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Why Matt Yglesias should be a conservative
“Conservative” isn’t exactly the word I would use, but he chose it, so for now let’s just run with that. Here is an excerpt from Matt’s Substack (do subscribe!):
In terms of Tyler’s take, while I accept the logic of the view that it’s better to tax consumption than to tax investment, I just don’t buy into the idea that taxing investment is really bad. If I did, I would be a conservative like he is. But I don’t. I also think that, frankly, he always holds Democratic bills to a super-high standard of technocratic rigor while setting a much lower bar for Republican ones — to be generous, he maybe does that to counteract what he sees as a prevailing left bias of econ Twitter.
But to me, taxing investment with one hand while subsidizing investment with another is pretty good, especially paired with deficit reduction and permitting reforms.
Whether taxing investment at high rates is “bad,” or “really bad,” I am not sure. But it is at least one of those. Let me lay out a core, simple case for relatively low rates of taxation on capital income. One can slug it out with the models, but much of the case comes down to two core intuitions:
1. A lot of people are myopic. That encourages too much consumption relative to investment. Matt himself frequently cites examples of myopia, in this Substack post it is Doritos chips and also Instagram.
2. A lot of institutions, including corporations, are too risk-averse relative to social returns. This is the old Arrow-Lind argument. They won’t take enough chances, and that too stifles some investment. After all, consumption usually is safer than investment, at least if you know where to take your dinners. Furthermore, the bureaucratization of society, including much of the private sector, is proceeding apace, so the thrust of the Arrow argument is stronger than it used to be, even though it may be relying increasingly on non-Arrovian mechanisms.
If you favored Operation Warp Speed, chances are you buy into this argument for at least some kinds of investment.
We simply don’t want the tax system to make these biases worse. And those biases are pretty strong, close to ever present, and fairly universal.
You might add a third argument from time inconsistency:
3. Governments are often not credible, and short-sighted, so they have an excess tendency to tax or confiscate fixed capital investments, even when this is bad in the longer run.
To refer back to Matt’s post, I am not so keen on the general concept “raise the taxes on capital and make the subsidies for investment even bigger” as an approach If you wish to subsidize some kinds of investment, do so at the lowest (optimal) rate possible.- It is simpler, cheaper, involves less deadweight loss, and places less burden on the government to find and implement all of the right tax and subsidy offsets.
I used to favor a zero tax rate of capital, but I no longer hold that view. There are too many options for reclassifying labor income into capital income and thwarting the purposes of the tax system altogether. Nonetheless, subject to this constraint, I think taxes on capital should be as low as possible.
John Stuart Mill was considered a “socialist” in his time, but even he thought the tax rate on capital should be zero and governments should tax land and consumption, still a good formula.
I would make a few additional points:
a. You can favor a low rate of capital taxation without thinking the elasticity of savings is very high. If you tax Amazon less, they will have more money to invest, no matter how savings respond. Furthermore, capital can flow in from abroad, all the more as the world becomes wealthier (and less politically safe?).
b. Capital investment boosts wages, and the quantity/quality of capital invested per worker is a major long-run determinant of wages.
c. Capital investments produce goods and services, which create consumer surplus for everyone. If you are tempted to use the words “trickle down” in this discussion, you are not understanding #b or #c. You really do want to live in the economies with more capital investment per worker.
d. Plenty of Western European governments have relatively favorable taxation for capital income, and still achieve relatively egalitarian outcomes. I don’t myself put much stock in this point, but if it matters to you fine by me. A low tax rate on capital income is hardly “giving away the store.”
So Matt should be a conservative. It is fine if he in turn thinks the alternate views are “bad,” rather than “really bad.”
Saturday assorted links
Amritsar is underrated
The Sikh Golden Temple is for me India’s best sight, far more appealing than the Taj Mahal. Would you rather see a mausoleum or a living, breathing site full of human joy? The buildings are remarkably well done and most beautiful at dusk. The site is clean and largely maintained by volunteers, a triumph of Sikh civil society. More people should come here!
The surrounding shops in the pedestrian zone are appealing, and the primary touristy element is directed at Sikh and Hindu pilgrims, not to Westerners.
The food is first-rate, even by Indian standards. Lentils, spinach, mustard leaves, and kulcha soaked with ghee are some of the local specialties. You can eat butter chicken as it was intended, or fish fry. The lassis and raitas are almost as good as those in neighboring Pakistan. Kesar da Dhaba would be my top pick for a restaurant.
And you can stay in a five-star hotel for about $100 a night, excellent swimming pool and restaurant to boot.
