Warren Buffet’s Taxes

Posted on August 19, 2011 by Jonathan

After Warren Buffet suggested that rich people like him should pay more taxes, conservatives predictably encouraged him to voluntarily give more money to the government if he so desperately desires to do so. (E.g., from Michelle Bachmann: “If he’s worried about being undertaxed, we’d suggest he simply write a big check to Uncle Sam and go back to his day job of picking investments.”)

Jonathan Chait then replies:

Obviously this fails to grasp the fundamental collective action problem that’s the entire basis for taxation. You obviously can’t fund the government on the basis of voluntary donations. Buffett and other wealthy people who favor higher taxes on the rich don’t just believe they should pay more taxes. They believe the government needs more revenue. It’s amazing how many conservatives continue to think this just-pay-more response constitutes some kind of slam dunk rebuttal.

This seems like a sensible reply, but I don’t think it fully excuses Buffet’s behavior. This situation is best thought of as a prisoner’s dilemma-style situation (as it was framed by the commenters at Steve Landsburg’s site): The optimal solution from Warren Buffet’s perspective is for all rich people except him to have their taxes raised. Of course he won’t try to push that idea, as he could never gain any traction with it. The 2nd best option (in his opinion) is for all rich people to have their taxes raised (and that’s the option he pushes). The 3rd best is for nobody’s taxes to be raised, and the worst is for only his taxes to be raised. (For example these rankings would apply if Buffet gets 5 units of pleasure for every dollar he has, 2 units for every dollar a poor person has, and 1 unit for every dollar another rich person has).

(Note that if the 1st and 2nd options were reversed, then Buffet would immediately give away a lot of money to the government, which he has not done, despite Bachmann’s encouragement. Thus I believe the above ordering is correct, and the prisoner’s dilemma description applies.)

When viewed in this way, Buffet’s disingenuousness comes into full view, and Chait’s defense of Buffet can be seen to be lacking. Buffet’s op-ed gives the sense that a sense of fairness and justice should compel us to have the rich pay more in taxes, to alleviate the suffering of the poor:

Most [rich] wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering….

This cut helps the poor and the middle class, who need every break they can get.

This sort of language really does not seem to comport with Buffet’s failure to donate money to the government voluntarily. The 2nd sentence would only be consistent with his action if he amended it to read “This cut helps the poor and the middle class, who need every break they can get, except for those breaks that affect my own pocketbook without affecting other rich peoples’.” It doesn’t make sense to suggest that a sense of sympathy for the needy should compel the rich among us to donate to the poor, yet that same sense of sympathy should not compel the richest among us (i.e. Buffet) to donate to the very poorest (a donation whose marginal benefit would almost certainly exceed the average benefit of having all of the rich donate to the poor).

Buffet should admit that, as the prisoner’s dilemma analogy shows, his behavior (not donating + advocating for higher taxes) stems from a desire to be as rich as he possibly can be at the expense of poor people if necessary, combined with a preference for poor people to become richer at the expense of rich people other than himself. This is hardly the paragon of a philanthropic attitude.

If Buffet wants higher taxes, he should feel free to keep advocating for them. But he should drop guilt-tripping as his primary method of argument.

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Government Inefficiency and Disrespect towards Citizens

Posted on August 18, 2011 by Jonathan

Here is the story of a Politico reporter who, taking Obama’s advice, tried to inquire with the USDA about rules and regulations related to noise pollution for farmers in Illinois.

The reporter got passed around via phone and email from bureaucrat to bureaucrat (and agency to agency), none of whom could answer the question, and all of whom thought it was someone else’s job to deal with this reporter. The best part is the email that capped the episode (from a semi-literate representative of the USDA’s media relations team to the reporter):

Secretary Vilsack continues to work closely with members of the Cabinet to help them engage with the agricultural community to ensure that we are separating fact from fiction on regulations because the administration is committed to providing greater certainty for farmers and ranchers. Because the question that was posed did not fall within USDA jurisdiction, it does not provide a fair representation of USDA’s robust efforts to get the right information to our producers throughout the country.

Good idea. From now on I refuse to answer any questions posed to me by the IRS which I do not regard to be fair representations of my efforts to convey to the IRS how much money I believe I owe them.

