The New Grand Bargain Part 1: How To Address Climate Change in a Bipartisan Manner.

With our current circumstances, putting aside ideological preferences in favor of consensus based policies are our best chance of averting decades of skyrocketing debt, government spending levels similar to that of European social democracies (with far less services), virtually nonexistent GDP growth, etc. These issues cannot be fixed by simple grandstanding, government shutdowns, presidential vetoes, and more gridlock. Alternatively, the two parties need to work out a plan that will directly address these impending problems. While they are on opposite sides of the political spectrum, I do believe compromise is possible. They can, in fact, meet each other halfway. By conceding issues that are less important to the respective parties, in order to have their most preferential policies and policy outcomes implemented, both sides can have their values represented and addressed. 

Starting with the environment: the right's main goal is to downsize the EPA, in order to reduce mandates, spending, and the general economic inefficiencies resulting from these regulations. In contrast, the left's priority is to reduce CO2 emissions in order to slow global warming. These views are not irreconcilable, in fact, there is a very simple solution that can satisfy both parties. The right should offer a revenue-neutral carbon tax; that is, a tax on each ton of carbon emissions; offset by equal reductions in taxes elsewhere (if the current system remains, I'd recommend about half payroll tax reductions, half corporate/business tax reductions). The left should then agree to lower EPA regulations and cut the size of the EPA. Overall, this would reduce the deficit, as less bureaucrats and overhead would reduce the costs of the EPA. Further downward pressure on the deficit would be produced from a rise in GDP, as having less regulations and the shifting the burden of taxes from discouraging productive activities to discouraging a negative externalities. Businesses and individuals would cut back on their emissions until the marginal benefit of the last ton of CO2 emission is equal to it's marginal cost. Rather than across-the-board regulations, emissions would be reduced in the most efficient way possible. The rate of the carbon tax itself would be devised from climatologists and economists, but in general should probably be somewhat above what is considered the socially optimal rate of carbon emissions, in order to enable further tax reductions elsewhere. 

Libertarians and conservatives who attack this from ideological grounds should be reminded of Friedman's case for pollution taxes. Pollution taxes still leave choice up to the emitter, whereas regulations don't, and that negative externalities impose costs on unconsenting third parties, and thus violates their property rights. Liberals who oppose a revenue-neutral carbon tax should be called out for having an alternative agenda behind their environmental programs, such as enlarging government. After all, economists are in near unanimous agreement that a carbon tax would be the most effective way of reducing CO2 emissions. Essentially, those in the Pigou Club need to reveal the hypocrisy of legislators who oppose such measures until they have no choice but to pass a solution similar to the one proposed here. 

Noah Smith Fails to Make a Credible Case Against Neoliberalism

My last post argued, hopefully convincingly, that neoliberalism has been tried, and summarized the evidence that these reforms were successful in aggregate. And yes, while neoliberal policies are not going to be the solution to literally every single economic problem, in the vast majority of cases they have improved outcomes. Smith recently tried to list a few major areas where neoliberalism failed, but he provided no evidence to substantiate these claims, perhaps because the literature often contradicts him. Here's a point-by-point breakdown of why he's wrong about the failures of neoliberalism.

Exhibit A: Tax cuts

It is absolutely correct that there are diminishing returns to tax cuts, something Reformocons have also attempted to point out to supply siders. I also agree with his assessment that JFK's tax cuts had a large positive effect on growth, Reagan's a more modest positive impact, and W.'s a negligible impact. The latter, while an important lesson for conservatives; does not show that further tax cuts, or at least marginal tax rate (MTR) cuts won't be expansionary. I'd prefer revenue neutral or even slightly revenue positive tax reform with lower MTR's on capital, income, and businesses, but I still think plan's like Paul Ryan's, which would lose revenue, would be pro-growth to a significant extent (although not to the degree of the Tax Foundation projection).


Different taxes have a different level of economic impact, and the ways they are funded are equally important. For example, corporate taxes are heavily distortionary, anti-growth, and substantially depress wages/compensation. There is a substantial amount of growth potential that can be exploited by either reforming the corporate tax, cutting it, or eliminating it altogether. One could make a similar case with capital gains taxes, considering most economists have argued that the optimal capital tax rate is zero (with some exceptions, as in this study which argues for a negative capital tax rate, and this one which argues for a slightly positive one, mainly in the form of a higher estate tax).


Implementing these cuts to a substantially extent would likely make income tax cuts necessary, otherwise individuals would simply try to disguise their income as capital or business income, leaving reported taxable income much lower than projected. This is why I support Ryan's 33% top rate; specifically under the condition that the rest of his plan is implemented, but would not support it if it was a standalone policy proposal, unless it was paid for by limiting deductions/credits on the rich. That's not to say that lowering the top rate would boost total government revenues, even under those conditions, but I do believe it would produce enough revenue feedback to make it worth the modest boost to growth that it would provide.


Otherwise, replacing all current federal taxes with land-value, pollution, property, and consumption taxes (as the OECD paper suggests) would have large growth effects. So while Noah is accurate when claiming that the traditional across the board income tax cuts plan won't be very expansionary at our current MTR levels; especially when funded with higher deficits, the idea that we cannot generate a large amount of growth from tax cuts or reform is incorrect.






In "Exhibit B," he cites financial deregulation/underregulation as an example of a recent neoliberal failure, while criticizing the view that the government had a role in creating the crisis. A complete response to this would be far too lengthy to include in here (I may share my views on the causes of the financial crisis and the sluggish recovery at a later point), but I will add that I believe the view it was simply a private sector failure was simplistic, and there is evidence the government played a role in causing it. To summarize my thoughts, it was a once in a century colossal failure of the private sector, regulators, government policy, and monetary policy. The fact that he doesn't even mention the latter is incredibly disingenuous, as surely he's aware that tight money and the Fed's loss of credibility by not responding to rapidly falling inflation expectations and slow growth likely helped trigger the crisis. Certainly it's failure to respond to the calamity in the financial sector (effectively tightening policy because the Wicksellian interest rate was falling) was a large contributing factor to the depth and length of this crisis.

