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Posts Tagged ‘economics

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else”*…

 

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President Trump [recently] announced that economist Arthur Laffer will receive the Presidential Medal of Freedom. Laffer is most famous for his “Laffer curve,” a graph that suggested that lowering tax rates might increase tax revenue. This graph had major political consequences, but made him more notorious than celebrated in the field of economics…

Economists tend to roll their eyes when the Laffer curve is mentioned. A panel of elite academic economists across the political spectrum found in 2012 that none of its respondents agreed that the United States was on the wrong side of the curve. Even George Stigler, a leader of the Chicago School of Economics who disliked taxes at least as much as Laffer, described the Laffer curve as “more or less a tautology.”

Yet the idea has been influential for more than 40 years. The Laffer curve did not begin as a formal economic theory, but as a simple depiction of the relationship between tax rates and government revenue. Legendarily, perhaps apocryphally, it was scribbled onto a napkin after dinner. [A recreation of the legendary napkin, created by Laffer for Donald Rumsfeld, who was at the dinner (with Dick Cheney) where it was supposed first sketched.]

The concept is simple enough. As tax rates increase, people’s incentives to work and make investments decrease because they make less money from them. Above some rate, taxes become so onerous that total revenue goes down because people aren’t as economically active as they would be in a world with lower taxes. The big question is what that rate — the tipping point on the Laffer curve — actually is.

Laffer may have named the curve, but the idea was not original to him. As proponents in the late 1970s liked to point out, the general idea dates to the Arab social theorist Ibn Khaldun, who wrote in the 14th century, “At the beginning of a dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments.”

In less remote history, Andrew Mellon, Republican treasury secretary to three presidents, articulated a similar idea in 1924. And when Democrats advocated for the Revenue Act of 1964, which cut the top marginal rate from 91 to 70 percent, their bill made exactly the same arguments. Even Wilbur Mills, the fiscally conservative Democratic chair of the Ways and Means Committee, found himself claiming that the tax cut would “eventually lead to higher levels of economic activity and thereby increase, rather than decrease, revenue.”

Yet it was Laffer’s variant that caught the ear of Republicans in the late 1970s, just as they were shifting from a position as the party of balanced budgets to the party of tax cuts. Indeed, the Laffer curve was a way to say, “Why not both?” One influential ear Laffer caught was that of Wall Street Journal associate editor Jude Wanniski, who made the curve a centerpiece of his 1978 book, “The Way the World Works.”

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Laffer and Wanniski had a champion in Congress as well, in former Buffalo Bills quarterback Jack Kemp. In April 1977, Kemp introduced a bill to cut income tax rates by 30 percent across the board. He started talking about the Laffer curve in October and over the next year mentioned it several more times in Congress.

But it was only with the June 1978 passage of California’s Proposition 13, which slashed property taxes, that the Laffer curve argument exploded into the mainstream. In this new atmosphere of “tax revolt,” the Laffer curve came up 128 times in the Congressional Record in less than four months…

The man who gave (what Will Rogers first called) trickle-down economics its own “curve,” who gave supply-side economics its graphic icon: “Trump is giving Arthur Laffer the Presidential Medal of Freedom. Economists aren’t smiling.”

For more on the “tyranny of curves,” see “Phillips, Laffer and Gatsby: on economists obsessing about curves.” And for more on the out-sized political, economic, and social impact of Laffer’s ideas, see “Starving the Beast- Ronald Reagan and the Tax Cut Revolution.”

* “The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”          -John Maynard Keynes

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As we grapple with graphs, we might spare a thought for a different kind of economist (and one whose impact was much more indisputably positive), Elizabeth Josephine Craig; she died on this date in 1980.  A home economist and journalist, she published dozens of books, mostly cookbooks and volumes of home management advice.  Craig started to cook when she was 6 and began collecting recipes at 12; she began publishing cookbooks after World War I and continued to publish until her death.  Her contribution to English culinary literature comprises a very large collection of traditional British recipes, but also included a considerable number of dishes from other countries, which she gathered during visits abroad (often with her war correspondent husband).

