You know what? Let’s repeal Obamacare. Here’s my replacement.

Feb 18 JDN 2458168

By all reasonable measures, Obamacare has been a success. Healthcare costs are down but coverage rates are up. It reduced both the federal deficit and after-tax income inequality.

But Republicans have hated it the whole time, and in particular the individual mandate provision has always been unpopular. Under the Trump administration, the individual mandate has now been repealed.

By itself, this can only be disastrous. It threatens to undermine all the successes of the entire Obamacare system. Without the individual mandate, covering pre-existing conditions means that people can simply wait to get insurance until they need it—at which point it’s not insurance anymore. The risks stop being shared and end up concentrated on whoever gets sick, then we go back to people going bankrupt because they were unlucky enough to get cancer. The individual mandate was vital to making Obamacare work.

But I do actually understand why the individual mandate is unpopular: Nobody likes being forced into buying anything.

John Roberts ruled that the individual mandate was Constitutional on the grounds that it is economically equivalent to a tax. This is absolutely correct, and I applaud his sound reasoning.

That said, the individual mandate is not in fact psychologically equivalent to a tax.

Psychologically, being forced to specifically buy something or face punishment feels a lot more coercive than simply owing a certain amount of money that the government will use to buy something. Roberts is right; economically, these two things are equivalent. The same real goods get purchased, at the same people’s expense; the accounts balance in the same way. But it feels different.

And it would feel different to me too, if I were required to actually shop for that particular avionic component on that Apache helicopter my taxes paid for, or if I had to write a check for that particular section of Highway 405 that my taxes helped maintain. Yes, I know that I give the government a certain amount of money that they spent on salaries for US military personnel; but I’d find it pretty weird if they required me to actually hand over the money in cash to some specific Marine. (On the other hand, this sort of thing might actually give people a more visceral feel for the benefits of taxes, much as microfinance agencies like to show you the faces of particular people as you give them loans, whether or not those people are actually the ones getting your money.)

There’s another reason it feels different as well: We have framed the individual mandate as a penalty, as a loss. Human beings are loss averse; losing $10 feels about twice as bad as not getting $10. That makes the mandate more unpleasant, hence more unpopular.

What could we do instead? Well, obviously, we could implement a single-payer healthcare system like we already have in Medicare, like they have in Canada and the UK, or like they have in Scandinavia (#ScandinaviaIsBetter). And that’s really what we should do.

But since that doesn’t seem to be on the table right now, here’s my compromise proposal. Okay, yes, let’s repeal Obamacare. No more individual mandate. No fines for not having health insurance.

Here’s what we would do instead: You get a bonus refundable tax credit for having health insurance.

We top off the income tax rate to adjust so that revenue ends up the same.

Say goodbye to the “individual mandate” and welcome the “health care bonus rebate”.

Most of you reading this are economically savvy enough to realize that’s the same thing. If I tax you $100, then refund $100 if you have health insurance, that’s completely equivalent to charging you a fine of $100 if you don’t have health insurance.

But it doesn’t feel the same to most people. A fine feels like a punishment, like a loss. It hurts more than a mere foregone bonus, and it contains an element of disapproval and public shame.

Whereas, we forgo refundable tax credits all the time. You’ve probably forgone dozens of refundable tax credits you could have gotten, either because you didn’t know about them or because you realized they weren’t worth it to you.

Now instead of the government punishing you for such a petty crime as not having health insurance, the government is rewarding you for the responsible civic choice of having health insurance. We have replaced a mean, vindictive government with a friendly, supportive government.

Positive reinforcement is more reliable anyway. (Any child psychologist will tell you that while punishment is largely ineffective and corporal punishment is outright counterproductive, reward systems absolutely do work.) Uptake of health insurance should be at least as good as before, but the policy will be much more popular.

It’s a very simple change to make. It could be done in a single tax bill. Economically, it makes no difference at all. But psychologically—and politically—it could make all the difference in the world.

Stop telling people they need to vote. Tell them they need to cast informed votes.

Feb 11 JDN 2458161

I just spent last week’s post imploring you to defend the norms of democracy. This week, I want to talk about a norm of democracy that I actually think needs an adjustment.

Right now, there is a very strong norm that simply says: VOTE.

“It is our civic duty to vote.” “You are unpatriotic if you don’t vote.” “Voting is a moral obligation.” Etc.

The goal here is laudable: We want people to express the altruistic motivation that will drive them to escape the so-called Downs Paradox and actually go vote to make democracy work.

But the norm is missing something quite important. It’s not actually such a great thing if everyone just goes out and votes, because most people are seriously, disturbingly uninformed about politics.

The norm shouldn’t be that you must vote. The norm should be that you must cast an informed vote.

Best if you vote informed, but if you won’t get informed, then better if you don’t vote at all. Adding random noise or bias toward physical attractiveness and height does not improve electoral outcomes.

How uninformed are voters?

Most voters don’t understand even basic facts about the federal budget, like the fact that Medicare and Social Security spending are more than defense spending, or the fact that federal aid and earmarks are tiny portions of the budget. A couple years ago I had to debunk a meme that was claiming that we spend a vastly larger portion of the budget on defense than we actually do.

