The Economic Effects of the Republican Tax Plan - Punishing Work and Rewarding Luck

Although the Republican tax plan has been - and still is - evolving it has recently included changes that would tax innovation in two forms. One, grad students who receive a scholarship will be required to pay income tax on it's value. If you get a $45,000 a year scholarship to Stanford, you would have to report that as income. Two, any stock options granted to employees would be taxed at the point they are granted, not - as they are now - taxed at the point when they are exercised. As it is, this tax will make it harder for people to get PhDs and to launch startups. What do these two things have in common? They threaten the status quo and can unleash gales of creative destruction.

The bad news about new ideas, technologies and businesses that come out of grad school and startups is that they can overturn existing industries. Your hotels could be undermined by Airbnb. Your oil well can be undermined by affordable solar panels. 

There are two groups who are threatened by the gales of creative destruction. One group is the elites who own existing hotel chains, oil wells and other assets whose value can be eroded by the new. The other group are the folks who work for these elites and share their concern that innovation could disrupt their livelihood, people who may lose their coal mining jobs.

So startups and grad students are being taxed more but the Republican plan is advertised as a tax cut. So, who pays less? The folks who will get the most dramatic tax cut are the folks who inherit. Current law is already ridiculously generous to folks who inherit: if the value of the estate you inherit is $5.45 million, you don't have to pay a dime in inheritance tax. This new plan will double that. 

Republicans are rewarding people who resist change by simply inheriting and punishing people who are encouraging change. This is not particularly surprising for social conservatives, people who see as a threat most change from the world they learned.

I recently put out a survey to ask this question: 

Put aside for a moment whether you think that the highest marginal tax rate should be 5% or 95%. This question is about something else. Which of the following do you think should be taxed at the highest marginal rate?
- Income tax: I think money you make from your job, your labor, should be taxed at the highest rate
- Capital gains tax: I think that money you make from your investments should be taxed at the highest  rate
- Inheritance tax: I think the money you get from inheritance should be taxed at the highest rate
- Consumption tax: I think the money you spend (on groceries, transportation, housing, clothes, entertainment and other consumption goods) should be taxed at the highest rate

The responses were as follows:

My respondents clearly thought that the highest marginal tax rate should be applied to the income that came with the least personal effort: inheritance tax. This is the opposite of what Republican leaders believe, proposing a plan that levies the highest tax on the people who apply the most effort: the people who are out earning an income rather than leaving that job to their investments or grandparents.

Taxing inheritance the highest isn't just about fairness. If we want a society where everyone has an incentive to work, we would want a society where work is taxed less than inheritance and one person isn't free of tax on the first $10 million they inherit while another person has to pay income tax as soon as she makes more than $10,000. That is partly about fairness but it is also just common sense: we want everyone to help with the work.

The older I get the more confident I am about what makes for good policy and the less confident I am about what makes for good politics. On the face of it, a Republican tax plan that hikes up the deficit by an additional $2 trillion, gives tax breaks to rich grandkids, and discourages entrepreneurship and education would seem like taping a sign to your back that says, "Vote for the other guy." Who knows, though. It might just be that the American people will fall in love with a plan that helps to discourage the progress that so many find disruptive.

Some Thoughts on Sex Scandals, Politics, Culture and Consent

As I write this, Twitter is a twitter about sex. At least for the accounts I follow, that's unusual.

The two big stories are Roy Moore and Al Franken. The left is appalled that Moore won't drop out of the senate race and is asking Franken to resign.

There is a line of Shakespeare, "First let's kill all the lawyers," that seems to describe what so often happens in political arguments. The point should be to clearly define terms as lawyers would do but instead, on this discussion, we're killing off all efforts at clarity and lumping a lot of  behavior under the heading of "sexual misconduct."

We now know why Roy Moore dresses like Woody from Toy Story

In Roy Moore's mind, sexual misconduct does include consenting adults engaged in homosexual behavior but does not include a 32 year old man groping and touching a 14 year old girl he met at a child custody hearing.

In Donald Trump's mind, sexual misconduct does not include grabbing women's pussies or kissing them because they are so beautiful or regularly having affairs. Sexual misconduct does include whatever it is that Al Franken is doing.

