Tag Archives: politics

Who do you trust?

When I was in high school I was staunchly conservative. Even then I disliked the idea of party loyalty and tried to subject friendly ideas to criticism,  but there was a kind of filter in place. When I found problems in conservative arguments I would react by trying to fix them, assuming that the core concept was sound and that the argument needed to be strengthened. But with anything coming from a liberal perspective I would assume it was wrong and look for problems as an excuse to dismiss it, to declare victory for the opposing view. I think it’s a pretty common trap for young people, particularly those who think of themselves as intellectual, which I certainly did.

But economics was a difficult place to apply this kind of attitude. Try as I might, I couldn’t get the core conservative ideas to work. I could improve the arguments, but it always felt like trying to prove that 1+1=0. Eventually I gave up, and decided that economics was simply an area I could not master, that it was a confusing subject that defied understanding and only people who had some mysterious talent could make sense of it.

That changed when I stopped thinking of myself as a conservative. When I started looking at economics from a less partisan perspective I realized that the problem wasn’t economics. In fact when I started reading Paul Krugman it all fell into place. It wasn’t just that he was arguing that 1+1=2, he went further and also showed that 1-1=0. All the pieces that had confused me now made sense. The entire discipline went from a frustrating obstacle to a meaningful, useful tool.

So I when I read Krugman saying this:

What Samuelson does is to throw up his hands and declare that we just don’t understand what’s going on in the macroeconomy. How does he know this? He talks to several people who declare themselves deeply puzzled by events — notably, Lorenzo Bini Smaghi and Allan Meltzer.

I see my own past mistake. Samuelson and Meltzer were the kind of people I used to assume understood economics. And it’s small wonder that I had a hard time understanding economics, when faced with something that contradicts their understanding they declare the subject a lost cause. The smoking gun they’ve been pointing to for years turns out to be based on an error. When they’re forced to face up to that they say that it’s just so complicated and unintelligible that understanding is impossible.

It’s not just that I was biased. The real problem is that the structures I used to evaluate economics all hid my bias. Politicians, business men, the news: every source I trusted to inform me pointed me towards the same figures as credible sources of economic understanding. Somehow those sources were immune to being discredited. It wasn’t until I started evaluating their credibility for myself that I saw how flawed they were, and realized that the credit they were given was political or personal, but didn’t come primarily from their economic skills. Once I stopped believing that economics was a nonsense world where good was bad and up was down, once I entertained the possibility that the liberals were the ones who got it, it ceased to be confusing and mysterious.

This idea that economics is a mysterious discipline, so full of contradictions and hidden variables and unknowns that no one can really understand it, comes up a lot. This idea is common not because it’s true, but because people want to believe it. No one can master every subject, and most people find economics complex and boring. So they look for sources they trust to tell them what they need to know. When those sources fail it’s much easier and more comfortable to believe that no one got it right than to consider that they were trusting the wrong sources.

Some real hope and change

For the first time in about six years, I’m feeling hopeful about the Republican party. At the annual Republican retreat big issues included finding a way to not ruin the economy and not talking about rape. I know some are mystified that these are things that need to be said. That’s fair, but here we are. In the madness of the last campaign they needed to be said to some, but they were not. That they are being said now is progress.

Combine that with an actual compromise on the debt ceiling and I feel like we’re seeing a really good shift in attitude. The compromise isn’t simple, as rather than raise the debt limit it will allow the government to temporarily ignore it. It’s contingent on the Senate passing a budget, and it’s only a three month solution. But it’s a good solution, reached well in advance of the deadline. This type of negotiation, with the Republicans asking for something reasonable and the Democrats agreeing to it with time to spare, was unthinkable last year when the debt ceiling was an issue.

I want to be clear here. I don’t want the Republican party to compromise its ideals. I’m looking for them to reject obvious falsehoods, like birtherism. I’m looking for them to accept hard truths, like global climate change and the economics of depressions. But most of all, I’m looking for them to embrace compromise and to accept the idea that they will always have to share power with people they disagree with. We’re still a long ways from there, but this debt ceiling resolution gives me hope that we’re moving in that direction.

