Evidence of Intent

I just thought of a reason for why the effective corporate / upper bracket tax rate is persistently low. These entities simply avoid taxes by responding more effectively to tax incentives. Tax rebates are out there because the government wants to buy certain types of behavior right? The problem, accounting-wise, is that effective behavior-changing tax rebates don’t show up as (income - expenditure), they just show up as reduced government income.

This is a case of the market value vs. book value dilemna. Things are worth more to you than what you paid for them, otherwise you wouldn’t have decided to buy. Tax rebates buy behavior which is presumably more valuable to the government than the tax income lost, but under simple analysis is valued at the tax income lost.

Of course, when the tax-avoiding behavior is not the anticipated kind, then it is called a loophole. If you believe that regulators will never outsmart corporate tax lawyers, you should be arguing for a simplification of the tax code.

It is easy to argue that objects fall at the same speed in vacuum, regardless of mass. Just imagine two identical uniform cubic bricks dropping from a height. Since the two bricks are identical, they drop at the same speed. Now imagine placing the starting bricks closer and closer to each other, until eventually they join up. The resulting brick has twice the mass of the originals, and assuming there is not discontinuity in behaviour, it should also fall at the same rate.

Similarly, imagine an economy with four people in it - a baker, a shoemaker, a farmer and a blacksmith. The four people sell each other goods at prices that result in no savings or loans. Now imagine another world, except it only has 3 people, and the shoemaker and the blacksmith are now the same person - i.e. the shoemaker/blacksmith makes in total the same things as the two people in the first world, and consumes in total the same amount as the two people in the first world. This second situation does not change the standard of living of the baker and the farmer at all, but assuming equal incomes in the first world, income inequality is higher in the second world.

If I am the farmer, should I care that I live in the second world instead of the first?

wikipedia

article

Another article, like the one about Japanese engineers, where worrying is done about competing with well-paying finance and consulting jobs. Instead of engineers, the sector of focus here is public service.

But for many Harvard seniors, corporate work represents security. “It’s scary not knowing what you’re going to do,” said Chen Xie, who is joining McKinsey. “A lot of people think, ‘Here’s a plan, let’s just do the safe thing.’ ”

I think young people underestimate the risk that they are capable of withstanding, and at the same time also underestimate the risks that they are taking, so the two generally cancel out. The desire for expression, coupled with a low level of risk adversity, drives investment in uniqueness, which pays off pretty well for society as a whole since diversity has all sorts of positive externalities.

But ultimately those benefits ARE externalities, so even though an activity is productive and “meaningful”, its benefit is not fully captured by the individual. Such channels then get shut down when people do better accounting. Society loses diversity, gets closer to monoculture and as a whole becomes more fragile.

Or does it? Higher education is subversive, in that you rarely get what you are asking for. In that sense, people usually do the right thing for the wrong reasons. In this case, the scenario above says they are doing perhaps a less correct thing, but for the right reason! As far as honesty in advertising goes, cash promises are much more testable and more reliable than vague pictures of “making an impact” and “contributing to humanity”. Those other things almost always require a paternalistic attitude, or faith in some untestable belief system about how the world works. I say it’s the prevalence of beliefs uncoupled with empirical reality that make the world a fragile place.

LongBets.com

article

The intention of Long Bets is to encourage responsibility in prediction-making (by keeping a public roster of predictions), to encourage long-term thinking (by offering an opportunity to shape a long-term bet), and to sharpen the logic of forecasting (by recording the logic of predictions and bets.)

…

Buffett’s bet is an ideal Long Bet. It makes a huge difference to anyone who invests in stocks (as do a large percentage of the US, either directly or indirectly) whether a boring index fund yields as much as fancy private hedge funds. The answer either way would be a huge influential signal. When economist Julian Simon won the famous bet against biologist Paul Ehrlich (Simon betting that the long-term prices of commodity minerals would decrease over ten years; Ehrlich betting they would increase), his win essentially eradicated the argument of resource scarcity from the environmental debate. Environmentalists then shifted their concern to the many other issues needed to foster a healthy environment.

Wikipedia has an interesting article on that last wager mentioned, including analysis on why Ehrlich lost. The main gist of the analysis is that the bet was in economic terms and scarcity leads to price changes only indirectly. There is no question that resources become scarce, but we really sit on deep pools of long-term elasticity, where any long term increase in price pressure pulls miracles out of the pool. For example, public discussion about oil scarcity today is phrased in strange terms - people generally do not mention the vast amounts of more expensive oil which remain untapped, and “oil running out” actually means “oil at today’s prices running out”.

A biologist positing a theory which violates a law of physics is just plain wrong, because the rules of physics exist at a higher level of rigor. Granted this is a rare situation, because biological phenomena are usually too hard to capture in physics terminology, but when it does happen the victor is certain.

The followup: just how fundamental is economics? Sure, it may be based on expired physics concepts, and sometimes takes its assumptions way too seriously, but when compared to most populist ideas like “eating less meat because it is better for the environment”, if conflicts between the two arise, I’d lean heavily towards the economics approach. In this case, I will agree with efforts to price in the externalities of meat, but not be willing to take individual action otherwise since I really enjoy eating meat and highly doubt that it is so bad for the environment that abstaining would be profitable overall.

HT: MR

Salon on Saturday was quite heated… we spent some time debating the idea of living well as a country without growth. Growth brings better living, sure, but what’s so bad about a constant standard of living? There was the assumption that zero growth meant a constant standard of living.

Not true! Because of trade. We live so well today because we trade. No growth = no efficiency improvement = eventually nothing to trade as others outcompete you. For no growth to mean a constant standard of living, you need to be isolationist as well!

Note that this applies to both countries and individuals.

NYT: High-Tech Japanese, Running Out of Engineers

It was engineering prowess that lifted this nation from postwar defeat to economic superpower. But according to educators, executives and young Japanese themselves, the young here are behaving more like Americans: choosing better-paying fields like finance and medicine, or more purely creative careers, like the arts, rather than following their salaryman fathers into the unglamorous world of manufacturing.

What I don’t understand is how following economic incentives can make a nation’s economy weaker. Are the economic signals wrong, or are the investors (the students) ignorant? Absent evidence so, the flight from science and engineering could be an efficient reallocation. Heck, I’m one of those who are leaving.

The only other possibility that comes to mind is that benefits from science education are a public good - benefits from having such an education exist, but are enjoyed by society overall and cannot be efficiently captured by the individual.

HT: Xinhong

Authors@Google

Richard Florida quotes Scott Page (The Difference) on the causes of innovation (paraphrased by me):

If you want to know where innovation comes from, you have to understand cognitive diversity - cognitive diversity is critical for innovation. And an easy route to cognitive diversity is through demographic diversity - diversity in ethnicity, nationality, place of birth, gender, sexual orientation, age groups. Benefits from such result in the clustering force.

Most of the people I know who criticize the paternalistic policies of modern Asian nations are bent on replacing that paternalism with another paternalism of their own design. Pluralism requires a bigger cognitive jump, I think.

At 53:30, Florida explicitly mentions the missing element in trying to create Silicon Valleys by combining universities and venture capital - you are still missing the tolerance for diversity, which is left out because of its subversive potential.

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Diversity is not all good, however - according to Robert Putnam (KSG), there is evidence that diverse neighborhoods exhibit more social isolation. That study is consistent with “Who’s Your City” in determining a positive correlation between diversity and creativity/economics, but finds that social trust is lowered by diversity.