Harvard's Niall Ferguson Apologizes for 'Stupid' Keynes Remarks

Harvard's Niall Ferguson Apologizes for 'Stupid' Keynes Remarks

This fall, I will be teaching a class on communication for future economists. One of the exemplars of public economists I plan to include in the course materials is Niall Ferguson, author of several texts on economics for general audiences.

And, yet, like many scholars I respect, he says some dumb things. Trying to explains Keynes via his sexuality or lack of a family is pretty stupid. At least Ferguson admits his mistake. Maybe a long list of economists could learn from this example.

However (you knew that was coming), cultures and experiences do shape our political views and our economic biases. At the time of Keynes, government was solidly anti-gay rights. Consider the fate of Alan Turing, sadly. But, Keynes did have faith in government. I wonder why…

Charles Lane: Big bloat on campus - The Washington Post

Many economic policies are driven by the emotions of political populism: the policies feel "right" or "good" as long as you don't ponder them too deeply. Then again, there's evidence that some people would still support bad a policy because economics takes a backseat to various emotions.

"Medical insurance" is no longer… insurance. It is indirect payment, and that's a problem. The other major example of indirect payment in our society is college tuition, with federally subsidized loans and grants creating an indirect market, as well.

In both of these markets, healthcare and education, government policies have distorted costs, contributing to rising costs and declining value.

Consider the following column and what it illustrates about the cost of higher education.

An F for effort on holding down tuition
http://www.washingtonpost.com/opinions/charles-lane-big-bloat-on-campus/2012/12/31/649c12b8-536b-11e2-bf3e-76c0a789346f_story.html
By Charles Lane, Published: December 31
The Washington Post

At the University of Minnesota, the number of employees with "human resources" or "personnel" in their job titles has grown from 180 to 272 since the 2004-05 academic year. Since 2006, the university has spent $10 million on consultants for a vast new housing development that is decades from completion. It employs 139 people for marketing, promotions and communications. Some 81 administrators make $200,000 per year or more.

In the past decade, Minnesota's administrative payroll has gone up three times as fast as the teaching payroll, and twice as fast as student enrollment.

Oh, and tuition more than doubled in that same period, to more than $13,000 per year.

When I hear college administrators talk about the benefits their institutions bring to local economies, apparently a huge benefit is the high salaries paid to administrators. Clearly, they must be demonstrating "trickle down" economics in practice. No?

My wife and I attended graduate school at the University of Minnesota. It was expensive, especially at the graduate level. Thankfully, her outstanding employer reimbursed her tuition and I was a fellowship recipient. But, someone always pays — even when the student doesn't pay directly.

There should be a lot more outrage about this than exists — though we can hope that outrage will grow as more and more such facts come to light.

Solving the problem, however, won't be easy. Americans and their elected leaders have grown used to discussing college "affordability" as a matter of distributing ever more government aid — in the form of tax breaks, direct assistance or subsidized loans.

Actually, this is self-defeating: by making it possible for students to pay higher tuition, federal and state aid reduces institutions' incentive to make the hard budgetary choices that might hold tuition down in the first place.

My young students, and some of the non-traditional students, didn't give much thought to what college would cost them in the long-term. They signed some papers, subsidized loans were awarded, and the students went to class. When I would ask students if they knew the amount of loans they might owe, few had even a rough estimate.

I understand the problem. This happens when people buy anything on long-term credit. As a society, we often buy cars, homes, or expensive luxuries based on monthly payments instead of total costs. Imagine if you didn't have to make any payments for five, six, or even ten years. Loan deferments warp the perception of costs, further than the loans would anyway.

Colleges and universities, especially the for-profit and the tuition-supported institutions, rely on student debt and other forms of government support. I've met many veterans attending expensive institutions, obtaining degrees with minimal marketplace value; I must assume some institutions seek out these students.

While universities are good at seeking out students, they aren't so good at basic management. This is particularly ironic at Minnesota, home of the respected Carlson School of Management.

Management got so loosey-goosey at Minnesota… that the school had no idea of such basic facts as how many employees report to each supervisor.

Someone might want to teach the administrators how Visio works. It's called an org chart, and it's a good thing to have when auditors ask questions.

Forget the "value" of education — it is hard to quantify. But, can't we all agree that mismanagement cannot be excused simply because education is a special kind of service?

… In their purest form, market concepts of cost-effectiveness don't neatly apply to what universities do, for reasons well explained by economist William Baumol of New York University's Stern School of Business.

Like medical care or the performing arts, Baumol says, education is one of those "industries" whose "output" defies precise measurement and whose production processes are hard to automate and standardize. It's a hands-on endeavor, with lots of human interaction, so there's a limit to how much labor you can save.

