Woody Allen Confronts a Soda Dispenser

“I needed my afternoon refill on sugar and caffeine, so I went downstairs to the soda machine. I wanted a Coke, and all the cokes were in top row—row A. I put in my dollar, and punched in ‘A5.’ Any other number 1-8, would have done, but A5 caught my eye. The machine has this mechanical arm that starts moving and goes up and grabs your soda from you, and puts it in the dispenser where you can take it. But—would you believe it?—the mechanical arm grabbed the Coke in column 1! Coke A1 instead of A5! I mean, sure, yes, it was still the exact same soda—a regular Coke. I got my Coke. But still. Why couldn’t it just have fetched A5 like I asked? The arm still had to travel the same total horizontal distance, because it rests on the left side of the machine, and the dispenser is on the right side of the machine. So why couldn’t I be drinking A5 right now? Why not? Was this a little slight? Was it something about me? Is it something in the way I dress, or the way I talk, or the narrowness of my shoulders, that made the Coke machine think it didn’t need to take my order too seriously? Or was this some kind of big political statement, like, “I’ve spent my whole life as a mechanical arm in a soda machine, just so fancy intellectuals like you can write your screenplays, so, you know what, this time I’m going to do something slightly different from the thing you asked me to do”? I mean, sheesh, I’m sorry you’re not getting published, but it’s not my fault. Technology these days…It’s a matter of basic decency, or maybe one of Asimov’s Robot Laws or something. Just do what humans ask.”

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Language versus Death

I never had the luck to meet Marina Keegan before she died, but she was an extraordinary writer. Not extraordinary because her premature death made her extraordinary, but extraordinary in the sense that even if she were alive and middle-aged and paid to do it for a living, her words would still knock you in the gut. Extraordinary in the sense that it is impossible to read her prose quickly, because every phrase twists you around.

The great thing is that I, and so many admirers, have sort of, maybe slightly, gotten to know her after her death, because she wrote.

I’m afraid of dying because of the interesting people who will still be unmet; because the world will keep on going, and I want to be there to influence how it does; because I want to have my say about the world, which will be tough when it is there and I am not. I used to think I would want an enormous gravestone over my body. Some big, heavy thing in the grass, so I would leave some sort of guaranteed footprint on the world after the others had been weathered. A physical object that was only mine, so that some influence, even that of an immobile vanity stone, would persist.

Writing is a better way to not die. Thousands of interesting people got to know and love Marina the past couple of days. We have, a little bit, inhabited her mind, which is proof that it’s still there. And that has moved us in small ways that guarantee that her influence will still move through the world, like the apocryphal ripples, forever.

The body dies, but the soul can live on, because we humans have the extraordinary grace of language, which is a thing that you can bundle your soul up in and send to others. It’s important to have something to say while you are alive; and to write love letters. There are other ways to not die. This is the one that struck me today. I want to leave something behind like Marina did.

Angry at the investor class? Lower/index their taxes

[Note: The first four paragraphs are an ‘econ for poets’ style background introduction. My idea starts in paragraph five.]

The title is a bit flippant, but my idea is relatively modest. One thing we’re hearing a lot of in the econosphere is that the U.S. would benefit from a more inflationary monetary policy from the Federal Reserve to drag us out of our current economic doldrums. (The reasons why moderate inflation can help a depressed economy include: (1) If firms expect higher prices in the future, they’ll want to ramp up production now to position themselves to profit form that [giving us a nice a supply boost]; (2) If consumers [both individuals and firms] expect higher prices in the future, they’ll want to purchase things now, rather than delay till then [giving us an immediate demand boost];  (3) Higher inflation should make it easier to pay off debts that are owed in nominal terms, accelerating the process of “deleveraging”; and (4) Since wages are sticky in nominal terms, inflation is the only way to allow real wages to fall, which we need to make it easier for firms to retain and hire new employees [which will lower unemployment, which in turn brings a demand boost, etc.].)

Indeed, such a consensus among otherwise ideologically opposed economists has coalesced behind the idea that the U.S. needs higher inflation that this consensus has itself generated a new debate: Why, then, isn’t the Federal Reserve doing the thing that all the outside experts seem to agree it should do? And one explanation that is voiced, most loudly by Paul Krugman, but by others as well, is that the Fed is protecting the interests of, the “rentier class” (the pejorative term for financiers) — i.e., those of us whose primary source of income is the accumulation of dividends and interest payments and capital gains on assets we own. The idea is that our Fed governors spend their days hanging out with and working with financiers and, thus, either subtly absorb their ideologies or are more directly corrupted by their desire to help their pals.

Suppose that it’s true that the Fed is failing to hike inflation due to the influence of the investor class. Next question: Why do investors hate inflation so much? (And, the newsletters that end up in my inbox, forwarded from my finance-world friends, confirm just how intensely many of them hate inflation.) Partly it’s ideological — the finance world has historically aligned itself with political conservatism/libertarianism and conservative/libertarian intellectuals have traditionally been more anxious about the costs of inflation. But surely it’s also partly a matter of self-interest. Inflation would make it easier for you to “deleverage” by paying off your mortgage (provided your mortgage is in nominal terms) because it would mean you owed less real value to the bank — and obviously the bank doesn’t like that, all else equal, for the same reason you do like it. This generalizes — debtors love inflation if their debts are owed in nominal terms, while creditors (their lenders) hate it.

Now, we need to step back and remember something very basic: Inflation is only a good thing when it helps boost real growth in the real economy. It is not a good thing per se. I.e, there’s no point in going from a world with 0% inflation and 0% nominal growth (meaning 0% real growth) to a world with 4% inflation and 4% nominal growth (meaning 0% real growth). It’s only worth inflating at 4% if that will bring you to 5% nominal growth (meaning 1% real growth). So (sorry to belabor the point) this means that the interests of society as a whole are neutral with respect to inflation per se; though society has a positive interest in inflation that boosts real growth. Now, financiers also have an interest in the real growth of the real economy — as the economy as a whole starts doing better, fewer corporations risk defaulting on their bonds (increasing bonds’ real value) and the expected future profits of companies increase (raising their share prices). The key difference is that financiers have a negative interest in inflation per se  — i.e., they prefer the world of 0% inflation and 0% real growth to the world of 4% inflation and 0% real growth (while society as a whole is neutral), and so they are ambivalent about the choice between a world of 0% inflation and 0% real growth versus one with 4% inflation and 1% real growth.

