Mankiw's Taxes

Greg Mankiw admits that he could afford to pay higher tax rates, but says that higher rates do affect his incentives to take on more work:

I could go so far as to say I am almost completely sated. One reason is that I don’t aspire for much more than a typical upper-middle-class lifestyle....I don’t want to move to a bigger house or buy that Ferrari, but I hope to put some money aside for my three children. They will never lead lives of leisure, but I hope they won’t have to struggle to find down payments to buy their own homes or to send their kids to college.

[Explanation of how $1,000 in income from a writing assignment grows to $10,000 over thirty years without taxes, but only to $1,700 with Obama-level taxes.]

Then, when my children inherit the money, the estate tax will kick in. The marginal estate tax rate is scheduled to go as high as 55 percent next year, but Congress may reduce it a bit. Most likely, when that $1,700 enters my estate, my kids will get, at most, $1,000 of it....By contrast, without the tax increases advocated by the Obama administration, the numbers would look quite different. I would face a lower income tax rate, a lower Medicare tax rate, and no deduction phaseout or estate tax. Taking that writing assignment would yield my kids about $2,000. I would have twice the incentive to keep working.

Do you see the card he palmed? Basically, the effect of letting the Bush cuts expire is so tiny that the only way to make it noticeable is to compound it over 30 years, which reduces the eventual payout of his writing assignment from $2,000 to $1,700. (And even that's probably overstated, since it assumes Mankiw pays all his taxes at their full statutory rate, which virtually no one does.) The rest of the reduction down to $1,000 comes solely from the estate tax. But even on the heroic assumption that you should take this year's zero rate as the baseline for comparison, the estate tax has an exemption of several million dollars. Unless Mankiw leaves his kids a helluva lot more than they need for a down payment on a house, they won't pay a dime of estate tax.

This is why the tax posse has such a habit of wildly overstating things. If they don't, there's no there there. It turns out that the effect of letting the Bush tax cuts on the rich expire is so minuscule that the only way to make it look sensational is to pick a scenario in which you (a) overstate effective tax rates, (b) compound those tax rates over 30 years, (c) slash the final number nearly in half by ignoring the estate tax exemption, and (d) use this year's highly unusual zero rate as your baseline. It's a virtuoso performance.

UPDATE: I should make something clear before I start getting emails about this. If you believe that taxes affect incentives — and I do — then you should also believe that small changes in tax rates affect incentives in small ways. I believe that too. My problem isn't with the idea that higher taxes will cause Mankiw to work less, it's with his final conclusion about the effect of the lower Bush rates on guys like him: "I would have twice the incentive to keep working."

But aside from the fact that Mankiw plays fast and loose with the actual tax laws, this is only true if (a) you're motivated solely by how much money you leave your children, and (b) you care about income 30 years in the future as much as you do about income right now. This doesn't describe any actual human beings, and I don't think it describes Mankiw. (I doubt very much that he doubled his production of outside writing after the Bush tax cuts went into effect.) If he'd laid out the incentives honestly — a small tax increase might reduce his incentive to write misleading op-eds by a small amount — that would have been OK. But that's not what he did.

Sen. Susan Collins (R–Maine) writes that the Senate has become increasingly nasty and partisan. For example:

During the past two years, the minority party has been increasingly shut out of the discussion. Even in the Senate, which used to pride itself on being a bastion of free and open debate, procedural tactics are routinely used to prevent Republican amendments. That causes Republicans to overuse the filibuster, because our only option is to stop a bill to which we cannot offer amendments.

It's true that Harry Reid has filled the amendment tree a little more often than his predecessors: nine times in the 110th Congress vs. six times for Bill Frist in the 109th. And while I can't find a tally for the 111th Congress, I wouldn't be surprised if it were higher still. But is Collins seriously trying to suggest that this is the direction that causality runs? That Republicans are only resorting to filibusters and other delaying tactics because they haven't been allowed to offer serious, substantive amendments more regularly?

I'm willing to be schooled by a congressional expert on this, but reality seems just the opposite: Republicans have adopted a whole host of aggressive delaying tactics since they became a minority party, and one of them is the practice of offering dozens or hundreds of dilatory amendments in order to suck up endless floor time. The only way to avoid that is to fill the amendment tree, invoke cloture, and then try to round up 60 votes. If you don't, your bill is effectively dead.

