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Saturday, December 09, 2017

DeLong & Krugman vs Mankiw and Mulligan III

I thought it was all so absurdly simple after all that I could explain to the many readers over at AngryBear. But I am so bad at expressing myself that even my very trivial explanation of the controversy was a mess. so I brought it here. Now I have to add paragraph breaks by hand

There has been a very odd debate among very smart economists in which Brad DeLong and Paul Krugman are convinced that Greg Mankiw made a silly algebra mistake and Greg Mankiw is not convincedade a silly algebra mistake [update oh my Prof Mankiw appeared in my comments noting that he didn't say anyone made a mistake & just wrote that he hadn't. Sorry about that].

I have struggled to understand the disagreement, which, again is elementary algebra and geometry. There is no point in trying to make sense of my efforts to understand. I am now quite sure I understand the disagreement. I am also quite sure that none of the three made a silly algebra mistake.

Mankiw's question is here

He assumes a small open economy (with something making adjustment gradual) so the after tax return on capital must be equal to the world interest rate r*. then he asks a very odd question: what is the ratio of the long term gain in wages due to a (small) reduction in the capital income tax to the short term loss of revenue. There is no particular reason to ask this question, except that it has an oddly elegant answer. That ratio is 1/(1-t) where t is the initial tax on capital income.

Brad's latest effort to explain is here

Just click the links. I finally understand that Brad too is asking a very similarly odd question. The only difference is that Brad considers a tax on capital (tau)k not on capital income (t)f'(k)k. This makes the difference.

The reason is that changing t by delta t (delta t <0 so this is a cut) has three effects on revenues. First there is the immediate loss (delta t)f'(k)k (this is what Mankiw calls the static cost and I think that's standard terminology). Second there is the additional revenue because the tax cut will cause higher investment (t+delta t)(delta k). Third and critically there is a gradual reduction in tax revenue per unit of k due to the decline in f'(k) equal to (t+delta t) f''(k) (delta k) so this causes a loss of revenue equal to (t+delta t) f''(k) (delta k)(k+delta k) or, to first order

tf''(k)(delta k)k

This means that the change in revenue per unit of capital is (to first order) (delta t)f'(k) + t f''(k)(delta k). Now imagine that new capital is due to entry of new firms, so I can talk about revenue collected from old capital. that changes by

(delta t)f'(k)k + t f''(k)(delta k)k

if delta t is negative, delta k is positive. f''(k) is negative so the second term is an additional cost to the treasury of cutting t. It taxes at a lower rate and the profits earned by the old firms are lower bcause of the competition from the new firms.

wages paid equal f(k)-f'(k)k so the change in total wages is (always to first order)

f''(k)(delta k) k.

OK as noted by Brad, the after tax returns on the old capital are always kr* so the reduction in revenue collected on old capital must be equal to the gain in wages (to first order in delta t)

(delta t)f'(k)l + t f''(k)(delta k)k = f''(k)(delta k)k

so

(delta t)f'(k)l = (1-t)f''(k)(delta k)k

Oh look that's Mankiw's short term loss in revenue equals (1-t) times the long term gain in wages. The long term loss of revenue from taxes on income of old capital is equal (to first order) to the long term gain in wages.

Now consider a tax on capital Tau if it is changed by delta Tau then there are only two effects on revenue. A short term loss of (delta tau)k and a gain of (tau +delta tau)(delta k). the long term effect on revenues from taxing old capital is just (delta tau)k.

The long term effect on after tax income from old capital is zero again, so the long term effect on wages is, to first order (delta tau)k. So again the ratio of the long term gains to wages and the long term reduction in revenue from old capital is 1.

But now the long term reduction in revenue from old capital is equal to the short term reduction in revenue from capital. So now the ratio of long term wage gains to short term revenue losses is 1 not 1-t.

Now I think the actual lesson here is that it makes no sense to look at a long term change divided by a short term change.

But no one has made an algebra mistake. Taxes on capital and capital income are different. The effect of changing them on revenue collected from old capital is different if the change in the taxes affects the pre-tax return on capital.

Now something is gained by drawing the figure (see Brad's figure). It makes it very clear that the gain to workers is equal to the loss of revenues collected on old capital (plus the little triangle which is second order in the changes in taxes).

DeLong & Krugman Vs Mulligan & Mankiw II

Below, I tried to understand why Brad DeLong and Greg Mankiw were having so much trouble understanding each other. The story so far: Delong and Paul Krugman think that Mankiw and Casey Mulligan made an elementary algebra mistake. Mankiw and Mulligan think that DeLong and Krugman made a math mistake.

I think they are all wrong and that none of the four made a mistake.

update: I also now think that I was wrong about what Brad wrote when I wrote the silly post below. Like Mankiw, he was considering the ratio of the long term effect of a tax cut on wages divided by the short term effect on tax revenues. The difference is entirely that DeLong and Krugman consider a tax on capital and Mankiw and Mulligan consider a tax on capital income. Short run revenue effects changes in such taxes differ only by a constant (the initial marginal product of capital). Long run changes in tax revenue per unit of capital and of wages differ by an further factor 1-t explaining the different results. end update: Mankiw considers a reduction in the tax on capital income in a small open economy. He assumes that the after tax return is equal to a constant world rate of return r* (in the long run although he doesn't clearly state that he doesn't think this holds in the short run). He looks at the "static" cost to the Treasury of a tax cut. Here he assumes that the pre-tax return doesn't change quickly, so he assumes that, in the short run, the after tax return is greater than r*. Then he looks a the long run increase in total wages paid (the wage bill).

He notes that the ratio (long run)/short run = (1/(1-t)) where t is the initial tax rate.

DeLong scolds Mankiw very harshly for using the word "static" with a different definition that the JCT. I personally wonder why Mankiw thinks anyone should be interested in a (long run)/(short run) ratio.

