Normally I’d say one’s level of outrage over a “15 percent” tax rate on earned interest is inversely proportional to one’s knowledge of finance and/or taxation. Same thinking applies toward the notion that wages and income on savings demand equal treatment by the IRS (risk anyone?). A basic level of sophistication brings an understanding that the effective cap gains rate is much higher than the nominal rate — and is far from “15 percent.”

Greg Mankiw addresses this well here, and Krugman is forced to admit defeat but he feels obliged to snarl during the process while rambling in an unrelated vein about employee wages. The comments are revelatory. Normally he is universally cheered on by his readers, but even they are left scratching their heads.

Mankiw left out one pedestrian yet IMHO noteworthy point. That is that one is taxed on nominal gains, not on real gains. When one factors in inflation and looks at returns on T-Bills over the decade of 2000 to 2010 the effective rate of taxation is more like 25%.

What strikes me is that Krugman and his team shout about the injustice of “15 percent!” from the treetops even when they know that number needs serious adjustment in order to be compared to wage rates. Between corporate taxation and inflation we can be talking about an effective rate that’s at least twice that number. Why don’t they just be honest and say “35% is not enough!”??. Isn’t there a persuasive case to be made via honest analysis? Maybe not.

I have to say this obsession with the number 15 reinforces in my mind, the thinking of Don Boudreaux:

“Krugman spends the bulk of his time today, when writing for the general public, assuring the general public that its economically untutored instincts are correct.”

This is perfect. As Boudreaux tackles the question “Who is today’s Bastiat?” as proposed by David Henderson, he puts forth the best description I’ve heard yet of what Paul Krugman does, and why he has such a large audience who read and echo his writings:

“Krugman spends the bulk of his time today, when writing for the general public, assuring the general public that its economically untutored instincts are correct.”

This sentence also encapsulates why he is so often caught contradicting himself — the usual case is that his academic writings (which focus on “real” economics) collide with his populist Conscience of a Liberal columns.

More from Boudreaux:

“The general public, for example, naturally “sees” the beneficial effects of more government spending. While Bastiat specialized in showing the general public that what it sees is only part of the picture, Krugman – vocal advocate of “stimulus” spending that he famously is – specializes in assuring the general public that the part of the picture that it naturally sees is, in fact, the full (or at least the most important part) of the picture.

Another example: The general public naturally “sees” that a low-priced Chinese renminbi makes Chinese goods more attractive to American consumers and, hence, reduces the demand for some American-made outputs. Bastiat would have pointed out the unseen – the fact that many of these low-priced Chinese goods, used as inputs in America, allow some American producers to profitably expand their output; the fact that monies American consumers save because of lower-priced Chinese goods can be spent buying other goods and services, some of which are ‘made in America,’ that would otherwise be out of reach; the fact that that if Beijing truly is keeping the value of the renminbi too low the result will be inflation in China – which will eventually raise the prices Americans must pay for imports from China; and, most importantly, the fact that there’s very little difference from the perspective of Americans in China’s government subsidizing our consumption of Chinese-made goods and some natural source (say, a technological breakthrough) that lowers our cost of buying Chinese-made goods.”

A good definition of brand proposition here.

“A brand proposition is a succinct expression of what your brand promises. This is an important anchoring point for brand awareness. The brand proposition should include target audience, the benefits of working with the brand and the criteria for attaining it. The aim is to clarify what the brand is offering, to whom, in what format – and how to attain it.”

After reading about Needlebase on RWW, (very, very cool example of the potential here.) I spent many hours playing with it — and while I was able to do some interesting/fun things, I finally gave up on Needlebase because of several issues:

Byzantine interface. Think this. Built by engineers, for engineers. While I’m sure Professor Frink had no issues, mortals were no doubt lost much of the time.

Latency. Since it was a Web-based service running in the browser, and required clicking to page after page after page to set set up a sequence, it always felt like I was running in molasses. (Might have been more of a Safari issue than a Needlebase issue…?)

Constant denials. Since it was a Web service, and sites hate getting scraped, sites learned to deny access to Needlebase. This is not Needlebase’s fault, BUT — you generally didn’t know until well into the process that your efforts were all for naught. (See interface issues above).

The bad news is that Google (who acquired the service) has now killed it.