It gets worse: Only a quarter of Americans can even name all three branches of government. Almost half couldn’t identify the Bill of Rights. We literally required them to learn this in high school. By law they were supposed to know this.

But of course I’m not one of the ignorant ones, right? In a classic case of Dunning-Kruger Effect, nobody ever thinks they are. When asked to predict if they would pass the civics exam required to obtain citizenship, 89% of voters surveyed predicted they would. When they took it, only 17% actually passed it. (For the record, I took it and got a perfect score. You can try it yourself here.)

More informed voters already tend to be more politically engaged. But they are almost evenly divided between Democrats and Republicans, which means (especially with the way the Electoral College works) that elections are primarily determined by low-information voters. Low-information voters were decisive for Trump in a way that is unprecedented for as far back as we have data on voter knowledge (which, sadly, is not all that far back).

To be fair, more information is no panacea; humans are very good at rationalizing beliefs that they hold for tribal reasons. People who follow political news heavily typically have more distorted views on some political issues, because they only hear one side and they think they know but they don’t. To truly be more informed voters we must seek out information from reliable, nonpartisan sources, and listen to a variety of sources with differing views. Get your ideas about climate change from NPR or the IPCC, not from Huffington Post—and certainly not from Fox News. But still, maybe it’s worth reading National Review or Reason on occasion. Even when they are usually wrong, it is good for you to expose yourself to views from the other side—because sometimes they can be right. (Reason recently published an excellent article on the huge waste of government funds on building stadiums, for example, and National Review made some really good points against the New Mexico proposal to mandate college applications for high school graduates.)

And of course even those of us who are well-informed obviously have lots of other things we don’t know. Given my expertise in economics and my level of political engagement, I probably know more about politics than 99% of American voters; but I still can’t name more than a handful of members of Congress or really any state legislators aside from the ones who ran for my own district. I can’t even off the top of my head recall who heads the Orange County Water District, even though they literally decide whether I get to drink and take a shower. I’m not asking voters to know everything there is to know about politics, as no human being could possibly do such a thing. I’m merely asking that they know enough basic information to make an informed decision about who to vote for.

Moreover, I think this is a unique time in history where changing this norm has really become viable. We are living in a golden age of information access—almost literally anything you could care to know about politics, you could find in a few minutes of Google searching. I didn’t know who ran my water district, but I looked it up, and I do now: apparently Stephen R. Sheldon. I can’t name that many members of Congress, but I don’t vote for that many members of Congress, and I do carefully research each candidate running in my district when it comes time to vote. (In the next California state legislature election, Mimi Walters has got to go—she has consistently failed to stand against Trump, choosing her party over her constituency.)

This means that if you are uninformed about politics and yet still vote, you chose to do that. You aren’t living in a world where it’s extremely expensive or time-consuming to learn about politics. It is spectacularly easy to learn about politics if you actually want to; if you didn’t learn, it was because you chose not to learn. And if even this tiny cost is too much for you, then how about this? If you don’t have time to get informed, you don’t have time to vote.

Voting electronically would also help with this. People could, in the privacy of their own homes, look up information on candidates while their ballots are right there in front of them. While mail-in voter fraud actually does exist (unlike in-person voter fraud, which basically doesn’t), there are safeguards already in widespread use in Internet-based commerce that we could institute on electronic voting to provide sufficient protection. Basically, all we need to do is public-key signing: issue every voter a private key to sign their votes, which are then decrypted at the county office using a database of public keys. If public keys were stolen, that could compromise secret-ballot anonymity, but it would not allow anyone to actually change votes. Voters could come in person to collect their private keys when they register to vote, at their convenience weeks or months before the election. Of course, we’d have to make it user-friendly enough that people who aren’t very good with computers would understand the system. We could always leave open the option of in-person voting for anyone who prefers that.

Of course, establishing this norm would most likely reduce voter turnout, even if it did successfully increase voter knowledge. But we don’t actually need everyone to vote. We need everyone’s interests accurately represented. If you aren’t willing to get informed, then casting your vote isn’t representing your interests anyway, so why bother?

False equivalence is not centrism

False equivalence is not centrism

Feb 4 JDN 2458154

Turning and turning in the widening gyre

The falcon cannot hear the falconer;

Things fall apart; the centre cannot hold;

Mere anarchy is loosed upon the world,

The blood-dimmed tide is loosed, and everywhere

The ceremony of innocence is drowned;

The best lack all conviction, while the worst

Are full of passionate intensity.

~ W.B. Yeats, The Second Coming


Centrism is not very popular these days, but I believe this is because neither its alleged adherents nor its alleged opponents actually have a clear understanding of what centrism is supposed to be. Most of what is called “centrism” in this polarized era (the US is now more politically polarized than it has been in decades) is actually false equivalence.

Most people who express pride in their “centrism” adopt a heuristic which basically amounts to taking the two positions that are most loudly proclaimed in public and averaging them. One side says “Kill all puppies”, the other side says “Don’t kill puppies”, and they proudly and self-righteously declare that the only sensible policy is to kill precisely 50% of the puppies. Anyone who says “the two parties are the same” or “liberals deny science too” is guilty of this false equivalence—and it’s all too common.

