The Myth of Barstool Economics

Facebook has seen versions of this video floating around recently. It's a cute little story about men drinking beer in a bar, something we can all sympathize with, and it tries to make a larger statement about how "unfair" our tax system is and how we shouldn't stigmatize inequality.

Now, for anyone that's spet even a little time looking at the tax system, something seems a little off here. What's more, the Facebook version of this story, often posted in the form of a letter, is always attributed to American economists who deny having anything to do with it. Clearly, these guys wouldn't spend so much effort distancing themselves from this obviously partisan tale if they actually believed in what it says.

As the incredible Richard Wolff points out, part of the deception in the video is its simplicity. Viewers often drop their critical assessment of its content because it both seems straightforward (look at the easy math!), and it supports a common sentiment (taxes suck!). But if you only take it this far, you miss an incredibly pernicious piece of political economy.

Debunking all of this is going to take some work, and I'll be relying on the basic messages that Wolff presents, filling in details as we go.

i) While the "barstool economics" story assumes that everyone is getting the same service (a beer), the truth is that the rich receive more benefits from the government than the poor, which is why they should pay more. The tax code is just one of many examples.

ii) The original point of the income tax, as it was conceived in the beginning of the 20th century, was to use the money from the top 1-5 percent to develop common well being. The sentiment is very similar to Adam Smith's take on taxes, that those with the most should provide the most to guarantee a strong civil society. This is basically described in the original legislation. 

Over the last 50 years, the rich have been steadily moving the tax away from themselves and onto poorer people, which helped turn people against it. This is part of the reason that anti-government rage seems to only grow stronger the longer Republicans are in office: by shifting the cost of government onto

iii) The story is confusing for people who don't understand that we have a marginal tax system. You do not pay a tax rate on a total amount of money. You pay rates for certain increments that you earn.

For example, the first 10k are tax free. The next 10k are taxed at 5 percent. The next 10k at 10 percent and so on. The rich only pay the top rate on the money that they've earned above 250,000k; the lower increments are taxed at the same rate as the poor and middle class. As it works out, your effective (actual) tax rate is always lower than the tax rate of your top marginal bracket. This is why no one in the US actually pays 35 percent (the top threshold), even before accounting loopholes come into play.

So if Barack Obama is going to keep the Bush tax cuts for everyone except those "earning over 250k," what he's actually doing is adjusting the rate for the very top threshold. Rich people will still get a tax reduction for everything they earn up to 250, only the amount that comes over the top is actually taxed higher. Does that make sense?

To play the game a little, Obama's plan would be similar to this scenario:

Guys 1-6 no longer have to pay due to the cut. Every one else shares a four dollar tax cut, which is the maximum reduction that anyone would receive. Although everyone shares the cut equally, the richest guy now pays a larger portion of the bill, since some other guys have dropped out. This is true of the "discount" given in the story too, and it would happen in most scenarios that try and distribute the discount fairly.

(This demonstrates the great irony of the right's tax cutting zeal. Half of Americans don't pay income taxes because Republicans have been cutting taxes so aggressively for the last thirty years. Having created this situation, they now complain about it to further their real goal, lower rates on the rich and higher rates on the poor).

iv) In the end, the biggest problem with barstool economics is how incredibly far it is from the actual kind of tax cuts proposed by the Republican Party. Under the story's little description of a "tax cut," everyone got roughly the same savings, in percentage terms. In fact, the "percent" cut actually favored the poor.

No Republican is actually proposing anything like that. If you compare Romney and Obama's plans (assuming that Romney could actually deliver, which is a whole 'nother issue), you can calculate the "Romney saving" by combing the two together.

Graph original prepared by Ezra Klein here.

Excluding the poorest twenty percent (who would see their taxes increase), all of the bottom 99 percent would get a tax deduction of less than ten percent (comparing with the rate they'd have under Obama). The top one percent, would get a 13 percent tax deduction, while the top .1 percent would get a 15 percent tax deduction.

So, people aren't just confusing dollars and rates when they look at Republicans' tax cuts. The rate of the cut for the rich is way larger than the rate of the cut for everyone else. Combined with reduced services, you see a massive shift in the burden of government from the rich to the poor.

...And they blame the left for class warfare.

A Chronicle of a Political Death Foretold

A small consensus is forming around the idea that Romney's campaign is now officially "dead." After several weeks of very bad messaging - including a conversation with a chair, bad judgement in his statements on the Middle East crisis, reports of infighting and an already notorious secret video - criticism from moderate stalwarts like David Brooks has been fierce. Unfortunately, these proclamations of imminent campaign collapse are widely exaggerated.

