In Lehmann's Terms

Is the Ivory Tower a non-conforming use?

I'm usually skeptical of the popular conception of academia as an "ivory tower," whose denizens occupy a completely insular universe that cuts them off from the cares, concerns, and causes of the common man. I've known many academics in my life and while, sure, there are a few flakey professors out there (hell, I've got some in my own family) I find most are not nearly so different from the hoi polloi as the popular stereotypes would suggest.

But then, every once in a while, you'll find an academic trying to do his impression of a populist, and in the process, making it that much harder for me to defend my position. Bryan Caplan, bless his anarchist heart, is the latest offending party:

How about this: A populist movement to drastically reduce the price of housing by slashing the regulatory barriers to new construction? Uh oh, it still sounds like an egghead is talking. Real populism means sound bytes. My best shot so far: Free to Build. 

Everyone from Paul Krugman to Ed Glaeser now highlights the fact that an array of regulations make housing needlessly expensive. A simple populist response: Gut the regulations so we can build more houses that are affordable for the average family. If a private party owns some land, let him develop it. If the government owns some land, let them sell it to the highest bidder, then use the proceeds to cut property taxes.

Simplistic? Sure. If it weren't simplistic, it wouldn't be populism, and wouldn't have a chance of becoming popular. But of course that's only a necessary condition, not a sufficient one. The big question is: Could a majority embrace the cause of Free to Build?

Clearly, Bryan hasn't spent much time at local planning and zoning board meetings. Unfortunately, having spent years toiling away in the doldrums of community newspapers...I have. If he'd seen what I've seen, he'd know the only reasonable answer to his question is -- are you nuts? No, really.....are you friggin' NUTS?!?

Bryan contemplates that vastly expanding the supply of habitable housing would bring down prices of the existing stock of homes, but he reasons that "people generally favor policies because they think they are right, not because they help their bottom line."

All well and good, but believe me, there is NO support out there for the proposition that unfettered land development is right, just, or proper. In contrast, the vagaries of the tax code and the consumerist bent of American culture have combined to ensure that citizens invest wildly disproportionate amounts of their savings in the undiversified asset of home ownership. Anything -- and I do mean anything -- that threatens this nest egg is anathema to the common American.

Moreover, to the extent that those at the grass roots do think about property rights, their notion of what that term means INCLUDES both prevailing market values, and the quality of life they associate with holding the resource in question. If an interloper from the outside -- whether it be a private developer or the state -- contributes to the diminished value of their property, the "populist" reaction is that THAT is a violation of their rights.

Similarly, when a new construction project contributes -- as it nearly always does -- to more traffic, more noise, more overcrowding in the public schools, more teenagers loitering on the streets, and so on, those property owners that have a vested interest in maintaining the status quo band together precisely BECAUSE they feel it's only "right" that the quality of their lives not be disturbed.

I applaud the premise that libertarians, if we want to make a dent in the social fabric, need to focus on causes that can be sold using effective populist rhetoric. I just can't possibly imagine a LESS likely candidate for success than this one.

If Irony Were Oil, We Could All Afford S.U.V.s

Cafe Hayek's Don Boudreaux on protectionist slogans long thought retired:

A few days ago, while driving on the Washington, DC, beltway, I saw a bumper sticker that I'd not seen in probably a decade.  It's the one that says "Help 10 Americans Lose a Job - Buy a Foreign Car".

This bumper sticker was on the rear of a mid-1980s Buick Regal -- a fact that gave me an idea for two other bumper-sticker slogans:

"Help 10 Americans Lose a Job -- Drive an Old Car"

"Help 10 Americans Lose a Job -- Buy a Used Car"

...Of course, buying foreign cars does nothing to reduce employment.  But if it did, so, too, would the keeping of older cars and the purchase of used cars.

Yes, I'm a Szaszhole

Cato's Will Wilkinson -- blogging at his new site focused on the subject of "happiness studies," and its intersection with public policy -- is rightly skeptical of the claims of folks like The Loss of Happiness in Market Democracies author Robert Lane, who would look to draw grand inferences about the present state of human happiness from an observed rise in diagnosis of depression.

This grandly evasive passage from Lane captures the thinness of the evidence and the desperation to build mansions of conjecture upon it:

Rising depression of this magnitude is a tragedy for any civilization, but the epidemological study of these tragic phenomena is dependent on measurement instruments that are being perfected, and the longitudinal data are in their infancy.

That is to say, “We can’t really say with any certainty whether the incidence of depression is really rising or not, but my book will be much more exciting if I act like I know that civilization is in the throes of tragedy.”

As an antidote to depression hysterics, I strongly recommend “The Age of Depression,” by Allan Horwitz and Jerome Wakefield in the penultimate edition of the Public Interest.

After examining the epidemiological numbers, they write:

No plausible theory of depressive disorder, whether genetic, psychological, or social, can explain why rates of depression would have increased so much in such a short period of time. Instead, the explanation appears to lie in changes in the ways that physicians, mental-health professionals, and people themselves characterize and diagnose their mental states. There are, and always have been, true depressive disorders, in which the response to loss goes awry and takes on a debilitating life of its own. But in the past, such disorders were distinguished from normal sadness that arises in response to life’s vicissitudes. That traditional, common-sense distinction has broken down in contemporary psychiatry, resulting in the conflation of depressive disorders with normal sadness. The sources and social implications of this breakdown are as yet largely unappreciated. [emphasis added]

Horwitz and Wakfield provide a fascinating history of depression through the ages and an extremely illuminating account of how theory wars over the DSM categories led to an overly inclusive “theory neutral” clinical conception of depression.