So here’s my idea: If we really think the interests of financiers are the major barrier to sensible monetary policy, then what we need to do is to bring their interests in inflation into alignment with those of society as a whole. This, very simply, means making the investor class’s interests neutral with respect to inflation per se, and keeping them positive with respect to growth. The way this could happen on the bond side is if more, ideally all, bonds were indexed to inflation. Now, the government obviously can’t just mandate that all bonds issues be inflation-indexed. But we could use a variety of tax incentives to encourage it; if, as a result, the vast majority of bonds were indexed to inflation, investors would support inflation that actually boosted growth, because that would mean bring lower default risk without any erosion of the bonds’ real value. (The disadvantage of this is that we could no longer use inflationary monetary policy to help debtors deleverage — and I’m curious to learn from others how serious this disadvantage is.) But we would also — and here’s something that I haven’t seen talked about at all — need to change the tax treatment of capital gains. Right now, in my understanding, we are taxed on the nominal value of our capital gains (i.e., gains we make from increases in the prices of stocks we hold, as opposed to what we earn from their dividends). This gives stock-holders a strong bias against inflation. Consider the example above, in which we have to choose between a world with no inflation and no growth, versus a world with 5% nominal growth and 4% inflation and 1% growth. Suppose that in both worlds, equity portfolios track the nominal growth of the economy. Well, if capital gains are taxed above 20%, in nominal terms, then stockholders would actually prefer the world with no growth to the world with 1% growth. (I’ll do the math for you: If your stock portfolio gains 5%, but more than 20% of that is taxed away, you’re left with less than a 4% nominal gain — which is a loss in real terms, when inflation is 4%.) Now, obviously we can change the growth, inflation, and tax numbers I selected. According to the number we choose, there are many worlds in which stockholders still prefer growth-boosting inflation to none. (In the example I chose, when the capital gains tax is lower than 20%, stockholders prefer the world with 4% inflation and 1% real growth.) But it is always, necessarily, the case that the taxation of capital gains in nominal terms gives stockholders a bias against inflation per se, whereas (once again) society is neutral with respect to inflation per se. Were it not for this tax treatment — that is, if capital gains were taxed in real, inflation-adjusted terms — stockholders would always have an unambiguous interest in growth-boosting inflation, and their interests would be fully aligned with society’s as a whole.

Now, one obvious objection to my idea is that it’s simply irrelevant — this tax change wouldn’t be significant enough to move the meter for investors at all. Removing the anti-inflationary bias in the taxation of capital gains wouldn’t come close to compensating bond-holders for how inflation would erode the real value of their fixed-income investments. But is this necessarily correct? Since investors hold both bonds and stocks, the former mostly for security; since stocks are the major source of growth and profit in investors’ portfolios; and since the easing of corporations’ nominal debt obligations should be reflected in higher future cash flows, hence higher share prices — is it not, then, plausible that changing the tax treatment could be a major step toward aligning financiers’ interests in inflation with those of society? And if not, would indexing more and more bonds to inflation have this effect? If so, how can we speed that process?

It seems to me that if financiers are currently blocking policy changes that would be in the interest of society as a whole, the thing to do is to use the political process to bring their incentives in line with ours (rather than just rage against the oligarchy), and then let their rapacious self-interest work to our benefit.

***

(N.B. I don’t claim any expertise on this. It really is just a stab–concordant with the function and purpose of this blog. I think it’s very probably that these ideas are (1) obviously wrong for some some obvious, stupid reason I am blanking on, or (2) extremely obvious to some people, having been advocated dozens of times by others.)

Is Finance Too Big? Some Regulation Basics [Econ for Poets]

Allow me to come at the question from this angle: We often hear it said that the finance industry has gotten too big. In other words, we have too much financial services. But if you’ve had introductory economics, your ears should prick up at this claim. What would it mean to say, and how could it be the case, that an industry had gotten too big?

Look at it this way: What if somebody told you that the shoe industry had gotten too big? If you think about it, this claim doesn’t actually make much sense. The shoe industry is simply supplying as many shoes to the market as we shoe-wearers demand at the price that covers its costs plus a small allowance for profit. In other words, it’s weird to say that the shoe industry is too large, because its size is determined by what we (society) demand. Sure, maybe people should be less vain and more willing to wear ratty shoes for years on end, in order to save money that they could use to solve global poverty. That is actually (I’m serious) a morally reasonable claim. But in that case, your issue is with society and its mores, not with the shoe industry. Remember back to the post on sin taxes: In a competitive market, unless there are externalities, the price of a good is a measure of its cost to society as a whole. Every time an individual buys a pair of shoes, then, he is himself covering the social costs of the production of those shoes—and he’s saying that he’s more interested in spending those X dollars on those shoes than on any other thing. So the shoe market as a whole is just the aggregation of individual transactions in which people say, essentially, “These shoes are worth more than anything else I might the money toward; and I’m willing to bear the full cost to society to get them.” The abstract term “the shoe market” actually just refers to that thing happening billions of times. So, if we’re non-judgmental, and tolerant and accepting of individuals’ preferences and purchase decisions, then we have to admit that, yeah, the shoe market is about the size that it should be—it must be.

Is finance different? “Yes, of course,” everyone says. And everyone is right. But they’re usually right for the wrong reasons. People say things like, “Finance is not real work—they don’t produce real things, like in manufacturing, but they still come away with all the money.” Sure, but same goes for your general practitioner doctor—he just produces advice, and puts symbols on papers so you can pick up prescriptions that machines have made, and claims a hefty salary. Is that itself a reason to think you have too much of your general practitioner doctor? No. Indeed, in modern America, must of us are employed in services, as opposed to the production of physical commodities. “Right,” people say, “but medical services produce value for people directly, but finance just moves the money around. It doesn’t produce new wealth for society; it just captures it.” And while this might, debatably, be true for certain kinds of high-frequency trading, it’s not true of finance broadly. (Brief explanation: There’s a strong correlation, and a logical causal link, between the development of a society’s finance industry and its broader level of economic growth. One of the biggest determinants of whether a business succeeds or fails is its access to credit and its insurance against unpredictable risks. These both depend on the robustness of the financial services industry.) If you think that figuring out what firms and projects could best make use of investments is easy, trivial business, then you should probably already be a billionaire right now. So a priori, there’s no reason to think that finance is fundamentally different from other services.

So how could the financial services industry be “too big”? Well, interestingly, the financial services industry could be too big for the same reasons any other industry could become too big—for example, if it is directly or indirectly publicly subsidized. Remember back to the sin taxes post, where we saw that if a good had negative ‘externalities’ too much of it would be produced. Well, goods and services will get overproduced when they are publicly subsidized for the same basic reason—individuals are not bearing the full costs of their purchases. (Unless the public subsidy has been put in place to directly balance the goods’ positive externalities—but this is for a different post.) I.e., if the government were to pay some of the cost of every shoe purchased in America (which might happen, say, in an alternative universe in which shoe-wearing became a hot spot in the culture war, such that one party, eager to flare the culture war for its own fundraising purposes, decided that shoes qualified as something to be covered by health insurance), we would all go out and buy more shoes than were really ‘worth it’ for society as a whole, because each individual would be getting shoes for less than they cost society as a whole.

