I have funny friends

Quote #1 from today, after an iMessage conversation and involving a ton of context that I wouldn’t print here if you paid me:

Only through that kind of multi-generational emotional torsion can you twist someone around far enough to have them believe they really want to wear inside-out bear costume feet someone named “Uggs”.

Quote #2, in re “Coakley lawsuit wants college’s ex-chief to repay millions”. I write,

‘Northeastern University investigative reporting students’!

I’ll grant you that I only skimmed the article, but I don’t entirely get the grounds on which the state is suing him.

Also, I don’t entirely understand how you can just get your organization to pay for a bunch of stuff without their knowing about it.

whereupon (here’s where the funny comes in) my friend replies:

Right. Like: he founded a college, then spent millions on vacation homes and Mercedes, and then Northeastern students noticed when they made an Excel spreadsheet of public data and sorted by the “salary” column. Why didn’t I think of that?!?

Of all the stupid modern tribes to belong to, the tribe of the corporation is probably the silliest

On the occasion of Apple’s releasing their revenue numbers, it’s fair to point out that lashing yourself to a particular company is really stupid. Daring Fireball, for instance, exists to defend Apple and lash its detractors. Which is fine as far as it goes: I read DF every day, and I like his style very much. John Gruber is very much a part of the corporate-tribalism nonsense, and he makes a good living from it: people invite him to give talks to defend and explain Apple, and there are rumors (unclear how accurate) that he makes half a million dollars a year from it. And good for him.

Of course there’s a tribe on the other side, namely the tribe of Android. Inasmuch as I use Apple products, I guess I’m not a member of the Android tribe. I like Apple products.

But here’s the thing: this has nothing to do with me as a person. Yet the weird stupid modern tribalism requires that your choice of technology have something to do with you as a person. If you use Android, you probably have a neck beard, for instance. If you use Apple, you’re probably effete and eat kale. Or whatever. (Turns out I eat a lot of kale, you guys.)

Starting from this base of letting the technology determine your personality, the next step is to care very much about the companies that make them. I am supposed to be personally invested in the success or failure of Apple Inc. Turns out I’m not, though. I like their products. I will keep buying their products because I like them. If they go out of business, I will be sad, because then I will have to use products that I wouldn’t otherwise have chosen. Only, it seems really hard to imagine Apple’s going out of business, so … I guess I have no reason to be sad. Problem solved!

Apple doesn’t need your support. Neither does Google. Apple and Google will do just fine even without bands of true believers furtively tossing grenades at the other side. Use their products if you like them; don’t use them if you don’t like them; lobby the company to change things (in its dealings with Chinese manufacturers, for instance) if that’s what you want. But defining yourself as an “Apple person” or an “Android person” is just pathetically demeaning to your stature as a human being.

Every word the Wall Street Journal op-ed page says about Capital in the Twenty-First Century is false, including “and” and “the”

Red border, 'CAPITAL' in red, everything else in black. Nicely modern font (Futura, maybe?) I was just minding my own, Googling for an image of the cover of Capital in the Twenty-First Century for inclusion in an eventual review, when I happened upon the Wall Street Journal getting it horribly, horribly wrong, and I was awoken from my dogmatic slumbers. I guess I’ll be writing that review now, then.

I really cannot emphasize this enough: there is nothing in that Journal piece that gets Piketty even half right. That the piece contains the phrase “this book is less a work of economic analysis than a bizarre ideological screed” is proof on its own that the author wasn’t even reading the same book that the rest of the literate Anglophone world was.

The best thing you can do to combat the Journal piece is to go read Piketty himself. Really, you need to do that. If people aren’t still citing Piketty himself in 30 years, they will be citing works that would not have existed without him; it’s really that good.