Friday assorted links
1. Eastward travel benefits NBA teams.
2. How does copyright for AI-created art work?
3. Why aren’t smart people happier?
5. “Fund managers who run marathons deliver higher risk-adjusted returns.” (speculative)
6. What would Cole Porter say? “My Favorite Things,” or rather yours?
Thursday assorted links
1. A new anti-schizophrenia drug of real potential.
2. Is the productivity slowdown due to the implementation/idea processing side?
3. How much will the climate bill lower global temperatures?
4. Place-based policies in the CHIPS and Science Act (don’t they usually fail? Why are investing so much in them?).
5. Markers of Long Covid? And an explainer.
*Vanishing Asia*, by Kevin Kelly
Three volumes, $281.57, totally worth it. Picture books! Asia only, the vanishing part of course. Very wide coverage of various regions, including parts of western Asia such as Georgia. And yes this is the same Kevin Kelly who is a Hayekian, tech commentator, and much more. It is thus one of the most conceptual picture books, noting the text is minimal and descriptive.
And it is not just the usual stuff, such as amazing old buildings or vistas of rice paddies and brightly colored festivals. Kelly is not afraid to hit you with 40 door photos in a row, all lined up in neat little rows.
Might this be one of the very best picture books? Based on 9,000 photographs and 50 years of travel, 40 of them spent taking photos, and none of it was paid for by other parties. They don’t make ’em like this any more. Recommended.
p.s. One trick of the book is that a lot of this stuff hasn’t vanished at all. Note the gerund!
My excellent Conversation with Will MacAskill
Here is the audio, video, and transcript. Here is part of the summary:
William joined Tyler to discuss why the movement [Effective Altruism] has gained so much traction and more, including his favorite inefficient charity, what form of utilitarianism should apply to the care of animals, the limits of expected value, whether effective altruists should be anti-abortion, whether he’d would side with aliens over humans, whether he should give up having kids, why donating to a university isn’t so bad, whether we are living in “hingey” times, why buildering is overrated, the sociology of the effective altruism movement, why cultural innovation matters, and whether starting a new university might be next on his slate.
And an excerpt:
COWEN: Of all the inefficient things, which is the one you love most?
And longer:
COWEN: If we’re assessing the well-being of nonhuman animals, should we use preference utilitarianism or hedonistic utilitarianism? Because it will make a big difference. We’re not sure all these animals are happy. They may live lives of terror, but we’re pretty sure they want to stay alive.
MACASKILL: It makes a huge difference. I think the arguments for hedonism as a theory of well-being, where that saying that well-being consists only in conscious experiences — positive ones contribute positively, negative conscious experiences contribute negatively — I think the arguments for that as a theory of well-being and the theory of what’s good are very strong. It does mean that when you look to the lives of animals in the wild, my view is it’s just very nonobvious whether those lives are good or not.
That’s me being a little bit more optimistic than other people that have looked into this, but the optimism is mainly drawing from just lack of — I think we know very little about the conscious lives of fish, let alone invertebrates. But yes, if you have a preference satisfaction view, then I think the world looks a lot better because beings, in general, want to keep living.
Actually, when we look to the future as well, I think if you assess how good is the future going to be on a hedonist view, well, maybe it’s quite fragile. You could imagine lots of future ways that civilization could go, where they just don’t care about consciousness at all, or perhaps the beings that will, are not conscious. But probably, beings in the future will have preferences, and those preferences will be being satisfied. So, in general, moral reality looks a lot more rosy, I think, if you’re a preference satisfactionist.
COWEN: But it’s possible, say, in your view, that human beings should spend a lot of their time and resources going around destroying nature, since it might have negative net expected utility value.
MACASKILL: I think it’s a possible implication. I think it’d be very unlikely to be the best thing we could be doing because once —
COWEN: But there’s a lot of nature. We have very effective bombs, weapons. We could develop animal-killing weapons if we set our minds to it.
And from me:
COWEN: I worry a bit this is verging into the absurd, and I’m aware that word is a bit question-begging. But if we think about the individual level — like what do you, Will, value? — you value, in part, the inefficient. It’s very hard to give people just pure utilitarian advice, because they’re necessarily partial.
At the big macro level — like the whole world of nature versus humans, ethics of the infinite, and so on — it also seems to me utilitarianism doesn’t perform that well. The utilitarian part of our calculations — isn’t that only a mid-scale theory? You can ask, does rent control work? Are tariffs good? Utilitarianism is fine there, but otherwise, it just doesn’t make sense.