First I think I understand the communication problem (update I didn't understand it end update). Mankiw is no more able than I to write the symbol for a partial derivative on the web.

He wrote "We cut the tax rate t. Because f '(k)*k is the tax base, the static cost of the tax cut (per worker) is

dx = -f '(k)*k*dt."

he means partial x/partial t = -f'(k)k. by "static" he means "holding k constant" that is taking a partial derivative. Now if k were constant, then wages and production would be constant so profits gross of taxes would be constant and the return on capital would be greater than r*. In Mankiw's example, the only thing which changes (other than taxes once) is k. You can't change t, keep k the same and keep (1-t)f'(k) = r* constant.

update 3: All that follows is my confusion. I can get to a model in which there is a short run wage gain equal to the short run revenue loss. However, it isn't Brad's model at all. Like Mankiw his is looking at long run wage gains vs short run revenue losses dw/dtau/(partial x/partial tau). The difference is that Brad considers a tax on capital not on capital income.

Everything that follows is irrelevant to the discussion and just an example of how one can get any result one wants out of an economic model by fiddling the assumptions.

end update 3

Brad *insists* on another definition of static -- one which he knows is used by the JCT to score tax reforms and generate the ultra important $ 1.5 trillion. In this defintion, prices may change (and accounting tricks definitely change) but actual production doesn't.

So in Brad's static calculation, k stays the same but the pre-tax return on capital falls so (1-t)(pretaxreturnoncapital) = r* stays the same. This can only happen if wages go up. The net of tax income of investors is (by assumption) fixed so the gain to workers is exactly equal to the loss to the Treasury.

Brad's static analysis is a bit odd. He assumes k is fixed *and* that wages and the pre tax return on capital change. He writes that it is very important to defer to the JCT. I agree with him about that as a matter of political economy. But I want at least a story for how w and pretaxreturnoncapital can change without k changing.

The story follows. Capital is like clay. Once it is assembled, the production function is Leontief so there is no way to substitute capital and labor. Output is firms choose a technology with a given capital labor ratio from a menut that looks like an ordinary production function, but, once chosen, the ratio is fixed.

In contrast w is not determined by the technology. It is determined so the after tax return on capital is r*.

If w is too low the return is higher than r* and foreigners send in capital and hire a worker (taking w as given). There would be excess capital so the return would be zero. Uh oh. if w is too high domestic investors send all their savings abroad. Then One tiny bit of capital deprciates and there is surplus labor and wages fall to zero.

So wages and pretaxreturnoncapital adjust instantly.

New capital is installed with a higher capital labor ratio (because wages are suddenly high in the USA). So as the old capial is replaced by new capital, demand for labour slowly changes.

Capital as clay makes it possible for prices to change quickly and quantities to change slowly. This is what Brad assumes, presumably following the JCT.

Mankis is assuming a smooth production function in which substitution of capital and labor is alway possible. His short term calculation is in the short term, k is the same so w = f(k)-kf'(K) is the same so the ratio of gain to workers to loss to the treasury is 0. not 1/(1-t) not 1, but exactly 0.

DeLong, Mankiw, Krugman, Mulligan and Cochrane Argue About Elementary Economics

I think you should read this post by Brad DeLong to understand the issue and the very grave condition of the discussion in which academic economists try to contribute to the policy debate.

The TL:DR version is that Greg Mankiw blogged a little exercize in which he asked the interested reader to calculate the ratio of two effects of cutting the tax on profits. The ratio was the long run increase in wages divided by a very short run loss of revenues to the Treasury.

The point was that this ratio is 1/(1-t) where t is the initial tax rate. I have no doubt that, as a partisan Republican, Mankiw was eager to lead people to a ratio greater than 1.

Brad DeLong objected that Mankiw incorrectly called his extremely short run analysis a static analysis. The exact definition of "static" matters, because it appears in the rules of the Senate which determine if a bill can be filibustered.

In Mankiw's extremely short run, the capital stock is fixed and so are wages and prices. This is a perfectly standard Keynesian short run. In static analysis as conducted by the CBO, the OTA and the JCT, wages and prices are assumed to adjust (and all accounting tricks are used).

Astonishingly, there is a heated debate about this. I think it can be resolved if Mankiw says he didn't use static in its Senatorial sense and should have written "extremely short run". I also think he should, but definitely won't, note that his calculation is just a calculation with no policy relevance at all (it would have none even if the super simple modeling assumptions were the truth, the whole truth, and nothing but the truth).

Oh crap my summary for those who find DeLong's post TL is Too Long too. Just click the link.

My interest is in totally pointless theory. (no JCT no CBO). Why, in the model, does the long run take a long time to arrive ? What assumption is made which prevents K from jumping ?

I can think of 3

1. What Mankiw really has in mind. The economy is a closed economy. higher after tax interest implies higher saving and capital accumulation (there is a substitution effect but Ricardian equivalence means there is no income effect). The economy converges to a new steady state with after tax interest equal to the rate of time preference (1-t)f'(k) = rho. But this is hard, so (like the Tax Foundation as denounced by Krugman) he semi shifts to an open economy, but just to say that the after tax interest rate reaches a constant in the long run.

But then, if there are no installation costs and domestic and foreign goods are perfect substitutes, then domestic K will jump. Oooops. One needs one or the other. Krugman has very wonkishly done imperfect substitutes here.

so I will whip out Q. To avoid Krugman's insanely wonkish math (and replace it with other insanely and pointlessly wonkish math) I assume that domestic and foreign goods are perfect subsitutes (with no transportation costs either). This means that there is alway perfect purchasing power parity and current account deficits can jump up and down. This good can be consumed or assembled to make capital. I use its price as numeraire. It really just means I am setting the after tax rate of interest to a constant r*.

I will assume that labor input is constant and L=1. So I can write production as f(K) = F(K,1) and talk about derivatives. Capital income gross of taxes is Kf'(k), investors get (1-t)Kf'(K), the IRS gets tKf'(K) and workers get f(K)-Kf'(K). Here notice that I assume that reinvested profits are taxed -- no expensing investment here.

