Month: October 2019

Summers on the Wealth Tax

Larry Summers is my favorite liberal economist because even while maintaining his liberal values he never stops thinking like an economist. That makes him suspect among the left but it means that he is always worth listening to. The video below with Saez, Summers and Mankiw (with Rampell moderating) is excellent throughout. I cribbed a number of points from Summers:

“I have studied last week’s twitter war very carefully and I have to say that I am 98.5% convinced by the critics that the Zucman-Saez data are substantially inaccurate and misleading.”

The arguments around political power are not persuasive. Most of what is wrong with politics is because that is what the people want (I’m filling in a bit here from comments throughout). A wealth tax does nothing about corporate lobbying and would increase the incentive to give to political organizations. If you cut wealth at the top by 30% that wouldn’t change relative political power in the slightest.

Wealth is up in large part because interest rates are down which means that permanent income hasn’t increased.

Forced savings programs like social security and unemployment insurance mean that people at the bottom need to save less and thus their wealth falls even as their welfare increases.

A wealth tax increases the incentive to consume instead of save and invest.

On employee stock ownership plans: “When you put workers in control of firms and you give them substantial control–see Israeli kibbutz’s, see Yugoslav cooperatives, see universities where faculties have a powerful voice–the one thing you do not get is expansion. You get more for the people who are already there. That does not seem to be an attractive position for progressives.”

In the Q&A Summers just goes to town on Saez when Saez claims 90% tax rates are a great American invention. “The people who were around in the Kennedy administration who were at least as progressive as you are were united in the belief that 90% tax rates were a bad idea….The number of people who paid those 90% tax rates was trivial and it wasn’t because there weren’t a lot of rich people.”  Greg Mankiw, who gives a nice parable in his remarks, has to stifle a laugh as Summers lets rip.

The body language in the Q&A is very interesting.

Ranking states by their degree of regulation

Now Mercatus has completed an analysis of state-level regulation. State RegData 1.0 analyzes the administrative codes of 46 states plus the District of Columbia, and the results are informative. The average state has 131,000 restrictive terms and about 9 million words in its code, which would require roughly twelve work weeks to read at a normal reading pace.

But there is huge variation. The least regulated state is South Dakota, with about 44,000 regulatory restrictions, while the most regulated state is California, with 395,000. All told, the least regulated states are South Dakota, Alaska, Montana, Idaho, and North Dakota, while the most regulated states are California, New York, Illinois, Ohio, and Texas.

Unfortunately, we weren’t able to include Vermont, New Jersey, Arkansas, and Hawaii. Arkansas is the easiest to explain: It has no administrative code, at least not yet. Its state agencies produce regulations, but until this year no one had ever bothered to compile them in one place. Fortunately — perhaps partly in response to RegData — legislation was passed this year to create an official Code of Arkansas Rules by January 2023, so Arkansas’s regulatory landscape will eventually come to light.

That is from James Broughel and Patrick A. McLaughlin, there is more at the link.

Trust, Airbnb, and Himalayan villages

An excellent short essay, with many points of note, here is one:

In Himalayan villages like mine, there is deep social uncertainty because of Airbnb and other online marketplaces. The opportunity cost of doing business with one’s nephews and cousins is now high. There is the real problem of nephews who run away on the flimsiest of pretexts. The stakes are higher, and there is much to gain by trading with outsiders. You can’t even run Airbnbs well without breaking free from closed relationships with your family and tribe, and forming spontaneous relationships with strangers.  It’s hard for me to do justice to my Airbnb listings without being free to run them in a fairly entrepreneurial fashion.