Exhibit C: Light-touch regulation of monopoly. The evidence is mounting that industrial concentration is an increasing problem for the U.S. economy. Some of this might be due to intellectual property, but much is simply due to naturally increasing returns to scale.

The issues of monopolies are largely a government manufactured one, the barriers to entry (we rank 49th in the ability to start a business) and large costs to businesses imposed by regulations (and to a lesser extent, taxes, which small businesses do not have the money to exploit loopholes in order to pay lower rates) have simply crippled competition. Returns to scale and IP are certainly contributing, but they are often net-benefits to consumers and have existed in the past where a more vibrant and dynamic economy with plenty of competition has existed alongside them. The areas of the economy in which natural monopolies are truly most likely to form, even with low burdens on businesses and a lack of barriers to entry, have not been subjected to large-scale neoliberal deregulation.

Exhibit D: The China shock

The idea that a single paper, which doesn't even claim that the China trade shock was a net-negative, somehow debunks the entire consensus and prior literature on free trade is a claim that can be dismissed off hand. The sole argument that has grabbed my attention involves the demographic composition at the time of the China shock. Workers in manufacturing were too old to retrain and too young to retire, so that would help explain the Autor paper results. Even then, it is hard to imagine how these costs exceeded the benefits, as China's explosive growth flooded our markets with cheap products (in part, this is evidenced by the fact that inflation of goods consumed by the poor and middle class has been substantially lower than luxury goods) and the simple law of comparative advantage is almost irreconcilable with trade having a negative impact on any participating nation. Also, the benefit to the poor in the third world has been so immense that even if there was a slightly negative impact on the utility of the average American citizen (the absolute worse-case scenario), I would still fully support our trading with China and southeast Asia and would find it morally repugnant to oppose doing so. I appreciate his acknowledgement that trade has been otherwise beneficial, and trade policy on China didn't even change during this shock, with a single exception (that Yglesias argues is responsible, I really don't buy it given how insignificant the change is). So how is trade a failure of neoliberalism?

Exhibit E: Faux-privatization. True privatization is when the government halts a nationalized industry and auctions off its assets. Faux-privatization is when the government outsources an activity to contractors, often without even competitive bidding.

I agree with Noah on private prisons. However, there is evidence that charter schools and vouchers have been effective (although not to the extent proponents have hoped for). This is not true in all circumstances, but I'd liken these reforms to Universal Pre-K; the way they are designed matters, and short-term problems may not be an indicator of what occurs in the long-run. As for noncompetitive bidding projects; they are crony capitalism (and bad), not neoliberalism.

 Exhibit F: Welfare reform. Clinton's welfare reform saved the taxpayer very little money, and appears to have had little if any effect on poverty in the U.S.

Sure, if one ignores the massive reduction in poverty that coincided with the reforms, especially from the EITC expansion.

Exhibit G: Research funding cuts

I think the cuts were a mistake. I'm not sure this is technically a neoliberal idea, but it is certainly one that is conservative/libertarian.

Exhibit H: Health care. The U.S. health care system is a hybrid private-public system, but includes a proportionally much larger private component than any other developed nation's system. Our hybrid system delivers basically the same results as every other developed country's system, at about twice the cost. Private health care cost growth has been much faster than cost growth for Medicare

The neoliberal position on healthcare is to simply more market incentives into healthcare (whether or not one favors universal coverage is not a particularly neoliberal position). It's quite unfair to pin the flaws on the current system on neoliberalism, given how neoliberals are not satisfied with it either. Regardless, the empirical claims here are dubious.
It's hard to compare the quality of healthcare systems, but once adjusted for factors like obesity, smoking, alcoholism, homicides/suicides, etc., the U.S. appears to deliver higher quality care than nations with single payer such as Canada. Again, this is debatable. What isn't debatable is that the U.S. does not have the large degree of rationing that can be found in the few nations with Single Payer healthcare (in terms of very lengthy wait times and government deciding how much to spend on healthcare and what exactly to pay for). There are plenty of other nations that have more free-market oriented healthcare systems than single payer, that seem to be doing just fine in terms of annual spending, quality, and wait times. The best example of this is Singapore, but Switzerland and Germany also fit the bill.


While on this subject, it is worth noting that Noah makes the very common mistake of conflating spending with costs. Americans are freer to spend more on healthcare, and also have a greater degree of health issues that aren't related to the quality of a nation's healthcare system, so they end up spending more which in turn drives up prices somewhat, further skewing the numbers. More importantly is the issue of third party payers. Prior to World War 2, most Americans paid out of pocket for the majority of their healthcare expenses. Now, between the fact that healthcare benefits have been tied to employment (as a result of wage controls during WW2), and the fact that government covers a lot of healthcare spending through Medicare and Medicaid (comparing the cost growth of these programs to that of the private sector is unfair as they drive up private sector costs and these programs have price controls), and it is clear to see why prices have been driven up so much. With third parties paying for the vast majority of healthcare, the obvious result will be overconsumption of non-vital healthcare services and consumers not bothering to shop around for the best price. Switching to a Singaporean-style healthcare system with mandatory savings and price transparency, would help us bring our healthcare spending/GDP down to similar levels as theirs, (although due to path dependency and our lifestyle choices, not quite as low), which happen to be roughly a quarter of what ours is.


I largely agree with the last couple of paragraphs; but as to the final argument that alternatives to liberalism should be sought out, don't fix what isn't broken. The global growth slowdown has to do with the fact that the neoliberal reforms have gotten most of the low-hanging fruit out of the way (demographics are playing a role too), and thus are a sign of it's success. Nations that have deviated from neoliberalism, such as Brazil, Argentina, and Venezuala have seen disastrous results. Neoliberalism, like it or not, has brought more success than any other type of economic system or ideology.

