Monthly Archives: June 2013

Tyler Cowen offers an optimistic theory about the longevity of the surveillance state:

Let’s say that everything is known about everybody, or can be known with some effort.  The people who have the most to lose are powerful people who have committed some wrongdoing, or who have done something which can be presented as wrongdoing, whether or not it is.  Derelicts with poor credit ratings should, in relative terms, flourish or at least hold steady at the margin.

It is not obvious that the President, Congress, and Supreme Court should welcome such an arrangement.  Nor should top business elites.  More power is given to the NSA, or to those who can access NSA and related sources, and how many interest groups favor that?

Therein lies a chance for reform.

I’m not as sanguine, and I don’t think Mancur Olson would have been either. The security state is a perfect, if subtle, example of Olson’s “dispersed costs, concentrated benefits” thesis. A classic application might be America’s Farm Bill (which costs each of us cents each year, and gives large agricultural many millions, providing incentive to lobby).

Here’s a place to start for this thought experiment. How much would you pay to avoid government surveillance. This isn’t a realistic heuristic, at least to the extent that those willing to pay the most are also most likely to be the ones we want to target. But it’s sound enough to build a public choice logic. I wouldn’t pay more than $10 a year, and even that small change is a reflection of my distaste for the program rather than any rational calculation. Frankly, I just don’t care if all my information is read by a jobless bureaucrat at the NSA.

On the other hand,  a whopping 98% of Booz Allen Hamilton’s revenue comes from the security state. Here’s the nonlinearity, the big “business interests” Cowen talks about perhaps have a Bayesian prior of p = 0.005 that government surveillance will affect their profits negatively – or the probability that information regarding the company surfaces, that it is detrimental, that government would be willing to use it against them, and that it actually effects long-run profits. A long chain. (My point here isn’t restricted to a binary consideration of profits, but makes the abstraction a little bit simpler). And that’s an overestimate, if you ask me. I do believe businesses powerful enough can evade state scrutiny through a plethora of tools, including encrypted networks. Strong corporations also have a good reason to believe were sensitive material to emerge, they can strong arm the government into compliance.

But Booz’s prior that they will benefit from the military-intelligence-industrial complex (MIIC) is asymptotic to p = 1. A better way to put it is their prior that they will be destroyed without the MIIC is p = 1. And there’s a huge number of companies in the most politically connected corners of the country who will have this prior.

Therefore, for Cowen’s suggestion to ring true, the 200*E[cost of MIIC to big business] > E[benefit to MIIC]. That seems extremely improbable to me unless, as some have suggested, the MIIC directly hurts technology companies in foreign countries.

Also remember, we’re discussing metadata aggregation here. This is far more relevant to understanding political trends, indeed it’s what made the 2012 Obama campaign so technologically robust. It seems very unlikely that specific, detrimental, messages – of, say, an affair – would surface beyond the intestinal gears of whatever mining algorithm NSA uses.

This is, of course, so long as NSA doesn’t target businessmen in particular. But even if lobbies can prevent them from doing that, until Americans decide to place a non-negligible monetary value on their privacy, I don’t see the emergence of a permanent security state.

By the way, we know that Americans don’t trust their government. A recent study showed, however, that people respond to surveys with “cheap talk”, as a means to display political affiliation. What if our indifference towards surveillance is a revealed preference that we do, indeed, trust our government?

Brad DeLong has a long and thoughtful discussion on the confusing process of updating his priors in the past decade. The macronarrative is the tension between his prior and posterior of his confidence. At a 2006 lecture on NAFTA, DeLong starts by noting “Usually whenever I standup and talk in lecture, I am talking about something I’m sure I know what I think, and I’m also arrogant enough that when I’m sure I know what I think, I’m also sure I know I’m right”. This post does not exude that same confidence. But the micronarrative is the tension between his prior and posterior on the state of neoliberalism: have we solved the business cycle, are we at the end of economic history?

It’s a long post, and I won’t comment on it all. It’s definitely worth reading and, if you keep up with his blog, not all the sentiments or slides are brand new. I will respond to Paul Krugman’s pithier post disagreeing (for once) with some of DeLong’s comments.

Brad DeLong has a long meditation on policy that, surprisingly, includes some things I strongly disagree with. I guess I should start by saying that when he describes his fairly complacent view of macroeconomics on the eve of the crisis, he’s describing a view that many economists shared — but I wasn’t one of them. Japan’s troubles and the Asian financial crisis destroyed my faith that we had the business cycle under control; I wrote a whole book about the return of depression economics back in 1999.

Paul Krugman first detailed this argument, a year before his book, in 1998 at BPEA, for which Kenneth Rogoff’s opening response was “this is a truly inspired paper on Japan’s ongoing ‘Great Recession,’ although I have to keep pinching myself to ask if the main thesis can really be true”. I hope Rogoff is no longer pinching himself. (Note, one year later, in March 1999 the Bank of Japan became the first central bank in history to engage in quantitative easing policies).

However, Paul Krugman’s general prior with regard to fiscal dominance at the turn of the 21st century – which is the primary object of DeLong’s introspection – could not have been far from DeLong’s, and other “complacent” neoliberals. Indeed I wonder who, in 2003, wrote:

[L]ast week I switched to a fixed-rate mortgage. It means higher monthly payments, but I’m terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits…my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.And as that temptation becomes obvious, interest rates will soar. It won’t happen right away… But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.

Like any intellectually honest man, he recognizes his flaw and notes:

My thinking has evolved. If you haven’t updated your views in the face of new experiences, you’re not doing your job.

At least insofar as the blight of fiscal dominance, which was the import of the discussion, both Paul Krugman and Brad DeLong have evolved substantially. Krugman indeed was definitely more vocal about the return of depression economics as a phenomenon. However, if I sat with Krugman and DeLong, each, a decade ago and asked “what are the odds America will fall into a liquidity trap”, I expect both would find the chance negligible.

