When it comes to the temporary Bush tax cuts on the rich, Republicans insist that allowing them to expire would be a tax increase that they're flatly unwilling to even consider. However, when it comes to the temporary Obama payroll tax cut on the middle class, they say that letting it expire is OK. It's not a tax increase in this case, and our looming budget deficit is so critical that we can't afford to keep it in place. Steve Benen comments:

If I had to guess, I'd say Republicans probably support an extension of the payroll tax cut, but just aren't willing to say so. Why not? Because then they lose leverage — GOP officials know the White House wants this, and if they simply agree to pass the measure, they won't get anything extra out of the deal. Hostage strategies have become an instinctual norm for Republicans.

I think I'd take issue with this in two ways. First, I'm honestly not sure Republicans do support an extension of the payroll tax cut. Historically, their focus has always been on upper-income marginal rates, and they've never brought quite the same fervor to middle class levies like the payroll tax or the gasoline tax as they have to things like capital gains taxes and estate taxes. They're just really, really focused on keeping taxes on the rich low.

But even if this is just a bargaining ploy, it's not fair to call it a "hostage strategy." In the case of the debt ceiling fight, that was appropriate language because Republicans were genuinely threatening fiscal Armageddon if they didn't get their way. That's hostage taking. The payroll tax debate, conversely, is just garden variety politics. Presidents and members of Congress have bargained over stuff like this forever, and it's perfectly normal to play hardball in order to seek the strongest advantage for your own side. This is logrolling and dealmaking and favor trading, not hostage taking.

What's more, it's a good thing. Frankly, we could use a little more logrolling and dealmaking and favor trading, not less. The fact that Republicans these days are so unwilling to make compromises of any kind is a major cause of our current legislative paralysis. I'd like to see more of it, not less, no matter how shrewdly the game is played.

Nearly every day I find myself thinking that we're slipping closer and closer to the dystopian marketing world that was mere satire half a century ago in The Space Merchants.1 Here's the LA Times today:

Picture this: You stop in front of a digital advertising display at a mall and suddenly an ad pops up touting makeup, followed by one for shoes and then one for butter pecan ice cream. It seems to know you're a woman in your late 20s and, in fact, it does. When you looked at the display, it scanned your facial features and tailored its messages to you.

....Kraft said it's in talks with a supermarket chain, which it would not identify, to test face-scanning kiosks. "If it recognizes that there is a female between 25 to 29 standing there, it may surmise that you are more likely to have minor children at home and give suggestions on how to spice up Kraft Macaroni & Cheese for the kids," said Donald King, the company's vice president of retail experience.2

What's most unnerving about this to me isn't the technology itself, which is inevitable. It's not even the obvious next step beyond just age and gender targeting, which has been common practice forever. It's the fact that I know most people don't even object to this. It's just a better way of making sure that you only see ads for stuff you're interested in, after all. And what's wrong with that? We're busy people, you know.

But I am a dinosaur and I already dislike the fact that virtually every major chain store — and really, what other kind of store is there these days? — demands that I pay an artificially jacked up price unless I agree to let them maintain a database of every item I've ever bought from them. They've fooled most of their customers into believing that this is actually a discount program, but I remain a heretic on this score. I'm decidedly unexcited by the prospect of every marketing broker in the country having access to my lifetime purchasing history for a small fee. And I'm even more decidedly unexcited by the prospect of this purchasing history following me around from POS display to POS display wherever I go.

But I'm losing this war and I know it. I'm rich enough that I can afford to refuse to play just out of sheer cantankerousness, but most people can't. They just can't afford to pay 10% more for everything they buy as the price of a bit of privacy. I only wish that all these people at least felt aggrieved about this state of affairs instead of being cheerfully convinced that it's all being done for their glorious benefit by the generous and civic-minded purveyors of America's retail emporia.

1Double criminally left off NPR's list of the 100 best SF and fantasy books. ("Double" because not only is it a great book, but it kills two birds with one stone by getting both Fred Pohl and Cyril Kornbluth onto the list.)

2Vice president of retail experience? Seriously?

Whenever you buy an asset — a house, say, or a share of stock or some other investment instrument — and then sell it later for more than you paid for it, the profit is a capital gain. And unlike you and me, whose income mostly comes from wages, a big part of the income of rich people comes from capital gains. Naturally, then, rich people are extremely interested in having low tax rates on capital gains.