But this is not what centrism is supposed to be. A good centrist isn’t someone who looks at their existing Overton Window and chooses the mean value. A good centrist is someone who understands and appreciates Horseshoe Theory. Horseshoe Theory says that the political spectrum is not actually a straight line from left to right; it’s more of a horseshoe shape, where the far-left and the far-right curl down and toward one another. A good centrist is someone who values the top of the horseshoe, more strongly than they value whatever particular policies might move you toward the left or the right edge.

What does the top of the horseshoe represent? Democracy.

A good centrist is someone who really, truly believes in defending democracy.

What the far-left and the far-right have in common is authoritarianism:

For those on either edge of the horseshoe, people who disagree with (the collectivization of all wealth/the superiority of my master race) aren’t simply wrong, they are evil. Persuading them to vote my way is a waste of time. Freedom of speech is dangerous, because it allows them to spread their evil ideas. It would be better to suppress freedom of speech, so that only people who know the truth (read: agree with me) are allowed to speak.

Along similar lines, Slate Star Codex recently published an excellent blog post on how people seem to separate into two very broad political worldviews: There are Mistake Theorists, who think that most of the world’s problems are due to honest ignorance and error; and there are Conflict Theorists, who think that most of the world’s problems are due to the malign influence of evil enemy factions. The far-left and the far-right are overwhelmingly composed of Conflict Theorists. A good centrist is a Mistake Theorist through and through.

Being a good centrist means fighting to defend the institutions that make freedom possible. Here is a whole list of policies that neither the far-left nor the far-right particularly values that we as centrists must:

  1. Voting rights: We must fight against voter suppression and disenfranchisement wherever it occurs. We must stand up to defend the principle “one person, one vote” wherever necessary.
  2. Equality under the law: We must protect the rights of everyone to have equal representation and equal standing as citizens—including, but by no means limited to, women, racial minorities, LGBT people, and people with disabilities.

  3. Election reform: We must find ways to undermine gerrymandering, the Electoral College, and the campaign finance system that allows corporations and wealthy individuals to exert disproportionate influence.

  4. Freedom of speech: We must protect the right of everyone to speak, including those whose views we find abhorrent. Our efforts should be focused most on those who have the least representation in our discourse.

  5. Individual privacy: We must fight against the creeping rise of the surveillance state and the use of extra-legal means of intelligence gathering, particularly in domestic spying. We should be outraged that the House of Representatives voted to extend the NSA’s warrantless wiretap authority after what Edward Snowden revealed about the NSA.

  6. Demilitarization and deincarceration: We must fight to contain or reverse the expansion of military and penal force that has given the United States not only a military larger than the next ten countries combined, but also the world’s highest rate of incarceration.

On some of these issues we might find agreement with the left or (less likely) the right—but even when we don’t, we must press forward. In particular, the goal of equality under the law often aligns with the goal of left-wing social justice—but there are cases where it doesn’t, cases where hatred of White straight men or a craving for vengeance against past injustice drives the left to demand things that would violate this principle. And the atavistic joy of punching Nazis in the face must never overwhelm our sacred commitment to the principles of free speech.

This doesn’t mean we can’t also adopt detailed policy views that align with the left or the right (or both). I for one support single-payer healthcare (left), progressive taxation (left), renewable energy (left), open borders (left), zoning reform (right), reductions in corporate taxes (right), free trade (right, or so I thought?), and a basic income (both—yet strangely we can’t seem to make it happen).

But being a good centrist means that these detailed policy prescriptions are always less important to you than the core principles of democracy itself. When they find out that the rest of the country is against them on something, a leftist or a rightist starts looking for ways to undermine the public will and get the policy they want. A centrist accepts that they have been outvoted and starts looking for ways to persuade the majority that they are mistaken.

Centrism is about defending the guardrails of democracy. False equivalence is not centrism; it is an obstacle to centrism. It prevents us from seeing when one side has clearly damaged those guardrails much more than the other. So let me come out and say it: At this historical juncture, in the United States, the right wing is a far greater threat to the core principles of democracy than the left. This is not to say that the left is inherently incapable of threatening democracy, or never will do so in the future; but it is to say that right here, right now, it’s the right wing we should be worried about. Punching Nazis will never be as threatening to the core of freedom as warrantless wiretaps or the discrediting of the mainstream press.

Why is redistribution of wealth so difficult to achieve in the US?

Jan 28 JDN 2458147

Income and wealth in equality is much higher in the US than in other First World countries. Within the OECD, only Mexico, Turkey, and Chile have higher income inequality than we do. Over 60% of Americans agree that the distribution of wealth in the US is unfair. Furthermore, the majority of Americans support the use of taxes and transfers to directly redistribute wealth from the rich to the poor.

Why, then, is it so hard to actually get any meaningful wealth redistribution in the United States?

Part of it is surely partisan differences: While about 70% of Democrats favor redistributive taxes, about 70% of Republicans oppose them. So one would not expect a move toward redistribution when Republicans control all three branches of government, and indeed we have seen quite the opposite. (Then again, one would also not expect a government shutdown under one-party rule, and yet that is what we have.)

