Economics: How Wealthy Countries Tax Their Citizens

For more, see How Wealthy Countries Tax Their Citizens, January, 2010, at visualeconomics.

Misc: To My Faithful Readers

Now that some of you comment on various posts, I've added a Recent Comments area at the top right of the blog which makes noticing them easier.

And sorry about my infrequent posts of recent days. I've had a hard time fitting U.S. Open tennis into my busy schedule.

-- Doug

Mind: We Relate to Our Computers as We Do to Humans

Sociologist Clifford Nass, who's just published the book “The Man Who Lied to his Laptop“, says we're treating our machines as if they were human.

Participants in one experiment interacted with a program that said something like “Most PCs these days have at 2MB of memory. Being an older model I only have 1MB. What do you feel inadequate about?” Participants were much more likely to reveal personal information in this case then when the program simply stated the specs of the machine.

The same was true when a search program was configured to be “helpful” or “unhelpful” in some search tasks participants performed. When people were then asked to help optimize the screen resolution on a computer where the program had been “helpful”, they were much more likely to do so than with the less helpful version

For more, see New Book Says We Relate to Our Computers like Humans by Ciara Byrne, September 6, 2010, at VentureBeat.

Economics: 1938 in 2010

Here's the situation: The U.S. economy has been crippled by a financial crisis. The president's policies have limited the damage, but they were too cautious, and unemployment remains disastrously high. More action is clearly needed. Yet the public has soured on government activism, and seems poised to deal Democrats a severe defeat in the midterm elections.

The president in question is Franklin Delano Roosevelt; the year is 1938.

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. Over the course of the war the federal government borrowed an amount equal to roughly twice the value of G.D.P. in 1940 — the equivalent of roughly $30 trillion today.

Had anyone proposed spending even a fraction that much before the war, people would have said the same things they're saying today. They would have warned about crushing debt and runaway inflation. They would also have said, rightly, that the Depression was in large part caused by excess debt — and then have declared that it was impossible to fix this problem by issuing even more debt.

But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits.

... it's slightly sickening to realize that the big winners in the midterm elections are likely to be the very people who first got us into this mess, then did everything in their power to block action to get us out.

For more, see 1938 in 2010 by Paul Krugman, September 5, 2010, at The New York Times.

Mind: Forget What You Know About Good Study Habits

... psychologists have discovered that some of the most hallowed advice on study habits is flat wrong. For instance, many study skills courses insist that students find a specific place, a study room or a quiet corner of the library, to take their work. The research finds just the opposite. In one classic 1978 experiment, psychologists found that college students who studied a list of 40 vocabulary words in two different rooms — one windowless and cluttered, the other modern, with a view on a courtyard — did far better on a test than students who studied the words twice, in the same room. Later studies have confirmed the finding, for a variety of topics.

Varying the type of material studied in a single sitting — alternating, for example, among vocabulary, reading and speaking in a new language — seems to leave a deeper impression on the brain than does concentrating on just one skill at a time. Musicians have known this for years, and their practice sessions often include a mix of scales, musical pieces and rhythmic work.

For much more, see Forget What You Know About Good Study Habits by Benedict Carey, September 6, 2010, at The New York Times. Thank you, Martha.

Economics: The Dubious Benefits of Being No. 1

After World War II, America picked up the pieces of a shattered world. It restored order and economic health to Europe and Japan while keeping the Russian bear and Chinese dragon at bay. America became the world's leading economic and military power. Proud achievements, but what does it mean to be the “greatest” nation on earth? What has being No. 1 done for most Americans, and where has it left us today?

With a mind-numbing national debt of $13 trillion and growing, the nation is flirting with financial disaster. Every American man, woman and child would need to fork over $43,000 to pay off that debt — a debt that grows greater every day. About half of that titanic debt has been incurred paying for the insatiable U.S. military behemoth, and for chronic wars of questionable rationale and cloudy conclusions. When veterans' benefits and debt service are included, military spending is now more than $1.4 trillion per year and consumes more than 50 percent of the total federal budget.

America has military bases in more than 120 countries scattered around the world — and rather than being reimbursed for protecting these countries — from enemies real or perceived — we actually pay rent to them. For some nations, our military presence has become a source of resentment, even festering into terrorist violence against us. For other nations, our military presence has become more a matter of economics than of their national security. Our military bases generate vibrant economies for the locals.