So: Is the finance industry publicly subsidized? Yes, it is! But how? The answer is a term that is very familiar: Too Big to Fail. As we saw in that little financial crisis that you may have heard something about, when a so-called “systemically important” financial institution looks like it is about to fail, the government will step in and use public funds to save it. Those funds, and their implicit guarantee, act as subsidies for the specific “systemically important” financial institutions that are protected by them and for the system as a whole. When the government, in times of crisis, lends to these institutions at below-market rates, and buys their toxic assets at above-market rates, that sort of amounts to a more publicly palatable way of just giving money away to them. And the knowledge that the government will save them in a time of crisis it easier for these “systemically important” financial institutions to get more, cheaper credit (loans) from the private sector the rest of the time, because the knowledge that these firms won’t be allowed to fail means that the creditors to “systemically important” financial institutions don’t need to worry about the risk that they’ll default.

Now, here’s an interesting thing: Right now, the conventional wisdom is that “Too Big to Fail”—the policy—is necessary and unavoidable and good. That is, the CW is that it is just factually true that these systemically important financial institutions will bring down the whole financial system, and thence the whole economy, is allowed to fail, so we have no choice but to bail them out, and there’s no way around that. The real problem, the CW continues, is not the policy, but “Too Big to Fail” the fact of life—i.e., the fact that these financial institutions have gotten big enough that the failure of just a few private firms could bring the whole economy down. The wicked irony, of course, is that once “Too Big to Fail” the fact of life exists, then “Too Big to Fail” the policy becomes necessary, and the policy itself helps perpetuate and exacerbate the fact of life. That is, as we noted above, the “systemically important” banks have an implicit subsidy and implicit guarantee that helps them get easier, cheaper access to credit than smaller, non-systemically important banks, which helps them outcompete these smaller banks, and gives every bank an incentive to become dangerously large. More, once banks have gotten dangerously large, giving them implicit TBTF protection, they actually have a publicly-subsidized incentive to make extra-risky investments and bets, because they get to claim the full upside of those risky investments, while taxpayers have to bear the downside costs if they go sour.

So, this together had led to a new conventional wisdom in the debate over “What do we do about this shit, post-financial crisis?” And this conventional wisdom is that trying to limit executive pay won’t do anything but satisfy our envy-lust; separating commercial banking from proprietary trading won’t really do the trick anymore; and just giving regulators more generic authority won’t really work either, because the whole thing about a financial crisis is that it comes from risks that we don’t see. Rather, real financial reform needs to start with breaking up the big banks, so that no bank is actually, in fact, TBTF. Once this happens—that is, once no bank or small group of a few banks is so large that its failure poses a risk to society as a whole—no bank will have an implicit government guarantee. So, no banks will have such an accordant specially, unfairly easy time getting capital (which should slow the consolidation of the financial system). And, lenders to all financial institutions, knowing that the government won’t bail them out, will be more circumspect in examining these financial institutions’ risk—which should, combined with their own financial interests, put pressure on banks’ managers to do better and more circumspect risk management.

In short, the key to fixing the financial system, the new CW goes—and I think there’s a lot of truth to this CW—is to actually allow market pressures and incentives to work on the financial services industry as they should in a real market.

***

So now that I’ve introduced you to the conventional wisdom, let me tell you about the subversive, contrary-the-conventional wisdom piece I read that forced me to revisit the conventional wisdom in the first place. In Dealbook, Richard E. Farley writes,

“But would we be better off if no bank were too big to fail? And what might happen if all the banks were too small to save?

One thing we know for certain: banks will continue to make loans that will not be repaid, none of which, when initially made, were thought to be bad loans. Many of these bad loans will be discovered to be unsound at the same time across many banks. When the scale of loans going bad all at once is large enough, you will have a banking crisis.”

Read the whole thing. But here’s the basic idea: All financial crises happen from widespread defaults on loans that all banks are making, which result from unpredictable shifts in the real economy. So, breaking up big banks doesn’t actually reduce systemic risk—it just redistributes it into more separate, but equally interlocked, balance sheets. So the size of the banks per se doesn’t really matter. There are going to be crises anyways, because sometimes large numbers of people just get things wrong and don’t see changes in the economy coming. Given this, a TBTF policy is the only thing that can stop ‘bank runs’ (think of the bank run in It’s a Wonderful Life—except this isn’t individuals demanding their deposits back [a phenomenon prevented with the genesis of the FDIC], but banks and hedge funds etc. demanding their money from each other, cutting off overnight loans, etc.). With a few large, systemically dominant banks, it is easier for the government to restore confidence in the system—it was able to summon the “big 9” to the New York Fed and get them to work together on a bailout policy, but it would be harder to assemble hundreds of smaller, less reputable bank managers.

Is this argument correct? Yes and no—I’m not really sure. I ran the idea by a few smart friends on Facebook, and here’s my basic sense now. If you read closely, you’ll notice that Farley ignores the main, big argument in favor of breaking up the big banks, in that he implicitly assumes that a hypothetical alternative group of smaller banks would, together, make the same investments our large, ‘systemically important’ banks are making right now. And, according to our logic above, that’s not true. The big banks make riskier bets because they know they’ll be bailed out by the government if they things go seriously wrong. Smaller banks won’t have this guarantee, so they’ll be more circumspect. So that part of Farley’s argument seems to fail.

But, still, if there are weird enough changes in the real economy, a big financial crisis still could happen, even in a world with very small banks. So what are our options given that? I see two: One is to say that, whatever its costs, TBTF is okay, because it is the only way to stop bank runs during a time of crisis. The other is to say that with a few more tweaks to the system—say, for example, forcing banks to hold more equity and lower levels of leverage, so they can bear larger losses without going under—we could make financial crises so surpassingly rare, and less impactful on the real economy, as to make it unnecessary.

What does mom like to eat? And other mysteries of family life

The briefest of touching little thoughts: Last Sunday, I traveled with the young lady to my home to upstate New York to visit my parents (and dog) for mother’s day. Hearing of my imminent arrival, my mother had naturally inquired which of my favorite dinners she should prepare for my first evening at home. When I told the young lady this, she proposed a radical idea: Perhaps, on the second night, we (the young lady and I) should prepare her (my mother) her favorite dish. “What does your mom like to eat?” asked the young lady.

The truth is, I had, and still have, no idea about my mom’s food preferences whatsoever. I can’t name a single food she doesn’t like; am totally naive regarding her attitudes toward Indian food; and can’t say what she would prefer between filet mignon and angel hair pasta.

Does this mean that I am a bad son? Very possibly. But allow me a short argument in my defense.

