Tories axe academic freedom

[Victor Galis]

You assume someone would take their place. I don't. The financial sector has grown way beyond the size it needs to be. Without the subsidy it might return to its historical size.

This subsidy is already disbursed. Only the promise of future subsidies can maintain a sector above its non-subsidized size.

That promise of future is implied by the unwillingness to let any of the major players fail since Lehman. Furthermore, not all subsidies have already been paid out.

The whole buying of toxic assets thing hasn't happened yet.

Tax revenues are transfers. I thought we were already clear on this? Bubbles and crashes actually raise revenues due to the one-sidedness of capital gains, by the way.

We keep drifting away from the original point.

Too bad this isn't even close to verified in what's actually happening. You see a far lower level of leveraging today than previously. The governments actions are serving to reduce the inevitable overreaction to crashes. Risk premia are still high, leverage is low.

Yes, today is not the future. It takes almost 10 years for markets to forget and get sloppy again.

This is absolute nonsense. The poor are drains on the public purse because they consume more in government services than they pay in taxes. Note that I don't have a problem with this. I am wholly in favour of larger amounts of income redistribution (I would avoid high marginal tax rates at the top, however; my ideal tax and benefit system would be large per-person transfers to the public in money with a flat consumption/earned income tax rate + no tax on capital gains; the two are equivalent, of course).

I'm not sure how that math works. You cut the top rate, but do more redistribution. I suspect the payment to the bottom would become too large (to make up for the consumption taxes and increased income taxes).

I suspect such a system might be workable in some situations, like if you are a major exporter and can impose those taxes on foreigners indirectly.

I thought that's what I said 20 posts ago.

I kinda skimmed the thread.

[KrazyHorse]

I'm not sure how that math works. You cut the top rate, but do more redistribution.

a) I would reduce in-kind distributions. I'm done with being paternalistic about the choices people make regarding consumption. I'm including in here the elephant in the room (medicare).

b) I would greatly reduce the tax breaks enjoyed by the middle class (f.e. on housing interest deduction in the US, child tax deductions+credits, health insurance deduction). If we're going to do redistribution it should be aimed at helping the poor, not the moderately well-off. Presumably helping the poor is where the greatest marginal utility per dollar lies. The fact that transfers will be per person rather than means-tested is merely to avoid large marginal tax rates in the phase-out region.

[KrazyHorse]

In general, assuming that the goal is to maximize utility, that utility curves slope downward with marginal dollars and that marginal tax rates cause deadweight losses as some convex function of the rate the efficient solution is the one I've proposed. It should also be noted that removing the tax distortion between current and future consumption is achieved here.

When you add in certain empirical facts like the observation that the income elasticity of labour at the top end is higher than elsewhere you might actually want to drop marginal tax rates with income above a certain point. The effective tax rate will be progressive for most of the distribution, but may be somewhat regressive when comparing individuals at the top end (I don't think we should care too much about this; my concern is mainly for those at the lower end).

[KrazyHorse]

Yes, today is not the future. It takes almost 10 years for markets to forget and get sloppy again.

This is precisely what I think too. Which is why moral hazard arguments are silly, in my view. Please think about this.

If markets exhibit availability bias (weighting recent events strongly) which is eminently reasonable and in fact borne out by the evidence then the time horizon in which moral hazard affects behaviour is small. The negative effects from increasing moral hazard are therefore smaller than you would assume if the time horizon was longer.

[Victor Galis]

a) I would reduce in-kind distributions. I'm done with being paternalistic about the choices people make regarding consumption. I'm including in here the elephant in the room (medicare).

Ah, that I have to disagree with. I suspect the value of the services provided is significantly greater than could be purchased for their cost in the free market (or it would be if the government were better run). Well, that's true for some of the services.

Remember, my argument isn't that the current services provided by the US government is optimal, it's that in an optimal situation the government will provide some services.

b) I would greatly reduce the tax breaks enjoyed by the middle class (f.e. on housing interest deduction in the US, child tax deductions+credits, health insurance deduction). If we're going to do redistribution it should be aimed at helping the poor, not the moderately well-off. Presumably helping the poor is where the greatest marginal utility per dollar lies. The fact that transfers will be per person rather than means-tested is merely to avoid large marginal tax rates in the phase-out region.

I would kill a lot of those deductions because I don't like the distortions they cause.

This is precisely what I think too. Which is why moral hazard arguments are silly, in my view. Please think about this.

If markets exhibit availability bias (weighting recent events strongly) which is eminently reasonable and in fact borne out by the evidence then the time horizon in which moral hazard affects behaviour is small. The negative effects from increasing moral hazard are therefore smaller than you would assume if the time horizon was longer.