Now I will intoduce an installation cost. The cost of increasing K by dK is dk+dk^2 . The second term is called an installation cost. This means that the value of a unit of capital is not necessarily one unit of the final product. The ratio of the prices is called Q.

The convention is to call the dk increase I (investment) and not explain where installation costs appear on profit and loss statements. I assume that the installation costs are counted as investment not expenses for tax purposes (this is also conventional). I am just insisting that the tax collected is equal to tKf'(K) no matter how much or little firms invest.

The Standard results now are that

1) Q = 1+2I

2) r*Q = (1-t)f'(K) + dQ/dt

so in steady state r*=(1-t)f'(K) . There is math behind the equations, but they make sense. The marginal cost of capital is 1+2I so equation 1 just means that there is no arbitrage opportunity based on building new capital and selling it. Equation 2 says the return on ownership of capital is equal to r*. In other words, there is no arbitrage opportunity based on borrowing, buying some capital, operating it for a while collecting after tax revenues then selling it for a capital gain or loss.

Now what happens quickly if t is suddenly cut by dt ?

K can't jump. production can't jump. The real wage doesn't jump. real profits gross of taxes don't jump. This short term is Mankiw's extremely short term. There is no need for wage or price stickiness.

The variable Q jumps up (owners of capital are richer -- that is the actual point of the whole operation even if Republicans won't admit it).

OK I haven't proven this (and have no intention of doing so) but the transfersaility condition and the budget constraint imply that K will converge to a new steady state where r* ( 1-t+dt)f'(K), dK/dt = I = 0 and Q = 1. So Q has to head back down (K,Q) moves down a saddle path.

This means that the dQ/dt term is negative. This means that Q jumps up to a level lower than (1-t+dt)/(1-t).

Well that was almost exactly pointless. The only tiny point is that I have a model which has been fully worked out (I didn't here -- it's in the literature google [Q theory hayashi]) in which the very short run is exactly Mankiw's very short run.

Monday, December 04, 2017

Twitter AI Fail

I just got 2 new twitter followers.

Asteroid day is "Raising awareness to protect Earth from asteroid impacts and inspire the next generation." kay mccull's avatar tells people to vote.

I have trouble doubting that there is some connection with the poll I recently posted in which I asked if Clinton weren't on the ballot would her supporters have voted for the Sweet Meteor O'Death. A.I. is getting scary, but still confused support for a life destrying meteor with opposition. I assure my (few) blog readers that only one of my (few) twitter followers voted for the Sweet Meteor O'Death

Sunday, December 03, 2017

Republicans Reject the NFL, the CIA and the FBI

I forget who said she never expected that, after the national divorce, liberals would get custody of the NFL. But it's beyond that. Now Republicans reject the CIA and the FBI too. Donald Trump sometimes sounds like a paranoid 60s hippy claiming he is being persecuted by the evil FBI (except some of them really were persecuted).

So what else can they reject and abandon ? Hmm the flag. Some of it is blue like blue states -- they can't have that, and some is commie red. So they will probably decide to purify it.

I can't wait to see Republicans wave their white flag.

Wednesday, November 29, 2017

Optimal Capital Taxation and The Long Run

I do not like the argument that capital income shouldn't be taxed and I do not like the assumption that, in any good economic model, the economy will converge to a unique long run balanced growth path.

The two are related in two ways. First the mathematical case for zero tax on capital income states that as time goes to infinity the tax rate goes to zero. Many economists pretend this means that it should be cut to zero right now. This is utter nonsense.

The argument is that we wish people to have high consumption. For that to be possible they must save and invest. Capital income taxation penalizes saving and so prevents capital accumulaion -- by causing higher consumption now. The whole argument is based on the fact that, when one has a budget constraint, more now means less later. But this fact that the whole discussion is about doing the opposite now of what you want to do in the future is conveniently forgotten when it shifts from assumptions about desired consumption to conclusions about optimal taxation. I do not think that this can be an honest mistake.

The solution to the simplest version of the problem is that a state which wished to take wealth from investors and worries about their incentive to save should take the wealth as quickly as it can until it has taken all that it has any desire to take, then stop. The tax on capital income goes to zero if and only if the state does not wish to take from capitalists. Exactly when a lump sum tax which capitalists must pay no matter what would also be zero. As claimed, there is no tradeoff in the very long run between concern about incentives and other aims. But the reason is that the other aims are totally achieved as they would be if there were no problem with incentives.

The math is fairly simple (pdf warning). A slightly different and more realistic model has a more extreme result. The state takes from capitalists at time t even though it would rather let them keep the wealth in order to reduce their consumption at earlier times.

Here the trick is to assume the future is now.

A much more serious problem which actually affects political debate is the assumption that tax cuts will not lead to an exploding debt. This is just and assumption and it is part of the rhetoric of advocates of tax cuts, but it is also true of the models used by serious economists to analyse tax cuts. The reason is that the standard approach requires the economy to converge to a steady state. An exploding debt to gdp ratio is not allowed, because all such ratios are must converge to constants in all respectable models. Here the point is that this is required for the model to be respectable -- it does not follow from other core assumptions.

So, for technical reasons, it is assumed that the tax cut is paid for either by a tax increase or a spending cuts (often the assumed tax increase is a lump sum tax) which does not affect incentives. This makes the analysis useless. A more realistic assumption would be that the exploding growth will cause a future policy change involving taxes which have actually been collected without causing uprisings. This means that low taxes now imply high taxes in the future. If one considers only capital income taxes, it means the believe that they should go to zero as time goes to infinity implies they should be high now. If the choice is taxes in the future or in the present (and it is) then arguments that taxes should be low in the future imply they should be high in the present.

