Arthur Laffer in the Wall Street Journal

Arthur Laffer, of Laffer Curve fame, gives some recommendations on how to improve the economy in today’s Wall Street Journal.  First, Laffer provides some reasoning for why the economy isn’t working to its fullest potential:

Employment is low because the incentives for workers to work are too small, and the incentives not to work too high. Workers’ net wages are down, so the supply of labor is limited. Meanwhile, demand for labor is also down since employers consider the costs of employing new workers—wages, health care and more—to be greater today than the benefits.Firms choose whether to hire based on the total cost of employing workers, including all federal, state and local income taxes; all payroll, sales and property taxes; regulatory costs; record-keeping costs; the costs of maintaining health and safety standards; and the costs of insurance for health care, class action lawsuits, and workers compensation. In addition, gross wages are often inflated by the power of unions and legislative restrictions such as “buy American” provisions and the minimum wage. Gross wages also include all future benefits to workers in the form of retirement plans.

For a worker to be attractive, that worker must be productive enough to cover all those costs plus leave room for some profit and the costs of running an enterprise. Being in business isn’t easy, and today not enough workers qualify to be hired.

But workers don’t focus on how much it costs a firm to employ them. Workers care about how much they receive and can spend after taxes. For them, the question is how the wages they’d receive for working compare to what they’d receive (from the government) if they didn’t work, plus the value of their leisure from not working.

The problem is that the government has driven a massive wedge between the wages paid by firms and the wages received by workers. To make work and employment attractive again, this government wedge has to shrink.

He then goes on to make several recommendations to shrink the government wedge.  I particularly like this one:

The cancellation of all spending that punishes those who produce and rewards those who don’t. This is really the distinction between demand-side economics and supply-side economics. Stimulus spending and quantitative easing don’t make it more rewarding to work an extra hour. If the government pays people not to work and taxes people who do work, is it really so difficult to see why employment is so low?

Incentives matter.  Fact.

I’ve seen firsthand the incentives Laffer writes about in play in two separate conversations over the past month with out-of-work colleagues.  These are smart, productive people who have been continuously employed for most of their careers and currently find themselves without work. I heard them say things like:

I have offers on the table, but I’m not interested in working until after the beginning of the year, otherwise I’ll be paying too much in taxes.

And:

I’m in no hurry to find work.  With unemployment and severance I’m making more than I was when I was doing something.  I’m taking a little break.

Of course.  I think most of us would feel the same way.  We make the same trade-offs each day without realizing it.

I’m reminded of a conversation I had long ago with a fellow who couldn’t fathom that incentives matter.  We were discussing tax cuts for the rich.   He thought tax rates for high income earners should be much higher. Since he wasn’t wealthy, he couldn’t personalize how raising rates on marginal income could change behavior. I also believe he didn’t understand the concept of opportunity cost very well.

He’d say things, “it won’t matter if they bring home 60% or 40% after tax, their goal is to maximize their wealth.”

I’d ask him if he works for pay during every waking hour of every day.

No.

Why not?

My job only pays me for 8 hours a day.

Why don’t you find a second job?  You can deliver pizzas.

I wouldn’t make enough doing that to make it worth my while to give up my leisure time.

Hmmm…..

I still don’t think he could transfer that personal trade-off he just made to that vision he had of the fat cat, wealthy person.

It Must Be a Communication Problem

People are miffed at being groped to fly on airplanes.

In step with post-election Democrat position that their policies are good but their communication is not, perhaps we just haven’t been enlightened to supreme reasoning behind this new power grab.

The Problem With Intelligent Folks

Writing in this morning’s Wall Street Journal, Karl Rove correctly identifies the feedback problem that often prevents intelligent people from becoming wise people.  He identifies that problem in the title of his op-ed, Obama Has a Listening Problem.

I’ve seen this problem in action all too often.

Folks who earned good grades in school, tested well, achieved high academic status, were donned with academic honors and awards and everyone goes out of their way to proclaim ‘how smart’ this person is, often share this problem with Obama.

They believe their own hype.  They become full of their intelligence and believe their gift is knowing when others don’t.  When they are wrong, it’s more plausible to them that everyone else is wrong and they have a unique insight that others are not capable of understanding.

Us more feeble-minded folks have an advantage over the elite intelligenstsia.  We do consider the possibility that we’re wrong and when faced with clear evidence of such, we learn.  We alter our world views and mental models to what we’ve learned.