But even most Republicans say they would like to see a much more equal distribution of wealth than the one we actually have. In fact, when I as an inequality economist look at the distribution of wealth people say they want, it looks a little too equal! Even Denmark and Sweden aren’t that egalitarian! I know more or less how to get from here to Denmark; but from here to “Equalden” looks like an awful long way. So if this is really the distribution of wealth people want, we need to be doing a huge amount of wealth redistribution—but we’re hardly doing any at all.

Indeed, we didn’t actually see all that much redistribution of wealth when Democrats more or less controlled all three branches in the period from 2008-2010. We may have seen a little bit shortly thereafter, and tax policy typically does come with a delay of a year or two. But as you can see in this graph, the Great Recession did more to reduce the top 1% income share than any tax policy changes:

US_top_income_share_1pct

The biggest changes made to our tax code under Obama were actually the handling of capital gains; the increase of the top rate on capital gains from 15% to 20%, plus the 3.8% capital surtax from the Affordable Care Act raised the tax bill for the top 0.1% by tens of billions of dollars. Surprisingly, Trump’s tax cuts don’t actually remove these provisions, though they did dramatically cut the corporate tax rate, which will probably have a similar effect on the income distribution.

To be honest, I’m not as disappointed with Trump’s tax cuts as I thought I would be. Some genuinely good ideas (like the reduction of the mortgage interest deduction, tighter restrictions on carried interest, and increase of the personal standard deduction) and some reasonable but debatable ideas (like cuts to the corporate tax rate, switching to a territorial corporate tax system, limits to deductions on corporate debt payments, removal of the deduction of state taxes, and extensions of 529 savings plans to private primary and secondary schools) were mixed in with the absolutely ludicrous and terrible ideas (like eliminating the Obamacare mandate, doubling the estate tax threshold, cutting the alcohol tax, and allowing offshore drilling in Alaska [One of these things is not like the other ones….]). Some of the terrible ideas, like ending the deduction of student loan interest and tuition waivers, were actually removed in the final version of the bill. Of course, you won’t be surprised when I tell you that the overall US tax system became a lot less progressive as a result of this bill. And even if cutting the corporate tax while raising the capital gains tax is probably a good idea (as I and many economists believe), cutting the corporate tax without raising the capital gains tax probably isn’t.

(An aside: For how much they claim to be “tough on crime”, it’s always kind of baffling to see how often Republicans like to cut alcohol taxes and pollution regulations, which are pretty much the only things that have ever been empirically shown to actually reduce crime. There is some evidence that maybe more policing also helps, but if so, it does so in a far less cost-effective way—indeed, the direct cost of alcohol taxes and pollution taxes is negative. Even if they didn’t work at all, they’d still be worth it just because they raise revenue. I begin to suspect that Republicans don’t actually want to reduce crime, because they know they can use the fear of crime to win votes; they simply want to appear tough on crime, and so they press as hard as they can for more policing and incarceration in the country that already has the highest incarceration rate in the world. This may be a more general phenomenon: While Democrats want to actually solve problems, Republicans want to appear to solve problems while actually exacerbating them, thus insuring their own job security. Compare how Bush kept talking about Osama bin laden while invading Iraq, and Obama actually killed Osama bin Laden. Is this too cynical? Can anything be too cynical in the era of Trump? There were 50,000 Russian bots on Twitter trying to tilt our election! Mueller’s FBI investigation is already implicating several of Trump’s top officials! Everything that seemed like paranoia or cynicism just a few years ago is turning out to be entirely true.)

This is what seems to happen: Year after year, we raise some taxes, then we cut some taxes. Then when raise some taxes, then we cut some taxes. The tax system gets a little more progressive for a few years and inequality begins to fall, and then those changes are removed and inequality begins to rise again. Back and forth and round and round we go.

Is there some way to lock in these tax changes for a longer period of time? The only way I can see would be a change in voter behavior: Keep voting in Democrats to all branches of government consistently for 20 years, and then maybe we would see a serious reduction in income and wealth inequality. Or at least stop voting in Republicans; aside from the Democrats, there are some third parties that would also support redistribution, like the Green Party. And yes, it really is about voting behavior: As prevalent as gerrymandering has become, as terrible as the Electoral College is, as widespread as voter suppression has gotten, Trump only won because 63 million Americans voted for him. Even after everything he’s done, Trumps’ approval rating is still about 39%. As long as there are enough people in this country whose partisan loyalty so strongly outweighs any rational assessment of policy, we are going to continue to see such travesties continue.

It would certainly help if our voting system were fairer, so that third parties had a better chance at taking seats. But it’s also difficult to see how that could happen any time soon. For now, the best I can come up with is trying to show people two things:

First, most Americans favor redistribution of wealth. You’re not alone in wanting that. It’s not some fringe opinion.

Second, there is a real difference between Democrats and Republicans on this issue. The canard “The two parties are the same” is the most untrue it has been in at least twenty years.

I would even understand if there are other issues you consider more important than wealth redistribution. Ecological sustainability is the most defensible—you can’t eat GNP—though that would push you even harder toward the left. Among things that might push you right, I can understand being concerned about higher taxes hurting economic growth, and while I think the view that abortion is murder is ludicrous, given that as your belief I can understand why you would want to prioritize fighting abortion. (If I thought we were murdering millions of babies every year, I’d be pretty mad too! Of course, you should be glad, then, that the US abortion rate has been falling. Right? You know about that, right?)