In a strange way, ignorance of another’s preferences, desires, idiosyncracies, intentions — their subjectivity and interiority, to use the pretentiously academese terms — can be a product of those most deeply loving relationships represented within a family. Let us imagine a graph with “extent of love and closeness” on the x-axis and “attention to the other’s subjectivity” on the y-axis. Our relationship with a stranger — say, a barista we will never see again — registers a zero on both the x and y. We treat the barista, unfortunately, primarily as an instrumentalized means to the end of getting our coffee — we don’t wonder much about his political views or taste preferences. But as we start to move out along the x-axis, toward relatively closer, more loving relationships, our y-value, attention to the other’s interiority, rises. Consider a boss we admire and aspire to imitate, a crush we wish to date, a prospective buddy with whom we wish to become closer — we are extremely interested in getting inside each person’s head; we are more attentive to, and more easily able to remember, what they say and what that evidences about them. We are this way with people we admire, because we wish to more fruitfully interact with them; because we wish to be able to express our respect for them and satisfy their preferences; and because they are still foreign enough to us that it makes sense to stand back and look at them with curiosity.

But as we move further down the x-axis, toward the closest and most loving possible relationship, I submit that our y-value reverses its upward trend, and begins to decline. Family members don’t really behave like distinct individuals hoping to learn what they can about each other and get inside each other’s heads. Once we become sufficiently close with a person — particularly when, as with our parents, we have been infinitely close since birth — they are no longer foreign enough that it makes sense for us to stand back and ask ourselves questions about them. Mom is not a person to be learned about — she is, rather, a permanent quality of the universe, both as essential and as unexotic and uncurious as oxygen.

But, much more broadly and interestingly, the other thing going on here is that family members don’t really operate as, or even conceive of each other as, separate and distinct individuals. Think of it this way: If you’re going to ask a crush to a movie, you’ll really want to figure out what kind of movies (s)he likes. You think, “This person is a distinct and independent person, whom I should approach with respect for that; I should work to satisfy his/her preferences.” But this isn’t how family members decide what movie to see. The decision is a bit more — to use a slippery word — organic. Your mother’s preferences, goals, intentions — her entire interiority — are bound up in yours. It doesn’t make sense to ask what her distinct, individual preferences are, because they are defined in terms of your own. The family decides what movie to see through a sort of more mysterious process in which everybody is thinking about the preferences of the others, which preferences are themselves determined by the others’ preferences. Out of this process, which is not like bargaining or negotiating or contracting, a communal preference arises.

And so it’s no wonder that I, at 23, have no idea what kind of movies my mom likes. And so, also, perhaps we should not be so scandalized by the sometimes thoughtless attitude children can have toward their own parents. The children don’t always think about what their parents want and like, because what their parents want and like is what the children want and like. So the egotistical, following-his-happiness child is, rather curiously, doing the most loving thing — doing just what his parents want.

I don’t know what my mother likes to eat — or how her tastes differ from mine — because I have never been able to conceive of her as a curious other person. My own food preferences were formed by what she choose to cook and feed me from my birth. Those meals, in turn, became regular features, and other meals were eliminated, long ago, perhaps through a single, now-forgotten declaration of liking or disliking from any one of six family members. Through this organic process of piecemeal adjustments — of food choices forming tastes, and individuals’ tastes then going back and reforming food choices — we have unconsciously arrived at a set of meals that all of us like, without any one of us being consciously aware of what, in particular, any other particular person particularly likes.

***

It’s a really hoary cliche that love and hate are two sides of the same coin. Allow me to take a stab at reconstructing this idea. I think that love and hatred are both relationships of possessiveness. In relationships of both love and hatred, the other’s subjectivity partially disappears. When we hate somebody, or if we hate even an entire group, we do not empathize with their pain; we do not acknowledge the legitimacy of their goals and intentions and aspirations and views. We have, in short, little interest in inhabiting their head. We implicitly feel that they properly belong to us, and should accordingly be submitted to our will. On an individual level, we feel outraged and humiliated by the successes of those we hate — we feel that we should have a veto on this success. For the anti-Semite, it is an outrage that a Jew has succeeded in public life without her permission. Physical violence flows from hatred for this same reason — we can only justify violence unto others when we feel that they are not entirely in possession of their own bodies, but that their bodies belong to, and are properly subordinated to, our own will.

This is very strong language, indeed, and so the specifics of hatred above obviously do not apply to love. But the basic relationship of possessiveness, of disappearing individual subjectivity and separateness, hold. When we merely admire somebody, as noted above, that is when we are most attentive to their subjectivity, most eager to meet their preferences, etc. When we are indifferent to somebody, like our barista, we conceive of them, in good Hegelian fashion, simply as separate, rights-bearing fellow citizens. Out of respect for them, we make the most eager and conscientious efforts to respect their autonomous sphere. But in a loving relationship, a boyfriend can guide his girlfriend by the waist across the street, she can pull him by the arm to speak to her cousin at a party, without either feeling it as a violation. Very clearly, it is only in the most loving, and the most hateful relationships, that even basic, physical tugs like these make sense. To be awkwardly explicit about it, a sexual relationship — in which pairs interact as physical bodies receiving and enacting desires upon one another — is the antipodal opposite of the Hegelian relationship among citizens, who interact as disembodied minds recognizing each others’ sovereign rights and contracting in the marketplace, etc. Sometimes, we even resent the successes of those we most wholly love, like we resent the successes of those we hate — because these successes are a reminder of their independence from us, and we feel that we are entitled to participate in everything about them. In other words, admiration looks like this: “I think you’re great, so I’m going to do everything I can to figure out what you want and satisfy that.” But love looks like this: “I conceive of you as a part of myself and myself as a part of you. So I can pull your arm and you can pull mine. And we’ll organically decided what movie to see together as a unit — not through a process of negotiation or contracting, for the same reason that it doesn’t make sense to talk about a person negotiating or contracting with himself.”

How do love and hate differ? My first idea was that in loving relationships, the possessiveness is mutual and bidirectional — i.e., we are willingly possessed by as much as we possess those we love, while we only possess those we hate. But as I think more about it, I think even the hater feels himself to be possessed. Ironically, we often feel the most cowered, ashamed, and moved by the judgments of those whom we most hate. So what’s the difference between love and hate? I guess the answer is a lot more mundane and boring sounding: Hate is destructive and love is creative in many different senses.

Income Inequality; Taking Ideas Seriously

A very quick thought: America is very peculiar in that we have very high income inequality, and yet we do not have overwhelming political pressure for greater income redistribution. Indeed, even as economic inequality has exploded over the past thirty/forty years, the American electorate has arguably become more conservative/libertarian on economic policy issues, such that higher taxes on the top 1% is not a clear winner as a policy. During the Republican primary debates, the candidates described Democrats’ efforts to let the Bush tax cuts expire as “class warfare,” and middle-class voters cheered. This poses a puzzle, and naturally invites the question of why.

And Republicans and Democrats, liberals and conservatives, very often converge upon the same descriptive answer to that question/explanation of the phenomenon. Both say something like this: “In America, ordinary middle class people believe that they could become rich in the future.”

Where they differ, of course, is in their normative attitudes toward this descriptive claim. Republicans think this is great, an exhibition of American optimism and ambition, a proof that the American dream is still alive. Democrats think it’s sad that they believe this, because it’s just statistically untrue that many ordinary, middle class people will join “the 1%”–and the more old-school Leftists might even throw around the term “false consciousness.”