Valuable points, all, but I think Will is still being too forgiving of the initial proposition that there could be anything "scientific" about subjective, normative evaluations of revealed behavior.

Horwitz and Wakefield draw a line in the sand between the historic contextual conception of melancholy, which distinguished between sadness "with or without cause," and the modern diagnostic tools of the DSM-4 that look only at symptoms. But both still essentially posit a "disorder" for which no discernable and corresponding abnormal pathology of the brain or body can be identified.

Perhaps depressive behavior is a manifest symptom of disease, which we'd normally say is caused either by a bug (virus or bacterium) or from misfiring of some physical system due to damage from either external sources (say, exposure to carcinogens, or simply too much ingested cholesterol) or internal ones (such as genetic abnormality.) Neuroscience seeks out the answers to these questions, but it still has a long way to go. The psychiatric profession, by and large, pretends the questions don't matter.

But without those answers, it seems to me no less capricious and arbitrary to hinge diagnosis of a presumed "depressive disorder" on whether a person appears to have a "good" reason to display sadness, than simply whether that display exists at all. Actually, presuming there might be asymptomatic manifestations of "depressive disorder" -- a presumption applied to most medical disorders, but rarely pondered by psychiatry -- how could one conclude that a person who otherwise appears perfectly cheerful isn't actually similarly afflicted?

For that matter, without an identified bug we could point to definitively as cause the depressive behavior, who is to say that Prozac is any more effective a treatment to alleviate its effects than whiskey and wine, those time-honored lubricants for smoothing life's more jagged edges?

Adverse selection on aisle two

Wading into Wal-Mart's latest memogate over its efforts to control health care costs, Alex Tabarrok opines that the company is suffering from that most dread of insurance-related malladies -- "A.S.":

Wages for low-wage workers have been flat in recent years but health care costs have been increasing.  For a company like Wal-Mart, which pays many of its workers modest wages but does offer a reasonable health insurance plan, this is an invitation to adverse selection.  As the value of the wage component of the Wal-Mart benefit package has declined relative to the value of the health insurance component Wal-Mart has attracted more workers who want the job for the health benefits, i.e. sicker workers.

Though I may have trouble keeping many friends if I constantly subject their health care posts to nit-picky criticisms, I have to say I think the good Dr. T. is a bit off in his analysis, in part led astray by the N.Y. Times article that sparked his post.

Without question, Wal-Mart draws its labor pool from among the least desirable demographics, in a health care cost sense. Thanks in large part to a greater propensity for obesity, the working poor are disproportionately likely to suffer a variety of malladies -- high blood pressure, high cholesterol, Type II diabetes, acid reflux, hypertension, sleep apnea, respiratory problems, liver and kidney problems...you name it. They are also more likely to be smokers, more likely to be victims of violent crime, and have disproportionately more children -- leading to big bills both for obstetrics and for infant and childhood health care.

All of this contributes to what I'd call the "unfortunate selection" the company faces, but this is true of pretty much all large retail operations. The Times quotes Diane Rowland of the Kaiser Commission on Medicaid and the Uninsured saying that the company faces a disadvantage competing against retailers who offer no health benefits at all, but this is a radical overstatement. The number of retail jobs that don't offer SOME coverage is vanishingly tiny, by and large limited to those mom-and-pop operations that can't qualify under the federal ERISA law to be exempt from state-level benefits mandates. For those that are exempt, there is a tremendous advantage to offering compensation by way of benefits rather than wage salary -- both are fully deductible for the employer, but health benefits, unlike salary, are not subject to income and payroll taxes.

But to say that Wal-Mart's demographic problem amounts to truly adverse selection, one must ignore a rather crucial fact about Wal-Mart employees. That is, while most large firms that offer group health coverage typically see take-up rates (the proportion of those eligible for coverage who actually elect to purchase it) of 75% to 90%, at Wal-Mart, the rate is only about 50%. So, if the argument is that some large number of Wal-Mart employees sought their jobs solely to get access to health insurance....then why aren't they buying it?

To answer the question, it's important to keep in mind some other facts about Wal-Mart employees. Namely, that they are disproportionately likely to work two or more jobs (and thus draw coverage from some other employer source); disproportionately more likely to be women and/or "secondary" sources of household income (and draw coverage from their spouse's plan); disproportionately more likely to be minors or students (and draw coverage from their parents); disproportionately more likely to be seniors and/or retirees (and draw coverage from Medicare or a pension package); and, most crucial of all, precisely because of the very low wage rate at Wal-Mart, its employees are far morely likely than those at most firms to be eligible for Medicaid and other public health programs.

