Category: Ethics & Equity

Tax cuts visualized

Much has been made of the fact that Trump’s revised tax plan cuts its implications for deficits in half (from ten to five trillion). Oddly, there’s less attention to the equity implications, which border on the obscene. Trump’s plan gives the top bracket a tax cut ten times bigger (as percentage of income) than that given to the bottom three fifths of the income distribution.

That makes the difference in absolute $ tax cuts between the richest and poorest pretty spectacular – a factor of 5000 to 10,000:

trumptax

Trump tax cut distribution, by income quantile.

To see one pixel of the bottom quintile’s tax cut on this chart, it would have to be over 5000 pixels tall!

For comparison, here are the Trump & Clinton proposals. The Clinton plan proposes negligible increases on lower earners (e.g., $4 on the bottom fifth) and a moderate increase (5%) on top earners:

trumpclinton

Trump & Clinton tax cut distributions, by income quantile.

Sources:

http://www.taxpolicycenter.org/publications/analysis-donald-trumps-tax-plan/full

http://taxfoundation.org/article/details-and-analysis-donald-trump-tax-reform-plan-september-2016

http://www.taxpolicycenter.org/publications/analysis-hillary-clintons-tax-proposals/full

Footing the bill for Iraq

Back in 2002, when invasion of Iraq was on the table and many Democrats were rushing patriotically to the President’s side rather than thinking for themselves, William Nordhaus (staunchest critic of Limits) went out on a limb a bit to attempt a realistic estimate of the potential cost.

All the dangers that lead to ignoring or underestimating the costs of war can be reduced by a thoughtful public discussion. Yet neither the Bush administration nor the Congress – neither the proponents nor the critics of war – has presented a serious estimate of the costs of a war in Iraq. Neither citizens nor policymakers are able to make informed judgments about the realistic costs and benefits of a potential conflict when no estimate is given.

His worst case: about $755 billion direct (military, peacekeeping and reconstruction) plus indirect effects totaling almost $2 trillion for a decade of conflict and its aftermath.

NordhausIraqNordhaus’ worst case is pretty close to actual direct spending in Iraq to date. But with another trillion for Afghanistan and 2 to 4 in the pipeline from future obligations related to the war, the grand total is looking like a lowball estimate. Other pre-invasion estimates, in the low billions, look downright ludicrous.

Recent news makes Nordhaus’ parting thought even more prescient:

Particularly worrisome are the casual promises of postwar democratization, reconstruction, and nation-building in Iraq. The cost of war may turn out to be low, but the cost of a successful peace looks very steep. If American taxpayers decline to pay the bills for ensuring the long-term health of Iraq, America would leave behind mountains of rubble and mobs of angry people. As the world learned from the Carthaginian peace that settled World War I, the cost of a botched peace may be even higher than the price of a bloody war

We already tried monarchy

Tom Perkins thinks votes should be proportional to taxes paid. (As if they weren’t already, to some degree!)

PerkinsHenryVIIIImages: CNN & The London Dungeon

You don’t have to look very far in history to find a system in which political power and ownership of assets were embodied in the same few people. We called its advocates “monarchists,” and there were remedies for that.

tar-and-featherThe founding fathers were rightfully aware of the need to prevent runaway positive feedback of wealth and power. Perkins evidently fears runaway negative feedback:

“The fear is wealth tax, higher taxes, higher death taxes — just more taxes until there is no more 1%. And that that will creep down to the 5% and then the 10%,” he said.

This is ignores conservation laws. If punitive taxation could really bring the wealth of the 1% down, where would all that money, and its underlying assets, actually go? And how can this be a real concern, when in fact incomes at the top are dramatically increasing by any measure?

So, Perkins is,

  • not a student of history
  • not a fan of democracy
  • not a keen observer of current trends
  • bad at economics

— or —

  • willing to fib about it all for personal gain

and we should give him a million votes?

Update: I’ve played this game before.