Fascinating throughout. Don’t forget Will’s excellent new book What We Owe the Future.
Addendum: Here is Ezra Klein’s conversation with MacAskill. And with Dwarkesh Patel.
Will travelers bifurcate into “challenge” and “comfort”?
That is the theme of my latest Bloomberg column, here is one excerpt:
When people are forced to adjust, as happened during peak pandemic times, they learn new things. What many Americans and Westerners have learned is that they enjoy “comfort travel” as much if not more than “challenge travel.” A lot of the new habits are going to stick. Especially with group travel, the preferences of comfort travelers will tend to win out in choosing a destination.
One slightly sorry truth is that many people do not very much enjoy challenge travel, which can be stressful and almost like work. When the social and group pressures to do it are removed or lessened, challenge travel is likely to decline, although the hardcore challenge travelers will remain and perhaps even expand their ambitions.
The future for challenge travel, then, may be that it becomes both less popular and more intense. In this sense it may harken back to an earlier era of travel, where risk and difficulty were ever present and surprises were frequent.
I am posting this from Ahmedabad and headed next to Udaipur…
Wednesday assorted links
2. How big is the housing shortage?
3. The culture and polity that is German: “darf in der SPD bleiben.”
One reason why a global carbon tax is impossible
Consequently, from a regional perspective, there are large disagreements about the welfare effects of carbon taxes: when a uniform carbon tax is imposed across all regions, with revenues redistributed locally as a lump sum so that there are no interregional transfers, some regions gain and others lose, often by large amounts that swamp the globally-averaged benefits of carbon taxes.
The microfoundations of that claim are interesting:
At the regional level, the optimal annual average temperature (at which the calibrated inverse U -shape governing how labor productivity varies with temperature reaches its peak) is approximately 12 degrees Celsius (◦C); an increase of regional temperature from 10 ◦C to 12 ◦C increases a region’s total factor productivity (TFP) by about 1%, while a further increase in annual average temperature from 12 ◦C to 14 ◦C reduces its TFP by about 2%.
Here are some bottom-line numbers on the global costs of climate change, with and without a carbon tax regime:
Without taxes global GDP reaches its nadir (relative to trend) just after 2190, when it is about 7.3% below the trend that would have obtained starting in 1990 without further global warming. With taxes, global GDP reaches its nadir just before 2190, at about 5.5% below trend.
Again, the costs of climate change are a few years of global economic growth. That is a big deal, and worth attending to, but far from an existential risk.
Here is the 160 pp. NBER working paper by Per Krusell and Anthony A. Smith Jr.
Tuesday assorted links
1. The economics of lithium constraints (FT). Augmenting supply is tough, and projects can take from six to nineteen years to pay off.
2. Dropbox for babies? (NYT)
3. Gideon Lewis-Kraus New Yorker profile of Will MacAskill, with a cameo appearance by the MR comments section.
4. American historian David McCullough has passed away (NYT).
5. Dylan Matthews on the rise of the EA movement.
6. What was the relative welfare gain from tobacco? (speculative)
Pharmaceutical drugs redux
In 2019 I presented this excerpt:
Humans are living longer, better lives thanks to innovations in prescription drugs over the past three decades, according to several new studies by Frank Lichtenberg, the Courtney C. Brown Professor of Business.
Every year, according to Lichtenberg’s research, drugs launched since 1982 are adding 150 million life-years to the lifespans of people in 22 countries that he analyzed. He calculated the average pharmaceutical expenditure per life-year saved at $2,837 — a bargain, he says.
“According to most health economists and policymakers, if you could extend someone’s life by a year for less than $3,000, that is highly cost effective,” says Lichtenberg, who gathered new data for these studies to cast a never-before seen view of the econometrics of prescription drugs. “People might be surprised by how cost-effective drugs appear to be in general.”
…To tease out the answer, the professor gathered data on drug launches and the age-standardized premature mortality rate by country, disease, and year. Drawing on data from the World Health Organization, the United Nations, consulting company IQVIA, and French database Theriaque, Lichtenberg was able to identify the role that pharmaceutical innovation played in reducing the number of years of life lost due to 66 diseases in 27 countries. (“Years of life lost” is an estimate of the average years a person would have lived if he or she had not died prematurely.)
OK, now a simple economics question: given such numbers, should we be spending more on pharmaceutical drugs, or less? I might add that biomedicine has made some spectacular advances as of late, so the notion that these are average costs, and the marginal cost slants sharply upward, probably is not true.
Here are further MR posts on this line of research. Here are Lichtenberg’s NBER working papers.
