Neutered Tax Cuts

The drive for tax cuts obscures the greater benefit of tax reform and simplification.  Taxes, however, are only a single component of friction costs. If the purpose of tax reform or tax cuts is to stimulate investment and productive activity then it can not be isolated from other friction costs. If taxes are cut but regulations are increased then the expected benefits are muted. Taxes and regulations are only two of the friction costs. The real cost of capital which is dependent on Fed policy and debt is also critical.  Trade policy  can open and close markets for raw materials and finished products. A  litigious culture plagues some industries more than others.

The dynamics of the tax cuts also matters: What taxes are cut? By how much?

One friction cost that is commonly overlooked is uncertainty.  Uncertainty is different from risk.  When the rules are known the investor can make rational decisions about risk. When the dealer can randomly change the value of an  ace, the black jack table will become vacant.

Kevin Williamson addresses the very real cost of this uncertainty in Regime Change in National Review:

One of the basic problems here — perhaps unexpectedly — is the national debt and the deficits that contribute to it. The debt presents straightforward problems: Keep running up the debt and eventually debt-service payments become so crushing that the federal government has no money left for anything else. But there are other problems related to the national debt, problems rooted in earlier efforts to reduce the deficit. Because of the way our budget rules now work, tax cuts passed by Congress frequently are temporary. They have sunset provisions, and have to be renewed. Hence all that endless talk a few years ago about “renewing the Bush tax cuts,” which eventually became the Obama tax cuts. The Byrd Rule, which is part of the 1974 Budget Control Act, allows senators to block bills being passed through the reconciliation process if those bills would add to the deficit over a ten-year budgetary horizon. Hence, lots of tax cuts expire in ten years. It doesn’t do any good, really — it’s just a way to keep statutory spending controls from doing their jobs.

There is not going to be any certainty on the big domestic-policy items — taxes, health care, the entitlements, and much else — until there is a reasonable, sober, sustainable settlement on our national fiscal challenge. So long as the charade of ten-year sunsets and CBO-satisfying accounting shenanigans rule the day, there is not going to be any predictability — and that is going to impose real costs on economic growth, employment, wages, and future prosperity.


Understanding Progressives

In The World is Never Finished Kevin Williamson addresses the fear of AI on employment .

But if we are going to look backward, let’s look back even farther. The belief that the remorseless efficiency of capitalist production will lead to mass unemployment and consign ordinary workers to lives of misery is older than the word “capitalism” itself. It is an ancient theme in science fiction and loomed large in the mind of Karl Marx. As Star Trek fans and etymology nerds know, the word “sabotage” comes from the French word “sabot,” a kind of simple wooden shoe that workers used to destroy machinery used to automate their work. The end of work has been upon us for a very long time, but it never quite gets here.

In the real world, the balance of power between the world of politics (which is to say, the world of compulsion) and the world of the market (which is to say, the world of cooperation) has shifted dramatically.

In that article he links to an old article of his from 2012 Risk, Relativism, and Resources.

This is a gem I have not seen before. It is a bit long -12 pages-  for him but it is an important article pointing out three things Conservatives need to understand about progressives:

  1. They are more risk averse- this is more defining that race and identity
  2. Inequality matters more than conservatives wish to admit.
  3. Progressive view people as liabilities, conservatives see them as assets.

Where Democratic-leaning Americans go wrong is that they miscalculate the welfare state’s value as a tool of risk mitigation. Americans support the relatively low returns on Social Security for the same reason that Britons and Canadians broadly support their relatively low-quality government health-care systems: because of the mistaken belief that these programs will always be there for them. Better a low-return retirement “investment” in Social Security than no retirement income at all, that line of thinking holds, or one that is subject to the inherent risks of the market. Similarly, many Americans understand that a government-run health-care system will be less innovative than a market-driven one, that it will be inefficient, and that quality will suffer — and they prefer it still, on grounds that access to health care will be guaranteed.

The article is worth the read.

Promoting Stupidity

from Higher Education’s Deeper Sickness by John Ellis at The Wall Street Journal:

The imbalance is not only a question of numbers. Well-balanced opposing views act as a corrective for each other: The weaker arguments of one side are pounced on and picked off by the other. Both remain consequently healthier and more intellectually viable. But intellectual dominance promotes stupidity. As one side becomes numerically stronger, its discipline weakens. The greater the imbalance between the two sides, the more incoherent and irrational the majority will become.

What we are now seeing on the campuses illustrates this general principle perfectly. The nearly complete exclusion of one side has led to complete irrationality on the other. With almost no intellectual opponents remaining, campus radicals have lost the ability to engage with arguments and resort instead to the lazy alternative of name-calling: Opponents are all “fascists,” “racists” or “white supremacists.”