Let’s leave aside the normative debate for a bit. I have a question: Why have we accepted this descriptive explanation? It strikes me as incredibly stupid and condescending. Let’s take an accountant named Brian as our archetype of the middle-class man. According to a Google search, $60,000 a year is a good salary for an accountant. Question: What ordinary accountant believes he can become rich in the future? Doesn’t he associate with other accountants, hang out with them, maybe even read accountant message boards?  Mustn’t he, then, know, much better than the conservative pundits who celebrate him and the liberal pundits who decry his false consciousness, that he is not going to get rich as an accountant? Aren’t, then, the statements “Brian stayed in his accounting job and had no intention of leaving” and “Brian believes that he will get rich in the future” mutually contradictory? In fact, wasn’t applying for any accounting position other than a partner-track job at the most elite New York financial accounting firm basically a commitment to not becoming rich in the future?

“Okay,” you object, “but what about another archetype of the middle-class woman, Charlize the small-business owner? She’ll probably have an average income for life, but if her business catches on, she might make it big in 15 years!” Okay, sure. Even so, does it really resonate with you that she opposes higher taxes on the rich simply because she is overestimating the probability that she will become rich, and hopes to save herself $2,000 on her 2027 tax return? Is this how people whom you know and talk with think? Do you know people who think this way? I definitely don’t.

So what can explain Americans’ failure to get enthused about more redistribution?

I have a radical idea: Let’s take people at their word! Maybe the reason Charlize and Brian are unenthused by the idea of higher taxes on the wealthy and more redistribution is the reason that they say their reason is, that they think such a redistribution would be unjust, and maybe the wealthy even deserve their wealth. Maybe intellectuals, who spend their lives debating abstract ideas, should take seriously the idea that ordinary people, too, are persuaded and motivated by abstract ideas.

***

For the record, despite my sarcastic tone, I’m not actually endorsing Charlize’s and Brian’s idea that higher taxes on the wealthy are unjust. Philosophically, I’m really skeptical of all claims about “moral desert,” especially as they relate to economic issues and income distribution. Take Debbie as our archetypal “1-percenter.” Suppose we even accept the (incomplete at best, and radically wrong at worst) argument that Debbie owes her relative wealth to her good  character — hard work, delayed gratification, determination and bravery, etc. Well, doesn’t she “owe” that good character to her parents, the public institutions that educated her, etc.? If not and she’s totally self-made, then does she “owe” her character to her genes? Where do we assign human moral agency, and hence, moral desert? To borrow from the vernacular, where does the buck stop? Since it’s impossible to clearly divide individuals’ moral agency, I think it’s impossible to assign people moral desert for their outcomes in life, and, so, I think debates about economic policy must take place on more broadly consequentialist grounds. (This is also, for those who are curious, why I am now so much more keen on social science, as opposed to the humanities, as my preferred way of thinking about the world.) This is not about taking sides — there are consequentialist argument in favor of higher taxes on the wealthy, and consequentialist arguments against — just about defining the terms for a reasonable debate.

More practically, our technological future is actually going to upend actually everything about our world in very unpredictable ways. It’s plausible that this technological future could make our economy even more tournament-like, in ways that could make economic inequality radically, radically radical. If that happens — if we end up with a world where cheap robots can do 99% of the world’s jobs, while the 1% accrue enormous rents on the patents they hold on these robots’ algorithms — then we’re unquestionably going to need some way to do a lot of redistribution through the tax system. In this world, claims that people’s income levels are a reflection of their moral desert will look plainly ridiculous.

So to clarify once more, the point of this post is not, “Charlize and Brian are terrific political philosophers,” or even, “I, for one, welcome our new robot overlords.” It’s that we need to take the influence of ideas seriously, and stop giving condescending, materialistic explanations of what voters say about their own beliefs. There are some such explanations that seem really implausible — this one being an outstanding example.

Research Findings, May 8 2012

Here are some interesting papers I’ve come across recently.

-BREAKING NEWS: Humans are biased by silly, superfluous factors. For example, at one school, MBA admissions officers are relatively unlikely to “strongly recommend” four candidates in a given day, relative to what would be predicted if excellent candidates were randomly distributed – i.e. this implies that they have an implicit ‘quota’ of three candidates for each day, and don’t like to go above that. In English: No matter how good a candidate you are, you’re less likely to get in if other outstanding candidates also happen to be interviewing on the same day. Which might strike such people as unfair.

-Financial deregulation in the U.S. led to financial development, which helped drive technological progress. In those states that deregulated finance earlier than others during the 70s and 80s, those firms that relied on bank financing undertook, and consequently enjoyed the benefits of, more R&D, as compared to those that deregulated later.

-There’s a cool financial innovation called the “Call Option Enhanced Reversed Convertible.” The idea is that it starts out as a bond – i.e., you loan to the bank at a set interest rate. But if that bank’s capital falls below a predetermined trigger level – i.e., it appears to be struggling or nearing bankruptcy – then the bond automatically converts to equity (shares). If I understand this right, that recapitalizes the bank, which prevents a downward ‘death spiral,’ of other banks refusing to lend to it because they fear it will go bankrupt, causing a self-fulfilling prophecy. This innovation could dampen financial panics.

-Jared Diamond’s narrative about the collapse of the Easter Island civilization due to overexploitation of the island’s resources is questionable.

-Is geography political destiny? Stephen Haber finds that “there is a systematic, non-linear relationship between rainfall levels, human capital, property rights institutions and regime types such that stable democracies overwhelmingly cluster in a band of moderate rainfall (540 to 1200 mm of precipitation per year)”—think Europe and America.

-In a controlled experiment, loan officers who were paid commission—as opposed to a fixed salary—accepted 20% more loan applications, and their loans were on average 28% more likely to default. This is very unsurprising—an easy prediction from simple theory. But it’s a good statistical demonstration of one contributor to the explosion of bad mortgage lending in the run-up to the crisis. As per the abstract, “the deterioration of underwriting standards can be partly attributed to the incentives of loan officers.”

-Very interestingly, the more that a bank’s shares were owned by its senior level managers and directors, the less risky its investments were in the run-up to the financial crisis, and the less likely it was to fail. Meanwhile, the more than its shares were owned by mid-level managers (who made day-to-day decisions) the riskier its investments were, and the more likely it was to default.

-Some Federal Reserve Board economists argue that the single biggest determinant of why one firm goes out of business rather than another—even bigger than, say, the characteristics of their managers—is their sustained access to credit. That access to credit is a Good Thing is not a super surprising or novel claim. But the study is good reminder of just how important keeping the financial system on stable and sound footing is for the real economy.

-When firms pay dividends, it is much more costly for them to do “earnings management”—i.e., playing make believe that they made more money last quarter/year than they actually did. So, as that would lead you to predict, dividend-paying firms do, in fact, do less earnings management than others. (One interesting little effect/proof of this is that, in the wake of the post-Enron Sarbanes-Oxley act, which improved the stringency of financial reporting standards in the U.S., non-dividend paying firms made more subsequent changes in their earnings-reporting behaviors, suggesting that they had been doing more shady stuff, on average, than dividend-paying firms.)