What I don’t get, however, is people who thought that voting for Donald Trump would help working people. I don’t understand how you can see someone who epitomizes everything that is wrong with the billionaire rentier class and think, “Yeah, he seems like he’s definitely a populist. That guy who was born insanely rich and made even more mind-boggling amounts of money by lying and screwing people over is definitely going to look out for folks like me.”

If I understood that, maybe I would know where to go from here. But people’s political beliefs can be astonishingly intransigent to evidence. Politics is the mind-killer.

Did the World Bank modify its ratings to manipulate the outcome of an election in Chile?

Jan 21 JDN 2458140

(By the way, my birthday is January 19. I can’t believe I’m turning 30.)

This is a fairly obscure news item, so you may have missed it. It should be bigger news than it is.
I can’t fault the New York Times for having its front page focus mainly on the false missile alert that was issued to some people in Hawaii; a false alarm of nuclear attack definitely is the most important thing that could be going on in the world, short of course of actual nuclear war.

CNN, on the other hand, is focused entirely on Trump. When I first wrote this post, they were also focused on Trump, mainly interested in asking whether Trump’s comments about “immigrants from shithole countries” was racist. My answer: Yes, but not because he said the countries were “shitholes”. That was crude, yes, but not altogether inaccurate. Countries like Syria, Afghanistan, and Sudan are, by any objective measure, terrible places. His comments were racist because they attributed that awfulness to the people leaving these countries. But in fact we have a word for immigrants who flee terrible places seeking help and shelter elsewhere: Refugees. We call those people refugees. There are over 10 million refugees in the world today, most of them from Syria.

So anyway, here’s the news item you should have heard about but probably didn’t: The Chief Economist of the World Bank (Paul Romer, who coincidentally I mentioned in my post about DSGE models) has opened an investigation into the possibility that the World Bank’s ratings of economic freedom were intentionally manipulated in order to tilt a Presidential election in Chile.

The worst part is, it may have worked: Chile’s “Doing Business” rating consistently fell under President Michelle Bachelet and rose under President Sebastian Piñera, and Piñera won the most recent election. Was that the reason he won? Who knows? I’m still not entirely clear on how we ended up with President Trump. But it very likely contributed.

The World Bank is supposed to be an impartial institution representing the interests of global economic development. I’m not naive; I recognize that no human institution is perfect, and there will always be competing political and economic interests within any complex institution. Development economists are subject to cognitive biases just like anyone else. If this was the work of a handful of economic analysts (or if Romer turns out to be wrong and the changes in statistical methodology were totally reasonable), so be it; let’s make sure that the bias is corrected and the analysts involved are punished.

But I fear that the rot may run deeper than this. The World Bank is effectively a form of unelected international government. It has been accused of inherent pro-capitalist (or even racist) bias due to the fact that Western governments are overrepresented in its governance, but I actually consider that accusation unfair: There are very good reasons to make sure that your international institutions are managed by liberal democracies, and turns out that most of the world’s liberal democracies are Western. The fact that the US, France, Germany, and the UK make most of the decisions is entirely sensible: Those are in fact the countries we should want making global decisions.

China is not underrepresented, because China is not a democracy and doesn’t deserve to be represented. They are already more represented in the World Bank than they should be, because representing the PRC is not actually representing the interests of the people of China. Russia and Saudi Arabia are undeniably overrepresented. India is underrepresented; they should be complaining. Some African democracies, such as Namibia and Botswana, would also have a legitimate claim to underrepresentation. But I don’t lose any sleep over the fact that Zimbabwe and Iran aren’t getting votes in the World Bank. If and when those countries actually start representing their people, then we can talk about giving them representation in world government. I don’t see how refusing to give international authority to dictators and theocrats constitutes racism or pro-capitalist bias.

That said, there are other reasons to think that the World Bank might actually have some sort of pro-capitalist bias. The World Bank was instrumental in forming the Washington Consensus, which opened free trade and increase economic growth worldwide, but also exposed many poor countries to risk from deregulated financial markets and undermined social safety nets through fiscal austerity programs. They weren’t wrong to want more free trade, and many of their reforms did make sense; but they were at best wildly overconfident in their policy prescriptions, and at worst willing to sacrifice people in poor countries at the altar of bank profits. World poverty has in fact fallen by about half since 1990, and the World Bank has a lot to do with that. But things may have gone faster and smoother if they hadn’t insisted on removing so many financial regulations so quickly without clear forecasts of what would happen. I don’t share Jason Hickel’s pessimistic view that the World Bank’s failures were intentional acts toward an ulterior agenda, but I can see how it begins to look that way when they keep failing the same ways over and over again. (I instead invoke Hanlon’s razor: “Never attribute to malice that which is adequately explained by stupidity.”)

There are also reports of people facing retaliation for criticizing World Bank projects, including those within the World Bank who raise ethical concerns. If this was politically-motivated data manipulation, there may have been people who saw it happening, but were afraid to say anything for fear of being fired or worse.

