Andrew Ross Sorkin is not helping

At least not with reporting like this:

Whatever the policy debates, households at President Obama’s dividing line might be wealthy, but that doesn’t mean they feel wealthy.

On a Yahoo message board, a poster named Mason, who lives in Manhattan with two young children, said his household income was $262,000. “I understand the need to raise taxes,” he wrote, “but I don’t understand why people like us are lumped in with millionaires and billionaires.”

Are we talking about taxable income here? The writing isn't very clear on this point and I couldn't get the link to work, so I would be inclined to assume that the phrase "household income" refers to the money coming into the household. If that's the case, then Obama's proposed tax increases wouldn't affect Mason at all.

But let's assume, just for the sake of argument, that we are talking about taxable income. Even if we make that assumption, the higher rate would only apply to twelve thousand dollars. Please check my math on this, but it looks like going from 33% to 39.6% would mean something around an eight hundred dollar increase.

Eight hundred dollars. Eight hundred dollars to someone who is probably bringing in close to three hundred thousand in gross income. Eight hundred dollars to someone living in a town where dinner for two at a nice restaurant can easily run you four hundred.

It's true that the writers and the editors of the NYT have always been deeply moved by the hardships of Manhattanites but even Sulzberger would draw the line at making this big of a deal over this small an amount of money. That's why Sorkin (in a story rich with specific figures) chose not to run this particular number.

Sorkin's "Rich and Sort of Rich" is standard NYT things-are-complex, both-sides-have-point, look-at-how-objective-I-am journalism, but if you actually clear away rather than add to the confusion about marginal rates and taxable income, the whole story collapses.

Sorkin is a smart and experienced financial journalist which makes this sort of shoddy reporting even less forgiveable.

[Joseph and I have been hacking away at this for a couple of days now. You can find the rest of the thread here, here and here.]

Tax Policy

Mark has been discussing the concerns about the hardship that tax increases would inflict on those with an income exceeding $250,000 per year. In part I think that this line of discussion began with Greg Mankiw trying to use himself as an example of a person who might do less labor if the marginal tax rate increased. There were a number of great points brought up as to why this example had issues: see here, here, and here.

There was a second economics professor who also made similar claims although I found them a bit harder to evaluate as the example was not as clear. This argument seemed to be more about how hard this person would find it to make cutbacks rather than a specific example of how he would become less productive.

Yesterday,Noahpinion linked to a great article by Karl Smith that went to the heart of this discussion. The argument was whether tax increases (at the sort of marginal rates we currently have) really depress productivity. Karl Smith made a number of arguments that were worth considering, including:

Third, high income people don’t seem to be working that much more than low income people despite the fact that a natural propensity towards work can make one high income.

Indeed, the data show us that low income folks used to work a little more, but now they work a little less than high income folks. Yet, if the income and substitution effects were balanced for each person we would still expect higher income people to work more.

That’s because working hard can lead to more education, more experience and more promotions. Being hard working is also associated with having a conscientious personality type which is itself more valuable.

So if someone was simply born with a stronger propensity to work, we would expect that person to earn more income per hour. Thus we when look at the data we should see that all these high income people are working lots of hours.

Yet, we actually don’t see that. We see only a mild effect and even then that effect is not robust over time. Sometimes, high income folks are working less.

But the piece is a must read in the entirety. The key argument here, though, is whether the extremely small tax increases that are under discussion (a raise in the marginal tax rate for the highest income bracket from 36% to 39.6%) is really likely to make high income Americans less productive. Because if these tax increases don't disincent work and we accept that government finances really are a mess then the tax hikes seem to be a logical way to "share the cost of these increases".

But I also think that these points don't necessarily go far enough. Are we really convinced that a small decrease in productivity among the wealthy will be that devastating? What is the source of productivity in the American economy? Is it highly paid CEOs, hedge fund managers, lawyers and medical doctors, or is it the majority of workers who drive productivity?

I think it is essential to get this correct. A top down model of an economy (where the people at the top make the key decisions and are responsible for the output) did poorly in Soviet Russia. A bottom up theory of economic gains seems to make a lot more sense and that suggests that small productivity losses among the wealthy are not a serious concern.

It is worth emphasizing that, at this time, I am aware of two proposals to increase the tax rates of the wealthy: increasing the amount of wages on which FICA can be charged and returning to Clinton-era tax rates. Neither of these increases is a vast change in the marginal tax rate of this group. Clearly there are tax increases that would cause issues, but we can handle those when they show up and not now when all of the possible rates under discussion are sane.

