kd��}\right) $

DeLong's Extension

To say more and to calculate dk, we need to know something about the production function. Suppose we pick the production function:

$ y = ����(k) = ��k^�� $

Then we can calculate how k depends on the production function parameters and the tax wedge via the equilibrium condition:

$ r^{\ast} + �� = ����'(k) = ����k^{(��-1)} = ��\frac{y}{k} $

And so calculate dk as a function of the tax cut d��:

$ dk = \frac{d��}{��(��-1)��k^{(��-2)}} = \frac{k^{2}d��}{��(��-1)y} $

Giving us our final answer:

$ \frac{dTR}{dw} = 1 - \frac{��}{��(1-��)}\frac{k}{y} $

The tax cut allows the economy to productively and profitably use more capital. The money that is no longer collected by the government because of the tax cut flows by assumption to wages instead (remember: small open economy with full capital mobility). And a portion of the revenue cost of the tax cut is recouped by taxes paid on the addition to the capital stock.

This is, as Alan Auerbach politely says, Econ 1-level tax incidence and deadweight loss calculation:

[This] is a combination of:

the standard result that in a small open economy labor bears 100% of a small capital income tax; and
the fact that starting at a positive tax rate, the burden of a tax increase exceeds revenue collection due to the first-order deadweight loss.

That is the Econ 1-level analysis of the incidence of a cut in corporate income taxes in a small open economy with infinitely-mobile capital.

Mankiw's Calculations

Okay. Now let's turn to Greg Mankiw's analysis of the problem:

Greg Mankiw: An Exercise for My Readers: "There has been��a lot of discussion��lately��about how much a cut in the tax on capital will increase wages...

...So I thought I would pose a relevant exercise for my readers.

An open economy has the production function $ ����(k) $, where y is output per worker and k is capital per worker. The capital stock adjusts so that the after-tax marginal product of capital equals the exogenously given world interest rate r.

$ r = (1-t)����'(k) $

Wages are set by the marginal product of labor, which (by Euler's theorem) equals

$ w = ����(k) - ����'(k)k $

We cut the tax rate t.�� Because ����'(k)k is the tax base, the static cost of the tax cut (per worker) is

$ dx = -����'(k)kdt $

How much will the tax cut increase wages? In particular, what is dw/dx? The first person to email me the correct answer will get a shout-out on my blog.... Casey Mulligan, who has been thinking along similar lines, was the first to email me the correct answer:

$ dw/dx = 1/(1 - t) $

So if the tax rate is one third, then every dollar of tax cut to capital (on a static basis) raises wages by $1.50...

Or, since we are putting the change in the tax revenue on the top here in order to keep our equations a little bit simpler:

$ dx/dw = 1 - t $

Reconciliation

The first thing to note is that Mankiw does not work with the tax wedge �� where the pretax rate of profit equals the tax wedge plus the after-tax rate of profit:

$ (r^\ast + ��) = �� + r^\ast $

Mankiw works with the tax rate t, in which case the equation for how the pretax rate of profit equals the tax wedge plus the after-tax rate of profit becomes:

$ \frac{r^\ast}{1-t} = \frac{tr^\ast}{1-t}+ r^\ast $

So to translate our results into Mankiw's notation, we have to replace our �� with its equivalent, which gives us:

$\frac{dTR}{dw} = 1 - \frac{t}{1-t}\frac{r^\ast}{��(1-��)}\frac{k}{y} $

which bears no resemblance at all to:

$ dx/dw = 1 - t $

So what is going on here?

The first thing that is going on is that Mankiw says that he is calculating "the static cost of the tax cut". In this case, "static" is a term of art used by the revenue estimators at Treasury's OTA and Congress's JTC (and those who shadow and check and dispute their calculations at CBO, OMB, TPC, and a host of other alphabet-soup Washington organizations). When OTA or JTC say that they are performing a "static" analysis, what they are saying is that they are taking the equation:

$ dTR = kd�� + ��dk $

and throwing away the last term. So:

$ dTR^{static} = kd�� $

Why would anybody throw away a term (unless it were infinitesimally small), and so guarantee that they are making a biased estimate?

