Could There Be a European War?

There are lots of things that the supporters of the Euro, and the Common Market, and the broader project of which both are a part, hope to get from increased European unification. But the one big thing is future peace. The first half of the 20th century featured two horrific wars, originating in and largely fought in Europe, largely between European states. Behind all the talk about the convenience of a common currency or the advantages of free trade within the EU is that memory, and a burning desire that it not happen again.

Which raises two interesting questions, to neither of which I can offer a confident answer:

1. If the EU dissolves, with countries going back to separate currencies and separate trade policies, is there any significant risk of a third major European war within, say, the next fifty years? My gut reaction is that there is not, but I do not have any real support for it.

2. If the EU is maintained and European integration increased, perhaps along the lines that the supporters of the Euro have been urging as necessary to save Greece, Italy, Ireland, and Spain, is there any significant risk of a third major European war within, say, the next fifty years? 

Before dismissing the possibility out of hand, it is worth considering what came out of the "integration" of the American states. I am not sure how much of a stretch it is to imagine a future where some of the countries, such as Germany, feel that they are being outvoted and exploited by others, such as Greece and Italy, through the institutions of a United States of Europe, with the tension eventually exploding into civil war. Each side would, of course, start out confident that once it was clear they were willing to fight the other would back down.

(Might make an interesting sf plot.)

Which suggests a third question: Does European integration make a major European war less likely, or more?

Comments welcome.

3D printing of clothing

At least, sort of 3D.

My wife, as usual, has been complaining about the difficulty of finding dresses that meet her requirements, which include fitting her, looking reasonably attractive, being washable, and pockets. Having read a number of things recently about 3D printing, it occurred to me to wonder if something along similar lines would, or soon will be, practical for clothing.

It requires an accurate model of the customer's body, which I'm not sure you could get from photos, although it's possible that smart software could manage it. But for a less demanding version, imagine something like a phone booth in a shopping mall. You go in, shut the door, take off your clothes—if Clark Kent could do it, so can you. The sensors in the booth take a 3 dimensional picture of you. Perhaps you move around a little and they take more pictures, since how your shape changes as you move is relevant to getting clothing that will be comfortable. The description of your body shape is uploaded to the firm that put the booth there.

You go to the firm's web site, select fabric, color, style. The web page displays what the resulting dress will look like. If you like it, automatic machinery produces the dress for you. 

Custom tailoring for the masses.

If customers are worried that their naked pictures will get ogled by someone in the cloud, the booth delivers its data directly to the customer, perhaps on a flash disk. The customer downloads the relevant software, plugs in the flash disk, connects to the web site for availability of fabrics, colors, and styles.

Is it doable? Is it being done? It seems like an easier problem than full scale 3D printing, since clothing is made from 2D shapes joined together. The quality of the material should be at least as good as with conventional clothing, since it's the same cloth. And the fit a good deal better.

Anything I'm missing? Any ambitious entrepreneurs out there?

D. Friedman vs D. Brin

[Here's a link to Brin's post and the comments, including mine, courtesy of Chris Hibbert]

I've been having an exchange on Google+ with David Brin, started by a post of his that began:

Is it "class war" to reset tax levels to the levels of the prosperous 1990s?

I pointed out that, according to the CBO figures, the top quintile of the income distribution was paying a slightly higher average federal tax rate in 2007, the last year for which I could find CBO data, than in 1990, while the bottom quintile was paying about half the rate in 2007 it was paying in 1990, and asked him if what he was proposing was doubling the taxes on low income taxpayers.

My point, of course, was that although there is lots of rhetoric about the rich paying low taxes, what actually happened over the past twenty years was a sharp cut in federal taxes for the lower half of the income distribution.

Brin responded with:

Quintiles are utterly utterly misleading. 90% of the people in the topmost quintile still earn most of their income from wages, not dividends or capital gains. Try the top 5% and 1% and 0.1% and include shelters overseas (estimated.) This is exactly the kind of razzle dazzle switcheroo you should be wary of and have spotted for yourself.

To which I replied by quoting his post, followed by:

I don't think I'm the one offering razzle-dazzle--and I note that while you ask me to look up data, you don't actually offer any.

As you could easily have discovered if you looked up the numbers yourself, the CBO figures for 2007 show the top 1% paying an effective federal tax rate of 29.5%. The figure for 1990 is 28.8%.