In Al Franken's mind, because he's a conscientious liberal, sexual misconduct is anything guys like Moore and Trump have done AND anything he - Al Franken - may have done that would upset his constituents.

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Alabama Republican Senate candidate Roy Moore's repeatedly made unwanted advances on girls; in his thirties, he dated, groped and molested girls between 14 and 16 years old. And speaking of repeatedly, I've repeatedly heard people excuse the folks still wanting to vote for Moore as being no different from Bill Clinton supporters, people willing to compartmentalize a man's private life from his policy stances, essentially saying "I like his policies and what he does in his personal time is not my business."

When Trump confessed that he grabbed women by the pussy, I heard the same thing.  Defenders of Trump said, "Well, people still voted for Bill Clinton even though they knew about his misconduct."

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What is clear about Bill Clinton was that after marrying Hillary he had sex with other women, at least one of whom he apparently had an affair with. What is less clear is that he actually forced a woman to have sex, something Juanita Broaddrick accused Clinton of doing. Three women accused him of unwanted advances. And most clearly of all, he had a sexual relationship with Monica Lewinsky that led to his impeachment. Lewinsky doesn't describe unwanted advances, though; she refers to it as falling in love. 

What is clear about Donald Trump is that he assaulted women and had sex outside of marriage multiple times (and twice that sex matured into an affair and then marriage). What is also clear is that he readily confessed to assaulting women on tape (a confession so repulsive that it got Billy Bush, who merely chuckled at the confession, fired). What is less clear is how often he did that; about a dozen women have accused him of assault and unwanted advances, which seems to corroborate his own confession.

What is clear about Roy Moore is that when he was in his 30s he dated and propositioned high school girls. He was actually banned from the YMCA and asked not to hang out at the mall because of this behavior and his coworkers thought it strange that he would attend high school football games to pick up girls. He's been accused by multiple women of having made unwanted advances on them when they were girls - 14 to 16.

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The first question is whether Roy Moore making sexual advances on a 14 year old girl who he literally met at a child custody hearing who later describes it as intimidating and confusing is the same as Bill Clinton making advances on a 22 year old woman who he literally met at work who later describes it as falling in love.

The second question is whether grabbing a woman's pussy hoping for sex is the same as making an unwanted advance in the hopes of sex.

To say yes to these questions is to say that consent is of no consequence. By law, a child younger than the age of consent cannot give consent. By common sense, anytime you grab a woman by the pussy without invitation it is done without consent. By experience, responding to the flirtations of a woman who describes the experience as falling in love is done with consent.

Consent - something the law states can only occur between adults - seems like a fairly useful way to distinguish between sexual conduct and sexual misconduct.

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Example of comedian making a bad joke or threatening advance?

And finally, there is a question as to whether making a sexual joke is the same as sexual misconduct. Going down this path alarms me. If we are going to ask every man who has done something stupid with a woman to resign, we're going to have a lot of job openings. (Going down that route could also take us back to the days when Lenny Bruce was arrested on obscenity charges; comedy is about mocking the sacred and making fun of these odd physical forms we're found in, cracking jokes about farts and the sexual impulses that make fools out of us all.)

What is clear about Al Franken is that he thought it was funny to pose for a picture groping the breasts of a woman who was wearing a bulletproof vest. I was a young man. It makes sense to me that a young man's imagination would find it hilarious to mock the guys who clumsily grope women by simulating that with a woman who would be impervious to bullets, much less hands. Such an act is just absurd enough to seem funny to a young man. There is no suggestion that this was done for anything more than a laugh. Franken himself dismisses it as unfunny now, as likely any man over 40 would.

Al Franken has welcomed a hearing on his behavior. It seems like such a hearing should be promised to start the day after the hearing on Trump's misconduct has ended.

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Culture plays a role here, obviously.

There is a sensibility about affairs often attributed to the French that winks at flirtation and sex outside of marriage as something understandable. Obviously anyone voting for Bill Clinton or Donald Trump was at least reluctantly in this camp.