The way that the Jedi Masters of OTA explained it to me in the early 1990s, on the few occasions when said Jedi Masters would deign to descend from the Olympian Heights to converse with me and answer stupid questions from OEP, was that their political masters had, depending on the year, wildly different views of what the dk that corresponded to what a particular change in policy was. You get more consistent and better estimates, they argued���ones with lower mean-squared error and ones that were more consistent year-over-year���if you just threw that second term away and worked with $ dTR^{static} = kd�� $. I think they were (and are) right.

But if you do throw the ��dk term away, you do not get $ (1 - t) $. You get:

$\frac{d(TR^{static})}{dw} = \frac{kd��}{-kd��} = -1 $

What's going on here?

What is going on here is that Mankiw correctly calculates kd�� when he is calculating the change in wages:

$dw = -kd�� $

But messes up when he calculates:

$ dTR^{static} = -����'(k)kdt = \frac{r^\ast}{1 - t}kdt $

If you are working not with �� but with t, there is an extra factor of $ (1 - t) $ in there. It should be:

$ dTR^{static} = -����'(k)kdt = \frac{r^\ast}{(1 - t)^2}kdt $

When the tax cut is imposed, the pretax interest rate falls. Thus the government is not just collecting less revenue per unit of tax base, it is collecting that less revenue per unit from a lower tax base as well.

Easy mistake to make. In fact, algebraic mistakes of this magnitude are inevitable when you blog (or when you teach classes). I've done worse. In fact, my "DeLong Smackdown Watch" is an attempt by me to induce people to point out typos, arithmatos, algebros, and mindos so that I can learn from them. Joe Stiglitz reserves the right to, at any time, perform a "Stiglitz transformation" on his blackboard math: change a minus to plus or a plus to minus in order to make things work out.

This mistake is particularly easy to make. There are always two ways to define tax rate. The first is to calculate the tax by multiplying the rate by factor cost and then adding the tax on to factor cost to produce market price. The second is to calculate the tax as a percentage of market price and then to subtract the tax from market price to produce factor cost. Sales tax is a tax of the first type. A corporate income tax is a tax of the second type. Greg's formula would have been correct if the corporate income tax had been calculated like a sales tax. But that is not what we have.

Working with the tax wedge �� is, IMHO, vastly preferable because it makes it harder to make these kinds of mistakes.

Greg was, in fact, puzzled by his answer of $ (1 - t) $. His brain told him that the answer should depend on the form and shape of the production function (it does: the �� and k/y terms in the real answer are witnesses to that). But it did not seem to:

I must confess that I am amazed at how simply this turns out. In particular, I do not have much intuition for why, for example, the answer does not depend on the production function...

Say, rather, that he has no "intuition for why... the answer does not depend on the production function". Because the answer does. His amazement and puzzlement should have led him to dig deeper.

The Circus and the Monkeys

Now I need to turn to people whom I can only describe as circus monkeys: they know who they are, and if you don't, you are blessed. Continue to ignore them. Neither part of that label is a compliment: neither "circus" nor "monkeys".

They say a number of incoherent things, and a number of wrong things, of which I believe only one is worth noting. It is, as I paraphrase:

Greg is free to define "static" revenue cost however he wants. You need to shut up and accept his definition. Accept the lesson of Through the Looking Glass:

Alice: But "glory" doesn't mean "a nice knock-down argument".

Humpty-Dumpty: When I use a word, it means just what I choose it to mean���neither more nor less.

Alice: The question is whether you can make words mean so many different things.

Humpty Dumpty: The question which is to be master���that is all.

We thus have a warrant from Humpty-Dumpty to say that "static revenue cost" means:

$ dTR^{static} = -����'(k)kdt = \frac{r^\ast}{1 - t}kdt $

and that your critique is only a semantic quibble of definition. After all, it is not as though the phrase ���static revenue cost" has an accepted meaning people are bound to respect.

