Friday, July 13, 2012

Mitt Romney, The Ideal Experiment

There are lots of things that can be said for or against Romney's candidacy, but it has at least one attractive feature—it provides a direct test of Obama's theory of how to win an election. A central feature of Obama's political strategy has been what his critics refer to as class warfare—attacks on the rich, with the implication that they are taxed at lower  rates than other people (pretty clearly not true) and ought to be taxed at higher.

It looks like a sensible strategy. It appeals to people's desire to think well of themselves, and so to believe that those who have been more successful got that way through, at best, luck and do not deserve their (possibly ill gotten) gains. It also appeals to the very natural desire to get something at someone else's expense—hence Obama's repeated claims that he will deal with budgetary problems entirely at the expense of very rich taxpayers. 

Most voters are not rich, so one might expect them to be persuaded. On the other hand, the midterm elections and current polling numbers suggest that a lot of them are not.

For an experiment on how well that particular strategy is likely to work in the U.S., Romney is the ideal test bed. He is very wealthy. He got his money not by writing best selling novels, being a sports or movie star, or inventing and marketing new and obviously useful high-tech gizmos, but by buying and selling companies, an activity that few voters are likely to identify with and one easy for the other side to present in an unflattering light—as the other side, of course, has been doing.

If, despite that, Romney wins, it will be good evidence that the strategy does not work very well in present day America. Which would, I think, be good news.

29 Comments:

At 8:35 AM, July 13, 2012, Blogger John David Galt said...

The problem with Obama's strategy is that he defines as "rich" a lot of people who are considered only middle class by both themselves and a majority of voters. His tax policies bear that out, especially when you include the impact of his energy and environmental overregulation on the average voter.

Of course, as others have pointed out, even if he could confiscate the entire fortunes of the top 1% through a wealth tax (a power the feds still don't yet have), it would not pay for one year of the federal budget. So without substantial budget cuts, the President could not possibly keep his promise not to raise taxes on middle class voters. He certainly knew this when he made the promise. But Romney, who is not a spending cutter either, faces the same dilemma.

As for the class-warfare strategy not working well in present-day America -- we won't know until the showdown that comes when the Treasury finds itself unable to continue the welfare payments. That day is still a few years away (but probably less than 10), and I expect at least street riots then, and maybe looting and burning. So it's high time for anyone who does have some wealth to protect to get out of big cities, which are where it will happen.

 
At 10:06 AM, July 13, 2012, Anonymous Anonymous said...

The wealth of the top 1% ($16.8 trillion as of 2009) is significantly greater than the 2012 federal budget ($3.8 trillion). It's even slightly higher than the current debt ceiling of $16.4 trillion. Confiscation the entire fortunes of the top 1% would elimnate the federal debt (and reduce the budget as there would be no intereste payments).

http://en.wikipedia.org/wiki/Wealth_in_the_United_States
http://en.wikipedia.org/wiki/United_States_public_debt
http://en.wikipedia.org/wiki/2012_United_States_federal_budget

 
At 1:24 PM, July 13, 2012, Anonymous Anonymous said...

David, I suppose this means that you believe that it's difficult to tell if Obama's "spread the wealth" strategy was beneficial to his campaign in the last election?

 
At 5:13 PM, July 13, 2012, Anonymous Anonymous said...

I continue to be amazed that the corporate income tax doesn't get counted as a tax on stock investors in the class-warfare debates. It's 35% at the federal level. Even the smallest stock investor starts out with a 35% marginal tax rate at the corporate level! This already satisfies the "Buffett criterion" for a tax rate of at least 30% on "the rich". This would be a wonderful talking point for Romney.

In other words, the class-warfare bit is largely based on a BIG LIE, and it's up to Romney to explode that lie. If he can do that in easily understandable terms, he should be able to put Obama on the defensive on this issue. 50% of American families are said to own stocks. Romney needs to show these people how they're paying sky-high tax rates on their retirement funds. Let Obama justify these sky-high rates, which are being applied to the average American.

Some people claim that the corporate tax is paid by everyone, and so is not specifically a tax on stock investors. However, there is a major difference between the treatment of, say, employees and shareholders. Employee compensation is deducted when calculating the corporate tax. Corporate profits (the part of the income stream that goes to shareholders) are not. To treat the two groups equally, one could also subject employee compensation to a 35% federal tax rate at the corporate level. This would cause a riot.

