Saturday, October 22, 2016

The New York Times (was) Right!

Believe it or not, I agree with the New York Times on immigration!  So does Donald Trump!  But it is the Times of the late first Clinton administration, not today.  Some amazing quotations from their editorial of 2/22/2000:
Amnesty would undermine the integrity of the country's immigration laws and would depress the wages of its lowest-paid native-born workers.
The primary problem with amnesties is that they beget more illegal immigration.
All that is unfair to those who play by the immigration rules and wait years to gain legal admission.  It is also unfair to unskilled workings already in the United States.  Between about 1980 and 1995, the gap between the wages of high school dropouts and all other workers widened substantially.  Prof. George Borjas of Harvard estimates that almost half of this trend can be traced to immigration of unskilled workers.
What has changed?  Two things:  Democratic Party strategy and the ownership of the New York Times.  Democrats have figured out that immigrants are permanent Democrat voters, and that wealthy donors who benefit from cheap labor can be flipped from the Republican Party.  The ownership change occurred when the Times was bailed out by billionaire Carlos Slim, whose fortune was built on phone service to immigrants from Mexico.

Trump's positions on the issues are based on sound common sense, but the only issues that matter in this election are the sexual habits of the candidates and their spouses, and whether people are saying mean things.

People will look back on this election and laugh a lot.  I heard this exchange last night on NPR:

Kelly McEvers:  "We just heard someone calling a presidential candidate an old hag (sigh) on our air (more sighing, deep breaths) How do we recover? (tone of fear and trepidation)... David?"

David Brooks:  "...if the nation devolves into this kind of cruelty, then it doesn't matter who sits on the Supreme Court because we won't be a nation of laws."

Fortunately for the survival of the civilized world, NPR's Sarah McCammon rode to the rescue by mocking the accent of the North Carolinian who spoke so cruelly.  He must be wrong if he says "nothin'" instead of "anything." 

Friday, October 14, 2016

Sex Sells, Policy Not So Much

The 2016 election has become a pure popularity contest.  Issues are irrelevant, and the most important thing is the sexual habits of the candidates and their spouses.

Nothing can change this, of course.  It seems obvious to suggest that we put personalities aside and focus on issues, but no one of any importance is doing so.  As a result, the vast majority of people who are paying attention at all care only about the latest sensational headlines.

With the exception of Jimmy Carter, all modern presidents have had some sexual scandal in their lives.  Neither Trump nor Bill Clinton would be even close to the worst.  We have also had presidents with tricky personalities and histories of corruption.  I don't think any of this sort of thing really matters, except in the process of tricking voters.

In most elections issues haven't mattered either, because the positions of the candidates have been fairly close.  This year is different.  On taxes, immigration, trade and war there are significant differences between Trump and Clinton.

I have explained my preference for lower taxes many times.  I also believe it is possible to have too much or too little immigration, and that at the moment the U.S. has more than the optimal level for both economic and social reasons.  Trump is the only candidate in many years who has suggested that this is the case, and he might nudge policy in the right direction.  On trade, I think that reducing income taxes by one dollar would produce more benefit than the cost of raising tariffs by the same amount.

On war, I accept that the long-term goal of the U.S. is to eliminate all rivals for world domination.  For its own security, the U.S. wants to ensure that no single power ever dominates Eurasia, and it will work to weaken any important regional powers that spring up.  But that does not mean threatening all rival powers all of the time.  The U.S. must pick its battles.

From the 1980s until fairly recently, Russia was weak and the U.S. pressed its advantage.  U.S. gains were tremendous.  Russia used to dominate 9% of the world's population and 5% of its area.  Those figures are now 2% and 1.3%.  But pushing too hard in recent years provoked Russia into taking back parts of Ukraine and projecting military power into the Middle East.  It is time to step back, consolidate gains, and tempt Russia into cooperative ventures.  Clinton seems stuck in confrontation mode, while Trump seems willing to try new approaches to Russia.