That Krugman believed disinflationary expectations challenged the end of business cycles does not mean he thought America would fall victim. There is an intellectual difference, granted, in accepting it could fall victim and rate the probability as negligible and rating the existence of such a probability itself as negligible. However, I have greater concern with Krugman’s take on confidence “imps”:

First, our expectations argument is a hope; theirs is a plan


Which brings us to the second point: those of us hoping to summon the expectations imp want to do so with policies that are at worst harmless, such as expanding the monetary base under conditions where this has no direct inflationary impact. The austerians, on the other hand, have pushed directly destructive policies — fiscal contraction in depressed economies — in order to achieve their hoped-for shift in expectations.

So this is the difference between “Let’s try this possibly ineffective remedy, it might work and in any case won’t do any harm” and “Let’s do the opposite of what standard analysis says we should be doing, just trust me”.

On the one hand, I’m bound to agree because I think confidence vigilantes are hardly a problem with the massive demand for safe assets and the American dollar. On the other hand, it misses the ideological Turing Test in its sweeping indictment. We must always consider the priors of those who advance a certain theory. This is like Krugman saying “bond vigilantes are wrong because, well they’re wrong”. DeLong is not unlikely to agree with Krugman on this point, but notes the structural and mechanistic similarity between the confidence fairy and expectations imp (god damned “animal” spirits!). One advancing the confidence fairy argument:

  • May take a Treasury view prior, or believe in monetary offset and hence disregard austerity as bad for growth.
  • May believe inflation is a serious risk.

Neither of these views lend themselves to Krugman or DeLong, but do not divorce the mechanistic similarities between the two spirits. So it’s really not “the difference between “Let’s try this possibly ineffective remedy, it might work and in any case won’t do any harm” and “Let’s do the opposite of what standard analysis says we should be doing, just trust me”.” Because that would be like (logically) begging the question.

The distinction between “hope” and “plan” is even more confusing. And it also really depends if you talk to New or Old Keynesian Krugman (or Krugman the academic vs. Krugman the blogger). He has as much a plan – via a standard IS-LM – as do the austerian types. It’s just a better plan, but that makes it a plan nonetheless. But his word choice is even more confusing. Krugman says that “we have a hope”, “they have a plan”, and yet uses this language to describe their “plan”:

I want the Fed, the Bank of Japan, etc. to target higher inflation, in the hope that it might help, but it’s a hope, and meanwhile we need to fight demands for fiscal austerity and even push for stimulus. The expansionary austerity types, on the other hand, are (or were) actually counting on the supposed rise in confidence to avoid what would otherwise be nasty recessions, which have in fact materialized.

Replace “counting on” with “hope” and tell me if the semantics change? Am I equivocating something? Have I misunderstood? Perhaps. But also, Krugman’s hope is as much predicated on a plan for something else. Furthermore, insofar as we’re only talking about one country, it’s entirely possible to kickstart inflation. As he himself brilliantly put it, the Bank of Japan must “credibly commit to be irresponsible”. That sounds like a plan. A hopeful one, but a plane nonetheless.

To me the similarity between confidence fairies and expectations imps ends at the mechanistic level. But I didn’t even think about it until Brad DeLong pointed it out, so I feel the smarter for it. I wrote this post because after reading Krugman’s post I was quite confident I didn’t feel stupid for feeling smart earlier. So I wrote this post; and maybe I haven’t updated my confidence levels as much as DeLong has, but that’s a sign of ignorance more than anything!

By the way, I think Paul Krugman has been the most astute academic through this crisis. Economic history textbooks will note his prescience and forceful blogging. That doesn’t mean he’s always right, and I think this post is a good example.

A lot of people are talking about labor’s declining share of economic output, de-unionization, and stagnating median wages. These three phenomena don’t have to be causally linked, but there tends to be a bit of hand-wavy rhetoric to this effect. Considering the political centralism of labor as an idea, this isn’t surprising.

The link between the median worker and labor share is today tenuous at best. Labor share falls when investment analysts or doctors are replaced with high speed algorithms and robots. Labor share also falls when a farm hand is given a high-powered tractor. I happen to think that both of these are great trends. Remember, capital productivity is the only way to keep expensive American labor competitive on an international market.

A conversation about “labor’s share” divorced from one about distribution of human and physical capital will lead us to profoundly confusing results. Important to note at this point, division of income is not a question on redistribution. Certain European countries have deeper safety nets, and that may well be a desirable goal, but it’s ridiculous to think that we’re at a point where more redistribution, especially through the right channel, will fundamentally distort the labor-capital dynamic. This is relevant both to conservatives who believe a higher tax rate is inherently distortionary as well as liberals who want bigger labor as an end in and of itself. I don’t want people to think that accepting a declining labor share requires an abdication of the welfare state.

The debate about labor share is often intimately connected with that about unionization across the rich world, which has been in secular decline for the past quarter-century. However, it’s unreasonable to think that reunionization, by itself, would elevate labor. To maintain employment with high union density, we would need to make it difficult to hire and fire workers. We would need to reinstitute protectionist tariffs. We would have to devalue the dollar more than otherwise. In other words, we would need to dismantle the very system of free trade we’ve built for over half a century. So the question about share of GDP is more about overall labor policy, than unionization itself.

This is to say that, in a globalized world, were we to reinstitute industrial policy, corporations would flee. This assumes that a large part of labor’s decline has come from international competition but, as Timothy Taylor here notes, the decline is shared across capital and labor intensive sectors; murky factors at least vaguely connected with globalization are key.

None of this would make labor richer. It would increase its share of the income and, perhaps, even decrease inequality. Let’s consider the counterfactual wherein we maintain our unions in relative strength over the past three decades. We would probably look like France (where capitalists can’t close factories).

In France:

  • Labor protectionism (like making impossible to fire workers or close factories) is the mantra versus America’s “flexicurity” (things like unemployment insurance or reemployment credits).
  • Labor share is of GDP is about 70% versus America’s 50%.
  • Labor share has increased by 10 percentage points over the past two decades; it has decreased by the same amount in the United States.


