All About Taxation

I write this blog for folks who are looking to learn more about economics. And if you are in this group, you can’t help but have noticed that there’s been a bit of a brouhaha over taxes, both in the United States of America and in India.

ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.
Taken together, it demolishes the cornerstone myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most. The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

What exactly is income tax? And what is its history?

Well, the first question is simple to answer (to begin with): it is a tax on your income. Ah, but that then begs the (pardon the puny pun) million dollar question: what is income?

But a question remained: What would count as income and what wouldn’t? In 1916, a woman named Myrtle Macomber received a dividend for her Standard Oil of California shares. She owed taxes, thanks to the new law. The dividend had not come in cash, however. It came in the form of an additional share for every two shares she already held. She paid the taxes and then brought a court challenge: Yes, she’d gotten a bit richer, but she hadn’t received any money. Therefore, she argued, she’d received no “income.”
Four years later, the Supreme Court agreed. In Eisner v. Macomber, the high court ruled that income derived only from proceeds. A person needed to sell an asset — stock, bond or building — and reap some money before it could be taxed.

https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

As the article I have excerpted this from goes on to say, folks were warning us even back then that this was not going to end well (it is nowhere close to ending, and it is not going well). But this talks to us about the difficulty of defining income, about which more in a bit. Here’s a brief snippet about how the idea of income taxes originated:

The universal taxes of ancient times, like the one that brought Mary and Joseph to Bethlehem just before the birth of Jesus, were invariably head taxes, with one fixed sum to be paid by everybody, rather than income taxes. Before about 1800, only two important attempts were made to establish income taxes—one in Florence during the fifteenth century, and the other in France during the eighteenth. Generally speaking, both represented efforts by grasping rulers to mulct their subjects. According to the foremost historian of the income tax, the late Edwin R. A. Seligman, the Florentine effort withered away as a result of corrupt and inefficient administration. The eighteenth-century French tax, in the words of the same authority, “soon became honeycombed with abuses” and degenerated into “a completely unequal and thoroughly arbitrary imposition upon the less well-to-do classes,” and, as such, it undoubtedly played its part in whipping up the murderous fervor that went into the French Revolution.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 93). Hodder & Stoughton. Kindle Edition.

That… is not reassuring.

The chapter on income tax from this excellent, excellent book makes for great reading. As it turns out, it was the (surprise, surprise) Civil War that finally provided the impetus for the imposition of an income tax across the length and breadth of the nation1 And the imposition was celebrated! Well, at least by some:

“I am taxed on my income! This is perfectly gorgeous! I never felt so important in my life before,” Mark Twain wrote in the Virginia City, Nevada, Territorial Enterprise after he had paid his first income-tax bill, for the year 1864—$36.82, including a penalty of $3.12 for being late. Although few other taxpayers were so enthusiastic, the law remained in force until 1872. It was, however, subjected to a succession of rate reductions and amendments, one of them being the elimination, in 1865, of its progressive rates, on the arresting ground that collecting 10 per cent on high incomes and lower rates on lower incomes constituted undue discrimination against wealth.

Brooks, John. Business Adventures: Twelve Classic Tales from the World of Wall Street (p. 96). Hodder & Stoughton. Kindle Edition.

Back, as it were, to the future. Anand Giridharadas wrote an article in the New York Times about the ProPublica report:

Mr. Buffett is almost the perfectly made billionaire for this moment in which, at last, many Americans are beginning to question not only corruptions of the system but the matter of whether billionaires should exist at all. He doesn’t do the things the worst of them do. He isn’t in it for what they’re in it for. He clearly must care about money, but he also kind of doesn’t care about money. Even in his generosity, he has avoided the imperial lording over that others cannot resist.
And this is what makes him so troubling, because through him we are tempted into believing that a system can be defended that allows a man to accumulate more than $100 billion while people are sleeping, in hock to him, in his mobile homes, shortening their lives with the beverages he’s invested in, scampering around the warehouses whose nonunion status has redounded to his money pile.
It can’t. And who keeps us from seeing that simple, stark truth more effectively, more perniciously, than the Good Billionaire?

https://www.nytimes.com/2021/06/13/opinion/warren-buffett-billionaire-taxes.html

The second card in my three card trick is a response to this essay, from V Ananta Nageswaran2:

