Why Libertarianism Doesn’t Work, Part N+a

But first – Why Regulation can Work, Part M+b (Part M+a is here):

Nobel Prize winning economist Paul Krugman just had a post, "Why Does Regulation Work?".  In reply, a commenter wrote, "Oil is washing up on Louisiana's beaches, yet Paul Krugman declares that 'regulation works'."

O.k., let's talk about this.

First I would note that if there were no regulation at all it would be far worse. These disasters would be far more frequent and severe. Fly-by-Night drillers would be setting up everywhere, and good luck suing them; they wouldn't have nearly enough assets to pay for their massive damage.

But a huge point is not that regulation always works well (overall), but that we have the option of it working well (overall). This is an option voters have, and it's very important that voters know their options. If they don't want regulation to work well, if they want it to work horribly, and be dismantled, then vote for the party that wants it, and government in general, to work horribly and be dismantled, the Republicans. They'll appoint Brownies, political hacks, cronies, and others who will make the regulation as ineffective as they can get away with. And, at the same time, they'll pass laws to just dismantle the regulation directly.

But, we do also have the option to vote for the other major party. And if we do, then there's a long history of strong regulation being highly successful, and implemented in a competent, objective, professional way.

There are myriad examples from the New Deal until the start of the modern Republican era in 1980. Perhaps most notable is the strong regulation of finance that led to the great moderation, and an era of unprecedentedly high evenly spread growth that created the great middle class.

Another example is one Krugman brought up:

Well, here’s the thing: regulation demonstrably does work where tort law doesn’t. Consider the environmental issue: in reality, the perpetrators of oil spills never pay most of the cost; but in reality, environmental regulation has led to much cleaner air and water. (Look up the history of Los Angeles smog or the fate of Lake Erie if you don’t believe me.)

So, we can have regulation that works; it's our choice; the option does exist; all it takes is voting Democrats into power. When we choose to vote Republican, regulation (and government in general) works far worse; it's severely degraded. When we vote Democrat it works, overall, well, or very well. And history shows this.

Now to Why Libertarianism Doesn’t Work, Part N+a (which is related to the above):

In Part N+1, Krugman wrote, "A few days ago I put up a post about how libertarians say we don’t need government regulation, because tort law will do the trick..." He then pointed out, "in practice, politicians will find ways to shield the powerful, as illustrated by the $75 million cap on damage payments from oil spills."

I'd like to really get into the meat of this with another example: vaccines.

The no regulation / just litigation, libertarian approach says, don't force people to get polio vaccinations, or subsidize them, just sue the person who gave you polio.

Ok, first it's almost surely impossible, or nearly impossible, to prove in court someone gave you polio. And, it also may be incredibly costly to prove this in court even if you could. There are lawyer costs, investigator costs, your time costs, and all of the court costs; judges, jurors, facilities, security, enforcement of rulings, etc.

And, as if that's not enough, second, the person who gave you polio probably doesn't have anywhere near enough money to fully compensate you for the costs and misery of a lifetime of polio.

By contrast, requiring that all children have polio vaccinations before they can attend school, and/or the government paying the cost of the vaccination, is very easy and inexpensive.

Remember the old saying, an ounce of prevention is equal to a pound of cure? The libertarians essentially want no prevention (regulation, subsidization, etc.) and only cure (litigation), even for things that are impossible to cure, or incredibly expensive to cure, but relatively cheap to prevent.

The VAT is not the only simple consumption based tax

In a post on Friday Bruce Bartlett wrote:

That being the case, it makes sense to raise those revenues, which will be raised in any event, in a way that is least damaging to the economy. Hundreds of years of analysis show that a broad-based tax on consumption is the best way to do that and a VAT is simply the best form of such tax ever invented.

No economist I know of denies this.

Well, then Mr. Bartlett doesn't know of many economists, or a very wide range.

First, the vast majority of economists expert in this area (real economists with PhDs) will tell you that the least economically harmful way to tax is to tax negative externalities and activities, like pollution and cigarettes. Here the harm from the tax is negative. The tax does good in addition to raising money; it increases efficiency and total societal utility. Here's an example of an obscure economist few have heard of speaking in favor of externalities taxes, Nobel Prize winner Paul Krugman.

Second, many economist don't like that the VAT, unlike the income tax, is completely unprogressive. And you just absolutely don't have to be unprogressive to have a tax that is consumption based and simple. This can be done with a straightforward direct consumption tax, as explained by another obscure economist, New York Times Economic View columnist and Cornell professor, Robert H. Frank. In a 1999 Washington Post Op-Ed Frank wrote:

...We can do this in a powerful yet unintrusive way by scrapping our current income tax in favor of a more steeply progressive consumption tax. Such a tax would be straightforward to administer: Each family would pay tax not on its income, but on its total spending--as measured by the simple difference between its annual income and its annual savings.

And precisely because this tax is (steeply) progressive, it also accomplishes point 1: It increases efficiency by taxing externality costs, chiefly those of the colossal positional/context/prestige externalities. In fact, this is the key point Frank makes in the Op-Ed I cite above. Mr. Bartlett, if you really are open minded as you say, then you should read it.