Except that it does.

"Static" is a term of art used by the revenue estimators at Treasury's OTA and Congress's JTC (and those who shadow and check and dispute their calculations at CBO, OMB, TPC, and a host of other alphabet-soup Washington organizations). When Greg uses the word "static", he is referring to them and their procedures. He is claiming that he is���in his model���doing what they do.

When OTA and JTC do revenue estimates, they do not take the change in the tax rate and multiply it by a frozen number that is the tax base.

They allow for asset prices and returns to shift in response to changes in tax rates, and those shifts change the tax bases on which the new tax rates are levied. They allow for people to shift from one activity to another and to relabel their income streams, thus changing the tax bases yet again. What makes the estimate static is that the Jedi Masters of Revenue Estimation do not let themselves be bullied by their overoptimistic political masters into making estimates that are wildly overaggressive in their assessments of investment and growth.

If there were no OTA or JTC���and if the stakes at risk did not include the credibility and influence on policy of the reality-based technocrats at OTA, JTC, & co., I would be very tempted to say to the circus monkeys: Go have your circus! Define "static" however you want! Know that your calculations do not correspond to any areas on any sensible economics graph! Know taht they do not correspond to anything in any coherent assessment of incidence! Know that what you are doing is the equivalent of looking at your genitals over and over again! But it is a free country���do what you want!

The problem is that there are serious people who do this tax incidence stuff for a living at OTA, and JTC, and elsewhere. We all owe them a great deal. I am, perhaps, more knowledgeable about what they do and respect them more from my time spent working downstairs of them. I am, perhaps, more honorable, in that I think that the work of competent people trying to do their best to make America greater should not be casually trashed via misrepresentation by ignorant circus monkeys.

But maybe that's just me...

Live from Sexual Harassment Central: Could Wieseltier ple...

Live from Sexual Harassment Central: Could Wieseltier please change his statement? Could he not say the false: "I am ashamed to know that I made any of [the women with whom I worked] feel demeaned and disrespected"? Could he say, instead, the true: "I am ashamed that now the public knows that I gleefully and joyfully made women with whom I worked feel demeaned and disrespected���and violated"?

Hiring assholes is almost always a bad idea, Brookings Institution. Sir Isaiah would not be pleased:

Brookings: Leon Wieseltier: "Leon Wieseltier is the Isaiah Berlin Senior Fellow in Culture and Policy...

...jointly appointed in the Governance Studies and Foreign Policy programs. Wieseltier comes to Brookings following a long and distinguished career as a writer, editor, and social and political commentator.

Amanda Terkel: Leon Wieseltier���s New Magazine Is The Latest Casualty In Reckoning Over Bad Male Behavior: "Laurene Powell Jobs pulled out of her partnership with Leon Wieseltier...

..."Upon receiving information related to past inappropriate workplace conduct, Emerson Collective ended its business relationship with Leon Wieseltier, including a journal planned for publication under his editorial direction. The production and distribution of the journal has been suspended..." Emerson Collective said in a statement to HuffPost.��

���For my offenses against some of my colleagues in the past I offer a shaken apology and ask for their forgiveness,��� Wieseltier said in a statement to Politico,��which first reported the news.�����The women with whom I worked are smart and good people. I am ashamed to know that I made any of them feel demeaned and disrespected. I assure them that I will not waste this reckoning. And I am profoundly sorry to my extraordinary collaborators at the journal we began together that the misdeeds of my past have made it impossible to go forward,��� he continued. ���My gratitude to them is boundless.���...

Jobs, the widow of Apple co-founder Steve Jobs, was friends with Wieseltier ��� which makes her withdrawal all the more notable. Wieseltier helped Jobs and her organization, Emerson Collective, become more interested in investing in journalistic publications...

Q & A: Should We Focus Our Attention on a Revitalized Public Sector and Social Insurance System?: INET Edinburgh

Is a sufficiently revitalized social insurance state and public infrastructure and other public goods provision system what we really need? That is a very difficult and a very hard question.