If you cycle through this for a couple decades what you find is that the feeble minded folks have a tendency to become wise and the intelligent folks have a tendency to go crazy.

I’m reminded of this Forbes column by Paul Johnson, The Five Marks of a Good Leader, especially in the section on judgment:

What makes a person judge wisely? It is not intelligence, as such. Clever people with enormously high IQs often show scarifyingly bad judgment. Nor is it education. When I need advice, I rarely turn to someone with first-class honors from a top university. I turn to someone who has knocked about the world and cheerfully survived “the slings and arrows of outrageous fortune.” One man to whom I turned for his judgment was Ronald Reagan. Though not a scholar by any gauge, he almost invariably judged correctly on the few big issues that really matter.

Being able to judge well is often linked to an ability to mix with and learn from other people–not so much from experts but from common people, those who lack the arrogance of power or the desire to show off their intelligence but who nevertheless think deeply about life’s trials. A person of judgment develops the habit of asking questions of such wise people and listening to their replies.

Is It Fair That So Much of Wealth is Accumulated in the Top 1%?

Also, on This Week with Christiane Amanpour, Amanpour asked one of her conservative elected guests (can’t remember which one)  if he thought it was fair that so much wealth has accumulated to the top 1%?

The guest skipped past the question.

I think it’s worth answering because so many harbor ill feelings toward the wealthy and want to use government to exact revenge through taxes.

Here’s how I would answer the question as an elected official.

First,  I have to ask how the wealthy accumulated such riches.

Did they steal it?

If so, one of the basic functions of government is to protect our private property.  Stealing is against the law and lawbreakers should be prosecuted and the property returned to the rightful owner.

Did they accumulate wealth from act of government?

For example, our government imposes tariffs on sugar imports.  That has made domestic sugar growers wealthier than they would be if they faced foreign competition directly.  This extra wealth for domestic sugar growers comes as a direct loss to consumers who pay more than they have to for sugar products and have less to buy other stuff.  I don’t think is fair. Government shouldn’t be used as a tool to enrich some at the expense of taxpayers.  Fortunately, there’s a simple remedy for that.  Remove government from that situation.  Remove the tariff on sugar imports.

Did they earn it through free, voluntary transactions in the market place?

If so, these folks should be thanked.  Their wealth is evidence that they provided a good deal of value to a good number of people.  Now, we may not all agree with or like how these folks choose to spend their money, but they may not like the way you choose to spend yours.  They have no more right to tell you what to do with your private property than you they.

Higher Tax Rates Can Lower Revenue

I normally don’t watch Sunday morning political TV.  I gave it a chance after this week’s election results.  I watched some of This Week with Christiane Amanpour.   I watched the interview with Rand Paul and the segment on raising taxes with Mike Pence and David Stockman (former budget director with Reagan).  I was surprised at the hostility Amanpour had toward Paul and Pence.

One theme Amanpour pushed in both segments was raising taxes.  She tried to get Rand Paul to agree that his desire to balance the Federal budget would require a tax increase.  The entire Pence/Stockman segment was on this topic.

It took longer than I expected to bring up this point, but Pence finally mentioned it in the back-half of his segment: raising taxes could result in lower Federal revenue.

Stockman disagreed saying that a $100 billion tax increase could increase revenue by $90 billion.

Amanpour then advanced a logical fallacy by appealing to Stockman’s authority on the matter, implying that Stockman was right because he was the “architect of massive tax cuts.”

At that point Pence could have pointed out that Stockman being “the architect of massive tax cuts” doesn’t mean his assertion that tax increases result in higher government revenue is correct.  That’s what’s known as a logical fallacy and fallacies are far too common.  This particular fallacy is called an appeal to expert or appeal to authority.

Then Pence should have asked the architect of massive tax cuts what happened to government revenue in 1986, the year his “massive tax cuts” went into place?

Here’s the Federal government revenue for some of the fiscal years surrounding the “massive tax cut” in 1986 that lowered the top income tax bracket from 50% to 28% from this source:

1985    $734 billion

1986    $769 billion

1987    $854 billion

1988    $909 billion

1989    $991 billion

Stockman could assert that the Federal government would have had even more revenue in 1986-89 if he hadn’t cut taxes, but that’s something we will never know because it didn’t happen.  Since we don’t know what would have happened, we can’t make any sound conclusions on that point.