The good news is that most people can happily get what they need using the excellent FireFox plug-in Outwit Hub.

I discovered Outwit Hub months ago and never looked back. Discovered I wasn’t a dope after all. Half an hour after installing it, I was happily extracting data from a myriad of sites.

Outwit Hub Works like normal humans would expect. Define fields, establish pre and post tag/html sets, enter a URL, and scrape away. No fool questions, denials by sites, or convoluted questions popping up. Since much of what’s happening is running locally on your CPU, the latency issue largely vanishes. Cheap too. Pay $35 one time, scrape forever.

R.I.P, Needlebase, I know there were a lot of people who relied on it and liked it a lot. I guess I’m glad now I just couldn’t warm up to it.

While the Food and Drug Administration monitors the safety and supply of the drugs, which are sold both as generics and under brand names like Ritalin and Adderall, the Drug Enforcement Administration sets manufacturing quotas that are designed to control supplies and thwart abuse. Every year, the D.E.A. accepts applications from manufacturers to make the drugs, analyzes how much was sold the previous year and then allots portions of the expected demand to various companies.

How each manufacturer divides its quota among its own A.D.H.D. medicines — preparing some as high-priced brands and others as cheaper generics — is left up to the company.

Gee, setting production quotas based on brainy insights of a handful of technocrats. Much better than letting supply and demand determine a market clearing price. After all, those unwashed masses have no idea what they really want, right?

Naturally, the response to the limited supplies and resulting high prices will be… wait for it…. demand for more intervention!

I’m adding a new category to this blog. It’s Iatrogenesis. This is the formal term for what’s better known as the situation where the cure becomes worse than the disease.

“But here’s the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that’s because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn’t do any subprime lending, because they can’t: the definition of a subprime loan is precisely a loan that doesn’t meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.”

Sadly, Krugman is way off base here. It was eventually revealed that Fannie and Freddie purchased an estimated 40% of all private-label subprime mortgage securities.

More:

“So whatever bad incentives the implicit federal guarantee creates have been offset by the fact that Fannie and Freddie were and are tightly regulated with regard to the risks they can take. You could say that the Fannie-Freddie experience shows that regulation works.“

Two things going on here. Of lesser importance is Krugman being so galactically wrong about the role of Fannie and Freddie in the subprime mess. More important is the blind faith in institutions and the smart, well-intentioned people who create and run them.

Trusting regulations and rules to this degree is a classic case of Sowellian Unconstrained thinking and belief in engineered solutions with goals/intentions at their core. The Constrained view prefers systemic, evolved solutions based on incentives. Consider the thinking behind Fannie/Freddie (and a dozen other like-minded agencies):

“We need to help more people get houses, let’s get those rates down.”

Compare to:

“The interest rates on loans automatically adjust to match the risk of the loan.”

The former is based on good intentions and is a proven failure. The latter is based on the self-interest of individuals, and the more you rely on the latter, the better you do.

I believe history will show that monopolistic government-backed entities (like ratings agencies) are prone to behave irresponsibly — despite the feel-good motives and regulations that frame them. Incentives matter.

FYI: Here are a few sites that I foolishly registered at and now get spam sent (viagra, penis enlargement, etc.) to the unique addresses I used. Seven sites, seven different addresses.

I’ll update as more violators appear.

vocus.com
airbliss.com
ispionage.com
urltrends.com
tweetlater.com
nwstir.com
coolnothot.com

Note: “dontregisterthere.com” is available.

Prior to attending the class I decided to read through Steve’s blog, and came across a post he wrote stressing the importance in all dealings of having a reality-based grasp of the price/value relationship. In this case Steve presents a scenario where a set of investors discounted the value of a new advisory board member and offered a price in stock that was too low, which caused them to lose a great opportunity.

It reminded me of how Bill Gates was able to capture overwhelming market share for Internet Explorer and almost entirely displace all competitors, significantly because he was able to see that the “correct” price for a browser was zero.

Here’s a textbook example of the scenario in reverse. My dad knew a test pilot who was offered a job testing a new exotic plane. He reviewed the situation, and determined at the risk level being offered, $100,000 was an appropriate market price, and put that price forth.