And Chile in particular has reason to be suspicious. The World Bank suddenly started giving loans to Chile when Augusto Pinochet took power (the CIA denies supporting the coup, by the way—though, given the source, I can understand why one would take that with a grain of salt), and did so under the explicit reasoning that an authoritarian capitalist regime was somehow “more trustworthy” than a democratic socialist regime. Even in the narrow sense of financial creditworthiness that seems difficult to defend; the World Bank knew almost nothing about what kind of government Pinochet was going to create, and in fact despite the so-called “Miracle of Chile”, rapid economic growth in Chile didn’t really happen until the 1990s, after Chile became a democratic capitalist regime.

What I’m really getting at here is that the World Bank has a lot to answer for. I am prepared to believe that most of these actions were honest mistakes or ideological blinders, rather than corruption or cruelty; but even so, when millions of lives are at stake, even honest mistakes aren’t so forgivable. They should be looking for ways to improve their internal governance to make sure that mistakes are caught and corrected quickly. They should be constantly vigilant for biases—either intentional or otherwise—that might seep into their research. Error should be met with immediate correction and public apology; malfeasance should be met with severe punishment.

Perhaps Romer’s investigation actually signals a shift toward such a policy. If so, this is a very good thing. If only we had done this, say, thirty years ago.

What about a tax on political contributions?

Jan 7, JDN 2458126

In my previous post, I argued that an advertising tax could reduce advertising, raise revenue, and produce almost no real economic distortion. Now I’m going to generalize this idea to an even bolder proposal: What if we tax political contributions?

Donations to political campaigns are very similar to advertising. A contest function framework also makes a lot of sense: Increased spending improves your odds of winning, but it doesn’t actually produce any real goods.

Suppose there’s some benefit B that I get if a given politician wins an election. That benefit could include direct benefits to me, as well as altruistic benefits to other citizens I care about, or even my concern for the world as a whole. But presumably, I do benefit in some fashion from my favored politician winning—otherwise, why are they my favored politician?

In this very simple model, let’s assume that there are only two parties and two donors (obviously in the real world there are more parties and vastly more donors; but it doesn’t fundamentally change the argument). Say I will donate x and the other side will donate y.

Assuming that donations are all that matter, the probability my party will win the election is x/(x+y).

Fortunately that isn’t the case. A lot of things matter, some that should (policy platforms, experience, qualifications, character) and some that shouldn’t (race, gender, age, heightpart of why Trump won may in fact be that he is tall; he’s about 6’1”.). So let’s put all the other factors that affect elections into a package and call that F.

The probability that my candidate wins is then x/(x+y) + F, where F can be positive or negative. If F is positive, it means that my candidate is more likely to win, while if it’s negative, it means my candidate is less likely to win. (If you want to be pedantic, the probability of winning has to be capped at 0 and 1, but this doesn’t fundamentally change the argument, and only matters for candidates that are obvious winners or obvious losers regardless of how much anyone donates.)

The donation costs me money, x. The cost in utility of that money depends on my utility function, so for now I’ll just call it a cost function C(x).
Then my net benefit is:
B*[x/(x+y)+F] – C(x)

I can maximize this by a first-order condition. Notice how the F just drops out. I like F to be large, but it doesn’t affect my choice of x.

B*y/(x+y)^2 = C'(x)

Turning that into an exact value requires knowing my cost function and my opponent’s cost function (which need not be the same, in general; unlike the advertising case, it’s not a matter of splitting fungible profits between us), but it’s actually possible to stop here. We can already tell that there is a well-defined solution: There’s a certain amount of donation x that maximizes my expected utility, given the amount y that the other side has donated. Moreover, with a little bit of calculus you can show that the optimal amount of x is strictly increasing in y, which makes intuitive sense: The more they give, the more you need to give in order to keep up. Since x is increasing in y and y is increasing in x, there is a Nash equilibrium: At some amount x and y we each are giving the optimal amount from our perspective.

We can get a precise answer if we assume that the amount of the donations is small compared to my overall wealth, so I will be approximately risk-neutral; then we can just say C(x) = x, and C'(x) = 1:

B*y/(x+y)^2 = 1
Then we get essentially the same result we did for the advertising:

x = y = B/4

According to this, I should be willing to donate up to one-fourth the benefit I’d get from my candidate winning in donations. This actually sounds quite high; I think once you take into account the fact that lots of other people are donating and political contributions aren’t that effective at winning elections, the optimal donation is actually quite a bit smaller—though perhaps still larger than most people give.

If we impose a tax rate r on political contributions, nothing changes. The cost to me of donating is still the same, and as long as the tax is proportional, the ratio x/(x+y) and the probability x/(x+y) + F will remain exactly the same as before. Therefore, I will continue to donate the same amount, as will my opponent, and each candidate will have the same probability of winning as before. The only difference is that some of the money (r of the money, to be precise) will go to the government instead of the politicians.

The total amount of donations will not change. The probability of each candidate winning will not change. All that will happen is money will be transferred from politicians to the government. If this tax revenue is earmarked for some socially beneficial function, this will obviously be an improvement in welfare.

The revenue gained is not nearly as large an amount of money as is spent on advertising (which tells you something about American society), but it’s still quite a bit: Since we currently spend about $5 billion per year on federal elections, a tax rate of 50% could raise about $2.5 billion.

