Weekend reflections

Weekend Reflections is on again. Please comment on any topic of interest (civilised discussion and no coarse language, please). Feel free to put in contributions more lengthy than for the Monday Message Board or standard comments.

66 thoughts on “Weekend reflections

  1. As per last weekend I am still keen to hear any additional economic theories or explainations as to why US Federal Tax revenues are going up significantly.

    http://www.tax-news.com/asp/story/story_open.asp?storyname=24210

    For the first nine months of fiscal year 2006, CBO estimates, total receipts rose by 12.8 percent compared with the same period in 2005. That increase represents the second-highest rate of growth for that nine-month period in the past 25 years (surpassed only by last year’s strong growth). Net corporate income tax receipts continued to show the largest percentage increase, but the rate of growth waned in June. Nevertheless, net corporate receipts during the first nine months of the fiscal year grew by 26 percent, or $52 billion, compared with the same period in 2005.

    Although significant uncertainty remains regarding the quarterly estimated tax payments due in September, CBO expects that corporate receipts will exceed $330 billion for the entire fiscal year, an increase of at least 18 percent over the amount collected in 2005.

  2. Random year to year fluctuations seem to be the explanation preferred by most economists who’ve looked at this. Revenue fell more than expected in the immediate aftermath of the first Bush tax cut, and now they’ve bounced back.

  3. Looking at the entry for Shout VC in Wikipedia I was struck by the convergence in the “Aftermath” of his death and that of Jacob Kovco. the more things change the more they stay the same it seems.

  4. Just on the Shout VC sale it should be noted that record Liberal Party donor, Baron Ashcroft is the holder of the largest collection of VCs in private hands.

    If Ashcroft is the high bidder in Monday’s auction for the last Gallipoli VC not at the AWM will John Howard take steps to prevent its export?

  5. PrQ: “Random year to year fluctuations seem to be the explanation preferred by most economists” (in tax revenue in US).

    Although it is tempting to consider tax revenue as some function of GDP or other reflection of ‘real world’ events, tax revenue on a cash basis (as I suspect the US data to be) will have a notoriously slippery timing relationship with real world events.

    Tax revenue corrected to an accruals basis (the tax liability accrues as the taxable income is earned), particularly corporate tax, relies on judgement of accountants in either government or corporations, and is only a guess until assessments are worked through.

    Therefore, it is not surprising that the relationship between tax revenue and real world events appears random.

    An example close to home is the “stick” business organisations have applied to Treasury for poor budget forecasts of tax revenue vs. actual receipts over most of the Costello era.

    There must be a bunch of potential Phds in economics to be gained by delving into this murky area!

  6. Random year to year fluctuations seem to be the explanation preferred by most economists who’ve looked at this. Revenue fell more than expected in the immediate aftermath of the first Bush tax cut, and now they’ve bounced back.

    Thanks for offering an explaination (although I am not sure if “random” is really an explaination so much a statement about the lack of one). If possible can you suggest the names of a few economists who have looked at this, or even better can you point me to their musings, blogs, articles or papers.

  7. Terje,

    Given your persistence, I called up your reference. Why do you believe the story you have cited deserves comment?

    I would not draw any conclusions from the story you have cited other than some people are trying to make a living from it and one can’t blame these people for tryig to make a living.

  8. Ernestine,

    Why do you believe the story you have cited deserves comment?

    The word “deserves” is interesting in this context. I am not sure that any story deserves anything. However I was interested in this story because it is about tax revenue. And the US president has cut tax rates using a specific argument about how tax rate cuts will impact on tax revenues.

    By the way the reference offered is merely one of many. The “story” has been run with various angles in much of the main stream US media (eg New York Times). So obviously some editors think the story deserves something.

    So long as you are reading articles here are some more:-

    http://www.washingtonpost.com/wp-dyn/content/article/2005/07/13/AR2005071301617.html

    http://washingtontimes.com/commentary/areynolds.htm

  9. The thought of Harry Potter briefly crossed my mind as I was reading The Glass Bead Game. But I quickly packed that thought off as too quirky and possibly due to my reading too much of “shallow” stuff! I’m glad that someone else also thought along the same lines!!!