In a state of balance between the two sides, leadership flows naturally to those better able to make the case for their side against the other. That takes knowledge and skill. But when one side has the field to itself, leadership flows instead to those who make the most uncompromising and therefore intellectually least defensible case, one that rouses followers to enthusiasm but can’t stand up to scrutiny. Extremism and demagoguery win out. Physical violence is the endpoint of this intellectual decay—the stage at which academic thought and indeed higher education have ceased to exist.


I contend that this same lack of intellectual diversity and demonization of dissent has infected  many of our media institutions with the same result.  Misleading statements are only judged by their factual components.  Lines between news and opinion have been erased.  Those in the bubble are convinced of their rightness and righteousness because they have excluded or marginalized legitimate and serious questions.

Trend Illusions

by Henry Oliner

The Art of Thinking Clearly by Rolf Dobelli (highly recommended) is a compilation of biases and psychological barriers to clear and rational thinking. Dobelli warns of “trend gurus who see trends in everything”.  He contends this is “one of the most idiotic ways to see the world.”

This is like our tendency to see shapes in clouds and to see patterns in data and numbers. Given our ability to amass vast quantities of data and our desire for order in the universe, this is a seductive pattern. It is unsettling to believe we are pawns in a casino.

The danger in these delusions is that we believe it enables our power to predict.  This “gambler’s fallacy” of seeing order where there is none causes financiers to make bad investments, pundits to make bad predictions, and politicians to enact bad policy.  This delusion causes less damage in business and investment because the damage is usually limited to the fools (often some very credentialed fools) and the mistake is rectified relatively quickly.

One of the reasons that government solutions should be a last resort is because political decisions are as subject to these errors in thinking as private sector decisions, but there are greater blocks to recognizing and correcting the error in judgment. Politics is part rational but also part tribal.

For some experienced yet biased investors, it was inevitable that Trump’s election would result in a market sell off. It didn’t. It resulted in the one of the sharpest market advances after an election in recent history.

When Gavrilo Princip shot Archduke Ferdinand and his wife, Sophie, on June 28, 1914 few would have predicted it would have led to World War One, the inept Armistice and soon after, World War Two and the Cold War.  If Princip had done the same deed a few months before or a few months after we could not be certain it would have had the same results.

The trend fallacy seems to work in hindsight.  Some movements go to extreme and invite countertrends.  After 50 years of expansive progressivism culminating in the stagnation of the 1970’s,  Ronald Reagan won claiming that government is more of the cause than the solution. A similar exhaustion may have provided some wind to Donald Trump’s sails.  But we should not confuse the power to describe with the power to predict.

While a complicated world may be unpredictable, that does not mean that behaviors are irrelevant. Excessive debt makes a family or a corporation or a government vulnerable to unpredictable events.  We may confuse talent and success for a mere regression to the mean, but predicting the timing of these outcomes or how they will become actualized is a fool’s game.

What appears to be a difference in political ideology may be a mere difference in time frame. Long term outcomes may be ignored for the short-term payoff of a vote or a campaign contribution.  We may lament the failure of policy after the first act of the play, only to see it succeed wildly after the third act, if we choose to stay for the entire play.  Patience is not a popular American virtue.

The first step to honesty is clarity. Good decision making is already difficult to achieve. To cloud it further with unnecessarily complicated systems designed to hide and cross subsidize costs is not likely to lead to better outcomes.

The Real Loser from Tax Reform

From my article in American Thinker, Save the Swamp:

I call the difference between the statutory rate and the actual rate the ‘special interest spread’.  It is the difference between the official stated rate and the actual rate paid after deductions and credits.  True tax reform should seek to reduce this spread to zero. 

But there remains a great benefit to meaningful reform in the form of simplification.  The influence of the Federal government is less because of its growth in size that because of its proxies in the private sector. Nonprofits, state and local agencies, and special interests do the work of the federal government and much of this is done through tax preferences and benefits. These proxies will all be fighting to retain their part of the swamp. 

Taxes should be low and broad based, as simple and as permanent as possible, while minimizing the ‘special interest spread’ and the marginal rate.

Such a reform castrates much of the federal power over the economy, requiring the separation of operating revenue requirements from their desire to engineer and design social outcomes. Any transition to such a system will not be equally shared and there is no need to pretend otherwise.  Many who lose their mortgage deduction will make it up in lower rates, but some will not. This is the problem with reforming complicated systems with an accumulation of special provisions.

The benefit to the economy, however, would be so strong that those who are comfortable in the swamp should not be allowed to derail it.