Ear Rational Thoughts

Microscopic view of the iPad and Kindle

This is very neat. The Kindle display is very impressive at high magnification. I've never seen one, but I would be amazed if it's not far clearer than the iPad.

Job turnover

From Arnold Kling:

[Tyle Cowen:] In a highly specialized modern economy, it is much easier to prevent jobs from being destroyed than to create them again, at least assuming those are "good" jobs in the first place.

... in an ordinary non-recession month 4 million jobs are destroyed and about 4.2 million jobs are created. Suppose that in a bad month of a recession, 4.0 million jobs are created and 4.5 million jobs are destroyed. Which of those 4.5 million jobs ought to be saved, because they might come back in a stronger economy? No one in Washington knows.

A long vacation

From the Economist, quoting Megan McArdle quoting the Economist, referring to retirement:

I don’t know if it’s ever going to be realistic that everyone saves enough to spend the last third of their life on vacation.

Well said. They conclude:

As we live progressively longer we must also rethink our retirement expectations. Retiring at the same age that your parents did, or earlier, can no longer be the expectation...

The problem is a double-whammy. First, the cost of keeping people alive goes up exponentially the older they get. Second, the longer people live, the longer they spend "on vacation", reducing the fraction of their life that they spent producing things. The problem is exacerbated for the infirm, who cost even more to keep alive and must (rather than choose, as is the case for the healthy) retire earlier. The result is a larger fraction of our resources going to keep people alive who are not ever going to produce additional resources in return.

If people were paying for those resources out of their pockets it wouldn't be a problem at all. But unfortunately, we have made an open-ended commitment to entirely insulate people from both costs. When thought about in this way, it seems clear that this path can NOT be sustainable.

Addendum: See this post from Arnold Kling:

As McArdle puts it,

Whether you collect a dividend check, get a corporate pension, or live off your social security, your retirement is funded by real claims on the output of people in the workforce.

For any given level of output, more consumption by one group (say, people over 65) is going to reduce what can be consumed by everyone else.

Don Boudreaux continues his quest

... to educate the masses, here:

You assert that “The bulging American trade deficit means that rising consumer demand is flowing to suppliers overseas rather than fueling growth at home”

... Why do foreigners accept green pieces of paper in return for the goods and services these foreigners produce for Americans? It’s not because foreigners have an insatiable demand for tiny monochrome prints of dead American statesmen. Rather, foreigners accept dollars because they want to spend those dollars, either on American exports or on American assets. Another term for spending dollars on American assets is “investing in America.”

The U.S. trade deficit rises whenever the amount of dollars foreigners invest in America rises relative to the amount of dollars foreigners spend on American exports. ...

and here:

Observing that suburban lawns consume land as well as other resources, Laura Vanderkam concludes that lawns are wasteful and environmentally destructive...

Newspapers – such as the one that Ms. Vanderkam writes for – consume trees, petroleum (in the form of ink), electricity, and numerous other resources. Were I as confident in my knowledge and speculations as Ms. Vanderkam is in hers, I might divine that newspapers are an unfortunate “fashion” that we would be wise to avoid. ...

Laffer maximization

Megan McArdle reminds us of a very important point:

... I have been puzzled by the number of liberal bloggers who have been taken with Dylan Matthews' compendium of economists and politicians commenting on where the Laffer Curve might maximize.

I mean, it's an interesting side question, but it doesn't really tell us much about policy, unless you actually think that the object of policy is to maximize the share of income the government takes.

Megan is of course correct. The goal of government policy is not to maximize how much its citizens send it in tax revenue. Government taxes are an expense for citizens and as with all expenses (gasoline, food, shelter, etc.), people should seek to minimize them.

But she doesn't go far enough. The Laffer Curve - which relates tax rates to government revenue - does tell you where the government should set tax rates. But it's just not at the peak. The amount the tax rate should be set at is the amount that maximizes total earned income for its citizens. After all, if it sets it any higher, it will deprive citizens of income - i.e. it will make them poorer.

The way to find this from the Laffer Curve is to divide total government revenue (Y axis) by the tax rate (X axis). For example, here is a sample Laffer Curve (to my knowledge, no one knows the exact shape of this curve so I just made one up). As you can see, the peak of the curve (blue line) is at a tax rate of 70% and it smoothly slopes from 0 in either direction:

The dashed orange line is the total income of the citizens in that country. As you can see, in this (albeit fictitious) example, the peak of that curve is at a tax rate of 0.

Will this value - tax rate = 0 - hold for all Laffer Curve shapes? No, and it probably doesn't hold in the "real world" version. But it's worth noting that it is rather difficult to devise a shape of the Laffer Curve where the tax rate that maximizes wealth for the citizens is not quite low.

