Month: February 2009

Keynes on cutting the payroll tax in a downturn

It seems he favored the idea.  Mario Rizzo directs me to his letter to James Meade, circa 1942:

am converted to your proposal…for varying rates of contributions in
good and bad times. (June 16, 1942). Keynes, Collected Writings, vol.
27, p. 208. 

are able to show fluctuations in income of an order of magnitude which
is significant in the context… So far as employees are concerned,
reductions in contributions are more likely to lead to increased
expenditure as compared with saving than a reduction in income tax
would, and are free from the objection to a reduction in income tax
that the wealthier classes would benefit disproportionately. At the
same time, the reduction to employers, operating as a mitigation of the
costs of production, will come in particularly helpfully in bad times.  (July 1, 1942). Keynes, Collected Writings, vol. 27, p. 218.

Will today's Keynesians follow suit?

One of Greg Mankiw’s ideas

Read the whole post, for Greg's full set of prescriptions, but this idea I had not previously considered:

I recognize that some state governments are now struggling in light of
the macroeconomic crisis. For the next two years, I would let each
state governor have the authority to divert a portion of the payroll
tax cut in his or her state and take the funds instead as state aid.
This provision would essentially be giving governors the temporary
authority to impose a payroll tax on his or her citizens, collected via
the federal tax system. Those governors who think they have valuable
infrastructure projects ready to go would take the money. When
designing a fiscal stimulus, there is no compelling reason for one size
fits all. Let each governor make a choice and answer to his or her
state voters. It is called federalism.

And here is Greg on the broken window fallacy, worth a read.

Salsa Dancing Into the Social Sciences

The author is Kristin Luker and the subtitle is Research in an Age of Info-Glut.  I enjoyed this book very much and I thought it was one of the best books on the philosophy of the social sciences I have read, ever.  In part it is good because it ignores philosophy of science (and Continental philosophy gobbledy-gook) and focuses on the anthropology of how research is actually done.  Here is the author's summary of her message

Let's review the state of play.  I've told you that "methods" in the social sciences are historically, socially, and politically located in both time and place.  I've also told you that the methods most commonly taught (canonical social science, "normal science") grew out of a particular time and place, namely postwar America.  I've tried to convince you that in this new postmodern, globalizing world, those old methods don't work as well as they used to, at least not for the kinds of problems that most of us are interested in these days.  Finally, I have argued that a whole set of "practices," that is, taken-for-granted ways of doing things that aren't even at the level of consciousness most of the time, grew out of those old methods and now must be rethought by those of us whose contributions will consist of making connections across boundaries, rather than following the normal-science way of making incremental contributions to a deep but narrow part of our fold.

There's much more to the book than that quotation indicates.  Recommended.

Jessica Crispin reads

I am a very keen and regular reader of Bookslut and here is Jessica Crispin:

I have been happily reading Timothy Clack's Ancestral Roots: Modern Living and Human Evolution,
although it covers so many areas I occasionally wish some things had
been expanded. Like the monkeys who went on hunger strike until all
monkeys were receiving grapes. Or the evolutionary explanation for
"beer goggles." Although my favorite part was when he mentioned a study
where women "politely" asked men for no strings attached sex and they
counted how many agreed. (Less than you would think.) So many
questions! Were the results different if they "belligerently demanded"
casual sex? Did they go through with the sex, or did they just say,
"Okay, just wanted to know if you were interested. I'm going home now."
Because that seems mean. I need to find the original study.

The link is here, but that is all there is.

Worry less about releasing Virginia prison inmates

This was the advice some of you gave me when I argued you should "Worry Less About Releasing Terrorists."  Now it may come to pass.  Virginia may release some of its non-violent (are they really?) inmates early.  I guess we need to save money so the public libraries can stay open for my regular use.

The real lesson is that whenever there is an issue of justice or desert or payback involved, the quality of economic analysis offered by most people, whether academics or MR commentators, declines.

In any case, I am not very worried about the inmates either.  Call it measurement error and bring 'em on!