Of course the enthusiasts for tax cuts hope that the debt will lead to cuts in social welfare spending. But they don't admit it, because even discussing the possibility of such cuts in the future is political poison. Also, I think, they have short planning horizons and want low taxes at the time of the next election and don't care about the long run (but are willing to use analysis of the long run whenever it is convenient).v The assumption that something will be done to deal with the debt (and that this something won't have bad incentive effects) is almost always combined with the insane assumption of Ricardian equivalence that ordinary people keep track of the national debt, know what share will be paid by them and their heirs and adjust consumption accordingly. In the real world, government bonds create the illusion of wealth causzing higher consumption and crowding out investment.v I think there is another problem with journalistic presentation of the debate. Supply side loons say tax cuts will cause so much growth that they pay for themselves. Sensible people say this is nonsense. Ballanced journalists say the truth is probably somewhere in between -- they will cause more growth but not enough to pay for themselves. This means they can say that, on the one hand GDP will be higher and on the other the national debt will be higher. They don't explain why the second is a bad thing (people just assume it is). But if it is a bad thing, it is because the debt causes lower GDP (it isn't painful to carry it in itself). There is a logical contradiction between believing public debt is bad because it is bad for GDP growth and ignoring this effect when discussing GDP growth. This is so obvious that I think the popularity of pairs of inconsistent claims must be do to something very strong. I think it is the need to find something good to say about Republicans, which regularly drives US journalists crazy.

So the discussion suffers from two huge fatal errors based on playing around with the long run.

Tuesday, November 28, 2017

A Comment on Drum

Read this excellent post by Kevin Drum on, you guessed it, lead.

I guessed where it was heading after reading the title.

my comment

I have often thought of attempting to write this post and always thought better of it, concluding that you will write it better. And so you did.

I'd like to add one more explanation of resistance to the lead hypothesis. It is offensive to human dignity to argue that a mere metal can undermine human society and distort a human mind. You and I are atheists, but most people in the US believe in some kind of immaterial and (they hope) immortal soul. Any strictly materialistic explanation in psychology is threatenting to this hope (I don't have any such hope to lose). I think there is a similar cause of hostility to psychopharmacology. I think it is one of the reasons that people assert (assume really) that pills cover up the real problem (but don't assert that insulin covers up the real problem of diabetics).

I'd note another right wing hypothesis which competes with lead. There are many who think that the war on poverty had perverse effects by distorting incentives. Another theme of yours is the extreme hatred of "welfare" so of course you have grappled with the argument that welfare created the culture of poverty. The progressive (domestic) program was tried 65-68 & followed by increased social pathology. Totally aside from the fact that the war on poverty didn't last as long as the war in Vietnam (let alone Afghanistan) you can argue that it was a coincidence.

Finally, another left wing hypothesis threatened by lead -- which was I think the counterculter's hypothesis. There was a time when "the affluent society" was pejorative. I think it's (among other things) the title of one of the Galbraith books which I haven't read. The idea was somehow that the immense increase in material wealth in the 60s did something bad to our character or psyche or something. This isn't the explanaton that the counterculter was to blame. Rather it is the explanation which members of the counterculter (and some eminent Harvard economics professors) offered. It too is blasted by lead.

Finally speaking of blasting by lead, the easy availability of guns hypothesis is usually an explanation of US vs rest of rich world murder rates not of the rise in the 60s. It's doing fine.

Wednesday, November 15, 2017

Do Android Phones Dream of Electoral Sheeple in 1984

Signs of the times

A photo tweeted by the Russian Ministry of Defense Tuesday as "irrefutable" proof that the United States has allied with the Islamic State in Iraq and Syria turned out to be from a video game.

@umpire43 a bot who claimed to have joined the nave at age 5 then claimed to have served 22 years from 1970 to 1972 has deleted all its tweets But I have a screen capture

Dan Scavino retweeted him/her/and or it.

Umpire43's story is amazing. Roy Moore & his wife literally took an old letter of support by 53 pastors, and forged it to make it seem like he was still supported AFTER the allegations of sexual assault on minors came out.

So far, multiple people named in the letter have demanded they be removed from it.

But Russian cyber spies who are just interested in ethics in gaming journalism, stolen honor bots who defend pedophiles and Roy Moore himself bow down to Bernie Bernstein the fake man of the day

Wow: There's a fake, mysterious robocall in Alabama out there from someone falsely claiming to be 'Bernie Bernstein,' a reporter from the Washington Post, seeking 'damaging' info on Roy Moore for $

WKRG is on the Bernie Bernstein case

With notably rare exceptions Bernie Bernstein is aware of all internet traditions. A meme is born.

Jeff B/DDHQ‏Verified account @EsotericCD

I'm surprised they didn't go with "Shlomo Jewgold" instead of the infinitely more subtle "Bernie Bernstein."

Jeet Heer‏Verified account @HeerJeet

ME: "....and then the child molesting candidate tries to save himself by robocalls from a fake reporter called Bernie Bernstein."

PRODUCER: "Security!"

Brohibition Now‏ @OhNoSheTwitnt

Bernie Bernstein? Did Hanukkah Solo and International Banker Globalowitz sound too unrealistic?

The inevitable contrarian hot take (from Matt Yglesias of course).

Matthew Yglesias‏Verified account @mattyglesias

I have met people named Bernie Bernstein — it’s not *just* a Fake Jewish Media Name.

Oh hell just search twitter for Bernie Bernstein they are all wonderful

I think @Yair_Rosenberg wins the prize

((Yair Rosenberg)))‏Verified account @Yair_Rosenberg

(((Yair Rosenberg))) Retweeted Meridith McGraw

This is ridiculous. We didn't assign Bernie Bernstein to manufacture anti-Moore stories. He's currently rigging the Brexit talks.

The enemies of truth are ruthless, but they are also very very stupid.