A quick note on the Hastert rule

Ezra Klein has an interesting piece on the Hastert rule. I wasn’t aware of it, so here’s his brief summary.

“The Hastert rule isn’t an official rule of the House. It refers to former speaker Dennis Hastert’s practice of bringing bills to the floor only if a majority of the Republican Party — his party — supported them.  It means a bill that has 125 Democrats’ support but only 100 Republicans’ support never comes to the floor, even though it would pass easily if it did.

Speaker John Boehner has typically followed the Hastert rule.”

The entire piece is worth reading, but what particularly caught my eye was this quote by Hastert himself:

“but when you start making deals, when you have to get Democrats to pass the legislation, you are not in power anymore.”

This seems painfully obvious, but shouldn’t the marker be what you can accomplish without those compromises? A lot of news has been made recently about how completely dysfunctional DC has become and how much effort has to be made just to keep the light on, to prevent imminent disasters intentionally created by Congress. I would suggest that this is exactly why.

For Hastert’s attitude to be reasonable Republicans would need to be able to pass meaningful legislation without Democratic support. They cannot. Republicans are not in power right now. But ,just as in economics, they refuse the evidence and demand to have their way. The result is a breakdown of governance and a lot of wasted time and money, and a lot of unnecessary suffering.

The prediction war

In the last few days before the election, the story I found most fascinating wasn’t who was going to win, it was how close the race was and how we could tell. On the one side, you had traditional reporters analyzing the politics and news and people’s reactions. On the other, you had people like Nate Silver of FiveThirtyEight doing poll analysis.

Nate Silver collects polling data and uses statistics to try to predict elections. In the days leading up to the election his analysis suggested that Ohio had a 99% chance to elect Obama and Obama had a nearly 75% chance to win the election. Pundits like Dylan Byers of Politico laughed at him. They said it was absurd to suggest that Obama was so far ahead in what was clearly a too close to call race. The Romney campaign was sure not only that it was a dead heat, but that they would eventually win.

These competing views came to a head during the election coverage itself on Fox as Karl Rove cautioned that Ohio had been called prematurely despite the decision desk standing by their analysis. The Ohio results played out exactly as the decision desk had predicted.  In the end, it appears that Nate Silver was actually being conservative. The election was much less close than he predicted, with Obama taking well over 300 electoral votes. The analysts claiming that we were in a dead heat, that the election was too close to call, were clearly wrong.

And I think the most significant thing to take away is that this isn’t an isolated incident. This dynamic is repeated all through American politics lately. Is the economic recovery a failure because it wasn’t v-shaped like the last few, or is it respectable because we’re doing better than the rest of the developed world? Is global climate change a liberal conspiracy or are we seeing increasing evidence of human impact on the world around us? Will cutting tax rates cause a huge economic boom and improve the deficit, or do we need to increase taxes if we want to pay for the deficit? Can ivory tower liberals with math and science really know as much as they claim, or are things like the economy and climate just too complicated for people to ever really understand.

In all these issues, I side with those who say that careful analysis or details and history are the way to understanding. Broad applications of logic and common sense are a good starting point, but they should not be used to reject a deeper understanding. Gut feelings are useful in a pinch, or when deeper understanding isn’t available, but they should not be used in place of research and facts. And those of us who don’t have that kind of expertise need to be willing to look to those who do for guidance, not look down on them for saying things that don’t support our understanding of the world.

Romney’s impossible plans

Mathematically impossible” is a pretty strong statement. But it’s how the non-partisan Tax Policy Center described Romney’s tax plan. It’s not a close call: they aren’t complaining about margin of error or nitpicking. That would be impossible since Romney hasn’t provided any specific cuts to nitpick. What they did was take the concepts he has proposed and try to implement them in any way possible. They tried to design a plan, any plan, that fit his stated goals.

