Friday, November 20, 2015

Government Supporters, Giving it Extra Credit

One of the tendencies among progressives, and among statist conservatives, is to give government far more credit for invention and creativity than it deserves. They point to projects funded or supported by government as evidence of the value of larger, centralized projects, but they forget you cannot prove a negative.

Because government is so intertwined in modern innovation and basic research, it is nearly impossible to prove what would be happening without government. People have forgotten that that big projects, like the Transcontinental Railroad, were actually boondoggles that catered to political cronyism, not genuine innovation. (There were better managed, more profitable railways that were crushed by the federalization led by the robber barons.)

The market, left to its own, might fill gaps. We simply will never know.

My thoughts on this are prompted by too many people claiming we need more and more and more federal spending, supported by higher taxes on the "rich" who clearly don't deserve their money. Of course, the math doesn't work, if you've ever bothered to watch "Eat the Rich" on YouTube:

Anyway, let's get into the concept that government is why we have great things. There is a role for government: maintaining order, protecting freedom, enforcing contracts, and protecting property rights. We cannot have stable economic growth and innovation without a trustworthy and fair government to act as something like a referee.

But, do we need government for the actual creative and innovative processes?
Tech's Enduring Great-Man Myth
The idea that particular individuals drive history has long been discredited. Yet it persists in the tech industry, obscuring some of the fundamental factors in innovation.

By Amanda Schaffer on August 4, 2015
Hero myths like the ones surrounding Musk and Jobs are damaging in other ways, too. If tech leaders are seen primarily as singular, lone achievers, it is easier for them to extract disproportionate wealth. It is also harder to get their companies to accept that they should return some of their profits to agencies like NASA and the National Science Foundation through higher taxes or simply less tax dodging.

And finally, technology hero worship tends to distort our visions of the future. Why should governments do the hard work of fixing and expanding California's mass transit system when Musk says we could zip people across the state at 760 miles per hour in a "hyperloop"? Is trying to colonize Mars, at a cost in the billions of dollars, actually the right direction for future space exploration and scientific research? We should be able to determine long-term technology priorities without giving excessive weight to the particular visions of a few tech celebrities.

Rather than placing tech leaders on a pedestal, we should put their successes in context, acknowledging the role of government not only as a supporter of basic science but as a partner for new ventures. Otherwise, it is all too easy to denigrate public-sector investment, eroding support for government agencies and training programs and ultimately putting future innovation at risk. As Mazzucato puts it, "It's precisely because we admire Musk and think his contributions are important that we need to get real about where his success actually comes from."
Much of the above article relies on the 2013 book The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato. The book implies, somewhat simplistically for an economist, that federal government spending has created our technology revolution. Prof. Mazzacato, of the University of Sussex, acts as a cheerleader for government, ignoring or glossing over the more complicated relationship between private invention and public investment in those inventions.

Federal spending can and does support refinement of inventions and basic discoveries. That's wonderful. Research labs do work that might not be profitable (like large particle accelerators smashing atoms) and may not have immediate market applications. But to credit government with too much is also problematic.

People forget that the National Information Infrastructure Act came about because government really did NOT see the value of the Internet. I was working on DARPA projects at USC and the Feds were convinced the networks were a toy at worst and a little better than physical mail at best.

The trope in this and other articles that things would have happened without a Jobs or Case or Serf ignores that there is a creative act in seeing how parts fit together. Jobs was a jerk, especially during the Next years (we were testers for Next). But, he said things we thought were nuts that proved to be true (Display PostScript, optical media, and so on).

And just because the government is a customer and offers contracts for something does not make it the only funding source. Yes, basic research is a function of our research institutes and universities, leading to great things, but take 3D rendering. Hollywood has actually spent more on computer imaging than the National Center for Supercomputing. So, private "frivolous" spending AND government spending overlap.

A side point, most of the "great things" mentioned in this article and elsewhere were the result of military spending, seeking better ways to kill and avoid being killed. Even our highway system was a "military" Cold War expense. Pretty sad, in some disturbing way. Orson Welles in "The Third Man" comes to mind and his speech on war as the mother of invention.

Private people, the Wright Brothers, and others invented the powered airplane. Government, during the Spanish American and WWI, realized these airplane things could be used to spy on and maybe kill other armies. Pershing in 1916 convinced the U.S. government to suspend the Wright patents (see the new book on the Wright Brothers), which they had been defending from competitors (a bit foolishly, as eventually their company and the competition would merge).

Lots and lots of money was spent "improving" airplanes to kill better. Guns, bombs, sights (telescopes), gear chains, and other technologies that ALREADY existed, were combined by government contractors (here, Germany, elsewhere) to create fantastic flying killing machines.

The "government" is given credit for these innovations, which government did fund… for better or worse. Meanwhile, what opportunities were lost in civilian application? We don't know. Can't prove a negative.


Already existed. Government wanted faster ways to calculate trajectories and targeting data. Government invested in ALREADY EXISTING technology to improve it for the purpose of… killing more people! Yeah! And, we now give government credit for innovations that BUILT ON existing technologies created to calculate financial transactions (National Cash Register, International Business Machines) that turned out to be great at doing the math needed to lob bombs at people.

And on and on. Existing technologies receive government money to improve their killing / defense potential and people mistakenly give "credit" to federal spending for more than the improvements and evolutionary advancements made.