Neoliberalism Has Indeed Been Tried, and the Results are Clear: Resounding Success. A Response to Bryan Caplan and Noah Smith.

Noah Smith recently reignited a long-standing debate on neoliberalism, making the case that neoliberal policies has been implemented and has some serious flaws. Bryan Caplan responded by linking to an old blog post, arguing that Scott Sumner was wrong to assert that Neoliberalism worked, given that it was never tried.


Neoliberalism, broadly speaking, is an economic ideology aimed at reducing the regulatory burden on the economy, privatizing state-run industries, enacting free trade policies, and cutting back on (what is perceived to be) excessive government spending. It is also highly controversial, with many believing neoliberal policies to be responsible for the financial crisis, increasing inequality, and sluggish income growth. However, it has proven difficult to discuss as many 'neoliberals' don't think neoliberalism has actually been tried.






All of them make salient points, and this is an important question to be answered, for if neoliberalism has not been tried we can't assess it's merits and flaws.
So, has neoliberalism been tried? Overall, the answer is a clear yes. Caplan is obviously correct that tax revenues and government spending as a percentage of the total economy have not fallen, and in fact have risen in many countries. While certain sectors have been deregulated, the total number of regulations, and arguably the total economic burden of them, have climbed dramatically. All of the smaller and medium sized regulations do add up.




On the other hand, those large scale deregulation policies, as well has privatization, has been undertaken in the U.S. Even more aggressive reform has occurred in nations like Denmark. Taxes/GDP may not have fallen, but marginal tax rates on income, capital, and corporate income have been drastically reduced. Since incentives work on the margin, this is certainly a welcome improvement. Outside of the U.S., the revenues have been made up with consumption taxes for the most part, which economists tend to agree are much less distortionary. Even better, they have been in the form of VATs, which have an incredibly broad base and are "hidden" so as to not effect incentives much. Free trade agreements have been enacted, and welfare has been reformed as to reduce implicit marginal tax rates further and apply strict work requirements.




To this argument, I will echo Nick Rowe here. The main battles against economic statism fought by the classical liberal economists such as Milton Friedman, were to challenge price controls, government ownership of key industries, concentrated regulations in given sectors, protectionism, and the use a demand-side view of the causes of economic growth, as well as the use of fiscal policy to stabilize the business cycle rather than monetary policy. The lesser battles were fought over taxes and government spending, and even there they made progress on MTRs as I've mentioned. Therefore, one can in fact state that neoliberalism has been implemented.




We can certainly agree that these reforms have lead to more economic freedom than the rest of the world which has not reformed. (very few have undergone true neoliberalism as per Caplan's definition).






There is also near consensus amongst economists that the main impact of these reforms will be reflective in the level path of GDP, rather than the permanent growth rate. There are a few exceptions here, but they tend to be the areas that have seen the least amount of reform, and to a lesser extent, arguably government spending. Therefore, it is still useful to reflect on the late '70s to mid 2000's period as the neoliberal era.




This is important, as simply looking at a time-series based data points will not work; both because the areas which have gotten more statist are more likely to have a significant effect on the long run growth rate (and almost certainly in a negative manner), and the fact that there are diminishing returns to economic growth in general. So even if Caplan believes that the regulatory burden and increased G/GDP outweighs the growth effects of the neoliberal policy revolution, we can still determine, with a good degree of confidence, whether neoliberalism has been successful or not, both on a broad level and also with regards to individual neoliberal policies.
Sumner has already addressed these cross country comparisons (something I expanded on, and also discussed the tax portion further). A quick summary would be that the most neoliberal nations tend to have the highest levels of GDP. Those of which that have reformed the most have seen their economies improve faster than those that haven't. Non-neoliberal nations like France, Italy, and Argentina are falling further behind, rather than experiencing the catch-up growth one would expect. Meanwhile, Chile, Ireland, Estonia, etc. are surging, and Singapore, Hong Kong, and the United States remain amongst the most wealthiest per capita nations (adjusted for price levels), after excluding nations that are oil-rich. Of course one can also point to the miraculous reduction in poverty in nations like China and India that have undergone massive degrees of economic liberalization. Clearly, neoliberalism has worked. Granted, the fact that it has achieved its goals overall does not mean each individual policy that neoliberals have pushed have been beneficial. Noah lists several such cases, and I will go over them point-by-point in a follow up post.

Keynesian Economics Misconceptions

The confusion over what Keynesianism is; especially in its modern form, referred to as New Keynesianism, and what it's implications are is quite frustrating. Both sides, at least in popular discussion, seem to mistake Keynesianism for the idea that spending and bigger government is what drives growth. The left uses this as a justification for increased spending and redistribution as a means of growing the economy. The right scoffs at this idea as overly simplistic and a contradiction to Say's "Law." The problem is, this interpretation is completely wrong to begin with.


In reality, it has nothing to do with long-run growth. New Keynesian economics seeks to stabilize the business cycle. In other words; mitigating the risks of recessions, and reducing the length and severity of them when they do occur. The main stabilizing mechanism used is not even increased government spending, it is monetary policy. Specifically, New Keynesians generally support Central Banks setting inflation targets, and adjusting interest rates in order to achieve this level. Inflation is used as a proxy of demand, because when demand exceeds supply, inflation increases. This is why New Keynesians tend prefer a target of around 2% inflation growth per year. This level of stable demand growth is meant to protect the economy from sudden, rapid changes in demand, in which businesses may not have enough time to adjust wages and prices and thus face severe difficulties, and potentially leading to recession. So in general, that's what New Keynesian economics promotes. The main idea is to reduce interest rates to boost investment, inflation, and sending, when inflation is below target, and raise them when inflation is above target.


