Tyler Cowen's Blog, page 13

Tyler Cowen’s three laws

Many of you have been asking for a canonical statement of what I sometimes refer to as Cowen’s Laws.  Here goes:

1. Cowen’s First Law: There is something wrong with everything (by which I mean there are few decisive or knockdown articles or arguments, and furthermore until you have found the major flaws in an argument, you do not understand it).

2. Cowen’s Second Law: There is a literature on everything.

3. Cowen’s Third Law: All propositions about real interest rates are wrong.

I coined those some time ago, when teaching macroeconomics, yet I remain amazed how often I see blog posts which violate all three laws within the span of a few paragraphs.

There is of course a common thread to all three laws, namely you should not have too much confidence in your own judgment.

Addendum: Kevin Drum comments.

Is the Income Tax Legal? Voluntary?

Just in case you are tempted to go all Wesley Snipes and refuse to pay your taxes on “constitutional” grounds, the income tax is legal and mandatory. Sorry.

Jonathan Siegel, professor of law at GWU has carefully examined all the primary tax protester arguments. All are wrong. Some are quite interesting

Some tax protestors claim that [the 16th] amendment is not really part of the Constitution — it was never ratified! Therefore, they say, the income tax is unconstitutional. This argument was popularized by Bill Benson in a book called “The Law That Never Was.”

Surprisingly enough, this argument has a little something to it. When the Sixteenth Amendment was ratified by state legislatures in the early twentieth century, the versions that some states voted on contained minor textual errors. Some of them neglected to capitalize the word “States,” one had “income” in place of “incomes,” one said “remuneration” instead of “enumeration,” one said “levy” instead of “lay,” and so on.

If the states didn’t all vote on the same, identical text for the Sixteenth Amendment, can the amendment really be considered ratified? When Congress makes a law, the House and the Senate must vote on the same text. Similarly, if the states didn’t vote on the right text, one could argue that they didn’t ratify the amendment. No Sixteenth Amendment, no income tax, the argument goes.

However, it seems that the amendment really was ratified. The alleged defects in the ratification process were considered at the time of ratification in 1913. The Solicitor of the Department of State convincingly explained why the minor textual variations in the versions the states voted on should be disregarded.

First, it seems that the state legislatures intended to ratify the amendment as proposed by Congress. They understood themselves to be voting to approve the proposed Sixteenth Amendment. The text set forth in their instruments of ratification was for recitation purposes only. The errors in the text were not proposals to change the text being ratified; they were just inadvertent errors that do not detract from the intention of the state legislatures to ratify the amendment as proposed.

Benson denies this. He claims that states deliberately altered the text of the proposed amendment. But the evidence just isn’t there. In one of his court filings, Benson singles out Oklahoma as a particularly clear case. He says the facts “unequivocally show that Oklahoma intentionally amended what the United States Congress had proposed” (see page 2 of Benson’s filing). But looking at Benson’s own book (pp. 61-67), one can see that the Oklahoma legislature adopted what it called “A resolution ratifying an amendment proposed by the sixty-first Congress of the United States” (emphasis added). This resolution then begins its ratification by reciting that “Whereas . . . Congress . . . on Monday the fifteenth day of March, one thousand nine hundred and nine, by joint resolution proposed an amendment to the constitution of the United States, in words and figures as follows:” Then, it’s true, the resolution misstates the text of the amendment (and pretty badly too). But it sure looks as though the Oklahoma legislatorsthought they were ratifying the amendment that Congress had proposed on the specified date and just misstated it. So even in a case that Benson himself singles out, it seems quite clear that the state legislature thought it was ratifying the Sixteenth Amendment, not proposing to change it.

…For all these reasons, it seems clear that the Sixteenth Amendment really is part of the Constitution.

Certainly that has been the uniform holding of the courts in cases in which this argument has been raised. For some representative cases, see United States v. Benson, 941 F.2d 598 (7th Cir. 1991) (rejecting these arguments in a criminal case brought against the author of the “Law that Never Was” book); United States v. Foster, 789 F.2d 457 (7th Cir. 1986); Cook v. Spillman, 806 F.2d 948 (9th Cir. 1986) (calling the argument that the Sixteenth Amendment was never ratified “frivolous” and imposing sanctions of $1,500 on the party making it); United States v. House, 617 F.Supp. 237, 238-39 (W.D. Mich.1985).

So while this argument is not as utterly absurd as most tax protestor arguments, one can be confident that it would not succeed in any actual court proceeding.

How meritocratic is meritocracy?

There is some new research by Castilla and Bernard:

In this article, we develop and empirically test the theoretical argument that when an organizational culture promotes meritocracy (compared with when it does not), managers in that organization may ironically show greater bias in favor of men over equally performing women in translating employee performance evaluations into rewards and other key career outcomes; we call this the “paradox of meritocracy.” To assess this effect, we conducted three experiments with a total of 445 participants with managerial experience who were asked to make bonus, promotion, and termination recommendations for several employee profiles. We manipulated both the gender of the employees being evaluated and whether the company’s core values emphasized meritocracy in evaluations and compensation. The main finding is consistent across the three studies: when an organization is explicitly presented as meritocratic, individuals in managerial positions favor a male employee over an equally qualified female employee by awarding him a larger monetary reward. This finding demonstrates that the pursuit of meritocracy at the workplace may be more difficult than it first appears and that there may be unrecognized risks behind certain organizational efforts used to reward merit. We discuss possible underlying mechanisms leading to the paradox of meritocracy effect as well as the scope conditions under which we expect the effect to occur.

