Friday Video Extravaganza

We're auto-tuning after the break (language warning on all videos, btw).

Truth Claim of the Day

We are at the beginning of the Death of Credentials. The ROI [Return On Investment] for 95% of college educations will be negative.

Please, discuss. The context is here. I'm particularly interested in the thoughts of those who are currently or plan to eventually be teaching at the post-secondary level.

High Tax, Low Tax

There has been a lot of talk among economics bloggers about Ezra Klein's informal poll regarding the Laffer Curve. The key is that how high we set our highest income tax rates (called "top marginal rates" by those who like using economic-y words like "marginal") matters a lot for how much money the government actually brings in, especially from the wealthiest citizens. Klein summarizes this favorite tool of conservative political discourse:

The idea, popularized by economist Arthur Laffer and writer Jude Wanninski in the 1970s and '80s, is simple. Tax rates of zero percent produce no revenue, for obvious reasons. Rates of 100 percent should produce no revenue either, as no one would bother making the money that falls into that bracket knowing it would all be taken away. Thus, presumably, there is some rate in between the two that maximizes revenue. Go above it and revenue would fall because people would avoid taxes or stop working; go below it and revenue would fall because less money would be taxed.

That is, as we raise taxes we increase government revenue, but at some point this has to stop being the case. The reasons put forward for this are many, among them the following:
(A) if taxes are too high people have a very strong incentive to lie about their income levels;
(B) if taxes are too high people have very little incentive to work more / harder (they won't see most of the benefits anyway);
(C) if taxes are too high the highest income earners have a strong incentive to take their business somewhere else more wealth-friendly, like Singapore or Hong Kong;
(D) if taxes are too high government will be too big a part of the economy, and since government is not as good at promoting long run growth as the private market, long run growth and overall income will suffer, and tax revenues will suffer along with them.

Some of these are much stronger arguments than others. (A) is a big one on a practical, year-in-year-out level. (C) probably plays an important role in the long run, on the order of several decades, and becomes more of an issue the more globalized the world becomes and the more high income earners get paid for their skill with information (which means its easy to do what they do from anywhere). (B) and (D) are tempting philosophically, but there's just not much empirical evidence to support them.

Still, one thing is certain: we definitely don't want to be on the wrong side of that peak, so knowing where it is could be very important. Thus, Klein decided to ask some experts where the peak is.

There were a lot of bad answers to his question. To be sure, figuring out where precisely government revenues can't go up anymore is hard, but a lot of the people Klein asked gave numbers based almost purely on ideology---as opposed to, I don't know, data, or even theory---but acted like it was based on research. Others gave a single number as if they'd seen the number written on stone tablets somewhere. But there were some pretty good answers among the bizarre ones.

Probably the best numerical answers were given by Emmanuel Saez and Bruce Bartlett, both of whom offer a way of getting a range, and both of whom put the number somewhere around 60% to 80%; in other words, the US was probably close to the edge at the beginning of Reagan's presidency (top rates were around 70%), but we're nowhere close right now.

Greg Mankiw pointed out that in a longer term situation people will probably respond more to the tax rates they face, although he does seem to put a lot of stock in the economic growth argument that, as I mentioned, isn't great empirically. Bruce Bartlett adds a pretty important insight:

I think 50 percent is an important threshold and I would be very reluctant to go higher even if it raised net revenue.

This is key, in my view. Yes, we might be able to raise revenue up to a certain point without crossing the threshold, but there are good reasons to not just stay on the left side, but stay significantly on the left side. If we reach the peak, we've already gone too far. For this reason, my favorite response is Marty Feldstein:

Why look for the rate that maximizes revenue? As the tax rate rises, the "deadweight loss" (real loss to the economy) rises so as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue.

If only my micro principles students could think like this.  Yes, it might bring in revenue. It might not even be hurting long term growth. There are still important economic reasons---distortions to the economy---not to go that far.

There's a moral dimension here, too, but that is, I suppose, a post for another time.

Friday Video Extravaganza

Final Frontier edition below the jump.

How to Deceive with Statistics

Someone Else Does My Job Edition

I realize I haven't talked about statistical errors in a while, but nothing readily accessible to the layman has really come up. That is, until this thorough article discussed a recent article on the topic of children and cow's milk:

Mothers who feed their babies cow’s milk in the first 15 days of life may be protecting their children from dangerous allergies later on, says a new study.