However, since "rich people deserve to pay low tax rates" is not a very persuasive argument, the justification for low capital gains tax rates is usually couched in the language of "capital formation." This is a concept that's perfectly legitimate in theory but, in the hands of the Wall Street Journal editorial page, has been corrupted over the past couple of decades into an all-purpose excuse for low tax rates on pretty much everything related to the income of rich people. In fact, a pretty good rule of thumb these days is that any time you see the phrase "capital formation" in an op-ed page anywhere, you should ignore everything that comes after it. It's just bollocks.

Still, it's worth having some hard data about this too. In the context we're using here, capital formation refers to capital used for investment purposes, so in its nickel version the argument for low capital gains rates is that it encourages capital to be invested. This is a good thing, and if it were true it would be a powerful argument for low taxes on capital gains. But it's not. Jared Bernstein provides the chart below, which shows the growth of investment over time (blue line) and the capital gains tax rate (red line):

There's pretty much no correlation at all. Investment increases over time at a steady rate regardless of what the capital gains tax rate is. Bernstein comments:

There are a few economic principles that we consistently get wrong in ways that do lasting damage to our economy and diminish our future. At the top of this list are arguments about large behavioral responses to changes in tax rates. I don’t think it’s zero, but I’ve simply never seen compelling evidence that tax increases significantly hurt growth, labor supply, jobs, wages, or that rate decreases provide much of a boost the other way. And when you factor in the benefits of the investment and services government provides—something the literature tends to ignore—the hyper-responsiveness arguments are even less compelling.

Yep. All taxes have deadweight losses, and all taxes affect incentives, but the bulk of the research suggests that the size of the incentives is pretty modest. It's handy for rich people to pretend otherwise, and in particular to pretend that investment levels will skyrocket if capital gains tax rates are reduced, but the evidence for this is very slim. Still, it is a handy argument for rich people, and that's why it will never die.

Personally, I've always been sympathetic to the argument that capital gains should be adjusted for inflation before they're taxed. If you invest $100 and ten years later it's become $150, it's unfair to tax the full $50 if a chunk of that is merely the result of inflation and the real profit is smaller. But indexing for inflation is complex, and as a substitute it might make sense to simply set the capital gains tax rate a bit lower than the normal income tax rate. Aside from that small adjustment, however, keeping all tax rates at similar levels prevents a lot of useless and distortionary tax arbitrage, and is usually the best course unless there's a really compelling reason for a difference. In the case of capital gains, there isn't, regardless of how often the Journal editorial page tries to hoodwink us into believing differently.

On Persuasion

Here is a brief Twitter conversation from this morning:

Actually, I think Steve is right, which just goes to show that Steve is right. My own experience, which I think is fairly generalizable, is that within the course of a single conversation hardly anybody ever changes their mind — including me. Arguing is a dominance game, and in a face-to-face confrontation over anything of significance (virtual or otherwise) we hairless apes will go to considerable lengths to avoid conceding dominance. So if we find ourselves on the losing end of a confrontation, we end up simply switching to new arguments, trying to redefine the terms of debate, cherry-picking our evidence a little differently, burrowing down into ever more trivial sub-arguments, or reverting to mockery and then walking away. In other words, pretty much anything other than actually conceding that someone else is right and that our worldview might need to be updated.

However, that's only the immediate dynamic. With some frequency — 10% of the time? 20%? In any case, certainly more than 1% — arguments will start to sink in maybe a day or a week later when the emotional charge has worn off. You'll probably never know that you've successfully persuaded your adversary, since it's a gradual change that happens offstage and is rarely acknowledged (dominance games again), but it happens. That's especially true if the arguments get repeated over time, and even more especially true if they get repeated by people in positions of respect. The number of people who refuse to change their minds regardless of the evidence is still large, since evidence isn't really what underlies most of our beliefs, but it's less than 99%.

Thus politics.

I have some worrying news to report. Based on the picture on the left—and believe me, this is just one of many—Inkblot's senior campaign staff is beginning to wonder if we have a Newt Gingrich problem on our hands. Inkblot insists that he's "developing new approaches and new ideas" that are "fundamentally different from anything you've seen," but it looks an awful lot like plain old snoozing to us. What's more, his repeated insistence that he's just "resting up for the campaign" is starting to wear thin. And needless to say, his sister isn't helping things any. There's just a serious lack of energy that's pervading campaign headquarters these days. Clearly, something needs to change.

In related news, Inkblot is also suffering from a lack of national exposure. I wonder if I could fix this by learning how to take "magazine cover" pictures of his majesty presidency? Seems like a bargain for only 25 cents, especially considering its promise to teach me "cat psychology." This could be just the ticket!