I'll be curious to see if any veteran Congress watchers weigh in on this. I don't doubt that Democrats have become more tactically aggressive over the years, but in this case it really doesn't seem that they were the first movers. Comments welcome on this.

Hayek and Rand

Tyler Cowen semi-defends F.A. Hayek's The Road to Serfdom:

The most important sentence in the book is "This book, written in my spare time from 1940 to 1943..." In those years, how many decent democracies were in the world? How clear was it that the Western powers, even if they won the war, would dismantle wartime economic planning? How many other peoples' predictions from those years have panned out? At that time, Hayek's worries were perfectly justified.

On a completely unrelated subject, this is one of the things that's always struck me as so peculiar about Atlas Shrugged. If it had been published in 1937, it would have made a kind of sense. Capitalism was on the ropes, there were lots of serious adherents of central planning, and the NRA was a pretty good example of the kind of law that Rand condemns in her novel. Likewise, even if it had been published in 1947, it might have made a bit of sense in an extravagant sort of way. As Tyler notes, it was unclear how the postwar economy would pan out, lots of people assumed that wartime planning would make the transition to peace, and communist parties in Europe were, at the time, very active and very successful.

But it was published in 1957, and even aside from its train-themed plot it seems wildly out of tune with its times. The United States was firmly capitalist, the New Deal had settled down into a quiet adolescence, the country was rabidly anti-Soviet and anti-communist, and celebration of big business leaders was the order of the day. Hayek at least had the excuse of writing his book in the early 40s and publishing it in 1944, when it might have been an over-the-top but still understandable attempt to warn against continuing wartime planning and socialist control of industry after the war was over. But Rand took a decade to write her book and apparently did nothing to make it relevant to its eventual time. And so it feels like an antique.

But hey — it's sold a bazillion copies or so and continues to resonate with a certain kind of temperament to this day. So who am I to criticize? And maybe its antiquarian timelessness is part of its appeal. I guess no matter what era you live in, the veneer of capitalism is always thin and the looters are never more than a snail darter away from taking over society.

Bruce Bartlett calls out the neocons for being hypocrites on spending:

Establishment conservatives love to talk about the need to cut government spending, but they always seem to find an excuse whenever there is a serious effort to actually do it. Last year, for example, they opposed cutting Medicare as part of health care reform. Now they are banding together to stop cuts in defense spending, which is a fifth of the federal budget, even as they also insist that the deficit is our most critical problem.

This hypocrisy was on full display on Oct. 4, as American Enterprise Institute president Arthur Brooks, Heritage Foundation president Ed Feulner, and Weekly Standard editor Bill Kristol penned a joint op-ed for the right-wing Wall Street Journal editorial page on why the defense budget should be totally off limits to budget cutters.

Sure they're hypocrites. But so is everyone else. All of us want to cut spending, after all — except for the stuff we care about. That always needs to be off limits. The 65+ crowd in the tea parties wants to cut spending. Except for Social Security and Medicare. Heartland farmers want to cut spending. Except on agricultural subsidies and ethanol allowances. Rock-ribbed businessmen want to cut spending. Except for all the tax expenditures that virtually every sector enjoys. Doctors and nurses want to cut spending. Except on healthcare. Teachers want to cut spending. Except on schools.

Look. The truth is that no one wants to cut spending. What we all want to do is cut spending on stuff we don't happen to care about. Kristol & Co. are a little more barefaced about it than most, but otherwise they're just part of a great American tradition.

Marian went to Crate & Barrel the other day and got something for everyone. For us, new soup bowls. For Domino, a fabulous new hidey hole. The next day, however, it was back upstairs to snooze in the sunny spot by the bedroom window. Unfortunately, Inkblot decided to join her, and eventually his roving paw got the best of him. This all turned out badly a few seconds after I snapped this picture, but Inkblot seemed pretty pleased with himself. After all, when Domino fled he was able to take over the entire sunny patch for himself. And he did.