  10. Terje, here is a dash of cold water that may extinguish that flash of light you seem to discern at the end of the deficit tunnel:

    Speaking of these terribly encouraging figures, Douglas Holtz Eakin, former director of the Congressional Budget Office, remarked “One cannot reasonably expect corporate income taxes to grow at double-digit rates forever,” … “It would be prudent to assume that this might not be permanent either.” … “This is tiny compared to the big problem, and it’s on the wrong side of the budget. The big problem is on the spending side.”

    http://www.cavalierdaily.com/CVArticle.asp?ID=27155&pid=1453

  11. Katz,

    My interest in the US deficit is pretty low, although I have little doubt that it is a spending problem. My question was about tax revenues. I am interested in the drivers of tax revenue. From this discussion so far it seems that random forces play a big part and that revenue is somewhat independent of reality. Personally I was hoping for some more profound insights, however beggers can’t be choosers I guess.

    Regards,
    Terje.

  12. After a comment over on the norton soon catalaxative blog I’m curious about the price of a big mac as an international comparison.

    I think the original logic was that the cost of labour, materials, transport, utilities would be (largely) captured in the price of a big mac so that it served as a reasonable proxy of the comparative price of living.

    However looking at the price of a big mac in a few countries lately (Lebanon being one) made me wonder if perhaps there isn’t also a “luxury” element or what the market will bear element in the price, thereby making it not so useful.

    Any comments?

  13. FXH,

    I think the idea is that a Big Mac is a Big Mac is a Big Mac wherever you go, so the Economist is comparing like with like to hazard a guess at Purchasing Power Parity. It’s an interesting approximation but it’s not what academic social scientists use. They generally rely on the cost of a standardised ‘basket of goods’. The World Bank’s basket, if I recall correctly, includes all goods and services available in an economy. This isn’t without it’s own problems either though. See: http://socialanalysis.org/

  14. Quote from Ian McLachlan on the front page of the weekend AFR:

    I might be old-fashioned but I find it just incredible that an absolute arrangement was made for John’s benefit, which I was part of, and later it can all be denied by somebody like John. I just find, and have found, that incredible over the last five years

    The key point being:

    and later it can all be denied by somebody like John

    Well, d’uh! Of course it will be denied by somebody like John. John is a pathological liar.

  15. FX Holden: “I think the original logic was that the cost of labour, materials, transport, utilities would be (largely) captured in the price of a big mac so that it served as a reasonable proxy of the comparative price of living. ”

    The big mac kinda substitutes for the basket of goods used in PPP (Purchasing Power Parity) comparisons used more formally. How both PPPs and the Big Mac perform may be judged not only by comparisons with each other but by comparisons with currency exchange rates.

    By and large the big mac performs reasonably in lockstep with currency markets, suggesting that there is little “cultural” bias. I guess it also says that rich young things the world over are subject to the same peer pressures and advertising impacts.

    Check out the Economist website for more on the big mac index.

    Unfortunately, it averages the EEC area, thus not letting me disprove a theory prevalent before monetary union that prices would be the same for a given commodity/service all over the union. It averages the Champs Elysee big M with that of Piraeus (amongst others), which I think is outrageous given the variance between Switzerland (top Big Mac cost in USD equivalent) and other places in their data.

    BTW, the US data at least averages regional Big Ms, so you can get a handle on NY/Chicago/California relativities.

  16. I’m curious about the price of a big mac as an international comparison.

    I think the idea is that a Big Mac is a consumer good that is relatively international and fungible.

    I think it would make more sence if the world used a benchmark “unit of account” by comparing the wholesale price of flour in various nations. Flour should be a reasonable proxy for bread and has a reasonable shelf life. Of course I think gold grams would be better still but that is another conversation entirely.

    In my view the management of inflation using domestic consumer goods, instead of international commodity goods, leads to unnecessary exchange rate turbulence without achieving anything superior in the way of domestic price stablity. A bit like the way that a cat chasing it’s tail causes a lot of turbulence but does not make any more progress than a cat that is sleeping.