Equity, equality and positive feedback

I’m reflecting on Deborah Rogers‘ presentation on equity/equality at the Balaton Group meeting, concerning the apparent evolutionary drivers of the transition from a long human prehistory of egalitarian societies to today’s extreme inequity. A key point of terminology is that equity and equality are not quite the same thing – equality implies similar wealth or resource access, while equity implies something more like Rawlsian justice. But you can’t have one without the other, because inequality leads the haves to tilt the tables of justice against the have-nots.

This might not be a deliberate choice to exploit the masses. It could occur as an evolutionary consequence of the inability to predict the outcome of dynamically complex decisions.

I once described a complex theory of the emergence of inequality to Donella Meadows. I no longer remember the details, but perhaps it was the ancestor of this. Her answer was characteristically simple and insightful, to the effect of, “it doesn’t matter what the specific dynamics are, because the rich control the decisions, so the question boils down to how much inequ(al)ity the elite will tolerate.”

Evidence indicates that high inequality is bad for growth, so a possible irony is that policies that transfer wealth to the wealthy in the short run are bad for them in the long run, because growth eventually dominates allocation, even for the richest.

So, for me, the key question for society is, how much positive feedback should a civilization build into its social organization?

A bit of positive feedback can be helpful, if it creates a gradient that guides individuals who aren’t making the best decisions to imitate the habits of their more successful peers.

However, this probably requires a relatively low level of inequality. As soon as there’s stronger positive feedback, it’s likely that dysfunctional feedbacks take hold, as the wealthiest institutions use their market power to block innovation and good governance in service of maintaining their exalted positions.

I think the evidence that this occurs today is probably fairly simple. Look at the distribution of IQs or any other metric that might be an input to productivity in the economy. It’ll be relatively Normal (Gaussian). But the distributions of wealth and power are heavy tailed (Zipf or Double Laplace). That’s a pretty clear indication that there’s a lot of reinforcing feedback at work.

The IAMs that ate the poor

Discounting has long been controversial in climate integrated assessment models (IAMs), with prevailing assumptions less than favorable to future generations.

The evidence in favor of aggressive discounting has generally been macro in nature – observed returns appear to be consistent with discounting of welfare, so that’s what we should do. To swallow this, you have to believe that markets faithfully reveal preferences and that only on-market returns count. Even then, there’s still the problem of confounding of time preference with inequality aversion. Given that this perspective is contradicted by micro behavior, i.e. actually asking people what they want, it’s hard to see a reason other than convenience for its upper hand in decision making. Ultimately, the situation is neatly self-fulfilling. We observe inflated returns consistent with myopia, so we set myopic hurdles for social decisions, yielding inflated short-term returns.

It gets worse.

Back in 1997, I attended a talk on an early version of the RICE model, a regional version of DICE. In an optimization model with uniform utility functions, there’s an immediate drive to level incomes across all the regions. That’s obviously contrary to the observed global income distribution. A “solution” is to use Negishi weights, which apply weights to each region’s welfare in proportion to the inverse of the marginal utility of consumption there. That prevents income leveling, by explicitly assuming that the rich are rich because they deserve it.

This is a reasonable practical choice if you don’t think you can do anything about income distribution, and you’re not worried that it confounds equity with human capital differences. But when you use the same weights to identify an optimal emissions trajectory, you’re baking the inequity of the current market order into climate policy. In other words, people in developed countries are worth 10x more than people in developing countries.

Way back when, I didn’t have the words at hand to gracefully ask why it was a good idea to model things this way, but I sure wish I’d had the courage to forge ahead anyway.

The silly thing is that there’s no need to make such inequitable assumptions to model this problem. Elizabeth Stanton analyzes Negishi weighting and suggests alternatives. Richard Tol explored alternative frameworks some time before. And there are still more options, I think.