This is a close campaign. It was always going to be a close campaign. As Matthew Dickinson writes,

As I’ve discussed previously, these remarks tend not to have much impact largely because they are filtered through voters’ preexisting ideological beliefs. For this reason, I doubt Mitt’s 47% comment is the game changer that partisan pundits predict/hope it will be. Remember, campaigns tend not to change votes so much as they activate latent predispositions among voters. Yes, it’s possible this time will be different, and that Mitt’s remarks really are a turning point. But in the absence of evidence indicating why this time should be different, forgive me if I don’t take the partisan pundits’ words for it.

Dickinson refers to the following chart from John Sides, discussing the strong evidence that gaffes don't really influence polling data.

Now some liberals, including most of the people that would read this post, would look at some of the "gaffes" highlighted above and scoff. But that's the point. While you, liberal reader, don't think  that UDBT is a big deal, people on the right say otherwise. This is clearly framing, based on ideological preferences. It's also why we see, over and over again, that "gaffes" don't seem to have too much of an immediate, short-term effect. One side goes up in arms over them; the other shrugs; those in the middle, who hate "politics," mostly ignore it all.

John Sides shows this effect in his discussion of George Allen's "Macaca moment." While there was an immediate negative effect, similar to the polling shift observed by Nate Silver, it becomes very difficult to see how this influenced the final election results. A few weeks after the statement, once the election finally came around, the race was tied. And even if Macaca did a lot to damage Allen as a candidate, it does nothing to explain how Webb's campaign grew in stature and how that candidate finished so strongly.

So maybe the media makes a little too much out of gaffes (gasp!), and maybe we're blowing the current situation out of proportion. Nonetheless, I think there's another issue, relating to general impression, which I think that this outweighs any short-term reference. While it would be much harder to track, there's clearly a point in a campaign where a candidate just isn't taken as seriously anymore. It could be Al Gore's statements on the Internet, John Kerry "for it before I was against it." These sort of lasting impressions, which persist with us even to this day. They form the kinds of halos that permanently color our impression of these politicians. Jon Stewart continues to show zero respect for John Kerry.

The challenge about this sort of thing, though, is that we don't have any sort of testable hypothesis to work on. The only real evidence about the existence of damning impressions is counterfactual. As Sides explains,

The best argument you can make about these gaffes is sort of a woolly counterfactual: “Well, if it hadn’t been for the release of Romney’s video today, Romney would have been able to accomplish X, Y, and Z, which would have helped him win the election.” Like any counterfactual, there is some plausibility—yes, Romney would rather talk about the unemployment rate than these comments.

But like any counterfactual, it’s predicated on assumptions about what the world would have looked like without these comments. And given the tenuousness of any such assumptions, and the (at best) small effects that single events in any presidential general election campaign tend to have, I would stop well short of calling this video “devastating.”

So pay attention to public impression, more so than the actual statements. There is some signs that this isn't really going well for Romney, and his campaign is losing most of its credibility. Take this video from Key and Peele for example. But it is still too early to say. It's going to be a very close election.

Romney's Big Moment Overshadowed by Ryan Problem

The inevitable happened, which I guess is only newsworthy because we doubted its inevitability for large chunks of the last four years. Mitt Romney is the Republican candidate in the 2012 Presidential Election. Congratulations to Mr. Romney and his family, this will probably be the high mark of his political career. He responded with uncharacteristic grace, delivering one of the better speeches of his political career last night. He didn't let himself get carried away in attacks on Obama, which let him remain happily generic and relatively truthful.



He should savor this moment, because the next several months are going to be a miserable grind. Mr. Romney has a big problem, which pretty much entirely summed up by the other half of his ticket. By completely tethering his horse Ryan and the conservative, he has committed himself to the basic partisan dynamic existing in the US, and he has set his campaign on a course for failure.

It's hard to understand why he should have chosen Paul Ryan in the first place. Vice Presidents have very little influence in Presidential elections. To understand this, you have to remember that the American electorate is incredibly misinformed and apathetic towards politics, which is largely the result of the unending stream of partisan crap sprayed on them. When 49 percent of Americans actually know that Obama is a Christian, don't expect them be won over by Paul Ryan before November. He only has one major prime-time appearance in the next three months, the VP debate.

To make matters worse, Ryan is actually pretty unpopular, despite what a lot on the Right might say about it. He was pretty much unknown to the general public before Romney brought him to the ball, and there has been almost no evidence of Ryan actually helping the Romney ticket's chances in November. Americans also strongly oppose his signature Medicare plan, which is why they've desperately run away it over the last couple of weeks.