Let me give a particular partial answer to it. My decision to give this partial answer is, I think, motivated in large part by my perception that the six of us here on this panel agree on too much. There is insufficient Dixit-Stiglitz variety up here on the panel for it to be in any sense optimal.

Therefore let me, for the moment, fly my rootless neoliberal cosmopolite freak
flag. Let try to push back a little against the idea that a better social
insurance state is all we need.

If you think about say the people of rural and semi-rural Kentucky, facing the continued long-term decline of their regional resource-based export industries and increasingly facing global competition for manufacturing industries in which their principal advantage within the United States was a relatively low real wage level, and if you ask "what could have been done to make their lives better over 2009 to 2016", the answer would have been: Obamacare. Give them health insurance. Give them access to the health care system in a manner that does not require them to risk bankruptcy in order to see a doctor. The Democratic Party did that. And they turned out.

It is true that many of them have spent 2017 in wonder, staggering around, telling reporters that they really don't think Trump will get rid of their Medicaid, or make their Exchange policy either unaffordable or so riddled with coverage holes that it is nearly useless. But they voted for Trump. And they will vote for Trump again.

Material standards of living���the opportunity to earn enough money so that you can purchase the things you need���is not really what is going on, is it? Making insurance affordable was a huge material standard of living win, wasn't it?

Well, you may say, it is economic insecurity. But back up. In America the job-finding and job-separation rates are 3 percent per month. 20 percent of all workers change or lose or find new jobs each year. The US is a country with
high job turnover for a great many people. Yet that turnover, and the uncertainty that it generates, has never been a subject of particular extraordinary.

What does seem to be the subject of particular extraordinary concern are the concentrated region-industry shocks. We have had five of these since the 1930s:

The southern textile shock, as production moved to Virginia and North Carolina, that generated the collapse of blue-collar factory employment in New England from the 1930s to the 1950s.
The Reagan deficit shock that produced the overvalued dollar that devastated Midwestern manufacturing in the 1980s.
The right-to-work shock, in which right-to-work states made a bid for
manufacturing employment by promising to bust unions, from the 1980s to 2000s
The 1980s oil price shock when Saudi Arabia upended the world configuration of energy prices.
The China shock of the 2000s
And note one non-shock: there was no NAFTA shock in the 1990s. Communities were not devastated. Workers displaced from previously protected apparel and furniture jobs found new ones. Manufacturing employment actually grew as the auto and other industries constructed transnational value chains. People transitioned relatively easily because the 1990s when NAFTA was implemented was a time that also saw a high-pressure economy, and so���despite warnings beforehand���NAFTA was not a huge source of political energy and upset at the time its implementation was affecting the economy.

Of these five shocks, three were due to international trade: the Reagan
deficit shock, the oil price shock, and the China shock. The right-to-work shock and the southern textile shock were internal to the United States.

What we really need is an analytical grammar: some explanation for why some
of these shocks produced powerful and awful and destructive resonances in
our politics, and others did not. They all���save NAFTA���were concentrated region-industry shocks. They all were driven by the workings of the market. They all devastated communities.

Q & A: What Can We Economists Do Right Now to Be Useful?: INET Edinburgh

What can we economists do right now to be useful, as far as policy is concerned?

I believe that we economists can do very little, right now, to materially affect policy. Joe Stiglitz is an economist. Joe Stiglitz was in fact the chief economist in the late 1990s. Joe Stiglitz then argued that TRIPS was a bad idea. It enriched not America but rather the holders of pharmaceutical patents. It did so at the cost of charging poor countries like Vietnam and Congo through the nose for intellectual property that was non-rival in some very basic sense, and for which the appropriate market price was zero. Joe Stiglitz lost that argument. USTR does not regard its mission as primarily that of promoting the health of the world or even the U.S. economy.