This last fact is the one that has done the most to engender public scrutiny of the company (and no small degree of public embarrassment.) According to a study of Wal-Mart's California employees by Ken Jacobs and Arindrajit Dube of the Labor Center at U.C. Berkeley, families of Wal-Mart employees utilized 40% more in public health care (such as that state's MediCal and Health Families programs) than did those of all large retailers. In response to such figures, the state in 2003 passed a "pay or play" health care initiative -- narrowly repealed by way of a Schwarzenegger-backed ballot referendum in 2004 -- that would have, among other things, defined the percentage of premium costs for which large employers would be responsible. Similar measures have since passed in Maryland and New Hampshire, and are gaining ground in a number of other states, helped along by big labor's ability to sell the notion to fiscal conservatives that -- with or without anything resembling Clintoncare -- Wal-Mart is already sloughing off its employee health costs onto the taxpayer.

And so, the company now increasingly finds itself between the rock of rising health care costs, and the hard place of government fiat, which the much-discussed "secret memo" from Wal-Mart's Susan Chambers to the company's board rightly recognizes is driven by some valid criticisms:

Healthcare is our most pressing reputation issue because well-funded, well-organized critics, as well as state government officials, are shining a bright light on Wal-Mart's offering. Moreover, our offering is vulnerable to at least some of their criticisms, especially with regard to the affordability of coverage and associates' reliance on Medicaid.

In total, the memo marks a brilliant strategy of counter-attack that looks to address both problems simultaneously. Moving toward high-deductible plans would lower costs to the company, lower premiums to employees, and likely increase take-up rates of the offered plans (and lower Medicaid take-up rates among employees.) As a sweetener to offset employee dissatisfaction, the high deductible plans would be coupled with HSAs for those who have been enrolled in a company plan for at least one year (giving the HSA benefit right off the bat would likely increase take-ups a little TOO much, and contribute to the rising cost problem.)

The 12-page memo, which I urge any interested parties to read in full, also offers a host of other strategies for addressing the company's labor and health care problems. Cutting cross-subsidies to spouses would decrease the job's attractiveness to older, costlier applicants, while making it easier for part-time associates to gain coverage (moving toward an average of one year for eligibility rather than two) increases its attractiveness to younger applicants. The company also would respond to employee demand for benefits that aid them in obtaining education and home ownership -- both of which not only prove to be more stable than health care costs, but also help attract higher income and higher educated workers, with more attractive health demographics.

But the real question is this: at what point do health care costs, and the relative unattractiveness of the low-income demo, combine to lead Wal-Mart to the seemingly counter-intuitive conclusion that the best way to control its labor costs would be to RAISE salaries?

American health care's dirty little secret

Joanna Robinson over at Fey Accompli indulges in a bit of schadenfreude at the hands of human resources managers everywhere, in light of Kaiser's latest numbers finding that health care premiums were up another 9.2% in 2005, and that the share of businesses offering coverage to their employees dropped to 60% from 69% in 2000.

I was actually there at the Kaiser presentation yesterday, and they seem to take some creative liberties in choosing which numbers to highlight to the press. For instance, the press release makes great hay about the fact that average annual premiums for family coverage reached $10,880, thus eclipsing the gross earnings for a full-time minimum-wage worker of $10,712.  That sounds quite terrifying, but it skips over the part where employees opting for family coverage were only responsible for 26% of those premiums, which was actually down from 28% in 2004. And, of course, any household whose head made only $10,712 a year would be eligible for Medicaid anyway.

Even the 9.2% number, it should be noted, marks a trend of flattening increases, down from 11.2% in 2004 and 13.9% in 2003.  Hewitt Associates, for one, have projected that flattening to accelerate considerably in 2006.

That's not likely to cheer the lovely Ms. Robinson, who sees in these cost trends, and in the expansion of high-deductible options, a hope that the employer-based model of health care provision may finally be imploding:

High-deductible plans are a good transition to people owning their own insurance and being responsible consumers that demand good service and low prices - something that does not happen now with so many intermediary institutions keeping the system bloated and inefficient. If prices keep rising at the rate they have been, which I hope they do, it will finally provoke an actual market response.

I'm not quite sure about that.

High-deductible health plans, of course, are already widely available in the individual market, and in fact, they always have been. The newer and more marked trend is HDHPs coupled with Health Savings Accounts, which have only been available for the past year. The early evidence is that they, too, have had their greatest initial impact in the individual market, though Kaiser's lament that relatively few HDHPs in the group market are bundled with HSAs is premature -- the rules for the plans were only formalized this year, so H.R. managers looking to include the option would only have their first real chance to do so over the coming few months as they look forward to January renewals.

HSA/HDHPs are an interesting development but also, in my opinion, a mixed blessing. The "HD" part is promising, as it looks to return the concept of "insurance" -- that is, transfer of uncertain and potentially large risk in the long-term for the certain and predictable  payment of premium dollars in the short-term -- to what is all-too-loosely called "health insurance." Were homeowners insurance to function the way health insurance does, every time you painted a room or changed a lightbulb, you'd make a claim on your policy. And you would only be allowed to shop at an Allstate-approved home improvement store...where non-members would be charged 10 to 30 times as much.

But are these products really likely to help bring costs down in what Joanna describes as the "bloated" U.S. health care system? At the margins, perhaps.  They could reward some doctors and hospitals who lower visitation fees, thus encouraging investment in more efficient processing systems and procedures. They might also cut down on a few unnecessary tests, or lead consumers to comparison shop among diagnostic labs.