Many people viewed the Ryan choice as a "game changing" kind of move that was meant to help Romney narrow the gap on Obama. It was probably the wrong risk to take to. By putting Ryan on the ticket, Romney's strategy seems to be completely based around the conservative base. Unfortunately for him, there just aren't enough conservatives to actually get him elected.

Even worse, the choice of Paul Ryan highlights a bunch of icky social issues, total abortion bans and unrelenting gay bashing, that all Republicans want to avoid. They've thrown away Missouri already, a race that should have been easy for them to win.

Never has a president been reelected when economic conditions are this bad. A candidate like Romney should be the kind of guy to beat him. Unfortunately, the Republican party is so out of touch that they've lined themselves up for a historic defeat. They'll lose the White House when it should have been easy to take; they'll fail to retake the Senate because a Republican couldn't win states like Missouri. Democrats have spent a long time being known for their talents of snatching defeat from the jaws of victory. I have little down that this embarrassment will stick to the Republicans for a long time to come.

The Problem with the Rich

A common misconception on the left is that the rich simply inherent all of their wealth. Mitt Romney, so they say, only got to where he is because of his rich daddy. If he had started poor, like everyone else, he never would have become the incredibly wealthy man that he is today.

Unfortunately, this just isn't true. As Robert Frank helpfully points out, only 9 percent of the net worth of the top 1 percent was inherited (as of 2001). Of course, no one would deny that there is an advantage to being rich. But what happened in the last 30 years in the US has very little to do with people being richer than others. Even in your story about the casino, the money isn't actually inherited. It was earned, regardless of whether the way of earning it is offensive or whether the odds were already stacked in someone's favor (the second part is closer to the truth than the first). If the problem was only inheritance, it could be solved pretty quickly with an aggressive estate tax. Nor would it lead to situations where a small elite continue to skyrocket away from general populace. The problem of inequality is much deeper and much pernicious than just inherited wealth.

George Romney was well off, but he would barely be considered that rich nowadays. He comes from an era where a CEO earned only 40 times more than the average worker. He wouldn't seem all that different than what most people call upper middle class today. The most, MOST, anyone earned back then was about 250,000 a year; and that's in today's dollars.

The problem with Mitt is not that he started well, we're always going to have that, but that he was able to game the system to make unimaginable sums of money for himself and other rich people. Let CEOs give birth to other CEOs, as long as they're all earning 40 times more, like in the past. But now, now they make 3,500 times more than the average worker. That's not some "natural" thing. That's not a "market" reward for higher productivity. That's the result of specific changes in policy. That's the result of the efforts of specific groups to get government to create obscene awards for people like Mitt Romney and Dick Fuld and John Thain and Jimmy Cayne.

The Right tends to put forward the argument that its not "equality of outcomes" that matter, but "equality of opportunity." That hides the fact that the outcomes delivered by the system have fundamentally changed. Some people are rewarded on a scale unfathomable to others. And while they trumpet along about free markets and battling the "evils of socialism," few people seem to be noticing that they're rewriting economic rules to make sure they always profit.

Dan Ariely presented this table originally on his blog. It can be found here.

That's why "we built this" must be the most hilarious slogan any party has put forward. Especially since it's coming from a Republican party that has specifically used government to make itself rich. The stadium they held their little conservative rally in was paid for with taxpayer money. Just like so many of those Republican-owned sports teams are supported by taxpayer money. Many of the businessmen that they paraded across the stage enjoyed government-backed loans. Just like all those whiney financiers made their money through deregulation. And like all how those CEOs who got their compensation rules changed to pay themselves otherworldly amounts of money.

That's not capitalism. There's no worthwhile innovation there. It's all about manipulating the rules to make sure you get to operate in a protected bubble while everyone else fights to survive.

So don't rail against Mitt Romney or others like him for being born rich. Rail against Mitt Romney because he represents the most insidious sides of our "market" economy. He's a man who made the vast majority of his money by gaming the corporate tax system, who considers it patriotic to aggressively avoid actually contributing to the system that made him wealthy. Mitt Romney represents a type of world-view where the rich get to enjoy endless government largesse that is paid for by the suffering of the rest. That's where the casino metaphor is apt. Government is picking winners all the time, just as those doing the picking deny it actually happens. This is what needs to change. It doesn't matter if your rich or poor, we all should be treated the same. Right now, we're not. It's not even close.