The bottom quintile, on the other hand, paid an effective rate of 8.9% in 1990. In 2007, it was 4.0%.

So you have your facts backwards, at least so far as I can tell from the CBO figures--if you have something better, feel free to offer it. The effective rate on the bottom quintile has been cut in half since 1990, on the top 1% it has increased a little. I have no idea, and you don't say, what your source is for "shelters overseas (estimated)," but I suspect it's bluff--do you have figures showing that the top 1% is sheltering much more of its income now than in the 1990's? That's what your argument requires.

Let me repeat my question, since you didn't answer it the first time. You suggest rolling back tax levels to what they were in the 1990's. Does that mean that you want to double taxes on low income taxpayers, to get them back to where they were then? That's the big change, after all.

My figures are only up to 2007, since that's all I could readily find from the CBO; my guess is that the 2010 figures, if I could find them, would show a lower tax rate than in 2007 for all groups, since the current Administration has financed its budget largely with borrowing. But the big change from 1990 would still be the sharp drop in the effective tax rates paid by the lower part of the income distribution. For some reason neither you nor Obama seems to have noticed that--or at least let it interfere with your rhetoric.

Brin has so far not responded. I'm waiting to see if he will support his claims, concede error, or simply leave the argument unanswered. The fact that his response to my first post was, so far as I can tell, pure bluff--no data, just the implication that if one looked at the data it would support his beliefs--is disturbing. 

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David Henderson has a link to a piece that goes into much more detail than I have and finds that the tax system has been becoming pretty steadily more progressive over the past fifteen years, under both Democrats and Republicans.

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The argument continues. For those who don't want to follow the link at the top of this and then search through the comments, here is my most recent response (to two of his):

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David B. writes:

“In fact I agree that taxes for everybody are lower now than they were in the 1990s.”

Because current spending is financed by borrowing. Which, absent a default, will eventually have to be paid for by higher taxes.

That was not however the point of my comments. My point was that taxation has become more progressive since the 1990’s, when you and lots of other people, including Obama, want to claim it has become less. Do you agree with that? If so, why have you gone to so much trouble, with your handwaving about the top 1% and tax shelters, to deny it?

“Put this in the context of 6000 years of history …”

More evasion. If I can’t get you to face demonstrable facts about taxation in the U.S. over the past few decades, I doubt that arguing with you about the past 6000 years of history would be very useful.

You keep trying to make this an argument about whether one supports or opposes the policies of the Bush administration. I didn’t vote for Bush, didn’t approve of his policies at the time, and don’t approve of their continuation by Obama, so you can have that argument with someone else. I’m simply trying to get you to face the fact that the federal tax system has gotten more progressive over time, not less.

And when I point you at evidence that that’s true, your response isn’t to try to rebut it, or even to understand it, but to talk about “you guys” and try to change the subject to your grand theories about America. If I’m going to argue about grand theories, I would prefer to do it with people who care whether the facts they use in their arguments are true or not.

“You even seem to implicitly say that tax rates SHOULD be progressive. Of course they aren't. Look closely.”

I have said nothing at all about whether tax rates should or shouldn’t be progressive. I’ve merely been trying to establish what they are, and how they have changed over time.

“Most of these right wing "studies" incorporate corporate taxes INTO the recipient's claim of taxes paid, under the bizarre incantation that this envelopes what the call "double taxation."”

Does that include the “right wing studies” by the Congressional Budget Office? Have you looked at their figures on the federal income tax alone? That by itself is highly progressive. That plus payroll taxes—which they treat as entirely a tax on the employee—is still progressive, although not as progressive.

How progressivity has changed over time requires a little effort to determine, and you would rather demagogue than make that effort. To see that the federal tax system is progressive, under any plausible assumption about incidence, requires only the ability to read and do arithmetic. But it apparently doesn’t fit your current ideology, whatever that may be.

I am curious, however, as to who you believe pays corporate income tax, since you think the notion that it comes out of money that would otherwise go to dividends and capital gains is bizarre. Is it just manna from heaven?

What's Wrong With Gestational Surrogacy?

Gestational surrogacy is the arrangement by which a couple arrange to fertilize the woman's egg with the man's sperm, then have the fertilized ovum implanted and gestated in another woman's womb. In the U.S. the practice is regulated by state law, illegal in some states, legal in others, which means that in practice it is legal, since the couple can arrange to do it in a state where it is legal. 

