I actually agree with Paul Krugman’s latest New York Times column, at least at a high level. In detail I have some quibbles. His latest column is a reflection on “Trump’s signature policy”, i.e. his tax cuts. One of my quibbles is that I don’t think that was his signature policy or, at least, it was only one among a number of signature policies. If you had to pick one, solitary signature policy for him, I think it would have to be “the Wall”, about which I shrugged. I agree that there’s a problem; I just never thought that a wall could solve it or even mitigate it. But that’s a digression.

In considering why the tax cuts failed, your first step is to demonstrate that they did, indeed, fail, and IMO the evidence that Dr. Krugman presents is sufficient:

The rationale for the corporate tax cut was, however, quite different. It wasn’t about individual work effort; instead, it was about incentives to invest in the United States as opposed to other nations. That’s clearly a real issue in a world of mobile capital. And the tax cut’s advocates argued that lower profit taxes would bring higher investment here, leading over time to faster growth and higher wages.

At the time I accepted this logic, at least as a qualitative matter. I still thought the tax cut was a bad idea, but that was because I believed that the inflow of capital would be smaller and take much longer than the plan’s advocates claimed, and as a result wouldn’t be enough to compensate for the loss of revenue.

But I was, it turned out, being too generous. As a 2019 analysis by the International Monetary Fund found, the Tax Cuts and Jobs Act ended up having no visible effect at all on business investment, which rose no more than you would have expected given the growth in demand.

at least for the cut in the corporate income tax. The evidence he produces for the failure of the cut in the personal income tax to incentivize higher personal productivity is mostly hand-waving—another quibble. Since I was always skeptical that the beneficial effects of the cut in the personal income tax rates would outweigh the adverse effects of increasing the debt, I don’t feel any need to defend it.

He goes on to sketch several explanations for why business capital investment showed little increase that wouldn’t have happened without the tax cuts include:

• A tax on profits isn’t a a tax on capital
  

  Imagine a company considering whether to borrow money to invest in some new project. If there were no profits tax, it would proceed if and only if it expected the rate of return on the project to exceed the interest rate on the loan. Now suppose that there is, say, a 35 percent tax on profits. How does this change the company’s decision? It doesn’t.

  Why? Because interest on the loan is tax-deductible. If investment is financed with debt, profit taxes only fall on returns over and above the interest rate, which means that they shouldn’t affect investment choices.

  OK, not all investment is debt-financed, although that itself poses a puzzle: There’s a clear tax advantage to issuing debt rather than selling stock, and the question of why companies don’t use more leverage is subtle and hard. The immediate point, however, is that the corporate profits tax isn’t a tax on capital, it’s a tax on a particular aspect of corporate financial structure. Analyses — mine included! — that treat it simply as raising the cost of capital are being far too generous to tax cutters.

• Business investment isn’t that sensitive to the cost of capital, anyway
  

  Suppose we ignore the deductibility of interest for a moment, and consider a company that for some reason finances all its investment with equity. Imagine also that investors know they can earn a rate of return r in the global marketplace. In that case they’ll require that the company earn r/ (1-t) on its investments, where t is the rate of profit taxes. This is how advocates of the Trump tax cut looked at the world in 2017.

  Under these conditions, cutting t, by reducing the required rate of return — in effect, by cutting the cost of capital — should induce corporations to increase the U.S. capital stock. For example, the Tax Foundation predicted that the capital stock would rise by 9.9 percent, or more than $6 trillion.

  But these predictions missed a key point: most business assets are fairly short-lived. Equipment and software aren’t like houses, which have a useful life measured in decades if not generations. They’re more like cars, which generally get replaced after a few years — in fact, most business investment is even less durable than cars, generally wearing out or becoming obsolete quite fast.

  And demand for short-lived assets isn’t very sensitive to the cost of capital. The demand for houses depends hugely on the interest rate borrowers have to pay; the demand for cars only depends a bit on the interest rate charged on car loans. That’s why monetary policy mainly works through housing, not consumer durables or business investment. And the short lives of business assets dilute the already weak effect of taxes on investment decisions.