The sound and fury of this election signifies nothing.  But the candidates have made a number of promises, and evidence suggests that promises are usually kept.  Clinton has been pushed far to the left by Bernie Sanders, and so would probably govern very differently than Bill Clinton did.  Trump tells us that his negotiating strategy is to ask for more than he expects to obtain, and so he will probably not accomplish everything he describes, but I think he would move things in the right direction.

Why have the media and intelligentsia allowed the campaign to degenerate?  I think it is because they know that most voters agree with Trump on the issues, and the only way to beat him is with trivialities.  Why do they want to beat him?  I think the main reason is that they have spent their careers building up contacts, and they don't know anyone who supports or works for Trump.  Trump is such an outsider that insiders are afraid that they will be completely shut out of power and influence if he wins.

The media and policy elite have drifted into policy positions that are absurd, but remaining an insider requires acceptance of them.  The emperor has no clothes, but it is not a good career move to point this out.

Saturday, October 8, 2016

Clinton and Trump on Taxes

Hillary Clinton's website says the following:
"she will close the “step up in basis” loophole that lets accumulated capital gains go untaxed when assets are passed on to heirs"
"Her plan will treat bequests as a realization event."
"she would limit the tax benefits of “like-kind exchanges"
"Clinton is...calling for returning the Estate Tax to 2009 parameters, and lower the exemption for the Estate Tax"
"higher rates as values rise, up to a 65% rate on estates"
"Hillary will call for imposing a 4 percent “Fair Share Surcharge""
These proposals are a declaration of war on wealth.  Trump's plan is different - he would eliminate the estate tax and drop the top income tax rate to 25%.  The incentive for a wealthy person to earn an extra dollar of investment income would be much less under Clinton's plan.

Under Clinton's tax regime, that dollar would first be taxed at the top rate of 39.6%, plus the 3.8% Obamacare tax, plus the 4% surcharge, leaving the earner with 53 cents.  At death, Clinton's estate tax would take 65% of what is left, leaving about 18 cents.  Trump would tax 25%, leaving 75 cents.  This is a gigantic difference.  Add in state taxes, and depending on how exactly Clinton's proposals end up as tax law, it is very possible that some wealth will be taxed at more than 100% at the time of death. This sounds crazy, but it could happen if capital gains taxes are assessed on the beneficiary and are not deductible for estate tax purposes.  In Maine, for example, the estate tax is 12% and the capital gains tax is 7%.  The tax rate on a fully depreciated asset could be 65+12+20+7 = 104%!

Clinton is clear that she will eliminate loopholes that might allow avoidance of these taxes, with one exception - there is no mention of foundations on the website.  Not many families are wealthy or connected enough to start a foundation like the Clinton Foundation - here are their two headquarters in Midtown Manhattan and Little Rock:

The Clinton Foundation is the perfect way for the Clintons to pass down wealth and power to Chelsea Clinton and Marc Mezvinsky, which ensures that Hillary and Bill will remain powerful until they die.  The Clintons have attained a net worth of over $100 million, all through political power and connections. That wealth bolsters their political power, which enables them to gain even more wealth.

One of the loopholes that Clinton targets, the step up in basis on death, has been a feature of the U.S. income tax code since it was first enacted in 1913.  (It was dropped in 1976, but then retroactively reinstated in 1980)  Every estate planner uses this provision, and eliminating it will convince many taxpayers never to trust in the stability of the tax code again.  Clinton claims that she will provide exemptions for farms, small businesses, houses, etc., but accountants and lawyers will find ways to exploit these exemptions, eventually forcing the government to close them.  By raising the exemption and eliminating the step up and like kind exchanges, Clinton will subject many more families to death taxes than have ever paid them before.

Another loophole that Clinton intends to close, like-kind exchanges, has been found to be a net contributor of tax revenue.  (I will be discussing this paper at the ASSA meetings in January)

If you are planning to pass wealth on to your children, you should be worried about the possibility of a Clinton victory next month.

Saturday, October 1, 2016

American Decline

Donald Trump wants to "make America great again" while Hillary Clinton says "America is already great."  So who's right?  Has America declined?

 The World Bank publishes "Worldwide Governance Indexes" for different countries over time.  In the categories of "Voice and Accountability," Government Effectiveness," "Regulatory Quality," "Rule of Law," and "Control of Corruption" the U.S. declined from 2005 to 2015.