There are examples of "pure" federal research. Definitely. But not as many in technology as people want to believe. Drones? Private first, and then the government realized they could be used to kill. Blimps? Private turned military (and still used today by the Navy). GPS was based on a private concept, but the federal government (until recently) didn't allow private application. (There's a law about exporting or using potential military technology… amazing how that limits private industry and ensures government "innovation" of some technologies. Remember, Apple couldn't export the G5 PowerMac originally. It had "military" uses.)

Friday, November 13, 2015

Taxes, Inequality, Debt, and Deficit

A September 2015 report from the Brookings Institute demonstrates that significant increases in top marginal tax rates would have minimal effects on both income inequality and the federal budget.

This report was prepared by William G. Gale, Melissa S. Kearney, and Peter R. Orszag. It should be stressed that Orszag was Pres. Obama's director of the Office of Management and Budget and a former director of the Congressional Budget Office. Nobody can claim Orzsag is a conservative or libertarian — he is an excellent analyst.

Read the report here:
A larger hike in the top income tax rate to 50 percent would result, not surprisingly, in larger tax increases for the highest income households: an additional $6,464, on average, for households in the 95-99th percentiles of income and an additional $110,968, on average, for households in the top 1 percent. Households in the top 0.1 percent would experience an average income tax increase of $568,617.

How would these reductions in after-tax income affect overall income inequality? To answer that question, we calculate the Gini coefficient on the full distribution of post-tax income under the three different tax policy scenarios. (The Gini coefficient is an index that ranges from 0, if everyone had the same earnings, to 1, if a single person had all the earnings and everyone else had none.)

Perhaps surprisingly, increasing the top marginal tax rate [from 39.6] to 45 percent or 50 percent has a trivial effect on overall income inequality. This can be seen in Table 1 below. Under current tax provisions, the after-tax Gini coefficient is .574. This compares to a Gini of .610 calculated over pre-tax income. Raising the top income tax rate to 45 percent reduces the Gini coefficient only from .575 to .573. Raising it to 50 percent brings the Gini to .571. If the 50 percent top tax rate is applied to income only above $1 million for married filers and $750,000 for single filers, the resulting Gini is .572.
Statistically, the results are insignificant in reducing income inequality. Raising taxes might feel good, but it accomplishes little. More importantly, you cannot really raise taxes on the highest earners and then cut lower-income taxes because doing so would not improve the fiscal situation of the United States.

The federal government is broke. Beyond broke. As of the moment I'm writing this post, these are the dark facts of U.S. finances:

Debt as of Nov. 12, 2015: $18.6 TRILLION

Deficit for 2015 (to date): $433 BILLION ($426 billion was forecast in 2014. Ooops)

But raising the taxes on the rich to a 50 percent rate? That would raise only $95.6 billion, not even a quarter of the deficit. Forget any new spending. The tax increase would likely have no net effect, either, because generally Democrats and Republicans call for lower taxes on the middle and lower-income brackets to accompany higher taxes in the upper brackets. If anything, we tend to increase the deficit when making adjustments to rates and tax breaks for the first four quintiles.

Here are the numbers from the Brookings report:
Increasing the top rate to 50 percent with the same redistribution scheme would bring in an additional $95.6 billion in revenue, leading to an additional $2,650 in post-tax income for the bottom fifth of households. Applying a new top rate of 50 percent to income above $1 million for married filers and above $750,000 for single filers would bring in an additional $63.5 billion in revenue, which would result in $1,760 in additional post-tax income for households in the lowest quintile.
It isn't that we shouldn't adjust taxes: someone has to pay for the debts of this nation. But the point is that we are so broke that only cutting spending would have a significant effect on the debt or deficit.

Assuming you did increase the top marginal rate to 90 percent, you might (and only might) raise up to $160 billion per year, assuming the wealthy only exploit a minimum of loopholes (good luck with that assumption). That $160 billion? That would not come close to balancing the annual budget in its current state.

The only way to balance the budget? Grow the economy, cut spending, and raise some tax revenue. Nobody will like all the steps needed to achieve all three of these. Not me, and not my progressive friends.

We don't need a truly balanced budget, but we should aim for a much smaller annual deficit and a significant reduction in the overall debt. In my view, and that of many macroeconomists, the federal debt should be half or less of U.S. gross domestic product (GDP), or about $6 to 8 trillion at this time.

Unfortunately, our national debt now exceeds the GDP of the nation. We owe more than the entire economy generates in a year. That's a very sorry state of affairs, caused by a public that doesn't want to pay for the largess we demand from government and our various international exploits. (Surprisingly, our military spending is only 19 percent of the overall federal budget, including non-discretionary spending, and most is for personnel-related costs.)

Raising taxes, it seems, does little to address inequality, debt, or the annual deficit.

We should be ashamed, since we the voters helped create this mess.

In my now ancient post from 2011, The 90 Percent Tax Rate Myth [] I attempted to explain that 1) that marginal rate was an illusion (much less any effective tax rate) due to the number and types of deductions allowed and 2) it wouldn't make much difference to the federal budget.

Since 2010, I've explained "the rich" couldn't pay for much of anything; not even a few months of government services if we confiscated all their wealth. See Taxing the Rich vs. Reality
[] and this great YouTube video, Eat the Rich [].