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Dice Puzzle

Posted on August 18, 2011 by Jonathan

Steve Landsburg has posted a puzzle about dice. I haven’t thought about it much and I don’t know whether I can solve it but it looks pretty good:

A standard pair of six-sided dice induce a probability distribution on the outcomes 1 through 12: The probability of rolling a 1 is 0, of rolling a 2 is 1/36, of rolling a 3 is 1/18, etc. Is there any nonstandard pair of six-sided dice that induces exactly the same probability distribution? If so, how many such pairs are there?

(A non-standard pair of six-sided dice might have, say, the numbers 1,2,2,3,8,9 on one cube and the numbers 2,3,4,4,4,4 on the other.)

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Vibe-based Reporting

Posted on August 15, 2011 by Jonathan

One point of contention in a debate about religion between Sam Harris, a prominent atheist, and Chris Hedges, the former New York Times Middle East Bureau Chief, was the issue of how common among Muslims worldwide is the support for suicide bombings. Harris had argued that a very sizable portion of Muslims in Europe and the Middle East support suicide bombings (as well as other “extreme” practices such as the death penalty for apostasy), and Hedges disputed this claim by describing his experience living in the Middle East for 7 years. He explained that he had gotten to know many Muslim families who viewed suicide bombings with disgust, and reported confidently that this view was representative of Muslims in general. Harris replied by saying “happily we do not assess public opinion by having New York Times journalists go out and live in the Muslim world and make friends and get a vibe” and then relaying the results of a Pew or Gallup poll that contradicted Hedges’ assertion.

Unfortunately, the amount of reporting that is based on the vibe gotten by a New York Times journalist is much greater than Harris might like (certainly more than I would like).

Consider a recent New York Times article explaining that the Republican party is “on the defensive” because their recent push for spending cuts is unwise in the opinion of “some well-known economists, financial analysts and corporate leaders, including some Republicans.” 19 of the article’s 30 paragraphs serve primarily to support the notion that a wide variety of economists and other experts do not agree with Republican policies. Among those quoted are co-head of global economics research at Bank of America, the chief United States economist for High Frequency Economics, and the chief economist of OppenheimerFunds. These all sound like smart and qualified people, but the obvious reason this article is not nearly as useful to the reader as it could be is that the reader still has no idea how representative these people’s views are of macroeconomists in general. Nor do we have any idea why the New York Times reporter chose to talk to the co-head of global economics research at Bank of America rather than the analogous person at Citibank, or JPMorgan, or anywhere else. Was the Bank of America guy more friendly? Was he the only one who listed his phone number on LinkedIn? Were his views more consistent with the theme the New York Times was trying to push?

Happily, as Sam Harris would say, we have a device that allows us to render all of these issues and questions irrelevant: a poll. Unhappily, the New York Times chose not to use that device.

Wouldn’t the reader have gained far more knowledge by simply reading the results of 2 or 3 poll questions posed to, for example, 200 randomly selected tenured macroeconomists at accredited U.S. universities?

The obvious reason why the New York Times chose to publish an article rather than a poll is that it is a newspaper, not a polling outfit (also maybe the article is more fun to read). But when deciding whether a New York Times journalist or Pew is better suited to answer the question “how commonly held is the view, among economists, that the Republican economic policies are bad?”, the answer is just as obvious, and the same, as it is when the question is in regards to Muslim public opinion.

 

*Hedges left the Times after being formally reprimanded for “public remarks that could undermine public trust in the paper’s impartiality.” One naturally wonders whether his greater offense might actually have been undermining the paper’s impartiality.

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Bug Eating

Posted on August 13, 2011 by Jonathan

From a New Yorker article on the movement to promote eating of bugs by people:

Matthew Krisiloff, who just finished his freshman year at the University of Chicago, recently started a company called Entom foods, which is working on deshelling insects using pressurization technology–trade secret–in the hope of selling the meat in cutlet form. “The problem is the ick factor–the eyes, the wings, the legs,” he said. “It’s not as simple as hiding it in a bug nugget. People won’t accept it beyond the novelty. When you think of a chicken you think of a chicken breast, not the eyes, wings, and beak. W’re trying to do the same thing with insects, create a stepping-stone, so that when you get a bug nugget you think of the bug steak, not the whole animal.” If he can overcome some of the technical challenges–like the fact that insect protein does not take the form of muscle, but is, as he put it, “goopy”–he plans to have a product out next year.