-Capital controls (which emerging economies often use to moderate the speed and volatility of the inflow and outflow of capital from exuberant and panicking foreign investors) don’t actually seem to achieve their intended effect. But the volatile flows of the developed world’s capital into and out of emerging markets — flows which are largely driven by the developed world’s sentiments, rather than the emerging markets’ fundamentals — are undoubtedly a big and unfair problem.

Political uncertainty reduces cross-border investment, in both directions, for both rich and poor countries. U.S. firms invest less abroad both around the times of national elections in the U.S., and around the times of elections in the counter-country. The more likely it is that the outcome of the election could significantly effect the country’s policy environment, the greater the reduction in Foreign Direct Investment (FDI). Political stability and predictability matters for investment and, hence, growth.

-The U.S.’s Clinton-era welfare reforms appear to have caused a 10-21% decline of illicit drug use among the population normally “at risk” of relying on welfare. Nudging people into actual employment had the extra benefit of reducing drug abuse.

-This is an incredibly cool review of the question, mystery, and theory of “health inequalities” in developed Europe—i.e., why is that, even though the welfare state has done much to mitigate desperate want and material inequalities among classes, different social classes in Europe still have radically different health outcomes? The authors are willing to entertain some provocative hypotheses.

-As gasoline prices rise, people become more active, both due to a “substitution effect”—people choose to ride bikes more and drive less to save money—and due to an “income effect”—higher gas prices cut into your disposable income, making you more inclined to mow your own lawn, etc. (This is true for most, but not all, segments of society.)

-Most of the research I’ve seen concludes that, contrary to the political conservative/libertarian narrative of the financial crisis, Fannie and Freddie’s “Affordable Housing Goals,” ushered through Congress in 1992, made at most a very small contribution — and arguably none at all — to the rise in the extension of credit to very-high risk borrowers.

-In the press and popular imagination, the terms “financial deregulation” and “financial instability” are linked together. In fact, however, there are a lot of ways in which, financial deregulation, broadly defined, contributes to greater financial stability. For example, if banks can more easily invest across state boundaries and national borders, they can better diversify their risks — reducing their rate of failure. This theoretical prediction is borne out from evidence from U.S. states’ staggered process of deregulation during the 70s and 80s — states that deregulated earlier saw fewer bank failures later on.

Signaling vs. Truth-Seeking

Premise #1: The things that we humans say are always a product of the fact that human discourse always points both outward and inward at the same time. Outward-facing discourse is about the things in the world, outside of our selves, as they are. Inward-facing discourse is about positioning ourselves relative to those things—it is about signaling our attitudes and loyalties. This is deeply, deeply ingrained into our brains. Throughout our entire evolutionary history, even to this day, success in life has always depended both on (1) ascertaining and sharing useful information about the world and (2) forming alliances, building loyalties, and maintaining the favor of the in-group—saying, “I am with you, I am on your side, I am not with them—let’s work together.”

Examples: People say things like, “I’ve always loved Beethoven’s sacred choral works—not that I’m religious or anything.” Or, “Not to sound like an angry feminist, but did that study really account for the effects of acculturation?” Or, “As a straight man, I see no reason why gay men are any less qualified for open military service than I.” All of these statements decompose into two separate propositions, one facing inward and the other facing outward: “I like Beethoven’s sacred choral work. But please don’t get the idea I’m some thumper!” “I think the behavioral sciences today tend to understate the role of culture in constructing gender differences. But I shave my legs, just so you know!” “I support gay rights. But I’m not gay, just so you know!” In each case, the speaker wants to make an outward-facing claim about aesthetics or science, but her/his anxieties about being identified with that group compel her/him to make an inward-facing, self-positioning declaration.

An intelligent extraterrestrial or computer would be baffled by why people do these things. Beethoven’s Missa Solemnis is undebatably gorgeous; not believing that the Latin words that accompany the music were divinely inspired does not detract one bit. The question of what is the truth regarding the perennial nature/nurture debates hinges on objective reasoning; it does not hinge on your personal identification as an angry feminist, a placid feminist, or no feminist at all. DADT was an unjust and stupid policy, objectively; your eagerness to advertise your straightness while saying so is rather ironic.

But we people, unlike intelligent computers and extra-terrestrials, understand exactly why we do these things: We know that people will make assumptions about what groups we belong to on the basis of what we say, and being identified with an out-group is extremely, extremely costly.

Premise#1, restated: People’s social anxieties, particularly their need to signal loyalty to favored groups and avoid signaling sympathy to out-groups, constrain their ability to plainly and directly state plain, factual truths about the world.

Premise #2: Journalists and intellectuals are supposed to have a moral obligation to state plain, factual truths about the world. This is the role they play in a democratic society—providing objective information and ideas which voters can use to cast informed ballots.

Premise #3: Most people are neither wholly bad, nor wholly good. Let us suppose that on a scale of 0-100, with 0 representing the Zoroastrian god of darkness, and 100 representing the Zoroastrian god of light, nobody in the world scores below 10 or above 90, and surpassingly few score below 20 or above 80.

Hypothesis: In assessing the goodness or badness of public figures, the producers and disseminators of information in our society (journalists and intellectuals) will be incapable of fulfilling their moral obligation to be objective, because their readers’ assumption that human discourse is inward-facing will make it very socially difficult for journalists and intellectuals to say unflattering truths about favored groups or people or talismans of the in-group, or flattering truths about disfavored movements or people or talismans of the out-group.

Examples: Take, as an example of an obnoxious person on the Right Rick Santorum. Take as an example of an obnoxious movement on the Left the Occupy Wall Street movement. Let us suppose that on our Zoroastrian scale, Rick Santorum is a 15—he does or says 15 good things for every 85 bad things. This would make him an extraordinarily bad man, indeed. An accurate and objective media, therefore, would report and disseminate 15 incidents of Rick Santorum being good for every 85 incidents of Rick Santorum being bad, allowing the informed public to ascertain the truth that Rick Santorum is 85% bad. However, because Rick Santorum is 85% bad—and particularly bad in the ways that most offend the professional classes—he is an especially unsympathetic figure in journalists’ and intellectuals’ social circles. It would not be going too far to say that he is or was the talisman of the out-group. So, if a journalist were to uncover (or any intellectual were to think) a good thing about Rick Santorum (one of the 15%), reporting this good thing would place her under under suspicion of sympathizing with Rick Santorum, causing her to lose caste and face social exclusion. So any journalist of less-than-extraordinary moral fiber will decline to report this good thing. As a result, 100% of Rick Santorum’s bad doings will be reported, and about 0% of his good ones. The informed public will conclude that Rick Santorum is 100% bad and 0% good. They will then wonder at the people who have voted for him after hearing his primary stump speeches, and conclude that there is only one plausible explanation—those people love and support some really horrible things and must be really bad themselves. (It is possible, of course, that those people heard some of the good 15% directly, during the stump speech.)