There is also a culture of child brides found in communities that see girls as people who would aspire to become mothers rather than people who might aspire to careers, to become equal to men outside the home. In these cultures, physical development that has largely played out by 14 is all that matters and intellectual development that might not play out until 18 to 22 is of less consequence as prelude to a relationship. States like Alabama have an age of consent at 16 and states with higher education levels like California have an age of consent of 18 given their different definitions of what it means to mature. A 14 year old preferred in some cultures because a child is easier to control. 

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The goal of going after guys for sexual misconduct should have two dimensions. One, it should further the notion that women are simply people to everyone they interact with and the object of lust for only a chosen partner(s). Two, any expression of interest in a woman should leave a woman feeling safe.

Given how much larger men are than women the culture should be this simple: a man could express interest in a woman through words and then simply say, "You're now in control. If you are interested I will leave it for you to initiate." We don't (yet?) live in this world, though, and in the world we do live in men have made and do make advances. I assure you that any man has expressed interest in a way that they'd be embarrassed to have broadcast. So what makes a difference between embarrassing and offensive? In my mind it is whether the unwanted advance leaves the woman feeling humiliated and unsafe or flattered and desirable, feeling like an object some guy would use to satisfy his lust or as a person some guy delights in. [Note: I'm not a woman. Women may have very different opinions about this.]

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Consent seems the anchor point in these discussions. To excuse assault on any woman or advances on a child is to dismiss consent as incidental to moral judgment rather than central to it.

We're Getting Older, Fewer are Working and GDP Growth is Slowing: Next Decade's Economy in 4 Simple Graphs

In October, the Bureau of Labor Statistics released a report forecasting some key numbers for the next decade. You can find it here.

Here in simple graphs is the story it tells. The punchline is that the U.S. is getting old and GDP growth is slowing.

First, population growth will slow. Babies and immigrants will be coming into the country at a slower rate.

As population growth slows, the population will get older. The percentage of the workforce 55 and older will continue to rise.

People 55 and older are less likely to work than people 25 to 55. So, as the population becomes older, labor force participation rate drops.

Finally, the BLS is projecting increases in productivity. That partly offsets a drop in population growth. Nonetheless, given a smaller portion of Americans will be working, GDP growth will be up higher than last decade (a period that included the devastating Great Recession) but lower than the decade before that (and what it was most of last century).

Demographics is destiny. Baby boomers were at their peak working years 1996 to 2006 and thanks to babies and immigrants (and the babies of immigrants) population growth was robust. Over the next decade that changes and with it will come a change in economic growth.

Evaluating the Fed's First Woman Chair: How Labor and Stock Markets Performed During Janet Yellen's Tenure

The U.S. got its first Federal Reserve Chair in 1914. 100 years later the first woman was appointed to Chair the Fed. Now, after she has served the shortest tenure in 40 years, the country is once again getting a man as head of the Fed. 100 years of men. 4 years of a woman. Now, at least 4 more years of a man. That seems fair and balanced.

Trump announced the appointment of Jerome Powell to be the Fed Chair, replacing Janet Yellen after the end of her first term in February. It's worth examining how the economy did on her watch.

While the folks appointing Federal Reserve Chairman seem to have a gender bias, the economy apparently does not. Or if it does, it is a positive bias. Even though hers was the shortest tenure in 40 years and the second shortest tenure in 66 years, more wealth was created on her watch than during that of any other Fed Chair: $17.7 trillion and counting. In the nation's first 237 years, it created $78.5 trillion in wealth; in the last 3.5 years it has created an additional $17.7 trillion, an uptick of 22.5% in less than four years. (Yellen's 4 year term does not end until February of 2018.) This is, of course, at least partly due to the simple dynamics of compound interest. As Benjamin Franklin said, "Money makes money and then the money your money makes makes money too." As the nation creates more wealth it creates more wealth. Also, just this month consumer sentiment hit its highest point for the century. (Well, okay. Highest point in 17 years. But century sounds more impressive.) And the economy has created an average of about 2.6 million jobs a year, helping to drive unemployment down from 6.7% to 4.1%.  Things have been good during Yellen's tenure.