Thursday, November 02, 2017

The Long Run and International Economics

I am still thinking about Krugman and the Gravelle Geardown

Do click the link if you are interested in understanding what I am typing about. Very briefly the question is: what effect would cutting the tax on profits have on the _US capital stock ? The particular issue is what difference does it make that most of US production is production of non traded goods and services. Gravelle claims that this implies a lower long run effect of the tax cut on US capital stock than would occur if all goods and services were traded (or that's what I think based on Krugman's explanation).

Here the key words are "long run" and, I think, an important issue is long run mysticism. This post is getting long. I will put the conclusion here. It seems to me that standard assumptions about the long run make even less sense in open than in closed economies and I think that is the key issue here. Macroeconomists have the most consensus and confidence about the long run. The reason is that it is all handled by simple assumptions made for convenience. In particular, it is standard to assume that there is a unique long run steady state determined by tastes and technology. This doesn't follow from other core assumptions. I think this is a terrible problem, because politicians think it is honorable to focus on the long run and that means they make policy influenced by the assumptions we make for convenience (austerity, the EU stability and growth pact, and European Single Bank single mandate). Over in the USA they talk about the effect of tax cuts assuming the government intertemporal budget constraint will be satisfied with equality -- this when commenting on GOP policy proposals which would violate it.

I will hint at a model used (by Krugman say) to assess the effects of a profit tax cut. It starts with two strong assumptions. First prduction is determined by technology and accumulated capital -- the model is solved as if there were full employment. This makes (some) sense if one assumes the unemployment rate is detrmined by monetary policy. Second it is assumed that consumption is not affected by interest rates. This assumption is based on the evidence -- it is radically different from the standard assumption made in theoretical macroeconomics. Finally Government consumption plus investment is taken as given.

With those thee assumptions, increased investment must correspond to reduced net exports. This matters a lot for short run dynamics. To get higher investment, the USA must run a higher current account deficit. Krugman recently argued that this has implications for exchange rate dynamics which, in turn, imply slow convergence to a new steady stated. But here I will just discuss the long run and assume it is a steady state.

I will now make an invalid argument as to why non-traded goods don't matter. In the long run, everthing will be in balance, The US after tax return on capital will be equal to the world real interest rate. The current account deficit will be zero. The real exchange rate will be that consistent with current account balance. It doesn't matter if all or onl ysome goods are traded.

Here the trick is that I assumed that there is a unique steady state even though the model must have a continuum of steady states. I assumed that each countries intertemporal budget constraint (that the present value of it's foreign debt must go to zero) is satisfied in the simplest way with each country having no foreign debt. Nothing guarantees that. Another steady state is one in which the USA is a net debtor and services the debt with trade surpluses forever.

Here long run mysticism has met representative agent mysticism, but an extreme representative agent assumption which is never made (but which I accidentally implicitly assumed). The assumption is that I can treat all countries as the representative country, so, in the long run, none is in debt to another. This is expecially crazy. It was an honest intellectual mistake I made.

In fact, I'm pretty sure I can guess what would happen if I actually worked through a model. The US cuts corporate taxes, foreigners want to buy US stock. This drives up the dollar and drives down net exports. The workers freed up by the reduced net exports build more capital in the USA until the after tax return drops to the world level. The dollar slowly depreciated until the world reaches a new steady state in which the US has more capital and the same rate of investment so the current account is at the constant level which satisfies national budget constraints. That does not imply zero net exports. The US has accumulated foreign debt while adjusting to the new higher capital stock. This means that the budget constraint implies positive net exports to service that debt. So the dollar will depreciate in the long run. The amount of capital which can flow in is limited by the amount of debt the USA can service. I think Gravelle gets her result, because this limit is binding.

Here my error was assuming that I could model the long run as a unique steady state in which all countries are symmetric -- none is a creditor nor a debtor. There is nothing in the model which implies this. It is an insane assumption about the representative country, which has no place in a model in which different countries have different tax policies. TThis is an extreme case of a very common error. Also in a closed economy, it doesn't really make sense to assume there is a representative agent. The assumption is just one of the many tricks used to get a single steady state when assumptions about tastes and technology are consistent with many different steady states.

A Comment on Krugman on Gravelle

Paul Krugman finds intuition for the calculations of Jennifer Gravelle difficult. Now even more than usually, you really have to click this link to know what I am typing about.

My comment.

yes that intuition is difficult. I have an attempt. So 1% of GDP is tradable. Also consumption and total production fixed. Mars cuts tax from t to 0. So to invest more Mars runs a current account deficit -- all cyberservice provided by earlhlings & martian cyberworkers go build capital. Note all the extra capital belongs to earthlings (I assumed martian savings are fixed).

In the long run, there will be current account balance. This means Mars will have a trade surplus required to pay the return on earthling owned capital on Mars. They owe us delta(k)r per year. They can run a trade surplus of only 1% of GDP so delta(k) less than or equal to 0.01 GDP/r

It seems to me the long run effect is entirely due to the fact that the tax cutting planet has to pay more capital income to the other one. This places a limit on the sum of their trade deficits and extra capital accumulation.

I think the limit on long run capital inflow is that hypothetical Mars (or the US in the real Solar system) can only owe the rest of the solar system liabilities which it can service. This is a long run limit -- a statement about the new steady state.

In the really real world, I think current US current account surplues are not sustainable forever, so the sum over the next century can't increase (or stay the same). So the long run effect of a profit tax cut is zero. But that's just a guess.

Tuesday, October 31, 2017

What could 51 Senators do to Save the Republic ?

I don't think knives in the Senate chamber will be needed to deal with Orange Julius.

I am inclined to fantasize two things. First I imagine that Trump will attempt to place himself above the law (not a fantasy). Second I dream that Democratic Senators, two independents, McCain, Flake and Corker will resist with all instruments provided by The Constitution.

They can replace McConnell with one of them (say Corker). They can nuke the rules of the Senate. They can make 100 new committees Trump Russia committees 1 through 100 each consisting of one Senator with full power of subpoena.