If you don’t read Piketty, what you need to know is the single mathematical statement that dominates the whole book: the rate of return on invested capital historically exceeds the rate of growth of the economy. If that continues over a long enough time scale, the weight of the past (in the form of inherited fortune) comes to dominate the present (in the form of new growth, entrepreneurship, etc.). Over long time scales, the rate of return on capital has exceeded the economy’s rate of growth; the only times when capital’s share of national wealth has dropped have been times of global-scale war. War made necessary the systems of income taxation that we have today; war destroyed capital, in the form of land and factories. In normal eras, inheritance comes to be viewed as the only way to “make it”: entering “the professions” (law, medicine) and working hard is not going to get you into the 1%. In short: under ordinary circumstances, everyone knows that the only way to become part of the aristocracy is to marry an heiress. That’s why the works of Austen and Balzac play such a central role in Piketty’s book: they illustrate what everyone knew in their guts in the 18th and 19th centuries, even when they didn’t necessarily have economic data to back it up.

And we’re heading back to that world: the basic depressing thrust of Capital in the Twenty-First Century is that we’ll almost inevitably end up in the land of “marry an heiress” whenever the rate of return on capital exceeds the economy’s rate of growth, which it almost always does.

You can choose to respond to this, or not. Piketty has his doubts that a society in which the wealthiest 1% own 90-plus percent of the assets is politically stable. As an economist with some humility, and with a great many critical things to say about his discipline, he is at pains — again and again and again — to observe that the problems of whether and how to respond to growing inequality are not merely technocratic problems of optimal tax policy to be solved by convex maximization; they must be solved by democratic polities in command of all the facts. And every generation encounters different variations of the governance problem, which require constant democratic engagement to handle them. One problem our generation faces is the increasing mobility of capital, which makes taxation by a single nation-state feel increasingly toothless. Even measuring the problem we’re trying to solve, Piketty observes, is getting harder: the wealthy seem to be hiding an astonishingly large quantity of money in offshore tax havens.

To sum up, then: inequality may be a problem; if it’s a problem, it cannot be solved by infinitely wise economists, but must instead be solved at the ballot box; if it’s going to be solved at the ballot box, the electorate must know the extent of the problem it’s solving; and increasingly, multinational capital flows make it hard for the electorate to know the extent of the problem it’s solving.

One of Piketty’s solutions is a modest tax on assets, in large part just to get some record of how large inequalities are. This would require some international coordination, of course; money hiding in Swiss banks needs to be exposed to the sunlight. As Piketty archly notes, it’s no more utopian to expect this to happen than it is to expect European nations to come together and agree on a common currency in the absence of a common government, yet somehow they’ve managed to do that.

As you might expect, it’s the modest asset tax that gets the Journal author’s panties in a bunch. Wealthy people don’t want to pay more money, and the cossacks have always worked for the czar; so it shouldn’t surprise anyone that the Journal would be upset. And it may well be a safe bet that most people aren’t going to read a 600-page work on the economics of inequality, so maybe the Journal will win by default. You, my intelligent reader, won’t allow that to happen, will you? The Journal has been blinded by tears of rage, to the point of actual illiteracy. On the one side I might quote Upton Sinclair: “It is difficult to get a man to understand something when his salary depends upon his not understanding it.” On the other, more hopeful side, I’ll quote Jefferson: “let them stand undisturbed as monuments of the safety with which error of opinion may be tolerated where reason is left free to combat it.” Let’s approach the Wall Street Journal as Jefferson would have, if for no other reason than that I think that’s what Piketty would want us to do.

The final thing to say about Piketty’s masterpiece is that its very durability derives from the fact that it is exactly the opposite of the “screed” that the Wall Street Journal has manufactured out of whole cloth. Whenever possible, Piketty maps out all branches on the road ahead, and makes clear that the choice of path is not up to him; it’s up to democracies. He’s fair to a shocking and refreshing degree. As soon as the ideologues at the Journal are done hyperventilating, perhaps they’ll be able to see that Capital in the Twenty-First Century is an astoundingly fair book, with ammunition aplenty for all sides in the debate. Indeed, much of what Piketty is saying is that democracies require knowledge for their effective functioning — not because that knowledge arms one side or the other, but because everyone on all sides needs it. Our perspective on inequality is a moral judgment that should be based on the soundest of reasons, and those reasons should be based on facts. Piketty doesn’t supply the judgment, but he does supply the facts.

