:LPE:

Which came back to haunt me today:

“All these moments will be lost in time, like tears in the rain.”

Rutger Hauer in Bladerunner.

Neil Reynolds has repeated some banal falsities of tax policy, worth mentioning I suppose as a standard object lesson of bad economics reporting. Link.

First, notice it is all about US tax policy, and the central claim (as the headline suggests) is tax cuts have caused all the good things he mentions in the article: job growth, GDP growth, governnment revenue growth.

But, are these things really all that good? His data make almost no case that they are because they lack all the relevant context.

The job growth statistic is “jobs created”. Is it net of jobs lost? There is massive churning in the employment market. Note too that US employment rates are idiosycratic measurments that include, for example, prison populations and persons employed 14 hours a week (a relevant bit of information to Canadians whose official statistics differ). We won’t even get into the main indicator of job quality, the wage rate (equal to or less than the CPI, and flat for 20 years). Finally, job creation follows business cycles, and where is this job creation statistic as compared to similar positions in other business cycles?

Second, and most egregious, the claim that the recent growth in tax revenues shows that the tax cuts have somehow paid for themselves. Context would help. In 2001 (before tax cuts) the Congressional Budget Office (their official forcasters) projected the economy to grow by 20 percent between 2000 and 2006. On its current path, growth over this period is projected to be 16.7 percent. So, economic growth has been equal to or less than projected.

Getting to tax revenue, CBO’s projection of revenue for 2006 was more than 20 percent higher (adjusted for inflation). In other words, the economy is behind its pre-tax cut growth path and its way behind its pre-tax cut revenue path.

The tax cuts did not “pay for themselves”.

The fact that tax revenues are coming in somewhat higher than expected this year is explained largely by the strong stock market performance last year and the resulting increase in capital gains tax revenue. It may also be explained by the end of some tax cuts (that is, in effect, tax increases) including the one-time holiday on repatriated overseas profits by US resident corporations.

Lastly, the wonky comparisons with China (what was the object of this article, anyway?). Cross-country comparisons of economic growth, and the size of an economy, can be difficult and misleading. More effective comparisons use purchasing power parity - a measure of how much you can get for your new found wealth. These were absent the US-China comparisons.

Use “simple arithmatic” and you will get simplicitic answers. Reynold’s column is basically meaningless repetition of numbers out of context.

The Daily - the Stats Can publications - reports that foreign securities purchases are up, apparently 5th highest Q on record. The buyers are led by institutional investors. Link.

We would expect this after the removal of the foreign property limit (FPL - 30% of total assets) in 2005, a limit imposed to foster Canadian securities markets and fund Canadian businesses via securities markets. We got around the FPL through clone funds and other methods, but those are now costly archaisms. Looking forward, there are several possible paths: does the diversity of Canadian securities offerings atrophy? Does the market require larger premiums? Do foreign bonds (the larger share of purchases) begin to address interest rate problems? Do Canadian securities markets become speciality markets (i.e., commodities, energy)?

Not all of this is due to the FPL - the increased overseas purchases were occuring before the removal as well - but also to the interaction / competition between securities markets. There is not a lot, some say, that the Tokyo-New York-London markets can’t service by themselves.

I had reservations about this book, and looked through it quickly. It appears to be one of those ‘de-bunk’ books about some conventional beliefs, which are divided into the myopic, twin views of mainstream U.S. political thought: liberal and conservative. The primary analytical technique appears to be statistical manipulation and games with causality: it turns out by some measures, pools are more dangerous than guns, air travel is more dangerous than car travel. (The latter I think is true when measured by fatalities per trip or per hour, not true when measured by fatalities per kilometre).

The most contoversial claim is that legalized abortion caused a drop in crime rates 20 years later, when unwanted pregancies no longer resulted in children. The causal chain is that unwanted pregancies are more likely to be born to poor families, as unwanted children, and crime rates have a higher correlation to the poor, rather unsurprisingly (do rich need to steal?). Anyway, the claim seems to have some merit to my mind, although I am wary of such long causal chains for such complex social behaviours (abortion, crime). Puts social conservatism in a nice pickle too: to get tough on crime, you might support por-choice. Or, to really get tough on crime, you might provide day-care and living wages to parents.

Agreed, we can always use better social statistics, and better tools to understand them in proper context. That is always a difficulty.

But the book is largely unremarkable in amition, and also, unremakrable in political analysis: it doesn’t really engage with much beyond suggesting we need better statistics and better reporting of them - to help understand their meaning and limits. Some are old familiars: yes, we can be notoriously bad as a species at risk assessment, hence social policies like subsidized education or forced savings. Occasionally, it get positively technocratic (so much for the apolitical stance), as with the episode in which Levitt literally watches on as teachers are fired for filling in incomplete standardized tests for their students, providing him data to support the contention that 5% of teachers cheat as a result of the pressures of standardized testing.

My guess is the authors needed the money. But not as much as the out-of-work teachers.