In the intertemporal optimization framework, one could treat the situation as a game between self-interested regions (with Negishi weights) and an equitable regulator (with equal weights to welfare). In that setting, mitigation by the rich might look like a form of foreign aid that couldn’t be squandered by the elites of poor regions, and thus I would expect deep emissions cuts.

Better still, dump notions of equilibrium and explore the problem with behavioral models, reserving optimization for policy analysis with fair objectives.

Thanks to Ramon Bueno for passing along the Stanton article.

Defense of the 1%?

Digitopoly has an interesting take on Greg Mankiw’s Defending the 1%.

You should go read the sources, but Mankiw’s basic scenario is,

Imagine a society with perfect economic equality. … Then, one day, this egalitarian utopia is disturbed by an entrepreneur with an idea for a new product. Think of the entrepreneur as Steve Jobs as he develops the iPod, …. When the entrepreneur’s product is introduced, everyone in society wants to buy it. They each part with, say, $100. The transaction is a voluntary exchange, so it must make both the buyer and the seller better off. But because there are many buyers and only one seller, the distribution of economic well-being is now vastly unequal.

Mankiw goes on to mention but dismiss other drivers, like rent seeking and monopoly. Krugman rejoins with a strong critique, and Digitopoly raises some interesting complications to the innovation policy arguments.

I think the thought experiment, framing the problem as a matter of innovation policy, oversimplifies and misses major drivers of what’s happening. As I wrote in Fortress USA,

The drivers of rising inequity in the US seem fairly simple. With globalization, capital has become mobile while labor remains tied to geography. So, capital investment flees high wage countries (US) and jobs follow. Asset income goes up, because capital is leveraged by cheaper labor and has good bargaining power among hungry host countries. There’s downward pressure on rich world wages, because with less capital per capita employed, the marginal productivity of labor is lower.

It’s not all bad for the rich world working class, because cheaper goods (WalMart) offset wage losses to some degree. If asset and wage income were uniformly distributed, there might even be a net benefit.

However, asset income and wages aren’t uniformly distributed, so income disparity goes up. Pre-globalization, this wasn’t so noticeable, because there was an implicit deal, in which wage earners knew that, even if they didn’t own all the capital in their country, at least they’d be the beneficiaries of it in some sense through employment and trickle down. Free trade and mobile capital turns the deal into a divorce, which puts a sharp point on questions of property rights allocations that were never quite fair, and sows the seeds of future discontent among the losers.

In addition to disparities in the fate of labor vs. capital, it’s hard not to see abundant rent seeking in the consolidation of firms and the pervasive role of money in government.

The simple, pure economic thought experiment often brings great insight. But I think this illustrates why models often have to get big before they can get small. Total analytic knowledge of a small model is fairly useless, unless that model encompasses the right structure. It’s hard, a priori, to decide what’s the right structure to include, without distilling that insight from a more complex model.

Fortress USA

The Fortress World scenario came up in Bert de Vries’ presentation at the Balaton meeting today. It’s a dystopian global future in which the rich retreat into safe havens (a macro version of gated communities) while the rest of the world degenerates into some combination of feudal subsistence, resource extraction and chaos.

On dark days, looks increasingly to me like this is already playing out in the US with the disappearance of the middle class.

The drivers of rising inequity in the US seem fairly simple. With globalization, capital has become mobile while labor remains tied to geography. So, capital investment flees high wage countries (US) and jobs follow. Asset income goes up, because capital is leveraged by cheaper labor and has good bargaining power among hungry host countries. There’s downward pressure on rich world wages, because with less capital per capita employed, the marginal productivity of labor is lower.

It’s not all bad for the rich world working class, because cheaper goods (WalMart) offset wage losses to some degree. If asset and wage income were uniformly distributed, there might even be a net benefit.

However, asset income and wages aren’t uniformly distributed, so income disparity goes up. Pre-globalization, this wasn’t so noticeable, because there was an implicit deal, in which wage earners knew that, even if they didn’t own all the capital in their country, at least they’d be the beneficiaries of it in some sense through employment and trickle down. Free trade and mobile capital turns the deal into a divorce, which puts a sharp point on questions of property rights allocations that were never quite fair, and sows the seeds of future discontent among the losers.