  17. The Economist has always made it plain that it views the index as a “lighter” look at PPP, so I would suggest that getting worked up about it is probably taking it too far.
    It is interesting and a bit of fun, but, as terence correctly (IMHO) points out it should not be used for anything serious.
    Terje – basing anything on one commodity, even flour, (again, IMHO) puts too much weight on the demand and supply conditions for that commodity. Relative prices between commodities, other goods and services are important too – but lets leve gold out of this one.
    BTW, if you want to make a point on this and have some time to read through a very long thread (1400+ comments – many by Graeme Bird, and as such abusive) the one at Catallaxy on this was good.

  18. Andrew,

    Gold is not going to go away so it can’t hurt if we leave gold out of the dicussion for a while.

    Commodity prices are more representative of monetary over-expansion (or under-expansion) than consumer goods. In particular they respond quicker to such errors and if used to manage monetary policy they allow a more timely adjustment to correct such errors.

    Keynes proposed the Bancor which was to be tied to a commodity index that included about 30 commodities. So it would deal with your concern about produce specific supply/demand anomolies. I think that a Bancor is more necessary than ever but unfortunately not very likely.

    I think the Big Mac as a unit of account is good starting point for such discussions in so far as it is fungible and international. However given that it is not priced in spot markets there may be a lot of lag between adjustments in exchange rates and wholesale price circumstances before the domestic price of Big Macs responds. Like most consumer goods it is a lagging indicator.

    It is telling that last time the world used a commodity price to manage monetary policy we had:-

    1. Pretty stable domestic prices pretty much everywhere.
    2. Stable exchange rates.
    3. Stable commodity prices. (Month to Month the Oil price was nearly flat).

    Regards,
    Terje.

    P.S. On the following chart Oil is normalised and shown in blue. The line in red is for the normalised price of some unmentionable shiny metal.

  19. PPP, International Trade and the Big Mac Index.

    I agree with Andrew that the Big Mac Index in the Economist is not to be taken too seriously.

    However, looking at the reactions of people to the Big Mac Index is quite instructive. For example, very few people seem to notice that ‘PPP’ is an old idea from international trade theory but the Big Mac is not an internationally traded commodity (although in some parts of the world, some inputs in the production of this thing, called Big Mac, are imported.) The international bit about the Big Mac is primarily that it is produced in various locations all over the world by a multinational corporation and the old international trade theory and international monetary theory (ie the one Terje and his colleague from the Libertarian party) keep on referrring to) does not incorporate multinational firms. I suppose not everybody will see the humour in it.

  20. the old international trade theory and international monetary theory … does not incorporate multinational firms.

    Can you clarify this statement for me. Are you saying that the “old theory” fails because of multinational firms or just that multinational firms were not around when the “old theory” was formulated.

  21. thanks everyone for the spirited replys to my simple Big Mac query.

    If it may help I was /am under no illusions that the Big Mac should replace a “basket of goods” and currency comparisons and sensible analysis. However if I want to do a quick flick while wondering how things might compare the Big Mac is useful enough.

    Not that I have any intentions of eating any. and it always amuses me to see maccas as a symbol of high spending style in some countries. It’s especially funny, coming from Melbourne, to see Starbucks in Asia, with cache, although to be fair it’s years since I’ve been to Queensland and Starbucks may well be a high class coffee shop up there.

  22. Terje, why don’t you pass the question on to your colleague, John Humphreys. If he has questions, let him write.

  23. Francis,
    Perth is, as yet, Starbucks free. We were Big Mac free for years as well, due to a copyright issue.
    I suppose Charbucks will have some caché for a while here once it arrives. It should not last beyond about the 20th store.

  24. For a long time silver tracked economic value fairly well, once you had adjusted for sepeculative attacks. This was because about half the world’s supply is a byproduct of other activities, rather than deliberate mining of silver, and there was a fairly steady need (I do not say demand) for silver for industrial purposes.

    Taking both of those together, silver would have made a better store of value than gold, and a better proxy of value than flour. But latterly there have been technological shifts reducing the needs for silver.