UPDATE: Support Friday Catblogging! Our fundraising drive continues all weekend. Click here to donate by PayPal or here to donate by credit card.

With the tea partiers snapping at their heels, Republicans will have to get serious about deficit cutting if they take over Congress in November. Right? No more smoke and mirrors anymore. The ravenous horde won't stand for it.

Maybe. But Jonathan Bernstein suggests three ways the GOP may try to placate the mob:

(1) Hire someone at CBO who will score tax cuts as massive revenue sources. Hey, look, the deficit is falling!

(2) Gotta have a gimmick — introduce some sort of auto-cut procedure, similar to the old Gramm-Rudman structure; make sure that it won't actually kick in until some point in the future (or with a divided Congress, let the Senate kill it). Talk a lot about the Balanced Budget Constitutional Amendment. Hold lots of votes on the Balanced Budget Constitutional Amendment. Repeat that deficits keep going up because the Democrats are blocking the Amendment, or the new absolutely necessary budget procedures.

(3) Eliminate earmarks. Talk a whole lot about eliminating earmarks. Claim that you're slashing spending — we eliminated earmarks! Never use the word "deficit" again. Hope no one notices.

I was pondering this the other day and #2 and #3 both crossed my mind in slightly different form. I missed #1, which I suppose is a possibility if Republicans take over both the House and the Senate. It might be a little too raw, though, even for them.

Beyond that, I guess I ended up with a different take: I don't think tea partiers really care about deficits. It's just the most useful cudgel at hand right now. So sure, Republicans will come up with a gimmick or two, but mainly this will boil down to a few high-profile fights over a few specific expenditures. There's no telling what they'll be, except that they'll almost certainly be (a) trivial, (b) aimed at programs Democrats hold dear, and (c) simple enough to turn into a shouting match easily. But trivial or not, it will likely end up in a dramatic, TV-worthy government shutdown. This will show that GOP hearts are in the right place, and if it doesn't actually have any serious effect on the deficit no one will really care. At least we're fighting to take our country back!

In fact, I'm willing to predict right now that sometime next year Fox News will decide with whiplash-inducing speed that deficits aren't really very newsworthy anymore. Why? Because it will simply be impossible to pretend that the issues at stake are anywhere near big enough to make a real difference in the deficit, and in any case, they're going to be far more interested in promoting tax cuts for the rich. So instead of scary deficit charts, it's going to be 24/7 yammering about how we need to motivate our Wall Street billionaires hardworking entrepreneurs to work harder by cutting their taxes. Should be loads of fun.

Brad DeLong is perplexed:

One of the puzzles of the Obama administration that I have absolutely no read on is the reappointment of Ben Bernanke. When Obama reappointed Ben Bernanke I was sure — and I had reason to be sure — that the Ben Bernanke they were reappointing was the academic I knew well, "Helicopter Ben," the intellectual advocate of much more aggressive policy responses to the collapse of the real-estate bubble in Japan in the 1990s.

Obama would, after all, have to be a complete idiot to appoint somebody who did not view the world the way Ben-Bernanke-the-academic had viewed it in the late 1990s, and who had not assured him that he did still view the world the way he had viewed it in the 1990s.

So huh?! What happened?

Perhaps this is the result of too many trips to Jackson Hole, where private conversations with the great and good can too easily convince you that the great and good all agree with you in their heart of hearts. But in August 2009, if you were someone who had never met Ben Bernanke, who had never been to Jackson Hole, who had never spoken privately with anyone of consequence in the economic community — in short, if all you had to go on was Ben Bernanke's public actions and public statements — I think you would conclude that he thought the economy was on the mend and had no intention of lighting his hair on fire over minor things like sky-high unemployment and trillion dollar output gaps. You would also, I think, conclude that he was still the same laissez faire Republican economist he has always been and had no real desire to seriously re-regulate the financial sector even after the biggest financial meltdown since 1929.

And guess what? You would have been right. I'd say that about 90% of the time, public actions and public statements are more reliable guides to reality than all the private conversations in the world. Unfortunately, the other 10% of the time they aren't, and that 10% tends to be fairly dramatic. So, like a gambler who gets a big payoff just often enough to keep him at the table, we continue to be suckered by what we think is inside knowledge. Just human nature, I suppose. Maybe I should add it to my list.