  • America has the highest disposable income in the OECD (a measure I like much more than pure per capita GDP; and this includes oil-crazy Norway). Compare its $42,050 with France’s $27,452. That’s 155%.
  • But I don’t need tell you America’s rich. Our labor force is also pretty robust. We have a natural rate of unemployed at about 5%. It’s 7.7% in France. Another way to read that is our unemployment during a cyclical-crash is better than theirs in equilibrium.

But hey, at least labor gets all the income, right? Oh, and as it turns out – this is news to me – union density is actually a little higher in the United States. I don’t take this to mean much as we’re gouging organized labor here across the pond, but it does refute the naive “unions increase labor share” theory some advance. It also confirms my point that successful unionization (in the sense of a higher labor share) requires locking labor markets like the French.

America is no doubt richer than most countries for a variety of reasons entirely independent of flexible labor policy. But generally low unemployment rates (we’ve adjusted rather well to China so far, and employment didn’t plummet after the construction bubble blew) are a sign that labor policies don’t benefit, well… labor.

Median wages have stagnated this decade. That’s sad. But maybe it has nothing to do with the fall of unions and/or labor share of GDP. It’s better than wage decline which might have been the result of confused policies. There are two reasons it sucks to be a median worker in America today:

  1. Physical capital is exceedingly owned by the rich, so you can see where a rising capital share goes.
  2. Human capital is a big part of “labor’s” share, and that’s also disproportionately spread.

To fix this, we need an imaginative safety net that distributes capital, not cash. Ideally, we would have some kind of inheritance tax that takes all capital stock at death, throws it into a fund, and progressively distributes ownership thereof. This becomes hectic with family-owned businesses and small plots of land, and requires another post to tease out, but in theory it does the job.

We also need to educate the “poor” in a better way. This means more blue-collar jobs, believe it or not. We’ve been spending lots of money on graduating Bachelors, but what we need is technical schools that teach everyone solid engineering and calculus. Not the kind that you need to understand marginal economics, but make America competitive in the “upper blue collar” category. (And, for what its worth, “lower blue collar” guys also use more math than the median white-collar worker). We also want doctors to be paid fairly, which is to say a lot less than what they are now. How do labor share advocates support that?

Two-year colleges are cheaper and, most importantly, let you live with your parents. This is an inexpensive, supply-side tool that’s woefully underutilized as far as “labor” is concerned. By the way, this might cause capital share of income to increase: but only because the median worker can use advanced tools more efficiently.

It’s vogue to criticize the marginal productivity theory of wages because workers have gotten a lot more efficient without seeing a commensurate increase in wages. There’s a lot of merit to this claim, but it’s important to note that global competition has eaten any would be raises; the question is to track wages in the counterfactual exclusive of India and China.

Ultimately, fighting capital as France does is a loosing battle for labor. The safety net should come from capital redistribution and flexible stabilizers like unemployment insurance and reemployment credit. This makes it easier to hire and fire, both signs of a robust labor market. It’s time to start talking about labor and not Labor.

As if to mock the current intellectual conversation on “derp”, Niall Ferguson has a new column in the Wall Street Journal arguing that regulation is the cause of all American decline. I am happy to report to you that, in this special Niall Ferguson edition the “ease of defeating derp” remains quite high.

Starts Ferguson:

Not everyone is an entrepreneur. Still, everyone should try—if only once—to start a business. After all, it is small and medium enterprises that are the key to job creation. There is also something uniquely educational about sitting at the desk where the buck stops, in a dreary office you’ve just rented, working day and night with a handful of employees just to break even.

“Everybody go become an entrepreneur” profoundly fails Kant’s categorical imperative. Also, mind you, this is the “Laurence A. Tisch” professor at Harvard telling us the virtues of “sitting at the desk where the buck stops, in a dreary office you’ve just rented, working day and night with a handful of employees just to break even”. Anyway, here’s Ferguson’s wisdom from his “experience” as a serial entrepreneur:

As an academic, I’m just an amateur capitalist. Still, over the past 15 years I’ve started small ventures in both the U.S. and the U.K. In the process I’ve learned something surprising: It’s much easier to do in the U.K. There seemed to be much more regulation in the U.S., not least the headache of sorting out health insurance for my few employees. And there were certainly more billable hours from lawyers.

Before I talk about this, let’s set context with this random quote from Ferguson’s article:

Consider the evidence from the annual “Doing Business” reports from the World Bank and International Finance Corporation.

Okay, Ashok, let’s “consider the evidence” from World Bank’s “Doing Business” reports:

Country/region 2013 2012 2011 2010 2009
Singapore 1 1 1 1 1
Hong Kong 2 2 2 2 2
New Zealand 3 3 3 3 3
United States 4 4 5 4 4
Denmark 5 5 6 6 5
Norway 6 6 8 10 10
United Kingdom 7 7 4 5 6
South Korea 8 8 16 19 23
Georgia 9 9 12 13 16
Australia 10 15 10 9 9

To use technical jargon, “ruh-oh”. So you’re telling me the three non-entitites that are “easier” than America have a sum total population less than… the New York metro area? Oh and what “regulation” does Niall Ferguson hate?

Why is it getting harder to do business in America? Part of the answer is excessively complex legislation. A prime example is the 848-page Wall Street Reform and Consumer Protection Act of July 2010 (otherwise known as the Dodd-Frank Act), which, among other things, required that regulators create 243 rules, conduct 67 studies and issue 22 periodic reports. Comparable in its complexity is the Patient Protection and Affordable Care Act (906 pages), which is also in the process of spawning thousands of pages of regulation. You don’t have to be opposed to tighter financial regulation or universal health care to recognize that something is wrong with laws so elaborate that almost no one affected has the time or the will to read them.