But despite the name, the deductibles in most "High-Deductible Health Plans" really aren't all that high -- $1,000 to $1,500 is typical for a singles policy. And, anyway, the HSA part of the equation would usually cover any of the common utilizations that the HD part would otherwise discourage. Furthermore, even if it did have the effect of curbing some arguably inefficient spending patterns, it's not entirely clear that discouraging "overconsumption" of routine health care is actually cost-effective. There are few markets more prone to "pennywise and pound-foolish" category errors on the part of consumers than in health care.

I actually would posit, contrary to the common wisdom, that rising health care costs are not due to the LACK of a market response -- rather they ARE a market response! What they are responding to is that we, as a culture, have a voracious demand for things that tend to make us sick, and for some medical means to deal with the consequences. Rising health care costs are not primarily the result of waste and widespread inefficiency -- they are the result of the ever-widening panoply of medical technologies created to address the trouble we create for ourselves. The cost of existing technologies is not growing -- it's  falling, and impressively at that. But in the world of health care, there is always some expensive new gadget that enables some daring new procedure, and always a slew of Americans in line clamoring for access to it.

This fact of American life is rarely fully appreciated, in part because of preconceived notions (many of them held by Puritanical doctors and health care advocates) about what people "should" want from a health care system. Take this 2003 article from Washington Monthly, comparing American expenditures on health care with those of our amigos in Costa Rica:

TO GET AN IDEA OF HOW WILDLY ineffective our health-care system is, consider this: The United States spends roughly $4,500 per person on health care each year. Costa Rica spends just $273. That small Central American country also has half as many doctors per capita as the United States. Yet the life expectancy of the average Costa Rican is virtually the same as the average American's: 76.1 years.

How can that be? According to public health researchers, the biggest reasons are behavior and environment. Costa Ricans consume about half as many cigarettes per person as we do. Not surprisingly, they are four times less likely to die of lung cancer. The car ownership rate in Costa Rica is a fraction of what it is in the United States. That not only means that fewer Costa Ricans die in auto accidents, but that they do a lot more walking, and hence they get more exercise. Thanks to a much lower McDonald's-to-citizen ratio, the average Costa Rican thrives on a traditional diet of rice, beans, fruits, vegetables, and a moderate amount of fried food--and therefore enjoys one of the world's lowest rates of heart disease and other stress-related illnesses.

It's very telling that the author doesn't notice any of the corollaries embedded in the statistics he cites. Because of our health care system, and our surplus of doctors and technology, Americans can smoke twice as many cigarettes as Costa Ricans, can use lots and lots more cars to get us places, can gorge on all the tastiest fried foods...and still enjoy the same average lifespan! That is, in spending our health care dollars, the bargain Americans have opted for is to use that money to enjoy their lives rather than extend them. Where Phillip J. Longman sees inefficiency, I see rational choice.

So, no, I don't think uncoupling health care from employment is likely to do much to address the real drivers of health care costs. It would take a far more fundamental change in American culture and the sorts of things Americans value to do that. Moreover, Joanna's wish for a purely individual consumer-driven health care model -- common among libertarians, and a concept toward which I'm not completely unsympathetic -- runs into a bit of trouble when you start to game out how costs are distributed through the system.

Since I started writing about insurance full-time three years ago, I've come to have a deeper appreciation of what I like to call the American health care model's "dirty little secret." In her post, Joanna laments being uninsured, but the plain fact is -- for someone young and healthy like Joanna -- anything other than truly catastrophic-level health insurance is probably an irrational purchase. Even in an employer-provided plan, with your boss to pick up 3/4s of the tab, annual premiums, co-pays and deductibles are almost certain to far exceed one's consumption of covered health care services.

Indeed, were it not for the tax advantages granted by the IRS to employers to provide compensation by way of benefits rather than salary (together with the exemption from benefit mandates provided to large groups under ERISA) most people probably would buy their health insurance in the individual market. And were health insurers freed from state regulatory fiats that limit their ability to establish underwriting criteria (deciding which risks to take on and which to refuse), to determine which benefits they would provide and which they would eschew, and to decide how much they wanted to charge for different sorts of policyholders, health insurance would undoubtedly be cheaper -- far, far cheaper -- for the overwhelming majority of citizens.

Now, this sounds great, especially to a libertarian. But another Kaiser chart reveals the dirty little secret.

You see it? Yep. That's it. It's hard to believe, but our health care expenditures are so concentrated that just 5% of the population account for half of them, half the population accounts for nearly all of them, and the remaining half accounts for virtually none of them.

A further wrinkle to the dirty little secret -- for most, more than half of those costs will come in the two months before they die. Thus, for "market forces" to work their magic in controlling the driving costs of the system, we'd have to sit back while all but the most obscenely wealthy die because they can't afford the treatment that would keep them alive.

This is an intractable problem. You can play with the numbers and the various possible structures all you like, but it stays with us no matter what sort of system we opt for -- public or private, insurance or managed care, cash-and-carry or single-payor....you can't escape it. Most people consume no significant amount of health care. For those that do, the costs would almost always far exceed their ability to pay if there were no mechanisms to socialize those costs.

As it is now, we socialize the costs through successive tiers of mixed public and private payment structures. The old and the poor are both disproportionately likely to face high costs, so we have Medicare and Medicaid, both of which have moved toward structures -- like Medicare Advantage -- that allow mixing of some private insurance in with public subsidies.