So far, everyone appears to be committed to pursuing this thread to its logical conclusion. Probably most are unwitting participants; workers are as enthusiastic about offshoring of capital in their pension funds as are the captains of industry.

However, it seems to me that there are several corrosive effects. The asset-owning rich appear convinced that their windfall has arrived because they’re smart, that the misfortunes of the masses are due to laziness. Their incentive to invest in services like education for labor they don’t need is no longer palpable. Uneducated masses are easier to manipulate anyway. Meanwhile the masses are desperate (if misguided) to lower tax burdens in order to compete with offshore labor.

The ultimate effect seems likely to hollow out the human capital of the rich world, leaving only tycoons and serfs, with perhaps a few protected sectors of the economy (pilots for tycoons’ jets). But is that a plausible end-state for this game?

If I were an American tycoon endowed with a little enlightened self interest, I’d be worried about several ways things could go wrong:

  • Increasing income disparity and loss of human capital cause a loss of civility at home, requiring wealthy enclaves to become desperate armed camps.
  • Political turbulence abroad leads to loss of control of all that capital that went overseas.
  • The global economy reaches such a vast physical scale that no amount of personal wealth provides adequate insulation against its side effects.

These outcomes could be triggered or amplified by financial or ecological stress. Even if you don’t care about equity or social justice per se, these possibilities seem like a great reason to invest in human and social capital at home and abroad.

Tim Jackson on the horns of the growth dilemma

I just ran across a nice talk by Tim Jackson, author of Prosperity Without Growth, on BigIdeas. It’s hard to summarize such a wide-ranging talk, but I’d call it a synthesis of the physical (planetary boundaries and exponential growth) and the behavioral (what is the economy for, how does it influence our choices, and how can we change it?). The horns of the dilemma are that growth can’t go on forever, yet we don’t know how to run an economy that doesn’t grow. (This of course begs the question, “growth of what?” – where the what is a mix of material and non-material things – a distinction that lies at the heart of many communication failures around the Limits to Growth debate.)

There’s an article covering the talk at ABC.au, but it’s really worth a listen at http://mpegmedia.abc.net.au/rn/podcast/2010/07/bia_20100704_1705.mp3

The rabble in the streets, calling for more power to the monarchy

When I see policies that formally allocate political power in proportion to wealth, I think back to a game I played in college, called Starpower.

It’s a simple trading game, using plastic chips. It starts with a trading round, where everyone has a chance to improve their lot by swapping to get better combinations of size and color. After trading, scores are tallied, and the players are divided into three groups: Triangles, Circles, and Squares. Then there’s a vote, in which players get to change the rules of the game. There’s a catch though: the Squares, who reaped the most points in the first round, get more votes. Subsequent rounds follow the same steps (lather, rinse, repeat).

When I played, I was lucky enough in the first round to wind up in the top group, the Squares. In the subsequent vote, no one proposed any significant rule changes, so we went back to trading. One of our fellow Squares was unlucky or incautious enough to make a few bad trades, and wound up demoted to the Circles when scores were tallied. That was a wake-up call – a challenge to the camaraderie of Squares. We promptly changed the rules, to slightly favor the accumulation of chips by those who already had many; we bribed the middle Circles to go along with it. We breathed a collective sigh of relief when, after the next trading round, we found that we were all still Squares. Then, we Squares abandoned all egalitarian thoughts. With our increased wealth, we voted to allocate future chip distributions so that the Circle and Triangle classes would perpetually trade places, never accumulating enough wealth to reach elite Square status. It worked, at least until the end of class (we were probably “saved by the bell” from having a revolution).