The big question facing Janet Yellen throughout her four years was when and at what rate to begin increasing interest rates. The trick is to keep inflation low while creating jobs. How did she do? Well, inflation is still low (it's bounced around 2%  - mostly on the low side - during her time) and the economy has created about 9.6 million jobs thus far into her tenure. Those numbers strike me as  flawless. And already she's begun to unwind the stimulus from the Great Recession; during her watch excess reserves at banks have dropped from $2.7 trillion to $2.1 trillion, a drop of $570 billion. (To put that in perspective, just before the Great Recession excess reserves were at $1.7 billion. Yep. Now it is over $2 trillion and  only a decade ago it was under $2 billion. She has unwound that by vast multiples of what it once was without scaring off investors or consumers. That deserves respect.)

Here is a graph that contrasts the average annual job creation and stock market performance under each of the last seven Fed Chairs.  The numbers are not final for Yellen, of course, because it will be about a half a year before the data is in on her full four year tenure.

In comparison to Yellen, the economy created more jobs per year under William Miller and the stock market did better under Miller and Paul Volker.
Miller wasn't normal, though. He was in office for only 18 months and he refused to raise interest rates to battle inflation during the late 70s oil shock. (Curiously, he was the last Fed Chair who did not have an economics degree; the most recent is Jerome Powell, Trump's new appointment.) Given he deferred addressing a bad situation, the economy did do well during his time but he left a mess to clean up; Volker was his successor and Volker's policies to bring down inflation triggered one of the ugliest recessions in the last half of the 20th century. So putting aside Miller's weird tenure, the punchline is that she did better than the boys in this century's old boys' club; no one else who served four years or more enjoyed the strong combination of labor and stock market performance that she did.

I could throw in all the usual caveats about how the economy is more than the result of fiscal policies defined by the Congress and President and more than monetary policy defined by the Federal Chair. And all of that is true. No president or Fed Chair invented personal computers or pioneered genetic engineering or venture capital. Still, monetary policy does help to determine things like inflation, interest rates and thus stock market performance and unemployment rates. The Fed's mandate is to keep unemployment and inflation low (but not too low) and it takes actions to do that. It is true that the economy is incredibly complex and luck plays a large role in what kind of numbers a Fed Chair presides over. That said, monetary policy matters and no one does more to define it than the Chair. If you are a woman or know one, you might be proud to see that the economy under Janet Yellen did as well as it did under any other Chair. While she did not get offered a second term, she should be proud of how markets - specifically labor and stock markets - performed under her watch.

We should consider appointing another woman someday. And maybe next time we won't wait a century.

Freud, Jung, Hidden Impulses, the Collective Unconscious, Hitler, Putin, Conspicuous Consumption and - Finally - Community

Freud's Couch Was Sort of a Bed

About a century ago two competing models for modern media emerged in the U.S. and Germany. Using what they were learning about psychology, the Nazis created state propaganda to sway the masses to serve the interests of the state and advertisers in the U.S. used those same insights to serve the interests of the corporation. (A fascinating documentary, the Century of the Self, makes this argument and can be found here.)

William James published what some argue was the first textbook on psychology - the Principles of Psychology - in 1890 and Freud published The Interpretation of Dreams in 1900 and Civilization and its Discontents in 1930. If you visit the apartment in Vienna where Freud pioneered psychotherapy you don't just see that the Freudian couch was actually a bed. (Freud thought that a bed was a safe and  cozy place from which to free associate but perhaps the preponderance of sexual references would have given way to a preponderance of food references had he instead used a kitchen table.) What you get from the museum that once was his office is this very exciting sense of the mind as a new frontier. Rather than blame spirits or madness for weird thoughts and behavior, these early psychologists were taking a scientific approach to the mind, hoping to better understand the impulses that seemed to lay below the seemingly thin veneer of our civility. Jung's concept of the collective unconscious might be suspect but it gets to the reality that something binds us that is almost mystical and that these impulses could be tapped to sway large groups to do strange things - like drive to the mall on a sunny day or shout angry slogans at political rallies.

These insights were exploited with new and transformative technology of that time. The radio was the first technology to allow people across an entire nation to hear about the wonders of the Third Reich or nylons and electric razors and it was quickly followed by TV.