And there is this:

Millions of people stay in Airbnb homes every night. It’s not trust which makes this possible. My pup is fearless when he sleeps with the door wide open, in a cottage in the woods. There are leopards around. Dogs here don’t live very long. He doesn’t trust leopards, but he knows they are afraid of humans. My pup sleeps on my bed, and so is well-protected from the vicissitudes of life. But I’m not the living proof that dogs can trust leopards. Dogs wouldn’t need humans to guard them if they could trust leopards. Similarly, Airbnb puts hosts and guests in a position where behaving badly would ruin their reputation. In one of my bad moods, I held my pup quite firmly. At midnight, he ran out of the cottage and barked for hours. I couldn’t bring him back to my bed. I did something he thought I wouldn’t consider. He felt I betrayed his trust in me. I’m, here, talking about a more meaningful form of trust. Intellectuals miss this obvious distinction, because they’re not the wonderful people they think they are. The distinction between trust and assurance is all too obvious. But if doing wrong doesn’t fill you with moral horror, you won’t get it. You can’t trust anybody who doesn’t feel that way, and there are not many such people. Unconditional trustworthiness is one of the rarest things in the world. Institutions can’t produce this kind of trust, because people aren’t conditionable beyond a point. In any case, how do you produce something you don’t even understand?

By Veridici, and I believe Shanu Athiparambath.

China facts of the day

Sports Business Journal recently estimated that the NBA’s presence in China is worth $5 billion to the league.


Nike, with [Lebron] James as a primary spokesman in China, received 17% of its $37.2 billion in brand revenue from Greater China in fiscal 2019…James also has served Tencent as a spokesperson, consultant and endorser of the NBA 2K League in China.

From a marketing expert who knows China:

“The NBA is nothing but good; it provides entertainment, keeps people busy, gives them something to talk and be passionate about, and if they’re doing all that, they’re not on the streets complaining about the government.”

And to close the joke:

Said [Bill] Bishop, referencing the pingpong diplomacy that initiated a warming of relations between the countries back in the early 1970s: “One of the jokes going around is U.S.-China engagement started with pingpong and ended with basketball.”

Link here.

Sunday assorted links

Questions that are rarely asked (from the comments)

Would the two percent wealth tax apply to muni bonds? Because of their tax advantaged status, muni bonds are generally held by the wealthy, who get enough of a tax advantage to offset the lower yield. A wealth tax presumably causes more “reach for yield” among those affected, which would disproportionately affect munis.

On the other hand, a wealth tax that excepted wealth held in munis would create a massive tax advantage for them at the high end, much greater than their current income tax exemption.

That is from John Thacker in the comments.  And, for the case where the wealth tax would apply to more people than just the very wealthy, Dallas ponders:

How would a wealth tax impact the fat civil service defined benefit pension plans? If you look at the actuarial value of my friend’s public pensions they have values in the 3 million+ range (up to 90% of a spiked salary at 55 years of age for life no-cut contract with a cost of living clause: if you claim disability, it becomes tax-free). A 2% wealth tax on that value would be $60,000+ per year.

Of course, since the people imposing the wealth tax would be bureaucrats with defined pension plans, they would be an asset (wealth) that is excluded and how can you charge a tax against an unfunded liability. Meanwhile, people like me who saved for his retirement would have their assets stolen (perhaps to fund that unfunded liability of the ruling bureaucrats).

The details of a wealth tax with the added variable of time would become even more complex than even the income tax system. With most long term assets value only becoming apparent upon sale having any real long-lived asset would become economically insane. You want some asset with near-zero value (as determined by the IRS bureaucrat) until the year you sell it. That will create a whole new class of privileged assets.

Ponder away on that one…

*In the Closet of the Vatican*

That is the highly controversial book by Frederick Martel, subtitled Power, Homosexuality, Hypocrisy.  For some time I had been resisting reading the book, as usually I find tales of corruption and scandal boring.  But I misunderstood the fundamental nature of the account.  It is not quite a homage, but Martel seems to admire the evolved culture of homosexuality (not my preferred word, but appropriate in this context) in the Vatican.  See this review: “The tone falters because Martel seems unsure whether to be horrified by the church’s corruption or to let out a gasp of high-camp amazement at its excesses.”

If anything, the study reminds me of Diego Gambetta’s work on the Mafia, at least in terms of some of its methods.