Because Obamacare and Dodd-Frank were both (!!!!!) passed in 2010, I imagine America’s ranking must have crashed from 4 to…. 5. (And it’s back down to 4, by the way).  For all its flaws, the Doing Business report is a lot more comprehensive than Niall Ferguson’s word. I bet Silicon Valley entrepreneurs are running away to “New Zealand, Australia, Singapore, Canada, Hong Kong and the United Kingdom” to create their billion-dollar startups. Oh and I hear the credit is oozing through Britain. Oh wait…

So not only does Niall Ferguson have the balls to cite a report that directly contradicts his opening speech, he goes on with irrelevant comparisons:

The decline of American institutions is no secret. Yet it is one of those strange “unknown knowns” that is well documented but largely ignored. Each year, the World Economic Forum publishes its Global Competitiveness Index. Since it introduced its current methodology in 2004, the U.S. score has declined by 6%. (In the same period China’s score has improved by 12%.) An important component of the index is provided by 22 different measures of institutional quality, based on the WEF’s Executive Opinion Survey. Typical questions are “How would you characterize corporate governance by investors and boards of directors in your country?” and “In your country, how common is diversion of public funds to companies, individuals, or groups due to corruption?” The startling thing about this exercise is how poorly the U.S. fares.

I think it’s “known unknowns” but, hey, as a neo-imperialist I’m sure you know Donald Rumsfeld way better than I (and, in that case, can someone please explain to me what the hell an “unknown known” is). But, because of people like Niall Ferguson, the decline of American institutions, incidentally, is secret. Regulation is bad in America, but it’s the fundamental distrust George Bush instituted to wage Niall Ferguson’s war that made it okay to start invasions with a lies, and from that we may never recover.

I don’t want to place the mantle of failed imperialism only onto Ferguson, but no one better embodies the neoconservative who knows so little of what it means to be an American, and to be a republic. It is the lying, militaristic, interventionist terror which Niall specifically endorses that has eroded our institutions.

Not the one legislation that is meant to bring peace of mind to the millions of uninsured Americans who, by the way, won’t have the courage to give up wage-work to “start a business”, as Niall would have them do, without universal guarantee. But his only refrain to randomly-selected reports with meaningless indices is, literally, “In every single category, Hong Kong does better”. Well, no freaking shit a port city of 7 million with finance as its sole industry does better than the whole of America.

This man just doesn’t get it:

Yes, we Americans have the right to be stupid if we want to be. We can carry on pretending that our economic problems can be solved with the help of yet more fiscal stimulus or quantitative easing. Or we can face up to the institutional impediments to growth I have described here.

In fact, if there was such an adjective as “American”, Niall Ferguson is the last person that would come to mind. I’d like to see him produce one prominent intellectual who suggests “fiscal stimulus or quantitative easing” are all America needs. Niall fights against a straw-man to create an argument of smoke and mirrors.

Folks, this man believes America should imperialize the world and bear the white man’s burden. If one thing has poisoned our institutions, it is such neoconservatism. Indeed eroding trust in America’s institutions and a burgeoning regulatory state is bad for economic growth, but this should be argued in a measured manner. America is still leads the world in an innovation ecosystem that is unlikely to be surpassed any time soon. Cass Sunstein offers a way to a smart and effective regulatory state. But two, long, bills do not a declining country make.

Note: I’m trying to tentatively oodle and sketch my thoughts here. Forgive idiocy. 

There’s no doubt that tight money in Europe is crippling its economy. But today’s job report should make you think twice about QE, at least under the Evans Rule. Soon after we saw the numbers, DJIA soared by over 165 points in just a few hours. Here’s the problem, markets are responding to a bad, not good, report.

When the Evans rule is contingent on unemployment rate, rather than job creation, the flatline since May has eased investor worries about any “tapering” of bond purchases. We should see Treasury yields fall within the next few days. This is counterintuitive, if the Evans rule worked correctly: meek aggregate demand should chill the markets (or at least not cause them to jump in joy).

One interpretation of these results is the so-called “wealth effect” of quantitative easing, where consumers and investors suddenly start spending more because they feel richer, is a lot weaker than previously believed. If the wealth effect were strong low wage growth  would worry investors about weak demand. (And Scott Sumner correctly argues that the small increases are a supply side phenomenon).

And in a normal market, that’s exactly what would have happened. However, the Evans rule is framed so oddly that stock markets can, for a very long time, benefit directly from a stagnating economy. Investors are now reassured that QE will continue. They are dreading a real recovery. Even if policy was contingent on monthly job creation, today’s report would have assured investors, but at least that response would be measured by the economy itself, than an artificial statistic.

Even then, the perversity of QE is clear. Obviously, considering QE’s transmission mechanism, asset prices have to increase. However, we should at least believe that a lot more of the stock market boom in the past few months is QE and AS rather than improvements in demand. Otherwise, today’s jobs report should have been met with a “meh” response from the Dow.

The thought experiment is this. Let’s say May was a fantastic month, and the BLS prints a fabulous report. Would the stock market go up? To the extent it falls, or doesn’t rise as we would hope to aggregate expected growth (which is high, because the market knows the economy has done well) – QE is a distortionary force. It’s not a bubble, but it clearly confuses markets.

A well-designed QE policy would offset the market effect of information from the jobs report vis-a-vis its “natural” trend. What does this mean? If the job market was booming investors would face two countervailing forces 1) an expected tapering of QE and 2) increasing consumer confidence and demand (which moves in line with the market). If the jobs report sucked, investors would be confident in continued QE, but worry about falling demand.

This is a sterile design that doesn’t approximate the real world, but can inform what a correct QE policy would look like. For one, the value of asset purchases would be proportional to (or correlated with) job creation.

I suspect this is a rather confused post, but I’m trying to collect my thoughts. Hopefully I can produce a more detailed and cogent post later.

Indian newspapers are pretty gloomy right now – inflation, laggard growth, and a falling Rupee don’t make for a great  diet. Before I tell you why to be optimistic, I should define my terms. Optimism could be a resurgence to double-digit growth rates. That seems unlikely without a robust recovery in China, America, and Japan. Optimism could be a rapidly falling poverty rate. But that’s a really low bar for poor countries in India’s convergence club. To many here, it could be about India’s relative position to China. But that’s boring. I’ll loosely define optimism as the confidence that a good number of pundits short on India today will be be seen as myopic in five years.