I gather, however, from a conversation with someone who has been researching the subject, that in most of western Europe it is illegal, and that while it is legal de jure to arrange to have it done abroad—India and the Ukraine are apparently the favored destinations—it is made difficult de facto by administrative obstacles put in the way of bringing the resulting infant back to its parents' home country. The U.K. is a partial exception; gestational surrogacy is legal, but only if it is altruistic, which is to say, only if the host mother is not paid for undergoing the inconvenience and risk of bearing another woman's child.

Which raises an obvious question: Why would anyone be against the arrangement? In many cases, it makes it possible for a couple to have a child—their own child—when they otherwise could not. Even in those cases where the biological mother could bear her own child, why should anyone else object if she can find another woman willing to do it for her on mutually acceptable terms?

There are, I think, a number of possible answers, although none that in my view justify the restrictions. One is that the decision to be a host mother is not freely made since it is "compelled" by poverty. This sort of argument is common in a variety of contexts, but I find it hard to make any sense of it. Put in its simplest terms, the claim is that if the potential host mother does not accept the offer she will starve to death, hence accepting the offer is not really a free choice, hence she should not be permitted to make it. Which, if the starting point is correct, means that out of our generous concern for a poor woman we will compel her to starve to death.

A second possibility, following a line of argument originated (I think) in the context of prostitution by professor Margaret Radin of Stanford Law School, is that by permitting a woman to rent out the use of her womb (body) we "commodify" motherhood (sex), cause people to think of it as something to be bought and sold, and so cheapen the human experience. Restated, the claim is that the  transaction of buying sex or renting a womb is  both an exchange and a statement. The exchange is one that, in Radin's view, should be permitted, since the woman owns her own body and so is entitled to decide how it is employed. But the statement, because of its effect on other people's view of their lives, is one that ought not to be made, hence the transaction may, arguably should, be prohibited.

What is bizarre about this argument is that it was made by an American law professor. The American constitution, as routinely interpreted by judges and law professors, contains a very strong protection for freedom of speech, making it a violation of the constitution to prohibit an act, such as flag burning, which is also speech. Following out that principle, Radin's argument ought to imply that even if there were good reasons to prohibit surrogacy or prostitution, the fact that both are speech as well as acts ought to protect them. She, along with those who accept her argument, reaches precisely the opposite conclusion.

A somewhat better argument that might be made against surrogacy is that permitting a couple to produce a child when they otherwise could not means that they will have no need to adopt, hence prohibiting surrogacy benefits children in need of parents. There is some logic to the argument, but its morality is questionable. Surely a legislator willing to forbid a couple from producing their own child in the only way they can in order that they will have to adopt someone else's ought at least to feel obligated to refrain from producing any children of his own until he has adopted at least one.

Finally there comes what I suspect is the real reason. Natural is good, and surrogacy (like IVF before it, and many other things as well) is unnatural. Our grandparents didn't do it, our pre-human ancestors didn't do it, so there must be something wrong with it, something wicked, sinful. Icky. 

And worse still if done for money.

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On the principle of full disclosure, I should mention that my granddaughter Iselle might not have come into existence were it not for surrogacy. A hard argument to rebut (see below).

Have I Been Tuckerized?

Someone yesterday told me that I had been Tuckerized by Jerry Pournelle in Prince of Mercenaries. A little quick research found that that book has been included in a larger volume called The Prince. Both books are out of print, I don't think I own either, and in any case am currently something over two thousand miles from my library. 

Is there anyone reading this blog who has one of the versions of the book and can check to see if my name appears, linked to one of the characters? I don't think the novel I'm currently working on has a space for a character named J. Pournelle, Destitute Nelly, or anything close, but perhaps one of the scenarios in my current nonfiction project ...  .

Religion, Law, and Sex

"We certainly respect First Amendment rights. However, religious freedom does not allow for criminal acts," Phoenix police spokesman Steve Martos told CNN.

From a news story describing the arrest of 20 people at Arizona's "Goddess Temple," on charges that the temple was a actually a brothel. 

 

"In addition to sex-ed and sex toy classes, the church offered "sessions" to heal sexual blockages for up to $650 a pop, ABC News reported. And that, cops say, has nothing to do with praising Jesus, or any other higher power."

