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Archive for October, 2007

State Department Blues

John Bolton, writing in Wednesday’s Wall Street Journal, observes how cravenly the Bush administration has been kowtowing to North Korea in what are supposed to be six-party talks on the North Korean nuclear program but have turned into one-party concessions by the United States—even in the face of evidence that North Korea was helping Syria construct a nuclear facility. This follows astounding posturing by Karen Hughes, Condoleeza Rice, and Laura Bush, who have visited the Middle East, donned the abaya, and spoken out in favor of Palestinian statehood, even as Palestinian territories collapse into civil war. The administration acts as if it is taking its marching orders from the Democratic Presidential candidates, who see diplomacy as the answer to every foreign policy question and who never met a dictator they didn’t trust.

Why does every administration, regardless of its initial ideology, end up treating diplomacy as an end in itself? Part of the explanation lies with the press, which applauds every agreement as a victory, whether or not it is verifiable or in the interests of the United States. But I think a large part of the problem is the State Department. State Department officials take on the views of the countries and regions in which they specialize. Middle East experts in the Department, for example, may start out representing American interests to the countries in that region but end up representing those countries’ interests instead. The result: Our foreign policy is largely in the hands of people who are, functionally, lobbyists of the countries with which we are supposed to be negotiating.

I am pleased to see several of the Republican Presidential candidates distancing themselves from current Bush administration statements and actions concerning the Middle East and North Korea. I would be even more pleased to see one propose a plan for restructuring the State Department to give its diplomats incentives to represent the United States rather than its adversaries.

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The Politics of Envy

An interesting example from Jon Elster and John Roemer: Suppose that A is doing much better than B, in economic terms, and that B doesn’t even know of A‘s existence, much less A‘s level of welfare. Then, B learns about A, and learns that A is much better off. In one sense, B is no worse off than before; the knowledge costs B nothing. But in another sense B‘s welfare may decline, for B now feels envious, less successful, less self-satisfied, and so on. B would like to be as successful as A, and now becomes aware that that desire is unsatisfied, making B feel even worse. In that latter sense, then, the inequality between A and B increases when B becomes aware of it. The same thing happens when A becomes aware of it, for A may now feel superior, more successful, more self-satisfied, and so on.

This points to a recipe for increasing inequality: not economic inequality, for, in the above example, no money changes hands, but hedonic inequality—the happy get happier, and the sad get sadder. Of course, the argument applies just as well if we start with hedonic inequality rather than economic inequality to begin with. Knowledge of each other’s conditions increases inequality.

That, it seems to me, gives rise to a dilemma for politicians who practice the politics of envy, speaking of inequality, “Two Americas,” class divisions, etc. If the economic inequality to which they point isn’t matched by an inequality in levels of happiness—and its correlation to such inequality is probably weak—then why should we care about it? And if it is, doesn’t drawing attention to the inequality make it worse? Couldn’t they produce greater hedonic equality just by shutting up?

Why, moreover, does Hollywood consistently make TV shows and movies about people who are far more affluent than average, who live in much larger houses, etc.?  It hasn’t always been that way—think of The Honeymooners, I Love Lucy, The Andy Griffith Show, The Wonder Years, and other icons of the 1950s, 1960s, and 1970s—but increasingly we seem to see mostly the top 1%.  Doesn’t that increase inequality in a similar way?

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My Daughter’s Car

Green GoSpeaking of incongruous, imagine a seventeen-year-old Mazda 626 with 150,000 miles on it. Now imagine it newly painted Green Go, one of the fabled 1970 Dodge/Plymouth “High Impact” colors. It turns heads.

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Incongruous

“Class, who can tell me what ‘incongruous’ means?”

A student quickly raises his hand. “Johnny?”

“That’s where our laws are made!”

Matt, in a comment to a recent post, points out that the point of Rep. Rangel’s tax reform proposal is probably not economic growth and may not even be greater equality. It may simply be political grandstanding to appeal to a part of the party’s base. Today’s Wall Street Journal lead editorial makes a similar point about the questioning and now obstruction of the appointment of Judge Michael Mukasey as Attorney General. Do the Democrats threatening the appointment over Judge Mukasey’s unwillingness to commit to holding waterboarding illegal really oppose waterboarding? Perhaps they do. If so, they could always outlaw it. But given its demonstrated effectiveness in breaking high-ranking terrorists, perhaps they don’t. Certainly they don’t want to become known as the Terrorists’ Rights Party. Waterboarding some captured terrorists has already yielded information that has very likely saved thousands of lives. Instead, they want to appeal to the part of the base that refuses to recognize tradeoffs—about interrogation techniques, about confinement of terrorists, about privacy, or pretty much about anything.

There is something deeply incongruous about the seriousness of the situation we face in battling terrorism and the unseriousness of many of our representatives, who view the struggle primarily as a way of scoring political points. Al-Qaeda has theorized that democracies are fundamentally unserious, which weakens them severely against a committed opponent willing to sustain a long-term fight. We shouldn’t scoff at that view; Plato and Aristotle would probably have agreed. Studying the examples of Britain and France in the 1930s provides little encouragement. They did not awake to the seriousness of the danger posed by Germany until Hitler invaded Czechoslovakia, at which point the balance of power shifted strongly in Germany’s favor. For France, that was too late. For Britain, it nearly was.

I would like to think that we have at least a few statesmen who may act like politicians most of the time but who will rise to the occasion and act for the good of the country rather than their own political fortunes when the chips are down. Where is our Churchill? That’s my first question in thinking about the Presidential candidates of both parties. Who will face our enemies with the seriousness it takes to defeat them?