… [Government] should condition more of its support for higher-ed on actual cost-cutting by institutions. The days of pouring government money into the existing business model, no strings attached, need to end.

The University of Minnesota is not unique. It is simply a documented example of what's wrong with the priorities at many institutions. The community college at which I once worked is at risk of losing accreditation, not for academic failings but for mismanagement. My colleagues in the classroom are often blamed for the perceived problems in education. I'd argue most of what's wrong starts in presidential suites and boardrooms.

Our priorities are often upside down, with less investment on direct teaching and more spending on administrators and impressive campus buildings. Maybe tuition increases will lead to demands that things change. I doubt it, though. It's easier for politicians to offer "affordability" via more spending.

Intro to Econ: A Summer Project

Though few visitors post comments to this blog, I do receive the occasional email question. Often, these questions involve definitions and concepts that should be included in a basic economics survey course. I'm uncertain how many high schools or colleges require economics, and a single-semester Econ 101 might be so compressed that it only creates more confusion and misunderstandings.

This summer, I'm hoping to begin an irregular series of posts, "Intro to Econ." It has also been suggested that I create a page that lists some of the common terms used on this and other economics-related blogs. That seems like a reasonable suggestion. Yes, there are introductory texts and lexicons, but I like the idea of a witty guide to the jargon of economists, businesspeople, and politicians.

I have a long list of blog topics, some dating back several years. The Intro to Econ would be yet another batch of posts to write. At least I'm never short of ideas.

The posts should begin by June. If you have ideas or suggestions, let me know. I'll add them to the list of topics.

Internet Sales Tax Coming Too Late for Some Stores

As I wrote in a few days ago, the Internet sales tax mandate is coming. It's stupid, and it will only benefit the larger retailers — especially Amazon because Amazon offers "retail services" to other businesses. Amazon Web Services, Amazon Merchant Services, and so forth, mean that Amazon will not only survive a tax mandate, but Amazon will thrive with Internet sales tax mandates.

Either politicians and business groups are stupid and/or naive, or they know perfectly well that Amazon and other larger retailers will do fine.

Consider the following New York Times and CNBC special report:

Internet Sales Tax Coming Too Late for Some Stores
http://www.cnbc.com/id/100681021
Published: Saturday, 27 Apr 2013 | 12:00 AM ET
By: David Streitfeld

Anita Demetropoulos, a Maine shopkeeper, figured she would never see the day when her most relentless competitor, Amazon, would be forced to collect sales tax.

Now that Congress seems ready to do that, she is no longer sure it matters. Even in losing, the e-commerce powerhouse is triumphant. It no longer needs the tax break to vanquish its foes — and could even make money by collecting the new taxes for other retailers.

"I'm surprised and glad this is happening," said Ms. Demetropoulos, who owns three toy stores with her husband. "But Amazon won't rest until it gobbles up everyone and everything."

The Senate is poised to pass a bill to require all but the smallest online sellers to collect the tax. The House appears likely to follow suit. Although Amazon's desire to avoid the tax played a fundamental role in its founding and growth, it is a supporter of the legislation.

Demetropoulos is mistaken to consider this more fair — and she should not be glad the Senate is considering sales tax collection mandates. "Hurting" other retailers to help yours is more about envy than about good law. This is like the people cheering higher taxes on the rich, simply because they dislike the rich.

Amazon does not complete on price differences of a few pennies. If I can buy a book locally for the same price or "close enough" price, I will. Amazon, however, is often much, much cheaper. More importantly, most items I order online aren't even in stock at local stores. Amazon competes on selection and convenience, at least as much as price. And when it wins on price, it wins by a lot. (Much like Walmart does. My wife and I buy household items at Walmart because it is significantly cheaper than other retailers.)

Consider the experience of Amazon in states where it already collects taxes.

Analysts who closely follow the fortunes of Amazon say collecting taxes is unlikely to drive away its customers. They say it may even help the Seattle company while simultaneously defusing a potent political issue.

In the few states where the company has already begun collecting, said Gene Munster, an analyst with Piper Jaffray, sales dip for about a year. "Then the customers come back for the convenience and selection," he said.

My wife and I are clearly not an isolated example of why people shop for books, music, and electronics items online. I shop with Amazon, Newegg, Other World Computing, and B&H Photo on a regular basis. I also use the Apple stores, both for physical items and digital downloads. There's no Apple retailer in our county.

Retailers need to stop obsessing about the few cents-per-dollar of a sales tax mandate. Focus on carrying items, in stock and for a "good enough" price with excellent service.