 

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"For these patients, some sex therapists turn to surrogate partners — people who help patients with intimacy issues using a hands-on approach. This can include having sex with the patient." 

 

From a news story on the use of surrogate partners to solve sexual problems. 

 

"The practice is controversial, and most sex therapists don’t work with surrogate partners. Some question its legality, although no laws specifically prohibit surrogate partners, according to the International Professional Surrogates Association (IPSA)."

 

Or in other words, selling sexual services is clearly illegal if done under the pretense of religion—despite the fact that religious prostitution is a well established historical practice, even if one not associated with Jesus. But it is presumptively legal if "exotic religion" is replaced by "sex therapy." 

 

Which suggests that the law may not be as nearly neutral among religions as it claims. You just have to take care to pick a religion that judges respect.

A Puzzle, a Solution, and Why It Cannot be Right. Maybe.

In the U.S. in the 20th century, stocks have consistently outperformed bonds. For an economist, this is puzzling. If you consistently get a better return buying stocks than buying bonds, why does anyone buy bonds? One would expect investment to shift out of bonds and into stocks until the return on both investments was equal.

There are several solutions that other people have offered to this puzzle. One is to argue that investors are risk averse and bonds have a more predictable yield; the rebuttal has been that, except over very short time periods, stocks almost always outperform bonds, so nobody investing for more than a few years can reduce his risk by buying bonds. Another is to claim that the U.S. market in the 20th century is a special case; investors in stocks just happened to be lucky, many times over.

I have a different solution, one that is elegant, coherent, and arguably cannot be right. More interesting still, the argument that shows it cannot be right also shows that there is no such thing as insider trading. 

I start with a bit of real world history:

When the Macintosh first came out, I was already familiar with the idea of a graphic interface and convinced that it was a better way of interacting with computers, having seen a video some years earlier on work at Xerox PARC. I observed that the rest of the world, or at least the people I could directly observe, had no idea what was going on; one colleague, told that I was buying a Mac, asked why I wasn't getting a PC Jr. instead, apparently in the belief that they were roughly comparable because of similar size. I concluded that if his response was typical, Apple stock was underpriced, so I bought some.  It turned out to be a correct decision. 

I was an insider for that transaction, not in the legal sense but in the  economic sense; I knew relevant things that most of the market did not know. Imagine a stock market in which every investor is in that sense an insider, each for a different tiny niche, a particular subset of investments with regard to which he has information that other investors do not have and cannot readily obtain. Like any inside trader, the investor can expect a better than market return when he invests on the basis of his inside information.

If expected return was all that mattered, each individual would invest only in the niche where he had specialized information. But individual investors are risk averse, so wish to diversify their investments. Having bought or sold stock in my niche to the point where any further bets would lose me as much in increased risk as they make me in expected return, additional investments will be outside of my niche. My investment income consists in part of a (say) 2% return on my capital, in part of an additional stream of income representing the rent on my specialized knowledge and obtained via a more than 2% return on capital invested in my niche.

It follows that the average return on investment, mine and everyone else's, is higher than the marginal return. My average return, pooling niche and non-niche investment, is something more than two percent. But my marginal return, what I would get if I invested another dollar, is only 2%, since I am already invested in my niche up to the limit imposed by risk aversion. The argument for equalizing returns on stocks and bonds is put in terms of average return—that, after all, is what we can observe. But the logic implies that what is equalized is marginal return. If bonds yield the same 2% return as stocks bought by an outsider—which, outside of my niche, I am—a 2% return on bonds is a sufficient reason not to shift capital out of them. 

We now have an explanation of how, in equilibrium, the average return on stocks can be consistently higher than the average return on bonds.

Unfortunately, the explanation cannot be right. The problem is that the outsider could choose some variant of the strategy sometimes described as throwing darts at the Wall Street Journal, buying stocks at random and so getting the market's average return. If he wishes to eliminate any random element, he could make his investment outside his niche by buying 1/100,000,000 of the stock of every firm on the  exchange,  guaranteeing himself the market's average return. He is  getting the average market return on his outside investments, more than the average market return on his inside investments. So is everyone else. 

Call the average market return R. I have just demonstrated that R equals a weighted average of Rout=R, the return on outside investments, and Rin>R, the turn on inside investments. Hence I have demonstrated that R>R, which is mathematically impossible.