TED: A Brief Report So Far

Bill Gates, now a full-time philanthropist, gave a good talk. Especially interesting was the section on his efforts to improve education. Bill’s first multi-billion dollar efforts in this area were not very successful. It’s now clear he sees the problem as much more political than technological. He noted, for example, that a New York law actually prohibits data on student performance to be used in a teacher’s tenure decision. Amazingly, in some union contracts a principal is allowed to enter a teacher’s classroom for the purpose of evaluation only once in a year and the teacher must be given advance notice! This is much harder hitting stuff than Bill has been saying over the past few years although he still isn’t talking about vouchers and competition which is a must to improve the education system.

I had a lovely chat with Peter Gabriel about Witness, a web site and foundation that he started that lets the disempowered all over the world upload videos showing government abuses of power and atrocities. Witness, in other words, empowers little brother to fight big brother.

On a lighter note do you remember Matt the guy who dances in all the videos from around the world? Well, I got to dance with him at TED. For all our sakes I hope I do not make the video.

“Small steps toward a much better world”

First, better than what? I suppose it’s better than the world we have now; but then the “world” of the slogan is not a whole possible world, which would persist throughout time, but rather a temporal segment or slice of a possible world. We don’t now “have” a whole world; what we have is the present time-slice of the world. Or you might say that what we have is the whole past-and-present–the temporal segment of the world from the Beginning to Now; but this would be less suitable for comparison with what you are striving toward, so I will assume that the present time-slice or “state-of-affairs” is the intended standard of comparison.

Then the target is a better (momentary) state-of-affairs rather than a better whole possible world, or a better whole future. Now, the latter, not the former, should be your ultimate or most basic objective; but, admittedly, it might be acceptable tactically to aim at the former. That is, in order to maximize the value of the whole future–which should be the aim–you might aim for “a much better (momentary) state-of-affairs,”to come into being at some point in the future.

And what point might that be; when is the much better state-of-affairs supposed to come into existence? That is being left indefinite (though,presumably, sooner is better than later).

I interpret “steps toward a (particular) state-of-affairs” as actions (perhaps mere “speech acts”) that make that state-of-affairs more probable. But these actions may also have other effects that ought to be considered, such as making some other state-of-affairs–perhaps quite a bad one–more probable. This points up a serious deficiency: the slogan is blind to risk, failing to incorporate hedging. The circumstance that a certain step that is “toward” a better state-of-affairs (i.e., that makes it more probable) is at the same time also “toward” a worse one should dampen your enthusiasm for taking the step; this is not reflected in the slogan.

There are probably infinitely many possible states-of-affairs, but for expository purposes let me pretend that the number is finite–say, a million. Let us rank these by value. The best will be S1, the worst S1,000,000 (I’ll ignore ties); the actual present state-of-affairs is somewhere in between–say, S100,000. {As you can see, this email program is incapable of representing the numbers as subscripts.}  

There is, for each of these possible states-of-affairs, some probability that it will eventually become actual, given what we have now. The slogan endorses actions that will increase the probability of one of these states-of-affairs–call it ‘Sn’. But this favored possible state-of-affairs is not specified as S1, the best of them. Indeed, I assume n ≠ 1, since the slogan says “much better” rather than “best.” Since Sn is to be better than S100,000, we have 1 < n < 100,000, and since it is much better it must be closer to 1 than to 100,000; let us say 1 < n < 30,000. But beyond this it is completely obscure what  n is or how it was selected. If n is, say, 10,189, you are aiming to make the eventual occurrence of S10,189 more probable. But the motivation for doing precisely this is hardly evident.

Finally, the “small steps” phrase is, presumably, intended as an expression of modesty. But why limit yourself to small steps? If you can take big steps to improve matters, do it! On the other hand, why restrict yourself to optimism? If you can make the world better, of course, do it; but maybe things appear likely to get worse, no matter what you do. You might even find yourself in a situation where there are no steps you can take “toward” Sn for any n < 100,000, perhaps because Prob (Sn/A) = 0, for any n < 100,000 and any possible action A (given that we are in S100,000). It would be well to cover this possibility, too, by presenting yourself as stepping toward the best (in this case, least bad) possible future.