Have you ever thought “there should be more books about how things actually work!?” — well, this is one of them.  Here is one excerpt:

‘Being of the parish’ could even be this book’s subtitle.  The expression is an old one in both French and Italian: I have found it in the homosexual slang of the 1950s and 1960s.  It may pre-date those years, so similar it is to a phrase in Marcel Proust’s Sodom and Gomorrah and Jean Genet’s Notre Dame des Fleurs — even though I don’t think it appears in either of those books.  Was it more of a vernacular phrase, from the gay bars of the 1920s and 30s?  Not impossible.  In any case, it heroically combines the ecclesiastical universe with the homosexual world.

‘You know I like you,’ La Paiva announces suddenly.  ‘But I’m cross with you for not telling me if you prefer men or women.  Why won’t you tell me?  Are you at least a sympathizer?’

I’m fascinated by La Paiva’s indiscretion.

And another bit:

It took me several months of careful observation and meetings to understand the subtle nocturnal geography of the boys of Roma Termini.  Each group of prostitutes has its patch, its marked territory.  It’s a division that reflects racial hierarchies and a wide range of prices.  So the Africans are usually sitting on the guardrail by the south-western entrance to the station; the Maghrebis, sometimes the Egyptians, tend to stay around Via Giovanni Giolitti, at the crossing with the Rue Manin or under the arcades on Piazza dei Cinquecento; the Romanians are close to Piazzadella Repubblica, beside the naked sea-nymphs of the Naiad Fountain or around the Dogali Obelisk; the ‘Latinos’ last of all, cluster more towards the north of the square, on Viale Enrico de Nicola or Via Marsala.  Sometimes there are territorial wars between groups, and fists fly.

You can buy the book here.  I would add this: I do not have much knowledge in this area, but Martel seems to go out of his way to avoid making speculative accusations.  But if you would like to read a negative Catholic review of the book, here it is.

*Essays One*, by Lydia Davis

Is there anything more enthralling than a writer of supreme intelligence covering topics she understands deeply?  Here is just one bit from this fantastic collection:

We know we are not being asked to believe in a woman named Oedipa Maas or a man named Stanley Koteks, and our attention is distracted from the story to the artifice and artificer.  What is shared by the two books is a sense of tight control by the author over the characters, the language, the book, and probably the reader.  Sometimes the control is achieved through his mastery of a graceful prose style or an appealing notion (“Creaking, or echoing, or left as dark-ribbed sneaker=prints in a fine layer of damp, the footstep of the Junta carried them into King Krjö’s house, past pier glasses that gave them back their images dark and faded, as if some part were being kept as the price of admission”): here is control by persuasion.  Sometimes, on the other hand, the young author goes beyond eloquence to a kind of hyper-eloquence that becomes a display of power over language itself that perhaps borders on control by coercion.

Or how about this?:

Franz Kafka’s “The Burrow,” because of the confident and convincing narrative voice of its obsessed narrator, who begins: “I have completed the construction of my burrow and it seems to be successful.”  Kafka fully inhabits his characters and presents them with a realism that makes them, though they are impossible, believable.


I have given students in writing classes the assignment to read, analyze, and then imitate stylistically one of [Thomas] Bernhard’s small stories.  Younger writers these days often have trouble constructing long, complex sentences.  They often restrict themselves to short, simple sentences, and when they try a longer, more complex one, they run into trouble.  I see this in otherwise good writers — including good published writers.

Make sure you read her short essay “Thirty Recommendations for Good Writing Habits” (you won’t agree with them all, though I think I do)

This is one of the very best books to read if you wish to think about writing more deeply.  You can pre-order it here.

