Archives: 05/2013

Imaginary Squabbles Part 2: Krugman and DeLong on Ireland

A short 2010 article of mine in Politico, which still annoys Paul Krugman and Brad DeLong, dealt with Ireland’s brief effort to restrain spending, which (while it lasted) was smarter than imposing uncompetitive tax rates as Greece had done. 

Krugman ridiculed my Politico article in at least four columns.  He imagines I predicted a “boom” in Ireland, because I wrote in June 2010 that, “the Irish economy is showing encouraging signs of recovery.”  That the Irish economy was turning up at the time is undeniable. Although I did not yet have the benefit of real GDP data, Ireland’s GDP was clearly rising before the third quarter of 2010 in this Krugman graph and this one.  What went wrong? Bonds and the economy collapsed after Black Thursday, September 30, when the government wasted millions on a gigantic bailout of Irish banks. My unforgivable blunder was in not predicting on June 9 what was going to happen on September 30.  Mea culpa.

Ironically, Krugman and I agree Ireland should have let the banks fail. We likely agree that is has been foolhardy to enact higher income tax rates in Ireland,  Portugal, Greece, Spain, France and the UK.   Although Krugman wants to label me “an austerian,” I have been rebuking IMF austerity schemes since 1978 for imposing rising tax rates and falling currencies on troubled countries.

There is another important point of agreement between Krugman and I, but only in recent years. In February 2004, I debunked fears that projected budget deficits would raise interest rates in a paper presented at the U.S. Treasury. That paper was largely aimed at Brookings Institution scholars but also at Krugman, who was “terrified about what will happen to interest rates once financial markets wake up to the implications of skyrocketing budget deficits.”  He has since come around to my view.

What Krugman and I cannot agree about, however, is his fantasy about Ireland’s “harsh spending cuts.” On The Colbert Report last year, for example, Krugman said, “Ireland is Romney economics in practice. They’ve … slashed spending; they’ve had extreme austerity programs.”

As the table below the jump shows, government spending as percent of GDP nearly doubled in Ireland, from 34.3 to 66.8 percent from 2006 and 2010, with bank bailouts after September 2010 pushing the deficit to 31.2 percent of GDP. By Krugman’s definition, Ireland had extremely “stimulative” spending and deficits since 2008. Does it matter that most spending since late 2010 was for bailing out bank creditors? Krugman’s new book says, “not at all: spending creates demand, whatever it’s for.”

Is the TPP a Waste of Time and Energy?

I hate to say “I told you so” but, well, “I told you so.”

Back in March 2010, I warned that the Trans-Pacific Partnership (TPP) agreement, a preferential trade agreement between the United States and then seven– and now 11, with the subsequent addition of Canada, Malaysia, Mexico and almost-officially Japan– other Asia-Pacific economies would be a hard slog, and that the signs towards a significant degree of liberalization were not promising. I followed that up with news about what then-United States Trade Representative Ron Kirk told a closed-door meeting with dairy lobbyists, and what it said more broadly about the administration’s commitment to free trade.

Today comes news from the latest round of TPP negotiations in Lima, Peru that industry groups have raised concerns about the way that the United States and Peru are approaching the negotiations: i.e, by negotiating with individual countries bilaterally rather than offering the same market access to all of the TPP members at once, a concept trade wonks call a “plurilateralism.” In addition, the United States is not re-negotiating market access with any of the TPP countries with which it already has an agreement (that’s six of the eleven other members).

Pluralizing the deal would be more fitting for an agreement that the Obama administration touted as being a “21st Century” agreement to reflect new world trade realities, like global supply chains. It would lessen the potential for an unholy mess that businesses find unworkable. A Wal-Mart representative said at the meeting “it’s a little hard to see how you have this very comprehensive agreement if we have bilateral market access negotiations that everybody doesn’t necessarily understand, and how you essentially plurilateralize those with common sets of rules of origin.” (Rules-of Origin are the methods by which customs officials determine the origin of a product, and thus which tariff rate should apply. They can get really messy when supply chains are complex).