The power to do good

From this piece in Der Spiegel referring to the recent news that 40 billionaires (led by Bill Gates) would donate large sums of their own money to charity:

I find the US initiative highly problematic. You can write donations off in your taxes to a large degree in the USA. So the rich make a choice: Would I rather donate or pay taxes? The donors are taking the place of the state. That's unacceptable. ... It is all just a bad transfer of power from the state to billionaires. So it's not the state that determines what is good for the people, but rather the rich want to decide. That's a development that I find really bad. What legitimacy do these people have to decide where massive sums of money will flow? ... In this case, 40 superwealthy people want to decide what their money will be used for. That runs counter to the democratically legitimate state. In the end the billionaires are indulging in hobbies that might be in the common good, but are very personal.** [emphasis mine]

It's not clear to what extent this person - himself a multi-millionaire - speaks for the rest of Germany. But it's a really interesting (and frankly, terrifying) look into the European-social-democrat mind. "It's not the state that determines what is good for people"? "People want to decide what their money will be used for. That runs counter to the democratically legitimate state."? What? Those are notions so foreign to me - and I believe to most Americans - that it seems caricatured. As in, I would almost expect to see this in a Republican smear campaign of Nancy Pelosi.

If this is what the modern American Progressive movement is thinking, that's really, really bad for the rest of us.

H/T my brother.

What does it mean to be ahead?

In general, Europeans do drive different automobiles, which tend to be smaller and more efficient. ... In Europe, the scooter is far more popular and differentiated (the scooter with roof is a common sight). Bicycles are also more common and differentiated, and the institutional supports for cyclists are more highly developed (cycle superhighways are old news in Europe).

And then there's public transport. From buses to trams to trains to high-speed rail, Europe is well ahead of America.

That's quoted by Megan McArdle in this post on carbon taxes and innovation.

I don't dispute any of the facts of what is said above (or any in the rest of the post). But it's interesting to use the word "ahead" to refer to public transportation - that seems to be a matter of opinion. Why is having more public transportation considered better than the alternative?

I mean, single family homes are much less efficient then a single large gymnasium capable of housing thousands of people. And restaurants with 2 or 4-person tables are much less efficient than a giant cafeteria. And yet I don't think anyone would say that a country where the majority of people live 1000 per in large gymnasiums, or eat all of their meals in large cafeterias was "ahead" of America. Ditto tiny cars, scooters and bicycles in comparison to a Camry.

I understand the point that without a carbon tax, the true cost of the Camry isn't necessarily included in the operating cost. But it's worth noting that the "solution" is actually a reduction in living standards. Which is not what you would assume when you hear the word "ahead".

Laffer on tax rates

Arthur Laffer on soaking the rich:

As a result of higher tax rates on those people in the highest tax brackets, there will be less employment, output, sales, profits and capital gains—all leading to lower payrolls and lower total tax receipts. There will also be higher unemployment, poverty and lower incomes, all of which require more government spending. It's a Catch-22.

Higher tax rates on the rich create the very poverty and unemployment that is used to justify their presence. It is a vicious cycle that well-trained economists should know to avoid.

Miscellaneous Links

I'm short on time, but I don't want to lose track of some of these interesting points from the past few weeks.

Don Boudreaux on promises:

Pres. Obama is a politician. His promises to voters to pursue science rather than politics are as credible as a prostitute’s promises to a client to pursue love rather than profit.

Arnold Kling does the best job I've seen of explaining the CAPM:

The portfolio separation theorem says that the number of portfolios that are needed to produce an optimum allocation is equal to the number of characteristics that investors care about. In particular, if investors only care about expected return (mean) and safety (minimizing variance), then every investor's portfolio can be computed as a mix of only two dominant portfolios.

David Brooks on the Grinds vs the Princes:

If you go to business conferences, you know that at lunch it is definitely better to be seated next to a prince than a grind.

Robin Hanson on the congestion vs scale:

Products and services (i.e., “goods”) can be divided into two types: those that on net suffer from congestion effects, and those that instead benefit from scale effects. For congestion goods, the more that one person consumes of the good, the harder it gets for others to consume it. For scale goods, in contrast, the more that some consume, the easier it gets for others to consume.

Don Boudreaux on why stimulus need not stimulate.

Arnold Kling on "neo-reactionaries:

The ruling class's appetite for deference, power, and perks grows. The country class disrespects its rulers, wants to curtail their power and reduce their perks. The ruling class wears on its sleeve the view that the rest of Americans are racist, greedy, and above all stupid. The country class is ever more convinced that our rulers are corrupt, malevolent, and inept. The rulers want the ruled to shut up and obey.

...The grandparents of today's Americans (132 million in 1940) had opportunities to serve on 117,000 school boards. To exercise responsibilities comparable to their grandparents', today's 310 million Americans would have radically to decentralize the mere 15,000 districts into which public school children are now concentrated.