• Monopoly
  

  Financial industry types often talk about the FAANGs: Facebook, Apple, Amazon, Netflix, Google — tech companies that loom large in the stock market. These companies look very different from past market leaders like General Motors in its heyday; it’s much harder to link their value to the tangible assets they own.

  True, there are more of those assets than are visible to the naked eye. For example, Amazon’s warehouses employ a vast number of workers. Still, the value of these companies mainly reflects their market power, the quasi-monopoly positions they’ve established in their respective domains.

  There are many issues relating to this market power, but in the current context what matters is that taxes on monopoly profits are as close as you can get to revenue-raising without side effects. They certainly don’t deter investment, because monopoly profits aren’t a return on capital.

  And the profit tax is at this point largely a tax on monopoly or quasi-monopoly profits. Officials I’ve spoken to cite estimates that around 75 percent of the tax base consists of “excess” returns, over and above the normal return on capital, and that this percentage has been rising over time. Loosely speaking, this means that most of a corporate tax cut just goes to swelling monopoly profits, with any incentive effects limited to the shrinking fraction of corporate income that actually reflects returns on investment. That I.M.F. study of the Trump tax cut suggested that rising monopoly power might help explain its lack of impact.

Of those three I think that the third is by far the weakest for a simple reason. 99.999% of companies aren’t FAANG companies and aren’t monopolies. But it does support something else I said: I think the tax cuts should have been much more narrowly crafted, more targeted than they were.

And I think the second point is by far the strongest. The correlation between business capital investment and company profits (and therefore taxes on company profits) is empirically weak. Not to mention that established companies tend to do relatively little capital investment while start-ups do a lot but, since they don’t have any profits to tax, cutting the corporate tax rates have little effect on that investment.

My reasons for supporting the cut in the corporate tax rates were two:

• Our higher taxes placed the U. S. at a competitive disadvantage not just with the Irelands but with the UK, France, and Germany.
• The corporate tax is an inefficient tax.

Cutting corporate taxes was a success in both of those but only in those.

But what about the increased incomes among the poor and minorities during Trump’s term of office (I hear someone ask). I attribute that entirely to the tighter labor market during the period which had a lot to do with his immigration policies and little or nothing to do with the tax cuts.

As you might expect Dr. Krugman is overly sanguine about the prospects for the Biden Administration. What I think will happen is that, just as Trump’s tax cuts were insufficiently targeted, so will whatever tax increases the Biden Administration puts into place and for analogous reasons.

I recommend this piece at the BBC, commenting on the same Global Trends 2040 study I pointed to yesterday. Read the whole thing—it’s not long. But I’ll focus on three scenarios they extract from the study.

“Optimistic” scenario

This involves the US and its allies harnessing technology and economic growth to deal with domestic and international challenges, while China and Russia’s crackdowns (including in Hong Kong) stifle innovation and strengthen the appeal of democracy.

Although it’s a possibility I would not make book on that scenario. I think it exhibits the confidence in technology I have only seen from people who barely passed high school trig.

“Adrift” scenario

“The world adrift scenario” imagines market economies never recovering from the Covid pandemic, becoming domestically deeply divided and living in an international system that is “directionless, chaotic and volatile” as international rules and institutions are ignored by countries, corporations and other groups.

That sounds a lot more like the world we’re living in. Think of it as an “if this goes on…” scenario.

Fantasy scenario

“Tragedy and Mobilisation” imagines a world in the midst of a global catastrophe in the early 2030s thanks to climate change, famine and unrest – but this in turn leads to a new global coalition, driven in part by social movements, to address the problems.

That’s what is known in the trade as “time inconsistency”. For some reason people respond in very different ways from the way they responded to the last time we faced major economic downturn, war, and environmental pressures all at the same time.

My reaction to all of these scenarios was how America-centric do you need to be not to consider a scenario in which China continues its rise? Or one in which a major war breaks out in East Asia which finds the West too self-absorbed to muster any will to do anything about?