The last example that people tend to bring up is innovation and how important it is to reward innovators. Now, as part of a first principle I would like to point out that the innovator is not always the person who profits the most from an invention (consider Nikola Tesla). But it is also worth noting, as Mark points out, that copyright law already provides enormous rewards for intellectual property holders.

So I think we should look to balance harms. Recent events have included layoffs of government workers into a economy with an extremely high unemployment rate. Are we sure that the consequences of a large body of long term unemployed workers will be better than that of small increases in tax rates?

"This really isn't about the hunting, is it, Bob?"* -- more on just scraping by on a quarter mil

Comments to my recent post on getting by on $250,000 (which was itself basically a comment on this excellent piece by Felix Salmon) picked up on the fact that, for people making a little over 250K in taxable income, the actual increase in taxes paid under the Obama plan would be remarkably small. This raises an obvious question: why do we keep hearing about the hardship on people making less than 300K when hardly any of the increase falls on this bracket?

The answer I suspect has less to do with math and more to do with marketing.

Sympathy for financial hardship is almost always inversely related to wealth and income. It's hard to feel all that sorry for someone who makes more money than you and yet has trouble keeping the bills paid.

For most of us, a quarter million in income takes you to the far outer edge of the sympathy zone. It seems like a lot of money but you might be able to convince some people (particularly, say, well-paid Manhattanites) that it was possible for a non-extravagant family to have a combined income of 250K and still not have much of a buffer at the end of the year.

Unfortunately for people lobbying to keep the Bush tax cuts, that 250K family wouldn't actually pay any additional taxes if the cuts expired. Neither would a 260K family or a 270K family (assuming those numbers are gross). Because we're talking about taxable income and marginal rates, a family's gross would have to be closer to 400K than to 250K in order to see anything more than a trivial increase.

If you're trying to make an emotional pitch for the Bush tax cuts this creates a problem: the only people significantly affected by the increase are those well outside of the sympathy zone. You can't expand the zone (the suggestion that many families making a quarter of a million were just getting by was met with considerable derision. Upping the number by another hundred thousand is a no starter). The other option is to focus on families making between 250K and 300K while downplaying the actual magnitude of the increase on these families.

Of course, that second option does require an overly compliant press corps that will simply parrot the releases of various think tanks without attempting to correct the false impressions they give. Fortunately for the tax cut supporters, that doesn't seem to be a problem.

* punchline to an old and very dirty joke.

What Rick Santorum had to say about fiscal responsibility in 2003

From the Hill via Krugman:

“I came to the House as a real deficit hawk, but I am no longer a deficit hawk,” said Sen. Rick Santorum (R-Pa.). “I’ll tell you why. I had to spend the surpluses. Deficits make it easier to say no.”

It's important to remember these things.

"The Problem with Biomass, Part 1"

I'll be referring to this in a future post.

From James Kwak:

Did you know that my wife is a “high-paid consultant” for the shadowy anti-biomass movement? Neither did I — and I’m the one who handles all of our finances, so I should know.

Last night she testified at a hearing held by the Springfield City Council, which is considering revoking the permit of Palmer Renewable Energy (PRE) to build a biomass plant in Springfield. PRE was granted a special zoning permit to build the plant in 2008. Since then, PRE has increased the amount of fuel it intends to burn (meaning, among other things, that more diesel trucks will have to drive in and out to deliver the material) and changed the type of fuel from construction and demolition debris to “green wood chips” (which matters because the plant was initially permitted as a recycling facility).*

My wife, a professor of environmental economics and econometrics, testified about the link between emissions (from power plants and diesel trucks) and illness, particularly asthma. At the hearing, one of PRE’s witnesses claimed not to know where my wife was “getting” the idea that air pollution can cause asthma. (In a newspaper article, PRE had this to say about asthma: “Valberg said there are many theories on the causes of asthma, and that indoor air quality in homes and schools is actually more of concern than outdoor air. For opponents to state that the project will worsen asthma rates ‘is just not scientifically accurate,’ Valberg said.”)

Well. Many, many studies have linked outdoor air pollution to asthma incidence or morbidity (Mortimer 2002, McConnell 2006, Ho 2007, Islam 2007, Loyo-Berrios 2007, Halonen 2008, O’Connor 2008 (summary here); Islam 2008 reviews studies of traffic-related asthma; Patel 2009 reviews studies of childhood asthma) and to bad cardiopulmonary health in general (Samet 2000, Pope 2002, Vedal 2003). I could come up with lots more citations, but you get the point.

...

Recently, the biomass developers have been arguing that they are the victims of a high-paid, high-powered, shadowy network of environmental activists. See for example this Springfield Republican article that largely repackages PRE’s talking points; its lead is “The developers of a proposed 35-megawatt wood-burning plant in East Springfield say the opposition to their project is well-organized, determined and well-funded.” (The Biomass Power Association blames a “small, vocal, extreme minority.”)

