Kevin Drum

Deadweight Losses Among the Super Rich

| Mon Dec. 20, 2010 1:58 PM EST

After reading a new paper on income inequality, Tyler Cowen says this is a "scream it from the rooftops" result:

....we find that a one percent increase in the net of tax share is associated with an 0.7 percent reduction in incomes earned by people in the top 0.1 percent of the income distribution, which would imply that if we were to raise top marginal tax rates further on these taxpayers, the increase in deadweight loss would be substantially larger than the increase in revenue raised [emphasis added]. However, we find essentially no evidence at all of any responsiveness of people below the top 0.1 percent...

The paper is here. I read it over the weekend, and since a lot of people probably saw Tyler's excerpt I thought it would be worthwhile to point out a couple of things:

  • The authors find a long-term elasticity of income with respect to tax rates of 0.72 for earners in the top 0.1%, "suggesting a high degree of responsiveness to incentives for income-earning efforts [] among those with the highest incomes." In other words, when tax rates go up, super high earners earn less and deadweight losses are large. However, elasticity for earners in the top 1% is -0.34. In other words, merely moving down from the top 0.1% to the top 1% apparently changes your responsiveness to tax incentives from +0.72 to -0.34. That's an extremely dramatic result and should make us very suspicious.
  • And sure enough, using a slightly different model that incorporates a six-piece spline, elasticity among super high earners changes to -0.27. The authors are unsure of which model is better, and acknowledge that the emergence of such a large change from a fairly small modification to their model "reduces our confidence in the conclusion that the decisions of high-income people about how much income to earn and report are highly responsive to tax rates."

I'd say a bit more. Even if you assume that the original number is correct, you have to ask yourself what it means. For someone earning a million dollars a year or more, why would their income go down because their tax rates went up? Because they decided to work less? That's highly unlikely, and the kind of people who earn money at this level — primarily CEOs, executives, and financial industry professionals — aren't paid based on how many hours they work anyway. Would Wall Street traders make fewer trades? That also seems unlikely, but even if they did it just means that someone else would do it. (Though who knows? Less trading might actually be a net benefit to society, not a deadweight loss.) Would they quit their jobs? Again unlikely, but in any case this would have no effect on society at large. Would they get lazy and drive their companies into a ditch, therefore lowering their bonuses? That hardly seems likely either.

The problem here is twofold. First, the calculation of elasticity is obviously very sensitive to the parameters of the model you use. Second, it's very difficult to conceive of an actual mechanism in which higher taxes on top earners translates into lower work performance and therefore deadweight loss to society. My guess is that super high earners respond to tax increases mainly via accounting strategies, not work effort, and in any case, any reduction in their earnings simply ends up going somewhere else anyway. In fact, if you take the original model in this paper seriously, an increase in high marginal tax rates reduces the earnings of the 99.9th percentile but increases the earnings of the 99.0-99.9th percentile. In other words, the total earnings of the top 1% probably go up on net.

But if you still want a "scream it from the rooftops" result from this paper, try this one instead:

The real income growth rate for non-financial executives in the top 0.1 percent was 7 times as large as for non-financial executives in the 99th to 99.5th percentile range....The heterogeneity in income growth rates across professions within the top one percent, and the divergence in incomes within professions in the top one percent, both suggest that the causes of rising top income shares cannot just, or even primarily, be things that are changing in similar ways over time for everyone within the top one percent, such as federal marginal income tax rates.

According to the authors, skill-biased technical change and globalization are unlikely candidates too, and the superstar effect is too small to have a significant impact. It has to be something else. Something that's driving enormous changes not just at the top, but at the very tippy top. The financialization of the U.S. economy, along with changes in norms of corporate governance, seem like the best guesses to me. Anybody got a better one?

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Quote of the Day: McConnell on START

| Mon Dec. 20, 2010 12:42 PM EST

From Republican minority leader Mitch McConnell, explaining why he opposes the New START treaty:

All of a sudden, we're once again trying to rush things right here before Christmas Eve. I think that was not the best way to get the support of people like me.

Translation: he's pissed that Democrats successfully repealed DADT and is bound and determined to get back at them. The childishness that passes for politics these days is endlessly astonishing.

Innumeracy on the Street

| Mon Dec. 20, 2010 12:08 PM EST

The New York Times inadvertently explains the financial crisis today: Wall Street traders, it turns out, are innumerate. Many firms doubled base salaries and eliminated bonuses for midtier employees after the crash, and apparently this is causing panic among the troops:

One executive, whose firm prohibited discussing the topic with the news media, said the bump in base salaries had confused people, even though their overall compensation was the same. “People expect a big bonus,” this person said. “It is as if they don’t even see their base doubled last year.”

Dealing with the Zeros can be complicated. “It’s a real headache,” said another senior banker, who asked not to be identified because the topic is so volatile at his company.