For more on taxation, I suggest starting here.

Come on! You don't give the same discount rate to insurance as stock, and that includes global warming insurance!

Paul Krugman recently had a long New York Times article on the economics of global warming. The vast majority of it was very good for laypeople, as you would expect from the great Nobel Prize winning economist, but this part I really didn't like:

The policy-ramp advocates [most notably William Nordhaus with his DICE model] argue...costs that far in the future should not have a large influence on policy today. They point to market rates of return, which indicate that investors place only a small weight on the gains or losses they expect in the distant future, and argue that public policies, including climate policies, should do the same...As a professional economist, I find this debate painful. There are smart, well-intentioned people on both sides — some of them, as it happens, old friends and mentors of mine — and each side has scored some major points.

This argument should not be given nearly this much respect. Krugman often chastises economists for not understanding things from intermediate undergrad econ. Well, the argument above shows a lack of understanding of finance 101, or at least an unwillingness to apply it on a societal level, or a lack of understanding of the significant catastrophic risks that are the consensus of the top climate scientists.

The rate of return demanded is dependent on the risk of an investment. You expect, and demand, the stock market rate of return for an investment that is as risky as the stock market portfolio, not for any investment. If the investment is less risky, then it's still a good deal even with a lower expected return. If the investment is even better than zero risk, that is if it decreases the existing risk you have, like insurance, then it can even be worth it even if it has a negative return.

And people practice this all the time. Almost everyone buys homeowners insurance or car insurance even though the expected return is negative, and this is the case even when it's not required by law or lender. The reason is that it's so decreasing of catastrophic risk that it's still well worth it. It's still considered a great investment.

Obviously, significant odds of planetary devastation is a catastrophic risk, so obviously insurance against this is not just low risk, it's negative risk, so the required rate of return should be far lower than the required rate of return for a diversified stock portfolio. It should, in fact, be negative. With such an appropriate required rate of return, any credible model clearly shows we should be spending far more on anti global warming measures – and right now.

I made this point in my blog action day post last October, but it's not being made nearly enough. This should be said vociferously every time someone says we should use the market discount rate, or anything close to it, for global warming insurance.

Let me be clear here: What is the required rate of return used by William Nordhaus, the most prominent proponent of the ramp, with the most prominent model, the DICE model?

From "The Challenge of Global Warming: Economic Models and Environmental Policy", 2007, by William Nordhaus:

The approach in the DICE model is to use the estimated market return on capital as the discount rate. The estimated discount rate in the model averages 4 percent [real, inflation adjusted] per year over the next century. (page 19)

So his model then says we should spend relatively lightly on global warming at this time (relative, that is, to a model like Nicholas Stern's of the London School of Economics). But imagine how much his model would say we should spend if we used a negative rate of return like that accepted by almost everyone for car and homeowners insurance. The planet is, of course, our home, and the home of our children, our grandchildren, and their grandchildren.

Wow, the Stock Market likes Socialism!

According to top Republican operative Larry Kudlow, “Stock markets are the best barometer of the health, wealth and security of a nation”

So what did the stock market think of the passing of the Democrats' socialist health care program?

The Dow closed up 44 points.

Wow, the stock market must like socialism, or communism, or fascism!

Yeah, I guess they must, because according to this major study published in finance's most prestigious journal:

The excess return in the stock market is higher under Democratic than Republican presidencies: 9 percent for the value-weighted and 16 percent for the equal-weighted portfolio. The difference comes from higher real stock returns and lower real interest rates, is statistically significant, and is robust in subsamples. The difference in returns is not explained by business-cycle variables related to expected returns, and is not concentrated around election dates. There is no difference in the riskiness of the stock market across presidencies that could justify a risk premium...Using data since 1927, we find that the average excess return of the value weighted CRSP index over the three-month Treasury bill rate has been about 2 percent under Republican and 11 percent under Democratic presidents -- a striking difference of 9 percent per year! This difference is economically and statistically significant.

-- "The Presidential Puzzle: Political Cycles and the Stock Market", abstract and page 1, The Journal of Finance, 2003

Anyway, at least it's official now, the Democrats have finally laid, "the cornerstone of their Socialist utopia" .

No wait, didn't we already lay the cornerstone of the socialist utopia when we passed Medicare in 1965 – universal single payer health insurance for all seniors?

No, we did it when we passed Social Security for our seniors in 1935.

No wait, we've been socialist for at least 100 years with the passing of free schooling for our children.

Boy, the Republicans really have a lot of work repealing stuff to make us no longer socialist.

Really expert, thorough fact checking just isn't profit maximizing, but what if it was?

Ezra Klein writes on David Brook's recent column today:

As for the prescription drug benefit? The prescription drug benefit didn't go through reconciliation. It was passed through the normal order.

Brooks is simply wrong on this.To recap, Brooks argued that reconciliation is being used more frequently, and that past reconciliation bills, like Bush's tax cuts and prescription drug benefit, were significantly bipartisan. Reconciliation is, in fact, being used less frequently, past reconciliation bills like the tax cuts were not significantly bipartisan by any stretch of the imagination, and the prescription drug benefit did not go through reconciliation.