Spending only enters the equation when interest rates hit zero, and thus the central bank is considered unable to do anything (or much else) to stimulate the economy. Even then, there is no actual idea that spending or deficits are what is necessary to boost the economy. Greg Mankiw, a well known New- Keynesian, advocates for tax cuts in these circumstances. Others argue that government spending multipliers are higher than tax cut multipliers, so they can actually stimulate the economy without adding to the deficit, simply by hiking taxes and raising spending in proportion. Yes, in many cases large amounts of deficit spending are advocated for under these circumstances, but these are a particularly rare set of circumstances to begin with, and one in which interest rates are low enough that deficit spending will not result in large debt payments later on.


There are significant problems with New-Keynesian economics, as market monetarists (a newer school of thought that has a good deal of similarities to NK econ) have pointed out, but overall it is a solid, empirically backed, but often misunderstood school of thought. While it may appear competing schools of thought (I.E. Austrianism, MMT, Marxism) have a good deal of traction, they simply are near irrelevant in the economics profession. New-Keynesianism deserves to be taken seriously, and interpreted properly.

(Edit: I was terribly wrong and apologize) Evan Mcmullin's Presidential Run Is An Establishment Ploy

The long search for a conservative candidate to run as an independent has come to an end. Evan Mcmullin is running for president, and potentially will have support from Mitt Romney and the Koch Brothers. However, there are some huge red flags that suggest he is not actually meant to be a viable candidate, or even a spoiler one. In fact, it is quite plausible that he was pushed into the race by the GOP establishment, because they understand that Trump is doomed, and are worried about Gary Johnson. Specifically, they seek to divide the #NeverTrump vote, in order to prevent Johnson from reaching 15% in the polls. This would, bar any changes in the rules, prevent him from being able to be in the presidential debates.


Let's be clear. This man is not a serious candidate. He's missed the registration deadline in over half of the states, with many more coming up. The main state he will contest is reportedly Utah, where Johnson had the best chance of winning and could have easily been the frontrunner in had he received a Romney endorsement (who was leaning towards Johnson but reportedly now supporting Mcmullin). Neither will be able to garner enough votes to win the state, effectively handing it to Trump.


There are many reasons this is problematic for the GOP establishment. For one, the amount of media attention that would be brought to Johnson just from hitting 15% would give a huge amount of attention to a center-right party that could, if it grew enough; end up being a spoiler party that causes the GOP to lose in a lot of close races, whether national, state, or local. Getting into the debates would also mean that Johnson would be virtually guaranteed to get the 5% of the actual vote required for the Libertarian Party to receive public funding and automatic ballot access, along with a ton of media coverage. Meanwhile, many Republicans have been defecting to the Libertarian Party, and others have backed Johnson. Stopping this outflow is going to be a priority for them. Combine the fact that he could very well win Utah, and the Libertarian Party could receive a huge boost from this election that results in a weakened GOP.


In fact, in the long run, the Libertarian Party may very well become a serious influence in politics, should it react to this attention it could receive by moderating and expanding. The polarization of the two main parties combined, with the fact that both are moving towards statism, opens a huge opportunity for a third party to attract voters who are, or will be, alienated as the parties shift. They could push for free marketers, neoliberals, centrists, non-interventionists, amongst other groups. This is why the GOP feels the need to sabotage it.


The GOP establishment knows Trump is almost certainly going to lose, and that Johnson could very well get the 15%. With that in mind, the only rational thing for them to do to protect their party was to take a major risk. It is clear this move will hurt Johnson, but if they are lucky it could also help Trump. Handing Utah to Trump will help his electoral strategy, and although Mcmullin will garner votes from reluctant Trump supporters, it is possible that he will gain more votes from reluctant Hillary supporters. Either way, the third party risk will be substantially mitigated and they may be able to protect downballot Republicans. Keep this all in mind before getting excited about an independent conservative run.

Edit: I was almost certainly wrong about everything. I have no question of McMullin's intentions, and  have incredibly strong doubts that the establishment had nothing to do with this run. I shall leave this up anyway, I'm not going to hide when I'm awfully wrong.

Donald Trump's Economic Policies Would be Disastrous

In honor of Donald Trump's Reddit AMA that he is conducting in his safe space, here's some real questions for him to answer.


One of the key platforms of your economic policy is putting 'America First' when it comes to trade. You've threatened to place tariffs as high as 45% on Chinese goods, in order to protect manufacturing jobs. But there is almost unanimous consensus amongst economists that free trade is good, that NAFTA, which you've railed against, was more beneficial than harmful (see the 2nd question of the first linked poll), that the poor and middle class disproportionally benefit from trade, and that it does not cost jobs on net (some are gained, some are lost). Why do you think you understand his issue better than the vast majority of economists, even those who would normally be ideologically opposed (I.E. Smith, Friedman, Krugman, DeLong, are all in agreement here)?


Deporting over ten million illegal immigrants could cost hundreds of billions of dollars. It would also lose the Federal government revenue, as most of them pay the payroll tax. What benefit justifies this massive increase in our debt, and breaking up millions of families and destroying the livelihoods of people, most of whom are just trying to escape the violence and poverty of the nations they came from?


In a debate, you were asked how your tax cuts would be paid for, when the Tax Foundation estimated they'd cost $10 trillion over 10 years, even when adjusting for the increased economic growth they'd generate. You responded that they'd be paid for by.... growth. How do you really plan on paying for them?


If immigrants reduce our wages and take our jobs, is population growth bad for the economy, too? Should women be prohibited from working to boost wages? Do you not think these people contribute to the economy too - by working, creating businesses, investing, etc.?


You promised to increase spending on military and the vets, while not cutting Medicaid, Medicare, or Social Security. You also say you plan on balancing the budget. Yet, looking at the plans you've listed, a conservative estimate would be that, combined with current deficits, they'd add at least $2 trillion a year to the debt (for a more accurate estimate, see here).
With interest rates set to rise and the boomers retiring, this will only get worse as your administration continues. Given that you've stated you won't cut the biggest budget items, how are we going to even remotely get near a balanced budget? What if a recession or war occurs?