220px-Craig,_E_Cakes_and_Candies_cover source

 

Written by LW

June 7, 2019 at 1:01 am

“Everybody’s talkin’ about hard times / Like it just started yesterday”*…

 

Abrahamian-inequality_img

 

I welcome the Deaton report into inequality. I especially like its emphasis (pdf) upon the causes of inequality:

To understand whether inequality is a problem, we need to understand the sources of inequality, views of what is fair and the implications of inequality as well as the levels of inequality. Are present levels of inequalities due to well-deserved rewards or to unfair bargaining power, regulatory failure or political capture?

I fear, however, that there might be something missing here – the impact that inequality has upon economic performance…

Chris Dillow, a columnist at the Investors Chronicle, enumerates and explains eight ways in which that impact accrues: “How Inequality Makes Us Poorer.”

Image above, from “The Rise of the Inequality Industry,” also eminently worthy of a read.

* “Everybody’s talkin’ about hard times
Like it just started yesterday
People eye know they’ve been strugglin’
At least it seems that way
Fat cats on Wall Street
They got a bailout
While somebody else got to wait
Seven hundred billion but my old neighborhood
Ain’t nothing changed but the date”

– Prince, Ol’ Skool Company album, 2009

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As we realize that more often than not the greater good is good for us too, we might send carefully-charted birthday greetings to François Quesnay; he was born on this date in 1694.  An Enlightenment social philosopher, he was a founding father of Physiocracy, a set of proto-economic theories that held that the wealth of nations was derived solely from the value of “land agriculture” or “land development” and that agricultural products should be highly priced. He published the “Tableau économique” (Economic Table) in 1758, which provided the foundations of the ideas of the Physiocrats.  It was among the first works attempting to describe the workings of the economy in an analytical way, and thus can be seen as one of the first important contributions to modern economic thought.

225px-Quesnay_Portrait source

 

Written by LW

June 4, 2019 at 1:01 am

“Thus did a handful of rapacious citizens come to control all that was worth controlling in America”*…

 

history-of-capital-ai

The evolution of capitalism (“the capital AI machine”) as a series of levels that were unlocked by new “learning” APIs to humans

 

Consider capitalism as a highly efficient objective function (or “AI”) with its parameters optimized for the satisfaction of our short term desires rather than our long term interests.

Paranoia about runaway feedback loops – in consumer capitalism, artificial intelligence, mass media, ‘Wrestlemania politics,’ etc – ultimately stems from the inscrutability of the emergent behavior of these complex systems to the individual actors and observers operating within them.

Rather than responding with Luddite / anarchist nihilism, we should remember that technological and social systems like these have dramatically reduced our exposure to the unpredictability of the natural world and greatly improved living conditions on a number of dimensions over the past few centuries.

At the same time, we should not ignore warning signs of a dystopian future, nor should we hope that a ‘personnel change’ of institutional leaders will solve our problems.

Because the problems at hand are complex systems problems – where the root causes are not the actors themselves, but the ill-designed structures and incentives that dictate their actions – we should think about redesigning the rules and incentives of social, political, and economic systems as the path forward…

Andrew Kortina explains modern capitalism as a system– one that, for all of its all-too-manifest faults, should be saved; then he starts the conversation about how to do that salvaging: “History of the Capital AI & Market Failures in the Attention Economy.”  Mildly geeky, but richly provocative– which is to say, useful, whether one buys his suggested solutions or not– it’s eminently worthy of a read.