Well, I can tell you that my wife drove down to Springfield after work, spent four hours at the meeting, came home late at night, missed dinner, and didn’t get paid a cent.

* There is a legal issue about the standard necessary to justify revoking a permit that has already been granted, but that’s not relevant for this blog post.

Sympathy for the financially inept

Felix Salmon does a great job dismantling the latest wave of "how can I possibly get by on a quarter mil" stories (Jonathan Chait also has a suitably snark-filled take on the subject, though unfortunately it's behind the TNR paywall). Salmon takes apart the bad math, the poor reasoning and the general offensiveness of these articles so thoroughly that there's not much to add on the general level but I do have this one locale-specific observation.

I've lived in LA for a number of years with an income that has bounced from low (parochial school teacher) to high (corporate statistician) to really low (writer and board game designer), so I can tell you from experience that any individual who can't live well in this town on 100K is either incredibly extravagant or ridiculously bad with money. I can also say from experience that you can get by on thirty (barring the unexpected) and be quite comfortable at sixty.

If you're an Angelino and you're a individual who makes six figures or a member of a household with a combined income of over a quarter of a mil and you still find yourself in the red at the end of the year (barring special circumstance like a sudden drop in income, major illness, or the birth of a special needs child), you should admit to yourself that you have a problem and either seek financial counselling or consider finding someone to make your money decisions for you.

Back to the future

I don't know if this has anything to do with Blogger's recent wave of weird glitches but my post comparing satiric views of the future somehow reverted to an earlier version that omitted one of the two primary examples -- the 1967 film The President's Analyst. I've restored it so if you have any interest in the subject or if you read the screwed-up version and would like to know what I was trying to say, take a look and let me know what you think.

Alternatives to Social Security

Matthew Ygelesias tackles the difficult question of what is the alternative to a government run universal pension plan. After all, if we want to replace the current system of government run pensions then it makes sense to have an alternative.

The results are pretty dismal.

So where else does the money come from? Well:

— Defined benefit pensions.
— Labor income.
— Private savings.

These three alternatives are all deeply problematic. The problems with defined benefit pensions in the public sector (chronic underfunding, etc.) are well-known, and in the private sector those problems are even more severe. Labor income is not a realistic option for people over a certain age. And private savings are, frankly, a disaster. As a country, we’ve tried to deal with the decline of defined benefit pensions by encouraging the mass middle class to engage in private retirement savings with 401(k) plans, IRAs, etc. And it doesn’t work. On the one hand, people don’t save enough. On the second hand, the tax policy is deeply regressive. On the third hand, virtually 100 percent of the management fees extracted from customers through these vehicles are value-destroying rents. On the fourth hand, it’s extraordinarily difficult for a middle class person to properly diversify his portfolio. And on the fifth hand, widespread ownership of index funds and mutual funds undermines corporate governance.

I think the drawbacks to the first two approaches are well known. But the concerns about the government savings vehicles are very thought provoking. Instead of a single (fatal objection), like the first two options, he lists a series of smaller problems that add up to a big issue. That being said, the issue of people not saving enough is always a concern.

I'd say that there is one more issue, though, that we should consider. Older adults are more easily subject to fraud on the part of either third parties or their money managers. It's not always clear that they have strong advocates. So even if people saved enough, the third option has the sixth downside of being vulnerable to theft in a way that pensions and labor income are not.

It's too late tonight to do it justice...

But this post is another reminder why Dana Goldstein is probably the most important education blogger currently on the beat.

More weirdness from Blogger

A few days ago I was playing around with the idea of writing a post about the dangers of economists trying for cool, so I copied this link into a new post and saved it as a draft. I had pretty much forgotten about it until a few minutes ago when it showed up with a new time stamp claiming I had created it this afternoon.

This is starting to make me nervous. Does anyone know a good way to make a hard drive back-up of a blog?

I can think of some exceptions

But I suspect Donald Knuth was excluding books like Light in August and Huckleberry Finn when he said this.

For years I tried to make calculus interesting

And yet I never considered this (via Andrew Gelman):

Those who forget the future are doomed to repredict it

Mr. SHTEYNGART: There's no present left. This is the problem for a novelist, is the present is gone. We're all living in the future constantly. How I envy...

GROSS: What do you mean by that? I'm not sure what that means.

Mr. SHTEYNGART: Well, look, back in the day, Leo Tolstoy, what a sweetheart of accounts and [transcription error?] a writer. He wanted - in the 1860s he wanted to write about the Napoleonic campaign, about 1812. If you write about 1812, you know, in 1860, a horse is still a horse, and a carriage is still a carriage.