I reached this point in the argument some years ago and eventually gave up, on the assumption that I must be making a mistake.  A day or two ago, it occurred to me that I had not only proved that my explanation of the stock/bond puzzle was wrong, I had also proved that insider trading, as normally imagined, does not exist.

To see why, apply the same argument to a market where only some investors are insiders. Anyone who wants can get the market return by investing in a random collection of stocks—or, to avoid any randomness, an equal fraction of every stock out there. Assuming, as economists routinely do, that investors are rational, all outsiders follow that strategy. Insiders get a return greater than the market return, outsiders get the market return. The market return is a weighted average of the return to insiders and outsiders. Hence R>R.

The only way out of this puzzle that I can see, whether for the general case of insider trading or my explanation of the stock/bond puzzle, is to assume that investors who are not insiders consistently follow a strategy that produces a lower return than another strategy readily available to them. When the insider buys or sells on the basis of his specialized knowledge there is some outsider willing to sell or buy, providing the other side of the transaction—despite knowing that doing so, in a market containing some insiders, is on average a losing game. That appears to contradict the assumption of rational actors, hence to be heretical from the standpoint of conventional economics.

Readers to whom all of this seems like confusing mumbo-jumbo are free to skip over it and wait for my next post, which will be on a different subject. Economist readers are invited to offer some solution to the puzzle that does not depend on investor irrationality.

What is Wrong with Global Warming Anyway?

The argument for large and expensive efforts to prevent or reduce global warming has three parts, in principle separable: Global temperature is trending up, the reason is human activity, and the consequences of the trend continuing are very bad. Almost all arguments, pro and con, focus on the first two. The third, although necessary to support the conclusion, is for the most part ignored by both sides.

The usual argument to show that an increase in global temperatures by a few degrees centigrade over the next century would be a catastrophe, or at least a very bad thing, consists of pointing out specific bad effects: rising  sea level increasing the risk of flooding in very low lying areas, rising temperature making particular areas less suited to growing the crops they now grow. But an increase in global temperature would also have good effects, as should be obvious to anyone who has ever spent a winter in Chicago, not to mention Alaska or Siberia. The question is not whether there are any bad effects but whether there are net bad effects, whether the increased risk of flooding in Bangladesh does or does not outweigh the opening of a sea route north of Asia and the increase in the habitable area of Canada and Siberia.

The answer, I think, is that nobody knows if the net effects would be good or bad, and probably nobody can know. We are talking, after all, about effects across the world over a century. How accurately could somebody in 1900 have predicted what would matter to human life in 2000? What reason do we have to think we can do better?

Should we, for instance, assume that Bangladesh will still be a poor country a century hence, or that it will by then have followed the path blazed by South Korea, Taiwan, Singapore and Hong Kong—and so be in a position to dike its coast, as Holland did several centuries ago, or move housing some miles further inland, at a cost that can be paid out of petty change? Should we assume that population increase makes agricultural land more valuable and the expansion of the area over which crops can be grown more important, or that improvements in crop yield make it less? While there may be people who believe that they know the answer to such questions, the numbers required to justify such belief are at best educated guesses, in most cases closer to pure invention. Someone who wants to prove that global warming is bad can make high estimates for the costs, low estimates for the benefits, and so prove his case to his own satisfaction. Someone with the opposite agenda can reverse the process and prove his case equally well.

If we cannot calculate in any detail what the actual consequences of global warming and associated costs and benefits will be, an alternative is to ask whether we have any reason to expect, a priori, that costs will be larger than benefits. There are, I think, two answers.

The first is that any change, whether warming or cooling, is presumptively bad, because current human activity is optimized against current conditions. Farmers grow crops suited to the climate where they are growing them; a change in climate will require a costly change in what they grow and how they grow it. Houses are designed for the climate they are built in and located in places not expected, under current circumstances, to flood. Putting it in economic terms, we have born sunk costs based on the current environment, and a change in that environment will eliminate some of the quasi-rents that we expected as the return for those costs.