So, notwithstanding Anand Giridhardas, we can still think about the manner in which incomes and capital gains & dividends are taxed. I see three issues, at my level.
There needs to be a discussion on unrealised capital gains and dividends. Dividends are avoided and companies buy stocks back to avoid dividend tax. What if the tax policies take away that choice?
Second, even if we accept that only realised capital gains are to be taxed, why are they taxed at much lower rates than tax on wages?
Third, even if we accept this logic (which, in addition to the above arguments, is also a reflection of who made those laws, their incomes and wealth status, etc., over time and across the world) of the primacy of capital, for the sake of argument and hence accept the conclusion that capital gains will be treated differently from regular labour income, then the question is one of defining short-term and long-term. Why should short-term be just one year? In economics, anyone’s definition of short-term is not one year but a business cycle, i.e., minimum three years. Extending the definition of ‘short-term’ to 36 months from 12 months will earn more revenues.

https://thegoldstandardsite.wordpress.com/2021/06/19/the-inequity-of-the-tax-system/

That is, the author is saying that that are indeed problems with capital being taxed the way it is, but (as he points out elsewhere in the blog) the way forward is evolution, not revolution.

Which brings me to the third card: TALISMAN.

The truth, as always, lies somewhere in the middle – and that, of course, is the point of the excerpt above too. On the spectrum of Current System Bad:::Current System Good, reasonable people can and should argue about the “sweet spot”.


And if you are a student of economics (and especially public finances), where do you go to learn more before trying to figure out where you should be on this spectrum?

  1. Please read the chapter on income taxes from the book Business Adventures
  2. Read this essay by Tim Taylor (and note that it was written before the ProPublica report came out!)
  3. Farhad Manjoo, a while ago, on abolishing billionaires (and the response to that essay)
  4. Gulzar Natarajan on this issue
  5. And for a theoretical understanding – always a good idea for an issue as complex and important as this one – Chapters 20 and 21 from Stiglitz’ Economics of the Public Sector.
  1. do read the entire chapter, though. The snippet about the experiment in Rhode Island is fascinating.[]
  2. note that I am excerpting the outline of the argument, please visit the blog to read it in full[]

Asking And Answering Important Questions

Shruti Rajagopalan asked a very important question on Twitter earlier this week:

I’m writing this post on Sunday evening, which is when Shruti asked this question (and you, of course, are reading it today) but so far, there haven’t been any encouraging responses to her query, save for this one:
That would be this report, and I don’t think it was recommending large purchase orders or calling out Prime Minister Modi’s incoherent vaccine policy. This is the entire paragraph on vaccination:

Vaccines: The Committee recommended that a vaccine should pass all phases of clinical trials before it is made public. Further, it recommended that the whole population should be vaccinated. In this regard, the Committee suggested that: (i) the cost of the vaccine should be subsidised for weaker sections of society, (ii) the cold-storage system across the country should be upgraded, and (iii) vaccines should be administered as per the World Health Organization’s strategic allocation approach or a multi-tiered risk-based approach.

https://www.prsindia.org/sites/default/files/parliament_or_policy_pdfs/Report%20summary%20COVID.pdf

Long story short, the answer to Shruti’s question is: nobody. None of us were prescient enough in 2020, and that is a failure on our part.


What Shruti is really asking for is this: who is India’s Alex Tabbarok?

Why do I say this? Because Professor Tabarrok was recommending/demanding large purchase orders…

We don’t want to find ourselves with a working vaccine but too little manufacturing capacity. From an economic point of view, it would make sense to install enough capacity so that everyone in the U.S. who wanted could be vaccinated within a month. Normally, new vaccines cannot be produced so quickly and in sufficient supply. Each step of the manufacturing process must be verified and tested, and inputs to the process may face their own supply chain bottlenecks. Just as shortages of swabs and reagents delayed the rollout of testing, shortages of glass vials, bioreactors or adjuvants (a substance that increases immune stimulation) may delay vaccines. For want of a vial, the vaccine could be lost. To stand a reasonable chance of having a substantial supply of vaccines in 2021, we need to plan for capacity and reinforce supply chains now.

https://www.nytimes.com/2020/05/04/opinion/coronavirus-vaccine.html

…on the 4th of May. That is the 4th of May 2020.

He had a post praising the idea of advance market commitments (AMC’s) out in February. Again, 2020.