Many standard economic indicators – government surplus, growth, and balance of payment – flatlined or dropped during the crisis and its aftermath. However, these are cyclical trends that have little bearing on future growth. In contrast, China has done exceedingly well in all of the above. But India has, to use a technical term, kicked ass in one indicator: real credit depth.

According to the World Bank, domestic credit provided by the banking system has grown from just over 60% of GDP in 2007 to almost 75% today. For reference, Brazil has flatlined around 95% and China at 140%. India has a long way to go, but the domestic banking system’s resilience to financial crisis and inflation makes a strong case for its structural health. 

India’s relatively shallow credit markets means we have a long way to go, and that’s cause for celebration. Further, India’s credit position relative to Brazil is more a reflection of a gradual, rather than immediate, liberalization of the capital account. Deep and liquid credit markets dampen entrepreneurial barriers to entry and hence encourage competition and innovation. That India’s savings rate has remained steadily high throughout an increase in credit suggests a more efficient allocation thereof. This, a secular trend, is rather more important than a volatile growth rate.

The government has further demonstrated a commitment to price stability, contrary to popular belief. The reason is subtle – the time at which India started offering inflation-indexed bonds (IIBs). There are three main “clubs” of countries that issue such bonds. First, Latin American countries with runaway inflation found IIBs the only entry into long-run capital markets. Second, countries like Britain and Australia which issued IIBs in the 80s and 90s as deliberative action to signal creditworthiness. Finally, America, issued the TIPS only as recently as 1997 as a means to long-run investor welfare. 

People are quick to place India in the first category but, as late as April, the wholesale price index (WPI) had fallen below 5%, less than half its double-digit peak. It’s curious, then, if the government were concerned about the inflation risk premium, why it didn’t issue IIBs in the heyday of price instability. By anchoring expectations before the first auction, India is best approximated by the second group, signaling a willingness to control prices in the long-run.

Relative to other developing countries, India’s vibrant democracy will reinforce bond market confidence as a welfare state emerges. The biggest guarantee American bondholders have against default are its pensioners, and the electoral bloodbath that would result. Therefore, there’s both an economic and political incentive not to default. Most Indians don’t own much wealth, at least not linked to its bonds. However, once a formal savings-based welfare state emerges, India is in a far stronger position than countries like China, which have only an economic incentive to avoid default.

Obstacles to this in the near-term include a deeply underbanked country, but that serves as reason for confidence not pessimism. With emerging electronic money transfer technologies, the financially-excluded are becoming more a low-hanging fruit than a pariah of the country. (This is a big bet, but in the long-run its one I’m more than willing to make. If a majority of the country remains excluded by 2020, call me out). 

Despite political instability in this government, it is likely that in the medium-run India will liberalize retail and finance to a much greater extent. The benefits of retail freedom are immense, as we know from Japan, mostly via indirect “knockback” effects. Larger and scaled firms like Walmart will invest in a deeper supply-chain providing India the cold-chain system which it desperately needs. Furthermore, competitive retail markets demand efficient input markets, thereby “percolating” efficiency through the system. 

Financial liberalization is trickier – even ardent free market economists like Jagdish Bhagwati note that capital accounts are precarious (they learn from 1997, and Indian resilience therein). Most importantly, a clearer statutory central bank independence is necessary. By many stalwarts (including India’s chief economic adviser, Raghuram Rajan), the Reserve Bank of India (RBI) is seen complicit in runaway deficits, by keeping capital reserve requirements high and thereby creating a captive demand for debt.

Recent success in taming inflation convinces me that smarter independence is on the horizon. It’s not unreasonable to expect that India will end preferential lending schemes, thereby capitalizing on the deepest benefits of a liberal economy, which are indeed self-reinforcing. 

Ultimately, a 4.5% growth rate is pretty shabby, and for many the outlook seems bleak. In five years, I imagine (and hope) that all the BRIC bears will wrong. But there’s cause for reason that India’s will be wrongest of all. 


The recent introspection about “reformist conservatism” hasn’t provoked anything of the sort among liberals. Current policy failures and existence of conservative opposition masks an emerging rift between the “two liberals”. On the infinite horizon, to the extent current philosophies are not murdered by revolutionary technology, this rift is more important than any ferment in the conservative camp. As capital share of income rises, most of America will become either of these two liberals. (Note: please forgive the liberal, for wont of a another word, generalizing in this post, I do my best to capture the spirit of my perceptions).

The first liberal is broadly typified by writers like Matt Yglesias, Josh Barro, (usually myself) and, in some odd form, Tyler Cowen. The first liberal believes the West is at and beyond the economic end of history. He believes that in this ahistoric world, economic tensions are a problem of calculation, and hence redistribution. His primary economic weapon is tax-and-transfer. He is liberal because he sees an inevitable, and perhaps even preferable, growth in government.

The second liberal is broadly typified by brilliant writers like Dean Baker, Steve Randy Waldman, Dani Rodrik, Mike Konczal (I feel like I’m drifting over, sometimes). This liberal is a full-blooded believer in liberal democracy and, hence, capitalism. But he still sees the world as a tension between labor and capital. He sees smart government regulation and protection as its key weapon (though he is always happy to raise the tax rate). It would be tragic for him to accept that this is the end of history; there is so much farther to go for the American worker.

A rift between these two liberals can already be seen with regard to immigration. Matt Yglesias (rightly) doubts low-skilled immigrants will decrease native wages. But, even if it did, it doesn’t matter, because we can just tax land and capital more than we do. The second liberal (rightly) believes free and open immigration weakens the position of American labor, and competition. He is more likely to discuss high-skilled immigration in terms of bringing down a doctor’s wage (as it ought to be) than innovation and growth.

The first and second liberal also battle it out on the Federal Reserve. Both are quick to agree that today’s disinflationary policies are a disaster, and support easy money. Both will also jump at Scott Sumner for saying that “NGDPLT is the end of macroeconomic history”. But the second liberal is more skeptical of market monetarism, and even quantitative easing (though, for the record, not Dean Baker). As a principle, he wants more inflationary policies because he sees the tension between debtor and creditor through the same lens as that between labor and capital. In his gut, he feels there is something status-preserving about the Federal Reserve.