P.S.: There’s really so much more to say about the book. For one thing, Piketty makes the point that you really need to distinguish between labor income and capital income in any analysis of inequality, so that naïve measures like the Gini coefficient hide more than they illuminate. And when you pick apart the numbers in this way, you find that the U.S. distribution of labor income — labor, not capital — is more unequal than at probably any other time or any other place in recorded history, because the wealthiest people are largely a new class of “supermanagers” rather than the basketball players or world-famous musicians that we might imagine. You really need to be in the top 0.1% or 0.01% before you find people largely living more off of capital assets than they are off of their labor.

Rather than explore all of the reasons why you should read this book, and all of the things that you’d learn, I’d just strongly recommend that you read it yourself. It’s seriously worth your time — again, because Piketty’s role is to inform democratic debate.

P.P.S.: Having now made up my own mind about Piketty, I can go and read the reviews I’ve been waiting to read, like Krugman’s.

P.P.P.S.: The title of the post, by the way, is a hat tip to Mary McCarthy.

Landed on an old interview with Charles Stein for some reason

I remember reading this interview between Morrie DeGroot and Charles Stein back in the day, probably when I was an undergrad at the department DeGroot founded. I was struck in particular by this bit:

This doesn’t answer the question, “When I say the probability is 1/6 that this die will come up 6 on the next toss, what does that statement mean?” But then in no serious work in any science do we answer the question, “What does this statement mean?” It is an erroneous philosophical point of view that leads to this sort of question.

Reminds me of the bit by Gellner describing reductionism:

Reductionism, roughly speaking, is the view that everything in this world is really something else, and that the something else is always in the end unedifying. So lucidly formulated, one can see that this is a luminously true and certain idea. The hope that it could ever be denied or refuted is absurd. One day, the Second Law of Thermodynamics may seem obsolete; but reductionism will stand for ever.

Oh, and then there’s this line of Stein’s; think “big data” when you read it:

There are so many more possibilities for computation, and some of them are clearly useful. People can find things by using somewhat arbitrary computational methods that could not be found by using traditional statistical methods. On the other hand, they can also find things that probably aren’t really there.

The interview was from 1986.

Placeholder for a forthcoming Piketty review

I will only say here of the Piketty book that practically almost absolutely everybody is talking about: it really is that good. I’m most of the way through it, hopefully to finish today. It’s just … hard to call it anything short of a landmark. It consolidates everything you’ve read or thought about inequality into a single work, complete with analytical support for nearly everything (though oddly lacking citations in nearly all of its footnotes).

This is just a downpayment on a review. You really want to read the book, though.

“This graduation speech teaches you everything you need to know about economics in 297 words” — no it doesn’t

Whoever wrote this headline decided to annoy a whole lot of people. Indeed, the whole thing is probably a nice big exercise in trolling. So rather than feed the trolls, I will reply in kind with very little text.

Whenever you read about how individuals behave in an economic sense, you should immediately come back with at least one question:what happens if everyone behaves that way? So for instance, that speech talks all about incentives, which are economists’ favorite things. I have an incentive to go to college, say, because doing so increases my expected lifetime income. But what if everyone goes to college? If everyone’s education increases by the same amount, will everyone’s income go up by the same amount?

Or similarly: we all have an incentive, let’s say, to live in a quiet place on the water. But since we all have that incentive, we all decide to move to a quiet place on the water. Now we all live on the water, crowded in with each other, and it’s no longer quiet or peaceful.

Or we all would like our kids to be able to walk to school safely. But they won’t be able to walk safely unless our neighbors believe that it’s safe. So some of us decide to drive our kids to school. Now there’s no safety in numbers, so our kids aren’t safe. So everyone drives their kids to school. So it’s no longer safe for our kids to walk to school.

Or see Klinenberg: used to be that, during heat waves, thousands of people would leave their homes and go sleep in public parks in Chicago. That little wave of revulsion you just felt explains why no one does that anymore. And since no one does that anymore, people have to sleep indoors during heat waves, because they no longer have safety in numbers outside. But lots of people can’t afford air conditioning; in particular, the most marginalized populations cannot afford air conditioning. So they die alone in their apartments.