There are two solid conclusions we can make from this data.  First, a “massive tax cut” does not appear to significantly hurt revenue and it might help.  In fact, if you look at the government revenues around other significant tax cuts you will see s similar pattern.

Second, since a tax cut may not hurt revenues, and may help, a tax increase may not increase revenue.

This isn’t as intuitive to folks on the left as it is to those on the right.  The left tends to assume that everything else (e.g. size of economy) remains constant, or close enough.  If they were correct, then raising tax rates increases revenue.  After all, 20% of 100 is greater than 19%.

However, the economy is dynamic and people do respond to incentives.  Higher tax rates cause a smaller economy (now and in the future) and more tax avoidance, while lower tax rates cause a bigger economy (now and in the future) and less tax avoidance.  In this case, 19% of 105 is greater than 20% of 100.

Nobody can tell you exactly how much the size of the economy and tax avoidance will change with differing tax rates.  Not an economist nor David Stockman.  If they tell you they know with a high degree of confidence, then there’s one thing you can be certain of, they can’t be trusted.

But the fact is that the size of the economy does change with tax rates.  Higher tax rates can lead to lower government revenue.  That’s enough for me to not really want to take a chance on that tactic when deciding how to balance the budget.

A Failure to Communicate?

According to this, President Obama told 60 Minutes’ Steve Kroft that poor communications and bad persuasion is what led to the Republican/tea party election results last Tuesday.

So, we can safely conclude that THE election message was not received.

In case Obama is considering other explanations for the results, John Boehner does an excellent job of summing up the message in this morning’s Wall Street Journal.  Key messages:

They [voters] look at Washington and see an arrogance of power. They see a Congress that doesn’t listen, that is ruled by leaders who seem out of touch and dismissive, even disdainful, of the anger that Americans feel toward their government and the challenges they face in an economy struggling to create jobs.

The political landscape has been permanently reshaped over the past two years. Overreaching by elected officials—in the form of pork-laden “stimulus” spending, permanent bailouts, and policies that force responsible taxpayers to subsidize irresponsible behavior—has awakened something deep in our national character. This has led to a surge of activism by citizens demanding smaller, more accountable government and a repudiation of Washington in Tuesday’s elections.

Tired of politicians who refuse to listen, Americans who previously were not involved or minimally involved in the political process are now helping to drive it. While their backgrounds are as diverse as the country itself, their message to Washington is the same: Government leaders are servants of the people; the people are not servants of their government.

I do agree with Obama in one respect.  Part of the problem is a communication problem.  But, the problem doesn’t appear to be in getting the message out to the people.  The problem appears to be getting the message from the people to the politicians.

Fortunately, elections allow the voters to solve that problem.   Republicans started losing power in the ’06 elections because they were in a very similar place as Democrats were before Tuesday.  And it took two election cycles for the Republicans to understand the message.

Our Elected Representatives

After seeing some of the very oddly shaped congressional districts, I’m reminded of a suggestion Steven Landsburg made in his book, More Sex is Safer Sex.

The oddly shaped districts are a result of generations of government-driven redistricting to redraw geographic districts that happen to hold high portions of people with similar political ideologies in order to help members of one political party or another hold onto their jobs and power in government.

For example, if by redrawing the district boundaries from a square that might contain 40% of voters who typically vote Republican to a sawtooth bordered district to encompass only certain neighborhoods to push the percentage of typical Republican voters up to 60% or 70%, the Republican representative in that district has less to worry about in terms of competition from the other party.  The result is you have folks who have been in Congress for very long times and, even when they do some pretty bad stuff, they retain their positions because the voters will keep take the evil from their own party over voting for the other party.

Steven Landsburg’s solution:    Instead of using geographic-based districts, base representation on the first letter of last name.  So, if your last name begins with A, you may share a representative with people all across the country, rather than sharing with just people who live close to you.

Landsburg thinks this will cut down on earmarks/pork barrel projects. Since there’s no geographic tie between the representative and his power base, there’s less incentive for representatives to bring home some government dollars to their districts because they essentially have no home to bring it to.

This may also help with creative districting that has results in plitting up Congressional seats based on ideology.