I really think Krisiloff is wrong about this. To me, the idea of eating a grasshopper cutlet is much nastier than the idea of eating a whole grasshopper, and I bet most people agree with me on this. I think the bug-eating movement will be better off distinguishing bug meat from other meat by playing up the “not processed at all” angle, rather than by making the bug meat just as processed as normal meat.

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Coin Flipping Puzzle

Posted on August 9, 2011 by Jonathan

Suppose your friend offers you the opportunity to play this game for free: Your friend will flip a biased coin 1000 times, which has a 60% chance of coming up heads each time, and a 40% chance of coming up tails. Every time it comes up heads, you are paid $100, and every time it comes up tails, you pay $100. You should definitely play this game, unless you are ridiculously risk-averse, because the chances of getting more than 500 heads are almost 100%, so you are virtually guaranteed to make money.

Suppose the game is changed slightly: Instead of agreeing upfront that the coin will be flipped 1000 times, you are given the option after each coin flip whether to continue flipping, to a maximum of 1000 flips, or to settle all payments and stop flipping (so this game is the same as the first one, with an additional option to terminate early). In order to decide whether to play this game, you think it through in your head, and you realize that, after 999 flips, you would probably end up terminating (i.e. not flipping the 1000th time), because at that time, you’d have a 40% chance of losing $100, and you are too risk-averse for that. But then you realize that, after 998 flips, you would effectively have only 1 flip left (because you’d know you would terminate after the 999th), so you’d apply the same logic and terminate at that time. You realize that this same logic can be applied repeatedly, backwards, all the way to the 1st flip, so you decide not to play the game at all.

But that doesn’t make any sense – the 2nd game is the same as the 1st, except for an option to terminate early (which makes the 2nd game superior), so it can’t make sense for you to agree to play the 1st game but not the 2nd.

So where is the logic wrong?

————

Note: I thought of this game in response to hearing the financial advice which I complain about in my last post.

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Financial Advice which is Totally Bogus but Often Given

Posted on August 8, 2011 by Jonathan

We’ve all heard one form or other of the following bit of financial advice: “You should only invest in the stock market if you are going to leave your money in it for a long time.”

It sounds sensible, but it is utter nonsense. You don’t need to know anything about finance, or about math, to see that it is nonsense.

Consider a slightly more specific statement of this advice “If you have a certain sum of money you are considering investing, you should invest it in the stock market if and only if you plan to leave it there for more than 5 years.” (You can find an example of this advice here, if you replace “5 years” with “10 years.” In this instance the advice is given by the founder of the Vanguard Group, who should know better. Here is another instance.).

To see that it is nonsense, consider it in the context of a short screenplay which I have written about the interaction between an investor and his foolish financial advisor:

———————————————

The year is 2011. The investor walks into his financial advisor’s office.

Investor: Hi. I have just won $10,000 in the lottery. Should I invest it in the stock market, or should I put it in a savings account?

Advisor: It depends on when you plan to spend the money. You should put it in the stock market if and only if you plan to take it out of the market more than 5 years from now.

Investor: I plan to spend it in 7 years, in 2018. I’m going to buy a house at that time.

Advisor: Ok, then, since 7 > 5, you should invest that money in the stock market.

Investor: Great, thanks!

3 years pass. The investor walks back into his advisor’s office to discuss his finances.

Investor: Hi. I want to check up and make sure I am doing the right thing with my money. 3 years ago you told me to invest $10,000 in the stock market, and I followed your advice. Should I leave it there?

Advisor: When do you plan to spend it?

Investor: I plan to spend it in 2018, as I told you 3 years ago.

Advisor: That is only 4 years from now. Since you should only invest money in the stock market if you plan to leave it there for more than 5 years, and since 4 < 5, you should pull your money out of the stock market. (Neglecting taxes and transaction fees, your decision about whether to keep your money in the stock market is equivalent to the decision about whether to put into the stock market money which is not currently in the stock market. Since you shouldn’t do the latter with only 4 years to go, you shouldn’t do the former.)

Investor: But that doesn’t make any sense! You originally suggested I should invest my money in the stock market for 7 years. Why are we abandoning your plan midstream?

Advisor: We are just re-applying the same advice I originally gave you, which is that you should only have money invested in the stock market if you plan to leave it there for more than 5 years.