* “Thus did a handful of rapacious citizens come to control all that was worth controlling in America. Thus was the savage and stupid and entirely inappropriate and unnecessary and humorless American class system created. Honest, industrious, peaceful citizens were classed as bloodsuckers, if they asked to be paid a living wage. And they saw that praise was reserved henceforth for those who devised means of getting paid enormously for committing crimes against which no laws had been passed. Thus the American dream turned belly up, turned green, bobbed to the scummy surface of cupidity unlimited, filled with gas, went bang in the noonday sun.  – Kurt Vonnegut, God Bless You, Mr. Rosewater

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As we wonder about the water in which we swim, we might recall that it  was on this date in 1933 that the Agricultural Adjustment Act came into force.  A central piece of New Deal legislation, the AAA aimed to aid farmers devastated by reduced demand for their crops by creating price supports via a series of government purchases (of crops and livestock) and subsidies (essentially payments not to plant/grow).

The program was controversial in its time– it made previously independent farmers dependent on the government– but it worked; average farm income rose 50% from 1932 to 1935.  It’s elements– government purchase and subsidy– survive to this day, evolved into (many of) the provisions of the Farm Bill, passed by Congress every five years or so… even though the constituency of small farmers the Act was intended to serve has largely given way to an agricultural landscape dominated by a handful of gigantic corporate players.

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A Roosevelt County New Mexico farmer and a County Agricultural Conservation Committee representative review the provisions of the Agricultural Adjustment Act (AAA) farm program to determine how it can best be applied on that particular acreage

source

 

“There are three types of lies — lies, damn lies, and statistics”*…

 

Charts

“Hiding in Plain Sight”

 

A chart’s purpose is usually to help you properly interpret data. But sometimes, it does just the opposite. In the right (or wrong) hands, bar graphs and pie charts can become powerful agents of deception, tricking you into inferring trends that don’t exist, mistaking less for more, and missing alarming facts. The best measure of a chart’s honesty is the amount of time it takes to interpret it, says Massachusetts Institute of Technology perceptual scientist Ruth Rosenholtz: “A bad chart requires more cognitive processes and more reasoning about what you’ve seen.”…

Five examples (like the one above) of the kinds of tricks that charts can try to pull, explained: “Five Ways to Lie with Charts.”

* Benjamin Disraeli

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As we stack the deck, we might recall that it was on this date in 2010, at 2:32p EDT, that the U.S. stock markets suffered a “Flash Crash”– in a period of just 36 minutes, the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite collapsed and rebounded (the Dow, e.g., lost 9% of its value, then recovered most of it).

Nearly five years later, the SEC charged a 36-year-old small-time trader who worked from his parents’ modest stucco house in suburban west London with having caused the collapse (using spoofing and layering, along with a form of front-running– all now explicitly outlawed).  But many experts are not convinced; to this day, there are numerous theories– but no consensus– as to the cause(s) of the crash.

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The DJIA on May 6, 2010 (11:00 AM – 4:00 PM EDT)

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Written by LW

May 6, 2019 at 1:01 am

“The welfare of a nation can scarcely be inferred from a measurement of national income as defined by the GDP”*…

 

GDP

 

Is the world becoming increasingly prosperous? It would be hard to answer “yes” right now, at least so far as the leading high-income economies are concerned. Yet the longstanding bellwether of economic progress – inflation-adjusted GDP – has been growing across most of the OECD since 2010, suggesting that everything is fine.

Some 80 years after GDP was introduced, nearly everyone (apart from the indicator’s stewards) has concluded that it is  of economic progress. But there is no consensus yet on a possible replacement. Reaching agreement on an alternative will require a new concept of prosperity and a new way to measure whether living standards are improving…

Over eight decades after its introduction, there is a widespread consensus that GDP is no longer a useful measure of economic progress.  Its successor will need to be compelling and tell a persuasive story, consistent with experience, of what is happening in our economies.  Diane Coyle offers some leads on possible successors: “What Will Succeed GDP?

* Simon Kuznets

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As we grope for good gauges, we might recall that it was on this date in 1848 that a political pamphlet by the German philosophers Karl Marx and Friedrich Engels, The Communist Manifesto, was published.  Commissioned by the Communist League and written in German, it appeared as the Revolutions of 1848 began to erupt.  Subsequently, of course, Marx elaborated on his argument (with Engel’s help, after Marx’s death) in Das Kapital.