Amazon isn't afraid of online taxes. That's a simply computer database problem for a company the size of Amazon — or Walmart, or Apple, or any other major retailer. But, for a small online and physical retailer, this is going to be a nightmare. I previously wrote of the nearly 10,000 (you read that right) sales tax jurisdictions in the United States. Good luck, Main Street. Small retailers will end up contracting with Amazon to process transactions. The irony in "punishing Amazon" is that it will reward Amazon — at the expense of mid-size retailers.

Figuring out the tax in thousands of jurisdictions could be a logistical nightmare for merchants just above the legislation's threshold of $1 million in annual revenue. That is another place where Amazon is expected to benefit; it could sell tax collection services to tens of thousands of third parties.

[…]

In recent years, states struggling in the recession became more aggressive toward Amazon. Texas, New York and California all pursued the company over the tax issue. Amazon began making deals to collect the tax while simultaneously building warehouses that would bring it closer to its customers, bringing same-day delivery within reach.

Forcing Amazon to collect taxes didn't hurt Amazon in these large states. Increase prices a few pennies, add the "Amazon Prime" program that charges customers for special delivery options, and the company was fine. If anything, Amazon turned out the big winner in these tax "surrenders" to various states.

Amazon knows this well enough that it actually supports the sales tax mandate. It resisted in the past, but has learned to capitalize on its technical prowess.

Last August, an Amazon executive testified before Congress that all "sellers should compete on a level playing field" and that the states really needed the tax money, which was estimated to be more than $10 billion annually. When the Senate introduced the legislation in February, Amazon wrote to the sponsoring senators to thank them.

Thomas J. Szkutak, Amazon's chief financial officer, dismissed any ill effect from legislation, telling reporters this week that "certainly we'll continue to have a good business in those states."

A few retailers recognize the scam that is the Internet sales tax mandate.

"This is all about the big Internet companies — Amazon, Walmart — crushing the small companies," said Chris Chapman, who sells winter sports equipment on eBay, Amazon and through his own Web site, SnowSportDeals.com.

His sales are slightly over the threshold. That means Mr. Chapman, who is based in Maryland, will either have to spend many hours figuring out how to collect taxes himself or pay someone to do it for him.

"This will make it harder for people like me to start a Web business," Mr. Chapman said.

"So Amazon will just get more customers. It's win-win for them."

As I posted recently, neighboring states don't have to charge my wife and me the Pennsylvania, Beaver County, Beaver Falls sales tax when we make a purchase. We don't pay Beaver Falls sales taxes in nearby counties, either (actually, those counties have higher tax rates).

If we want a simple tax policy for online retailers, make them collect the sales taxes applicable to their physical locations — period. A retailer in Ohio would charge every customer — physical or online — the same sales tax rate. That would be logical. Tourists in New York City pay New York sales taxes, no matter from where the tourists originated. Would NYC like to change that policy? I doubt it.

If retailers have to collect tax, therefore, let it be the local tax. Simple, one rate, no special database or software programming required. It isn't ideal, but it is closer to "fair" than trying to process collections and payments to 10,000 tax jurisdictions.

Internet Sales Taxes - Dumb Idea that Will Happen

The blunt truth: Collecting any and all "applicable" sales taxes online is not going to help retailers. It is not going to make things "fair" in some way. In the end, it's just another layer of complexity that might create jobs for tax specialists, but not many other people.

Congress Is Considering a Bill to Make Internet Firms Collect Sales Tax. Here's Why They Shouldn't Pass It.by Megan McArdle Apr 24, 2013 11:00 AM EDT
It's too burdensome on businesses we want to expand.

Businesses in states without a sales tax will have to install a collection system that they currently don't need—and to pay taxes for services that they don't receive from faraway states. Yes, their goods travel on the roads, but the shippers are already paying tolls and gas taxes to cover the wear and tear. If we think those tolls and taxes are too low, the right response is to raise them, not impose a completely different (and much higher) tax. My colleague argues that they also use common services like the post office, but, of course, the post office is a nominally unsubsidized service that is paid for by postage and the occasional infusion of income from the federal income tax. Which those businesses are already paying.

We want small businesses to get bigger, spread their wings, engage in interstate commerce. The best way to do this is to minimize the amount of burdensome regulation that we put on them. No, the Internet sales tax will not, by itself, shut down some aspiring small-business owner. That's not the problem with regulation in this country. The problem is death by a thousand cuts (and 9,000 jurisdictions). Any individual regulation can be justified as a small intrusion. But put them all together and they are a very large burden … enough to bleed a promising business dry.