But in fact this seriously under-estimates the benefits of such a tax. This simple model assumes that political contributions only change which candidate wins; but that’s actually not the main concern. (If F is large enough, it can offset any possible donations.)
The real concern is how political contributions affect the choices politicians make once they get into office. While outright quid-pro-quo bribery is illegal, it’s well-known that many corporations and wealthy individuals will give campaign donations with the reasonable expectation of influencing what sort of policies will be made.

You don’t think Goldman Sachs gives millions of dollars each election out of the goodness of their hearts, do you? And they give to both major parties, which really only makes sense if their goal is not to make a particular candidate win, but to make sure that whoever wins feels indebted to Goldman Sachs. (I guess it could also be to prevent third parties from winning—but they hardly ever win anyway, so that wouldn’t be a smart investment from the bank’s perspective.)

Lynda Powell at the University of Rochester has documented the many subtle but significant ways that these donations have influenced policy. Campaign donations aren’t as important as party platforms, but a lot of subtle changes across a wide variety of policies add up to large differences in outcomes.

A political contribution tax would reduce these influences. If politicians’ sole goal were to win, the tax would have no effect. But it seems quite likely that politicians enjoy various personal benefits from lobbying and campaign contributions: Fine dinners, luxurious vacations, and so on. And insofar as that is influencing politicians’ behavior, it is both obviously corrupt and clearly reduced by a political contribution tax. How large an effect this would be is difficult to say; but the direction of the effect is clearly the one we want.

Taxing donations would also allow us to protect the right to give to campaigns (which does seem to be a limited kind of civil liberty, even though the precise interpretation “money is speech” is Orwellian), while reducing corruption and allowing us to keep close track on donations that are made. Taxing a money stream, even a small amount, is often one of the best ways to incentivize close monitoring of that money stream.

With a subtle change, the tax could even be made to bias in favor of populism: All you need to do is exempt small donations from the tax. If say the first $1000 per person per year is exempt from taxation, then the imposition of the tax will reduce the effectiveness of million-dollar contributions from Goldman Sachs and the Koch brothers without having any effect on $50 donations from people like you and me. That would technically be “distorting” elections—but it seems like it might be a distortion worth making.

Of course, this is probably even less likely to happen than the advertising tax.

The potential of an advertising tax

Jan 7, JDN 2458126

Advertising is everywhere in our society. You may see some on this very page (though if I hit my next Patreon target I’m going to pay to get rid of those). Ad-blockers can help when you’re on the Web, and premium channels like HBO will save you from ads when watching TV, but what are you supposed to do about ads on billboards as you drive down the highway, ads on buses as you walk down the street, ads on the walls of the subway train?

And Banksy isn’t entirely wrong; this stuff can be quite damaging. Based on decades of research, the American Psychological Association has issued official statements condemning the use of advertising to children for its harmful psychological effects. Medical research has shown that advertisements for food can cause overeating—and thus, the correlated rise of advertising and obesity may be no coincidence.

Worst of all, political advertising distorts our view of the world. Though we may not be able to blame advertising per se for Trump; most of his publicity was gained for free by irresponsible media coverage.

And yet, advertising is almost pure rent-seeking. It costs resources, but it doesn’t produce anything. In most cases it doesn’t even raise awareness about something or find new customers. The primary goal of most advertising is to get you to choose that brand instead of a different brand. A secondary goal (especially for food ads) is to increase your overall consumption of that good, but since the means employed typically involve psychological manipulation, this increase in consumption is probably harmful to social welfare.

A general principle of economics that has almost universal consensus is the Pigou Principle: If you want less of something, you should put a tax on it. So, what would happen if we put a tax on advertising?

The amazing thing is that in this case, we would probably not actually reduce advertising spending, but we would reduce advertising, which is what we actually care about. Moreover, we would be able to raise an enormous amount of revenue with zero social cost. Like the other big Pigovian tax (the carbon tax), this a rare example of a tax that will give you a huge amount of revenue while actually yielding a benefit to society.

This is far from obvious, so I think it is worth explaining where it comes from.

The key point is that advertising doesn’t typically increase the overall size of the market (though in some cases it does; I’ll get back to that in a moment). Rather that a conventional production function like we would have for most types of expenditure, advertising is better modeled by what is called a contest function (something that our own Stergios Skaperdas at UCI is actually a world-class expert in). In a production function, inputs increase the total amount of output. But in a contest function, inputs only redistribute output from one place to another. Contest functions thus provide a good model of rent-seeking, which is what most advertising is.

Suppose there’s a total market M for some good, where M is the total profits that can be gained from capturing that entire market.
Then, to keep it simple, let’s suppose there are only two major firms in the market, a duopoly like Coke and Pepsi or Boeing and Airbus.

Let’s say Coke decides to spend an amount x on advertising, and Pepsi decides to spend an amount y.

For now, let’s assume that total beverage consumption won’t change; so the total profits to be had from the market are always M.

What advertising does is it changes the share of that market which each firm will get. Specifically, let’s use the simplest model, where the share of the market is equal to the share of advertising spending.