Some people claim that the corporate tax is paid by corporations, which are separate entities from the shareholders. Again, tax employee compensation at the corporate level, at 35%, watch take-home pay get devastated, and judge from the resulting screams if taxation at the corporate level really is merely taxation of a different entity.

This is an ideal issue for Romney in countering Obama's class warfare.

 
At 3:14 AM, July 14, 2012, Anonymous Tony P. said...

Romney would be an "ideal experiment" if he stood proudly on the proposition that "buying and selling companies" is a good and useful thing. But he doesn't, does he?

--TP

 
At 4:26 AM, July 14, 2012, Blogger Takis Konstantopoulos said...

Would you want to have a president who believes that some angel appeared to a con man, called Joseph Smith, and gave him some kind of text on golden plates (which he conveniently lost) which served as the basis of a religion, followed by Mitt Romney (and other lunatics)? I mean, come on, if someone is prepared to *believe* in nonsense, how can you take him seriously?

Seriously, now.

 
At 5:23 AM, July 14, 2012, Anonymous Anonymous said...

^ Well, the other guy, given that he's a Christian, must then believe a bunch of similarly outlandish things.

 
At 5:43 AM, July 14, 2012, Anonymous Anonymous said...

"Confiscation the entire fortunes of the top 1% would elimnate the federal debt (and reduce the budget as there would be no intereste payments)."

Well, if you confiscate the entire fortunes of the top 1%, you're also relieving them of most of their income, so you will have to subtract the lost income tax receipts money from your revenues. Assuming those assets return a 7% APR, and taxed at 30%, that's a loss of $350 billion in tax revenues. In 2010, we only payed $200 in interest payments. So this scheme would actually increase the annual deficit.

It probably wouldn't eliminate the debt, either, since the asset values would likely plummet in the government's firesale. After all, $16.8T is just an assessed value. If you throw it all at the market at once, you won't get that. There wouldn't be any demand since, after all, who would remain wealthy enough to be your buyers?

 
At 5:52 AM, July 14, 2012, Anonymous Anonymous said...

"Well, the other guy, given that he's a Christian, must then believe a bunch of similarly outlandish things."

Actually, if we're going to dock Romney's for his religion at face value, we have to dock Obama, not just for all the absurdities of Christianity, but for the outright and stated Marxism in Black Liberation Theology. I'd rather elect a Mormon than a Marxist.

 
At 7:57 AM, July 14, 2012, Anonymous Anonymous said...

Given that (1) Obama is a very savvy media operator, and (2) defending capitalism against the class-warfare theme is a tough PR exercise, Romney's got his work cut out for him. Too bad Milton Friedman isn't around anymore. He had the rare intellect and charisma to do this job. This is like a fight for America's soul, and I don't like where it's headed. All the points in Romney's favor are counter-intuitive. For example, it certainly makes sense to do things like buying and selling companies, employing people in foreign countries, and holding overseas bank accounts, but the average voter is hard to convince on these items.

I'm reminded of a Woody Allen film, wherein he said that the only witness in his favor was arrested on a morals charge.

 
At 5:08 PM, July 14, 2012, Blogger Takis Konstantopoulos said...

True. It's, however, just a bit easier to see that mormonism is crap, because it's so recent: native Americans, they claim, are one of the lost tribes of Israel. (Or something like that.) But, of course you are right. Nobody should believe in unsubstantiated nonsense.

I'm not sure how religious Obama is. He just knows he has no chance in getting elected in America if he is not seen praying, etc. He may be putting on a show to please the majority of his voters.

 
At 5:12 PM, July 14, 2012, Blogger Takis Konstantopoulos said...

This is a defeatist statement. You should vote for none of the two if they both believe in nonsense. But, wait, Obama a marxist? This sounds silly, our I didn't understand your statement.

 
At 6:36 PM, July 14, 2012, Anonymous Mike said...

This would be a good experiment perhaps if we were to hold the money spent on the election (as well as many other things constant) It's hard to assess without the counter-factual.

Will you be doing a post assessing the outcomes of your earlier natural experiments? I remember one this one from a while ago:

http://daviddfriedman.blogspot.com/2010/11/most-expensive-research-project-ever.html

 
At 8:03 PM, July 14, 2012, Anonymous RKN said...

You should vote for none of the two if they both believe in nonsense.