Both liberals broadly agree that some form of single-payer healthcare system is optimal. But the first sees healthcare as a brutal failure of markets with opaque information and asymmetric hospital power. The second sees the failure of America’s market healthcare system as a broader vindication of a government-centric ideology.

This core battle does not map well onto our party landscape. The first liberal isn’t really more conservative than the second (as I’ve certainly made it sound), but sees his progressive mandate through a different prism. Unlike Republicans, Democrats are not a party defined by ideology. Indeed, the second liberal might resent Bob Rubin’s globalist policy as an extension of the broken Washington Consensus. But the second liberal also lies to the right of the first when it comes to TARP. Like me, he believes saving Wall Street squandered a golden opportunity to save both American finance and capitalism. But the two liberals can become one.

The future of liberal consensus will find its answer from the past, in the work of John Rawls and Karl Marx. Indeed, from each according to his ability to each according to his need must become the masterpiece of redistribution. Rawlsian thinking will be slow to manifest for no other reason than the sheer brilliance of the two liberals. Ivy League graduates, generally far to the American left, are happy to pay more in taxes and cede they are lucky by nurture. But they are allergic to the idea of luck by nature. That work ethic, intelligence, and genetic code itself is not fundamentally theirs is a foreign thought.

The first liberal moves to his counterpart as the myth of meritocracy evaporates. The second liberal moves to his as the consumer surplus from a technological world – to worker and owner – becomes self-evident. Politically, today the two are aligned against needless austerity and worry about the rapidly growing inequality.

Ideally, if America was rich enough, the two liberals would reach consensus for a generous, universal basic income. As it stands under today’s tax code, any non-negligible universal income would cripple our welfare state and military obligations. Rather, policy framework in the near, postindustrial future should rely on limiting transfers but guaranteeing employment. This strikes a balance between the redistributionist and labor protectionist by expanding labor supply and encouraging flexible labor markets.

With conditionally-guaranteed employment, all liberals will be free to advocate broad immigration reform and employers will feel free to hire and fire at will (as it ought to be). This can be effectively achieved through a labor market auction program on a state-by-state basis under federal subsidy.

The details behind this are tricky, but express the point that the two liberals will not necessarily be far apart. Indeed, as long as the non-reformist conservatives who desire draconian cuts to government are forceful – as it is – the interliberal tensions will remain asphyxiated. However, recognizing this rift as it becomes evermore evident is a potent predictor for future debate among the Democrats. It remains to be seen the extent to which the two liberal wonks are divided at the political level.

Know this, the last liberal will live and die by John Steinbeck:

 “The last clear definite function of men — muscles aching to work, minds aching to create beyond the single need — this is man. For man, unlike anything in the universe, grows beyond his work, walks up the stairs of his concepts, emerges ahead of his accomplishments. This you say is man — when theories change and crash man reaches, stumbles forward, painfully, mistakenly sometimes. This you may know when the bombs plummet out of the black planes on the marketplace, when prisoners are stuck like pigs, and the crushed bodies drain filthily in the dust. If the step were not being taken, if the stumbling forward ache were not alive, the bombs would not fall, the throats would not be cut. Fear the time when the bombs stop falling while the bombers live — for every bomb is proof that the spirit has not died. And fear the time when the strikes stop while the great owners live — for every little beaten strike is proof that the step is being taken. In this you can know — fear the time when manself will not suffer and die for a concept, for this one quality is the foundation of man self, in this one quality is man, distinctive in the universe.

Since the time of Adam Smith, market-oriented economists have devoutly argued that capital accumulation is the path to ever-greater wealth (actually, Smith believed perpetual growth was limited by the division of labor). The “religion of accumulation” is the mother of tax-preferences for capital income. (The current tax system is a far cry from a land and resource oriented program, which I prefer, but that’s not likely to change).

In light of the recent Munk Debate, where odd couple Paul Krugman and Art Laffer agreed that the capital gains tax preference was inefficient, Evan Soltas refutes that “investment is really deferred consumption” and this preference actually dampens distortion in our tax code by encouraging people not to switch consumption forward in time. It’s worthwhile pointing out that there’s nothing inherently “left” or “right” about this debate. We can end the preference (though, technically, not the loophole) for capital income as much by decreasing top income tax rates as increasing capital rates.

Contra Soltas, Felix Salmon notes:

Investment really isn’t deferred consumption. The amount of money invested, in the world, is going up over the long term, not down — which means that once you look past the natural tidal movements of money in and out of various investment vehicles, it’s reasonable to say that money, once it gets invested, stays invested.

Felix’ ultimate point – that capital gains preference is clogging up money in a slow-moving investment vehicle – may be correct. But to say that investment is not deferred consumption because it’s never disinvested is roughly similar to arguing that deficits aren’t borrowing if we just roll them over and our growth rate exceeds the interest rate.

At the margin, an increase in the capital gains tax would decrease my investment in the stock market and increase my current propensity to consume. More importantly, it’s not necessarily the quantity of fixed investment that’s important (just like, in a rough analogy, the rolled-over debt in absolute is not important) but its relation to national income. Here’s a graph of net fixed capital formation as a % of output:


By the way, investment’s share of output is up-and-around 16%, well-below the 40% threshold suggested by the Ramsey Model (at which point fast depreciation makes further capital investment unprofitable). This per se is not an argument for the tax preference, but does suggest the marginal investment is not welfare-defeating, as Salmon implies.

However, as the title suggests, I am rather agnostic about about this big loophole. Capital accumulation hasn’t done wonders for the median American. Sure, we have a lot more unrealized utility from consumer surplus than we used to, but most of that comes from the technology revolution which isn’t capitally-intensive. Most of it is software derived from human capital (which is relegated to an afterthought in Soltas’ piece).

The mobility of capital ownership is dead, and that makes this loophole all the more damning. But the crux of Soltas’ argument can be applied to progressive ends. Preferably, the $161 billion in budget shortfall from the capital gains preference can be closed, financing government investment in deteriorating bridges, power grids, and airports.