Obviously it made an enormous difference whether a community used these powerful new media technology to promote the interests of the state or the corporation. Someone once said that the book most likely to change minds in the Soviet Union would be the Sears Catalog. Magazines, newspapers, radio and TV shaped minds - and thus communities - as only churches and sacred texts had before. And it was no coincidence that the state and corporation undermined the dominance of the church last century.

This century's transformative media is the internet and the social media it has enabled. The shift in advertising revenue from newspapers to the internet has shattered old business models and forced a scramble to discover new audiences and sources of revenue for reporting and commentary.

And curiously, the choice about whether this model will be funded by the state or the corporation, by advertising for political interest and shared values or great values on products you'll love, is still in question. This week's senate hearings with the social media giants Facebook, Twitter, and Google gets to the question of how social media has been used to manipulate voters and thus American policy rather than merely focus on getting us to buy more goods.

It's worth noting that this is social media.

About the same time as the emergence of the radio and television, a third really powerful technology emerged: the telephone. This was intimate and personal and allowed two people to communicate and in the process strengthen relationships. I think it's telling that so much of the internet is experienced on a phone. Even though actual talking on the phone is not even in the top ten activities people do with their phones, what they're doing is closer to what was done on the phone last century than what was done with TV and radio. They're creating and feeling part of a community.

Community is a third goal, different from the goals of consumption and propaganda. I think one thing we're seeing in the success of Twitter and Facebook is the strong impulse to belong. You can dismiss this as tribalism but I think it speaks to communities of the mind and shared values, to what it means to be human and feel the part of something larger. It's worth noting that the strength and vulnerability of these brands is that they are platforms. Zuckerberg doesn't make editorial decisions about what posts your Aunt Leola or cousin Curt should make on Facebook. They do. Your friends are rarely selling goods or trying to win votes for the political party they are starting. (Although I admit I would be interested in seeing the posts of someone who was starting a new party; that sounds like an interesting person.) They are simply connecting, sharing what they are proud of, what impresses them, what they are worried about and what made them laugh. The third way beyond media as a tool for conspicuous consumption or political propaganda is media a tool for creating communities of the mind, of shared interests and simple friendships. It's not novel that people would do that; it is novel that people could do that across distances, with a tool more inclusive than the phone or the kitchen table.

Bot Puppets

In the 2016 election, bots were busily posting and reposting weird memes to people who confused cynicism with sophistication, people who found credible claims like, "the Pope endorses Trump!" and "Clinton has used the Clinton Foundation to make Millions!" Millions of bots on Facebook and Twitter were busily forwarding fake news to gullible users who still didn't understand that a brand new site labeled "TrumpWillMakeAGreatPresident.com" or "MelaniaWillBeAMoreBeautifulFirstLadyThanBill.com"  is less likely to be offering objective news than the New York Times. Given they had already believed that the New York Times and other "mainstream media" sites were not to be believed, they actually found this put up overnight sites more credible than the mainstream media that still practiced journalism according to standards that predated the internet.

These bots were particularly busy swaying what the social media algorithms had identified as "soft Clinton" supporters. While they couldn't hope to win many black voters in Philadelphia over to Trump, they could feed rumors to voters likely to vote Clinton and thus convince them there wasn't enough difference between Clinton and Trump to justify voting. Just getting Clinton voters to stay home was enough to tip the election in the three states that gave Trump the national victory while only giving him the edge of 80,000 votes in Pennsylvania, Wisconsin, and Michigan. It was as if someone had concluded that a car salesman and a car thief were no different but it worked.

My elderly mother was having trouble with her computer during the election. After a lot of finagling I got her back online and signed into her Facebook account. This was either late October or early November.  I was aghast at the sheer volume of "news" articles posted to her Facebook feed. Obviously bogus news sites that looked credible to her were decrying Michelle Obama's lack of fashion sense and lauding Melania, showing Trump's promise to restore America or Hillary in an angry face. I honestly scrolled through about 50 of these posts while seeing only a couple of personal posts from her friends or family. And each post seemed to be from yet another fabricated site. It was absurd.

I don't know how many people will ever admit they were swayed by bots. It's not flattering to be duped by computer code. (Although I imagine that by 2017 we all have been at least once.)