Donald Trump: Putin's Pawn

Trump will be hosting an AMA today on Reddit. Unfortunately, it will be on /r/the_donald, meaning the pro-Trump mods will be able to hide comments and ban users that go against their narrative. It will also be swarmed with pro-Donald users who will be sure to downvote any tough questions for Trump, meaning he will not see them or need to reply to them. So, rather than have my comments deleted, I will place my own 'questions for Trump' here. These are the questions he should be asked, but won't be, because he's decided to retreat to a safe space. I'll divide them into sections since there will be a lot of them.

Russian Ties

If you really don't have financial interests in Russia, or economic ties to the oligarchs or state-owned industries, as you claim, why won't you release your tax returns to prove it? You promised to release them before the election, and now you have backtracked. Why should we take your word for it?

You've gotten the GOP to remove pro-Ukrainian language from their platform and have promised not to protect the Baltic states. Do you think this might empower Putin to try to conquer parts of Eastern Europe? Would this start a new cold war?

Apparently, you believe NATO should both be forced to spend more on defense (fair enough), and also pay a membership fee. Given that you've now promised not to protect NATO members, and want them both to "pay their fair share" and then some, do you think this will effectively be the end of NATO and our longstanding alliances with the various western democracies? If so, why is this desirable?

You're also anti-EU, as evidence by your support of Brexit, and against intervening in Syria against Assad. While I also take those positions, given all these other stances I've listed, how can I be sure these are genuine commitments to decentralization and not attempts to break up the west's unity, especially considering you don't seem to be too heavy on the decentralization here at home?

Your advisers have ties to Russia. Should we be concerned about this? Could this have an influence on your policy?

Why haven't you said anything critical of Putin? Given your willingness to attack just about anyone, it seems a bit odd you won't say anything negative about perhaps the most dangerous and corrupt leader on Earth.

Do you think it was treasonous to call on the Russians to hack a former Secretary of State's emails?

You have been endorsed by Putin, and have now had hackers that were likely agents of the Russian government attempting to sabotage your opponent in order to help you win the election. Given that, and all of the above, how do we trust that you aren't a Russian plant/puppet/Manchurian Candidate?

Edit: And now he's calling for ending sanctions on Russia and recognizing Crimea as a Russian territory. Holy shit.



The GOP is lost, efforts to push a different center-right party to prominence must begin.

A center-right party which nominates Donald Trump is not a serious party. While this statement would be true regardless of who Trump was running against, it's especially true given his competition.

There was Rubio, who was in the unique position of being able to unite virtually all factions in the party, while simultaneously broadening its appeal to demographics the GOP desperately needs to bolster its support from. To top it all off, he is from a crucial swing state, and brought truly innovative policy agenda proposals forward. These would include his reformation of the tax code to effectively be a progressive consumption tax (which economists have been clamoring over for ages), the conversation of the EITC to a wage subsidy; and pushing for a modernized role of education, a flexible one that allows constant and affordable skills retraining that are necessary for an ever-changing and constantly innovating economy. Yet his momentum died down after Iowa and never seemed to pick up again.

There was Gov. Kasich, one of the most experienced and qualified candidates out there, having been a state senator, and later a representative of the house on the budget committee the house budget committee during the Clinton Presidency (which would come in real handy as we know Hillary is going to try to use the economic success of the '90s as a talking point), and is currently Governor of Ohio (another important swing state) with incredible favorability ratings. He got obliterated.

There was Scott Walker, who managed to win a solidly blue state twice (and beat a recall attempt) on a very conservative platform, especially when it came to taking on public unions, promoting right to work laws, cutting taxes, and lowering the budget shortfalls substantially. He was liked by both the establishment and the Tea Party. It took him about a month after his campaign launch to not even be able to poll a single percentage point.

There were also candidates who were much more ideological than those listed (although by no means are those men unprincipled). Rand Paul was more or less the embodiment of the "limited goverment" ideal the GOP claims to be for. Granted, the GOP only seems interested in economic freedom, but nonetheless we had Ted Cruz for that position.

The wings of the party were definitely well represented this time around, with plenty of qualified candidates representing their respective fractions (and sometimes multiple ones). They were more conservative than W., but many still could have broadened the parties appeal and won the election.

Yet we ended up with a know-nothing, narcissistic xenophobe, who is all around an anti-small government, anti-freedom candidate, who's policies are resoundly anti-free market and would be disastrous if implemented. The party was so utterly incompetent by the time they made any effort to stop him (and it was pitiful) he had effectively had the nomination in his grasp. Now the party is being overrun by white nationalists, neo-nazis, and delusional nutjobs who think there is an ongoing "white genocide."

The party already has a major demographics issue, given the rise of minority populations. This situation is made worse because the GOP has been losing ever higher percentages of minorities with each passing election. The GOP's favorables have been abysmal, and young people are staying as far away from the party as possible. The media has successfully branded conservatism as the ideology of irrational fear, hatred of "subversives," and a deep dislike of the poor. With Donald Trump as the standard bearer, these already near insurmountable problems will be growing exponentially. By nominating a liberal strawman caricature of a conservative, the damage has already been done.

For those looking for some scenario in which the election ends up reversing some of the damage done, I see no reason for hope. There are three ways this can play out, none of which bode well for the GOP.

If Trump wins, he will alienate our allies and make us globally hated. He will ruin the lives of millions, whether through gestapo-esque deportation schemes to tariffs that cause American consumers to see the value of their dollars plummet while the Chinese sweatshop worker gets his job cut and he's forced to return to subsidence farming. We'd rack up mountains of debt and destroy our economy. W. damaged the Republican Party greatly, but it pales in comparison to what Trump would do.


Our second scenario is that Trump loses by a small margin. His supporters will blame #NeverTrump, and just pushes through Trump or someone like him in 2020.