Theorists will tell us that government is less efficient at allocating capital, and that might be true, but ignores a government mandate and competitive advantage in ultra-large scale projects like power grids, nuclear plants, and road systems. These are investments that increase net capital formation to the benefit of society as a whole. The latter is something our capital gains preference ignores completely.

More importantly, removing all loopholes simplifies the tax code and would allow a more efficient allocation of resources, which are currently tied up in the “tax industry” (lawyers, TurboTax coders, accountants, advisers, launderers, etc.)

As a footnote, when Soltas’ suggests “subsidizing human capital” it’s very important to point out that almost all incomes over 250,000 (before which capital gains are both irrelevant and untaxed) are human capital gains. Almost none of it is natural, but created through long investments learning a trade, going to grad school, and just being an engaged person. (Bill Gates might have dropped out of Harvard, but all the time he spent coding in high school is an investment in human capital).

The answer, perhaps, is a lower tax rate at the top that is applicable to all incomes, and the implementation of a land value tax to make up for any lost revenue… But now I’m getting too close to my ideal plan.

Some afterthoughts: Actually, everything else equal, I’d rather just run a higher deficit and cut taxes. But I’d rather the marginal deficit finance government spending than loopholes for the rich. Also worth noting that the progressive tenor of this post changes if capital ownership was more equitable, and I’d prefer a secular trend to that effect, but can’t detect any perfect policy so far. Further note that Soltas’ isn’t necessarily to the “right”, and Salmon to the “left”. I’m sure Art Laffer would like equal treatment at the current capital gains tax rate.

Wikipedia defines the social discount rate as “a measure used to help guide choices about the value of diverting funds to social projects. It is defined as “the appropriate value of r to use in computing present discount value for social investments.” Determining this rate is not always easy and can be the subject of discrepancies in the true net benefit to certain projects, plans and policies.”

The social discount rate often stars in discussions about climate change. Take the forceful argument against a carbon tax, from Jim Manzi:

Nordhaus offers a thought experiment to demonstrate just how unrealistic [such a low discount rate] is: Imagine a scenario in which global warming would lead to zero costs between now and the year 2200, at which point global economic growth would be permanently reduced by 0.1 percent — in other words, that economic output starting in 2200 would be 99.9 percent of what it would have been had there been no global warming. Under this scenario, how much should we be willing to pay today as a lump sum to avoid this cost? Using the assumptions of the Stern Review, Nordhaus points out, we would pay about $30 trillion, which is more than half of the world’s entire annual economic output. Thanks, but no thanks.

As it happens, I find it hard to square my (relatively) utilitarian bias with anything but negative inverse (back in time) social discount rates. However, I disagree with Manzi’s argument for several reasons. Most obviously, it falls flat once we note that tax has to be collected somehow and each dollar from pollution is better than one from income (why Manzi, a conservative, ignores this is beyond me). Climate disaster also poses a tail risk that can’t easily be imported into a standard discounting model. I also happen to care about the wildlife and natural cost of a solvable problem.

Many liberals – and perhaps the “we’re burdening our children with debt” conservatives – will jump at the idea of a high social (or negative inverse) discount rate. That, after all, means we shouldn’t invest in schools or roads, that we shouldn’t fix our power grid and build libraries. But that’s not what I’m arguing at all. In fact, I’m not arguing anything that has direct relevance to policy itself. I think it’s first important to design a more lenient intellectual framework for this discussion.

I’ll call it the generational discount rate: that is, how do we discount one unit of utility for a discretely antecedent generation from our own. (). Defining “generation” is difficult, especially with the rich web of relationships and obligations in the modern world. However, I’m making what will become a historical argument, so we can take the long view. So note “generation” as: the discrete time step at which the last person alive today dies. The next generation would begin sometime around 2130 (incidentally when the really calamitous effects of global warming will begin to emerge).

Of course, you’ll note, the “generational sequence” is path dependent, which results in an almost infinite number of “paths” back in time to a previous generation. Where you “start” tracing time is crucial in the discrete breaks between one generation and the next. However, this friction is largely an inconvenience that doesn’t alter the point I’m about to make.

Important to note is that the social discount rate is usually concerned with the rather tangible measure of “consumption”, whereas the generational discounting pertains to the the more metaphysical idea of utility. Ultimately, the philosophical idea behind consumption and utility are not too different: to what extent will we defer happiness today for even greater happiness tomorrow, an introductory finance book might ask.

Indeed, the idea of social discounting is intimately connected with that of redistribution. By ordaining a high social discount rate, other things equal, we’re bringing future consumption into the present. Similarly, someone could quite naturally define a “kinship discount rate” which measures the extent to which someone will be willing to help a friend or family member based on “steps removed”. This framework also – at the broadest level – captures modern redistribution. Americans pay lots into social security to help their own, and a little into USAID to help Ugandan peanut farmers.

Discounting, in some abstract sense, is therefore the key to understanding means of redistribution. The word normally concerns space (tax dollars from Beverly Hills to the Bronx; from America to Africa), but is of equal relevance to distribution through time.

Indeed, inequality through time is far deeper than that across space. Of America’s total output – ever – imagine the disproportional accrual to those by total luck living between 1975 and 2025. The incredible utility from modern American medicine, transportation, communication, and entertainment: freely available to all? That is the reason for against a positive generational discount rate (which values equal utility in generation t more than generation t-1). A low generational discount rate then suggests that, ideally, we should take some percent of our current utility and send it back in time. Not just to the first American; but to the first man.

(As an example, the total economic income earned by someone between 1950 and 2050 is far less than what I will earn ipso facto between 1995 and 2095. It is then incumbent on me to tolerate higher taxes in the future to equalize our income to the extent possible. That 25% of America’s elderly fall below the poverty line is sign that we should be expanding benefits in any “reform”).