They can hold Trumpers who resist Subpoenae in contempt of the Senate. The whole Senate can find them in contempt and propose that the House impeach. The 51 can keep the Federal Government open with weekly continuing resolutions and shut it whenever the Trump administration resists.

I think the Senate can clearly hold people in contempt -- that is have the sergeant at arms lock them up in some office.

Crazy and not enought.

Now 67 Senators and 290 Representatives can pass laws over vetoes. They can include making 535 committees with the power of subpoena and the rule that unelected employees of the US government found to be in contempt of Congress are not allowed on US government property. They can (by law) grant themselves the power to search and seize all US government property (maybe excluding property of the judiciary and stuff in the White House). This would require no warrants as the property already belongs to the US Government and the law describes what that means.

The power of veto and pardon won't cancel this law.

Crazy sure but 2017 is crazy.

Monday, October 30, 2017

Mysterious Ways

I have long believed that, if there is a God, He (or She) created to world to find the ultimate abyss of idiocy. This causes me great concern when I fear that we have achieved our Purpose as the world might cease to exist when we achieve ultimate idiocy. I was very concerned on my 56th birthday (November 9 2016). Subsequent events have caused me to doubt my non-faith. I mean if Trump isn't the pinnacle of the quest for the nadir then maybe it isn't our Purpose. But now I am concerned. It appears that George Papadopoulos, previously known as the Trump advisor who put his accomplishments at the model UN on his CV, may have saved humanity. My theory implies that the Lord (or Lady) chooses utter idiots as the preferred vehicle of His (or Her) Grace. Previous examples of the Lords Annoying are Galina Romanov daughter of the dread Soviet Communist enemy of human rights Grigory Romanov who narrowly lost the contest for General Secretary to Mikhail Gorbachev. This was one of the more important events in the 20th century. I have neither proof nor doubt that it was caused by Galina Romanov's wedding reception. As per his contempt for all standards of decency, Grigory forced the Hermitage to loan china which had belonged to Catharine the Great for the reception. His daughter and son in law decided to celebrate by smashing the plates. Thus humanity was saved (for a while). There was still the problem that the USA wasn't necessarily willing to accept Gorbachev's unconditional surrender in the cold war. Fortunately God's little finger Joan Quigley intervened. Ms Quigley (sadly departed 3 years ago) was an astrologer who convinced Nancy Reagan to convince Ronald Reagan to trust Mikhail Gorbachev. Can the 21st century match these two heroines of the 20th ? I thought not, but it appears that George Papadopoulos, unsatisfied with his triumphs at the model UN, decided to subvert US democracy by dealing with a mysterious professor who said he would help the Russian State help Trump help himself to Hillary's e-mails. Oh what a tangled web we weave when we are idiots totally over our heads. The Lord (or Lady) works in mysteriously moronic ways.

Friday, September 29, 2017

Jon Chait and Alex Pareene

I have a Jon Chait problem. I generally agree with him on most issues. I find him very provocative. I am very sure that no one cares about my opinion about Chait's latest post. That includes me. I don't want to waste time thinking about the exactly how far I agree with him. But here I am.

I also have a vaguely favorable view of Alex Pareene, but don't read him much. I was very entertained by his mild mannered amused Phillipic on Chait "You Are Jonathan Chait's Enemy".

There is one marginally interesting sub-topic. It appears that Pareene and Chait can't both be right, but I am confident they are.

Pareene wrote "I say “you” because his conception of the left almost certainly includes you. ... He means basically anyone to the left of Bill Clinton in 1996. " Chait wrote " (I allegedly oppose “basically anyone to the left of Bill Clinton in 1996,” which is odd, because I was to the left of Bill Clinton in 1996, and still am.)"

I see no contradiction. I think Chait was to the left of Clinton in 1996 and also that he considers anyone who goes out of her way to note that she is to the left of Clinton's positions as of 1996 to be a dangerous lefty. So the "basically" is a vague hint at "who is to the left of Bill Clinton in 1996 and says so even when not accused of being as far right as Bill Clinton in 1996".

Notably, Chait's point (such as it is) is that he supports Barack Obama and so do the vast majority of Democrats. This is true. It is also true that in "The Audacity of Hope" Obama hinted at some sort of praise for Clinton for the 1996 welfare reform. I am sure Obama would have voted against in 1996. I am fairly sure he would have vetoed 3 GOP welfare reform bills not just 2 as Clinton did. But he was not audacious enough to hint at any such doubts. I am quite sure that Chait would consider some statements dangerously left wing and disqualifying, even if he agrees they are true. This is Pareene's claim.

Now, I agree with Obama's not so audacious choice, and agree with Chait. In any case I wouldn't vote to nominate a candidate who says what I think about immigration (it should be allowed without any restrictions) or foreign aid (the foreign aid budget should be increased at least 10 fold). Where I differ with Chait is that he doesn't just demand moderation from candidates but also from commentators (other than Chait).

I took the one interesting bit off the end of a long boring post, which continues below.

I think I agree with Pareene. In particular, I think Pareene is right that his quotation of Chait is key to understanding Chait "the new breed of left-wing activists who are flexing their muscles within the party. These are exactly the sorts of fanatics who tore the party apart in the late 1960s and early 1970s. They think in simple slogans and refuse to tolerate any ideological dissent."

Chait strongly disapproves of such people and fears them. However, he never names them. This violates Chait's rule of polemic. He asserted that left bloggers were such people. Then when challenged read the lefty blogs & found they weren't far left radicals (yet) and asserted that they would become far left radicals. Then when challenged further read further and found many were wonks, divided the left blogosphere into the wonkosphere (analysts) & the net roots (advocates) then denounced the net roots for being advocates not analysts. His research lead to a tautology, unless he is willing to argue that there should be no advocacy organizations (which would render any discussion of the proper future for the Democratic party moot).