Obviously, there have been some technological advancements, et cetera, but you know, you don't have to worry about explaining the next killer app or the next, you know, Facebook or whatever, because right now things are happening so quickly.

Gary Shteyngart talking about his novel Super Sad True Love Story on Fresh Air.


Gary Shteyngart is a ludicrously credentialed writer, but the part of his interview that caught my attention had little to do with his fiction or his approach to writing. Instead it ... Well, maybe it would just be simpler to show you.

In 2010, here's what Mr. Shteyngart's near-future satire looked like:

A half-dozen of my fellow citizens were seated behind their chewed-up desks, mumbling lowly into their apparati. There was an earplug lying slug-dead on an empty chair and a sign reading: Insert earplug in ear. Place your apparat on desk and disable all security settings. I did as I was told.

An electronic version of John Cougar Mellencamp's "Pink Houses" - ain't that America, something to see, baby - twanged in my ear, and then a pixilated version of the plucky otter shuffled onto my apparat screen, carrying on his back the letters A-R-A, which dissolved into the shimmering legend: American Restoration Authority.

The otter stood up on his hind legs and made a show of dusting himself off. Hi there, partner, he said, his electronic voice dripping with adorably carnivalesque. My name is Jeffrey Otter(ph), and I bet we're going to be friends.

Feelings of loss and aloneness overwhelmed me. Hi, I said. Hi, Jeffrey. Hi there yourself, the otter said. Now, I'm going to ask you some friendly questions for statistical purposes only. If you don't want to answer a question, just say I don't want to answer this question. Remember, I'm here to help you.

OK, then, let's start simple. What's your name and Social Security number? I looked around. People were urgently whispering things to their otters. Leonard or Lenny Abramov, I muttered, followed by Social Security.

Hi, Leonard or Lenny Abramov, 205-32-8714. On behalf of the American Restoration Authority, I would love to welcome you back to the New United States of America. Look out, world, there's no stopping us now. A bar from the McFadden and Whitehead disco hit "Ain't No Stopping Us Now" played loudly in my ear.

And here's what near-future satire looked like almost forty-five years ago:



The inescapable communication device, the cheerful tone covering the ominous totalitarianism, the cute cartoon icon. All in a big budget movie made five years before Gary Shteyngart was born.

Go back a few more years to 1953 and you can find antecedents for Shteyngart's satiric take on corporations and consumerism in the Space Merchants * (where mergers were actually resolved through armed conflict) and in any number of books and movies since then. And as for the jokes about the decline of books and reading found in Shteyngart's story, the challenge is finding a science fiction book that doesn't have them.

None of this is meant to imply any kind of plagiarism or even to suggest the book is derivative. Shteyngart is a sharp and funny writer and though I haven't read it, there's every reason to expect Super Sad True Love Story to be a terrific book.

It is, however, a book that approaches the topic of the future in a way we've seen before and that fact leads to an interesting observation: for over half a century, people have seen themselves as being at that point in history where the world was about to undergo radical and unimaginable changes. What's more they've discussed these approaches using much the same language and often similar jokes.

I suspect that it was initially a reaction to the explosive technological and social changes from around 1875 to 1945. If one man could have witnessed the first phonograph, telephone, light bulb, airplane, radio, movie, television, and an atomic bomb (not to mention two world wars, enfranchisement of half the population and too many literary and artistic forms and schools to count), just imagine what the next few decades would hold. (It is probably not a coincidence that during this period, the time travel genre was introduced by Twain and Wells and became an established part of popular fiction.)

Once established it's easy to see why the idea of the hurtling future proved so popular. There is a natural tendency to underestimate the contemporary impact of what we think of as antiquated technology. Check out Shteyngart's quote about Tolstoy that seems to imply that the development of photography, telegraphs and locomotives changed the world less than Facebook and Angry Birds.

Besides, most people like the idea of an exciting future (particularly since so few of us alive today have actually had to live through one).




* You'll notice that some seniors have had no trouble keeping up with the future.

Sure $172,200 sounds high but you do get room and board

I wish I had time to give this the treatment it deserves:

For all the hand-wringing over the cost of a full-time MBA, it turns out that the most expensive graduate business degrees in the world are not the highly publicized two-year, full-time experiences at places like Harvard and Stanford. Instead, the bulging price tags are on elite part-time programs designed for mid-career executives.