I know you can already buy databases of all the tax rates in the United States, but I have no idea if there are complex systems that can accurate determine what is or is not taxable on a city, county, and state level. Some jurisdictions charge sales tax on clothing, some do not. Some charge only on certain types of clothing. Some jurisdictions tax clothing if the items cost more than a set price, while others tax on total dollar value of the transaction. The maze of rules and regulations on taxes is absurd.

Now, if you want a single, flat, low sales tax rate, that might work — if every state would agree to the rate. But, we have another problem Congress has to address:

Article I, Section 9 of the U.S. Constitution includes the following:
No Tax or Duty shall be laid on Articles exported from any State.

That's why states assess, but rarely manage to collect, "use taxes" for items purchased online. You cannot tax items at the point of export, legally. I'm certain the courts will find a way to allow cross-jurisdictional taxes, but right now the courts have limited sales tax compliance to organizations with physical presences in the jurisdiction.

Walmart might not like this, because they have stores in all states. Therefore, with a physical presence in California, Walmart must collect sales taxes as if a customer in California went to a California Walmart. But, a retailer with no presence in California doesn't have to collect sales taxes.

My wife and I live in Southwest Pennsylvania. We shop in Ohio often, and we've shopped in West Virginia. We constantly cross state lines — as do many Americans. We shop at a warehouse store in Ohio, because it has lower sales taxes and more selection (no ban on alcohol sales, for example). The selection and convenience matter more to us than the taxes, though. We aren't stopped at a checkpoint and asked for the difference between Ohio and Pennsylvania taxes. That would be reason enough to move a few miles into Ohio.

When we drive in these states, we pay gas taxes and tolls. We pay the Turnpike tolls because it is fast and convenient to drive the Interstates, instead of county roads. We pay our "fair share" with each trip. It isn't like we "steal" services from the two states.

Can you imagine retailers asking for an I.D. so they can charge the "appropriate" sales tax at the register? After all, Pennsylvania wants me to pay sales tax if I order online from a store in Ohio. Think about that. Buy in person? Pay Ohio taxes. Buy online? Pay the Pennsylvania taxes. That's just plain stupid.

While taxes don't alter our choices significantly in Western PA, when we lived in California, we compared the sales taxes from city to city, county to county. It made sense to buy large office supplies, furniture, and other items several miles from where we lived. If you're buying $10,000 in office equipment, the taxes are substantial — and worth a trip to the cheapest retailer in the cheapest county.

Our national leaders seem intent on making it impossible to operate a business. McArdle concludes her column with an illustration of this:

A few weeks ago I was talking to a very nice, very liberal wonk type who had tried to start a small business and come away with a changed vision of regulation. The most dispiriting thing, he told me, was that it wasn't even possible to know whether he was in compliance. He's a very smart guy with top-notch research skills, but if he'd spent all his time researching the rules, and none running his business, he still couldn't have been sure that he was legal.

Imagine trying to comply with nearly 10,000 (yes, TEN THOUSAND) sales tax jurisdictions. A small business simply cannot afford such an expense — so they will need to "outsource" transaction processing to a company that can deal with the tax jurisdictions. (Can you say, "Amazon"? Yes, Amazon could be a big winner with this move, because they already have the infrastructure to collect taxes in many states.)

Tax law changes will not shift shopping from online to bricks-and-mortar stores, at least not for the most popular online items.

As I explained above, we are convenience shoppers — we want to get what we want. Limit our choices, we will go elsewhere, including online. My wife and I shop online for books, music, and some other items. We will shop online with or without sales taxes. There are several reasons, other than taxes, for online purchases. If we have to pay the same taxes, online or in person, the odds are that the online price, selection, and service will still be superior for some items.

We have one, yes, one traditional bookstore in our county and three used book retailers. The "new" books are in a little (and I do mean little) mall store that was once a B. Dalton. It might be one of the smallest retail spaces in the mall. I've never found a book I wanted in the store. There's no significant selection of history, science, philosophy, or art books. And forget finding new computer books. We can either order books online or shop in Ohio at the chain bookstores (with mediocre, but better, selections).

The bookstore in the mall is staffed by teenagers busy using their cellphones. When you do get their attention, the standard answer is, "We don't have that, but we can order it."

If I have to order a book, I'm ordering it online from Amazon. If I lived in California, I'd order from my wife's sister (she runs the family's new-and-used bookstore) and ride my bike to the store. We don't have a local store here to support, so Amazon wins.

The only beneficiaries of an online sales tax mandate will be large retailers and online service providers. The winners will not include small businesses on Main Street. If a small business does have online sales, it could be among the losers thanks to compliance costs.