Meanwhile, our financial house of cards teeters precariously on loans from China and on paper dollars furiously churned out by the overheated printing presses of the U.S. Treasury. We are risking the financial health of the nation to remain the biggest dog in the kennel. Why?

North Korea proves that even a small nation without a global military presence can protect itself from enemies. It only needs enough nuclear weapons to deter aggression. America could abandon its foreign bases, slash its military spending to a fraction of what it is now and still protect itself from potential enemies as long as it maintains its capability to deliver nuclear annihilation against any place on earth.

For more, see Randy Alcorn: The Dubious Benefits of Being No. 1 by Randy Alcorn, September 4, 2010, at Noozhawk.

Society: The United States of Inequality

Today, the richest 1 percent account for 24 percent of the nation's income.

It's generally understood that we live in a time of growing income inequality, but "the ordinary person is not really aware of how big it is," Krugman told me. During the late 1980s and the late 1990s, the United States experienced two unprecedentedly long periods of sustained economic growth—the "seven fat years" and the "long boom." Yet from 1980 to 2005, more than 80 percent of total increase in Americans' income went to the top 1 percent. Economic growth was more sluggish in the aughts, but the decade saw productivity increase by about 20 percent. Yet virtually none of the increase translated into wage growth at middle and lower incomes, an outcome that left many economists scratching their heads. [Emphasis added].

Why don't Americans pay more attention to growing income disparity? One reason may be our enduring belief in social mobility. Economic inequality is less troubling if you live in a country where any child, no matter how humble his or her origins, can grow up to be president. In a survey of 27 nations conducted from 1998 to 2001, the country where the highest proportion agreed with the statement "people are rewarded for intelligence and skill" was, of course, the United States. (69 percent). But when it comes to real as opposed to imagined social mobility, surveys find less in the United States than in much of (what we consider) the class-bound Old World. France, Germany, Sweden, Denmark, Spain—not to mention some newer nations like Canada and Australia—are all places where your chances of rising from the bottom are better than they are in the land of Horatio Alger's Ragged Dick.

All my life I've heard Latin America described as a failed society (or collection of failed societies) because of its grotesque maldistribution of wealth. Peasants in rags beg for food outside the high walls of opulent villas, and so on. But according to the Central Intelligence Agency (whose patriotism I hesitate to question), income distribution in the United States is more unequal than in Guyana, Nicaragua, and Venezuela, and roughly on par with Uruguay, Argentina, and Ecuador. Income inequality is actually declining in Latin America even as it continues to increase in the United States. Economically speaking, the richest nation on earth is starting to resemble a banana republic.

For much more, see The United States of Inequality by Timothy Noah, September 3, 2010, at Slate.

Politics: America's History of Fear

Screeds against Catholics from the 19th century sounded just like the invective today against the Not-at-Ground-Zero Mosque. The starting point isn't hatred but fear: an alarm among patriots that newcomers don't share their values, don't believe in democracy, and may harm innocent Americans.

Followers of these movements against Irish, Germans, Italians, Chinese and other immigrants were mostly decent, well-meaning people trying to protect their country. But they were manipulated by demagogues playing upon their fears — the 19th- and 20th-century equivalents of Glenn Beck.

Most Americans stayed on the sidelines during these spasms of bigotry, and only a small number of hoodlums killed or tormented Catholics, Mormons or others. But the assaults were possible because so many middle-of-the-road Americans were ambivalent.

Historically, unreal suspicions were sometimes rooted in genuine and significant differences. Many new Catholic immigrants lacked experience in democracy. Mormons were engaged in polygamy. And today some extremist Muslims do plot to blow up planes, and Islam has real problems to work out about the rights of women. The pattern has been for demagogues to take real abuses and exaggerate them, portraying, for example, the most venal wing of the Catholic Church as representative of all Catholicism — just as fundamentalist Wahabis today are caricatured as more representative of Islam than the incomparably more numerous moderate Muslims of Indonesia (who have elected a woman as president before Americans have).

Americans have called on moderates in Muslim countries to speak out against extremists, to stand up for the tolerance they say they believe in. We should all have the guts do the same at home.