Among the general population, we rely mostly on employer-provided insurance. Because employers -- especially large employers -- tend to draw from a diverse base of labor, and because the terms of group plans are the same for every employee, this further spreads costs on a relatively even basis, with healthier employees subsidizing sicker ones, and the employer itself subsidizing everybody.

For everybody else, there is a hodgepodge of very imperfect options. You can choose to purchase private insurance, but since it is usually irrational for young and/or healthy people to insure all but the most catastrophic of risks, private plans in the individual market will tend to face problems of adverse selection: the only people who will buy the coverage are those who either already need it, or who have a good sense that they will very soon.

Some states minimize this problem by creating high-risk pools, where those whose employers don't provide group coverage and who are too wealthy for Medicaid, too young for Medicare, and too sick for individual coverage can pay a little bit higher than usual for policies that are still mostly subsidized by the state. Where it's been done, this has helped limit adverse selection and made for a healthier individual market. But were it not for the fact that the overwhelming majority of those at "high risk" are already in Medicare, Medicaid, or group coverage, the risk pools would fall apart.

So, one way or another, those costs are going to get socialized. If it isn't through employer-sponsored coverage or some other distortionary third party mechanism, it'll be through direct taxpayer subsidy. Not many Americans would be willing to accept the alternative -- which is, essentially, to let the chronically ill suffer and let the terminally ill die.

And as committed as I am to free markets, I'm not all that inclined to argue that they should.

Tierney's Wager

Tearing a page from Julian Simon's playbook, New York Times columnist John Tierney has laid down $5,000 against the prognostications offered by Matthew Simmons -- an investment banker, Bush Administration consultant, and author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy -- that oil prices will hit triple digits by Jan. 1, 2011.

Actually, the terms of the punt, as Tierney describes them, are even more dramatic than the claims in the book.  Simmons says now that he expects U.S. light sweet crude oil to not only surpass $100 a barrel, but to climb north of $200:

Mr. Simmons said he favored a simpler wager, based on his expectation that the price of oil, now about $65 per barrel, would more than triple during the next five years. He said he'd bet that the price in 2010, when adjusted for inflation so it's stated in 2005 dollars, would be at least $200 per barrel.

Remembering a tip from Julian, I suggested that we use the average price for the whole year of 2010 instead of the price on any particular date - that way, neither of us would be vulnerable to a sudden short-term swing as the market reacted to some unexpected news. Mr. Simmons agreed, and we sealed the deal by e-mail.

I think I'm beginning to see why Mr. Simmons moved out of the rough and tumble world of investment banking and into the less demanding field of punditry. This is a fool's wager, and you don't even need to be a proponent of Simonian optimism in the power of human ingenuity to see why.

There is, of course, ALREADY a huge market of potential betting partners interested in the long-term price of oil. It's called the commodities market. Every day, billions flow through exchanges like the N.Y.M.E. on futures contracts, including those on oil futures for the five-year window.  In fact,  open interest in light sweet crude futures for delivery in Dec. 2010, the time period in question, currently sits at 21.4 million barrels. 

The going rate, you ask?

$60.56

Mind you, that figure -- unlike the one Simmons and Tierney will be using -- is UNadjusted for inflation. (And it bears mentioning that framing this wager in 2005 dollar terms would seem a remarkably ill-advised concession on Simmons' part. If oil really did spike as sharply as he projects, one of the surest effects one would anticipate is an accompanying run-up in CPI. Adjusting 2010 prices for inflation could thus serve to assume away the very effect you were looking to measure.)

It's also a figure that exceeds the projections of many of those closest to the market. Goldman Sachs -- the largest commodity trader on Wall Street -- made headlines just last week by raising its five-year projection TO $60 a barrel from $45.  But even that projection leaves Goldman as among the more bullish houses on oil. Merrill Lynch, which also raised its long-term projection last week, still only forsees $42 a barrel oil in 2010.

And the oil companies themselves -- who obviously have a lot on the line when it comes to this question -- have been holding firm on projections that see long-term prices somewhere in the range of $20 to $35 a barrel. In fact, Goldman cites this evidence as relevant to their projections,  inferring that big oil isn't likely to invest significantly in expanding productive or refining capacity so long as they're under the impression that $60 a barrel is but a short-term aberration.
 
So, two questions immediately come to mind.

A) What does Simmons think he knows that all of these other cats with much bigger stakes on the line don't? (Presumably, the book is meant to answer that question) and...

B) If he really believes oil is set to rise to $200 a barrel over the next five years, then why would he waste his time looking merely to double his money in a bet against a journalist, for chrissakes, (a notorious lot of welchers, we are) with a whole set of onerous rules to qualify for the win, when he could be spending that cash on futures contracts, enjoy a much greater margin for error, and have the chance to more than triple his money?

But then, maybe winning the bet isn't the point, and maybe Simmons isn't quite so foolish as he seems. After all, had you heard of Matthew Simmons before this? For just $5,000, he may have just placed one of the shrewest publicity buys in recent memory.