Then the net profit for Coke is the following:

The share they get, x/(x+y), times the size of the whole market, M, minus the advertising spending x.

max M*x/(x+y) – x

We can maximize this with the usual first-order condition:

y/(x+y)^2 M – 1 = 0

(x+y)^2 = My

Since the game is symmetric, in a Nash equilibrium, Pepsi will use the same reasoning:

(x+y)^2 = Mx

Thus we have:

x = y

(2x)^2 = Mx

x = M/4

In this very simple model, each firm will spend one-fourth of the market’s value, and the total advertising spending will be equal to half the size of the market. Then, each company’s net income will be equal to its advertising spending. This is a pretty good estimate for Coca-Cola in real life, which spends about $3.3 billion on advertising and receives about $2.8 billion in net income each year.

What would happen if we introduce a tax? Let’s say we introduce a proportional tax r on all advertising spending. That is, for every dollar you spend on advertising, you must pay the government $r in tax. The really remarkable thing is that companies who advertise shouldn’t care what we make the tax; the only ones who will care are the advertising companies themselves.

If Coke pays x, the actual amount of advertising they receive is x – r x = x(1-r).

Likewise, Pepsi’s actual advertising received is y(1-r).

But notice that the share of total advertising spending is completely unchanged!

(x(1-r))/(x(1-r) + y(1-r)) = x/(x+y)

Since the payoff for Coke only depends on how much Coke spends and what market share they get, it is also unchanged. Since the same is true for Pepsi, nothing will change in how the two companies behave. They will spend the same amount on advertising, and they will receive the same amount of net income when all is said and done.

The total quantity of advertising will be reduced, from x+y to (x+y)(1-r). That means fewer billboards, fewer posters in subway stations, fewer TV commercials. That will hurt advertising companies, but benefit everyone else.

How much revenue will we get for the government? r x + r y = r(x+y).

Since the goal is to substantially reduce advertising output, and it won’t distort other industries in any way, we should set this tax quite high. A reasonable value for r would be 50%. We might even want to consider something as high as 90%; but for now let’s look at what 50% would do.

Total advertising spending in the US is over $200 billion per year. Since an advertising tax would not change total advertising spending, we can expect that a tax rate of 50% would simply capture 50% of this spending as revenue, which is to say $100 billion per year. That would be enough to pay for the entire Federal education budget, or the foreign aid and environment budgets combined.
Another great aspect of how an advertising tax is actually better than a carbon tax is that countries will want to compete to have the highest advertising taxes. If say Canada imposes a carbon tax but the US doesn’t, industries will move production to the US where it is cheaper, which hurts Canada. Yet the total amount of pollution will remain about the same, and Canada will be just as affected by climate change as they would have been anyway. So we need to coordinate across countries so that the carbon taxes are all the same (or at least close), to prevent industries from moving around; and each country has an incentive to cheat by imposing a lower carbon tax.

But advertising taxes aren’t like that. If Canada imposes an advertising tax and the US doesn’t, companies won’t shift production to the US; they will shift advertising to the US. And having your country suddenly flooded with advertisements is bad. That provides a strong incentive for you to impose your own equal or even higher advertising tax to stem the tide. And pretty soon, everyone will have imposed an advertising tax at the same rate.

Of course, in all the above I’ve assumed a pure contest function, meaning that advertisements are completely unproductive. What if they are at least a little bit productive? Then we wouldn’t want to set the tax too high, but the basic conclusions would be unchanged.

Suppose, for instance, that the advertising spending adds half its value to the value of the market. This is a pretty high estimate of the benefits of advertising.

Under this assumption, in place of M we have M+(x+y)/2. Everything else is unchanged.

We can maximize as before:

max (M+(x+y)/2)*x/(x+y) – x

The math is a bit trickier, but we can still solve by a first-order condition, which simplifies to:

(x+y)^2 = 2My

By the same symmetry reasoning as before:

(2x)^2 = 2Mx

x = M/2

Now, total advertising spending would equal the size of the market without advertising, and net income for each firm after advertising would be:

2M(1/2) – M/2 = M/2

That is, advertising spending would equal net income, as before. (A surprisingly robust result!)

What if we imposed a tax? Now the algebra gets even nastier:

max (M+(x+y)(1-r)/2)*x/(x+y) – x

But the ultimate outcome is still quite similar:

(1+r)(x+y)^2 = 2My

(1+r)(2x)^2 = 2Mx

x = M/2*1/(1+r)

Advertising spending will be reduced by a factor of 1/(1+r). Even if r is 50%, that still means we’ll have 2/3 of the advertising spending we had before.

Total tax revenue will then be M*r/(1+r), which for r of 50% would be M/3.

Total advertising will be M(1-r)/(1+r), which would be M/3. So we managed to reduce advertising by 2/3, while reducing advertising spending by only 1/3. Then we would receive half of that spending as revenue. Thus, instead of getting $100 billion per year, we would get $67 billion, which is still just about enough to pay for food stamps.

What’s the downside of this tax? Unlike most taxes, there really isn’t one. Yes, it would hurt advertising companies, which I suppose counts as a downside. But that was mostly waste anyway; anyone employed in advertising would be better employed almost anywhere else. Millions of minds are being wasted coming up with better ways to sell Viagra instead of better treatments for cancer. Any unemployment introduced by an advertising tax would be temporary and easily rectified by monetary policy, and most of it would hit highly educated white-collar professionals who have high incomes to begin with and can more easily find jobs when displaced.

The real question is why we aren’t doing this already. And that, I suppose, has to come down to politics.