So what did the U.S. and Peruvian chief negotiators say when they were called out on the self-defeating bilateral approach? They gave answers which do not pass the laugh test (the following quotes come from the same article linked to above, all emphases my added):

In response to [a] question, Weisel and Peruvian chief negotiator Edgar Vasquez both defended the bilateral approach to negotiating goods market access. Weisel argued that it makes more sense to import zero tariff rates that the U.S. already has with various TPP countries into the new agreement, rather than conducting a new market access negotiation with those countries.

Corporate Tax Avoidance: Where’s the Harm?

Politicians are having fun slapping around big corporations for supposedly not paying enough taxes. In this country, Apple is the current target, while in Europe it’s Google, Amazon, and Starbucks, according to the Washington Post today.

But there is an elephant in the room that the many reporters and politicians blustering over the issue have been too ideologically blind to see: There is no obvious harm being done by today’s corporate tax avoidance.

The first thing to note is that when investment flows through tax havens, it’s not clear that it causes any economic distortions. The Washington Post story makes a big thing out of foreign direct investment (FDI) flowing through low-tax Bermuda and the Netherlands, but then ending up funding actual factories built elsewhere. Economists worry when taxes distort real investment flows, but that does not seem to be happening here. Indeed, FDI is likely being allocated efficiently across final destination countries in these situations, and the interim trip through low-tax jurisdictions simply shaves off an extra layer of unproductive and distortionary taxes.

An even more obvious reason to question whether corporate tax avoidance is causing any harm–even from a pro-government perspective–is that corporate tax revenues have been trending upwards across the developed world. The chart below shows that corporate tax revenues as a share of GDP have been rising over the decades, despite the dramatic reductions in statutory tax rates in most countries. Revenues dipped in recent years because of the recession, but they are now trending upwards again even though growth is still very sluggish. (OECD data here).

So even if one believes the liberal view that higher government revenues are a good thing, there is no evident harm being done to government budgets from today’s supposed rampant tax avoidance. For more, see Dan Mitchell’s piece here, and Global Tax Revolution here.

OECD Average

Why is There a Shortage of Toilet Paper in Venezuela?

Forget about price controls. The Venezuelan government finally figured it out. The country is facing an acute shortage of toilet paper because people are eating too much. The head of the National Institute of Statistics released a survey yesterday that shows that Venezuelans “are eating three times a day or even more.” Thus the shortage.

However, Venezuelans don’t have to worry any more about eating in excess. Their National Assembly just approved the importation of 39 million rolls of toilet paper.

The beauties of Socialism.

More Firings Needed at the IRS—TSA Precedents

I’ve watched the congressional hearings on the IRS scandal, and like others, have been appalled at the glib performance of former IRS Commissioner, Douglas Shulman. Shulman isn’t taking an ounce of blame for the mess even though he headed the agency from 2008 to 2012. Dana Milbank reviews his slippery and rather arrogant performance in the Washington Post today.

Unfortunately, we can’t fire the Bush-appointee and Democratic-donor Shulman because he’s already escaped to the private sector. But we can fire other misbehaving IRS workers when we unravel the mystery of who ordered the political targeting.

Politico wrote yesterday that “heads won’t roll at the IRS.” The article is right that it is very difficult to fire federal workers, and I’ve written about the extremely low federal firing rate. The article says that 8,755 people were fired last year. But that was out of 2.1 million civilian federal employees, or just 0.4 percent of the total.

Politico notes that strong civil service protections are a big hurdle to firing. But just as  important, I think, has been the unwillingness of federal managers to put the time and effort into removals. It’s much easier for managers to move troublesome employees off to a quiet office to get them out of the way, or to transfer them out of their section.

Also note that it is the firing rate of poor performers that is especially low in the federal government, meaning workers who are lazy or produce poor work. One barrier to their firing is that managers often give these workers good performance reviews because they don’t want to rock the boat.

However, a larger number of federal workers are fired for misconduct—such as willfully ignoring laws and regulations—and that is what we are talking about with the IRS scandal. Recent incidents in the beleaguered Transportation Security Administration (TSA) indicate that federal workers can be fired for misconduct:

Aside from the thefts, the other TSA firings seem to have been for actions no more troublesome than that of IRS employees. IRS employees were apparently not just failing to follow proper protocol, but were proactively inventing new procedures that undermined fundamental rules for nonpartisan, neutral, and fair treatment of taxpayers.