Dirty Politics

This opinion column lists some of the things George Soros has been working on to keep power in the hands of the left.

The column also mentions the accusations from the left that the billionaire Koch brothers funded tea party efforts.

What a double standard.

By all accounts, Soros’s efforts are intended to bypass true voter intent in order to keep the guys in power that Soros wants.  That’s dirty politics.  That’s like trying to change the rules of the game for your own benefit.  That’s end-justifies-the-means action.

I’d be interested to know more about what the left thinks the Koch brothers specifically did.  Did they provide funds for tea party candidates so they could get the word out and let voters make up their own minds or, like Soros, did they attempt to bypass voter intent by tilting the rules for their benefit?

My guess is the latter and there’s nothing wrong that.

Alan Colmes on Election Results

I got a chance to watch some election coverage this morning.  I think Alan Colmes on FoxNews provides a typical example of the message from the left.  Here’s the video if you’d like to watch it.

Here are my observations on this.

First, the left seems to be putting up a feedback blocker to the real message voters sent.  Colmes, like some others, believe the problem that caused Republicans to gain big was a messaging problem from the Democrats.  For example,  “They [Democrats] didn’t tell us they gave us all tax cuts.”

I know it’s early still.  It took Republicans awhile to understand the message voters sent when they lost power in ’06 and ’08.  It took a grass roots effort and some weeding out of establishment politicians to recast the GOP for this election.

Here’s what I believe is the real message that voters sent yesterday:  This crop of Democrats is too far left. For many of us, this wasn’t a surprise.  But, for the moderates who were tired of Bush and Republicans, it was.  I remember my more moderate pals trying to convince me that Obama was a moderate, or would become moderate once elected.  I think moderates came to grips that they were wrong about that.

Second, Colmes provides a good example of a pundit who has an amazing lack of understanding of the opponents’ position.  Colmes said that he “sees no vision on the right.”  He seems to think that the main position of Republicans is just to oppose Democrats no matter what and not compromise just for the sake of opposing Democrats.

The current Republican vision seems clear to me.  Shrink government and reinforce freedom.  The reason Republicans wouldn’t “compromise” on so many things is not to simply oppose Democrats, but to defend what they think is right – limited government and freedom.

It’s like someone offering to buy your house for half what’s it’s worth.  You say, “It’s not for sell and that price is way too low.”   They say, “But, I want your house.  How about 75% of what it’s worth.”  Your response, “No.”

Then they blame you for not being willing to work with them and compromise.  It’s not that you didn’t compromise.  It’s that what they offered was so far away from what you’d be willing to do you didn’t bother.

I’m not sure if Colmes understands the Republican position and chooses not to acknowledge it or if he just simply doesn’t get it.  But, I’d find him much more interesting if he actually addressed the real arguments, rather than the straw men.

If he doesn’t think limited government and freedom are good ideas, tell us why.  He might be right.  But, pretending that those positions don’t exist befuddles me.

Restore Sanity? II

At about the 8:30 mark in John Stewart’s closing speech at his rally last Saturday, he starts a segment with:

We do impossible things, only made possible by the little, reasonable compromises we all make.

He then shows video of cars in traffic and describes the individuals in each car.  For example, “that car has a lady who’s in the NRA, loves Oprah.”  He describes several more individuals like that and then the video pans out to show the traffic merging into a couple lanes to get through a tunnel carved under a river, “carved, I’m sure, by people who had their differences.”

Back to the merging cars…

…and they do it concession by concession.  You go, I go.  You go, I go.  Sure, there’s some selfish jerk that comes along and cuts in, but that individual is rare and is scorned…

I found this segment interesting for a few reasons.

1.  It shows an example of a zero sum game.

I won’t pick on this point too much.  I know the idea was to show an easy visual of people cooperating.  But, I think the visual happens to represent how folks like Stewart view things — as a zero sum game.  There are only so many lanes in the tunnel and we just all have to share.

However, a broader visual with a time series would provide a truer example of how our getting along results not in a zero sum game, but a positive sum game where things can get better for everyone.

For example, a time series video may have shown how folks crossed the river before the tunnel was made and how the tunnel improved things by adding to the existing options of crossing the river.

Also, a broader picture might have included technology or new construction that saves people from ever entering the traffic jam, like a telecommuter working from home over a high speed internet connection or new apartments on the side of the river everyone wants to get to.