From standard utilitarian creed, in which I fall, it is of unimpeachable ethic that I should sacrifice just a little bit of my happiness to help those slave to a Malthusian world. Here it becomes very clear, for physical and not economical, reasons why backward redistribution of utility (though impossible) – and not income – is the lowest common denominator. Were we to redistribute income, denizens of history would invest more and we ourselves would be richer. This derives from basic principles of time travel and spacetime to which neoclassical economics is immune. Therefore, I prefer to mull within a framework of utility which is, after all, the charge of a utilitarian.

But the generation discount rate can’teven if it is welfare efficient, fall below zero! This is the most damning zero lower bound, of them all: liquidity traps pale in comparison to the almighty generational discount trap! But, unlike the European Central Bank, when market conditions dictate you bring rates below zero, you should at least bring it to zero. And our current policy does not reflect this thinking, at all. The whole “debt is hurting our children” argument is crap because:

  • It’s only hurting American children. Chinese kids will do great from American interest outflow, thank you very much.
  • Our kids our going to be richer than us anyway, because of technology we invented, because of economic growth, and because of a million other things. We should do as much as we can to borrow from them!

Of course, not everyone can think like this. We’re not actually borrowing from our kids. America just has a low generational discount rate whereas China’s is quite high: it all has to balance out (it would be genius if we could all figure out how to borrow from our kids, but this would break the global zero lower bound).

But I told you, I’m not arguing against investment in research, education, and infrastructure. After all, I wouldn’t want all the generations to be “equally poor”. However, the next time we hear on the TV that the social security retirees are taking everything away from our youth, remember we are rich as we are today because of that generation. They gave us Microsoft and Apple, Netscape and Mosaic. Economic growth is path dependent, and if the previous generation were a bunch of bozos, we the millennials would be the poorer for it.

The answer to the tension between redistributing utility forward in time (until the zero lower bound, at least) and the need for economic growth can be realized from both a low generational and social discount rate (remember, one is backward and the other is forward in time – so it’s really the opposite). Here the length of one “generation” matters a lot, but that’s why I like my Randian definition: it concerns “we the living”. A low social discount rate means we build the roads for our kids and even grandchildren, it means we give them the education they need to prosper.

But a low – even zero – generational discount rate means we want to do our best to redistribute utility back in time. (Remember, in this little philosophical game, that means our future kids give us utility as well). That means, social security and Medicare are not in fact unethical. It means consumption for this generation, is what the driving policy ought to be.

The normative tension arises primarily from the definition of “generation”. Mine is rather long, and hence not dangerous. Thomas Jefferson thought a “generation” was 19 years, and that would be disastrously myopic under this framework. This is a subjective question for moral philosophers. But I will personally no longer bemoan the principle of “borrowing from our kids”. At 18, I am sure I and my friends will be largely responsible for repaying any deficits incurred towards elderly entitlements, but that redistribution is one utilitarians shall be thrilled to commit.

Think not just space, but time.

P.S. It really doesn’t matter whether you think “forward” or “backward” in time. A forward generational discounting (like the normal social discount rate) would result in a “one upper bound”, if you will.

Alex Tabarrok comments on a cool new study, as explained by Dylan Matthews:

But when there was money on the line, the size of the gaps shrank by 55 percent. The researchers ran another experiment, in which they increased the odds of winning for those who answered the questions correctly but also offered a smaller reward to those who answered “don’t know” rather than answering falsely. The partisan gaps narrowed by 80 percent.


The authors conclude that false answers — like Democrats saying that casualties in Iraq increased from 2007 to 2008 — are just cheap talk, a way to signal a party affiliation rather than a sincere belief.

“Persistent partisan gaps, if sincere, suggest important limitations to democratic accountability. If Democrats and Republicans perceive different realities, then the incentives for incumbent politicians to pursue policies that generate objectively good policies may be reduced,” they write. “Our results imply that such concerns are overstated. Democrats and Republicans may diverge in their survey reports of facts, but such responses should not be taken at face value as sincere expressions of partisan worldviews.”

Here’s Tabarrok:

The paper also has implications for democracy. Voting is just another survey without individual consequence so voting encourages expressions of rational irrationality and it’s no surprise why democracies choose bad policies.

Excluding all the other evidence that democracies choose bad policies, I think Tabarrok here is the  brilliant defender of an untenable argument. Voting is not “another survey without individual consequence” – at least not to our electorate. A lot of America does not vote, presumably because they feel the expected gain from voting for the “least bad” candidate is outweighed by the opportunity costs of voting. If you are in the electorate you, ipso facto, do not feel this way.

Actually, there’s a caveat. (Hitherto) I’ve not been an eligible, but when I do vote it’s not because I feel any compelling reason that it will count, but more a reflection of “my duty as a citizen”. It’s simple Kantian universalism: if everybody decided it was against selfish interest to vote, we’d live in a broken society dictated by the most opinionated.

Part of that duty is voting for who I feel is the most competent, regardless of my countenance thereof. Voting, unlike all surveys, is usually a secretive endeavor. I do not need to signal my party affiliation. Therefore the incentive for “cheap talk” is already non-existent.

But there’s another more subtle reason at play. The questions surveyors asked related to the very mechanical and narrow questions of “inflation” and “unemployment”. Let’s take the premise that “Republicans were more likely to believe Iraq possessed WMDs”. Let’s further stipulate (broadly from empirics) that 30% of said Republicans changed their opinion given sufficient incentive to reveal their true beliefs. But that doesn’t translate into anything as far as voting is concerned. The implicit stipulation is that said surveyed individuals are Republican to begin with.

And to the extent that this tautology holds, they have rational reason to be Republican. So they might cloud out the unfortunate lies of Iraq, but they still believe in other, less measurable, Republican principles: hard law enforcement, social conservatism, etc. At this point “media cocoon” theories become very relevant (“Democrats are in their own flawed MSNBC bubble”), but this is a different argument all together.

Tabarrok’s claim rests on the assumption that:

  • Voting is like a survey. (People are incentivized towards “cheap talk”).
  • Voters are not incentivized.

Neither is true. People are not incentivized towards cheap talk on a secret ballot (they can tell their friends and family whatever else later) and if they are voters they are incentivized to reveal their true beliefs.

Democracy might have many problems. But this isn’t one.