For much more, see America's History of Fear by Nicholas D. Kristof, September 4, 2010, at The New York Times.

Society: Union Membership Rates

For more, see Union or Not, Government Workers Squeezed by Alan Greenblatt, September 3, 2010, at National Public Radio.

Economics: The Slog

For more, see The Slog by David Leonhardt, September 3, 2010, at Exonomix Blog, New York Times.

Economics: Obama Is Repeating the Mistakes of the 1937 Economic Collapse

An opposing opinion ...

Does the 1937-38 economic collapse, the so-called "depression within the Depression" offer any lessons on what we should do now? In 1937, it seemed that things were improving, some light was seen in the Great Depression, but unemployment suddenly jumped from 14.3 percent in June 1937 to 19 percent in June 1938.

Some conservatives, such as Newt Gingrich, have recently focused on the new Social Security taxes that started in 1938 as the problem. "If we have large tax increases in January, this economy will sink deeper into recession," Newt Gingrich told Newsmax in late July. "This was exactly the mistake made in 1937 and 1938, and it created a second mini-depression."

Yet, while taxes surely hurt economic growth, there were other major economic events that both these discussions completely ignore. The late Milton Friedman pointed to new banking regulations that went into effect from March through May 1937. President Roosevelt had accused banks of "hoarding" money and his solution was to increase the reserve requirement with the Federal Reserve, dramatically reasoning that the government could make sure that the banks' money was properly spent. Of course, banks had not just been "hoarding" extra reserves for no reason.

The real lesson from the 1937-38 is that government made the situation much worse by always trying to fix things. Unfortunately, this is precisely what we have seen under Mr. Obama's presidency with the failed stimulus spending and all the regulatory chaos they have created.

For more, see Obama Is Repeating the Mistakes of the 1937 Economic Collapse by John Lott, September 3, 2010, at FoxNews.com.

Science: Changing One of Nature's Constants?

Studying the pattern in which gas clouds absorb the light from distant quasars, astronomers say they have found evidence that one of nature's physical constants changes in a lopsided manner.

Along one direction the fine-structure constant, which governs the strength of the electromagnetic force, grows slightly weaker with time, while in the other direction it grows slightly stronger. The research, by John Webb of the University of New South Wales in Sydney, Australia, and his colleagues, was posted online at arXiv.org on August 25 (http://arxiv.org/abs/1008.3907). The work is the latest in a series of controversial studies on the fine-structure constant, also known as alpha, that the researchers have conducted since 1999.

If the study is correct, it would force physicists to reconsider many of their most cherished ideas about the universe, including the notion, touted by Einstein, that the laws of physics are the same everywhere in the cosmos.

“This would be sensational if it were real, but I'm still not completely convinced that it's not simply systematic errors” in the data, comments cosmologist Max Tegmark of MIT. Craig Hogan of the University of Chicago and the Fermi National Accelerator Laboratory in Batavia, Ill., acknowledges that “it's a competent team and a thorough analysis.” But because the work has such profound implications for physics and requires such a high level of precision measurements, “it needs more proof before we'll believe it.”

For more, see Changing One of Nature's Constants by Ron Cowen, September 3, 2010 at ScienceNews.

Economics: The Real Story

When Mr. Obama first proposed $800 billion in fiscal stimulus [in Spring/2009], there were two groups of critics. Both argued that unemployment would stay high — but for very different reasons.

One group — the group that got almost all the attention — declared that the stimulus was much too large, and would lead to disaster. If you were, say, reading The Wall Street Journal's opinion pages in early 2009, you would have been repeatedly informed that the Obama plan would lead to skyrocketing interest rates and soaring inflation.

The other group, which included yours truly, warned that the plan was much too small given the economic forecasts then available. As I pointed out in February 2009, the Congressional Budget Office was predicting a $2.9 trillion hole in the economy over the next two years; an $800 billion program, partly consisting of tax cuts that would have happened anyway, just wasn't up to the task of filling that hole.

Critics in the second camp were particularly worried about what would happen this year, since the stimulus would have its maximum effect on growth in late 2009 then gradually fade out. Last year, many of us were already warning that the economy might stall in the second half of 2010.