2. Stewart recognizes that people who disagree on some things generally get along for some reason, though I’m not sure he knows that reason.

Number 2 occurred to me when he made the remark about the workers coming together to carve a tunnel under a river, “even though they may have had their differences.”

This strikes at what I think is one of the most fundamental attributes of free markets and is overlooked or discounted by free market skeptics: the mutually beneficial, voluntary trade.  That mutually beneficial trade is the most effective way to align our “differences”  so that something good for everyone results.

For example, I buy my coffee from a dude who I may not agree with politically, because I want my coffee and he wants his paycheck.  To Stewart’s point, I compromised and he compromised.  I didn’t try to convert him to my way of thinking before I bought a cup and he didn’t qualify the sale of the coffee on my politics.  And we both came out ahead in the trade.

So, why do people with differences work together to carve a tunnel beneath a river?  Adam Smith explained it in this quote:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.

The people working on the tunnel didn’t build the tunnel out of kindness.  Nor did they refrain from imposing their beliefs on their co-workers because they’re nice people.  They wanted a paycheck and they wanted to remain employed, so they supplied their labor and got along with their co-workers.  There’s nothing wrong with that and something good and useful resulted.

The problem is so few people understand the underpinnings of the human interactions that brought about many of the things that make our lives better.

3.  Stewart recognizes why people make concessions in traffic and why jerks on the road are rare:  accurate, clear and direct feedback.

One of my pet theories is that any problem can be traced to problem in the feedback loops.  There are few jerks on the road because we have several methods of providing clear and direct negative feedback.  One  feedback, as Stewart points out, is scorn (btw, Don Boudreaux mentions this in the video of his I posted recently on the law).  That might show up as honking horns, finger signals, yelling, shaking heads, risk of road rage or not receiving favorable treatment by other motorists at the next merge.

Even the most stubborn jerks have a difficult time not modifying their behavior with all of that clear and direct feedback, so jerkish flare-ups are usually squelched quickly.

The leap in the thinking that Stewart doesn’t seem to have made yet is why these concessions that are so clear and direct in traffic are not so apparent or strong in political discourse.  If he made that leap, he might better understand why the “24/7 politico conflictinator” exists.

Let’s go back to my feedback theory of everything.

Correct feedback on political ideology is unclear and indirect.  When I accidentally cut someone off in traffic I know right away by the accurate feedback I receive.  I learn and take care not to do it again.

Consider a political ideology that supports policy touted at helping poor people.  What feedback do I receive if the policy works or not?  It’s unclear and it may not be accurate.  It’s certainly not as clear as someone giving me the one-finger salute in traffic.

If I question the effectiveness of the program, I might receive clear feedback.  “You’re stupid and heartless if you think this great program hurts!” But, that may not be accurate feedback.  Notice, that’s a name-call and it doesn’t give me any information as to whether the program works or not.

Stewart himself is guilty of feeding this monster. He has the sanctimonious, authoritative, thou-shalt-not-question-my-superior-judgment, let’s-all-just-get-along (as long as it matches what I think) act down pat.  It puts food on his table.  It also prevents him from learning that he might be wrong.

If I question a policy’s effectiveness, I might also get  feedback from less biased sources.  A group of economists might tell me why it helps and another group may tell me why it hurts, and I’m left sorting out which group I think is right and why.  I think that’s better than being bullied into not questioning the policy, but it’s still not as clear and accurate as traffic signals.

4.  After listening to Stewart’s rally closing and also to Beck’s, I think there’s one big message missing from each: It’s okay to not know, to ask questions, to be wrong and to learn.

I’m reminded of Steven Landsburg’s advice, delight in losing arguments because you’ve learned something.

Somehow, somewhere in our society we’ve lost the idea that it’s possible that we could be wrong and that it’s okay to lose an argument.  I can empathize.  It took me a long time to get past that and sometimes it still gets in the way.

But our betters tell us to get out, vote and let our voices be heard.  They should know better.  Instead they should encourage us to get out and lose some arguments so that we’ll be better informed. And when you lose an argument, say thank you.

We’re not afraid to ask an electrician for help in wiring stuff up.  We know that if we do it ourselves and screw up, the consequences can be deadly.  So why are we afraid to let people know that we don’t know much when it comes to politics?

Is it because politics is a bit more like a religion than wiring skills?