The President was right (though politically clumsy) to go after those luscious 529 college accounts

At the State of the Union, President Obama proposed limiting the tax advantages of 529 college savings accounts. If you’re an affluent college parent, you probably already know this. If you’re not a parent and/or you are not affluent, you probably said “Huh? What is a 529 account?” Which rather exemplifies the problem.

I have 529s for both of my daughters. I recommend these to all my friends with children. These accounts allow you to accumulate tax-free investment gains to help finance your kids’ college. These also provide a good mechanism for relatives to chip in on birthdays and holidays. Given time to accumulate interest, a few hundred dollars a year from Grandma can easily accumulate to cover a whole semester at a state college. 529s provide a convenient nudge to help you save more, too, though the net impact of such tax-advantaged savings vehicles appears to be quite limited.

The president’s proposal produced an entirely-predictable uproar among affluent families and within the industry of financial and college-savings advisors.  Leading Democrats such as Nancy Pelosi and Charles Schumer immediately ran from the proposal.  Political heat was so intense that President Obama was forced to beat a hasty retreat and to abandon the proposal….

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Mitt Romney Says the Thing That Is

I notice that progressive bloggers and Tweeters are pointing and laughing at poor little Mitt Romney for his sudden outburst of populism. But it seems to me that, as pleasant as laughter is, what’s really called for is a smile of grim satisfaction. He has told the truth – albeit probably insincerely – and there’s every reason to hope that he and his party will come to regret it.

It is among the core Blue-Team beliefs  that the current level of income inequality is unjust, inefficient, and socially destructive, and that public policy should attempt to reduce the degree of inequality.

The Red team – up until today – has believed, or at least said, that market-driven inequality reflects natural differences in economic contribution and is therefore just, while taking from “producers” and “job creators” and giving to the “47%” is unjust, and that the great inequality of outcome maintains incentives and thus contributes to efficiency. They love to criticize redistributive policies as “class warfare” and emphasize the importance of making the pie bigger rather than carving it up more equally, along with (formal) equality of opportunity rather than equality of result.

So when Mitt Romney describes rising levels of disparity – the rich getting richer while the number of poor people increases – as “income inequality getting worse,” he is making a major rhetorical concession to the good-guy side.

Of course he doesn’t really believe it, but hypocrisy is the tribute vice pays to virtue. Once the GOP concedes the claim that, from where we stand now, more equality would be an improvement, I don’t think it’s hard for the Democrats to win the argument about whose policies would do better at moving money from the rich to the middle class and the poor.


“No one brought Dodd-Frank down from Mt. Sinai,” said the worshipper of the Golden Calf.

Footnote I’ve heard  hens cackling, and dogs snarling. But who ever heard of a hen s(n)arling?

New nonsense from Heritage

Does anyone at the Washington Post read their Op-Eds before they go up? Like, a quick check for coherence and plausibility?  Today we have the Heritage Foundation’s chief economist (really) getting everything about the Laffer Curve wrong.

OK, let’s go over it again, time to rewhack the zombie.  The LC is a graph of government revenue against income tax rate.  Not GDP, not the sum of human happiness, not moral standing of a nation in the world, not any of those things: government revenue. The curve, like Ohio, is zero at the ends and high in the middle, duh; if the government takes all of everyone’s income, no-one will bother to earn any income and therefore not  pay any taxes; if it doesn’t take any, it doesn’t get any.  Again, duh.  Where the maximum is, and how steeply it slopes down where, are debatable with data, but a hat-shaped curve that is zero at the ends is assuredly the correct description of this relationship. Yes, Virginia, there is a Laffer Curve. No-one ever said there isn’t; how could there not be?

The LC, sketched without units on a napkin, is trotted out by people who want to make taxes lower: “see, the government could actually get more money if tax rates were lower!” (Notice that the tax rate axis always changes  from average income tax rates to top rates (what only a very few very rich people pay, and the only rates the Heritage Foundation’s funders care about) in this conversation.) To use it that way, you have to believe the high point is to the left of where we are now, not just that the curve exists, and this argument never, ever, comes with any data bearing on that. But you also have to be a liberal who wants government revenues to be higher!