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Rangel’s Redistribution

Greg Mankiw points out that, according to the Tax Policy Foundation, the net effect of the Rangel tax reform would be to transfer cash from the top 1% of earners to the next 3%. (Hat tip: Instapundit.) Those earning over $500,000 would pay more; those making $75,000-500,000 would benefit, and especially those making between $200,000 and $500,000. Those earning less than $75,000 would be little affected. The benefit to the $200,000-500,000 group is almost entirely due to the elimination of the Alternative Minimum Tax.

As Mankiw writes,

Thus, as a first approximation, the plan increases the progressivity of the tax code by redistributing income from the very rich (e.g., CEOs, hedge fund managers, superstar athletes and actors) to the upper middle class (e.g., doctors, lawyers, congressmen).

Given the incidence of the AMT, I would add, the transfer is primarily to the upper middle class in metropolitan New York, Washington, San Francisco, and other large cities on the coasts. At least, that’s true given current patterns. The $200,000-500,000 group is better off under Rangel’s proposal, despite reversal of the Bush tax cuts and a 4% surtax, only because the AMT is projected to increase its impact on this group severely. In other words, they wouldn’t be better off than they are now; they would be better off than they are slated to be if nobody does anything to adjust the triggers of the AMT.

Such a transfer probably decreases inequality overall, and could be justified on Rawlsian leximin grounds. Nevertheless, given the nature of the transfer, distributional considerations seem minor compared with potential effects on economic growth. Something that has a trivial effect on the bottom 75% of earners and little effect on the bottom 96% strikes me as hard to justify on purely distributional grounds. Others may not share that intuition—but if many do, that’s an argument against leximin or similar accounts of justice.

This problem is likely to affect not only the Rangel reform but any tax reform. As a result of the 1986, 1993, and 2003 reforms, the bottom 50% of earners pay little income tax (only about 4% of the total). It also almost impossible, therefore, to structure a tax reform any longer that has a significant effect on the bottom half of the income distribution. For those who share the intuition mentioned above, that means it’s almost impossible at this stage to argue for any tax reform on distributional grounds.

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Back to the 70s

House Ways and Means Chairman Charles Rangel has revealed the details of his plan for sweeping tax reform. As the Wall Street Journal observes, the plan has the virtue of making it clear what we might expect from a Democratic victory in the next election. It’s essentially a return to the tax policies and resulting stagflation of the 1970s.

The package is complex, and the static revenue estimates that relate its various parts are worse than useless, so let’s just look at the pieces individually:

  1. Reduce the corporate tax rate from 35% to 30.5%. That’s an excellent idea. Our corporate tax rate is one of the highest in the world, and provides a strong incentive for companies to locate offshore. Compliance costs are vast. A better idea would be to eliminate the corporate income tax altogether. (Remember when Ronald Reagan proposed that? Reporters took it as one more crazy Reagan idea, but, to their amazement, found that the economists they interviewed liked it.)
  2. Eliminate the Alternative Minimum Tax. I’m no fan of that tax—I was caught by it last year—but it actually has a number of virtues. It’s close to a flat tax with few deductions. It’s beginning to catch lots of middle-class people only because (a) Bill Clinton and the Democrats in Congress raised the AMT rates early in his Presidency and (b) amounts that trigger the tax have never been increased to compensate for inflation. Reduce the tax rate to its 1992 level, update and index the triggers, and the tax would go back to applying to relatively few people. Instead, Rangel proposes its elimination. What’s the difference? The AMT often hits people who have large deductions, including large state and local tax bills and large amounts of mortgage interest. Eliminating it subsidizes people in high-tax blue states such as New York and New Jersey as well as people in expensive real-estate markets who borrow heavily. I don’t see why the federal government should subsidize high state taxes or high real estate prices, so I don’t see elimination of the AMT as particularly desirable.
  3. Apply a 4% surcharge to couples earning over $200,000 and a 4.6% surcharge to those earning over $500,000. That would raise the marginal tax rate of those earning $200,000-336,550 to 37%; $336,551-500,000, to 39%; and over $500,000, to 39.6%, effectively reversing the Bush tax cuts. [UPDATE: I missed the fine print, that this is in addition to reversing the Bush tax cuts.  The rates would actually rise to 39%, 43%, and 44%, respectively.] Whether this would raise much revenue is doubtful, since people with high incomes tend to have choices about how much to take as taxable income. What it would do, surely, is slow economic growth. Moreover, though this will be sold as raising taxes on the rich, a couple making $200,000 in most urban areas is unlikely to feel rich.
  4. Raise the tax rate on capital gains from 15% to 19.6%. This is unlikely to raise the revenue Rangel projects; indeed, it’s likely to lose money. Every increase in the capital gains tax rate over the past 30 years has lost money; every decrease has made money. The reason is two-fold. First, lower capital gains rates encourage people to take profits and sell stock, moving capital to more productive uses. Higher rates encourage them to maintain their holdings, even if there are more productive uses of their capital. The result of higher rates, then, is fewer trades, and so less to tax, as well as lower economic growth as capital is held in less productive investments. Lower economic growth makes holdings less valuable, moreover, so the value of investments actually declines. Second, that indirect effect is coupled with a direct effect as taxes are built into stock prices. A thousand points off the Dow, anyone?

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Feline Friday

Zadok explores the front yard.On Fridays, I plan to publish a picture of one of my “animal companions,” to use the absurd politically correct phrase. (“Absurd,” because the relationship isn’t very reciprocal—they don’t feed me or clean my toilet!) This is Zadok, so named because one of my students found her a few years ago around the time of the annual Baroque Festival, in which we were singing Handel’s Messiah and Zadok the Priest. Unlike the real Zadok, she’s a girl, and she isn’t a priest. She’s Zadok the Beast.

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