The link is here, and for the pointer I thank Samarth Bhaskar.

Is globalization slowing down?

Probably so:

For at least three decades before the 2008 financial crisis, global trade regularly grew at twice the rate of the global economy, leading some economists to hail an era of “hyperglobalisation”. According to the WTO, the annual average recorded since 1990 has been 5.1 per cent growth.

With last year’s growth of 2.8 per cent, global trade has now expanded at, or below, the rate of the broader global economy for three straight years.

That is from Shawn Donnan, the rest of the FT piece is here.

Do government benefits for the poor subsidize large employers?

Adam Ozimek has a very good post on that topic, here is one of his final bits:

…many of these programs, including Medicaid and food stamps, are means-tested. That means as you earn more the programs become less generous, and as a result can generate extremely high marginal tax rates for low-income workers. This will reduce labor supply and create the exact opposite effect that “corporate subsidy” critics claim.

Unfortunately, there is little basis to claim that most public assistance programs benefit employers. This is unfortunate because such subsidies would incentivize firms to hire more low-income workers.

Do read the whole thing.

Tuesday assorted links

1. How much will the demand for dilithium crystals go up?  And is there a free lunch after all?  (Isn’t the universe as a whole a large free lunch?)  Possibly speculative.

2. The new Jeff Sachs paper on robots.  And Moore’s Law at fifty.  Are routine jobs disappearing? (yes)

3. If a person buys insurance against small losses, is there a way to make lemonade from that lemon?

4. How universal is the left-right political spectrum?

5. New job opportunity: economist at LinkedIn.

6. The case for composting.  Dementia and sexual consent.

7. And how is Spain doing these days?

8. David Brooks on cop-cams.

Is GE getting out of commercial credit a sign of triumph for Dodd-Frank?

Rortybomb argued yes, Paul Krugman too, but I don’t see it.  A lot of the interest in the GE loan portfolio is coming from private equity groups such as Blackstone.  Is that asset redistribution a move toward greater safety for the system?  Maybe so, but it also might just be pushing the risk around into different corners, and possibly less transparent corners at that.  After all, the Coase theorem suggests the loans will go where they have the highest private value, and if you favor Dodd-Frank in the first place you ought to worry some of that private value may be an arbitrage against bailout options and ultimately the taxpayer.

In the longer run banks might pick up more of this business, in part because they can raise funds through deposits, at basically zero pecuniary cost.  Is centralizing more lending in the TBTF parts of our banking system an improvement, or not?  Again, you can argue this one either way.

And is this good or bad news?:

…the company [GE] has embarked on a massive recruitment drive to hire risk managers and financial modelling experts to help it prepare for annual stress tests by the Federal Reserve. (same FT link as above)

In a nutshell, not every attempt to raise the cost of non-bank commercial credit is a favorable development.

I do get that GE received guarantees/subsidies during the financial crisis, but so did a lot of other institutions.  I don’t see that anyone making the “GE’s new policy is a triumph for Dodd-Frank” argument is stating the comparative analysis correctly, much less doing that analysis and reaching a defensible conclusion.

The investment slowdown, by the way after the short run demand is endogenous…

…firms in sectors that rely more on external funds, such as pharmaceuticals, have seen a larger fall in investment than other firms since the crisis. This finding is consistent with the view that a weak financial system and weak firm balance sheets have constrained investment.

That is Timothy Taylor, summarizing an IMF study, is an excellent post on the investment slowdown.  Here is more from his summary:

For these [advanced] economies, private investment has declined by an average of 25 percent since the crisis compared with precrisis forecasts, and there has been little recovery. In contrast, private investment in emerging market and developing economies has gradually slowed in recent years, following a boom in the early to mid-2000s.
The investment slump in the advanced economies has been broad based. Though the contraction has been sharpest in the private residential (housing) sector, nonresidential (business) investment—which is a much larger share of total investment—accounts for the bulk (more than two-thirds) of the slump. …

How to dine well in Yucatan and Quintana Roo

Go to the mercado in Valladolid, right off the main square, and sample as many dishes as possible.  Don’t hesitate to use the spicy black sauce.  That is the single best introduction to Yucatan cuisine I know of.

Mérida offers a more urbanized variant, with influences from Cuba (the tortas) and Lebanon (kibi, which is like kibbeh).  The town has many bad restaurants, go eat at Punto y Coma, a loncheria inside one of the markets, taxi drivers seem to know where it is.  Ask for their specialties, and don’t miss Sopa de Lima.

In Cancún, get yourself to El Centro, away from the tourist hotels.  If you are stuck on the strip, Tempo offers ten courses for less than $50, the founder chef is from San Sebastian and I would put the quality at that of a Michelin two-star.  Otherwise look for small places selling fish tacos.

El cenote Samula was created by the meteor which did in the dinosaurs, today you can swim there.  The open air restaurants to its side were the best meal so far.

Monday assorted links

1. Ghana’s success story goes dark.

2. What decision principles should we apply to national security issues?

3. What kind of music is best for relaxing cats during surgery?

4. Jeff Sachs defends David Cameron.

5. Does talk of God induce people to take more risk?

6. Modern house made of shipping containers.