Matthew Lilley on Saez and Zucman

From an email:

The eye-catching result here is they have consumption taxes being *sharply* regressive, e.g. 12% for the lowest income group. I’m not aware of any US state that has state + average local sales rates tax that high. And lots of goods are exempt from sales tax. So how do they get this? Well, suppose someone earns $1k in labor earnings and gets $9k in transfers, and consumes it all paying a 5% sales tax = $500 in tax. What sales tax rate have they paid (as a % of their income)? The method Treasury uses says 500/(1k+9k) = 5% (this is also what Auten-Splinter do). Saez-Zucman exclude transfers from the denominator, and thus say 500/1k = 50%. This is a matter of definition, so it’s hard to call it right or wrong, but it does seem misleading and yield some rather nonsensical implications. For example, it means that if welfare to the poor is increased, this will be measured as an increased tax rate.

Indeed, Saez-Zucman themselves seem to realise that this definition yields extreme numbers at the very bottom, where consumption tax rates can easily exceed >100%. In their appendix –  – they note “People with very low pre-tax income (below half the federal minimum wage) earn transfer income (temporary assistance, SNAP, supplemental security income, veteran benefits, etc.), which is not part of pre-tax income. They pay sales taxes on that transfer income when it is consumed. As a result, they have high (sometimes very high) tax rates as a fraction of their pre-tax income. We avoid that problem by restricting the population to adults with more than half the minimum in pre-tax income.

This is quite remarkable.  If the sensible way of defining tax rates involves excluding transfers from the denominator (as they claim), the fact that it leads to very high rates by construction at the bottom should be because this is a sensible summary of reality. Yet, in their own words, it’s a problem. Rather than switching method, they drop the people at the very bottom which conveniently covers up the problem (but leaves a less severe version of the problem in their remaining lower income sample). Of course, they could have just used the standard definition which includes transfers in the denominator, but doing this destroys the entire headline result.

It also seems noteworthy that in choosing to excluding transfers, they nonetheless retain payroll taxes. It seems pretty egregious to call payroll taxes regressive when social security is implicitly an insurance scheme with a very large degree of aggregate progressivity, but this is a minor point by comparison.

A Fine Theorem on RCTs and the new Nobel Laureates

In this vein, randomized trials tend to have very small sample sizes compared to observational studies. When this is combined with high “leverage” of outlier observations when multiple treatment arms are evaluated, particularly for heterogeneous effects, randomized trials often predict poorly out of sample even when unbiased (see Alwyn Young in the QJE on this point). Observational studies allow larger sample sizes, and hence often predict better even when they are biased. The theoretical assumptions of a structural model permit parameters to be estimated even more tightly, as we use a priori theory to effectively restrict the nature of economic effects.

We have thus far assumed the randomized trial is unbiased, but that is often suspect as well. Even if I randomly assign treatment, I have not necessarily randomly assigned spillovers in a balanced way, nor have I restricted untreated agents from rebalancing their effort or resources. A PhD student of ours on the market this year, Carlos Inoue, examined the effect of random allocation of a new coronary intervention in Brazilian hospitals. Following the arrival of this technology, good doctors moved to hospitals with the “randomized” technology. The estimated effect is therefore nothing like what would have been found had all hospitals adopted the intervention. This issue can be stated simply: randomizing treatment does not in practice hold all relevant covariates constant, and if your response is just “control for the covariates you worry about”, then we are back to the old setting of observational studies where we need a priori arguments about what these covariates are if we are to talk about the effects of a policy.

There is much more of interest in the post, very high quality as you might expect given the source.

What to make of prediction markets this election season?

That is the topic of my latest Bloomberg column.  Mostly I am pro-prediction market, but my last two paragraphs contain the cautionary note:

Prediction markets have another potential flaw: They focus attention on clearly demarcated events that are easy to bet on, such as who will win an election or whether Rudy Giuliani will face federal charges. Sometimes these are important matters. Other times they are not.

There are more meaningful trends that are more difficult to measure, such whether Americans are feeling more lonely. These things certainly have an impact on politics, but they are not easy to bet on. Political prediction markets are undeniably useful and very often enlightening, but maybe they should come with a warning: Feel free to check the odds as often as you like, but do not let your obsession blind you to the larger issues at stake.

There is much more in the earlier parts of the piece.