One thing we should be doing is laying the groundwork for some future day in which we can affect policy. We should be pushing very hard right now developing arguments for an expanded public sector���a public sector that will produce real marginal cost pricing for things that are non-rival, or perhaps liable only because of increasingly sophisticated and onerous layers of legal "protectionism", but that somehow is not called "protectionism" because it is not concerned with movements of goods. Why it does not count as "protectionism" is a mystery to me.

At this point I want to incorporate-by-reference the entire works of Dean Baker, and then stop.

Must-Read: Will Wilkinson: Public Policy after Utopia: "T...

Must-Read: Will Wilkinson: Public Policy after Utopia: "That all our evidence about how social systems actually work comes from formerly or presently existing systems is a huge problem for anyone committed to a radically revisionary ideal of the morally best society...

...The further a possible system is from a historical system, and thus from our base of evidence about how social systems function, the more likely we are to be mistaken about how it would work if it were realized.... There���s basically no way to rationally justify the belief that, say, ���anarcho-capitalism��� ranks better in terms of libertarian freedom than ���Canada 2017,��� or the belief ��that ���economic democracy��� ranks better in terms of socialist equality than ���Canada 2017.��� You may think you can imagine how anarcho-capitalism or economic democracy would work, but you can���t. ��You���re really just guessing���extrapolating way beyond your evidence.... This is a general problem. But it does hit especially hard for those who appreciate the unpredictability of complex systems and the inevitability of unintended consequences.... Expert predictions about the the likely effects of changing a single policy tend to be pretty bad.... Our predictions about the outcome of radically changing the entire system are unlikely to be better than random. If your favorite system is quite a bit different from any system that has existed, then even if it were true that it would rank numero uno in terms of your favorite normative standard, you���re not in a position to rationally believe it.... This is a hard lesson for ideologues to swallow....

It is intellectually corrupt and corrupting to define liberty or equality or you-name-it in terms of an idealized, counter-factual social system that may or may not do especially well in delivering the goods. Commitment to a vision of the perfect society is more likely than not to lead you astray.... For me, the death of ideal theory has meant adopting a non-speculative, non-utopian perspective on freedom-enhancing institutions.... What we need are folks who are passionate about freedom, or social justice (or what have you) who actively seek solutions to domination and injustice, but who also don���t think they already know exactly what ideal liberation or social justice look like, and are therefore motivated to identify our real alternatives and to evaluate them objectively. The space of possibility is infinite, and it takes energy and enthusiasm to want to explore it....

Nobody will fight for what works if the people who will fight are blind to what works, or if the people capable of seeing what works don���t have the imagination to look for it, or won���t fight for it if they see it. I think this is what makes Niskanen different. We���ve put misguided, utopian idealism behind us, but retain the moral passion that once attracted most us to radicalism, and have channeled it into discovering and fighting for what is most likely to actually work to make our society freer, more prosperous, and more just.

Should-Read: Music to my ears...Paul Krugman: On Twitte...

Should-Read: Music to my ears...

Paul Krugman: On Twitter: "Brad is right here: "Brad is right here...

...Mankiw et al have clearly made a math error. Take the framework I did here:

Paul Krugman: Some Misleading Geometry on Corporate Taxes: The stock of capital on the horizontal axis and the rate of return on capital on the vertical axis. The curve MPK is the marginal product of capital.... The area under MPK... is... total output.... A given world rate of return r*... the government imposes a profits tax at a rate t, so that to achieve a post-tax return r* domestic capital must earn r*/(1-t). And in the initial equilibrium that requirement determines the size of the domestic capital stock.... Real output is a+b+d. Of this, d is the after-tax return to capital, b is profit taxes, and a ��� the rest ��� is wages. Now imagine eliminating the profits tax.... The capital stock rises by ���K, and so does GDP, to a+b+c+d+e (of which, however, e is returns to foreign capital, so GNP doesn���t rise as much as GDP.) Profit taxes disappear: that���s a revenue loss of b. But wages rise to a+b+c, a gain of b+c...

Assume that the MPK curve makes a right angle:

Then c and e disappear: it's just the areas a, b, and d. It's immediately apparent that the wage gain = cut in profit tax, end of story.