But not to worry. The Zeros might be confused by this financial trickery, but the industry as a whole is still doing great:

In terms of overall profit, Wall Street is on track for one of its best years ever, although it will trail 2009, which was pumped up by federal bailout money and the rebound from the financial crisis. In the first three quarters of the year, Wall Street earned $21.4 billion, putting it on track to easily outpace 2006, when the economy was booming, and well ahead of the New York City government’s initial estimate of $20.6 billion for profit in all of 2010.

Chief executives, says the Times, will continue to get paid the old-fashioned way, "with bonuses climbing into the stratosphere as the shock of the financial crisis fades and pay for the top tier climbs back toward historical averages." Good to hear.

Obama After Two Years

| Sun Dec. 19, 2010 3:11 PM EST

Jonathan Bernstein has a question for us left-leaning types:

Think back to what you were thinking in November 2008, and in January 2009. As the 111th Congress winds down, what's your biggest disappointment of the things you expected to happen? Not your wish list, but the things you really expected to happen. What's your biggest happy surprise?

This is fairly easy for me, since I wrote a blog post on November 3, 2008, saying that I'd consider Obama's first term a success if he got three things done: (1) withdrawal from Iraq, (2) real healthcare reform, and (3) carbon pricing. "Get something serious done on those issues, and Obama's administration will be a big success. Fail on them, and it's not clear to me that any combination of other new programs will be enough to salvage it."

This leaves me in a pickle. Withdrawal from Iraq appears to be proceeding apace, and healthcare reform did indeed get passed. Carbon pricing, obviously, didn't. On the other hand, we can add a modest stimulus bill, a modest financial reform bill, and repeal of DADT to Obama's list of accomplishments. Does that make up for the failure of the carbon bill? Two years ago I said I didn't think any combination of other new programs would be enough to make up for failure on one of the big three, and that's a tough statement to walk back. So I guess I'd say I consider Obama's first term a success, but not a big success. How's that for weaseling?

As for happy surprises, I'm not sure I have any. I didn't expect miracles, but I did expect more from Obama, and I can't think of anything significant he passed that I wasn't expecting. Partly this was due to epic levels of Republican obstructionism, and partly it was due to Obama's native economic conservatism. On the other hand, I can think of two big disappointments that I didn't fully expect: the size of the buildup in Afghanistan and Obama's failure to rein in some of the civil liberties excesses of the Bush era. Again, I didn't expect miracles, but neither was I expecting 140,000 troops in Afghanistan or almost complete acquiescence to the national security posture of the Bush/Cheney administration.

So there you have it: on net, I'd call Obama a successful president, but not a hugely successful president. But he's still got six years left. There's still time to surprise us.

The Descent of John McCain

| Sat Dec. 18, 2010 9:34 PM EST

Joe Klein on John McCain, who led the charge this weekend against both the DREAM Act and the repeal of DADT:

I used to know a different John McCain, the guy who proposed comprehensive immigration reform with Ted Kennedy, the guy — a conservative, to be sure, but an honorable one — who refused to indulge in the hateful strictures of his party's extremists. His public fall has been spectacular, a consequence of politics — he "needed" to be reelected — and personal pique. He's a bitter man now, who can barely tolerate the fact that he lost to Barack Obama. But he lost for an obvious reason: his campaign proved him to be puerile and feckless, a politician who panicked when the heat was on during the financial collapse, a trigger-happy gambler who chose an incompetent for his vice president. He has made quite a show ever since of demonstrating his petulance and lack of grace.

I was never all that entranced by McCain even back in his Straight Talk Express 1.0 days, but like him or not he was a mostly honorable guy. It's hard to recognize the same man in the seething stew of resentment and bitterness he's become. I suspect that someday he'll come to regret what he allowed the past four years to do to him.

DADT is Dead

| Sat Dec. 18, 2010 12:57 PM EST

DADT repeal won today's cloture vote in the Senate 63-33. Actual debate followed by actual voting will now commence, but this was the vote that mattered. DADT is dead.

So: Good work, White House and congressional Democrats — and kudos as well to the few Republicans who stood on the right side of history with them. The tax deal was a tough swallow, but this makes things a little easier.

UPDATE: The final vote was 65-31. DADT has been officially repealed, awaiting only President Obama's signature.

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Friday Cat Blogging - 17 December 2010

| Fri Dec. 17, 2010 4:03 PM EST

It's been a dispiriting week for me, the weekend promises to be pretty disagreeable too, and next week I might have jury duty. Blecch. But at least we have cats! As you recall, a couple of weeks ago I wanted to do a "Cats From Your Window" feature, but only Inkblot cooperated. This week I've finally completed the pair with this picture of Domino through our front window. So now the set is complete. On the right, Inkblot majestically ponders the fate of the universe and the likelihood of dinner coming anytime soon.

And courtesy of my sister, we finally have an answer to all the dog lovers constantly pointing to stories of dogs saving people from burning buildings and asking with a sneer, "Can a cat do that?" Well, yes: Pepper the cat, a resident of Devon, saved his owner's house by opening a window after it caught fire and alerting the neighbors. So there. The story, complete with pictures of the amazing feline, is here.