My term for the folks who were swayed by bots? Either to believe that Trump somehow cared for them or that Hillary was just as bad? Bot puppets.

If you are a regular reader of this blog I expect you to incorporate the term into your daily vocabulary. Here is how you use it.

"Oh don't be just a bot puppet Justin. You've got to be smarter than three lines of code. Your argument doesn't even make sense."

"Did you just forward that argument from a bot? What are you, a bot puppet now? Just doing whatever the computers tell you? Think for yourself Justin."

"Well, Shelley is such a bot puppet that she doesn't know the difference between nytimes.com and notyourtime.com. Seriously, that woman will forward anything from anywhere as long as it blames Bill Clinton for whatever she's upset about today."

The goal is to make it shameful to rely on memes to do your thinking, to make bot puppet have all the stigma of racist.

Wait. That might not be enough to sway some of Trump's base that it's a bad thing to be a bot puppet.

The Most Overlooked Reason for Growing Polarization in Congress

An interesting study here depicts how little overlap there is in voting in Congress compared to what it was decades ago.

As you can see, Republicans and Democrats are more clearly voting along party lines.

Why?

One overlooked reason is likely the reliance on national media and the easy access of anything a politician has said. Once upon a time a politician could say things that let him establish a brand but then go negotiate and vote in ways that might suggest he was insincere about his campaign promises. To win in many districts you have to be clearly conservative or liberal. Then, once the vote comes, you have to vote consistent with those promises or you will be taken down in the primary. And your constituents will know about it because you can't hide your record or speeches in this age of Google and online data.

It is possible that we aren't getting compromise that helps a government to function because politicians aren't allowed leeway to negotiate. Instead, they're expected to be "true" to their principles and promises which means they're unable to compromise and reach agreement. The result? Even when one party owns both houses of congress and the white house it struggles to pass any significant legislation.

George Carlin's Driving Test Applied to Income and Politics

"Have you ever noticed that anybody driving slower than you is an idiot, and anyone going faster than you is a maniac?" - George Carlin

What he might have said about household income.

"Have you ever noticed that anybody making less than you is lazy and anyone making more than you is lucky?"

After an interesting exchange with a stranger about household income it occurred to me that this person judged people making more or less than her. She seemed really resentful of people who made more AND less than her. The ones making less were at home slacking off and pumping out babies. 

It was curious that she felt that people making less than her could have easily applied themselves - just by working hard - and increased their income but she apparently didn't think that if only she would work harder that she, too, could double her income.

Here is the thing about income distribution: 20% of your population will always be in the bottom 20% and 20% will always be in the top 20%.

This stranger said she made about $40,000. That means that she makes more than 40% of American households. Households that make under $20,000 are in the bottom 20% and households that make over $100,000 are in the top 20%. When you are talking to a random American there is a 50% chance that their household makes less than $50,000. You should be no more shocked or judgmental about discovering the person you talking with makes less than $50,000 than you are that a coin you flipped was tails. 

Or you could make it all mean something about a person's work ethic and morality.

2016 Distribution of Household Income

The aha I got from the exchange with this woman making about $40,000 is that we do have a tendency to believe that if only the people making $20,000 were to work as hard as we have, they too would make $40,000. And if only the people making $80,000 had fewer lucky breaks, they would be making no more than we are. In this worldview, incomes of the people making less than us would rise if only they worked harder and incomes of the people making more than us are so high only because they are lucky. 

History suggests that hard work doesn't change incomes as much as progress.

In 1900, people worked harder than us. The average work week was 60 hours, not the 37.5 it is today. Yet people in 1900 made an average salary of about $9,000 ($450, actually, but adjusted for inflation of things like groceries and housing), less than one-sixth of what they do today. Not only did they make less but their money could buy less. No one in 1900 was buying an airplane or movie ticket.

At any given point in history there is a distribution of income and half of the households will find themselves in the bottom half of that distribution. Maybe at some point in the future the people in the bottom 10 to 30% will be perfectly comfortable and able to afford housing and food and healthcare but that time isn't now. We can act like those people are in those bottom percentiles because they work only half as hard as people in the 40th or 50th percentiles and are meeting their just reward. Or we can acknowledge that incomes vary and some simply aren't enough.