Oh, and don't tell me that Germany proves that austerity, not stimulus, is the way to go. Germany actually did quite a lot of stimulus — the austerity is all in the future. Also, it never had a housing bubble that burst. And with all that, German G.D.P. is still further below its precrisis peak than American G.D.P. True, Germany has done better in terms of employment — but that's because strong unions and government policy have prevented American-style mass layoffs.

For more, see The Real Story by Paul Krugman, September 2, 2010, at The New York Times.

Mind: Digital Devices Deprive Brain of Needed Downtime

In gyms and elsewhere, people use phones and other electronic devices to get work done — and as a reliable antidote to boredom.

Cellphones, which in the last few years have become full-fledged computers with high-speed Internet connections, let people relieve the tedium of exercising, the grocery store line, stoplights or lulls in the dinner conversation.

The technology makes the tiniest windows of time entertaining, and potentially productive. But scientists point to an unanticipated side effect: when people keep their brains busy with digital input, they are forfeiting downtime that could allow them to better learn and remember information, or come up with new ideas.

“Almost certainly, downtime lets the brain go over experiences it's had, solidify them and turn them into permanent long-term memories,” said Loren Frank, assistant professor in the department of physiology at the university, where he specializes in learning and memory. He said he believed that when the brain was constantly stimulated, “you prevent this learning process.”

At the University of Michigan, a study found that people learned significantly better after a walk in nature than after a walk in a dense urban environment, suggesting that processing a barrage of information leaves people fatigued.

Even though people feel entertained, even relaxed, when they multitask while exercising, or pass a moment at the bus stop by catching a quick video clip, they might be taxing their brains, scientists say.

“People think they're refreshing themselves, but they're fatiguing themselves,” said Marc Berman, a University of Michigan neuroscientist.

For more, see Digital Devices Deprive Brain of Needed Downtime by Matt Richtel, August 24, 2010, at The New York Times. Thank you, Martha.

Diversion: Deep Cover

From Deep Cover by Tim Eagan, September 2, 2010, at GoComics.

Economics: Tax Cuts That Make a Difference

Republicans argue that a permanent cut in tax rates is the best form of stimulus. Allowing any of the Bush cuts to expire, John Boehner, the top House Republican, said in a speech last week laying out the party's economic agenda, is “a recipe for disaster.”

As theories go, this isn't a bad one. You can certainly imagine how a tax increase on the affluent could hurt the economy or how a tax cut for them would lift growth. Theories aside, though, consider what has actually happened in the last three decades.

Mr. Bush signed his original tax cut in June 2001, when the economy had been losing jobs for four months. It then shed jobs for two more years. In the decade that followed the tax cut, economic growth was slower than in any decade since World War II.

If the goal is short-term stimulus, even Ronald Reagan's much-lauded 1981 tax cut doesn't appear to have worked. After he signed it, the economy lost jobs for 16 straight months. It didn't start gaining jobs until after he had raised taxes, to reduce the deficit, in late 1982.

For much more, see Tax Cuts That Make a Difference by David Leonhardt, August 31, 2010, at The New York Times.

Climate: Bjørn Lomborg: $100bn a Year Needed to Fight Climate Change

The world's most high-profile climate change sceptic is to declare that global warming is "undoubtedly one of the chief concerns facing the world today" and "a challenge humanity must confront", in an apparent U-turn that will give a huge boost to the embattled environmental lobby.

Bjørn Lomborg, the self-styled "sceptical environmentalist" once compared to Adolf Hitler by the UN's climate chief, is famous for attacking climate scientists, campaigners, the media and others for exaggerating the rate of global warming and its effects on humans, and the costly waste of policies to stop the problem.

But in a new book to be published next month, Lomborg will call for tens of billions of dollars a year to be invested in tackling climate change. "Investing $100bn annually would mean that we could essentially resolve the climate change problem by the end of this century," the book concludes.

Lomborg denies he has performed a volte face, pointing out that even in his first book he accepted the existence of man-made global warming. "The point I've always been making is it's not the end of the world," he told the Guardian. "That's why we should be measuring up to what everybody else says, which is we should be spending our money well."