Sure things -- death, taxes, and specious arguments about the death tax

Brad DeLong approvingly quotes Edmund Andrews' piece in the New York Times on estate tax repeal, slated to be among the first bits of business taken up by the Senate when it returns from the August break. While there is no question that the populist rhetoric employed by the administration and its allies in support of repeal does mistate the case significantly (populist appeals used to obfuscate and distort an issue? No, sir, the Left would NEVER do that!) I don't see  how Andrews'  piece is any less misleading than the "Republican con game" DeLong wishes to assail.

As Michael J. Graetz and Ian Shapiro of Yale recount in "Death by a Thousand Cuts" (Princeton University Press), their entertaining account of the repeal movement, opponents of the estate tax have already achieved a remarkable political feat by building broad public support for abolishing a tax that currently affects only 2 percent of all estates...

Only 2% of estates PAY the estate tax. The percentage that the tax's existence "affects" is significantly larger, since most individuals with estates sizeable enough to be subject to the tax have the foresight to plan around it.

The nonpartisan Joint Committee on Taxation estimates that full repeal would cost $290 billion over the next 10 years, but that calculation understates the true cost because full repeal would not occur until 2011.

Once the estate tax was fully repealed, the Treasury would lose more than $70 billion a year in today's dollars. Over the first 10 years of full repeal, the cost would total more than $700 billion, plus interest.

That's a remarkably precise projection to offer on a subject that no sane person believes he could predict with any measure of reliability. Estate taxes are applied to assets, not income. The bulk of those assets are in real property. Are you willing to bet that the same sort of run-up seen over the last five years in housing prices will continue unabated through 2021? I'm certainly not.

It's not at all inconceivable that aggregate inflation-adjusted asset prices will drop, rather than rise, over the coming decades or that the Joint Committee's estimate is an overstatement of future potential  estate tax liabilities, rather than an understatement.

Assuming that the government is still running an annual deficit in 2011, which is more likely than not, the total 10-year cost would be close to $1 trillion.

Holy broken window fallacies, Batman! Leaving aside the fact that consideration of whether to tax inheritances should be an altogether separate issue from whether the budget is balanced (there's no reason estate tax proceeds couldn't be offset by taxes on income or consumption or by, oh, you know...SPENDING cuts, just to throw a wild idea out there) you can't just tack on debt financing to the "cost" of estate tax repeal (I still bristle and grit my teeth at this nomenclature that regards NOT taking people's money away from them as a "cost") without making at least a cursory attempt to account for the effect of having those funds available for investment in productive ventures.

For that matter, you can't assess what the government would lose by estate tax repeal without accounting for the ways the present system cannibalizes income taxes. Among the more obvious of these are the effects of the gift tax exemption -- which allows tax-free gifts of up to $11,000 per-year to as many people as the giver wishes -- that often results in transfers of  interest- and dividend-yielding assets from givers who would have paid the highest marginal income tax rates to recipients who tend to be in the lowest income brackets and thus pay much lower rates.

Or, for that matter, you can't ignore the much ballyhooed charitable trust exemption. Opponents of repeal often point to the impact repeal would have on charitable bequeathments. I tend to think they overstate the case somewhat, but if the impact truly is significant, then having those funds invested in taxable, income-bearing assets is bound to produce more tax revenue than if  they were held by a tax-exempt trust or foundation. 

And neither does it take into account the taxes that would be collected either on new investments that would otherwise never have been made were the estate tax still in place,  nor the potential gains from redeployment of millions that would have otherwise been devoted to compliance with the tax, or the many billions that would have been spent on the estate planning industry -- a huge deadweight cost if ever I saw one.

It is for these reasons that Alicia Munnell, a former member of President Clinton's Council of Economic Advisers, estimated that the revenues generated by the estate tax were more or less a wash when compared to the costs of imposing it.

A compromise being floated by Senator Jon Kyl, Republican of Arizona, could be almost as expensive. Indeed, because of a strange wrinkle, the compromise could end up being far more generous to many heirs than outright repeal...As a practical matter, Mr. Kyl's approach would eliminate the estate tax for more than 99 percent of all families and greatly reduce taxes for the few who owed anything at all. If the $3.5 million exclusion were in effect in 2000, the Congressional Budget Office estimated, only 3,676 estates - about 0.15 percent of all estates - would have had to pay any tax. But the proposed compromise also comes with an important twist that could make it more expensive than the $53 billion a year estimated by Congressional tax scorers.

The twist is that the proposal would retain a big tax break that is supposed to disappear along with the estate tax. That break is known as the "stepped-up basis," and it means that an heir does not owe any capital gains taxes on any increase in value of property during the life of the person who died.

The intent of Kyl's bill is to avoid the perverse effect likely to proceed from eliminating the step-up provisions of the code  along  with  estate tax  --  it would mean that those who initially got in under the estate tax exemption and paid no tax on their inheritted estate would, with repeal, suddenly be expected to pay potentially large capital gains based, not on the asset's value at inheritance, but based on profits over its INITIAL value.

My biggest problem with the Kyl compromise is that it would seem to signal the senator feels no pressing need to cut the capital gains tax, itself, below the 15% threshold.

And then we come to this :

That's why it is misleading for opponents of the estate tax to claim that it is a double tax on earnings that have already been taxed once.

In many cases, that's not true. "A lot of assets that passed through very large estates have never been taxed and never will be," said Mr. Graetz of Yale. "It's a very big issue."