Let us suppose that on our Zoroastrian scale, Occupy Wall Street is a 30—it mostly functions as a kind of camp for aggrieved losers with incoherent political resentments, but it also contains a very pressing and legitimate demand for an intelligent policy response to exploding income inequality and middle-class income stagnation. But because Occupy is on the whole a 30—and because its main underlying sentiment is hostility to elites—then it is held as an unsympathetic group by the media. A young CNBC reporter who discovers a really great thing about Occupy will be held under suspicion by his superiors; one who discovers a bad thing about them will flatter the prejudices of his superiors. So CNBC will do a much better job discovering the bad things about Occupy than the good.

Conclusion: We do not get the truth from the media, because the media are the product of humans who have lots of social anxieties about signaling loyalty to the groups with whom they identify. This reduces the reliability of the information that voters use to make decisions. It also causes geographically and professionally isolated social groups in the United States to misunderstand and hate each other. This is bad for the prospects of our democracy.

***

Closing assertion: There are some extraordinarily basic truths about the world that are well known by academic political scientists, but which are never presented in the media. Consequently, informed, intelligent people have some risibly opposite-of-truth beliefs about the world. (I will not name specifics in this particular blog post, because doing so would socially and politically position me in a way that would alienate some readers, causing them to discount the main, critical point of this post, which I genuinely hope everyone could take to heart.)

Emissions Taxes and Sin Taxes: Where Two Wrongs Make a Right

[Category: Economics for Poets]

Let’s start with a simple thought experiment: You go to a store to buy a pencil. You find two. One pencil, produced by company A, costs $1, and another, produced by company B, costs $2. Also, you live in a universe where pollution isn’t a thing, and in which all pencils from all companies are produced very simply: The only inputs are wood, lead, and a machine that combines them into a pencil.

Now, two questions: Which pencil would it be more ethical to buy? And, what can we infer from the price difference?

Well, the price of the pencil — the money you pay — all goes to two kinds of things: Profit and the cost of the inputs (wood, lead and the machine). So why is pencil B more expensive than pencil A? The answer, necessarily, is that either company B is taking home way more profits per pencil (which is unlikely — but we’ll get back to this later), or that (more likely) company B has a much less efficient machine. There are two ways in which a machine could be less efficient:  (1) its technology could just be more flawed; e.g., it eats more wood and lead to produce the same pencil, meaning that more wood and lead get wasted, or (2) the physical machine itself could be much more expensive.

So back to question 1: which pencil is it more ethical to buy? Well, let’s make the most plausible inference, and assume that company B has worse technology. In this case, it’s pretty clear that the ethical thing to do is to buy pencil A. Company A wastes a lot less wood and lead (i.e., makes more efficient use of them), which are valuable resources. By purchasing pencil A, you reward company A for doing the good deed for society of finding a more efficient way to make use of society’s scarce resources.

Serendipitously, of course, the ethical thing to do here is also the selfish thing to do: Pencil A is cheaper. It’s cheaper for the same reason that it is better for society — company A has done the unambiguous good of using smart technology to do more with less. So in our very constrained thought experiment, prices guide individual consumers, simply looking out for their own interests, to make choices that are good for society; they guide businesses to find technologies that can do more with less; and thus they guide the long-term structural evolution of the economy toward greater intelligence and efficiency. You can do good and do well, just like the business gurus said. (If this sounds familiar, it’s because this is both (1) kind of the big-deal insight of economics and (2) the concept that organizes and animates modern public-policy debates. I would distill modern political economy as one big attempt to answer this question: “The logic of evolutionary psychology suggests, and experience confirms, that people primarily look out for their own interest and their families’. How can we, as society, structure institutions and laws so that that selfish energy is redirected in a socially beneficial manner?”)

My readers here object, “But this is such pure theory, based on unrealistic assumptions!” Correct. Models based on simplifying assumptions are how all sciences have historically progressed.

So now let’s complicate this thought experiment a tiny bit. I can imagine two objections from readers: “What if company B’s machine is only less efficient in terms of cost — i.e., the pencil is more expensive because it has a machine that is much, much more expensive, but this machine actually saves lead and wood.” Compelling objection. But then let us ask why machine B is so much more expensive, sufficient to permanently drive up company B’s costs, despite its savings on lead and wood. We can apply the same logic we used above: Producing Machine B probably, in this case, requires way more scarce resources, such as metal, the energy used to produce the heat to smelt that metal, etc., relative to Machine A.  If this extra metal and coal adds more to company B’s costs than it saves on lead and wood, then this means that society places more value on that metal and coal than it does on that lead and wood. Which means that, overall, yes, company B and pencil B are still more wasteful.

Okay, so here’s the second objection: “What if company B’s extra dollar all goes to its profits, but company B is very ethical and donates that extra dollar to good causes. Shouldn’t I buy pencil B to support those causes?” I guess you could. But you could also just save yourself a dollar by buying pencil A and donate directly to the cause yourself. And you probably should. After all, companies aren’t fully transparent. You can better monitor the charitable uses of a dollar in your own pocket than in company B’s.

And if you think all the way through our basic theory here, applying our logic above at every step in every supply chain, you’ll see that, unless there are “externalities” (which we will get to) pencil B must be more costly to society as a whole, and so people who just want to get a cheap pencil are, whether they know it or not, doing a good thing for the world.

Okay, so now it’s almost time for sin taxes. To understand why sin taxes are good, even though taxes are usually bad and sin is sometimes bad, we need o understand a concept economists call ‘externality.’ An externality happens when, unlike in our thought experiment above, the ‘cost’ of a resource for society as a whole is different than its cost for an individual person or company.

To see what this means, let’s complicate our thought experiment with that thing that everybody’s talking about: Carbon emissions and their contribution to global warming. We all know that pollution and climate change are harmful, i.e., costly to society as a whole. But that’s not actually the reason they’re a big, difficult problem. Pretty much everything is costly for society as a whole. Our Platonic pencils are costly to society as a whole — when I buy and use a pencil, I’m, in a very abstract way, demanding that more labor and other of society’s scarce resources be taken away from other tasks, and directed into pencil-making.

Rather, the thing that makes pollution a really big, difficult problem is that its costs are borne by humanity as a whole, rather than by the individual consumers and producers who are responsible for it. So let’s go back to our original thought experiment, and tweak the parameters: Suppose, now, that pollution and climate change are problems in this universe, and pencil-production produces carbon emissions. Knowing this, company B has done the right thing, and either installed expensive technology to capture its carbon emissions, or started a program to plant lots of trees to make itself carbon-neutral (exactly counterbalancing its carbon impacts). And this, and this alone, is the reason pencil B is more expensive

Is it more ethical to purchase pencil B? Maybe. But also — and bear with me here — maybe not. Understanding why will help us see why pollution is inevitably a public-policy issue which really can’t be dealt with adequately by individual people and companies.

