The end of the tax revolt

The crushing losses suffered by Republican culture warriors in the US elections shouldn’t blind us to the fact that from the viewpoint of the 1 per cent, the culture war is just a useful distraction to ensure that those they are exploiting never combine against them. The big issue for them is taxation, and the opening round will be the struggle to keep the Bush tax cuts and the preferential treatment of capital gains. They’ve had an unbroken sequence of wins on these issues ever since California passed Proposition 13 in 1978. But things are finally turning around.

Over the fold, a piece on this topic that should be coming out in The Conversation next week

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Mulligan talks his book

Before engaging in another round with Casey Mulligan, I’d like to say that, while I find most of his arguments implausible, I don’t think he’s silly for making them. Given the position he’s trying to defend, these are the best arguments available. And that position is widely shared, not only by economists much more famous than Mulligan but by lots of governments and policymakers. Most mainstream opponents of Keynesianism are committed, one way or another, to the view that persistent high unemployment must be caused by problems in labour markets. But it’s much easier to talk in vague general terms about rigidities and structural imbalances than to present an operational explanation for the sustained high US unemployment of the last four years. Mulligan at least makes the attempt, which is more than most of the New Classical/Chicago/Real Business Cycle school have done, and necessary if there is to be any progress in the debate.

Replying to my criticism of his NY Times column, Mulligan suggests that I should have read his book. Perhaps so, but the column is presented as a critique of Krugman’s book, not a plug for Mulligan’s, and I responded in that light. His latest post mentions a couple of points where he draws on the book, but for the moment I’m going to continue to rely on data published elsewhere.

Mulligan responds to my points in reverse order, which makes sense, because his response to my central point is by far his weakest. The big difficulty for an explanation of post-2008 unemployment based on US welfare policies (unemployment insurance and food stamps) is that many other countries with radically different labor markets and policy responses experienced a big and sustained increase in unemployment at exactly the same time, following the global financial crisis of late 2008. In particular, lots of countries introduced austerity policies involving sharp cuts in the kinds of benefits Mulligan is criticising. Mulligan’s response to this evidence is handwaving. First he says that I haven’t calculated the implied changes in marginal tax rates, although its pretty obvious that most of them will be reductions. Then he resorts to US exceptionalism, saying

Finally, if marginal tax rates were found to be constant in Estonia (the only specific country that Professor Quiggin points to), does that mean that marginal tax rates do not matter in the U.S.? Please let me know so I can notify American economists that Estonia is our ideal laboratory, and notify policymakers that they can safety hike marginal tax rates to 100 percent without noticeable consequences.

That’s pretty startling for someone representing a school of thought which usually treats economic laws as having the same universal applicability as those of physics.

To try and make sense of an argument like Mulligan’s you’d have to start with the financial crisis as a global shock, then claim that, if only governments had sat on their hands, recovery would have been rapid. Instead, the argument would run, governments acted to alleviate the lot of the unemployed and thereby made things worse. That would be a coherent explanation for simultaneous and sustained increases in unemployment – the only difficulty is that it’s directly contrary to the facts.

It’s worth making the distinction here between changes and levels. Lots of European countries have high marginal tax rates and generous unemployment benefits, relative to the US. But, in many of the worst hit countries, benefits have been greatly reduced. By contrast in the US, benefits are very low but at least some have been increased. If, like Mulligan, you want to argue in terms of changes, then Europe should have seen reductions in unemployment (which was previously higher than the US). In reality, there is very little correlation between labor market policies and changes in unemployment. What has mattered has been exposure to the initial financial sector shock and/or subsequent austerity policies, exactly as Keynesian analysis would predict.

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Reality bites

The most striking political development of the last decade or so has been the abandonment, by the political right, of any concern with reality. Mitt Romney ran the most deceitful and dishonest campaign in US political history, vowing not to be deterred by fact-checkers. His partisans, in the US and Australia have made denial of reality an artform. This approach has had some remarkable successes, notably in delaying action against climate change. But there is always the risk that deception will turn into self-deception and the US Presidential election illustrated that, with the emergence of “poll trutherism”, the belief that the polls pointing to Obama’s re-election were skewed in order to encourage Democratic turnout.

Now that poll-based predictions have turned out to be as close to accurate as statistical theory would predict, how will the right react? I can think of three possibilities

(a) Going deeper down the rabbit hole with the idea that the “increase Democratic turnout” strategy ensured that the polls were a self-fulfilling prophecy
(b) Attempting to return to reality on this issue, while maintaining delusional positions on other issues, and maintaining faith in the pundits who led them astray this time round
(c) A serious attempt to shift to a policy discourse based on evidence and analysis rather than talking points in support of positions chosen on a basis of tribal faith

I can’t imagine much progress towards (c). Apart from anything else, most of the existing rightwing commentariat would be unemployable if this were required of them. So far, I haven’t seen much evidence of (a), but it may well be bubbling below the surface. Still, at this point (b) looks most likely.