Even on the Heritage payroll, Moore can’t recite the traditional Laffer refrain with a straight face, but after backsliding dangerously, he falls into complete heresy:

But today, even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue — except in extreme cases when rates are at the very highest range of the curve….It’s a happy byproduct that [economic] growth will help generate higher revenue than the government’s “static” estimates always undercount.

Happy? Stephen, Stephen, revenue is what the government uses to pay its jack-booted thugs to take away your freedoms. Where is Grover Norquist, when we need him to ferret out these red Commies at Heritage, and explain to de Mint that the party line is ” less revenue for government, not more”! Why is Moore not on the street this very morning, with a tin cup and a badge of shame?

Moore’s argument wanders through a bunch of post hoc ergo propter hoc anecdotes that prove exactly nothing, and he  is happy to wrap up by reporting that middle-class incomes going up 30% from 1980 to 2005  is (i) upward mobility (ii) caused by tax cuts. Well, the middle quintile’s share of after-tax income went from 16 to 15% during that time; he lowest quintile’s from 6 to 5.  The top 1% were quite upwardly mobile, as they scarfed up pretty much the whole increase in national wealth over that period, and their share of after-tax income went from 9 to 15%.  Except at the Heritage Foundation, that’s not upward mobility, that’s the rich getting ahead while everyone else stands still or falls behind,  exactly what you would expect when you collect less taxes from the very richest people and otherwise ply them with favors like carried interest deals.

Yes, there is a Laffer Curve. No, it tells us nothing about what tax rates should be. Yes, the Washington Post Op-Ed page needs warning signs.



Economist fail

No, not “an economist”, the magazine.  In a long discussion of winners and losers from low oil prices, we find what has to be the stupidest assertion in a mainstream publication this month, maybe even ever, who knows:

But the overall economic effect of cheaper oil is clearly positive.

Really. This is hard to even talk about without insulting the intelligence of our readers, but it’s in The Economist, for Pete’s sake. How does that work? Does The Economist think ‘overall economic effects’ just end in a few decades, before the, um, economic effects of climate change really kick in? Has a radical Christian sect with a line on the rapture schedule taken them over?  Or has the law of demand been repealed when we weren’t looking, so lower prices cause people to use less instead of more?


More canaries in the media coalmine

Two big journalism stories broke today that seem to have nothing to do with each other, but are actually the same chicken coming home to roost and coming home to roost. Rolling Stone’s University of Virginia fraternity rape story in Rolling Stone is falling apart, and as it happens, so is The New Republic.  Why are these chapters of the same book?  Because both are what happens when text, in a digital world, has no viable economic framework.  Magazines used to pay fact checkers and editors to ride herd on reporters and skeptically demand backup, sources, confirmation, and evidence: Rolling Stone can’t afford that stuff any more and left its reporter out on a limb without an essential support system.  The New Republic is a whole enterprise, a paper magazine, that can’t support itself the old fashioned way, so a tech millionaire who knows about journalism from Facebook is going to take the name and use it for something completely different.  How different? His new CEO admits he can’t read more than 500 words of anything at a time, and the staff has all hit the street.  I predict with confidence that the new New Republic will cost Hughes so much money to keep afloat that he will euthanize it within two years, unless he just want to pay for a hobby mouthpiece.

These are not the first nor the last times we will see the reality that content is a non-rival public good will make itself known.

If no-one can hear us…

Last week was the annual research conference of the Association for Public Policy Analysis and Management. For those who do not frequent academic conferences, this is a get-together of people like me and several of yr. obdt. bloggers, where we break up into “sessions” of about an hour and a half, in each of which three or four people present recent research.  A program committee of really noble souls puts these together out of proposals so they have some internal coherence: four papers about urban crime, or three about state pension accounting, and like that. Hour after hour of smart people saying more interesting things than you can possibly absorb.
The outgoing APPAM  president gives an address, on a topic of his or her choice, that is well-attended and subsequently published in the organization’s Journal of Policy Analysis and Management.  This year we heard from one of my  very favorite colleagues, Angela Evans, formerly of the Congressional Research Service and now at UT Austin scarfing up every teaching award in sight.
I thought it was an excellent talk about stuff on which Angela and I almost entirely agree, but at about 49:00 she has one of those moments professors anticipate with, um, qualified enthusiasm: in front of her whole tribe, and the world on YouTube, one of her own students asks an excellent question (heart leaps) to which she has only half of a good answer (heart palpitates): how is all this excellent policy analysis and research supposed to get to the public? Angela has always been all over the need for pointy-heads to explain their stuff in languages people can understand, and not browbeat them with regression coefficients and the kind of technical stuff we play catch among ourselves with.  But she didn’t say a word about  the most important current challenge to good governance in a democracy (and othercracies), namely the technology-driven collapse of the business model for diffusion and creation of content.