Here's another look at Rick Perry's Texas Miracle. It shows the unemployment rate in Texas and in the 11 states immediately surrounding it in the Sunbelt and the lower Midwest. Bottom line: It's doing better than four of them and worse than seven. I don't know about you, but in my church we have a higher bar for miracles than that.

From the Congressional Research Service, in a report on the cost of new EPA regulations that will shut down some of the worst polluting coal plants in the country:

The costs of the rules may be large, but, in most cases, the benefits are larger.

The full report is here. Brad Plumer has the user-friendly summary here. Bottom line: The cost of the new EPA regs is almost certainly being hugely overestimated by the power industry (surprise!), and the benefits in public health will almost certainly be far greater than the price tag for replacing our most antiquated coal plants — which are mostly near the end of their life anyway — by more efficient combined cycle natural gas plants.

Last week, Joshua Tucker suggested that parliamentary systems might generally sustain higher debt ratings than countries with presidential systems. Temple University professor Christopher Wlezien responds:

Madisonian presidential systems are more responsive to changing public opinion. That is, it may be that, in being more responsive to the public, these presidential systems are less responsive to the demands of financial authorities? Or, put differently, governments in parliamentary systems have greater discretion. There is reason to think that electoral system and party polarization will matter too, the idea here being that the level of fragmentation and division may influence what ratings agencies think about prospects for agreement.

On the specific question about debt ratings, I'm agnostic. But I'd make a further point here, one that I alluded to a couple of weeks ago. One of the features of a parliamentary system — you can decide for yourself whether it's a feature or a bug — is that the ruling party is fully in charge. The opposition party can kibbitz, but that's all.

In other words, just like a president, members of the ruling party have an obligation of responsibility that forces them to act conscientiously. They don't stop being politicians, but there are sharp limits on just how political they can be. People with ultimate responsibility simply don't have the luxury of demagoguery and populist bluster when things go sour. Perhaps this means less immediate responsiveness toward public opinion, but it also means a greater willingness to take necessary but unpopular steps.

In a presidential system, conversely, a minority party can bluster and obstruct all they want because they don't have an obligation of responsibility. They're just the minority party! As Republicans made relentlessly clear during the debt ceiling debate, they knew perfectly well that President Obama was ultimately accountable for the state of the economy and for running the government. That forced him to act responsibly, but it put no such restriction on anyone else.

The obligation of responsibility motivates political leaders to look for real solutions. It doesn't guarantee good solutions, but it does generally guarantee a moderately low level of complete buffoonery. They just can't afford it when they're the ones holding the bag. In a parliamentary system, that sort of thing can be safely left to the opposition party, which can bluster endlessly precisely because they have no real power.

But power without responsibility? That's a toxic combination, and that's what presidential systems can give you sometimes. I very much doubt that Madison would remain an enthusiast for his own invention if he saw us trying to keep it creaking along even with the strong party discipline that's typical today. Jemmy was a smart cookie, and he understood that strong party systems require political machinery designed to accommodate them. But he didn't want parties, so he wasn't interested in the machinery. For better or worse, though, that's no longer true. We now have a de facto parliamentary party system without the parliamentary rules and norms to make it work. So much the worse for all of us.

Ryan Avent responds to my gloomy take on the economy last night:

As a writer, it's difficult to know how to approach these situations. Is it time to panic? No, it's not. Is it time to develop a serious sense of urgency about looming crises, the better to protect against expected pain and insure against the possibility of real disasters? Absolutely. The problem is in trying to convey urgency in an appropriately sober way.

Quite so. I shall try to panic in more sober tones in the future.

Huntsman 2016!

I've long believed that Jon Huntsman is running to position himself for 2016, not because he thinks he has any chance of winning this year. James Fallows says there's now proof positive of this. Here's what Huntsman tweeted yesterday after Rick Perry said global warming was a hoax and evolution was just a theory:

Fallows comments:

Good to see this "what the hell, I might as well keep my dignity" spirit taking hold on Team Huntsman! I hope it will still prevail the next time he's asked to raise his hand, along with everyone else in the race, and promise to reject a budget deal skewed 10-to-1 in favor of spending cuts rather than revenue increases. He could be the one who stands alone and says:

"I believe in a balanced approach, just like Ronald Reagan did. Call me crazy."

Maybe "Call me crazy" will become Huntsman's new campaign slogan.