I think reducing moral hazard makes the events more memorable. Otherwise, the moral hazard reducing solution could include putting in place some restrictions which reduce the opportunities to **** up royally in 10 years time. Don't get me wrong, I suspect some major financial corporation will do something stupid, but it would be nice if we could let them fail instead of paying loads of money to bail them out for fear that the whole system will collapse if we don't.

[Victor Galis]

In general, assuming that the goal is to maximize utility, that utility curves slope downward with marginal dollars and that marginal tax rates cause deadweight losses as some convex function of the rate the efficient solution is the one I've proposed. It should also be noted that removing the tax distortion between current and future consumption is achieved here.

When you add in certain empirical facts like the observation that the income elasticity of labour at the top end is higher than elsewhere you might actually want to drop marginal tax rates with income above a certain point. The effective tax rate will be progressive for most of the distribution, but may be somewhat regressive when comparing individuals at the top end (I don't think we should care too much about this; my concern is mainly for those at the lower end).

I think I may need to think on this one, possibly do some research. I'm fairly certain that empirically your plan wouldn't work, but the reasoning is certainly sound. I'm not sure where the flaw is, and I think I'd have to do some serious reading to find the real flaw. (The downside of being employed is a lot less time to do stuff on my own time.)

[KrazyHorse]

I suspect the value of the services provided is significantly greater than could be purchased for their cost in the free market

The cost savings associated with, say, the single payer system are largely an effect of transfers from suppliers to the monopsony government purchaser. This is not necessarily a bad thing, since I'm of the opinion that medical services are overpriced due to entrance restrictions put in place by existing providers (college of physicians) however it means you cannot take at face value the difference in costs between (say) the US and Canada as efficiency savings. Add into that the fact that in-kind distributions are necessarily valued less than cash disbursements (cash disbursements allow individuals to make their own purchasing decisions, i.e. to choose to spend more or less on medical care) and I'm actually pretty sure that you end up with a reduction in utility (at least compared to the ideal situation where you break the back of the physician oligopoly).

I would kill a lot of those deductions because I don't like the distortions they cause.

Duh. Plus the fact that I'd rather transfer to the poor than to the upper-middle class.

. Don't get me wrong, I suspect some major financial corporation will do something stupid, but it would be nice if we could let them fail instead of paying loads of money to bail them out for fear that the whole system will collapse if we don't.

I am in no way, shape or form convinced that the taxpayer is going to lose money on the TARP deal

And all experience suggests that the market ALWAYS allows greed and arrogance to get the better of it within a decade or so. No regulatory solution I've ever heard of would do much to fix this without dramatically stifling actual positive innovation (and replacing it with regulatory arbitrage). The best one I can think of is to promote exchanges rather than OTC contracts to allow participants to fail without hurting others too much. Moral hazard is overrated because firms ALREADY behave so irresponsibly and trying to stop them from being reckless is fighting against human nature. Putting in place safeguards to prevent their recklessness from hurting others is the best we can hope for, and these need to be minimally invasive because otherwise the firms will simply engineer around them (which they are MUCH better at doing than regulators are at regulating).

**** moral hazard (on the timescale of decades). It's a non-issue.

[KrazyHorse]

I think I may need to think on this one, possibly do some research. I'm fairly certain that empirically your plan wouldn't work, but the reasoning is certainly sound. I'm not sure where the flaw is, and I think I'd have to do some serious reading to find the real flaw.

There is no flaw. This is a well-known solution. I am not proposing anything radical from an academic perspective. Politically it is unsound due to:

a) General ignorance (plus rationality bias, availability bias etc)
b) The median voter theorem

[Victor Galis]

I suspect the value of the services provided is significantly greater than could be purchased for their cost in the free market

The cost savings associated with, say, the single payer system are largely an effect of transfers from suppliers to the monopsony government purchaser. This is not necessarily a bad thing, since I'm of the opinion that medical services are overpriced due to entrance restrictions put in place by existing providers (college of physicians) however it means you cannot take at face value the difference in costs between (say) the US and Canada as efficiency savings. Add into that the fact that in-kind distributions are necessarily valued less than cash disbursements (cash disbursements allow individuals to make their own purchasing decisions, i.e. to choose to spend more or less on medical care) and I'm actually pretty sure that you end up with a reduction in utility (at least compared to the ideal situation where you break the back of the physician oligopoly).

Some of the savings come from universality. The HMOs spend loads of money trying to screen out applicants. I'm sure there's other examples.

(Heck, unifying medical records would help, but that doesn't require a single-payer system.)

I am in no way, shape or form convinced that the taxpayer is going to lose money on the TARP deal

Only time will settle this. Neither of us knows enough to win this argument at this point.