Internet sales taxes are simply another dumb idea that will happen.

Austerity study error found by student

When a scholar makes a mistake, he or she should admit it and do whatever must be done to revise the research involved. Often, mistakes teach a great deal. Also, nothing bothers me more than when a scholar won't explore challenges to his or her assumptions. Be honest, and search for the best approximation of "truth" possible.

What if "austerity" doesn't withstand scholarship?

For some progressives, liberals, socialists, et al, any evidence against austere budgets would be welcomed. That's why the following story has been trumpeted in left-leaning media. And they still miss some of the points. (But, that is partisanship.)

The problem is, "austerity" is defined many ways. The paper at the center of this debate suggests reducing public deficits and long-term debt by quickly cutting spending and raising taxes — a combination many reject, including me, because there are no such "quick and easy" solutions to long-term fiscal imbalances. But, lumping all theories of fiscal restraint together as "austerity" is what the media and many partisans might be expected to do.

Regardless of such generalizations, the original research paper at issue was wrong. Wrong is wrong, period, and it should cause a reexamination of the scholars' conclusions. Accuracy, even when it challenges your ideals, is what a scholar should seek.

Student Find Error in Famous 'Austerity' Study

http://business.financialpost.com/2013/04/18/reinhart-rogoff-austerity-study/
NEW YORK — When Thomas Herndon, a student at the University of Massachusetts Amherst's doctoral program in economics, spotted possible errors made by two eminent Harvard economists in an influential research paper, he called his girlfriend over for a second look.

As they pored over the spreadsheets Herndon had requested from Harvard's Carmen Reinhart and Kenneth Rogoff, which formed the basis for a widely quoted 2010 study, they spotted what they believed were glaring errors.

"I almost didn't believe my eyes when I saw just the basic spreadsheet error," said Herndon, 28. "I was like, am I just looking at this wrong? There has to be some other explanation. So I asked my girlfriend, 'Am I seeing this wrong?'"

I respect the approach Herndon took with his analysis. Unfortunately, as this article reveals, Herndon also had a bias — against austerity. It is a shame that economic research is too often ideologically driven. I fear that ideology allowed Reinhart and Rogoff to overlook their mistakes. That would be a shame; it would also be entirely normal in the field.

When scholars trust themselves too much, they make mistakes. We tell students to check, recheck, and check again. Good advice.

In the world of economic luminaries, it doesn't get much bigger than Reinhart and Rogoff, whose work has had enormous influence in one of the biggest economic policy debates of the age.

Both have served at the International Monetary Fund. Reinhart was a chief economist at investment bank Bear Stearns in the 1980s, while Rogoff worked at the Federal Reserve, passing through Yale and MIT before landing at Harvard.

Their study, which found economic growth slows dramatically when a government's debt exceeds 90% of a country's annual economic output, has been cited by policymakers around the world as justification for slashing spending.

There's one problem with such quantitative certainty as "90% debt slows an economy." What if every major nation in a limited system has similar debt burdens? What if that debt is temporary? What if other factors, like quantitative easing, are also distorting markets? As readers of this blog know, I admire the Austrian School because the thinkers assumed there are no perfect models in economics — there are too many variables involved in a global economy.

Also, that last sentence misses a major, major aspect of austerity in Europe: in addition to slashing spending, most nations also raised taxes. The "austerity" based on Reinhart and Rogoff has included tax increases that might reduce economic activity and investment. You then have government spending decreasing and private spending decreasing. Of course that will slow an economy.

But, what if you decreased government spending, lowered taxes, and encouraged private spending? That might lead to economic expansion. Austerity that assumes lower taxes — or at least simpler tax codes and lower rates raising more revenues — might result in rising GDP.

Consider Herndon's analysis:

Using the two professors' data, Herndon found that instead of a dramatic fall in growth, the decline was much milder, slowing to about 2.2%, instead of the slump to minus 0.1% that Reinhart and Rogoff predicted.

Debt might not cause a recession, Herndon's revised model suggests, only a drag on growth. Better slower growth than no growth.

Now, consider a family. I've offered this example before and will likely again. Most of us live with debt, and we have a "debt-to-income" ratio that lenders (and credit scoring agencies) consider when we borrow more money. Without debt, few of us would own cars, houses, or have college degrees. The question becomes not the immediate "debt-to-income" ratio, but the likelihood of future growth that might reduce that ratio in the future.

At this moment, my wife and I have one car loan, my student loans, and a home loan. Together, our total debt exceeds our income — the house alone does that. What matters, to us and most other families, is that our debt servicing does not exceed a certain percentage of income. Servicing debt depends on interest rates, terms of repayment, and other factors.