The most costly Executive MBA in the world? It's Wharton's 24-month MBA for executives at its West Coast campus in downtown San Francisco. At a cost of $172,200, students are effectively paying nearly $250 an hour for the pleasure of sitting in a class with 50 other people. That's nearly $100 more per contact hour with faculty than the regular full-time MBAs at Wharton pay. For every one of the roughly 700 hours a Wharton professor teaches Executive MBAs, the school is collecting a tidy $12,300.

Wharton Rakes It In

The second most expensive? It's also Wharton's Executive MBA program, this time on the East Coast, where the tuition and fees now come to $162,300. Those considerable sums compare with the $108,000 in total tuition and fees forked over by the full-time students back on the main Philadelphia campus. Wharton's Executive MBA business alone now brings in more than $35 million in annual revenues, with little more than 400 total students.

Why the Difference In Cost

Why is there such a big difference in the cost of these top-ranked EMBA programs over those at other schools? "It's like anything else, whether you're talking about buying Pepsi or Sam's brand of cola," says Michael Desiderio, executive director of the Executive MBA Council, the trade group representing EMBA programs. "There is a value inherently tied to a brand."

In fact, the average cost of an EMBA program, says Desiderio, is only $65,655. "So it's a huge continuum, ranging from a low of $30,000 to a high of $170,000."

Anjani Jain, Wharton's vice dean, MBA Program for Executives, obviously thinks Wharton programs are worth the premium. "The cost of the program, when normalized with respect to the number of contact hours and the inclusion of room and board during program weekends, is actually comparable to that of peer institutions," Jain insists. "Many other EMBA programs have substantially fewer contact hours, or don't include room and board in the base tuition."

Of course, at the high end, as Jain points out, Wharton's program is a premium experience that includes meals, accommodations, and professors who are among the best business faculty in the world. In Philadelphia, execs stay on alternating Friday nights in Wharton's fairly plush executive education residence facility, while in San Francisco, they're put up in at the upscale Hotel Le Meridian in the financial district within walking distance of Wharton's West Coast campus. For another, many business schools believe there is less price sensitivity in a market catering to already successful executives in their mid-to-late 30s who don't have to quit their jobs to get the executive version of the MBA degree.

Executive MBA Programs Tend to Be Costly

No wonder there are now nearly two dozen Executive MBA programs around the world that cost six figures. Increasingly, the most expensive programs feature international excursions for which meals and accommodations are covered (though airfare is not). Duke University's Global Executive MBA program, for example, boasts five residential sessions, with 60% of the classroom time in Asia, Europe and the Middle East. It carries a $146,600 price tag that includes lodging and meals. Or there is Trium, a three-way collaborative program among New York University, the London School of Economics, and HEC Paris. That program costs $140,000.

Noah Smith leaves out an important distinction

There's a good post at Noahpinion wondering where the opposition to high-skilled immigration is coming from. I suspect Smith is too quick to dismiss the role of xenophobes who see any increase in immigration as the first step down the slippery slope toward an open border, but it was this paragraph that really bothered me.

What about high-skilled native-born Americans? Are American-born computer programmers, engineers, and entrepreneurs afraid that high-skilled immigrants will take their jobs? I guess this is conceivable. I've heard some low-level grumbling from American-born engineers about the low wages and long hours that immigrant engineers are willing to accept, but I know of nothing even slightly resembling an organized movement or lobbying effort. And my guess is that smart Americans are smart enough to know that it's a positive-sum game - that the positive impact of the businesses started by smart immigrants vastly outweighs the effects of wage competition.

I may be opening myself up to an obvious insult here but having worked as a statistician in companies that used highly skilled immigrant labor, I'm not sure that this is automatically a positive-sum game.

At least not without one important caveat.

When we talk about naturalized citizens, students and green card holders,* it really does tend to be a net gain when we bring smart, highly-educated people into this country. Putting aside students (whose contribution is a topic for a different post), the positive impact of these highly skilled immigrants is due in large part to a labor market that does a reasonably good job matching employer and employee and setting compensation levels that reflect skills and productivity.

For H-1B visas, however, the labor market is severely distorted. Though the situation seems to have improved somewhat,** employees still face significant hurdles when changing jobs and limitations on what sort of jobs they can take, a situation sharply satirized by John Oliver in the clip below.

Having said all that, there's still a strong case to be made for increasing our H-1B quotas and this country could certainly use a good, healthy debate on the subject, but the specifics make a difference. You could argue that every time we bring someone smart and creative into the U.S.A it's a win for us, but the win is bigger when that person is allowed to participate in a more efficient labor market.

The Daily Show - Olivers on the Strike
Tags: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

* Green cards are a bit more restricted than many people realize, but probably not to the extent that it affects this conversation.

** See the American Competitiveness in the Twenty-First Century Act of 2000