How many of you got the simple economics question right?
Well-being average is over?
Jon Clifton, the head of Gallup, which has been tracking wellbeing around the world for many years, notes a polarisation in people’s life-evaluations. Compared with 15 years ago (before the financial crisis, smartphones and Covid-19) twice as many people now say they have the best possible life they could imagine (10 out of 10); however, four times as many people now say they are living the worst life they can conceive (0 out of 10). About 7.5 per cent of people are now in psychological heaven, and about the same proportion are in psychological hell.
That is from Tim Harford at the FT. There will be more in Clifton’s forthcoming book Blind Spot.
Monday assorted dystopian links
The tax provisions of the new climate and taxes bill
I can’t quite bring myself to call it the Inflation Reduction Act. One thing I have learned from experience is how hard it is to judge such bills upfront. For instance, I just learned that the electric vehicle tax credits do not currently apply to any electric vehicle whatsoever, nor will they obviously apply to any electric vehicle to be produced in the near future. Now the United States might take a larger role in battery production, or perhaps the law/regulation will be modified — don’t assume these standards will collapse. Still, the provisions are going to evolve. Or maybe there is a modest chance that provision of the bill simply will never kick in.
I don’t know.
How about the corporate minimum tax provisions? It sounds so simple to address unfairness in this way, and how much opposition will there be to a provision that might cover only 150 or so companies? But a lot of the incentives for new investment will be taken away, including new investment by highly successful companies. (You can get your tax bill down by making new investments, for instance, and that is why Amazon has paid relatively low taxes in many years.) Most of the companies covered are expected to be manufacturing, and didn’t we hear from the Democratic Party (and indeed many others) some while ago that manufacturing jobs possess special economic virtues? Furthermore, some of the tax incentives for green energy investments will be taken away. Has anyone done and published a cost-benefit analysis here? That is a serious question (comments are open!), not a rhetorical one.
Here are some other concerns (NYT):
“The evidence from the studies of outcomes around the Tax Reform Act of 1986 suggest that companies responded to such a policy by altering how they report financial accounting income — companies deferred more income into future years,” Michelle Hanlon, an accounting professor at the Sloan School of Management at the Massachusetts Institute of Technology, told the Senate Finance Committee last year. “This behavioral response poses serious risks for financial accounting and the capital markets.”
Other opponents of the new tax have expressed concerns that it would give more control over the U.S. tax base to the Financial Accounting Standards Board, an independent organization that sets accounting rules.
“The potential politicization of the F.A.S.B. will likely lead to lower-quality financial accounting standards and lower-quality financial accounting earnings,” Ms. Hanlon and Jeffrey L. Hoopes, a University of North Carolina professor, wrote in a letter to members of Congress last year that was signed by more than 260 accounting academics.
How bad is that? I do not know. Do you? My intuition is that the book profits concept cannot handle so much stress. By the way, kudos to NYT and Alan Rappeport for doing that piece. It is balanced but does not hold back on the skeptical side.
And here’s one matter I haven’t seen anyone mention: the climate part of the bill, and indeed most of the accompanying science and chips bill, assume in a big way that private sector investment is deficient in solving various social problems and needs some serious subsidy and direction.
Now the direction of that investment is a separate matter, but when it comes to the subsidy do you recall Kenneth Arrow’s classic argument that the private sector does not invest enough in risk-taking? Private investors see their private risk as higher than the actual social risk of the investment. This argument implies subsidies for investments, as much of the rest of the bill and its companion bill provide, not additional taxes on investment. This same kind of argument lies behind Operation Warp Speed, which most people supported, right?
And yet I see everyone presenting the new taxes on investment in an entirely blithe manner, ignoring the fact that the rest of the bill(s) implies private investment needs to be subsidized or at least taxed less.
Overall the ratio of mood affiliation and also politics in this discussion, to actual content, makes me nervous. The bills went through a good deal of uncertainty, and so a significant portion of the intelligentsia has been talking them up. Biden after all needs some victories, right? And at some point the green energy movement needs some major legislative trophies, right? What I’d like to see instead is a more open and frank discussion of the actual analytics.
It is very good when a top economist such as Larry Summers has real policy influence, in this case on Joe Manchin. But part of that equilibrium is that other economists start watching their words, knowing some other Democratic Senator might fall off the bandwagon. There is Sinema, Bernie Sanders has been making noise and complaining, someone else might have tried to extract some additional rents, and so on.
The net result is that you are not getting a very honest and open discussion of what is likely to prove a major piece of legislation.