Keep in mind that the report was produced by intelligence professionals. You can find that heartening or terrifying, depending.

Ohio Sen. Rob Portman has a post a RealClearPolitics in which he characterizes the situation at our southern border and presents some suggestions for addressing it. Here’s his characterization:

More than 100,000 migrants were apprehended in February, the most in 15 years. This included more than 9,500 unaccompanied kids, a 200% increase from this time last year. March numbers will be even higher, easily surpassing the surges in 2014 and 2019. And it hasn’t reached its peak.

The reason for the crisis is clear. The Biden administration’s policy changes encouraged families and unaccompanied children, mostly from the Northern Triangle countries of Guatemala, Honduras and El Salvador, to come to our southern border and apply for asylum. Traffickers are telling families they can come into the U.S. if they pay to make the treacherous trip north, then apply for asylum at the border. Under the Biden policies, there is a lot of truth to that.

The legal process to grant asylum takes several years, with a 1.2 million-person backlog and only about a 15% success rate for asylum applicants. Most waiting for immigration court dates or appeals are already in the United States and many do not show up for their court dates. People know there is very little chance they will be deported. In fact, more than 95% of the families who were released into the United States pending their asylum decision during the last surge in 2019 are still here.

which is followed by his prescription. You will see some similarities between what he proposes and ideas you’ve read around here:

First, support the Border Patrol and finish the wall system already paid for, closing gaps and deploying badly needed technology.

Second, give families and children seeking asylum relief a way to apply in their own country or a neighboring country rather than making the treacherous trip north. The Biden administration should do this by reviving the Safe Third Country agreements with Mexico and the Northern Triangle countries and working with the United Nations High Commission on Refugees so that individuals can seek asylum and are resettled in the country that makes the most sense for their situation – be it a neighboring country or the United States.

Third, the Biden administration should stop releasing children and families into the U.S. and instead restart and expand a pilot program that allows for due process through a rapid adjudication of asylum claims at the border, starting with the most recent cases. This will require additional resources, but it is worth it because it will create a powerful disincentive for future migration if people know they will be in custody on the border while their claims are being resolved.

Fourth, because American jobs are the magnet, the E-Verify program, which checks if a worker is legally eligible to work in the United States, must be made mandatory for all businesses, backed up by employer sanctions.

All four of these proposals would reduce the current incentives, or “pull” factors, to cross the border.

Congress and the administration should also provide additional smart development aid to the Northern Triangle countries to help with the long-term “push factors” that encourage people to leave their homes. This new assistance must be conditioned upon transparency and adherence to the rule of law, as well as assistance in the asylum process.

There are several things I find missing from that prescription. One of them is more stringent enforcement of E-verify. That will require expanded funding. Another is a recognition of the difficulty of doing anything about the “push” factors. I have consulted with individuals with considerable expertise regarding the “Northern Triangle” and they assure me that elites in those countries are fully mobilized to absorb any level of additional funding the U. S. might provide, line their own pockets, and do little to nothing to repair the broken economies and institutions in those countries. It will take some creativity and novel approaches as well as substantial attention to do anything material about them and, sadly, neither political party is particularly long on creativity, novelty, or attention these days. We can’t bomb Guatemala into becoming a safer, more prosperous country.

One of the signs of spring in our garden is that the lovage starts to come up. Lovage is a medieval herb that grows so fast you can nearly see it growing. It will ultimately be as much as eight feet tall.

Lovage has a very strong celery flavor—too strong for green salads but I’ve heard of people who use it in sandwiches which I don’t think would be palatable to me. I use it in soups, stews, in braciole, and, in very small amounts, in my potato salad. My potato salad recipe calls for both celery seed and parsley and lovage serves as a replacement for both.

Lovage is a perennial, i.e. it comes back year after year.