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Cover of the first edition

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Written by LW

February 21, 2019 at 1:01 am

“Emergencies have always been necessary to progress”*…

 

economy

The 2008 financial crisis continues to plague the world economy and our politics. It’s also messing with how we understand our narratives of global integration. Until recently, going global implied exuberant stories about one-world connectivity and technocratic togetherness. Now, it’s the other way around: the stories of our times are consumed with collapses, extinctions and doom. It’s a playbook for nativists, who see interdependence as a recipe for catastrophe.

Our big narratives were once capable of more nuance than the pendular swing from euphoria to dysphoria. For every 18th-century Enlightenment story of hope, there was a shadow of decline; in the 19th century, liberals had to joust with conservative and radical prophets of demise. Some even saw crisis as an opportunity. Influenced by Karl Marx, the Austrian economist Joseph Schumpeter in 1942 made a virtue out of ruin. There could be something creative about bringing down tired old institutions. The late German-born economist Albert O Hirschman thought of disequilibria as a potential source of new thinking. In 1981, he distinguished between two types of crisis: the kind that disintegrates societies and sends members scrambling for the exits, and what he called an ‘integrative crisis’, one in which people together imagine new ways forward…

Jeremy Adelman, the Henry Charles Lea professor of history and director of the Global History Lab at Princeton, argues that we should look for opportunities in our travails: “Why we need to be wary of narratives of economic catastrophe.”

See also: “The Three Revolutions Economics Needs.

* “Emergencies have always been necessary to progress. It was darkness which produced the lamp. It was fog that produced the compass. It was hunger that drove us to exploration. And it took a depression to teach us the real value of a job.”                               – Victor Hugo

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As we search for silver linings, we might recall that it was on this date in 1728 that John Gay’s The Beggar’s Opera premiered at the Lincoln’s Inn Fields Theatre in London.  It ran for 62 consecutive performances, the longest run in English theater history and second longest run in the Western world up to that time (after 146 performances of Robert Cambert’s Pomone in Paris in 1671).

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Painting based on scene 11 Act III of The Beggar’s Opera; by William Hogarth, c. 1728 [source]

Written by LW

January 29, 2019 at 1:01 am

“Economic theory is the art of pulling a rabbit out of a hat right after you’ve stuffed it into the hat in full view of the audience”*…

 

economic-crisis

Many critics were disappointed the 2008 crisis did not lead to an intellectual revolution on the scale of the 1930s. But the image of stasis you’d get from looking at the top journals and textbooks isn’t the whole picture — the most interesting conversations are happening somewhere else. For a generation, leftists in economics have struggled to change the profession, some by launching attacks (often well aimed, but ignored) from the outside, others by trying to make radical ideas parseable in the orthodox language. One lesson of the past decade is that both groups got it backward. Keynes famously wrote that “Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” But in recent years the relationship seems to have been more the other way round. If we want to change the economics profession, we need to start changing the world. Economics will follow.

From J.W. Mason‘s helpful survey of economic thought since the Crash of 2008: “How a Decade of Crisis Changed Economics.”

* Joan Robinson

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As we contemplate counting, we might send revolutionary birthday greetings to Alexander Hamilton; he was born on this date in 1755 (or 1757, there is some scholarly debate about the year, but not the date).  A Founding Father of the United States, Hamilton created the Federalist Party (proponent of stronger national government than provided by the Articles of Confederation), the United States Coast Guard, and the New York Post newspaper.  But he was probably most notably the creator of the new nation’s financial system.  The main author of the economic policies of George Washington’s administration, he took the lead in the Federal government’s funding of states’ debts, and established a national bank, a system of tariffs, and friendly trade relations with Britain.  His vision included a strong central government led by a vigorous executive branch, a strong commercial economy, a national bank supporting manufacturing, and a strong military…. in all of which he stood most frequently opposed to Thomas Jefferson, who favored agrarian and small government policies.

220px-alexander_hamilton_portrait_by_john_trumbull_1806 source

 

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