Tuesday, April 13, 2010

Ricardian Equivalence

I've been thinking about Ricardian Equivalence ever since Bill Maher pointed out that the Tea Partiers believe that taxes have gone up when in point of fact they have fallen.

And a year or so ago, Matt Yglesias wrote this:
why on earth would anyone believe that Ricardian equivalence holds? The theory is that a tax cut today can’t boost spending tomorrow because people will know that taxes will have to rise in the future. Do you believe that people act like that? If so, I have this interesting theorem about how since cigarette smoking today causes cancer in the future, nobody smokes cigarettes.

And then there's this quote from Spinoza in the fantastic book that Withywindle recommended a while back, Albert O. Hirschman's The Passions and the Interests:
All men certainly seek their advantage, but seldom as sound reason dictates; in most cases appetite is their only guide, and in their desires and judgments of what is beneficial they are carried away by their passions, which take no account of the future or of anything else.

There's some deep divide illuminated here between myself and these men and it goes back, I think, to the liberals having short time horizons point and then combined with The Big Assumption.

Let's say, simply for the sake of argument if you prefer, that the Tea Partiers aren't a bunch of morons. Then perhaps their belief that taxes have gone up is a Ricardian Equivalence type reaction. The rise in spending indicates that taxes will go up sharply, and they are internalizing that now because they have long time horizons. And this nicely fits into a Burkean conservatism worldview perspective where each generation owes a debt to those that came before it and will come after it.

So, Maher points us toward the lack of actual rise in taxes in an effort to portray the Tea Partiers as delusional and divorced from reality. Taxes haven't gone up, but they believe they have; therefore, they're nuts. Many of the smug-types like this type of argument for two reasons. First, it shows their intellectual superiority. Look, at me, Bill Maher, man of intelligence in comparison to the bigoted and backward hillbillies of flyover country. Second, it's empirical. Now, Bill, I think, likes this especially for the first point, but I'm sure he likes dealing with facts. The thing about facts is that they are biased toward the short-term and hence toward liberals, if you agree with my time horizons thesis.

FLG, are you saying that liberals have a monopoly on facts? Not quite, but facts, by their nature, are biased toward the short-term, at least when it comes to policy discussions, and therefore toward liberal positions. While facts may be biased toward their side, they do not have a monopoly on Truth.

In science, it doesn't really matter. The Sun goes 'round the Earth. Always has. Once it's been proven, it's been proven. Same goes for most natural phenomena.

It's different for human interactions. We need to do new studies and gather new data all the time. Circumstances change and human beings react to those circumstances, and often even to the previous data itself. We need to constantly gather new data.

Much depends on your time horizons when it comes to policy discussions. Taxes haven't gone up, but anybody with half a brain sees that they will have to go up in the future. Health care reform didn't have any death panels in it, but long-term cost control pretty much necessitates that they'll have to be created if we continue down the government path. Same can be said to some extent about our social ills. Liberals point to the facts of the limited economic resources of poor people at present. Conservatives argue that some of the responsibility lies with the poor choices made.

If we think of the federal budget issue as a meteor heading toward Earth, then Bill Maher is saying that the Tea Partiers are wrong to say it's already hit when it hasn't. But he's also wrong to think they're crazy for worrying about the meteor. The fact that* it hasn't hit yet is not reason to dismiss the concerns as the ravings of lunatics.

So, facts are somewhat biased generally speaking. But then again I really think this is all about The Big Assumption. So, Bill Maher focuses on facts, even if he selectively chooses them, and is biased toward the present. Spinoza, another empiricist, and somebody much brighter than Maher, also focuses on the present. (I'm probably messing this neat picture up by throwing in Spinoza, but whatever.) Yglesias again biased toward the present.

The Big Assumption comes in because when we are thinking of public policy or our political preferences we try to project how other people will react or we see the motivations of current actions through our own prism. For example, in regard to financial reform, I see the recent Wall Street fiasco as, very broadly, people misunderstanding the long-term trend toward quantitative finance. Liberals like to see it as greed and short-term concerns blinding bankers. This leads to two different ideas about regulation.

Now, I have my own opinions on why the liberals are wrong, which is namely that people who go to work on Wall Street are greedy. That's why you go to work there. So, why at this point in time was it a problem? However, there are some issues with my narrative too. But I'm really starting to think that the biggest issue with politics is what you think of the average person on the street's time horizon, which I think is ultimately your own time horizon.

* Yes, I hate myself for writing "the fact that."

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