So, in other words, despite having paid income tax on the original earnings, and sales taxes on things purchased with those earnings, and further income taxes on interest and dividends that investments made with those earnings yielded, and property and luxury taxes on the holding of assets purchased with those earnings, unless you ALSO pay capital gains taxes on the appreciation of those assets -- which ends up largely being a tax on inflation, despite the fact that everyone must already pay that tax through the reduced value of savings -- AND another tax on intergenerational transfers of those assets, then the assets were "untaxed."

Talk about your creative accounting schemes.

I've never really understood the apoplectic fits that the estate tax issue tends to inspire in the Left.  It's true that Republicans have been disingenuous in selling the notion that the tax applies to many more people than it actually does, but how is that any worse than selling opposition to repeal based, not on any sort of substantive policy or economics basis, but purely on the basis of class envy?

For my part, I tend to think that, at a time when savings have dropped essentially to zero, enforcing a tax that encourages excess consumption by penalizing long-term capital formation just might not be the best idea.

Sit right back and you'll hear a brief...

A bit of aimless web-surfing led me to stumble across this nugget, a reprint of a 17-year-old Santa Clara Law Review piece that looks at some of the legal underpinnings governing that prime piece of fictional Ancapistan real estate known as Gilligan's Island.   Some highlights:

Gilligan on equity compensation and the vagaries of the tax code --

In Episode 13, entitled "Three Million Dollars More or Less," Gilligan wins $ 3 million from Mr. Howell in a golf game. When it comes time to pay, Mr. Howell uses a convoluted explanation of the federal tax laws to convince Gilligan that receiving stock in a (worthless) oil company is better than getting cash

Gilligan on joint-and-several liability --

Finally, in Episode 85, entitled "Court Martial," a radio broadcast informs the castaways that a board of inquiry convened to investigate the loss of the Minnow has found the Skipper guilty of negligence. To prove to the Skipper that he was not at fault, the Professor suggests the castaways reenact the final hours of the storm. Doing so reveals that it was Gilligan's failure to secure the anchor to the boat that caused the sinking. This discovery leads both the Skipper and Gilligan to experience unbearable guilt. Just as things are at the blackest, however, good news arrives: after further study, the board has changed its verdict and concluded that the real cause of the wreck was a faulty weather report that had failed to predict the storm.

Gilligan on Lockean homesteading --

In Episode 16, entitled "Plant You Now, Dig You Later," Gilligan unearths a treasure chest while digging a barbecue pit for Mr. Howell. When Mr. Howell claims that he owns the chest because Gilligan found it while working for him, the Skipper insists that Gilligan is the owner because he discovered it. To settle the matter, a courtroom (complete with a judge's bench, witness stand and an American flag made out of flowers and starfish) is built and a trial held before the Professor (who substitutes one of Mr. Howell's capes for a judge's robe). Following a hard-fought contest, he rules that the chest should be treated like the island's other natural resources and, as such, belongs to all the castaways. Unwilling to share the chest, Mr. Howell immediately buys out the other castaways for $ 500,000. Much to his chagrin, the chest is then opened and found to contain nothing but old cannonballs.

Gilligan on estate planning and moral hazard --

In Episode 74, entitled "Where There's a Will," Mr. Howell rewrites his will to thank the others for their attentions during a recent illness. The new instrument leaves a large bequest to each of the castaways: Ginger receives a diamond mine, the Professor is given a railroad, Mary Ann is promised two plantations and a fleet of cars to travel between her properties, Gilligan is granted an oil well and the Skipper becomes the owner of Denver. Through a series of miscues, Mr. Howell subsequently becomes convinced that the castaways are planning to kill him to collect their inheritances. All is put right, however, when he later learns that the "old bore" they intend to kill is a wild boar to be served at a dinner honoring him for his generosity.

Gilligan on Miranda --

In Episode 27, entitled "New Neighbor Sam," the castaways become terrified after overhearing a group of gangsters. When it turns out that the "voices" are coming from a parrot, the Professor and the Skipper decide to interrogate the bird to learn what else it knows. Jumping to its defense, Gilligan insists that the bird be allowed to speak to an attorney before answering any questions.

Gilligan on discovery --

In Episode 52, entitled "Not Guilty," a crate washes up on the island. Inside are some old newspapers from Honolulu which report that someone aboard the Minnow might be a murderer because each had been shopping in the same store on the same day as Randolph Blake, a man who turned up dead just as the Minnow had set sail from Honolulu. With their imaginations running wild, the Professor proposes that the castaways reenact the scene in the store to determine the killer's identity. To their great relief, doing so proves that the incident had been an accident: slamming the store's door had released the trigger of the spear gun that had killed Blake.

Gilligan on immigration --

In Episode 38, entitled "Beauty Is as Beauty Does," the castaways hold a beauty contest to select Miss Deserted Island. When the others are unable to agree upon a winner from among Ginger, Mary Ann and Mrs. Howell, Gilligan casts the deciding ballot for Gladys, a chimpanzee he had found on the island. His reason for doing so rests on solid legal grounds: as the tournament's only native, Gladys is the sole contestant eligible to win the title.