The third is that Trump outcome loses in a landslide, and this is certainly the most favorable outcome, but would also likely be quite chaotic. There would still be a sizable Trump-esque faction, as well as a rabid tea party one. And since a landslide loss would be indicative that Trump was a terrible, brand-tarnishing candidate, the party would be essentially left in chaos and would have virtually no chance of winning the presidency in 2020.

So this is effectively it for the GOP. They do have some things going for them, such as their leads in state legislatures, governorships, and Congress, their name recognition, funding, and infrastructure, but the long term trends are going to be too strong to deal with now that Trump has irrevocably damaged the GOP brand. The GOP has maybe two more goes at the White House before the blue wall surpasses 270 electoral votes. And since we're talking Trump here, it's effectively one more shot, because there's no way he'd be a two term president.

The right needs a fresh start. A complete rebranding to separate itself from the toxicity of the GOP brand (and its insane leadership), Trump, fear-based economic populism, and all the alt-right neo- nazis.

The most obvious choice for this is the Libertarian Party. It's got the most registered voters of any party outside of our two established ones. It has access to the ballot in all 50 states and is the only third party to do so. Their current presumptive nominee is a former Republican. The label libertarian is much less toxic than conservative has become. It's much more popular amongst young people, and a sizable number of Republicans and independents describe themselves as libertarians or hold libertarian views. And libertarians have actually been fighting for the GOP's supposed principles: free markets and small government. The LP is certainly flawed - one can simply look at some of their nominees for 2016, but we have not seen how things would play out if they became the mainstream center-right party. Certainly, if they could not purge or at least reduce the influence of their crazies, I would be in favor of just establishing a new party entirely. For now, though, they deserve a chance.

Now, the Libertarian Party would certainly have to make some concessions. The party leadership and base would have to be more willing to accept pragmatic and moderate candidates. They would have to concede some flexibility in terms of foreign policy, as there is simply no way to bring in conservatives without allowing for other foreign policy stances besides complete isolationism. They would have to be more willing to accept pro-life candidates, and those who are concerned with border security.

Those who wished to run on the LP platform would need to make some concessions as well. They should be willing to adhere to the LP's core message of social and economic freedom. That means giving up on the war on drugs, the will to criminalize gay marriage, and other positions that are held by many conservative politicians. A simple way for conservatives to reconcile these views with their principles is to take a 10th amendment stance on these types of issues, as this would be acceptable to libertarians and conservatives alike.

It's time to give the Libertarian Party a chance.

Have incomes really stagnated for 4 decades?

A popular claim in the media, and with liberal think tanks and politicians, is that median income has essentially been stagnant since about 1973. If true this would certainly be incredibly newsworthy, and potentially even suggest we need a radical overhaul of capitalism, if not an entirely different economic system.


Luckily, this claim is completely incorrect, and quite frankly, doesn't even pass the smell test.  The idea that the median household is no better off then in the 1970s is utterly absurd. We have massive televisions, large houses, cell phones, powerful computers, studio quality headphones, etc. Clearly our standard of living is substantially better. And it shows in the statistics; if one knows which to look at, and which to avoid.


Median household income, the statistic generally used to show this supposed stagnation in incomes, is flawed in several ways. Household sizes have declined dramatically. That means more divorces, and less teens/young adults working per household, both of which put downward pressure on real income statistics, even though the real material standard of living per capita may have increased.

Even worse is the measurement of inflation, the CPI, which is widely believed to overstate inflation by up to an entire percentage point a year. Compound that over four decades, and add in the fact it overstates price growth for the poor and middle class even more than it does for the rich, and it's surprising we aren't seeing a "decline" in real incomes.


Of course income itself is not a good metric to use, nonwage compensation has increased overtime, both in real terms and as a percentage of total earnings. It also helps to understand that rising healthcare costs eat up a lot of these gains, these would be passed on as higher wages or other forms of compensation if we could get healthcare costs and spending under control. This means the problem, which itself is overstated; as it is more the case of lower than usual compensation growth than no growth at all, would be much less severe if we could overhaul our healthcare system (may I suggest looking at Singapore for some guidance?). It's not a failure of capitalism as a whole, in other words.


The Federal Reserve's real compensation per hour metric (which uses their preferred PCE-deflator), is a much better way of measuring income gains. Even better is mean GDP-deflator adjusted income, as the productivity statistics one often sees coupled with the "stagnant wage" statistics use those same metrics. And while inequality has risen, the middle class has in fact seen a sizeable increase in its earnings as well.


The other, serious issue that needs attention, is that productivity growth is slowing. This is preventing incomes from rising at a similar pace to their past trend. While diminishing returns plays a role in this, there are certainly reforms that we can make to boost productivity, and encourage innovation.

We should be concerned about slow income growth, but we should not exaggerate the issue, and we must avoid misdiagnosing the problem, as it will lead to non-optimal solutions.

No, We Don't Live in Consumer-Driven Economy

The idea that consumption is the driver of growth is a pervasive one, and one that is quite intuitive. After all, your spending equals someone else income, and more spending at businesses should increase the demand for labor and profitability. It is backed by the commonly cited statistic that 70% of our GDP is consumption, which many misinterpret to mean 70% of our GDP is generated by consumption.


This is not the case. It is crucial to keep in mind that GDP is an accounting identity, not a growth model. How we decide to allocate the spoils of our productive capacity is the result of growth, not the cause of it. If consumption did drive growth, Singapore wouldn't be one of the wealthiest nations on the planet, and the Chinese wouldn't have such rapid growth rates (just to be clear, I'm not saying we could grow as fast as them if we had their level of savings, I don't think growth that high is possible for an economic frontier nation like the U.S.). The fact is that during normal times (near or at full employment), higher savings results in higher growth, not consumption. The reason is simple; savings = investment. More savings results in more capital goods, which increase the productive capacity of the economy (see figure 1.3 and comments). And since in this scenario most or all of our resources are being utilized, any spending on consumption necessarily translates to less savings (in most cases, anyway, obviously an increase from 99% savings to 100% savings would reduce GDP, and GDP maximization is not the goal, the optimal rate is the based on the Golden Rule). This is one of the reasons why economists consider the Long Run Aggregate Supply Curve to be vertical, and why increased savings, not consumption, boosts the level path of GDP. in the Solow Growth Model.