Add realistic complications, and wage gain clearly < tax cut. We all make mistakes, but funny how this mistake went in "right" direction

Good to have someone reassuring me that I am not, after all, insane, and can, still, do math and baby analytic geometry.

Remember:

Paul Krugman is right.
If you think Paul Krugman is wrong, see (1).

What Is a "Static" Revenue Analysis?

I seem to have a disagreement with Jason Furman here:

@paulkrugman: Brad is right here: Mankiw et al have clearly made a math error

@jasonfurman: Not seeing the math error. Mankiw said static. His soln is right for static (defined as unchanged base)... And dynamic version is higher.

I was taught the definition of "static" by the Jedi Masters at OTA in the early 1990s...

...on those rare occasions when they would deign to provide oracular pronouncements to those of us in OEP trying to understand their work. The Jedi Masters insisted that "static" analyses were those that did not incorporate what were essentially political-ideological views about the effects of policy changes on GDP. "Static" thus means stable overall capital stock and GDP growth paths.

But that does not mean that "static" analyses assumed no changes in behavior. OTA strongly believed that people responded to tax law changes. Income would be shifted from one category to another. Asset prices would change. Thus tax bases would vary.

Thus, Jason, when you say "Mankiw said 'static'. His soln is right for static (defined as unchanged base)..." you give the game away. "Static" has never���not in OTA-land, JTC-land, CBO-land, or OMB-land���been defined as an "unchanged [tax] base".

If you want to say: "In addition to making the inappropriate modeling choice of taking the US to be a SOE, and in addition to setting forth an incomplete model in which the policies that close the hole in the government budget constraint are ignored, Mankiw also cooks up his own definition of 'static' that does not apply to OTA or JTC analyses..." then be my guest.

But if you want to allow people to think that Mankiw's "static" has something to do with the revenue loss estimates that will be produced by JTC, I do not think that's wise...

Note: Yes, the "dynamic" ratio of dw/d(TR) is higher than OTA's or Mankiw's "static" ratio. My point is that in Mankiw's (poor choice of model) SOE setup, OTA's dw/d(TR) = 1 by necessity: that's what no rents and fixed required rate of return on capital get you. And Mankiw's dw/d(TR) = 1/(1-t) is not a fact about the world���about how their are efficiency gains from cutting tax rates that flow to labor when you assume 100% of the incidence of the CIT is on labor���but is an artifact of his assumption that "static" means not just a fixed capital stock but fixed asset prices and returns.

I think that���as former political appointees who owe the career staff at OTA a great deal���our proper response to Mankiw should be "he gets 'static' wrong", rather than letting Mankiw define "static" as he wishes and thus introduce confusion with respect to what OTA and JTC are doing. But it is clear that opinions differ here...

Should-Read: Jared Bernstein also wishes that we had (1) ...

Should-Read: Jared Bernstein also wishes that we had (1) Greg back. It is indeed the case that the old (1) Greg-teaching-students-about-public-finance-issues was much better than the current (2) Greg-going-as-far-as-he-believes-he-can-to-be-helpful-to-the-Republican-Party:

Jared Bernstein: When econ models potentially mislead, econ profs should say so: "Greg Mankiw points out the direction [but not the magnitude] of Hassett���s result is consistent with a particular economic model...

...teaching his students how to get a result like Hassett���s by imposing standard assumptions common to such models. Greg... answers the question: is there an economic model that might defend Kevin���s findings, at least directionally if not their magnitudes? Answer: yes.... [But the] question... is: what���s the real-world likelihood that corporate tax cuts will raise workers��� wages anywhere near the amount Hassett claims?... The answer... is ���very low���... based on both theory and evidence....