Let’s start by looking at his plan. Romney wants to significantly reduce marginal tax rates, the base percent people pay on each income bracket. And he wants to do it without increasing the deficit. To pay for it he plans to eliminate loopholes and deductions in the tax code. This is a fairly standard concept for tax reform referred to as broadening the base. He also doesn’t want to change the distribution, which means he doesn’t want any particular group to pay more or less than they are now. There are some Republicans who want to decrease taxes on the rich and increase taxes on everyone else, and Romney is specifically saying he doesn’t want to do that. Unfortunately, it turns out that isn’t possible.

While Romney hasn’t specified what he would cut, he has said how much he wants to reduce marginal rates. This tells us how much he needs to cut, and it’s too much. As many problems as there are in the tax code, you just can’t get enough money by eliminating deductions and loopholes to pay for that many cuts without a massive shift in the tax burden. Especially since his plan specifically says it will maintain current rates on interest, dividends and capital gains, which the rich use much more than anyone else. This means no matter which deductions you cut you end up with a lot less taxes on the wealthy and a lot more on everyone else.

Which isn’t to say taxes should remain as they are. The state of the tax code is a problem, and it does result in wildly unfair variations in how much people with similar income pay in taxes. But many people, particularly conservatives, have a flawed impression of how much money that actually accounts for and what reform would do. It is a myth that loopholes in the tax code are such a big problem that fixing them is an easy way to solve our Federal budget problems. Romney is intentionally exploiting that myth with his claim that he could pay for his wish list by closing loopholes and removing deductions.

Ezra Klein sums up Romney’s plan as:

“cut taxes by trillions of dollars, increase defense spending, keep entitlement spending on pretty much its current path for the next decade, and balance the budget.”

This should set off even the most idealistic optimist’s “too good to be true” alarm. If you bother to look at the numbers it’s not just unrealistic: it’s impossible.

So what is Romney actually going to do? Well, he could ignore the claim that he would keep the tax distribution as it is, and instead decrease taxes on the wealthy while increasing them on everyone else. He could also skip the hard work of eliminating deductions and pay for his tax breaks with deficit spending, the way George W. Bush paid for his tax breaks and Medicare part D. He could reduce marginal rates much less than he’s claiming he will. This is the problem with this plan. The numbers don’t add up, and there are enough competing claims that whatever you want him to do, you can make a case that it’s what he ‘really’ wants to. Voters are meant to see their preference in his plan and either not notice that he can’t do it all or assume that something else they care less about is the part that won’t happen.

What’s going to go? Cutting taxes, balancing the budget, or maintaining Medicare and Social Security and defense spending? The only thing he’s produced a real plan for is cutting taxes, and that’s the only one of those that isn’t hard. I think it’s fair to assume it’s the only one he’s really committed to.

DeMarco, Bernanke and Draghi protect unemployment and recession

This has not been a good week for economic policy news.

On Tuesday nearly every economics resource I read was condemning Ed DeMarco for refusing to consider principle reductions for home owners. Here’s the short version. Ed DeMarco is in charge of the FHFA, a government agency overseeing Freddie and Fannie Mae. With so many people still owing more on their home than it’s worth, allowing homeowners in financial distress to refinance at current rates would save them a lot of money and prevent a lot of defaults. The proposed plans would all improve the budget of the FHFA. DeMarco refuses to consider this. He believes it would cause people who do not qualify to intentionally default hoping to enter the program. He also he believes the program would ultimately cost taxpayers more than it saves.

According to Jared Bernstein, the first is answered rather thoroughly by the proposed plans. He quotes a letter from the treasury as saying:

“…a borrower who defaults cannot be certain that he and she will obtain a HAMP modification, much less…principal reduction.  Therefore, a borrower would take a substantial risk be deliberately defaulting: they would have to choose to damage their credit for years to come and perjure themselves on the chance that they would be found eligible for the program.”

While it’s reasonable to think a few people might try to cheat into the program, the incentive against doing so is huge and there doesn’t seem to be any good reason to believe the number who try would be significant.

This argument seems to be his entire justification for  his claim that the program would cost taxpayers money. As both Bernstein and Krugman point out, the report he uses to support his decision, from his own agency, says the opposite. It says that taxpayers would actually make money off the program, and that’s without even considering the positive economic effects it would have.