And all experience suggests that the market ALWAYS allows greed and arrogance to get the better of it within a decade or so. No regulatory solution I've ever heard of would do much to fix this without dramatically stifling actual positive innovation (and replacing it with regulatory arbitrage). The best one I can think of is to promote exchanges rather than OTC contracts to allow participants to fail without hurting others too much. Moral hazard is overrated because firms ALREADY behave so irresponsibly and trying to stop them from being reckless is fighting against human nature. Putting in place safeguards to prevent their recklessness from hurting others is the best we can hope for, and these need to be minimally invasive because otherwise the firms will simply engineer around them (which they are MUCH better at doing than regulators are at regulating).

Yeah, but some collapses are bigger than others. Not having firms that are "too big to fail" come to the brink of failure is not beyond our regulatory abilities.

I'm also not very convinced that there's significant benefits to financial innovation. I can see the advantage of borrowing from people who want to save and lending to those who want to invest. I can't really see the benefit of allowing people to buy CDS to insure against default on bonds they don't own. That's just gambling pure and simple, no different from betting on a horse race.

There is no flaw. This is a well-known solution. I am not proposing anything radical from an academic perspective. Politically it is unsound due to:

a) General ignorance (plus rationality bias, availability bias etc)
b) The median voter theorem

Academic economics is rife with foolish ideas. Maybe this isn't one of them, but we'd need some empirical evidence. As I've said, there's no flaw in the logic, there might be are flaws in the assumptions. Empirical evidence is needed to point them out and figure out if they are significant enough to impact the conclusion.

[Victor Galis]

Oh, and on the transfers in kind issue, do you also include in there things like security (army, intel orgs., etc.), law enforcement, maintenance of roads and other transportation infrastructure?

I think those are all even more obviously natural monopolies than healthcare.

[KrazyHorse]

Those are obvious public goods. Healthcare is not particularly obviously a public good beyond immunization and some basic hygiene. Most healthcare expenses in the West do not go toward the prevention/containment of communicable disease.

[KrazyHorse]

By the way, you are confusing the term "natural monopoly" with "public good". A public good is one where the free-rider problem is acute. Natural monopolies are simply industries where the cost of production is strongly inversely dependent on size. For example, electricity distribution is usually claimed to be a natural monopoly, however it is not a public good. My neighbour using his toaster doesn't allow me to use my TV without paying the electric company. On the other hand, lighthouses are the classic example of a public good, but as far as I can see it doesn't really matter if one company runs some lighthouses and another company some other ones.

I suggest you get these two straight

[KrazyHorse]

Roads may be both a natural monopoly (or at least natural oligopoly) as well as a public good, depending on how much you hate tolls.

[KrazyHorse]

Not having firms that are "too big to fail" come to the brink of failure is not beyond our regulatory abilities.

If you think that this will do anything you're crazy. In addition to the fact that financial firms are just as guilty of groupthink as other people, there are obvious ways to engineer around any size restrictions you care to think of. You have far too much faith in regulation. It never works. Not for long, at least.

I can't really see the benefit of allowing people to buy CDS to insure against default on bonds they don't own. That's just gambling pure and simple, no different from betting on a horse race.

Dude, exposure to firms' credit is FAR bigger than is indicated by the freaking size of its bond issues. There's a whole ****ing HOST of things you can hedge against by using CDS. Like exposure to a downturn in the sector of the underlying. Or direct business dealings with the underlying. Or some crazy **** that it takes 5 PhDs ages to figure out. I'm not smart enough to know what's hedging and what's gambling without in-depth knowledge of every situation and neither are you. Accept the bounds of your intelligence and knowledge. The world is FILLED with very smart people. The things they come up with is constantly surprising to me. Be humble. CDS are so massively used because they're so useful. Why would people choose to gamble with CDS instead of options, futures or any other of the scads of derivatives UNLESS THE CDS FILLED A NEED WHICH WASN'T PREVIOUSLY FILLED?

Academic economics is rife with foolish ideas.

Yeah, but the areas where most of 'em agree is pretty stable and convincing. And most, if not all of the points I made there are precisely in those non-controversial areas, even if they are phrased slightly differently.

High marginal tax rates are bad. Transfers in cash are more valuable than transfers in kind. Utility curves slope down. With those assumptions you're led pretty inexorably to what I proposed.

[KrazyHorse]

Some of the savings come from universality. The HMOs spend loads of money trying to screen out applicants. I'm sure there's other examples.

(Heck, unifying medical records would help, but that doesn't require a single-payer system.)

Both of these are true of the auto insurance market too. I agree that these are inefficiencies, but I question any claim which say that the cost savings from these factors is a significant part of the total cost of medical care.