Here’s why it’s not necessarily ethical to purchase pencil B: You, the individual consumer, could alternatively purchase pencil A, save yourself a dollar, and devote that extra dollar to abating carbon emissions by yourself. You could put the money to your own tree-farm or a very fuel-efficient car. Logically, if fuel-efficient cars can offset carbon emissions on a more cost-effective basis than fuel-efficient pencil factories, then the ethical thing to do is to purchase pencil A and put the money toward a fuel-efficient car.

And this is why the most intelligent, effective, and efficient way for us to cut back on carbon emissions — the way that would balance the very real goods that come from our industrial progress with the very real costs of pollution — would be to add a single, uniform, and across-the-board ‘price’ to carbon emissions. If we were able to do this, the price of every product you buy would incorporate the social costs of the pollution involved in its production. You wouldn’t need to ask yourself the insanely complicated question, “Which is a more efficient way to reduce carbon emissions — my fuel-efficient car or company B’s abatement technology?” You wouldn’t even need to exercise any ethical self-restraint. You would just need to figure out the best way to save yourself money, and the price system would guide you to the ethical choice — i.e, the one that balanced your legitimate desire for a product with society’s legitimate expectation that you bear the cost of the pollution involved.

(The second, more obvious reason why pollution is a public-policy issue rather than a private one is that most consumers are not perfectly ethical, so company A will inevitably drive company B out of business by underpricing it.)

Again, if you follow the economic logic here very, very carefully (and this is one of the Really Big Insights of modern economics), you will see that if we could determine a social cost of a given unit of carbon emissions, and we could tax companies according to their emissions at that rate, then the social cost of the product would be embodied in its price, and consumers would be guided by their own self-interest to make environmentally conscientious decisions without even thinking about it, and the economy would consequently evolve to put carbon emissions to their most efficient uses. Companies whose carbon-intensive production technologies were still ‘worth it’ to society would survive; companies which could find efficient green substitutes for their carbon-intensive technologies would be incentivized to do so; and companies that could do neither would go out of business. All three would be good for society.

So carbon taxes are one of the very, very best ways for a government to raise revenue, from all perspectives. I don’t really see any strong argument against a revenue-neutral tax-reform that would substitute emissions taxes for, say, a large portion of our corporate taxes.

***

Carbon-emissions taxes aren’t always considered a kind of ‘sin tax,’ but there are conceptual overlaps. Sin taxes are taxes on (to use the main examples) cigarettes, alcohol, and gambling — socially undesirable behaviors.

For cigarettes and alcohol, there is an obvious argument directly parallel to the argument for carbon-emissions taxes. Because of the way American health care is structured, the costs of emergency care for the kinds of health problems that cigarettes and alcohol can cause are arguably partially socialized. So, we all pay for lung cancer, even though not all of us smoke. Sin taxes could incorporate the  social cost of smoking into the individual smokers’ purchase, etc., etc., as above.

But one has the sense — correctly in my view — that this isn’t the real argument for sin taxes. And it also doesn’t explain the argument against legalized gambling — gamblers bear all their own losses. Taxes on cigarettes are already extremely high — many ethical people want them to go even higher, even beyond where the taxes levied on smokers outgrow the costs of caring for them. Rather, the economic argument conceals or rationalizes a much plainer moral judgment: Smoking, drinking, and gambling to excess are bad things to do. They are the wrong choices. They bring harm to the people who make them. We live in a free society, so we can’t ban people from smoking, drinking, or gambling, but we can discourage them a little, nudge them toward the right choices, with the tax system. We humans are weak. Addiction is a disease, a force. The moral thing to do is to try to counterbalance that force just a little bit.

And I largely agree with this argument, though doing so requires me to take off my economist hat and put on my ethicist hat. I actually don’t (as my friends who are familiar with my self-parodies know) object to smoking as much as some people do. Pipe smoking from time to time does no harm to anybody. I dislike the modern valorization of health, youth, beauty, and fitness as all-consuming moral ideals (on which much anti-smoking fanaticism is based). I hate the stupid and mean denigration of smokers as low-class, or un-kissable, or culturally regressive, or not-to-be-trusted-with-children. But if government is going to have to raise revenue somehow, I’d rather it come from increasing the price I have to pay for my occasional decadence, than from increasing the price my boss has to pay to employ me in productive enterprise. A tax doesn’t imply utter moral disgust.

I’m harsher on gambling, but don’t really support sin taxes on casinos, because I just think casinos should be outlawed everywhere. They prey on the uneducated and desperate, and encourage hopelessness by encouraging false hopes. The particular contours of the market for gambling mean that a tax on casinos will mostly fall on the prey rather than the predators. Nicotine and alcohol have some compensating benefits — social ease, creativity, etc. Casinos have none. Just ban them.

***

So now let’s get out of theory and talk about the rhetoric of these things in the real world. As I said above, I don’t see any intelligent objection to substituting carbon taxes for corporate taxes in a revenue-neutral fashion. Democrats should support it because it would mean less pollution without lower tax revenues; Republicans should like it because it would mean more efficient markets without higher tax burdens overall. The problem is, gridlock means that this kind of substitution can’t really happen. Democrats will always stop a corporate-tax-rate cut and Republicans will always stop a carbon-emissions-tax hike.

Why do conservative Republicans object to emission taxes? After all, Republicans are putatively the party of free markets, and the same basic logic that explains why free markets normally work so well also explains why why need carbon-emissions taxes. Well, partly it’s because conservative Republicans are largely stupid hypocrites with an inchoate rage at anything they associate with the good intentions of the other party, and who are financially beholden to concentrated but powerful groups whose interest run counter to those of society as a whole. (I part only from my peers and zip code in my view that liberal Democrats are also generally stupid hypocrites with an inchoate rage at anything they associate with the other party, who are also financially beholden to concentrated but powerful groups whose interests run counter to those of society as a whole.)

But conservative Republicans might also, more reasonably, object that the government has imposed taxes and received revenues quite high enough, thankyouverymuch. “If we could start all over,” a conservative Republican might say, “we would prefer carbon taxes to income taxes. But as long as taxes are so high, we’re not going to support any new ones, no matter how good in theory.” This is why the only way forward for Washington is for the whole pundit-intellectual class to start repeating “revenue-neutral” over and over and over again. Everybody should be able to agree to tax reforms that are revenue neutral, non-regressive, and efficiency-increasing. There are a lot of those out there, and there’s not a single good reason not to do them. And as long as Congress remains as partisan and gridlocked as it is now, no reform intended to either increase tax burdens or decrease government revenues overall is going to happen. They’re not even worth talking about. But we should be able to talk about the unambiguous gains from a more efficient and intelligent tax code overall. Revenue-neutral tax reform toward lower corporate taxes and more emissions taxes, for example, are worth talking about, incessantly.