But that’s not all! Yesterday featured an announcement from the Federal Reserve that despite conditions calling for action, they would provide none. And today, despite a recent statement by president Mario Draghi that it would do “whatever it takes” to protect the Euro, the ECB and the bank of England both announced that they will do nothing. Are we truly to believe that the Euro is in no danger under current conditions?

This all has me thinking back to this article. The main point is:

“We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives.”

And it is because the alternatives involve risk. The truth is those with the most political power are very afraid of losses, and they will give up a lot of opportunity and turn a blind eye to an incredible amount of suffering to avoid risking loss. It is up to those of us who disagree to voice that – to say that wealth should not be protected at the cost of the unemployed, and to pressure those in power to change their priorities. It isn’t because it’s impossible that this doesn’t happen, it’s because it’s complicated, and the vast majority of people who would stand against the current inaction either don’t understand or don’t care.

Pledging to not reform taxes

I don’t think many people realize how incredibly inflential Grover Norquist is. In the book The Benefit and the Burden Bruce Bartlett titled one chapter “If tax reform happens, it will be because Grover Norquist permits it.” It is not a compliment. Rather the chapter explains that Norquist is the single largest barrier in the nation to successful tax reform. Grover Norquist is, ironically, the founder of Americans for Tax Reform, and the author of the Taxpayer Protection Pledge which nearly all Republicans sign.

So why is Grover Norquist the single most powerful voice in tax policy? First, let’s talk about tax reform. There’s no ironclad definition, but it generally means removing complications and market distortions in the tax code. The last major tax reform happened in 1986, and since then a lot of deductions, exemptions, credits and complications have been added. Some of those have proven useful, others have outlived their purpose, some of them never worked quite properly, and others had unintended consequences. The purpose of tax reform would simply be to evaluate those changes and remove as many as possible to restore some of the simplicity that their addition has cost. Not only would it make doing taxes simpler, it would make then more fair and allow the market to function more properly.

Norquist has so much power because of his anti-tax pledge. Signing his pledge offers an advantage in winning Republican primaries, and breaking it tends to lose candidates elections. This has made signing and keeping it essentially a requirement for most Republicans. So what does it say? Essentially, the candidate will oppose any increase in tax revenue. It is a pledge not to raise taxes, but it is also a pledge not to remove any element of the tax code that would result in more tax revenue. It is a line in the sand opposing the government taking in any more money, regardless of spending or deficits.

Since the majority of changes to the tax code are credits, deductions or other breaks, this has the effect of completely disallowing tax reform unless it is accompanied by equal government cutbacks. This ties together two completely separate issues: tax reform and cutting government spending. Worse, it does so in a way that allows no compromise. Tax reform has historically been aimed at being revenue neutral, a goal impossible under Norquist’s pledge because every adjustment must be offset by spending cuts rather than other tax adjustments. Broadening the base is a very common conservative goal, but no matter how much they claim to support it, those who have signed this pledge have agreed to vote against any reform that doesn’t also include very large spending cuts.

The intended purpose of his pledge, according to Norquist, is to starve the beast, or to use a crushing deficit to force a significant reduction in the size of government. Unfortunately, it seems that as spending levels and taxes become disconnected voters have lost appreciation for the cost of government programs and the opposite has happened. The lower taxes get, the more deficit spending voters want. As Dick Cheney put it, “Reagan proved deficits don’t matter.” This view of taxes also distorts understanding of government spending, encouraging politicians to hide spending in the tax code. In fact, following Norquist’s logic allows politicians to increase spending and call it tax breaks.

I know some people will read this and take away that all politicians are corrupt and feel some mix of anger and despair. I can’t blame them for that, but it is very much not my point. My point is that people like Norquist must be opposed. We, as citizens and voters, must be better informed. As I noted earlier, Norquist has the incredible power he has because his tax pledge works. I do not believe that is inevitable. I’m sure that if people are informed, if they understand how flawed that pledge is, it will become a political burden rather than an asset. And if that happens Norquist will no longer have the power to prevent tax reform.