And while the first excerpt up above was a plan for the USA alone, he and his collaborators expanded upon this plan, outlining what a globally coordinated plan may have looked like:

I’ve been working with Michael Kremer, Susan Athey, Chris Snyder and others to design incentives to speed vaccines and other health technologies. AcceleratingHT is our website and now features a detailed set of slides which explain the calculations behind our global plan. The global plan is similar in style to the US plan although on a larger scale. The key idea is that the global economy is losing $350 billion a month so speed pays. One way to speed a vaccine is to invest in capacity for 15-20 vaccine candidates before any candidates are approved, so that the moment a candidate is approved we can begin production (one can store doses in advance of approval). Most of the capacity will be wasted but that is a price worth paying. As Larry Summer says if you will die of starvation if you don’t get a pizza in two hours, order 5 pizzas. Human challenge trials are another way to speed the process.
A global plan is ideal since there are significant benefits to coordination. If each country invests in vaccines independently they will each choose the vaccine candidates most likely to succeed but that means all our eggs are a few baskets. There are over 100 vaccine candidates and they have different scientific and production risks so you want to choose the 15-20 which maximize the probability of success for the portfolio as a whole. To do that efficiently you need countries to agree that ‘I will invest in lots of capacity (more than I need) in candidate X if you invest in lots of capacity (more than you need) for candidate Y’, even knowing that the probability that X succeeds may be less than that of Y.

https://marginalrevolution.com/marginalrevolution/2020/05/acceleratinght.html

The website AcceleratingHT provides many more instances that reinforce my point, and as a student, reading the material there is genuinely useful.


A while ago, I wrote a post for students who want to work in the field of public policy. Alex Tabbarok’s work this past year is a great example of what that advice might look like in practice.

I do not know who India’s Alex Tabbarok is in 2021 – there may not even be one. But as a student, the correct question to ask is this:

What do I need to do to acquire the ability to be ahead of the curve when the next crisis comes around?

Here is my list in response to that question:

  1. Read, and write. Everyday, read and write. If you are a student of the humanities (and if you think about it, who isn’t?), you should be reading and writing everyday. It compounds, trust me.Don’t be afraid
  2. Learn the art of working backwards from the solution you want to get to. In this specific case, if you want the world to be vaccinated by the end of 2021 (let’s say), then begin by asking yourself what needs to be done to get there, but in reverse.
    7 billion vaccines will be needed – which are the manufacturers that are most likely to supply them – what do they need to get the job done – how can we get them what we need – what are the regulatory, financial, supply-chain-related hurdles they will face – how can these be removed – and so on…
    My point here is not the specifics of the exercise, whether in the case of vaccines today or something else tomorrow. My point is to learn and apply the art of working backwards from where you want to eventually be. I don’t know what you’re supposed to call this in consultant/management speak, but for starters, read about the game 21 flags in The Art of Strategy.
  3. Learn the art of being unafraid to ask big picture questions. Whenever you get that feeling of “Surely somebody somewhere must have thought to ask this question already?” – especially if you have been serious about pt. 1 above – ask the question. Repeatedly, furiously and publicly.
  4. Consume as much content as you can about crisis management from the past. (I’m working on this for my own self, and recommendations are welcome)
  5. Do not be afraid of putting out your potential solution out there. Your worst case scenario is that it is a wrong solution. As a society, we’re still better off rejecting wrong solutions than waiting for the perfect one. For rejecting a solution as being the wrong one forces us to learn more about the problem at hand.
  6. Most difficult of all: once you have offered a solution, remember that your job is to solve the original problem. Your job is to not defend your solution at all costs. This is hard.

So You Want to Work in Public Policy…

If you’re between the age of 18-24, and aspire to work in the field of public policy, how should you prepare for such a career? Outside of the academic requirements and the network that you will build, reading about what public policy experts have done when on the “front-lines” is a useful exercise.

In today’s blogpost, I aim to get you started on this journey by referring to a book, an interview and an article.

The book? To Move the World, JFK’s Quest for Peace.

The book is about the lead-up to the Cuban Missile Crisis, the crisis itself, its succesful resolution, and the aftermath. It is a short book, and well worth your time if you are an aspiring public policy student.


At the very start of the ExComm process, Kennedy made the basic decision—one that was never second-guessed within the group—that the Soviet weapons must go. Either the weapons would be removed peacefully by the Soviets themselves, or they would become the cause of war.

Sachs, Jeffrey. To Move The World: JFK’s Quest for Peace . Random House. Kindle Edition. (Location 529)

Decide upon a goal. In this case, the goal was to get the Soviet weapons to go. Professor Sachs lays out the consultations that led to this goal being chosen in subsequent pages. But that is step 1. Without a clear goal, the rest of the process is meaningless.