So far President Obama has “fired” acting IRS Commissioner Steven Miller, although Miller had planned to retire in June anyway. But more heads should roll in the IRS scandal, and despite Politco’s cautionary note, I’m guessing that they will roll.

Can Congress Make Lois Lerner Talk?

Lois Lerner is lucky that she’s testifying at a congressional hearing rather than at a criminal trial. In a courtroom, if Lerner were a defendant, then she couldn’t have simply read an “opening statement” and then refused to testify further; her statement would’ve “opened the door” to questioning about the subjects she raised (and then there are further wrinkles in civil, as opposed to criminal, cases). Before the House Oversight Committee, however, Lerner is merely a witness at an investigative hearing—and one compelled to attend by subpoena, no less—so she can “selectively” invoke her Fifth Amendment right not to answer particular questions that may incriminate her or to cut off questioning altogether.

Still, Lerner said four things that should pique Congress’s interest: (1) “I have not done anything wrong.”; (2) “I have not broken any laws.”; (3) “I have not violated any IRS rules or regulations.”; and (4) “I have not provided false information to this or any other committee.” The committee should do all it can to investigate Lerner’s understanding of the laws and regulations she was applying, and how her previous oral and written testimony comport with the IRS malfeasance under review.  

It certainly looks fishy that Lerner has decided not to answer questions on these issues, but Rep. Darrell Issa (R-CA) can’t force her to do so.

What he can do is call Lerner back and have her prior testimony read, asking how her current knowledge of what went on compares to her earlier statements – and any other questions the committee has. This would force her to “plead the Fifth” on every question, which would put pressure on the IRS and its political masters, even if Lerner doesn’t have to answer. He could also, now if there’s enough evidence of wrongdoing already or later if there will be by the end of the investigation, move for a criminal indictment. 

Climate History: Cato Boffins Discovered “Anti-information”

While doing some historical studies in preparation for an article in Cato’s Regulation magazine, we found that we  once discovered the information equivalent of antimatter, namely, “anti-information”.

This breakthrough came  when we were reviewing the first “National Assessment” of climate change impacts in the United States in the 21st century, published by the U.S. Global Change Research Program (USGCRP) in 2000.  The Assessments are mandated by the Global Change Research Act of 1990.  According to that law, they are, among other things, for “the Environmental Protection Agency for use in the formulation of a coordinated national policy on global climate change…”

One cannot project future climate without some type of model for what it will be.  In this case, the USGCRP examined a suite of nine climate models and selected two for the Assessment. One was the Canadian Climate Model, which forecast the most extreme warming for the 21st century of all models, and the other was from the Hadley Center at the U.K Met Office, which predicted the greatest changes in precipitation.

We thought this odd and were told by the USGCRP that they wanted to examine the plausible limits of climate change. Fair enough, we said, but we also noted that there was no test of whether the models could simulate even of the most rudimentary climate behavior in past (20th) century.

So, we tested them on ten-year running means of annual temperature over the lower 48 states.

One standard method used to determine the utility of a model is to compare the “residuals”, or the differences between what is predicted and what is observed, to the original data.  Specifically, if the variability of the residuals is less than that of the raw data, then the model has explained a portion of the behavior of the raw data and the model can continue to be tested and entertained.

A model can’t do worse than explaining nothing, right?

Not these models!  The differences between their predictions and the observed temperatures were significantly greater (by a factor of two) than what one would get just applying random numbers.

Ponder this:  Suppose there is a multiple choice test, asking for the correct temperature forecast for 100 temperature observations, and there were four choices. Using random numbers, you would average one-in-four correct, or 25%. But the models in the National Assessment somehow could only get 12.5%!

“No information”—a random number simulation—yields 25% correct in this example, which means that anything less is anti-information. It seems impossible, but it happened.

We informed the USGCRP of this problem when we discovered it, and they wrote back that we were right, and then they went on to publish their Assessment, undisturbed that they were basing it models that had just done the impossible.