In the remaining category, "Political Stability and Absence of Violence," the U.S. improved significantly.  This is interesting, given that Trump's rise began in mid-2015, and many claim that his followers are violent and that Trump is a new Hitler.

Trends in real per capita consumption of nondurables and services seems to me to be to be a reasonable indicator of the standard of living in the U.S.  Americans have come to expect rapid economic growth, and are disappointed if consumption falls below its previously established growth path.

I obtained the time series from the BEA, took the log, and calculated the quarterly deviation from the expected value if it had grown from 1947 to 2016 at a constant exponential rate.  Here is the result:

(The difference in the log is the log of the quotient.  The quotient is actual consumption divided by trend consumption, and the log of that corresponds roughly to a percentage difference.)

Consumption growth took off from 1963 until 1973, when it leveled off at a high rate.  Starting in 2007 consumption relative to trend plummeted and has not recovered.

Something is wrong, and that is why Trump, a first time politician with everything against him, is doing so amazingly well in the polls.

Friday, September 23, 2016

Sense and Nonsense on Immigration

Pigs get fat, hogs get slaughtered.  It's an old saying that means look out for yourself, but don't be too greedy.  Democrats could use the advice on immigration.  Of course they are pro-immigration, because most immigrants vote Democrat.  But pushing the issue too far might cost them an important election.  

A small, steady stream of immigrants from Mexico would eventually produce a permanent Democratic majority in the U.S.  As I have explained, I believe the costs of these immigrants outweigh the benefits, but below some level, the costs would be relatively small and unnoticeable for most voters.  Restricting immigration from dangerous countries would also help to keep immigration under the electoral radar.  It is a brilliant strategy - keep bringing immigrants in, slow enough to avoid attracting too much attention, but fast enough to annihilate the Republican party over the next couple of decades.  The part that is most brilliant has been convincing Republicans to play along!

The Obama administration appears to have some understanding of this strategy.  While they have weakened border restrictions, they do deport some people, although the statistics are confusing.  They just this week announced a tougher policy on Haitian immigrants, and last year President Obama signed a bill passed with broad bipartisan support that targeted European Muslims for more scrutiny at U.S. borders.  Europeans can enter the U.S. without a visa, but the new law requires visas for those with dual citizenship from "Iraq or Syria, a country designated as a country that has repeatedly provided support for acts of international terrorism, or any other country or area of concern."

If Donald Trump had proposed the same thing, Hillary Clinton would be calling it un-American, bigoted, and "not who we are."

The Obama administration miscalculated and pushed immigration a bit too far, allowing Trump to emerge as a serious contender.  Democrats, too greedy for a quick padding of the voter rolls, countered instead of co-opting the Trump message.  If Clinton had emphasised the anti-immigration policies of the Obama administration and agreed that more could be done, she would now be way ahead of Trump.  After the election she could have stuck with the steady stream strategy.  Slow and steady wins the race.

Instead, the Clinton campaign is advocating open borders extremism.   A recent Clinton campaign tweet read:
"No one has the right to immigrate to this country." Donald Trump during his rally in Florida today.   
We disagree.
If there is an international right to immigrate to the U.S. we are in big trouble, because hundreds of millions of very poor people want to move here.  Hillary Clinton knows better, but she has been painted into a corner with short-term strategic thinking.  By mindlessly opposing everything Trump says, Clinton has taken leave of common sense and risks losing everything.

Unfortunately in this case, candidates usually keep their campaign promises.  If Clinton wins, she will be under tremendous pressure to open the borders, which will lead to an even bigger backlash in the next election.

Saturday, September 17, 2016

A Reason to Vote Against Hillary Clinton

After the Cold War, the U.S. tried out a new role as world hegemon.  Reasoning that it remade totalitarian countries like Germany and Japan into liberal capitalist democracies after World War II and seeing that Russia seemed to be moving in the same direction, Americans believed that they could transform the entire world in their own image.