I've never understood the basis for statements like this. Clearly people are able to compartmentalize their beliefs. Why should someone who worships and prays in church on Sunday not be taken "seriously" (as you said above) the rest of the week? Would you apply that standard to your heart surgeon? And if not, why a presidential candidate?

There are good reasons not to vote for Obama or Romney, but the nature or depth of their religious beliefs it seems to me are irrelevant.

 
At 11:28 PM, July 14, 2012, Blogger Takis Konstantopoulos said...

Let me correct myself, because, unfortunately you are right. I say "unfortunately" because humans are still at a primitive stage, having the need to believe in silly things.

The correction is this: one should not vote for, or trust anyone, who may use their beliefs as justification for their decisions (I decided we should invade Iraq because God told me so.)

No, religious beliefs are not at all irrelevant. The deeper they are, the more dangerous they can be-in general.

 
At 5:26 PM, July 15, 2012, Anonymous Nightrunner said...

Experiment in what, human stupidity? Almost 50% of Americans believe God made them and their shit ... and they vote!
http://www.gallup.com/poll/155003/Hold-Creationist-View-Human-Origins.aspx

 
At 3:26 PM, July 16, 2012, Anonymous Anonymous said...

Actually Obama only believes fairness defined by his narcissistic personality. GM bail out auto workers, some do not have health care, fixed, home foreclosed, blame banks, fixed, mortgage fraud caused by Fannie Mae, blame banks, fixed. The list is endless and this what he will run on. Like a narcissistic puppet master going from group to group, deciding what is fair and fixing it. Law, constitution and debt are all ignored.

 
At 8:06 AM, July 17, 2012, Anonymous Major_Freedom said...

Takis Konstantopoulos:

Let me correct myself, because, unfortunately you are right. I say "unfortunately" because humans are still at a primitive stage, having the need to believe in silly things.

Should I take it then that your argument here is really just the product of "silly" beliefs from a "primitive stage" human?

I always laugh at people who make sweeping pejorative pronouncements concerning humanity, totally missing the inconvenient fact that it undercuts the very pejorative pronouncement they are making.

 
At 2:06 AM, July 19, 2012, Anonymous Andy Z said...

The test Prof Friedman proposes is worthless.

The winner of the election will largely be chosen by dollars from China and Saudi Arabia, now made legal through corporate campaign donations to superPACs.

Nice to know that foreign powers have more power over our elections than average citizens.

 
At 11:17 PM, July 19, 2012, Anonymous Nightrunner said...

Come out, come out. Dont be so coy.
"What his critics refer to as class warfare." What is your opinion? Not sneaky "it will be good evidence that the strategy does not work very well", just your opinion - if actions are close to perfectly rational and Romney demanded and was able to receive full compensation for his business efforts, why would he change when going into politics and start acting in a way that would benefit the American people? You probably would not be happy with US Government fully dedicated to promoting personal interests of Mitt Romney, correct?

 
At 1:01 PM, July 20, 2012, Blogger David Friedman said...

I disapprove of Obama's strategy--but "class warfare" is an evaluation not a description. I don't plan to vote for either Romney or Obama, and have no reason to expect either to do a good job as President.

I expect any president to act in his own interests, but I doubt that either Obama or Romney interprets them as narrowly as your "personal interests" appears to imply. Humans value lots of things other than money.

 
At 4:54 AM, July 21, 2012, Anonymous Nightrunner said...

"Humans value lots of things other than money."

Completely agreed. People's actions - including employment, investment etc - have important non-monetary components that depend on their values and biases. But ... does that not mean the definition of economic efficiency must include them too? So the free markets are efficient in allocation of investment to future revenues subject to the biases of the participants, which are to some extent and can be irrational or changeable based on the information unavailable to the other participants? Are we still on safe libertarian soil here?

 
At 1:04 PM, July 21, 2012, Blogger David Friedman said...

"But ... does that not mean the definition of economic efficiency must include them too?"

Of course. And it does.

Everything can be measured in money--how much you would pay if you had to to get a benefit or prevent a cost. But money itself isn't what is being measured--value is.

 
At 1:18 PM, July 21, 2012, Anonymous Nightrunner said...

"Everything can be measured in money--how much you would pay if you had to to get a benefit or prevent a cost."

Sorry I was unclear - my point was about free market efficiency, in the next sentence: "So the free markets are efficient in allocation of investment to future revenues subject to the biases of the participants, which are to some extent unknown and can be irrational or changeable based on the information unavailable to the other participants?"