Investor: But that advice clearly doesn’t work! 3 years ago, that advice suggested I should leave my money in the stock market for 7 years, and now it suggests that I should pull it out after only 3. It seems to me that as long as we are living in a universe in which time passes, rather than standing still, your advice is self-contradictory.

Advisor: I don’t get it.

Investor: You’re fired.

———————————————

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I hate how everything is a % of GDP

Posted on August 5, 2011 by Jonathan

Here James Fallows shows a chart (reproduced at right) that indicates how taxes as a % of GDP are very low in the U.S. as compared to other developed nations. Then he suggests that in order to solve the deficit problem we need to raise taxes. This is a total non-sequitur. The higher the GDP a country achieves, the lower the tax/GDP ratio should be. Suppose you live a hypothetical country where GDP is $100 per person, and taxes are $30 per person, and things are generally ok – the military is big enough, there are enough roads, etc. Then you as a country develop very quickly, so that GDP doubles to $200 per person, would you also want to double the tax money sent to the government to $60 per person? Only if you are obsessively fond of the government. The government is there to keep us safe and secure, and to provide infrastructure. These needs clearly should not scale linearly with how rich we are. When we become a lot richer, we should strive to become a lot more entertained, not a lot safer and securer, unless we are, to begin with, very unsecure and unsafe.

(chart from OECD)

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Political Parties as Interest Groups

Posted on August 4, 2011 by Jonathan

In their book The Declaration of Independents, Nick Gillespie and Matt Welch describe the Democratic and Republican parties as behaving like they are representing “interest groups.” One way to think of this is that the Democratic and Republican squabble with each other to fight over the resources of the citizens, hoping to distribute the spoils to the their respective constituencies in what is often zero-sum interaction (or negotiation), rather than working with each other (adversarially) to arrive at an optimal scenario (i.e. optimal for the country as a whole, though likely not optimal to either party individually), through non-zero-sum interaction. We’d obviously hope that they were doing the latter rather than the former.

This recent debt ceiling deal seems to me to be a good example showing how the political parties behave like interest groups rather than adversarial cooperators. Here is how the White House website assures us that they have done a good thing by creating the “trigger” deficit cuts that will take place if some other agreement sufficient to cut the deficit by $1.2T is not reached:

If the fiscal committee took no action, the deal would automatically add nearly $500 billion in defense cuts on top of cuts already made, and, at the same time, it would cut critical programs like infrastructure or education.  That outcome would be unacceptable to many Republicans and Democrats alike – creating pressure for a bipartisan agreement without requiring the threat of a default with unthinkable consequences for our economy.

So the White House propaganda is that we should be so proud of our leaders because they have established that, unless they are able to arrive at an agreement on the deficit, there will be a fallback scenario which both Republican and Democratic leaders think would be bad for the country. This is only something to be proud of if we regard Republicans and Democrats as akin to two kids fighting over a box of candy, who would both be happy to hear from their mother that no matter what happens, the other child will not be granted rights to the entire box.

Wouldn’t it be more comforting if they were issuing propaganda with exactly the opposite message? I.e.: “That [fallback] outcome would be acceptable to many Republicans and Democrats alike…” Yes, it would be, in a world where we actually trusted our politicians. But the reason they’d never say anything like this is that they know that we know that they are just representing their respective interest groups, so there is no way to achieve a non-zero-sum gain through this process; all that we can hope for is a situation where neither side feels totally shafted as compared to the other.

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Will Wilkinson on Norwegian Prisons

Posted on August 1, 2011 by Jonathan

After describing Norway’s luxurious prisons and short prison sentences, Will Wilkinson suggests that we should consider making our justice system more like Norway’s in order to bring down our murder rate:

Norway has one of the world’s lowest murder rates. America is worst in the developed world. Maybe we could learn something. Perhaps we should wonder why our detention facilities aren’t more like Halden [a Norwegian prison]….

All evidence supports the proposition that Norway’s criminal justice system is both practically and morally superior to America’s. If America’s abominably cruel and unjust system delivered results even remotely comparable to Norway’s enviable level of civil peace and order, then there might be some reason to take seriously American animadversions against Norway’s short sentences and humane prison.

Wilkinson should teach this lesson to the Dutch: if only they stopped building dykes all over their country, maybe they wouldn’t need to worry so much about flooding! After all, we Americans are far less aggressive with our dyke-building, and we don’t have nearly the level of flood anxiety that they have.

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