Arnold Kling gives reasons for pessimism regarding unemployment:

Robert Fogel tells us that the three long-term superior goods are leisure, health care, and education. Obviously, an increase in leisure does not increase employment, although it certainly creates opportunities in complementary goods and services.

But health care and education in the U.S. are arguably the most cartelized labor markets in the world. How many entrepreneurial ideas in those fields are rendered implausible by credentialing issues? If you want your innovative school to draw customers, you have to get accredited--not to mention dealing with the fact that your competition gets public funds and you do not. Your innovative health care delivery process will run afoul of medical license and practice laws.

Dave Altig finds something curious in the unemployment numbers, with good graphs:

The disconnect between the supply of and demand for workers that is reflected in statistics such as the unemployment rate, the hiring rate, and the layoff rate can be dynamically expressed by the Beveridge curve. Named after British economist William Beveridge, the curve is a graphical representation of the relationship between unemployment (from the BLS's household survey) and job vacancies, reflected here through the JOLTS."

Since the second quarter of last year, the unemployment rate has far exceeded the level that would be predicted by the average correlation between unemployment and job vacancies over the past decade. Tuesday's report indicates that the anomaly only deepened in the first two months of the second quarter.

Arnold Kling makes the claim that individuals in the US have lost their voice over the past several decades. He makes some good points.

David Henderson on power:

... there will be need for actions which are bad in themselves, and which all those still influenced by traditional morals will be reluctant to perform, the readiness to do bad things becomes a path to promotion and power. The positions in a totalitarian society in which it is necessary to practice cruelty and intimidation, deliberate deception and spying, are numerous. ... Yet it is through positions like these that the road to the highest positions in the totalitarian state leads.

Arnold Kling summarizes his "recalculation story" of which I am a big fan.

Megan McArdle makes the case that the 30 yr fixed mortgage is a big reason for the recent financial turmoil

Unemployment Insurance

This post from Freakonomics blog reminds me to post something on unemployment insurance.

First off, the post on Freakonomics is about whether unemployment insurance encourages people to not work. The post - and the comments that follow - frame the question incorrectly. They ask it as if unemployment insurance causes laziness. When in reality, I think it's really more a question of selectiveness.

For example, if an out of work software engineer has an offer to work as a software engineer at his old salary and he declines because he's getting an unemployment check, that is laziness. This seems to be the way it is being framed in the post above as well as in most of the media coverage I've seen. I think the case of laziness is so ludicrous that it is surely almost non-existant.

But if the software engineer has an offer to work, e.g. at Walmart for much less money and he declines because he's getting an unemployment check, that is selectiveness. It's worth noting that either way - laziness or selectiveness - the amount of unemployment is higher than it would otherwise be.

I think the case of selectiveness is quite prevalent, and it can even be seen from reading the comments in the post above. People who respond and are unemployed are indignant at the accusation of laziness. And yet they describe their situation in exactly the way I've described selectiveness - applying only for jobs in their "old" field; not taking jobs making less money, etc.

The second thing about this is that I think there's a much better way to handle unemployment insurance that would render the whole question moot. The key is to give people ownership of their unemployment insurance.

For example, let's say the government takes 5% of your salary every month and puts it into a special (personal) account. Your contributions accrue - possibly with some interest, as if you had purchased gov't bonds with them - as long as you are employed. When you are unemployed, you are then allowed to take any amount out per month of the account up to 50% of your previous salary (which is similar to today's terms). When the account reaches 0, your unemployment checks stop. If you get a job before then, the accrual resumes.

The key thing is that any money left in at the time you retire is transferred to you. So that staying on unemployment is draining down potential future money. In contrast with today where staying on unemployment is only draining down gov't money that would otherwise not come to you anyway.

I think another key feature should be to allow you to continue to draw down the account even when you find a job. For example, you could allow people to draw from the account any amount (up to a max of 50% of their previous salary) as long as the sum of (unemployment check + new salary) does not exceed their previous salary. For example, if someone earned $50K before being laid off and finds a new job for $35k, they could continue to draw up to $15k from their account if they want. This way, finding a job at a substantially lower salary still allows you to take home more pay (which is the opposite of today's system where additional salary does not lead to more take home pay).

In addition, this doesn't preclude any progressiveness. For example, the gov't could "top-up" the accounts of people with very low incomes by, e.g. making their 5% contribution for them, or matching their 5% contribution, or anything in between.

It also does not preclude tinkering during very deep recessions. For example, if this was in place for this recession, the gov't could decide to take everyone who was unemployed during 2008-2011 and add some amount to their accounts. This would have the effect of extending their unemployment checks, but it would not provide any incentive to stay out of work. It would effectively penalize those who are working, but in a lot of ways that speaks to most people's sense of fairness.