For now, we can pay the loans we owe and still live a good life. If we wanted to live "debt free" it would mean not owning a house, at the very least, because we'd never save the total purchase price. But, we can and should try to pay down our debts quickly and within reason.

Nations borrow money, via bonds and other mechanisms, to invest in infrastructure and services. Right now, international interest rates are low and borrowing terms are favorable. While I believe the government should do less and spend more wisely, that is a different argument than setting a specific ratio of debt to GDP. I'm not sure we can set such an ideal ratio with models.

Again, Herndon had a bias. We should know that bias, and then consider how much it does or does not matter to this student-scholars research.

Herndon's paper began life as a replication exercise for a term paper in a graduate econometrics class. He expected to replicate Reinhart and Rogoff's results, then challenge the idea that high public debt caused growth to slow.

But he never got that far. Repeated failures to replicate the results roused his interest.

I do believe high debt eventually causes rising interest rates, which in turn cause an inflationary spiral. But, what if your nation is the "best of the worst" among debtors? That's pretty much the reality of the United States today. We are unlikely to see inflationary pressures for a few years — though I do believe we will experience inflation at some point.

As the "best of the bad," our nation can keep on borrowing and spending. That's one of the arguments in favor of stimulus projects. It is an argument I reject — primarily because once government assumes a role, it seldom retreats. I've argued before on this blog, if government spent wisely… I might (and only might) trust it to spend on infrastructure. (Exhibit A: California roads and bridges are crumbling. So, the state spends money on a new high speed rail effort that goes nowhere. That's government logic at work. Politicians spend on new, shiny projects, not maintenance.)

I'd rather we reduce spending, simplify tax codes, and hope that we might, might be able to run a surplus in the future that could rebuild our infrastructure. I don't care about 90 percent debt-to-GDP or even 100 percent — what I care about is why we borrow and is there a true long-term benefit. Wasted stimulus, I can't support even if we have a 50 percent debt-to-GDP ratio, or a surplus. Spending wisely means avoid waste, no matter what some model might illustrate.

Now, we should offer some praise to Reinhart and Rogoff for doing what good researchers do: sharing their data so it can be tested. They didn't hide the data.

Herndon approached Reinhart and Rogoff earlier this year for the spreadsheets they used in their paper. The two professors provided them at the start of April, unlocking the mysteries of the data that had stumped Herndon.

I wish all research data were published online and available for download. This shows why data should be shared and examined.

The response of Reinhart and Rogoff, once they learned of the problems in their model, seems inadequate to me. I hope they have a more detailed response planned, because "oops" isn't an answer.

Reinhart and Rogoff have admitted to a "coding error" in the spreadsheet that meant some countries were omitted from their calculations. But the economists denied they selectively omitted data or that they used a questionable methodology.

Is this a win or loss for a particular school of economics? I cannot say. It is a win for an open scholarly process. I wish Herndon well. He has provided a valuable service by reminding us that the "great minds" of any field are fallible.

Reinhart and Rogoff, however, say their conclusion that there is a correlation between high debt and slow growth still holds.

"It is sobering that such an error slipped into one of our papers despite our best efforts to be consistently careful," they said in a joint statement. "We do not, however, believe this regrettable slip affects in any significant way the central message of the paper or that in our subsequent work."

Now that Herndon has ably crossed swords with some of the most eminent figures in his field, he is thinking about expanding his work into a Ph.D. thesis.

Models are, in my view, always flawed. But, welcome to economics in a quantitative world. I can't wait for the "subsequent work" from Reinhart and Rogoff. Maybe Herndon will analyze those papers, too.

Poll: Most say redistribute wealth - POLITICO.com

This is both depressing and, sadly, understandable.

Poll: Most say redistribute wealth - Kevin Robillard - POLITICO.com
Nearly 6 in 10 Americans say wealth is distributed unfairly in the United States, and a majority want the federal government to play Robin Hood to fix the problem, according to a poll released Thursday. 

Only 33 percent of Americans think the current distribution of wealth in this country is fair, according to the Gallup Poll, while 59 percent say it is not. Fifty-two percent said the United States should redistribute wealth through heavy taxes on the rich, while 45 percent disagreed.

What is "fair" income distribution? How can the government make things "fair" when most of the elected leaders (and many of the bureaucrats) are in the upper-class?

States with high taxes on the highest income earners, such as New York and California, have cities with some of the greatest wealth gaps. If the most "progressive" places cannot make things "fair" with high taxes, exactly what does solve the gap?