This is a real argument against rapid change. But the global warming controversy involves changes over not a year or a decade  but a century. Over a century, most farmers will change the crop they find it most profitable to grow multiple times; if average temperatures are trending up, those changes will include a shift towards crops better suited to slightly warmer weather. Over a century, most houses will be torn down and replaced; if sea level is rising, houses currently built on low lying coastal ground will be rebuilt a little farther inland—not much farther if we are talking, as the IPCC estimates suggest we should be, about a rise of a foot or two. Hence the presumption that change is bad is a very weak one for changes as slow as those we have good reason to expect from global warming.

It is hard to see any other reason to expect gobal warming to make us, on net, worse off. The earth and its climate were not, after all, designed for our convenience, so there is no good reason to believe that their current state is optimal for us. It is true that our species evolved to survive under then existing climatic conditions but, over the period for which humans have existed, climate has varied by considerably more than the changes being predicted for global warming. And, for the past many thousands of years, humans have lived and prospered over a range of climates much larger than the range that we expect the climate at any particular location to change by.

If we have no good reason to believe that humans will be substantially worse off after global warming than before, we have no good reason to believe that it is worth bearing sizable costs to prevent global warming.

Readers who reject this conclusion are invited to offer reasons why we should expect the negative effects of global warming to outweigh the positive. Readers on the other side, inclined to post comments attacking me for being so credulous as to accept the reality of anthropogenic global warming, are free to do so but should not expect any response from me, since that is not the argument I am at the moment interested in having.

Arctic Ice: Prediction That Isn't

A recent story suggests, based on computer modeling, that the decline of arctic sea ice may be a good deal further in the future than various people predicted, fifty  or sixty years instead of five or ten. It struck me because I had some posts a while back pointing out that a NASA/JPL web page was misrepresenting the facts on the subject, claiming a continued decline in the face of a (perhaps temporary) reversal. 

The other thing that struck me about the post was that the author did not understand the nature of computer modeling and how you test it:

Accuracy of future predictions was checked by running simulations of the late 20^th century. The Model replicated the events of the past well enough to suggest that its forecasts of possible futures are realistic.

How are such models created? By fitting to past data. Having used that data in constructing the model, it is no longer available to test it.  Someone is said to have claimed that with ten parameters he could fit the skyline of New York. Assuming he did it, it does not follow that by keeping the same regression coefficients while increasing the range of the parameters he could predict the skyline of the rest of the country.

In order to test the predictions of a model you need to do it against actual predictions—information that didn't go into building the model.

What the Tea Party Gets Wrong

Suppose the government wants, for some reason, to subsidize biofuels. There are at least three different ways to do it:

1. For every gallon of biofuel produced, the government will pay the producer a one dollar subsidy.

2. For every gallon of biofuel produced, the government  gives the producer a one dollar tax credit.

3. Make a regulatory rule that forces people to use more biofuels, such as a requirement that gasoline can only be sold if combined with at least ten percent biofuel.

The first two differ only in labeling. They have the same effect on the federal budget. They provide the same amount of subsidy. They are both, in fact if not in form, federal expenditures. The only difference is that the second is an expenditure masquerading as a tax cut.

A lot of expenditures pretend to be tax cuts. If you look at the CBO figures for federal income tax in 2007, you discover that, on average, the bottom 40% of the income distribution not only does not pay federal income tax, it is paid federal income tax—a federal welfare program in the form of tax credits. And since these are 2007 figures, it is Bush's federal welfare program, not Obama's.

As best I can tell by news stories dealing with recent budget controversies, this simple point has somehow been missed by the Tea Party Republicans. They insist on taking such expenditures at face value, as tax cuts rather than expenditures, hence oppose their elimination. They have thus fallen for the very simplest scam operated by their opponents in both parties, and by doing so come out against instead of for cutting federal expenditures.

The third alternative is also an expenditure, also a subsidy, should also be opposed by those who wish to reduce the role of government in the economy. But at least it uses a less obvious device, goes to more trouble to hide what it is, than number 2.

Capital Gains Taxation: Contra Landsburg

Steve Landsburg has a recent post on capital gains taxation in which he makes one odd but arguably legitimate point while missing two other and, I think, more important ones. The result is that he gets the wrong answer to the question of how capital gains ought to be taxed. 

His central claim is that the tax rate on capital gains ought to be zero—more precisely, that if it is zero, taxpayers with capital gains will end up paying as taxes the same proportion of their income as those with other forms of income. It's not as screwy a claim as it seems at first; here is the argument, in my words not his. It assumes a 50% income tax, no capital gains tax.