The quote is variously attributed but making predictions about the future is not just hard, sometimes it’s downright mean. That’s certainly the case with the Global Trends 2040 report remarked on by Warren P. Strobel and Dustin Volz in an article in the Wall Street Journal. Here’s a sample:

The report, Global Trends 2040, envisions a rough ride ahead for the planet, with accelerating contests over resources, governments struggling to meet citizens’ aspirations, and increased fragmentation of communities where “people are likely to gravitate to information silos of people who share similar views, reinforcing beliefs and understanding of the truth.”

There’s also some, presumably unintentional, humor:

It sees some bright spots. Population growth in Latin American and South Asia could spur economic expansion, the report says, even as China, Japan and South Korea deal with aging populations. The advent of artificial intelligence, by boosting productivity, could help governments deliver more services and tackle rising national debts, it says.

Population growth is inversely correlated with economic growth in low income countries. China, Japan, and South Korea are some of the most racially and ethnically homogeneous countries on the planet. Are they suggesting that the expanding populations of Latin America will prove to be good markets for China, Japan, or South Korea? Or that China, Japan, and South Korea will gladly accept workers from Latin American countries?

“Artificial intelligence” is a more complicated subject. If they mean automation, automating tasks that would otherwise be performed by unskilled or semi-skilled human workers will mean less work for those workers not more. If they mean true artificial intelligence it’s hard to say but progress in true artificial intelligence has been glacially slow. Most of what you see today is just applying cheaper, faster hardware in ways that were well understood 50 years ago but too expensive to be practical.

I guess that Michael O’Hanlon’s advice in his Washington Post op-ed, that we shouldn’t “overdemonize” the ruling regime in China is wise but I’ve got to admit it has me stumped. What would constitute “overdemonizing” a regime that is suppressing democracy and civil liberties, engaging in genocide, is forcibly sterilizing women, is racist, anti-religion, elitist, enslaving its own people, supporting some of the most heinous regimes in the world, viz. North Korea, Zimbabwe, Venezuela, and for all we know whose recklessness might have unleashed a virus on the world that has already killed more than 3 million people? I’ve got to admit I’m stumped.

I’m sure someone will come along and point out that at least the trains run on time.

I was going to file this under the “too soon you get old; too late you get smart” category but I’m sorry to say that Dan Gross has only advanced part of the way to wisdom in his New York Times op-ed: After identifying himself as a leader of the gun control movement he expresses the beginnings of wisdom:

Of the nearly 40,000 deaths involving guns in 2019, well under 1 percent were caused by what the F.B.I. defines as “active shooter” incidents. In an average year, around 60 percent of deaths involving guns are suicides and upward of 30 percent are homicides that don’t meet the “active shooter” definition, like episodes of domestic and gang violence. Even unintentional shootings (about 1 percent of the total) outnumber mass shootings.

but here’s his prescription for mending the situation:

• Vigorously pursue and prosecute the small percentage of gun dealers who are knowingly contributing to the illegal gun trade (a trade that is disproportionately hurting communities of color).
• Identify opportunities to strengthen the background check system by adding prohibited purchasers that we all, including 90 percent of gun owners, agree should not have guns. For instance, federal rules governing privacy for health records could be modified to allow mental health clinicians to identify those who are a threat to themselves or others, so that they could be temporarily added to the National Instant Check System. This would have to include exemptions for private sales that may make some gun control supporters uncomfortable; but in the end, in combination with the other measures listed here, it would result in a significant improvement to public safety.
• Invest in a large-scale education and awareness campaign on the dangers of owning and carrying guns, and what can be done to mitigate those dangers. It is crucial that these efforts be led in partnership with gun rights groups and public health experts and that they remain free from any judgment about gun ownership or connection with political advocacy. There are many initiatives already, such as public education about the warning signs of mental illness and suicide, which have proven effective and could be models.
• Expand on the work of “violence interrupters” and similar programs proven to reduce gun violence in cities.
• Clearly define what it means to be a federally licensed firearm dealer, with standards that include sales volume. For years, gun control groups have talked about closing the “gun show loophole.” The real problem is not specifically gun shows, it is people who are regularly selling multiple guns to strangers, regardless of the venue, without being required to conduct the same background check that a federally licensed dealer must. Not only does this clearly contribute to straw-man purchasing and gun trafficking, it puts honest dealers at a competitive disadvantage.