Regrettably for him, another pilot understood the market better and determined zero was the proper price. That other pilot’s name was Chuck Yeager, and the plane was the X-15.

I can’t remember the name of the pilot who asked for $100,000, and I guess that helps me make my point…

He hit upon a few points that I’ve been meaning to post about. I’ve wanted to go into detail how those with a fundamentally unconstrained worldview will find most of the foundations of modern economic theory disconcerting.

The one to start off with is scarcity. They hit you with this one in your first Econ class.

From Wikipedia: Scarcity is the fundamental economic problem of having humans who have unlimited wants and needs in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs. Alternatively, scarcity implies that not all of society’s goals can be pursued at the same time; trade-offs are made of one good against others. In an influential 1932 essay, Lionel Robbins defined economics as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

While we have been steadily moving (largely thanks to embracing market-based economies) toward making more and more resources available to more and more people, not everything is available to everyone yet. While the obese now outnumber the hungry worldwide, and hunger is no longer an issue in America, (the Department of Agriculture in 2006 stopped using the word “hunger” in its reports), there’s a lot left to provide. Example? Up to 20 percent of American households defined as “poor” still do not have air conditioning.

Now of course the simple answer is to just have the government buy them air conditioners, but what about the people missing microwaves, cars, personal computers, internet access, or a house to call their own? Dialysis? Can we do it all? Shouldn’t people be able to vacation in Cabo? Don’t people want to go to Cabo? Yes they do. Want? Humans have unlimited wants. If you run the numbers you quickly hit the wall. Wants are greater than resources. Even rich countries who specifically try to satisfy the wants of their people bump up against scarcity.

Can’t the rich just pay for it? Let’s pencil it out. Take all the money Bill Gates has (56 Billion) and divide it up among the population (7 Billion). Everyone will get 8 bucks. A very cheap air conditioner is $400.00. You’ll need to confiscate all the wealth of 13 Bill Gates just to buy everyone one little box for a house of 4. Power it? Do you even have AC power? How many Bill Gates do we need to bring power to your village? Crap, an air conditioner costs a couple hundred dollars a year to power! We’re going to need a lot more rich guys to make all the good stuff happen. We aren’t even close to Cabo yet.

You get the idea.

Even the most unconstrained thinker I know had to finally/reluctantly agree that scarcity was real after he gave it a little thought. If we have scarcity, then we know resources have to be allocated somehow. If we have allocations, and some “get” and some don’t, we’re faced with a challenge we can’t just wish away.

Economics is the study of the allocation of scarce resources. Get over it kids.

Next episode: The inconvenience of gains from trade…

The New York Times reported yesterday:

The official in charge of Medicare and Medicaid for the last 17 months says that 20 percent to 30 percent of health spending is “waste” that yields no benefit to patients, and that some of the needless spending is a result of onerous, archaic regulations enforced by his agency.

“…The government, unlike many private health insurance plans, is working in the daylight. That’s a strength.”

The official, Dr. Donald M. Berwick, listed five reasons for what he described as the “extremely high level of waste.” They are overtreatment of patients, the failure to coordinate care, the administrative complexity of the health care system, burdensome rules and fraud.

If his estimate is right, Medicare and Medicaid could save $150 billion to $250 billion a year by eliminating waste, which he defines as “activities that don’t have any value.”

(emphasis mine)

Some of us thought these efficiency arguments seemed fishy all along. A line I used to hear frequently from my professors was “intuitively, we know that…” One of the things we intuitively knew was that incentives matter (greatly). When you don’t have incentives for efficiency, you won’t get it. Market-based entities that can literally vanish from existence if they aren’t competitive have that incentive. Government agencies do not. Neither do banks that are “too big to fail.”

I’ll quote one more time from the econ text Public Finance and Public Policy by MIT’s Jonathan Gruber:

“Correspondingly, a large literature finds that when state-owned companies are privatized, efficiency improves dramatically, and a smaller company is required to produce the same level of output. Mueller (2003) lists 71 studies that compared the performance of state-owned companies: in only 5 of these studies did state-owned companies outperform their counterparts in terms of efficiency.”

MIT. 66 out of 71 studies. Ex post facto analysis. Common sense. Personal experience (I have worked in both government and private offices.) I call this case closed.