Some random thoughts on the US election

As regards the outcomes, it’s all positive except for the failure to make significant gains in the House of Reps. Obama wins easily, the Dems gain ground in the Senate despite defending 23 states against the Reps 10, and some big referendum wins on marriage equality and drug law reform. The good thing about the House is that it’s up for re-election in two years time, without the distraction of a Presidential race.

The popular vote is a more complicated story. At this stage it looks as though Obama will win narrowly. But he would win easily among registered voters, more easily among US citizens, more easily again among US adults and overwhelmingly in the world as a whole. The Dems need to make voting rights a core issue from now on.

The Repubs only lost narrowly, but time and demography are against them. Unless they shift ground on some major issues, they look like being a permanent minority. But the attack machine they’ve built up will savage anyone who suggests such changes. Logic says they’ll find a way, but maybe it will take another, bigger, defeat. Let’s hope so.

Particularly in the Senate, the quality of the Democratic caucus is greatly improved – Ben Nelson, Joe Lieberman and others are gone, while the additions include Elizabeth Warren and Tammy Baldwin. A House win in 2014 could see a genuine Democratic majority rather than one relying on Blue Dogs and Dixiecrats as in the past. That would provide a path to passage of genuine reforms.

It would be great if, now that he doesn’t need to go for re-election, Obama returned to the defence of civil liberties he advocated in his 2008 campaign and his inaugural address. Sadly, I’m not holding my breath on this one.

Race report

Thanks to everyone who sponsored me and Flavio Menezes for the Noosa Triathlon. I finished in 3:04:55, a personal best. The highlight was finishing in the top half (31/72) of my age-gender category for the run leg, the first time I’ve managed this in any leg of a tri. As regards the 1.5k swim, though, the less said the better. Flavio outdid himself (and me) finishing in 2:50. As you can see from the sidebar we raised $2320 for Heartkids which is really great. Thanks again!

Like Catallaxy on a bad day

Journalism academic Julie Posetti has just announced a move from the University of Canberra to the University of Wollongong. This represents a small step up in the status hierarchy, but not exactly front-page news. Except of course, at the Oz, where Posetti ranks high on the enemies list, having induced editor Chris Mitchell to issue absurd threats of a defamation action, based on a tweeted report of statements by a former Oz journalist. So, this story gets the full Oz treatment with references to Posetti’s “notoriety” her “ducking of questions” about the possible move (standard practice when you are in negotiation, AFAIK) and “incidents” that have “rocked” the UC journalism school.

This is pathetic, but typical of what happens when you give a third-rate group blog like The Oz the resources that allow it to pose as a national newspaper.

Food stamps cause global depression?

Chicago is about as close to the American heartland as you can get and still be in a major city (the infamous Heartland Institute is located there, for example), but even so, I’d expect a professor at the University of Chicago to be aware that the USA is not the only country in the world. That’s not true, apparently, of Casey Mulligan, who claims that the continued weakness of employment in the US is due to policies introduced in 2008 and 2009, which ” greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.”

Mulligan’s claims about US policy are dubious at best (see over fold), but there’s a much more critical problem with his argument. If US unemployment is caused, not by a demand shock but by the mistaken policies of the Obama Administration, why did unemployment move in the same way, and at the same time, in many different countries? Did Iceland expand its food stamp program? Does Estonia pay unemployment bonuses? Sadly, no. And while many countries adopted Keynesian policies in the immediate aftermath of the Wall Street meltdown, others did not, and most have now switched to the disastrous policy of austerity. An even clearer demonstration is given by the Great Depression, where nearly all governments pursued austerity policies after 1929 (Mark Blyth’s soon-to-appear Austerity: The History of a Dangerous Idea tells the story)>

This isn’t just a problem for Mulligan. The simultaneous occurrence of a sustained increase in unemployment in many countries, with different institutions and policies undermines any explanation of unemployment that works at the national level. That includes all forms of New Classical Economics, in which unemployment arises from labor market “distortions”, as well as Real Business Cycle theories (except if you stretch the idea of a technology shock to the point where “technology” effectively means “aggregate demand”).

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Last chance to give!

The Noosa Triathlon is coming up on Sunday, and there’s still time to give to Heartkids, the charity I’m supporting. Just click on the picture in the right-hand sidebar. Or, if you’d prefer a different charity, why don’t you give now, and (if you like) post a comment announcing it. Either way, it’s a great chance to help others.