Be crystal clear about the “What are we trying to do here?” question, first and foremost.


That brings you to step 2. And once step 1 has either been decided, don’t make your arguments from now on about step 1. The time for that is now gone. Step 2 is about clear-eyed assessments about what maximizes your chances of getting step 1 done.

The ExComm held divergent views on the substantive effect of the missiles on the East-West military balance. Secretary of Defense Robert McNamara held that the missiles had zero net effect, given that the Soviets had intercontinental ballistic missiles (ICBMs) that could target the United States from Soviet territory anyway. The military brass felt otherwise, that Soviet missiles just off the U.S. coast would substantially enhance Soviet military power, especially since the Soviet strategic forces at that point depended overwhelmingly on bombers with a long and difficult flight path to the United States. All agreed, however, that the missiles must go.

Sachs, Jeffrey. To Move The World: JFK’s Quest for Peace . Random House. Kindle Edition. (Location 548)

“How should we go about getting to our goal?” is the difficult, contentious issue. This is where your expertise is called upon as a public policy expert.

This forced a thorough review of options, and it allowed some time for communication between Kennedy and Khrushchev, albeit through a laborious and confused process of letters, public pronouncements, telegrams, and messengers. It gave time for heated emotions—panic, fear, and desire to lash out at the adversary—to be kept in check so that reason could be invoked. “Slow” rational thinking was given time to dominate the “quick” emotional thinking.

Sachs, Jeffrey. To Move The World: JFK’s Quest for Peace . Random House. Kindle Edition. (Location 558)

It sounds peaceful and professional – “a thorough review of options”. But this is where you have to:

  1. Really, really know your subject, or admit that you don’t and get out of the way.
  2. Have a strong point of view on the basis of your expertise, and defend it passionately. Arguing at this stage isn’t just fine, it is expected.
  3. The really, really difficult bit: figure out where your argument is weak, and listen to folks on the other side of this issue. What are they saying that is worth including in your recommendation? What are they saying that makes you want to refine/exclude parts of your proposal? Can a happy medium emerge? Remember, The Truth Always Lies Somewhere In The Middle.

Even if you think the article is mostly fluff, I found this excerpt relevant for this blogpost:

Before making up his mind, the president demands hours of detail-laden debate from scores of policy experts, taking everyone around him on what some in the West Wing refer to as his Socratic “journey” before arriving at a conclusion.
Those trips are often difficult for his advisers, who are peppered with sometimes obscure questions. Avoiding Mr. Biden’s ire during one of his decision-making seminars means not only going beyond the vague talking points that he will reject, but also steering clear of responses laced with acronyms or too much policy minutiae, which will prompt an outburst of frustration, often laced with profanity.

https://www.nytimes.com/2021/05/14/us/politics/joe-biden-policy-decisions.html

And finally, for those of you who are hoping to get into public policy and are currently studying economics:

I would like economists to be working with engineers, to be working with public health, to be working with the medical professionals so that we’re actually working on the real systems of our time and adding our pieces to that, understanding and studying that so that we have an answer to robotics, not a pure theoretical model, which is nice and fun, but something that can be helpful.

https://conversationswithtyler.com/episodes/jeffrey-sachs/

The point isn’t to build a theoretically correct model. The point is to build a model that maximizes the chances of getting to the goal we established in step 1: What are we trying to do here?

Or put another way, if you have to choose between being theoretically correct and doing whatever it takes to achieve step 1, choose the latter. If I had to choose between the two, that is what I would do.


There’s tons of other books, papers, blogs and newsletters to read on this topic, of course. If you asked me to pick just one, make it Anticipating the Unanticipated. Spend the summer reading every single one of their posts and taking (and then publishing!) notes. Better, if you ask me, than any other way to learn.


[Thank you to all those who reached out to check if I was ok. It means a lot. There’s been a covid death in the family, and a covid scare. We’re getting back to a semblance of a routine, but it has been tough and slow going. Please, stay safe, all. And again, thank you for your wishes.]

In Memoriam: Robert Mundell

Robert Mundell passed away earlier this week. Most macroeconomics students will know of the Mundell-Fleming model, of course, while a lesser number may have heard of his work on optimum currency areas.