Readers know my answer: personal choices have more to do with wealth gaps than any other factors. Yes, those choices reflect cultural pressures, but they are still choices. We cannot make someone graduate high school. We cannot make couples marry (though I would rather government not be involved in marriage). People make bad choices when they are young and the consequences last a lifetime.

Yes, life is not fair. Government cannot change that. At most, it can offer a minimal safety net.

We already tax the "rich" more than in the last 30 years, and we tax the middle and lower-class families less. So, why is the gap increasing? Clearly, there is more to this issue than tax policy.

Tax bills for rich families approach 30-year high

This would be "old news" if President Obama's new budget didn't include yet more tax increases on the highest income earners. I include my usual caveat: we tax income, not wealth — so the president and others talking about "the rich" or "wealthy" households are intentionally misleading audiences. The wealthy have their money. The taxes were paid (or not) already and the wealth has been safely invested.

Income is what we tax. Period. And those taxes are at near-record highs, in terms of effective rates paid to local, state, and federal coffers by the top 20 percent of income earners. Caveat two: the effective rate paid is not the "marginal rate" applied to the last dollar someone earns. Again, the president and others mislead by citing higher marginal rates in the past — though the effective rates were much lower!

See also:
http://almostclassical.blogspot.com/2013/01/in-2013-top-1-will-pay-their-highest.html
http://almostclassical.blogspot.com/2011/03/90-tax-rate-myth.html

And now, the old news…

Tax bills for rich families approach 30-year high - Business - Boston.com
http://www.boston.com/business/personal-finance/2013/03/03/tax-bills-for-rich-families-approach-year-high/tPcmllN0iKPUSpp53v8WcI/story.html
With Washington gridlocked again over whether to raise their taxes, it turns out wealthy families already are paying some of their biggest federal tax bills in decades even as the rest of the population continues to pay at historically low rates.

President Barack Obama and Democratic leaders in Congress say the wealthy must pay their fair share if the federal government is ever going to fix its finances and reduce the budget deficit to a manageable level.

A new analysis, however, shows that average tax bills for high-income families rarely have been higher since the Congressional Budget Office began tracking the data in 1979. It's middle- and low-income families that aren't paying as much as they used to.

For 2013, families with incomes in the top 20 percent of the nation will pay an average of 27.2 percent of their income in federal taxes, according to projections by the Tax Policy Center, a research organization based in Washington. The top 1 percent of households, those with incomes averaging $1.4 million, will pay an average of 35.5 percent.

Those tax rates, which include income, payroll, corporate and estate taxes, are among the highest since 1979.

With the top "One Percent" earners, those horrible rich people, already paying an effective rate of 35.5 percent, what does the president consider a "fair" tax rate?

At the other extreme, the "poor" receive money from the government. The poor do not pay income taxes and the credits they receive tend to offset other taxes.

The system is not fair. It does punish the "almost-rich" and the "barely-rich" for working hard and producing more. (I've written about the "hours worked" phenomenon: it turns out the top earners work significantly more hours. Shocking, isn't it?) The president and his Democratic colleagues are fostering a war of resentment. I resent that my taxes are outrageously high in historical terms. That's not fair.

The average family in the bottom 20 percent of households won't pay any federal taxes. Instead, many families in this group will get payments from the federal government by claiming more in credits than they owe in taxes, including payroll taxes. That will give them a negative tax rate.

"My sense is that high-income people feel abused by being targeted always for more taxes," said Roberton Williams, a fellow at the Tax Policy Center. "You can understand why they feel that way."

Apparently, plenty of people don't understand why the upper-class feel this isn't fair. The truly super-rich (the top tenth of a percent) also get unfair breaks and special treatment in the tax code. The "wealthy" (as defined as the top 20 percent) are paying taxes to cover the super-rich and the poor.

In the U.S., the "top 10 percent" starts at $82,500 for individuals and $118,200 for households (2011 data). At least as a household, my wife and I are "rich" and apparently need to be taxed more. A lot more.

Contrary to the rhetoric of politicians, most households with $1 million of income annually are not avoiding taxes, either.

On average, households making more than $1 million this year will pay 37.2 percent of their income in federal taxes, according to the Tax Policy Center. But there are exceptions.

For example, the Internal Revenue Service tracks tax returns for the 400 highest-paid filers each year. Those taxpayers made an average of $202 million in 2009, the latest year available. Their average federal income tax rate: 19.9 percent.

The super-rich don't have normal income. They have special investment incomes. I'm not about to argue this is fair — but it means that the near-rich are getting hammered to score political points.

The middle class? They're being taxed less than the historical norm. The near-rich are paying the difference.