But he said the crucial turning point in his argument was the Copenhagen Consensus project, in which a group of economists were asked to consider how best to spend $50bn. The first results, in 2004, put global warming near the bottom of the list, arguing instead for policies such as fighting malaria and HIV/Aids. But a repeat analysis in 2008 included new ideas for reducing the temperature rise, some of which emerged about halfway up the ranking. Lomborg said he then decided to consider a much wider variety of policies to reduce global warming, "so it wouldn't end up at the bottom".

The difference was made by examining not just the dominant international policy to cut carbon emissions, but also seven other "solutions" including more investment in technology, climate engineering, and planting more trees and reducing soot and methane, also significant contributors to climate change, said Lomborg.

"If the world is going to spend hundreds of millions to treat climate, where could you get the most bang for your buck?" was the question posed, he added. After the analyses, five economists were asked to rank the 15 possible policies which emerged. Current policies to cut carbon emissions through taxes - of which Lomborg has long been critical - were ranked largely at the bottom of four of the lists. At the top were more direct public investment in research and development rather than spending money on low carbon energy now, and climate engineering.

For more, see Bjørn Lomborg: $100bn a Year Needed to Fight Climate Change by Juliette Jowit, August 30, 2010, at guardian.co.uk.

Government: One Woman I-Team Sacks Tax Board

Mega-kudos to Laura Mahoney, Sacramento correspondent for the Daily Tax Report and the winner of the Calbuzz Little Pulitzer for Investigative Reporting, for a superb, 25,000-word probe of the powerful, under-the-radar state Board of Equalization.

The only journalist who regularly covers the board, she spent 18 months reporting and writing the five-part series, which reveals an incontrovertible pay-to-play connection between campaign contributions to its elected members and the outcome of tax appeals on which they rule.

“I realized when (the project) took me as long as it did to gestate my babies, I was in trouble,” said Mahoney, a mother of two.

Known as “the Board of Eeek!” to generations of California reporters who quake with fear at the mere thought of covering complex financial stories, the BOE not only administers billions of dollars of tax collections, but also adjudicates disputes about them between the state and corporations or individuals.

A summary of her findings begins:

Taxpayers with complex tax dispute cases before the California State Board of Equalization were more likely to win their cases if they or their representatives made campaign contributions to the elected board members, either directly or through political action committees, according to a detailed examination by Daily Tax Report, a BNA publication.

In a series of reports, BNA examined the outcomes of 70 complex, high-stakes cases argued before the board between 2002 and 2009, and compared those cases to publicly available campaign finance records.

BNA found more than $1 million in contributions to board members from taxpayers or their representatives who argue those cases before the board. All of the contributions were legal and contributors who spoke to BNA denied any causality between their contributions and success before the board.

We just bet they did. Check this:

However, a correlation appears to exist between contribution levels and success before the board, based on BNA's original research. BNA found that 20 of the 70 cases examined had less than $250 tied to them, and those taxpayers won their cases 30 percent of the time.

Success rates rose with higher contribution rates. Dividing the remaining cases in equal groups, BNA found another 17 cases had between $250 and $16,000 in contributions tied to them, and those taxpayers won 53 percent of the time. The next group of 16 cases had $16,000 to $50,000 tied to them, and those taxpayers won 75 percent of the time. The last group of 16 cases had $50,000 to $137,000 tied to them, and those taxpayers won 88 percent of the time.

For more, see Press Clips: One Woman I-Team Sacks Tax Board, by August 27, 2010 at , at Calbuzz.

Economics: Corporate Profits near Pre-Recession Peak

Corporate profits are near their pre-recession peak, according to a report released today by the Bureau of Economic Analysis.

From Corporate Profits near PRE-Recession Peak by Catherine Rampell, August 27, 2010, at Exonomix Blog, New York Times.

Economics: Young Firms, Not Small Ones, Are the Engines of Job Growth

Small businesses are the engines of job growth. So the conventional wisdom goes.

A new paper, by John C. Haltiwanger, Ron S. Jarmin and Javier Miranda, challenges this view, arguing instead that start-ups and other young firms are the disproportionate source of new jobs.

"... our main finding is that once we control for firm age there is no systematic relationship between firm size and growth."

For more, see Young Firms, Not Small Ones, Are the Engines of Job Growth by Catherine Rampell, August 26, 2010, at Exonomix Blog, New York Times.