The interesting thing about the game is that it’s a perfect market economy. Property rights in chips are fully allocated, everyone walks in with a similar initial endowment of brains and chips, and there are mutual benefits to trade, even when wealth is distributed unequally. Yet the libertarian ideals are completely undone when the unequal allocation of wealth spills over to become an unequal allocation of power, where votes are weighted by money. That creates a reinforcing feedback:

starpower

Allocating votes in a zoning protest in proportion to acreage, or any other policy that matches power to wealth, has the same properties as the Starpower game, and will lead to the same ugly outcome if left unchecked. As Donella Meadows put it,

The wise Squares whom we call Founding Fathers, who set up the rules of our national game, knew that. They invented ingenious devices for giving everyone a chance to win — democratic elections, universal education, and a Bill of Rights. Out of their structure have come further methods for interrupting accumulations of power — anti-trust regulations, progressive taxation, inheritance restrictions, affirmative action programs.

All of which, you might note, have been weakened over the past decade or so. We have moved a long way toward a Starpower structure. One one the worst steps in that direction was the evolution of expensive, television-mediated election campaigns, which permit only Squares to run for office. That puts Squares increasingly in control of the rules, and they make rules to benefit Squares.

Is that the game we want to be playing?

The simple dynamics of violence

There’s simple, as in Occam’s Razor, and there’s simple, as in village idiot.

There’s a noble tradition in economics of using simple thought experiments to illuminate important dynamics. Sometimes things go wrong, though, like this (from a blog I usually like):

… suppose that you have the choice of providing gruesome rhetoric that will increase the probability of a killing spree but will also increase the probability of the passage of Universal Health Insurance. Suppose using the Arizona case as a baseline we say that the average killing spree causes the death of 6 people. Then if your rhetoric is at least 6/22,000 = 1/3667 times as likely to produce a the passage of universal health insurance as it is to induce a killing spree then you saved lives by engaging in fiery rhetoric.

http://modeledbehavior.com/2011/01/11/the-optimal-quantity-of-violent-rhetoric/

Here’s the apparent mental model behind this reasoning:

Linear ViolenceIt’s linear: use violent rhetoric, get the job done. There are two problems with this simple model. First, the sign of the relationships is ambiguous. I tend to suspect that anyone who needs to use violent rhetoric is probably a fanatic, who shouldn’t be making policy in the first place. Setting that aside, the bigger problem is that violence isn’t linear. Like potato chips, you can never have just one excessive outburst. Violent rhetoric escalates, and sometimes crosses into real violence. This is the classic escalation archetype:

Violence EscalationIn the escalation archetype, two sides struggle to maintain an advantage over each other. This creates two inner negative feedback loops, which together create a positive feedback loop (a figure-8 around the two negative loops). It’s interesting to note that, so far, the use of violent rhetoric is fairly one-sided – the escalation is happening within the political right (candidates vying for attention?) more than between left and right.

There are many other positive feedbacks involved in the process, which exacerbate the direct escalation of language. Here are some speculative examples:

Violence Other LoopsThe positive feedbacks around violent rhetoric create a societal trap, from which it may be difficult to extricate ourselves. If there’s a general systems insight about vicious cycles, it’s that the best policy is prevention – just don’t start down that road (if you doubt this, play the dollar auction or smoke some crack). Politicians who engage in violent rhetoric, or other races to the bottom of the intellectual barrel, risk starting a very destructive spiral:

violence Social

The bad news is that there’s no easy remedy for this behavior. Purveyors of violent rhetoric and their supporters need to self-reflect on the harm they do to society. The good news is that if public support for violent words and images reverses, the positive loops will help to repair the damage, and take us closer to a model of rational discourse for problem solving.

About that, there is at least a bit of wisdom in the article:

… if you genuinely care about the shooting death of six people then you ought to really, really care about endorsing wrong public policies which will result in the premature death of vastly more people. Hence you should devote yourself to actually discovering the right answers to these questions, rather than than coming up with ad hoc rhetoric – violent or polite – in support of the policy you happend to have been attracted to first.