Why They Win

Andrew Sullivan, who argues endlessly against the politics of outrage, emotion, and resentment, demonstrates today why the politics of outrage, emotion, and resentment work so well. Sharron Angle, he admits, is a "nutcase." But if he lived in Nevada, he still couldn't vote for Harry Reid, even if that was the only way of keeping Angle out of the U.S. Senate:

He is everything I hate about Democrats: incapable of making an argument, a face so weak it changes depending on the way the wind is blowing, a voice so sad you think he's a funeral director, a man whose appareance on television has never evinced any reaction from me but "where's the remote?" I just couldn't pull the lever for the guy. Sorry. So I won't be surprised if the nutjob wins. And a tiny part of me will feel a pulse of intense pleasure to see him go down.

Harry Reid is an inside player, not a Sarah Palinesque bomb thrower. He's no good on TV. But guess what? Against monumental odds, he played the inside game pretty decently this term, shepherding a stimulus bill, a healthcare reform bill, and a financial reform bill through the Senate. And to do it, he needed to figure out how to deal with prima donnas like Ben Nelson, Joe Lieberman, Scott Brown, and Olympia Snowe without losing his sanity. These are some of the most infuriating, self-regarding people on the planet. Could you do it? I know I couldn't. Hell, I probably would have taken a swing at Lieberman on the Senate floor around September of last year.

And then we would have lost his vote and healthcare reform wouldn't have passed. But I'd look tough! Cable news would love me! Andrew would be thrilled! Dems are showing some backbone!

And all at the minor cost of passing nothing. But at least we'd have someone telegenic running the Senate, and God knows that's what's really important.

And now for some genuinely good news. It appears that we've finally figured out whether it's a virus or a fungus that's reponsible for the collapse of honeybee colonies over the past few years. Answer: it's both.

Researchers on both sides say that colony collapse may be the first time that the defense machinery of the post-Sept. 11 Homeland Security Department and academia have teamed up to address a problem that both sides say they might never have solved on their own.

....Human nature and bee nature were interconnected in how the puzzle pieces came together. Two brothers helped foster communication across disciplines. A chance meeting and a saved business card proved pivotal. Even learning how to mash dead bees for analysis — a skill not taught at West Point — became a factor.

....Research at the University of California, San Francisco, had already identified the fungus as part of the problem. And several RNA-based viruses had been detected as well. But the Army/Montana team, using a new software system developed by the military for analyzing proteins, uncovered a new DNA-based virus, and established a linkage to the fungus, called N. ceranae....The Army software system — an advance itself in the growing field of protein research, or proteomics — is designed to test and identify biological agents in circumstances where commanders might have no idea what sort of threat they face....The power of that idea in military or bee defense is immense, researchers say, in that it allows them to use what they already know to find something they did not even know they were looking for.

So there you have it. Academic researchers teamed up with Army software designed to identify biological agents on the battlefield to figure out what was going on. Now all that's left is to figure out just how this virus/fungus combo works and whether there's any way to fight it.

Do I have to do a post about today's employment report? I do? Fine: it sucks. Private sector job growth was anemic, just as it has been since falling off a cliff in May, and shows no signs of picking up. Public sector job growth, thanks to state and local layoffs, was negative, just as it has been since falling off a cliff in June. As a result, total job growth was tiny, far too small even to keep up with population growth. At the rate things are going right now, unemployment is going to stay near double digits for a very, very long time.

Too negative, you say? You want some good news, you say? Here it is:

While job creation remains scarce, there could be a silver lining. Expectations are growing that the Federal Reserve will try to stimulate the economy by stepping up its purchases of government bonds. The gloomy jobs report could give the Fed more incentive to act.

Jason Pride, director of investment strategy at wealth management firm Glenmede, said "by not being stronger, (the jobs report) gives them the window of opportunity to take action."

Any other good news? Well, the stock market broke 11000 and the teen apparel sector posted strong growth as part of "brisk" back-to-school sales. So buck up, folks. Prosperity is right around the corner.