The events of the past few days lead me to think about Herman Melville

From The Confidence Man, Chapter 7:

The stranger was a man of more than winsome aspect. There he stood apart and in repose, and yet, by his mere look, lured the man in gray from his story, much as, by its graciousness of bearing, some full-leaved elm, alone in a meadow, lures the noon sickleman to throw down his sheaves, and come and apply for the alms of its shade.

But, considering that goodness is no such rare thing among men--the world familiarly know the noun; a common one in every language--it was curious that what so signalized the stranger, and made him look like a kind of foreigner, among the crowd (as to some it make him appear more or less unreal in this portraiture), was but the expression of so prevalent a quality. Such goodness seemed his, allied with such fortune, that, so far as his own personal experience could have gone, scarcely could he have known ill, physical or moral; and as for knowing or suspecting the latter in any serious degree (supposing such degree of it to be), by observation or philosophy; for that, probably, his nature, by its opposition, imperfectly qualified, or from it wholly exempted. For the rest, he might have been five and fifty, perhaps sixty, but tall, rosy, between plump and portly, with a primy, palmy air, and for the time and place, not to hint of his years, dressed with a strangely festive finish and elegance. The inner-side of his coat-skirts was of white satin, which might have looked especially inappropriate, had it not seemed less a bit of mere tailoring than something of an emblem, as it were; an involuntary emblem, let us say, that what seemed so good about him was not all outside; no, the fine covering had a still finer lining. Upon one hand he wore a white kid glove, but the other hand, which was ungloved, looked hardly less white. Now, as the Fidèle, like most steamboats, was upon deck a little soot-streaked here and there, especially about the railings, it was marvel how, under such circumstances, these hands retained their spotlessness. But, if you watched them a while, you noticed that they avoided touching anything; you noticed, in short, that a certain negro body-servant, whose hands nature had dyed black, perhaps with the same purpose that millers wear white, this negro servant's hands did most of his master's handling for him; having to do with dirt on his account, but not to his prejudices. But if, with the same undefiledness of consequences to himself, a gentleman could also sin by deputy, how shocking would that be! But it is not permitted to be; and even if it were, no judicious moralist would make proclamation of it.

This gentleman, therefore, there is reason to affirm, was one who, like the Hebrew governor, knew how to keep his hands clean, and who never in his life happened to be run suddenly against by hurrying house-painter, or sweep; in a word, one whose very good luck it was to be a very good man.

I should note that my mother, a retired English Professor and Melville mavin, led me to read this, Melville's last, novel, many years ago.  My understanding is that it is not widely read, but it should be.


 

Chris Christie yearns to be run by the Medicis

Since love and fear can hardly exist together, if we must choose between them, it is far safer to be feared than loved.

Niccolo Machiavelli, The Prince

A California Renaissance?

Here is the preliminary job growth rate by state from July 2011-July 2012, according to the BLS.  States are those for which there was a statistically significant change in employment from July to July.

Note that California outperformed Texas.

Orwell's six rules on writing.

From Politics and the English Language:

(1) Never use a metaphor, simile or other figure of speech which you are used to seeing in print. 

(2) Never use a long word where a short one will do. 

(3) If it is possible to cut a word out, always cut it out. 

(4) Never use the passive where you can use the active. 

(5) Never use a foreign phrase, a scientific word, or a jargon word if you can think of an everyday English equivalent. 

(6) Break any of these rules sooner than say anything outright barbarous.

The problem with the capital gains tax

Tax policy can be frustrating.  A major reason that Mitt Romney pays a lower effective tax rate than many working stiffs is that most of his income comes in the form of capital gains, which is taxed at a preferential rate (the top marginal ordinary income tax rate is 35 percent, while the long term capital gains rate is 15 percent).  It may therefore seem that the easy way to implement a "Buffet rule" would be to match the capital gains rate to the ordinary income tax rate.

There are three policy dilemmas here, along with a practical problem.

The first policy dilemma is that some capital gains are nominal--they don't reflect changes in purchasing power.  We recognize this problem in other places in the tax code--for example, we adjust tax brackets for inflation every year.  The problem could be solved using indexing--we could tax real capital gains at the ordinary income tax rate.

The second dilemma is perhaps more controversial.  In a Solow-Swan world of economic growth, more savings produce a larger and newer capital stock, both of which are key to growth (Barro and Sala-i-Martin have a lucid description).  If they are correct (and the consensus is that they are), then policies that encourage both savings and flexibility are good policies.  To some extent we do this with our retirement tax policies: so long as savings remain in a retirement fund, their returns go untaxed, even when securities within the fund are bought and sold.  With respect to capital gains policy, this implies that we should discourage the consumption of realizations of gains, but should encourage investment flexibility.  In other words, if someone sells her winners in order to buy a Jaguar, she should be taxed, but if she sells winners in order to reinvest somewhere else, she should not.

The second dilemma creates a third dilemma--the investor who makes smart decisions accumulates considerable wealth, which could lead to disproportionate political power.  Capital gains preferences accelerate this phenomenon.  This is particularly vexing.

Now for the practical problem--the statutory capital gains rate can be considerably different from the effective rate (my approach here follows the argument in Dave Geltner and Norm Miller's Textbook, Chapter 11).  Consider an investment that pays no dividends that grows in value at 10 percent per year in a world with a statutory capital gains rate of 20 percent.  Suppose the investor holds that investment for ten years, and then sells it.  To put some numbers on it, a $100 investment will grow to $259.37 in value.  The capital gains taxes will be $159.37*.2=$31.87, so the net to the investor after capital gains taxes with be $227.50.  The internal rate of return on the investment drops from 10 percent before tax to 8.6 percent after tax.  Consequently, the effective tax rate is not 20 percent, but 14 percent.

If we stretch out the investment horizon to 20 years, the effective rate drops to 10.3 percent; if we reduce it to 1 year, the effective rate matches the statutory rate of 20 percent.  The point is that regardless of the capital gains rate, investors have considerable discretion at determining their effective rate.  So it is almost certain that a behavioral response to a higher capital gains rate would be longer periods of time between realizations, hence lowering the effective rate.  When it comes to figuring out tax policy, nothing is easy.





  

Trending is dangerous

Niall Ferguson is horrified at the prospect that total Chinese GDP will catch the US in 2017.  Let us leave aside for a second the fact that if China's total GDP matches the US', its people will still be less than 1/4 as affluent, or the fact that maybe it would be a good thing if the most populace country in the world had living standards comparable to ours.  So far as I can tell, his 2017 projection comes from assuming growth in China will continue over the next several years at the same pace it has experienced since 1989.  Such projections are always problematic.

Let me give one example.  From 1890 until 1920, Los Angeles population grew by about 11 fold, from  50 thousand to 576 thousand.  If one assumed that this would continue, Los Angeles' population 90 years later, in 2010, would have been 576,000*11^3, or about 766 million, which is a shade under the population of the entire Western Hemisphere.  Its actual population is around 4 million.

Is this absurd?  Of course.  But I have been seeing similar forecasts based on similar foundations since I was in college (when a very well-known professor projected that the USSR would have a larger economy than the US by the year 2000).    This kind of "analysis" has been driving me crazy for years.

For this first time ever, I have put a blog post on my syllabus

It is Yves Smith's review of The Big Short.  That I have just done this now probably shows how behind the times I am.