Taxpayer A earns $1000, pays $500 in taxes, has $500 left to spend on her own consumption—half as much as she would have in a world without taxes.

Taxpayer B earns $1000, pays $500 in taxes, uses the remaining $500 to buy an asset which then appreciates at 5%/year for the next twenty years; for simplicity we ignore compounding. B then sells the asset for $1000, which he can spend on himself. 

In a world without taxes, B would have had $1000 to invest and so would have ended up with $2000. Hence A and B have both paid the same tax rate—50%. The only difference is that A chose to take her (taxed) income in the form of $500 of consumption in (say) 1990, B his (taxed) income in the form of $1000 of consumption in 2010. Each ended up with half the consumption he would have had in a world without taxes, so is really being taxed at 50% on all income. Hence, Steve argues, the fair capital gains tax rate, the rate that treats capital gains like other income, is zero.

What is being described here as capital gains looks an awful lot like interest. B could, after all, have deposited his $500 in a bank at 5% instead of buying an asset that appreciated at 5%. From an economic point of view, interest is what people are paid to postpone their consumption, making resources available for other people to use productively. It's not obvious why interest should not count as income and be taxable as such.

No doubt some of what shows up as capital gains is in fact implicit interest, but I don't think that is the natural way of looking at most of it. I think it is more accurately viewed as the return from a particular form of skilled labor. A speculator/investor spends time and effort figuring out what firms and what assets are going to increase in value and investing in them, improving the allocation of capital, nudging markets a little closer to efficiency, and being rewarded, assuming he does a good job, with income above and beyond the normal return on capital. I do not see why the income from that form of labor is a less suitable subject for taxation than income from digging ditches. And since the return is not a fixed proportion of the amount invested, as in Steve's case, but a function of the time and effort spent investing it, Steve's argument for implicit taxation does not apply.

There is, however, a serious problem with treating capital gains as ordinary income—much of it, perhaps most of it, is not income at all.

To see why, imagine that you buy a house for $100,000 and sell it, twenty years later, for $200,000. Over those twenty years, not only has the price of housing gone up, the price of practically everything has gone up, with the result that two dollars at the end of the period will buy about what one dollar bought at the beginning. Measured in nominal terms, by counting dollar bills, you have made a capital gain of $100,000 and will be taxed on it. Measured in real terms, by what those dollar bills will buy, you have made a capital gain of zero. Prices in our society trend up over time, so measured capital gains overstate—for long periods greatly overstate—actual capital gains.

Combine these two arguments and you have a simple conclusion. Capital gains ought to be indexed—measured in real rather than nominal terms, purchasing power not number of dollars. That done, they ought to be taxed as ordinary income.

The Syrian Bodycount Puzzle

"a crackdown that, by the count of some human rights groups, has killed more than 2,000 people. Hama, the victim of one of the bloodiest moments in modern Middle East history, is a national symbol of violent repression. The military crushed an Islamist revolt there in 1982, killing at least 10,000 people. The assault in Hama last week, in which more than 200 people were killed, inflamed sentiments across the country" 

             (recent news story)

Syria has been in revolt for months. News stories describe attacks by tanks and troops on nonviolent protesters. At least one story on the recent attack on Hama made it sound as though the city had been bombed out and destroyed. 

Checking Wikipedia, the population of Hama is 696,863. 200 people killed comes to fewer than one in 3000.

Which raises an obvious puzzle. The figures on bodycounts are coming from the opposition, which one would not expect to minimize them. Yet they seem surprisingly small, given the scale of the violence.

Which makes me wonder if, at this stage of things, a lot of what is happening is bluff—security forces killing a handful of demonstrators in order to shut down demonstrations, while refraining from the sort of large scale violence of which they are surely capable for fear of setting off a level of conflict with which they cannot adequately deal.

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"Syrian troops stormed the port city of Latakia and sprayed it with gunfire on Saturday, killing at least two people" (Aug 13 news story)

Probability of U.S. Default

"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the Press.

 The first sentence is true. The second is not.

Suppose that avoiding default requires money creation on a scale that would set off an inflation rate of fifty or a hundred percent a year. The U.S. could--but would it? That would be a de facto default although not a de jure one, since creditors would be being paid back in inflated dollars. And it would have all the added costs of inflation.

Would Greenspan advise doing it? Unlikely.