 
At 3:44 PM, July 25, 2012, Anonymous Anonymous said...

As a Brit it looks like Obama has studied Blair/Browne.First the truly rich pay damn all in taxes thats what lawyers accountants and lobbyists are for at one point in my life i was making over a million a year in a very high risk business tax rate? 85% no chance catch me if you can.Then under Thatcher max tax 40% well i dont love it but i will pay it.I dont remember the name but there is some link between tax rate and tax take? In the UK employers deduct tax PAYE and pay direct to tax men
Result if you are rich paying tax is a choice if you are poor there is a huge range of benefits if you are in the middle your screwed
Richard

 
At 5:22 PM, July 25, 2012, Anonymous Anonymous said...

David, when you say "pretty clearly not true" are you speaking of the double taxation? Or something else entirely?

Where can someone easily find that data?

 
At 1:40 PM, July 26, 2012, Blogger David Friedman said...

Anonymous:

If you look at the IRS data on the federal income tax, you find that the bottom 40+% of filers pay zero or negative taxes. Beyond that, average tax rate generally rises with income.

Including the effect of corporate tax, payroll taxes, and state and local taxes makes the calculation much more difficult, and arguably undoable, since it isn't clear who "really" pays how much of which of them.

You can find a good deal of the data at:

http://taxfoundation.org/article/summary-latest-federal-individual-income-tax-data-0

It has links to the IRS data.

the bottom 50% pay an average federal tax rate of less than 2%, the top 1% pay an average of 24%.

 
At 3:32 PM, July 29, 2012, Blogger Hiram J Goldstein II said...

Anon, the problem with confiscating all the assets of the top 1% is that they aren't cash. They're mostly financial assets traded on highly reactive markets, and the act of confiscation and liquidation would massively devalue them at a stroke.

For example, the Walton family owns 48% of Walmart stock. If the federal government confiscated all of it and tried to sell it on the NYSE or something today, such a massive flood of available shares would cause the price to crash. Now multiply that effect across all the stocks that the government confiscated, and you've got a genuine crisis on your hands.

Not only that, but you've just introduced into the market the expectation that if your shares go up in value too high, the government will just step in and outright take them. So before the government has sold off so much as one percent of the stock it's stolen, investors are fleeing the exchanges, and values are crashing all over the board.

Expropriation of the means of production never goes as well as the expropriators think it will.

 
At 6:09 AM, July 30, 2012, Blogger William B Swift said...

>Experiment in what, human stupidity? Almost 50% of Americans believe God made them and their shit ... and they vote!

Which is why I have said before, the problem isn't the politicians and bureaucrats, it's deeper than that, it is the majority of the people. (And not just Americans, since there is no evidence other nations are better.)

I've about given up on peole, more than half judging from surveys and observation, believe in socialism, or the socialism lite of modern liberalism, a belief system on a par with Creationism. Economics may not be as scientific as biology, but it is the most reliable of the social sciences, and economic socialism denies economics exactly as Creationism denies biology.

Economic libertarianism, the free market, is how things actually work; socialism, of all styles and degrees, is to economics as Creationism is to biology. It is a political attempt to make the real world conform to wishful thinking. Political libertarianism is the refusal to condone that attempt to evade reality. Also the recognition that other forms of freedom are also as important in other areas of human relations, even if they are not as easily quantifiable as economics.

Libertarianism in the real world is far from perfect, of course. One failure of libertarianism is to clearly define fundamental versus derived effects and their importances. The "market worshiping" libertarians celebrate any effect caused by a free market whether it is good or not. The problem is that most of what they notice are derivative effects, what the market makes available. The fundamental benefit of free markets, though, is in the freedom granted creators, without which hardly any of the goods would be available in the first place. A key document describing, and celebrating, the "market worship" perversion is Virginia Postrel's The Substance of Style: How the Rise of Aesthetic Value Is Remaking Commerce, Culture, and Consciousness. I once, in my pre-Internet days, started an essay in response, "Why Style Lacks Substance, or The Value of Free Markets is in Opportunity it Provides, not in What it Rewards."

Another libertarian perversion is the "libertinist" position, they can usually be recognized by the outsized emphasis they place on recreational drugs, pornography, and entertainment. Not that these should be controlled, but they are definitely secondary, in the real world, to production and distribution.

 

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