Although I don’t think there’s anything wrong with any of those in principle, I strongly suspect that if those measures were implemented, they were fully funded, and they were perfectly executed, in five years or ten years the number of gun homicides will have increased if anything and the primary measurable effect will be on the incomes of the NGOs that get the contracts to do the safety and awareness training. And if experience at least in Chicago is any guide some of those NGOs will be fronts for criminal gangs.

As evidence for that I would submit one fact and one claim. The fact is that in most crimes committed with guns the guns are not legally owned. The claim is that the perpetrators of those crimes know exactly what they’re doing. There’s no amount of publicity or awareness training that will change their incentives.

Ever-hopeful, Wall Street Journal columnist William A. Galston continues to press for a compromise infrastructure plan:

The administration appears to have decided to move the entire plan through the Senate using the budget-reconciliation procedure, which requires only a simple majority. The Senate parliamentarian’s reported willingness to allow more than one reconciliation bill on a single year’s budget will encourage this strategy. But leading Republicans have indicated their willingness to do business with Democrats on pieces of the bill—road, bridges, dams, water systems, ports and airports, as well as broadband and measures to counter China’s economic rise. Why not explore the possibility of a discrete bipartisan agreement before moving on to areas where agreement is unlikely?

The administration’s apparent course is not without risks:

If the administration guesses wrong, it will unravel its gains among moderate and suburban voters and restore a Republican congressional majority. If I were President Biden, I would take out an insurance policy by demonstrating my openness to honorable compromise before going to the mattresses.

I have no particular insights into the thought processes of the Biden Administration but I would speculate that they believe that the $2.2 trillion plan (which will probably cost considerably more) will attract “shy progressives” to their banner. I believe those are just as mythical as “shy conservatives”.

Failing that it may just be the Conan the Barbarian strategy:

Warlord: “What is best in life?”
Conan: “To crush your enemies, to see them driven before you, and to hear the lamentations of their women.”

The editors of the Wall Street JournaL speculate that China and Russia are testing the Biden Administration.

China

The Philippines began to sound the alarm last month over Chinese militia boats, at one point totaling 220, occupying the Whitsun Reef west of the archipelago. The naval equivalent of Russia’s “little green men,” China’s military-affiliated flotillas can masquerade as fishing fleets to give Beijing plausible deniability as it entrenches itself in disputed waters.

An analysis by two researchers from the U.S. Naval War College last week found “no evidence of fishing whatsoever during these laser-focused operations, but every indication of trolling for territorial claims.”

For more than a decade China has been moving aggressively to establish dominance in the waters surrounding the Philippines, Vietnam, Malaysia, Indonesia and Taiwan, building military installations and harassing other nations’ commercial vessels. In 2016 an international court said China was breaking the law in the South China Sea. The Trump Administration last summer sanctioned firms involved in the construction of illegal islands there.

Russia

Russia’s aims in stepping up its military presence along Ukraine’s border are less clear, though President Vladimir Putin never shies from an opportunity to torment NATO. The State Department on Monday called for Moscow to “refrain from escalatory actions.”

The two situations are hardly comparable. We actually have a treaty with the Philippines which extends to safeguarding them from attack across the South China Sea. We have no discernible interest in Ukraine other than to irritate Russia. China’s interest in Philippine territory is just part of their stated belief that the entirety of the South China Sea belongs to them (cf. “nine-dash line”). Ukraine on the hand during its entire lengthy history was never an actual country until Nikita Khrushchev, who coincidentally had some Ukrainian ancestry himself, made it a distinct Soviet republic in the 1950s. The Russians see Ukraine (the name means “on the border”) as being an intrinsic part of Russia and they have a pretty good case.

Personally, I think that when either China or Russia “test” the Biden Administration and I believe they will, there will be little ambiguity about it. As it is I’m not sure who is provoking whom or to what end.