The middle 20 percent of U.S. households — those making an average of $46,600 — will pay an average of 13.8 percent of their income in federal taxes for this year, according to the Tax Policy Center. Over the past three decades, the average federal tax rate for this group has been about 16 percent.

Gov report: Actually, evil City traders DIDN'T cause the banking crash • The Register

I've long argued that the Great Banking Crash of 2007 was and is simple to explain: bad loans were made to people unable to repay the loans. In the United States, pressure from the federal government to create a "homeownership culture" backfired. Nonsense like the "Community Reinvestment Act" and other pressure to make questionable loans… resulted in defaults. Shocking, right?

Well, the same problem struck in the United Kingdom. Bad loans were made. The crises was not about all the fancy financial instruments the U.S. Congress and the U.K. Parliament hope to regulate.

Gov report: Actually, evil City traders DIDN'T cause the banking crash • The Register 

The full report is only for masochists and journalists - to the extent that those are different groups, anyway. Below is, in full, what you really need to know about what happened:
This was a traditional bank failure pure and simple. It was a case of a bank pursuing traditional banking activities and pursuing them badly.

We all know what the political narrative about the banking failures - the Great Crash of 2007 - is. Excessive speculation, trading in swaps and options and futures using high speed trading algorithms. Greed and financial capitalism run mad in free markets led to the collapse of the economy and we've got to do something about it.

So, the narrative runs, what we're going to do is tax the transactions with the Robin Hood Tax. We're going to separate casino banking from real banking, slice the investment banks off the commercial banks. Cut The City down to size and force them to invest in the real economy rather than gamble everything away in frenzied trading.

There are only two problems with this analysis, and thus, the plan of action.

The first is that it comes from those who would enforce such a plan anyway, whether the system had collapsed or not. The second is that it gets who collapsed, and why they collapsed, entirely wrong.

As Parliament's report has found, HBOS [Halifax Bank of Scotland] fell over simply because it lent too much money to too many people who couldn't pay it back. Banks have been going bankrupt in this manner ever since the very concept of a bank was invented (13th century Italy to some, about 30 seconds after the building of Ur to others).

A bank that wasn't involved in fancy derivatives or swaps, or high-fequency trading, failed because people borrowed money and didn't pay back the loans. Wow, that's soooo complex! We'd better ban that entire loan thing… because banking was the problem.

HBOS didn't have an investment bank of any size, and the losses it did make didn't come from the tiny one that it did have. Losses were also nothing at all to do with futures, options, swaps, CDS, CDOs or any of the plethora of acronyms that infest investment banking. There was no high speed algorithmic trading unit of any size. They weren't short selling, naked or not; they weren't even trading stuff very much.

Quite simply, they made loans to people who said they had a great plan. And fewer of those plans turned out to be great than was necessary to keep the bank afloat. One revealing number in the report is that in 2008-2010 they wrote off 10.5 per cent of their total 2008 loan book. 

Given that banking regulation, even after being tightened up, insists only that a bank has 9 per cent of capital behind its loans, this would have busted the bank anyway. Well, maybe HBOS would have survived if it had more capital, but it would still be a close-run thing.

I actually like the idea of banning high-frequency trading (HFT), but I dislike most other ideas put forth to "prevent the next crisis." The crises was caused because American, Britons, and too many other people seem to love living on credit.

Speech to Conservative Party Conference | Margaret Thatcher Foundation

Speech to Conservative Party Conference | Margaret Thatcher Foundation

Prosperity will not come by inventing more and more lavish public expenditure programmes. You do not grow richer by ordering another cheque-book from the Bank. No nation ever grew more prosperous by taxing its citizens beyond their capacity to pay. We have a duty to make sure that every penny piece we raise in taxation is spent wisely and well. For it is our party which is dedicated to good housekeeping—indeed, I would not mind betting that if Mr. Gladstone were alive today he would apply to join the Conservative Party.

Protecting the taxpayer's purse, protecting the public services—these are our two great tasks, and their demands have to be reconciled. How very pleasant it would be, how very popular it would be, to say "spend more on this, expand more on that." We all have our favourite causes—I know I do. But someone has to add up the figures. Every business has to do it, every housewife has to do it, every Government should do it, and this one will.

But throughout history clever men, some of them economists, not all of them rascals, a few of them vicious men, have tried to show that the principles of prudent finance do not really apply to this Government, this budget, that institution. Not so. They always do, and every sensible person knows it, no one better than you, Mr. President, who had to deal with countries which flouted those principles and are now up to their eyes in debt. Who do they turn to? Those who follow prudent principles like us.