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I despise the institution of tipping for service.  There’s no practical way to escape it (obviously no decent person will stiff a waiter in the service of a principle), it’s degrading to people who are no more “servants” to me in a restaurant than I am to my students, the “expected” tip has been increasing as a percentage of the tab for no reason (because its a percentage, inflation is automatically covered already), and in some contexts (like New York garages and apartment houses) it’s only slightly above extortion, with a soupçon of positional arms race.  Furthermore, it’s an invitation to tax evasion.

Here’s the beginning of a worthy trend: some high-end restaurants here are just putting a stop to it, and apparently to everyone’s approval.  Now we just need to increase the menu prices 20% and have done with the whole mess.  I like charging extra for checked bags on an airplane; why should people without bags pay to schlep mine across the country?  But having dinner put on your table is not an optional part of dining in a sit-down restaurant.  Roll it all up together and have done with it; let management manage things like salaries, training, and working hours.

[rev 24/X] from the linked (paywall) article:

Citing both pragmatic and philosophical reasons, a small collection of Bay Area restaurateurs are eliminating tipping. Instead of expecting diners to leave a tip, the restaurants will automatically add a 20 percent service charge to all bills — and not accept any additional gratuity beyond the service charge….Rather than relying on tips, the restaurants will compensate staff on merit-based hourly wages and revenue-sharing. It’s a system common abroad….So far, the restaurants’ respective staffs have been largely supportive, according to owners. Camino’s Hopelain estimates that cooks stand to receive an hourly increase of 50 cents to $1, while servers’ pay will remain steady, or perhaps decrease 50 to 75 cents an hour….One major shift will be in reporting tips for tax purposes. Generally speaking, cash tips have a tendency to go unreported among restaurant servers. Once the service charge becomes an official line item on a receipt, people will be accountable. Hoffman [co-owner] said employees at Comal will not see a change in their income if they have been declaring all of their tips.

Nudgefail: The Case of Organ Donation

Behavioral economics is cool science with numerous applications. The concept of nudges, for example requiring newly hired workers to sign a form to stop automatic retirement contributions rather than having to sign a form to start them, is certainly useful in many contexts. But as I write in Washington Post’s Wonkblog, it can’t solve some problems, including the shortage of organ donations, which leaves over 120,000 Americans on the waiting list:

One commonly proposed solution to the organ shortage derives from behavioral economic “nudge” principles. Rather than requiring Americans to complete paperwork in order to opt-in to donation at death, the country could shift to the European model of presuming that donation at death was acceptable. But Tom Mone, chief executive of OneLegacy, the nation’s largest organ and tissue recovery organization, points out that “The recovery rate for deceased donors in the United States is actually better than that of European nations with presumed consent laws. The United States rigorously follows individual donor registrations whereas presumed consent countries actually defer to family objections.”

What this means on the ground, as Tom explained to me and our audience at a recent Stanford Health Policy Forum, is that when European health professionals show up to harvest organs from a newly dead individual, that person’s family often says “no way”, nudges be damned. The state could legally take the person’s organs by force of course, but unsurprisingly it does not. In contrast, in the US opt-in model, both families and the state respect the deceased donor’s wishes because they know they were the result of a proactive decision rather than a bureaucratically-designed nudge. More simply, an active choice has legitimacy that a nudged choice does not

Hundreds of thousands march for Pigou

There were lots of great signs at the People’s Climate March yesterday. But for RBC readers, I’ll showcase this one:

Sign from the People's Climate March, New York, September 21, 2014: Pay to use my air as your sewer: Carbon Tax I don’t know who’s responsible for popularizing the term “carbon pollution.” But it’s the rare political catchphrase that’s both tremendously effective and perfectly accurate. There was plenty of idealism (and of course a bit of wackiness) at the march. But at root, the core message is Micro 101:

Negative externalities should be taxed. And as a—poor, but politically necessary—second choice, they should be regulated.