9/11 accelerated the process.  Troublesome countries in the Middle East were to be turned into productive, placid places.  The Clinton and Bush dynasties both agreed with the strategy, and so the U.S. went to war.   Five years later, Americans began voting against the incumbent Republicans, largely because they were disappointed to learn that wars were more costly than they had expected.  After two more years of war, they elected an anti-war president who was promptly awarded a Nobel Peace Prize.

A new Secretary of State in this environment might have been expected to rethink American strategy.  Instead, Hillary Clinton doubled down, continuing the attempt to democratize the Middle East in Eqypt, Syria and Libya.  This New York Times article makes it clear that Clinton's support was crucial in convincing President Obama to intervene in Libya, with terrible consequences.  It is also clear from her campaign rhetoric that she intends to continue a confrontational foreign policy.  Trump is harder to predict, having never served in public office, but he has suggested a more moderate approach, and has rebuked the Bush administration over the Iraq war.

If Clinton wins, policymakers will conclude that the American people will continue to tolerate military adventurism abroad.  It seems to me that voters should punish Clinton for failing to learn from mistakes and send a message to Washington that it is time to focus more narrowly on American security, and to scale back on ambitions to transform the world.

Saturday, September 10, 2016

Don't Worry, Be Happy

Should we be worried about the election?  We all have preferences on this or that policy or personality, but how much will the election of one candidate or the other affect important things like peace and prosperity?

Since an anti-war, Nobel Peace Prize winning president has turned out to be the first ever to preside over 8 years of war, it is hard to argue that campaign promises accurately predict war or peace. 

What about economic growth?  I saw a graph on Twitter a few days ago, I think from Mark Perry.  I found long-term GDP growth data from, took logs so that constant growth would look like a straight line, and plotted actual growth (blue) against constant growth of 1.92% (red).  I calculated that this rate produces the best fit of the data for the longest time.  Here is a graph:

Starting about 1840, growth is remarkably constant through 2015.  There is a patch of slow growth from 1907 through the Great Depression.  Interestingly, that period begins with a financial panic which leads to the creation of the Federal Reserve.  The Federal Reserve was new and inexperienced at first, and many economists, including former Fed Chairman Ben Bernanke, believe that the Fed was responsible for the Great Depression.  Perhaps the Fed has gotten better at its job - but only good enough to match the growth we had before there was a Fed at all!

Measured growth is a bit more volatile during the years 1840-1906 than it is from 1949-2015, but that could simply be the result of better measurement - less noise in the data, not necessarily more volatile economic growth.  Either way, it is hard to believe that this slight volatility had serious welfare costs.

It is an amazing fact that economic growth in the U.S. is approximately 2% almost no matter what - the party in power seems to have little effect.  The stock market seems to agree, indicating that a Trump presidency would not cause serious economic problems - the market has increased in value while the odds of a Trump presidency have gone from zero to 0.3 over the past 15 months.

To see if there might still be a relationship between stock market changes and Trump odds I downloaded daily election odds from the Iowa Electronic Markets and stock and bond market data from the Federal Reserve Bank of St. Louis.  The IEM data are available from late January of 2016.  I multiplied the odds of Trump winning the nomination times the odds of the Republican nominee winning the November election for the time period before the Republican convention.

It might be the case that when Trump's odds improve, stock traders panic and the market declines.  It might also be the case that when the market declines, voters become more worried and are more likely to vote for Trump.  To disentangle these possibilities I used a Granger causality test using three lags.  It turns out that we cannot reject the null hypothesis of no causality in either direction.  It is slightly more likely that voters react to the market than the other way around, but both possibilities are unlikely.  In other words, stock market traders do not think a Trump victory would tank the stock market.

One reason for this is the American system of checks and balances.  A President Clinton would face a lot of Republican opposition, and a President Trump might not be able to count on a united Republican Party.  But another reason is that neither candidate is as terrible as the other side imagines.  Trump would lower taxes and immigration levels, Hillary would raise them, but probably not to levels that would cause catastrophe.  If they tried, they would be punished swiftly in mid-term elections, and then voted out of office before they could do permanent damage.

The election is entertaining, and we all have favorites for many reasons, but we should not expect economic disaster or nirvana as a result of either candidate becoming president.