Debit Cards and Capitalism

| Fri Dec. 17, 2010 2:57 PM EST

Over at The Corner, Katrina Trinko is not a fan of the Fed's proposed new caps on debit card swipe fees:

The idea behind the legislation was that the banking industry had these fees set too high. If the Fed forced them to lower the fees, retailers would save — and give their customers lower prices. Well, instead, it now looks like retailers will just pocket the extra cash and not charge lower prices, while banks will try to recoup some or all of their losses by charging consumers new or higher fees. Not exactly what the lawmakers intended to happen!

But it gets worse: the Fed has now announced they want to cap interchange fees at 12 cents per transaction — an amount that the Fed admits is “more than 70 percent lower than the 2009 average.” That’s a lot higher than the worse-case scenario of 50 percent that analysts had predicted — and means that consumers can expect to get slapped with a lot of banking fees.

Yep, that might happen. But here's the thing: the reason that Dodd-Frank forced the Fed to step in is because the debit card market is a monopoly that forces contracts on merchants that are almost criminally one-sided. Visa and MasterCard control an enormous proportion of the market, they charge sky-high fees that are plainly predatory, and they prohibit merchants from passing along these costs to customers.

It's the last one that's the smoking gun. Maybe you don't want to break up the card market because it's more efficient to have a small number of networks. Maybe you don't want the government stepping in to regulate fees. Fine. But if that's the case, then merchants should be allowed the free-market privilege of charging whatever prices they want. If they want to give discounts for cash, fine. If they want to add surcharges for debit cards, that should be fine too. If they want to add different surcharges depending on the card, also fine.

Then we'd find out where the problem, if any, lies. If merchants mostly decide not to bother with surcharges, then it means they feel like they're getting good value in return for the swipe fees. If surcharges become widespread, it means that Visa and MasterCard were using their monopoly power to extract unfair rents.

But the card companies have fought like crazed weasels to keep their contracts intact. They are absolutely, categorically intent on not letting merchants charge free market prices for the use of their cards. This should suggest to any good capitalist that something is amiss. And that's why the Fed is stepping in. The card companies have no one but themselves to blame.

The Digital Fog

| Fri Dec. 17, 2010 2:25 PM EST

Dan Gillmor:

Yahoo has decided to close its Web bookmarking service, Delicious, a move that is sparking angst to outrage around the intertubes. One result is a frenzied search for a new social bookmarking service to replace what many people, including me, have used over the years to stockpile and organize links to online material we've found interesting.

....But the most important result may ultimately be what this move, among others, does for public understanding of the role of Internet service providers of all kinds....We put our data — our websites, photos, bookmarks, email and more — on their sites. But they can, and do, change their terms of service at will, doing what they please with what we've put on their servers. And sometimes they just shut down the services they've been providing. They may do it for good reasons, or absurd ones. It doesn't matter. The point is, they can.

This is true. At the same time, it's nothing all that new. My first word processing was done in Scripsit on a TRS-80. Then in MASS-11 on a VAX 750. Then in Ami Pro under Windows 3.1. Then in Word. Then in Blogspot. Then in Movable Type at the Washington Monthly. Now in Drupal at Mother Jones. Everything I wrote on Blogspot is already gone, and it's true that everything I wrote at the Monthly and currently write at MoJo could easily disappear if either of those magazines goes bust. But guess what? Most of the older stuff is gone forever too even though it never touched the internet. The programs disappeared, the data formats disappeared, and the physical formats became obsolete. You can't buy Ami Pro or 5¼-inch floppy disks anymore. This is something that data retention experts have wrestled with for decades. Archival storage is nearly impossible in an era where both physical media and digital formats change relentlessly.

So yes, be careful. Backup your data. Don't trust the cloud for everything. But every time we do anything on our computers, we're trusting that the programs we use will be around for a while. Sometimes that bet pays off, sometimes it doesn't. I have a Civil War diary written by my great-grandfather in 1863, and it's still extremely legible and accessible. But what are the odds that a single word I've ever written will still be accessible in the year 2160? Aside from the stuff on paper, pretty slim, I'll bet.

The Stimulus Bill That Failed

| Fri Dec. 17, 2010 1:52 PM EST

New research from the University of Maryland shows that viewers of Fox News were more misinformed about factual questions than any other news audience during the 2010 midterm elections. No surprise there, I guess. But here's the breakdown on one particular piece of misinformation:

Overall, heavy Fox viewers were the most uninformed about this. But only slightly. With the exception of the MSNBC audience, every other audience was almost equally uninformed. The only exception was daily viewers of Keith and Rachel, and even there an astonishing 64% of viewers basically thought the stimulus was worthless.

I don't happen to believe that communication and messaging are as critical as the press sometimes makes them out to be, but something sure went cockeyed here. One way or another, the White House and congressional Democrats utterly failed to make a case that the stimulus bill did the economy any good at all. That's obviously a tough sell in a high-unemployment environment, but still. Complete, utter failure. It's astonishing.