"O RLY?" the author of the above article said upon reading the above sentence. After all:

[...] given they claim the exact amount is unknown, making a suggestion to "give a single bottle daily" is highly unusual; not least because it contradicts worldwide recommendations which are based on extensive evidence.

Not given to trusting Prof. Yitzhak Katz of Tel Aviv University’s Department of Pediatrics, Sackler Faculty of Medicine---at least not as a default position---she (I think the author is a she) decided to look up both Professor Katz and the original study.

On Dr. Katz, she found he has received funding from the Israel Dairy Board, which presumably could benefit from adding the 0-6 months demographic to their target audience. In other words, everything he says is probably a lie, right? Well, I don't recommend going as far as the author on this. Partially this is because while the Dairy Board might benefit from an increase in sales to newborns, inducing health concerns and possible allergies later on means they'd lose a lot of revenue to the soy folk, so I'm skeptical that they are really pushing junk science. Follow the Money is good advice, but it not only tells you when someone has an incentive to lie, it also says when they have an incentive to be careful about which lies they tell.

But I also think we should be careful about dismissing Dr. Katz for his Dairy Board connection because this is what the debate kids call an ad hominem attack: namely, we're complaining about Katz's credentials, but not dealing with his argument. In a very real sense, if the science works, the science works, regardless of who paid for it. Follow the Money lets us know when we should be extra perceptive to things like wording, but it doesn't give us license to just dismiss evidence. Fortunately, although the article's author takes a hard line in her rhetoric, her practice is solid in this area. I do so love the magic words "So I decided to dig out the study."

The article is a great example of giving a close reading to the original sources cited in a piece of potentially biased news. It also highlights how a close reading and attention to the wording of claims is important when dealing with statistics. Really, there's not much I can add to this case study. Do read the whole article, please.

The bottom line, given what the study actually says, is I think accurate:

To suggest infants be given a bottle of cow's milk on the basis of this one study, is not only irresponsible, but really quite scary!

In other words, don't do this. The bottom line from the "don't be deceived" angle is this: Be wary of any news item that tries to convince you with the phrase "says a new study." The study might not say that at all; even if it does, it might not lay claim to the level of confidence the article suggests; and even if it does that, the study might not be very well done in the first place!

Astro-physics

Seriously, modern physics and astronomical sciences hurt my brain. Here are four reasons why.

Time travel could be real, involve portals

Excerpt:

Einstein’s theory’s of relativity only precludes travel at the speed of light, he never said anything about travel faster than light. Of course it will still take an incredible amount of energy, but crucially not an infinite amount.

Now it turns out that a little technique called quantum tunneling is used by electrons orbiting around atoms to instantly move from point A to point B without passing through the space in between.

If we could utilize a similar process and "quantum tunnel" through the barrier of the speed of light, we might just be able to travel faster than light, but never actually have to travel at the speed of light to get there.

It only looks like gravity smashed your face into that sidewalk

Excerpt:

“For me gravity doesn’t exist,” said Dr. Verlinde, who was recently in the United States to explain himself. Not that he can’t fall down, but Dr. Verlinde is among a number of physicists who say that science has been looking at gravity the wrong way and that there is something more basic, from which gravity “emerges,” the way stock markets emerge from the collective behavior of individual investors or that elasticity emerges from the mechanics of atoms.

Afraid of an asteroid strike? That's small potatoes

Excerpt:

Astronomers using NASA's Hubble Space Telescope have detected a blue star called HE 0437-5439 they say was unceremoniously expelled from the Milky Way and is now hurtling through space at 1.6 million miles an hour. Scientists say his rates as one of the fastest of the 16 so-called hypervelocity stars they've discovered since 2005.

Aliens probably use text message acronyms, too

Excerpt:

''Whatever the life form, evolution selects for economy of resources,'' said Gregory Benford. ''Broadcasting is expensive, and transmitting signals across light years would require considerable resources.''

Writing in the journal Astrobiology, the Benfords claim that an alien civilisation would strive to reduce costs, limit waste and make its signalling technology efficient.