The interesting economics question is to why the [Mankiw] model predicts such an unrealistic result.... Which of the assumptions most fail to comport with reality? To the extent that we want to train students to be useful practitioners as opposed to proficient, yet unrealistic, modelers, answering those questions would also provide some real educational value-added.... The model assumes that the US is a small, open economy... assumes away imperfect competition.... Summers made a great point about this: The modelling of Mankiw and others ���illustrate why well-resourced, team-based institutions with a strong culture of attention to detail like the Congressional Budget Office, the GAO, the Joint Tax Committee Staff or the Tax Policy Center are so important.��� By ���detail,��� I take him to mean an unbiased use of literature (unlike Hassett, who totally cherry-picked), and more important, an historical perspective.... Corporate tax cuts never come close to the wage impacts Hassett claims, and Mankiw���s modelling supports. Real modelers analyzing real policy proposals must reference real empirical results, and not just the ones that go their way.

This all points to a bigger problem.... A well-placed, highly-pedigreed economist (Hassett) makes an implausible claim.... His claims can be and are, if not defended, then apparently corroborated, by an economic model, in this case by other highly pedigreed economists. This is lovely development from the perspective of the politicians and their donors who crave these high-end tax cuts. All they need is some ���analysis,��� regardless of how cherry-picked, and a little backup from other erudite economists saying ���under certain conditions, yeah... this could happen.��� They���those other erudite economists���shouldn���t do that....

They should be explicit about how applicable the model is to the real world, and whether the assumptions it violates are germane to policy makers (Krugman does so here; Furman here).... In the hurly-burly of political economy, it���s an egregious omission, one with the potential to mislead policy makers and, once the tax cuts fail to generate the result predicted by the model, reduce the trustworthiness of economic analysis.

Should-Read: Dani Rodrik: Growth Without Industrializatio...

Should-Read: Dani Rodrik: Growth Without Industrialization?: "FLow-income African countries can sustain moderate rates of productivity growth into the future, on the back of steady improvements in human capital and governance...

...But the evidence suggests that, without manufacturing gains, the growth rates brought about recently by rapid structural change are exceptional and may not last.... Sub-Saharan Africa���s economic growth has slowed precipitously since 2015, but this reflects specific problems in three of its largest economies (Nigeria, Angola, and South Africa). Ethiopia, C��te d���Ivoire, Tanzania, Senegal, Burkina Faso, and Rwanda are all projected to achieve growth of 6% or higher this year. In Asia, the same is true of India, Myanmar, Bangladesh, Lao PDR, Cambodia, and Vietnam.

This is all good news, but it is also puzzling. Developing economies that manage to grow rapidly on a sustained basis without relying on natural-resource booms ��� as most of these countries have for a decade or more ��� typically do so through export-oriented industrialization. But few of these countries are experiencing much industrialization. The share of manufacturing in low-income Sub-Saharan countries is broadly stagnant ��� and in some cases declining. And despite much talk about ���Make in India,��� one of Prime Minister Narendra Modi���s catchphrases, the country shows little indication of rapid industrialization.

Manufacturing became a powerful escalator of economic development for low-income countries for three reasons.... It was relatively easy to absorb technology from abroad and generate high-productivity jobs.... Farmers could be turned into production workers in factories with little investment.... Manufacturing demand was not constrained by low domestic incomes: production could expand virtually without limit, through exports....

What, then, are we to make of the recent boom in some of the world���s poorest countries? Have these countries a discovered a new growth model?... Growth-promoting structural change has been significant in the recent experience of low-income countries such as Ethiopia, Malawi, Senegal, and Tanzania, despite the absence of industrialization.... Rapid structural change in these countries has come at the expense of mostly negative labor productivity growth within non-agricultural sectors.... The African model appears to be underpinned by positive aggregate demand shocks generated either by transfers from abroad or by productivity growth in agriculture....

Because of low income elasticity of demand for agricultural products, outflows of labor from agriculture are an inevitable outcome during the process of development. The labor that is released must be absorbed in modern activities. And if productivity is not growing in these modern sectors, economy-wide growth ultimately will stall.... Continued convergence with rich-country income levels seems achievable. But the evidence suggests that the growth rates brought about recently by rapid structural change are exceptional and may not last.