Hard Heads, Soft Hearts

I just finished reading Alan Blinder's excellent book "Hard Heads, Soft Hearts" (1987).  It is interesting, well written, and at times, laugh-out-loud funny.  For example, this comes amongst his withering criticism of supply-side economics (p. 87):

The supply siders had learned their history lesson.  Monetarism had stormed the Keynesian castle with statistical evidence, but little theory.  Rational expectationists had attacked with a powerful new theory, but no evidence.  Combining the best features of both tactics, supply siders armed themselves with neither theory nor evidence....  It proved to be an effective arsenal.

Here are a few of my highlights:

1. The book has a chapter on taxes, which mentions the regressive nature lower tax rates on capital gains (as I mentioned here).  He also notes that the gap between capital gains and income taxes is abused in many tax shelters and that deductions for business expenses of travel, dinners, etc. are also quite regressive.


2. His chapter on protectionism has some new points.  Readers with an economics background will know that protection for one industry usually comes with (even larger) costs paid by consumers across the country.  However, Blinder also points out that other workers can also lose out.  This occurs when the output of one industry is input to another.  For example, tariffs on steel increase prices to auto companies, so we may trade auto jobs for steel jobs.  This also occurs when other countries retaliate with protectionist measures aimed at other industries.  For example, rather than increasing tariffs on our steel (where they are already winning), they raise tariffs on our computer software (where they are losing), so we trade computer jobs for steel jobs.  Thus, the total cost to the economy is often larger than the wages of the jobs we are supposedly "protecting".  Blinder references a study showing, for example, that saving one auto job costs over $100K per year to the rest of us.


3. Finally, in politics, he notes that the special interests often win out because the benefits to them are visible while the costs to the general interest are hidden, or in Blinder's eloquent words, because "the benefits are concentrated, visible, and well understood, while the diffuse, subtle, and barely visible costs are sprinkled like a light mist across the electorate".  He describes how the 1986 tax reform succeeded by requiring those costs to be visible.  Specifically, since the tax changes were required to be revenue neutral, any deduction for a special interest had to be paired with a tax increase somewhere else.  This caused nearly all proposed amendments benefiting special interests to be voted down.

Difficult Facts About Marginal Tax Rates

This article presents some difficult facts for those who argue that government should pay for new spending by only increasing taxes on the rich (e.g., only increasing the top marginal tax rate). The data show that the top marginal tax rate has little if any relationship to tax returns, which appear to always stay at 16-20% of GDP.

The author argues, then, that tax rates should be set so as to best spur economic growth, i.e., to increase GDP. While that certainly makes sense, it does not by itself argue that the latter is best accomplished by cutting taxes on the rich. Tax cuts of an equal dollar amount could be given to the middle class, for example. It would be interesting to see data about how tax rates on different different income levels increase economic growth.

Whatever those results, say, however, they must be balanced against issues of fairness, of course. None would argue that we should give tax cuts, say, only to the rich.

Difficult Facts About the Housing Crisis

This article points out some facts that are "difficult" to those who (like the author and myself) accepted the arguments that the housing crisis occurred because of the community reinvestment act (CRA) or the actions of regulators on Fannie and Freddie. Those facts are that the housing bubble occurred simultaneously in many nations outside of the US, where neither the CRA nor Fannie and Freddie had substantial effect.

Two causes that still seem like possibilities are:

1. The long period of low interests rates enacted by the fed. This conceivably could have affected foreign countries as well, given how much foreign money is invested in the US.
2. Irrational exuberance or other psychological factors.

Of course, having just seen other perfectly reasonable explanations proven false, some humility about our power to find the truth through reason (in absence of all the facts) is certainly in order.

Skepticism on Ds vs. Rs

This post by Brian Caplan makes some great points about the lack of any substantive differences between the two parties. This certainly matches my experience.

For example, if you ask republicans why they supported McCain over Obama, they often cite differences that are not even real. Both support middle class tax cuts, both want to stop global warming, both are in favor of missile defense, both want to increase the size of the Army and Marine Corps, both favor restrictions on late term abortions, etc.

Similary, differences between Bush and Kerry were often more in emphasis than substance. In particular, thinking back to the start of the Iraq war, Kerry argued that it is critical to gain the support of allies (multi-lateralism), but admitted that the president must ultimately do what is in the interests of the American people. Bush argued that it was most important to do what is in the interests of the American people, but admitted that it is better to have as much support from allies as possible. What's the difference between those positions? Emphasis.

Of course, it is well known that candidates "run to the center" during an election. This is predicted by the median voter theorem as well as common sense. However, to win, the candidate must also get his base to turn out, and that usually requires convincing those voters of important substantive differences between themselves and their opponent.

How can a candidate do this while actually taking extremely similar positions? Rhetoric. The easiest rhetorical tactic is for him to ascribe to his opponent views that he does not actually hold, and then argue against those (which really are different) instead. This is called the "strawman" argument. And this is leads to Rs and Ds often having substantial misconceptions about the views of their candidate's opponent, like the ones mentioned above held by republicans about Obama.

Sowell Talks Past Moderates

In his brilliant book, A Conflict of Visions, Thomas Sowell explains how liberals and conservatives (or as he more accurately calls them, believers in the "unconstrained" and "constrained" visions, respectively) often mean different things when they speak the same words. For example, "equality" means equal outcomes to a liberal and equal rules/laws to a conservative. As a result, when liberals and conservatives argue about equality, they talk past each other: neither side's arguments make sense to the other since they take the same words to mean different things.

In Sowell's recent columns (for example, this one on negative advertising), he falls victim to the same phenomemon. His points about Obama's track record on various issues are only compelling under the assumption (not stated until the very end) that his record is a better predictor of his future actions than his currently stated beliefs.

When Sowell does get around to mentioning this assumption, he quickly dismisses any contrary opinion:

Does anyone in real life put more faith in what people say than in what they do? A few gullible people do -- and they often get deceived and defrauded big time.

But this assumption is the basis of his entire argument. If you instead believe Obama's recent statements are better predictors of his future behavior, then nothing Sowell says in the article will be compelling. So perhaps it would be better to focus the article on addressing the evidence for this assumption rather than simply dismissing anyone who would disagree as "gullible".

Unfortunately for non-moderates, it is easy to find examples in either direction. In fact, republicans themselves do not always believe this assumption. For example, many seem to accept McCain at his word that he would not offer amnesty to illegal immigrants despite his clear track record of trying to do so.

The fact is that no simple rule -- either Sowell's assumption or the opposite -- is always true. The moderate voter is left to make the best prediction possible taking all the evidence into account on a case-by-case basis. Those who decide Obama means what he now says will ignore contrary evidence in his record, and conservative commentators like Sowell will talk right past them as they write article after article decrying that record.

The Ultimate Skeptic

This farmer is the ultimate skeptic.

Consciousness Exists

I have often heard people (especially, computer scientists) say "consciousness does not exist". This is, quite literally, the stupidest thing one could try to argue.

The fact is that consciousness is the only thing you experience directly. Hence, its existence is the only thing you can know for sure. Everything else -- the universe, people, atoms -- is conjecture.

Don't get me wrong: I'm quite convinced that the universe is real. But consciousness is the foundation, that through which you experience and gain knowledge of the world. You cannot distrust consciousness without distrusting everything.