My proposal for reform, then, is simply to advertise yourselves as intending to act in ways that promote maximum expected value throughout the future; in short: “Acting to maximize expected future value.” (If that’s not your intention, why not?)

The bottom line: I believe that James is a kindred spirit and that he indeed lives "Small steps toward a much better world."

The Cowen experiment

Not every country is opting for fiscal stimulus:

Ireland's prime minister announced €2 billion ($2.57 billion) in
public-spending cuts on Tuesday, saying the country desperately needs
to shore up its battered public finances. Also Tuesday, the Polish
government approved a contingency plan to trim public spending by 19.7
billion zlotys ($5.65 billion). The budget cuts come even as other
countries are boosting spending to juice their economies.

Speaking to the Irish parliament, Prime Minister Brian Cowen said
the bulk of this year's cuts — some €1.4 billion — would come in the
form of increased pension levies on public-sector employees. That is
effectively a pay cut for those workers. Mr. Cowen also pressed forward
with tax increases for higher-income workers and second-home owners.

I'll let you know how it goes.  A few things are worth noting.  First, a small open economy has a harder time making fiscal stimulus work.  Second, a small open economy often has to worry more about its credit rating.  Third, a small open economy offers a tougher testing ground for macroeconomic "field experiments" because there are more confounding external factors.

Tax break for homebuyers?

I'm not sure I understand the proposal, but here is what the NYT says:

The Senate on Wednesday voted to expand the economic stimulus package
with a tax credit for homebuyers of up to $15,000, a provision
championed by Republicans as addressing a root cause of the recession.

Like Arnold Kling, I wish to shift the economy out of housing, not into it again. I also believe that the supply of homes is relatively elastic right now.  The tax credit will subsidize the new buyers without propping up the price of homes.  Demand will go up, supply will go up, price will stay more or less on the same trajectory, and banks won't be any healthier.  The subsidy goes to new home buyers and why should we be helping them above all others?  Aren't they relatively wealthy on average?  (Not that there's anything wrong with that.)  Aren't some of them the dreaded "flippers" and speculators for that matter?  (Can we really enforce the primary residence requirement?)  Do we really want to push people into being less diversified and less geographically mobile in the labor market?  And here's Alex's post from earlier today.

There's a whole other debate you could have on whether we should be encouraging people to buy outputs which are already produced.

So far I say boo to the Republicans.  It could be I don't understand the proposal; if that is so please correct me in the comments.  Here are further discussions of what is going on.

Sentences to ponder

From the ponder-worthy Felix Salmon:

Ray Pellecchia
is right: if Harry Markopolos had taken all of his evidence about
Bernie Madoff and put it on a blog, instead of submitting it to the
SEC, there's a good chance that would have been the end of Madoff right
All the time Markopolos was talking to the WSJ, trying to get them to
run a story about Madoff, would have been much better spent setting up
an anonymous WordPress blog and just putting the information and
analysis out there himself

The difficulties of a housing stimulus

Ed Olsen, one of the nation's foremost housing experts, points out that it's much harder to stimulate housing than many people think because you have to take into account the rental market.

The primary effect of many proposals directed at the housing market would be to decrease the demand for rental units by about the same amount as they would increase the demand for owner-occupied units. This would be the effect of the proposed tax credits or loans at below-market interest rates to new homebuyers.

 …The impact of preventing foreclosures on housing prices is overstated for the same reason. The overwhelming majority of families who default on their mortgages move to another unit that they do not share with others. Therefore, preventing foreclosures would have little effect on the total demand for dwelling units and hence little overall effect on market prices.

 …Subprime mortgages did induce some people to buy houses beyond their means, and foreclosures would decrease the demand for the types of houses bought by these people. This would decrease the prices of similar houses. However, when they default on their mortgages, the families involved move to more modest houses or apartments, thereby increasing the demand for other types of units in other locations and the prices of units of these types. Preventing foreclosures would lead to higher prices for some properties and lower prices for others.

Read the whole thing (doc).