  25. Ernestine,

    I really don’t understand what you are up to by telling me to discuss this monetary issue with John Humphrey. Perhaps you are refering to the discussion he and I had on this matter recently at libertarian.org.au. For those not in the know JH and I disagreed quite strongly over monetary policy. JH thinks the status quo is fine whilst I think it is baddly flawed.

    Anyway, please elaborate Ernestine because I don’t see what you are trying to achieve.

    Regards,
    Terje.

  26. Terje,

    You quote from my post: “the old international trade theory and international monetary theory … does not incorporate multinational firms.”

    You ask: “Can you clarify this statement for me. Are you saying that the “old theoryâ€? fails because of multinational firms or just that multinational firms were not around when the “old theoryâ€? was formulated. ”

    I reply: The answer to your question is in the quote.

  27. The references to the Big Mac index sparked a thought in my mind. It used to be said by certain people, mostly with neocon leanings, that no two countries with McDonald’s stores had been at war. This was supposed to prove something about the peace-enahncing effects of capitalism and transnational corporations.

    I believe that there was a McDonalds in Serbia when it was bombed in 1999, but someone wrote an article claiming this was the exception that proved the rule (can’t remember why). However, since Israel has kosher versions of McDonalds, if Lebannon has the golden arches too then I guess the claim can be considered dead.

  28. Ernestine,

    You may be right. However I don’t understand how or why or even if you are right.

    Regards,
    Terje.

  29. Terje,
    It must be interesting to ask Ernestine a question in a lecture. The response would be almost guaranteed to induce more confusion than the initial statement.
    Reminds me of Orac, from Blake’s Seven, who, when asked a question, would occasionally just testily say “The answer is obvious” and then leave the humans to painstakingly plough through mountains of data rather than just answer the question and save everyone’s time.

  30. Terje, would you mind giving Andrew the original question? He seems to be confused.

  31. True, Terje. Your original question is in the discussion history. I suppose its up to Andrew now to find it.

    PS: Congratulations to your third child – belated, I know.

  32. It must be interesting to ask Ernestine a question in a lecture. The response would be almost guaranteed to induce more confusion than the initial statement.

    Interesting is one word for it.

    I have this view that in common communication it frequently makes sence to check for understanding by asking for clarification when you feel uncertain about a persons intent on specific details and to test your understanding of their statements by paraphrasing what you understood of what you just heard/read and asking if you have paraphrased correctly.

    The reason for this testing process is that each of us carry around certain perception filters and each of us make statements with some implicity assumptions. So to overcome potential mismatches between what is meant, what is said, what is heard and what is understood there is a need for some error correcting protocols.

    Most people don’t check enough to see that they have understood others, but they certainly respond appropriately if you check your understanding with them. They handle this naturally as a part of every day dialogue. Until I met Ernestine I took for granted this normal process of discourse by which somebody would clarify things if you said they seemed unclear or correct you if you paraphrased incorrectly.

    With Ernestine a request for clarification always seems to open up a guessing game where he tries to get you to guess his original intent by pointing you to various clues. This is very tiresome and usually entails a long digression away from the original topic. Conversation subsequently does not flow easily.

    With Ernestine an attempt to test your understanding of one of his statements by paraphrasing invariable leads to an accusation that you have misquoted him or else an implication that you are perhaps dim (or maybe just not as smart as him). Rather than just saying “what I meant was…”. This also tends to end up in a guessing game.

    He also takes statements made by others that are broadly correct and then dismisses them because of technicalities. For instance when I said “interest rates are the price of credit” he played a game of cat and mouse with the fact that percentages have no units and hence can not be a price. A technicality that he was well positioned to simply correct but instead used as a means to reject the entire original statement as simply wrong. In communication terms he would seem that his receivers lack an inbuild error correction system.

    I suspect that the main problem is an overdose of cerebral activity. He spends so much time analysing that he misses the art of communication. Not deliberately or out of malice but as a matter of habit. I think he also views the normal protocols of dialogue as merely inefficient overhead. If he was a communications engineer he would hate X.25.

    Anyway I have made it my minor mission to reform him. For the sake of his students, and because he seems like a nice guy with a sharp intellect and some interesting insights.