The moral here should be entirely obvious: what I do depends upon what you do. It makes very little sense, in a lot of contexts, to talk about what you want — what your “incentives” are — without talking also about what I want, or vice versa.

Shorter version of all of the above: read Tom Slee. Really. Go read him as soon as you can. His book is a necessary corrective to the trite Sargent speeches (and, I’m coming to worry, to the Voxes) of the world.

If you get a big tax refund, you’re doing it wrong

This probably gets said to everyone every year, but I feel I need to repeat it: if you get back a big tax refund, it’s not like you’ve outsmarted The Man, or like you’ve gotten a big windfall; it’s just that you paid the government more throughout the year than you needed to, and they’re giving you back what you overpaid.

I really think many people don’t understand what they’re doing when they file their taxes. They’re computing on the one hand how much they should have paid during the previous year, and on the other hand how much they actually did pay. Subtract what you did pay from what you were supposed to pay. If the result is a number greater than zero, then you underpaid during the year, and you need to pay to make up the difference; if it’s less than zero, you overpaid, and the IRS owes you back some of your own money.

When you underpay throughout the year, you can take the extra money from every paycheck and put it in a bank account and earn interest, or you can invest it and (if you’re lucky) earn a positive return. Whereas if you overpay, the government doesn’t pay you interest at the end of the year. So by overpaying throughout the year and receiving a refund at the end of the year, you’ve given the Federal government an interest-free loan throughout the year.

The optimal strategy, then, is to do two things:

  1. Estimate, early in the year, roughly how much you’re going to owe in taxes.
  2. Underpay throughout the year by just enough that the IRS never gets mad.

Actually, 2. isn’t quite right. It’s okay to get them mad, because when they get mad they just charge you money. If you know your tax situation well enough, you can have them charge you just enough money that you still end up ahead. Suppose they charge you $1.05 for every dollar you underpaid. Well, if you can get a 6% return on your money by investing it rather than paying it to the IRS, you should just invest that money, earn 6%, then pay the 5% penalty. You’ll still end up ahead.

But presumably they don’t just charge you some fixed low rate of interest for every dollar by which you underpaid throughout the year. I don’t know, but I would imagine you pass some threshold where your underpayment makes them really unhappy (we might say that their response is “nonlinear”). So the optimal strategy would be to underpay such that the marginal dollar of underpayment is just offset by a marginal dollar of fines from the IRS.

I realize this takes all the fun out of why people like tax refunds. They like seeing a nice big check. And I think a lot of people don’t believe they have the self-control to set aside a few dollars with every paycheck; they believe they could handle a windfall better. If that’s how you feel, then go you. Empirically, I wonder if it’s true that people can handle a windfall in their taxes any better than they can handle a small regular payment.

Generally speaking, I don’t understand why people find taxes so vexing. For most of us, it’s simple:

  1. Add up all the money you made during the year.
  2. Subtract exemptions for yourself and your dependents.
  3. Subtract deductions for your house and charitable contributions.
  4. Use the tax tables to figure out what you owe.

Some people do have it hard. Small-business owners, I would wager, will find this particularly tricky. If you have lots of complicated financial assets, it’s probably annoying. I’d like to look it up empirically, but here’s a quick observation: most people don’t itemize their deductions. If you take that as a measure of how complicated most people’s returns are, you have your answer: most people’s returns aren’t complicated.

And if the pain of filing your taxes is that you’re sending money to the IRS, you can eliminate this pain by just setting up your withholdings properly throughout the year. Set it up so that you owe nothing, and are owed nothing, at the end of the year. If you’re like 2/3 of Americans, this isn’t hard: you’re not even going to be itemizing the deduction for the home you own.

Indeed, most Americans would be just fine letting the IRS handle their taxes for them, if we had such a thing; we’d be more likely to have such a thing if tax preparers weren’t lobbying against it. Your employer would submit your salary to the IRS; your bank would submit your interest income; your mortgage company would submit any interest payments you made; the IRS would tell you what you owe, and you’d be done with it.

For most people, though, I just don’t see what the big deal is.