And finally, in what serves as a disturbingly apt parable for our current times, Gilligan on Liberty vs. Security:

In Episode 83, entitled "Gilligan Goes Gung Ho," the castaways decide they need greater law-and-order. Therefore, they appoint the Skipper to be their sheriff and Gilligan to be his deputy. Adopting a "by-the-book" approach, Gilligan soon has the castaways under arrest. Unfortunately, his zeal costs them one of their best chances to be rescued: while they languish in jail, a rescue plane flies over the island.

Import quotas? They're gr-r-reat!

Hold on to your shorts. They're about to become a lot more expensive.

Showing a remarkable talent for talking out of both sides of his mouth -- and in two languages, no less -- Commerce Secretary Carlos Gutierrez is following up a whirlwind tour touting the benefits of the proposed Central American Free Trade Agreement by announcing that the U.S. would be slapping new quotas on Chinese textile imports due to "disruption" in the market for "cotton knit shirts and blouses, cotton trousers, and cotton and man-made fiber underwear."

I know what you're thinking, but no, the disruption actually had nothing to do with those terminally creepy Old Navy commercials. Apparently, the Chinese clothes were just too good, too cheap, and people were just buying too gosh-darned many of them. Or, as Gutierrez oh-so-eloquently put it:

“Today CITA announced its decision to invoke textile safeguards based on market disruption and threat of market disruption due to the magnitude of increases in textile imports from China and China’s significant capacity to increase production and exports to the United States in these product categories,” said Commerce Secretary Carlos Gutierrez. “Today’s action by CITA demonstrates this Administration’s commitment to leveling the playing field for U.S. industry by enforcing our trade agreements. We will consult with the Chinese to find a solution that will permit the orderly development of trade in a quota free environment.”

Was that Spanish? Maybe it was Mandarin. It certainly doesn't qualify as English. The "orderly development of trade in a quota free environment?" What the funk is that?

So quotas are bad? Then why are we imposing them? Or is it that trade is bad? So then why were you just praising it to high heaven just....why, just yesterday, as a matter of fact?

And why are we calling these things "free" trade agreements, and then complaining when the result is not "orderly"? As opposed to "disorderly" freedom? Is there any other kind?

Or is it just that trade is ok when it means cheap Dominican sugar for Kellogg's, where Senor Gutierrez used to be chairman and CEO, but when it threatens to turn off the spigot of campaign contributions from the textile industry....not so much.

Captain Obvious and His Trusty Sidekick

Dean Baker and David Rosnick over at the Center for Economic and Policy Research have a new brief that purports to look at what effect the "progressive indexing" proposal that President Bush has been endorsing of late would have on rates of return for Social Security.

Their conclusion?

The rates of return went down.

The proper, measured reaction of anyone who isn't completely comatose?

Duh.

What possible alternative result were they expecting of a proposal for significant cuts in benefits adjustments and no change in the tax base? This required an analysis? Someone's got an awful lot of free time on his hands.

Of course, the comparison they're making is to the projected rate of return that would be realized if both current benefits and current contributions remained constant. But, as I hope most have come to grasp at this point, the current benefits and contributions can't remain constant.  There's that whole looming insolvency issue and all...you know, as I recall it, the only reason anyone's having this discussion in the first place.

There's only a limited number of options for sorting out that whole insolvency thing -- tax hikes, raising the retirement age, etc. -- and far as I can tell, they ALL would contribute to a lower rate of return. So the proper comparison is not to things as they stand -- an arrangement which is untenable -- but to the lower returns that would be realized if, for instance, benefits remained constant, but the payroll tax went up the 6 or 7 percentage points needed to balance the system. And that includes the huge opportunity cost of the returns that would have been realized on those funds if they didn't have to be devoted to Social Security.

Speaking of Social Security and rates of return, I'm just curious: at what point did a memo get circulated among the left-wing public intellectuals instructing them not to recognize the existence of foreign markets? Witness Krugman, for instance:

To get a 6.5 percent rate of return, you need capital gains: if dividends yield 3 percent, stock prices have to rise 3.5 percent per year after inflation. That doesn't sound too unreasonable if you're thinking only a few years ahead.

But privatizers need that high rate of return for 75 years or more. And the economic assumptions underlying most projections for Social Security make that impossible.

The Social Security projections that say the trust fund will be exhausted by 2042 assume that economic growth will slow as baby boomers leave the work force. The actuaries predict that economic growth, which averaged 3.4 percent per year over the last 75 years, will average only 1.9 percent over the next 75 years.

In the long run, profits grow at the same rate as the economy. So to get that 6.5 percent rate of return, stock prices would have to keep rising faster than profits, decade after decade.

I would note, first of all, that such sluggish long-term growth rates hardly present a rosy outlook for our ability to meet the obligations imposed by Social Security and the other public entitlements programs, with or without private accounts. An economy that can't manage 3% growth in its equities market can't very well shoulder a tax burden that grows much faster than that.

But, that said, there's no particularly good reason why the investments of Social Security's private accounts have to be solely tied to the domestic growth rate, since there's no particularly good reason to limit oneself to domestic investments.  The Chinese and Indian economies are certainly expected to grow faster than 1.9% annually over the 75-year frame, and one would expect, at some point down the line, the African and Middle Eastern economies to join them.

CALPERS and the other big public pension funds have done a fine job of capturing the higher growth rates of the emerging markets in the past, so why couldn't Social Security be counted on to do the same in the future?