  33. If you think Ernestine is obscure, you should meet his brothers Maxine, Pauline and Christine.

  34. It is not very nice to make fun of peoples names. And yes I know that I have a vested interest in saying so.

  35. Terje, I am a female. No apology required.
    Surely, there is nothing wrong with all of us finishing the day with a good laugh.

    James, which monitoring program do you use? Your timing of recovering the ‘male choir line’ is impressive. I didn’t wish to reply today – it was just perfect.

    Its interesting, isn’t it, that gender is irrelevant as long as the game is to play the ball rather than the player and gender turns out to be a critical variable (in a technical sense) when the game is to play the player rather than the ball. I got two observations from the accidental experiment which came to my mind spontaneously when reading your male choir line some time back. It was a good line.

  36. Ernestine, I was uncomfortable recycling my own joke so soon. But if the penny didn’t drop for Terje the first time (and I think in fact he’s had more than one hint), how much time can one afford to spend on thinking up new ones?

    Anyway, now the gender is cleared up, I think it’s high time the two of you got married.

  37. James,

    I don’t think Terje’s missionary ambitions, involving reformative communications strategies, can ever be married with my interest in theoretical models of non-dictatorial resource allocation systems.

    Terje’s Libertarianism is incompatible with the notion of personal liberty and rationality in the theoretical models of non-dictatorial resource allocation.

    .

  38. Ernestine,
    This: “Terje’s Libertarianism is incompatible with the notion of personal liberty and rationality in the theoretical models of non-dictatorial resource allocation”, if I have understood it correctly, is a big call. Do you have analysis that indicates that either:
    a) Terje’s Libertarianism diverges from libertarianism, properly so called, sufficiently to be “…with the notion of personal liberty and rationality in the theoretical models of non-dictatorial resource allocation”;
    b) libertarianism, properly so called, “…is incompatible with the notion of personal liberty and rationality in the theoretical models of non-dictatorial resource allocation”;
    c) some other option I have not thought of that renders this statement correct; or
    d) oops, I have mistyped it
    If you do have such evidence, please either produce or link to it, such evidence or argument to be in a form that a person who is not an academic, can understand and / or follow. If option d, please indicate any typing corrections.
    (There, I think I have covered all bases. Am I going to get just a response like “Option C, and the evidence is in the question?)

  39. Andrew Reynolds,

    I assume you know what you are talking about (rationality). You wrote:

    “Sorry, Ernestine, but you must have mistaken me for someone who cares. ”

    I strictly prefer to spend my time communicating with people who care (liberty).

    QED

  40. Terje, I am a female. No apology required.

    That was a rapid communication improvement.

  41. Why? The information that I am a female has been public knowledge on this blog site for a long time. Ask Andrew.

  42. I was working on an assumption that was wrong. Rather than provide the usual easter egg hunt of clues you cut to the chase and pointed out the exact nature of the error. I regard that as a huge improvement in communication style. Issue resolved in one step instead of 50.

  43. Such are your perceptions, Terje. The truth is closer to:

    “But if the penny didn’t drop for Terje the first time (and I think in fact he’s had more than one hint), how much time can one afford to spend on thinking up new ones?”

    It takes a long time to tease out from your verbal communications technology one implicit assumption (gender). It would take a very long time (and I am not convinced it would happen in finite time) to tease out all the implicit assumptions in all your statements. No offence intended, but I have better things to do with my time.

  44. It takes a long time to tease out from your verbal communications technology one implicit assumption (gender).

    Actually it took seconds. The assumption that you are male is now gone.

    Will I ever make such a mistake based on an assumption again. Yes quite possibly. However should it happen it is not a time consuming mistake to fix (although obviously better to avoid in the first place).

    My first name is such that people have on occasion assumed that I am female. It has never required much investment of time to correct such an assumptions. Although I did have to think for a few minutes about how to reword my prefered announcement on my mobile phone messaging service so that the call centre workers didn’t make follow on statements such as “does she have your number?”.

    Your own “implicit assumption” that it takes a long time to tease out implicit assumptions would probably be somewhat mitigated if you adopted a direct communication style rather than a “tease” it out approach.

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