Interestingly Chait seems unable to even understand what Pareene is trying to tell Chait about Chait. He thinks Pareene's point is that the future of the Democratic party is named Bernie Sanders. I didn't detect any such opinion in Pareene's post. Indeed (I admitted above I don't read Pareene much) I have no idea who he supports for 2020 Democratic nominee.

Chait argues that Pareene is wrong to suggest "The other politician supposedly representing my worldview is Lieberman. (In fact, while my editor endorsed Lieberman for president in 2004, I wrote a dissent saying Democrats would be crazy to nominate him.)"

Just above the quote of Chait which I requoted Pareene wrote "The rest of this column is dedicated to listing the many ways in which Joe Lieberman, then engaged in a bitter primary fight, was a terrible Democrat.

Chait's claim about Pareenes alleged claim about Chait's views of Lieberman is plainly obviously 100% false. I can understand that people don't respond calmly to harsh criticism, but his failure of reading comprehension is amazing.

Actually there is an even more striking proof of this. Pareene's preceding sentence is "Here is a very instructive passage from a column he wrote in 2006." Chait conflated 2004 and 2006. How did that happen ? For one thing, he seems to have entirely forgotten what he wrote in 2006 and, in particular, that he wrote it in 2006.

Pareene continued "It is overly simplistic to reduce the fight over the identity of the Democratic Party to Joe Lieberman on the one hand and Bernie Sanders on the other, but if, purely as a thought experiment, those were the only two futures on offer, it’s clear which one Jonathan Chait would pick. He would rather belong to the party of Joe Lieberman. If you wouldn’t, then you’re the sort of person he has spent his career fighting against."

Lieberman responded "It is common to read Sandernistas describing the Democratic electorate as if Hillary Clinton and Bernie Sanders were the only two choices available." But Pareene explicitly said the choice isn't Bernie Sanders or someone else. He was talking about a thought experiment.

His points are that Pareene is a "Berniecrat". This may be true (I will check) but has nothing to do with Pareene's post about Chait. He notes that Barack Obama is very popular and is not Bernie Sanders. This has even less do do with Pareene's post. I am quite sure he is sincere, but I think he can't understand Pareene's criticism, because he doesn't understand himself and how strange his obsession with the late 60s & early 70s seems to people who are younger than he is (and to me -- I don't confidently claim to be younger than he is).

Saturday, August 19, 2017

Sure Abigail Hauslohner, Paul Duggan, Jack Gillum and Aaron C. Davis Sure

I have trusted The Washington Post, since I learned how to read. However, By Abigail Hauslohner, Paul Duggan, Jack Gillum and Aaron C. Davis are testing me. In this article they assert that an American Nazi went over to that very dark side in spite of the well meaning efforts of Weimar.

"Fields looked forward to soldiering in democracy’s most powerful military.

That’s how Derek Weimer, his favorite teacher in 2015, remembers it."

Suuuuure. History doesn't repeat itself but it can't resist an ironic pun. No doubt about it.

Tuesday, August 08, 2017

Jon Chait Shoots at all the Ducks in a Row -- and Manages to Miss (once)

I admire both Jon Chait and Glenn Greenwald. They do not admire each other. I enjoy it when they debate. Sometimes they both make fools of themselves.

Jon Chait wrote a blog post "The Alt-Right and Glenn Greenwald Versus H.R. McMaster". The chance to simultaneously critique the right and the left must have delighted him. The post is a critique of this column in The Intercept

Chait has many convincing criticisms of Greenwald. However he also wrote these paragraphs (bolding mine)

Trump “advocated a slew of policies that attacked the most sacred prongs of long-standing bipartisan Washington consensus,” argues Greenwald. “As a result, he was (and continues to be) viewed as uniquely repellent by the neoliberal and neoconservative guardians of that consensus, along with their sprawling network of agencies, think tanks, financial policy organs, and media outlets used to implement their agenda (CIA, NSA, the Brookings/AEI think tank axis, Wall Street, Silicon Valley, etc.).”

It is certainly true that all manner of elites disdain Trump. What’s striking is Greenwald’s uncharitable reading of their motives, which closely tracks Trump’s own portrayal of the situation. Many elites consider Trump too ignorant, lazy, impulsive, and bigoted for the job. Instead Greenwald presents their opposition as reflecting a fear that Trump threatens their wealth and power. (This despite the pro-elite tilt of his tax and regulatory policies — which, in particular, make it astonishing that Greenwald would take at face value Trump’s claim to threaten the interests of “Wall Street” and its “financial policy organs.”)

This is a very odd critique. Chait doesn't misquote Greenwald. Nor does he remove necessary context. he just quoted Greenwald writing one thing and then asserted that Greenwald had written something else. Greenwald wrote about a "consensus" -- that is about shared beliefs. for some reason, Chait asserted that Greenwald asserted that he was discussing people's concerns about their "wealth". Chait prsented no evidence at all in support of his claim. The passages he quoted say somethign completely different from the words near them which are presented as paraphrases.

This is crazy. Now it isn't as if Greenwald didn't preseent an easy target -- he too wrote silly things. But Chait presented no evidence that he ascribed venal motives to McMaster's defenders. His specific accusation (about a brief document) is not supported by any trace of evidence.

Later in the column Greenwald wrote "his policy and personal instability only compounded elites’ fears that he could not be relied upon to safeguard their lucrative, power-vesting agenda. " Chait was too sloppy to quote the word "lucrative" which does support his claim. However, the quoted passage clearly ascribes the force to "consensus", ideology, beliefs, dogmas. Greenwald also refers to the "most sacred pieties" of neoconservatives -- strongly suggesting other than mercenary motives.

As I mentioned Greenwald also wrote silly things. His conclusion, that both Trump and the deep state are dangerous, potential threats to US Democracy and probably sources of war and suffering is reasonably supported by the limited evidence he presented. It certainly is a widespread view (Greenwald asserts with no evidence that it isn't).