Other reasons include the fact that outside of recessions, more consumption generates higher inflation. This wipes out any GDP gains, so that real growth is at best growing at a similar rate (often, such as the case in Zimbabwe or the U.S. in the '70s, real growth slows or even declines). One might object to both those cases, given that there was a lot of money printing going on, but printing money itself is not the cause of inflation. We can observe that by looking at QE; trillions were injected into the economy but had limited effects on inflation because the vast majority of the dollars were saved in the banks as excess reserves, and not loaned out. If one looks to the equation of exchange, MV=PY, one can see that the increase in inflation is caused by an increase in overall demand. If the monetary base increases but velocity falls, the impact on inflation (and demand) is uncertain (depends on how much each changed by). The same goes for the opposite. It is only when there is more demand available than supply that inflation starts to rise. Therefore, when there's a lack of an output gap, increased demand simply translates to more inflation, not higher real output. That is if one can even increase demand at one point, keep in mind most centrals banks target inflation and thus will try to reduce demand should inflation get too high.


The final point to understand is that the value of the money itself is tied to what we produce. Say's Law may not hold in all circumstances, but in the long run it is more or less correct. This is why we cannot print/spend our way to prosperity, and why recessions are short run. The price level will adjust to the amount of demand in the economy in the medium run.


If one is wondering why this doesn't apply in the short run, it's because of sticky wages and prices.  If a 10% decrease in demand was responded to by an immediate corresponding reduction in wages and prices, there would be no actual change in any factors other than transactions would be dealt with in lower nominal terms. This isn't the case, however. People often have difficulty distinguishing between nominal and real, so they refuse to take pay cuts when a demand-driven recession begins. This boosts their real wage at a time when businesses become less profitable, often pushing them above their marginal productivity. This results in a surge in unemployment. One can see some confirmation of this by looking at the results of FDR's mandated wage hikes in the Great Depression. If it was just consumption that drove growth, increasing wages should boost production. If the sticky wage theory is correct, than they should have lowered growth, which is what happened.  So making sure the demand side of the economy remains on a stable path (like the market monetarists have suggested) is important for macroeconomic stability, but we cannot spend our way to prosperity.

Minimum Wage Misconeptions

I'm turning the "misconceptions" posts into a series, in which I will point out the follies in both sides of the argument. One of the most controversial issues in the public eye today is the minimum wage, and there is a lot of faulty reasoning and factual errors behind most of the discussion.


Starting with the right, the idea that supply and demand dictates that higher minimum wages will result in substantially higher unemployment is not true. The standard supply and demand model is based off perfect competition. There are a variety of different models in which one would get different results. There are many reasons to suspect perfect competition doesn't apply here. There are search costs for employees when it comes to finding new work, both in time and in lost income if they are not searching and working simultaneously (they also likely don't have much savings or assets they can sell of in order to do this).  This also has the effect of encouraging workers to specialize, which reduces the amount of job opportunities they'd have when compared to what job would be available had they developed a more broad skillset.  This can increase search costs. The number of firms employing low-skilled labor is greatly outnumbered by the number of low skilled workers. It's also worth noting that the fact they have little savings or assets means they have to accept a job to be able to live (welfare aside which one is not allowed to be on indefinitely), which also reduces bargaining power.




Perhaps the most convincing reason not to believe that a perfect competition model is applicable, is the economic literature on the subject. Prior to famous Card and Krueger (1993) study, the minimum wage literature overwhelmingly showed a correlation between higher minimum wages and higher unemployment. Afterwards, the relationship is much less clear, with most studies seeming to show a small (often significantly insignificant) negative impact. While many will point out Neumark and Wascher (2007) as a rebuttal, it is important to note that in this analysis the studies are taken from many different countries and weighted based off the authors' personal views as to what consists of more solid methodology. The most recent meta analysis, which does not make such subjective judgments, finds no disemployment effects of the current minimum wage. So, is it settled then? Let's all join the #FightFor15, or an even higher minimum wage? Not so fast.


If you go back to the link about the different models of the minimum wage that I shared earlier, it is evident that to when pushed above some degree, the minimum wage will kill significant amounts of jobs. The exception being the demand shock model, but the LRAS is vertical, so we can discard that one as a model of anything outside of recessions (I'll explain why this is in another post, and why in recessions raising the minimum wage is a bad idea as well). Dube, who is at the forefront of minimum wage research and is certainly significantly more optimistic towards the minimum wage than the average economist, has found that the optimal minimum wage is roughly 50% of the median wage. This would mean a $15 minimum wage wouldn't be fit anywhere, let alone in places like rural Alabama and other areas where $15 is close to, or above, the median wage. A clear cut example of a minimum wage causing massive unemployment effect is the unfortunate case of Puerto Rico, which the Federal Minimum wage used to not apply to. The reasoning is simple; push the minimum wage above the marginal value added by the average low skilled worker, and they will be laid off. In other words, if the employee is only able to add $10 an hour in value, and the minimum wage is $12 an hour, they will be laid off. Another way to think of this is through a hypothetical; imagine a minimum wage of $1000/hr. Obviously, this would cause mass unemployment.


In summary, a minimum wage can be a useful tool to mitigate the advantage the employers of low skilled labor have in bargaining power. However, it can be a risky tool, as pushing it above the marginal productivity of low skilled labor can cause mass unemployment. The optimal minimum wage also differs greatly by area, based off the productivity and cost of living of those areas. So both sides have solid points on the issue, and in a later post of my own I'll make some recommendations on how to go about designing minimum wage policy.