Wow, I wonder if this column would have ever been published in anything like its current form if the New York Times had mandatory careful, thorough fact checking of columns by a well paid, well staffed, large, highly expert force. Of course, I guess that's too expensive for them to do and stay in business (or make their profits as large as possible). But what if it wasn't? Hmmm.

How to shift the profit advantage away from Fox News reporting

Former executive editor of the New York Times, Howell Raines, writes in a Washington Post op-ed today:

Why has our profession, through its general silence -- or only spasmodic protest -- helped Fox legitimize a style of journalism that is dishonest in its intellectual process, untrustworthy in its conclusions and biased in its gestalt? The standard answer is economics. Some prominent print journalists are now cheering Rupert Murdoch, the head of News Corp. (which owns the Fox network) for his alleged commitment to print, as evidenced by his willingness to lose money on the New York Post and gamble the overall profitability of his company on the survival of the Wall Street Journal...

Under the pretense of correcting a Democratic bias in news reporting, Fox has accomplished something that seemed impossible before Ailes imported to the news studio the tricks he learned in Richard Nixon's campaign think tank: He and his video ferrets have intimidated center-right and center-left journalists into suppressing conclusions -- whether on health-care reform or other issues -- they once would have stated as demonstrably proven by their reporting. I try not to believe that this kid-gloves handling amounts to self-censorship, but it's hard to ignore the evidence. News Corp., with 64,000 employees worldwide, receives the tender treatment accorded a future employer.

Wow, look at that last line. Former New York Times editor Howell Raines appears to believe there's a reasonable case that reporters at the mainstream outlets are, "suppressing conclusions -- whether on health-care reform or other issues -- they once would have stated as demonstrably proven by their reporting.", at least in part because they fear losing their jobs due to inadequate profits, and then needing a job at the highly profitable Fox, which, like the rest of the right wing machine, holds a grudge, intimidates with revenge, and generously rewards loyal cronies.

Now, let me ask you a question. What if there were a very large tax credit, like 50% or more, refundable with some limitations, for the monumental positive externalites of serious investigative and research reporting? a tax credit for expenses like fact checking, investigation, research assistants, on-staff and on-retainer experts in economics, government, and science, travel expenses to war zones, and so on.

How would this affect the profit equation, and the relative profit equation?

First, it would make it much more profitable for serious, unbiased (relatively, and the bias that exists is towards the right, with the mainstream media constantly not calling them on their lies and misleading) news organizations to not lay off serious reporters, editors, and related staff (as has been happening en masse), and to, in fact, hire many more – I'm talking about a tax credit of 50 to 80 percent that's refundable (with sensible limitations), something big enough to have a huge impact, not a tiny little effect around the margins.

Second, this tax credit would benefit serious unbiased (relatively) news outlets more than Fox type news outlets. This is because at Fox it's not about serious investigation to find the truth and be accurate. It's much more about selling opinions, disinformation, and outright fabrication. They therefore have a much lower relative expense for research, fact checking, expert help, and serious investigation.

The result then, is that with such a tax credit reporters at serious news outlets would be a lot less fearful of losing their jobs and having to get new ones at Fox, or similar outlets, greatly allaying Raines' fear. I would like to note here that Raines' conjecture is stunning, but he is a former executive editor of the New York Times, so we should think about it seriously.

And, of course, in addition to greatly decreasing any intimidation of reporters by Fox, such a tax credit would address positive externalites that are simply colossal. A tremendous amount of good would come from greatly increased spending on journalistic research, investigation, fact checking, debunking, expert support, etc. For more on this see here.

If our health care system really is more efficient than the Europeans', then why...

We spend about $100 billion per year on medical research, public and private combined (see here).

We spend about $2 trillion per year on health care delivery, the doctors, hospitals, administration, etc. If we adopted a European style system, cutting our spending per person in half, as in European countries (that I think the evidence shows have about as good or better health care and results anyway; see for example here), then we would save about $1 trillion per year.

Now, what if we spent that $1 trillion in savings on medical research? It would increase medical research spending more than 10 fold.

Even if delivery did get a little worse, even if we did get a little bit less of our brightest and best becoming doctors due to lower pay, it seems like this would be totally outweighed over the long run by tremendously more advanced medical understanding and treatments due to the 10 fold increase in medical research spending (or more, as some advanced universal healthcare countries provide comparable health care to the US at about a quarter of the cost per person) .

So it looks like if you want better medical results, better treatment, breakthroughs in rejuvenation, better odds of surviving cancer, you name it, you should support going to a European style system, and using the immense savings to increase medical research more than 10 fold.

So if our health care system really is more efficient than the Europeans, then why is it possible to make such a vastly favorable trade?

If the Republicans really care about our children and grandchildren so much why don't they do this, so in 50 years they could have medicine as advanced as it would take perhaps 150 years to achieve with our current system. I don't care how bad you imagine European health care to be, you cannot think a European medical center of today is less effective than even the Mayo Clinic of 100 years ago, when penicillin and polio vaccines hadn't even been invented.