He argues that most Democrats are unconcerned by the policy making roles of Generals. He quotes no examples of rejection of such concern by Democratic elected officials (not one). He quoted Barbara Lee "By putting Gen John Kelly in charge, Pres Trump is militarizing the White House & putting our executive branch in the hands of an extremist." Then asserts (presenting no evidence at all) that "But hers was clearly the minority view: The military triumvirate of Kelly, Mattis, and McMaster has been cast as the noble defender of American democracy,"

The passive voice was used to assert that someone of some sort who is not quoted said something which proves Greenwald correct. This reminds me of something I like about Chait -- he insists that criticisms of allegedly existing arguments be directed at people who are named and quoted and not at vaguely described groups which might be made up of made up straw men.

Greenwald presents himself as a bold dissenter. He quotes Jeet Heer, Brian Buetler, Barbara Lee, Dana Priest, Bill Arkin, Marc Ambinder, D.B. Grady, Peter Dale Scott, and Mike Lofgren who agree with him. Good thing so many establishment liberals are willing to join the tiny minority with Greenwald. On the other side, he quotes no Democrat or liberal. He asserts that someone somewhere claimed that Trump invented the concept of the deep state. He ascribes this nonsensical view to lots of people who aren't Glenn Greenwald. He names none of them. I can't name anyone who believes that -- I was very familiar with the phrase back in the good old days of of 2014.

Sen Schumer is only elected Democrat other than Lee quoted by Greenwald who quoted a tweet by Kyle Griffin quoting him "Chuck Schumer on Trump's tweet hitting intel community: "He's being really dumb to do this."" That is Schumer said there are permanent government employees who can hurt presidents if they so wish. Greenwald continues "Although it is now common to assert — as a form of in-the-know mockery — that the notion of a “Deep State” in the U.S. was invented by Trump supporters only in the last year, " right after he quoted Griffin quoting Schumer noting that there is a deep state. Greenwald doesn't see the contradiction, because he knows, somehow, that Schumer's accurate statement of fact constituted enthusiasm for the CIA harming presidents. I have quoted all he quoted (that being Griffin quoting). Greenwald just knows that the fact that Schumer agrees with Greenwald about the power and respect for elected officials of CIA employees proves that Schumer is a terrible enemy of Greenwald and Democracy.

Worst of all, Greenwald argues that the proposals Trump made during the campaign were ratified by the public. This is nonsense. The electoral college decides who is president but the votes of a minority can't be a mandate. Also, as Greenwald notes, not only has Trump broken the promises Greenwald ascribes to him, he also contradicted himself during the campaign (on Syria he proposed doing nothing and considering using nuclear weapons). It makes no sense to try to find out what Trump voters had in mind (although I am sure they have minds).

In the end, I mostly agree with Greenwald and Chait. Chait made one silly claim without evidence. He pointed out many cases in which Greenwald claimed to be able to read peoples' minds so that the true meaning of their statements can de deduced without reference to the words they said. Greenwald concludes that Trump isn't the only threat to peace and Democracy. The odd thing is their polemical enthusiasm causes both of them to go beyond the evidence in very similar ways.

Sunday, August 06, 2017

Riddle Me This

I read an interesting blog post on the web. I didn't save the url. Fortunately, I didn't read it at a funeral. Google sends me to Snopes which debunks the claims copied and pasted below. It appears that they are made up and not based on any evidence from interviews of serial killers.

The alleged test

This is a genuine psychological test. It is a story about a girl. While at the funeral of her own mother, she met a guy whom she did not know.

She thought this guy was amazing, so much her dream guy she believed him to be, that she fell in love with him there and then … A few days later, the girl killed her own sister.

Question: What is her motive in killing her sister?

DON’T Scroll down until you have thought what your own answer is to this question!

Saturday, August 05, 2017

Psychologist intergroup contacts himself

This is a very interesting article on psychology and support for Donald Trump. It isn't wildly original, but it is brief clear and convincing.

Also it is very lefty (as one would guess at alternet). Bobby Azarian has essentially no time for the hypothesis that Trump supporters are populist in any meaningful sense. As a psychologist, he looks at the causes of their votes, not the reasons they gave -- basically he treats Trumpism as a mental disorder (to be sure he doesn't write that explicitly).

But I was struck by ironic evidence of non-hypocrisy

4. Intergroup Contact

Intergroup contact refers to contact with members of groups that are outside one’s own, which has been experimentally shown to reduce prejudice.

[skip]

Bobby Azarian is a cognitive neuroscientist, a researcher in the Visual Attention and Cognition Lab at George Mason University

Now that's some serious intergroup contact. I fear Azarian is there, because it is just obviously the most desireable job he could get, but I want to believe that he went there in search of interaction with conservatives (and libertarians don't forget the libertarians or suggest they are just conservative hipsters).

Wednesday, July 19, 2017

Game Of Thrones Guesses

1. I guess from the TV series it is official that John Snow is the son of Lyanna Stark and Rhaegar Targaryan

2. I'm a fairly sure that Lyanna Stark is also the knight of the laughing tree (and that's part of the reason Rhaegar loved her so much it caused a civil war).

3. in King's Landing there is a black cat with one ear who hates Lannisters . I am suspect that he was Rhaenys Targaryen's pet whom she calle Bellarion the dread. I also suspect that Arya Stark will see through that cat's eyes.

4. I am fairly confident that the horn of Joramun was found by John Snow with obsidian weapons and given to Sam Tarly

5. I am quite confident that the younger brother of Cersei who will strangle her is Jaime not Tyrion.

6. of course John Snow is one of the heads of the dragon. I guess that Aegon Targaryen VI isn't the third (he would appear in the TV series if he were important). Some suspect that Tyrion is the bastard son of the mad king. I don't have a guess. Also Brandon as warg might control a dragon.