The Relationship Between Taxes and GDP is Precisely What Supply Side Economics Would Predict

A recent Jared Bernstein (who I'm a fan of) column in the Washington Post supposedly demolishes supply side economics. I've argued against this position before, pointing out that nations usually enact tax cuts when growth is slowing, and that when comparing GDP levels between lower tax nations, tax cutting nations, and high tax nations there appears to be a negative relationship between higher taxes and GDP Per Capita.

There is an even more important point to emphasize though, and one that supply siders rarely do. Once one accounts for the fact that tax cuts predominantly effect levels (roughly a ten year adjustment period), not the long-term growth path, and diminishing returns, a positive relationship between tax rates and growth is exactly what one would predict. To make a quick explanation as to why it effects levels, it takes time to adjust to new tax incentives (with regards to income taxes this is mainly effected by increases in labor supply), but labor supply isn't going to permanently increase unless taxes are permanently falling. So when we cut taxes to a new level, labor supply increases to a new level, but does not increase further. 

Let me explain. Say the top tax rate starts at 90%, and every 10 years it is cut by 20 points. So it goes from 90, to 70, to 50, etc, (stopping at 10%). When would the most growth occur, according to the supply side position? According to Bernstein, the years following it hitting 10%. Yet the correct answer is 70%. Why? Because the marginal income one earns triples when the rate is cut from 90% to 70%. With each further decrease of taxes, the percentage increase in take-home earnings gets smaller and smaller. So yes, one would expect higher taxes to be associated with higher growth, provided that they were cut from an even higher rate. It's worth noting too that this fits the data - the decade after the JFK tax cuts (which the top rate was cut from 91% to 70%) saw the fastest growth of the post-war period. Directly after the 10-year level path adjustment ended, we had stagflation (yes the RGDP numbers look solid, but that's only because the boomers and women were entering the workforce. Productivity was terrible). 

So one doesn't even have to do the cross-country comparison as Sumner did to make the case for supply side. One just has to understand levels and diminishing returns.

PS. My last post was pretty harsh towards DeLong, so I'll point out this excellent smackdown of Cochrane.  

Explaining the Neoliberalism Paradox: How Neoliberal Policies Can Be Correlated With Slower Growth and Still Be Pro-Growth

I'd like to draw attention to this great Scott Sumner post about one of the biggest mistakes intelligent people, including experts, make when it comes to economic policy. They often reason that policies that are pro-growth are actually anti-growth, because they are associated with low growth. Of course; using Scott's example, when it comes to monetary policy, defenders of monetary stimulus will correctly point out that low growth causes those policies, (which then increase growth but not always to prior levels/trend) rather than the other way around. The causality is backwards. (For a fantastic analogy, check out Scott's post here). 

The reason I'm bringing this up, isn't so much a case of people ignoring this logic, as forgetting it when it's ideologically convenient to do so.  I frequently see this kind of thinking applied to interest rates and QE, which is good; but almost never see it, for example, when people are talking about taxes or neoliberal reforms.

For example, the fact that growth in the 1980s was only .1%/year higher than the post-war trend is used as evidence that Reaganomics wasn't very stimulative, just increased the deficit a lot and resulted in a lot more inequality. Yet they were enacted precisely because of low growth, not just in the U.S. but globally. 

Productivity growth in the 1970s was abysmal, the only reason the RGDP figures look decent from that period is that there were a ton of women entering the labor force, which was obviously unsustainable and meant living standards were only increasing almost entirely because more people were working. This was the case globally, as well.

In my best estimation, the poor performance of the '70s globally was due partially to the increased energy prices and volatility in the oil market, and also due to the lack of reform aimed at boosting the level path of GDP. The '70s saw inflation push people into higher brackets and a ton of new regulation. G/GDP rose globally in the '70s too, just as growth was slowing. The causes, however, aren't particularly relevant to the point. 

Now, keeping all of that in mind, let's throw in some assumptions:

• neoliberal reforms are substantially pro-growth
• work mainly through boosting the level-path of GDP (as in an adjustment period of higher growth, presumably about 10 years as firms and individuals react to changed incentives), not through substantially permanently increasing the growth rate
• the long-run growth rate naturally declines as nations get wealthier.
• the global growth slowdown was not temporary 

What would be the result if these assumptions were true?  Well, nations with the most neoliberal policy would start from high GDP levels, those that did the most reform would have seen the largest increase in GDP levels, and global growth would have continued to be slow.  It would also indicate that the nations with the highest GDP per capita would be the ones that were the most neoliberal. In other words, exactly what happened.  

Incredibly, these assumptions explain the pre-war boom, too (which supposedly refutes the notion that high MTRs are bad for the economy). Policy was bad, but the U.S. started from a much lower GDP Per Capita level, and enough pro-level boosting policies were implemented to keep a steady pace of impressive growth.  

Pro-Growth policies:

•  '50s - Huge reduction in G/GDP, interstate highways, disciplined and education workforce from military service/GI bill, and the fact that the private sector was depressed for 2 decades due to the Great Depression/WW2. This is particularly important due to the fact that lots of technological advances during that period were not able to be utilized/implemented until later.  This also had a huge impact on the growth of the '60s.
• '60s - Large tax cuts, improved educated for African Americans, end of segregation.

It's also worth noting these MTRs applied to very little people and raised little revenue - and the negative impact of them was lower because capital flight was not much of a concern, given that the rest of the developed world adopted similarly high MTRs and they had been decimated by the war.

I don't really see any way to disagree with this information unless somehow neoliberal policies reduce growth in non-neoliberal countries more than in neoliberal countries, or that growth is just random luck, or that social democracies are better to live in despite the lower GDP per capita. The first two claims are ridiculous on their face, the third is worthy of addressing, and I will do so in a later post.