Here is a relatively old article about him from the New York Times:

”In the very short run, I’m a Keynesian,” he said. ”In the intermediate run, I’m a supply-sider, and in the long run I’m a monetarist.”

https://www.nytimes.com/1986/01/12/business/eccentric-economist-robert-a-mundell-supply-side-s-intellectual-guru.html

And here is a summary by The Economist on the impossible trilemma:

HILLEL THE ELDER, a first-century religious leader, was asked to summarise the Torah while standing on one leg. “That which is hateful to you, do not do to your fellow. That is the whole Torah; the rest is commentary,” he replied. Michael Klein, of Tufts University, has written that the insights of [[international macroeconomics]] (the study of trade, the balance-of-payments, exchange rates and so on) might be similarly distilled: “Governments face the policy trilemma; the rest is commentary.”

https://www.economist.com/schools-brief/2016/08/27/two-out-of-three-aint-bad)

Here is Paul Krugman, first rhapsodizing about the Optimum Currency Area1:

First up, Mundell, whose classic 1961 paper argued that a single currency was more likely to be workable if the regions sharing that currency were characterized by high mutual labor mobility. (He actually said factor mobility, but labor is almost surely the one that matters). How so?

https://krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/

.. and then rhapsodizing about Robert Mundell and his early theoretical work:

Those of us who work on international monetary theory have been wondering for a decade when Robert Mundell would get his richly deserved Nobel Memorial Prize in Economic Sciences. Mundell’s work is so central to that field, so “seminal”–an overused term that really applies here–that on many disputed issues his ideas are the basis for both sides of the debate. But a layperson might be confused about exactly what Mundell and his prize are really about.

https://slate.com/business/1999/10/o-canada.html

This is the NYT obituary:

In his 2006 interview, he said that winning the Nobel “was particularly pleasing to me as my work has been quite controversial and no doubt stepped on a lot of intellectual toes.”
He added: “Even more than that, when I say something, people listen. Maybe they shouldn’t, but they do.”

https://www.nytimes.com/2021/04/05/business/economy/robert-mundell-dead.html

And finally, the Washington Post’s obit:

Dr. Mundell gave one of the more unusual — and crowd-pleasing — acceptance speeches in the history of the Nobel Prize. He ended his remarks by singing a few bars of the hit Frank Sinatra song “My Way,” an allusion to the independent-minded approach that he brought to his life and work.

https://www.washingtonpost.com/local/obituaries/robert-mundell-dead/2021/04/06/36793d92-96d4-11eb-b28d-bfa7bb5cb2a5_story.html

RIP.

  1. This essay, along with the tables, used to be freely available on the NBER website. No longer, and I don’t know why. My apologies[]

End of the week reading list: 6th Nov, 2020

The NYT comes up with a lovely selection of Agatha Cristhie novels. Light Diwali vacation reading if you are new to her works, perhaps?
(Also, every time I am reminded of this book below, I feel this urge to apologize to that one friend I inadvertently revealed the ending to – so once again, I’m really sorry!)

That would be “The Murder of Roger Ackroyd,” the story of a wealthy man slain in his study less than a day after the woman he hoped to marry commits suicide. Although — as Hercule Poirot discovers — the dead man’s assorted friends, relatives and servants have reasons to wish him ill, “The Murder of Roger Ackroyd” will still leave you reeling. When you find out who the murderer is and begin leafing through the pages, looking for missed clues, you’ll realize just how completely Christie snookered you.

https://www.nytimes.com/2020/10/25/books/best-agatha-christie-books-murder-mystery.html

On the race to redesign sugar:

As public opinion turns against sugar, food companies have outdone one another in pledges to cut the quantities of it that appear in their products. Pepsi has promised that by 2025 at least two-thirds of its drinks will contain a hundred calories or fewer from added sweeteners. A consortium of candy companies, including Mars Wrigley, Ferrero, and Russell Stover, recently declared that by 2022 half of their single-serving products will contain at most two hundred calories per pack. Nestlé has resolved to use five per cent less added sugar by the end of this year—though, as of January, it still had more than twenty thousand tons of the stuff left to eliminate.

https://www.newyorker.com/magazine/2020/09/28/the-race-to-redesign-sugar

A short (and delightful) history of mashed potatoes:

During the Seven Years War of the mid-1700s, a French army pharmacist named Antoine-Augustin Parmentier was captured by Prussian soldiers. As a prisoner of war, he was forced to live on rations of potatoes. In mid-18th century France, this would practically qualify as cruel and unusual punishment: potatoes were thought of as feed for livestock, and they were believed to cause leprosy in humans. The fear was so widespread that the French passed a law against them in 1748.

https://www.mentalfloss.com/article/627023/mashed-potatoes-history

The excerpt below was an excerpt in the post I am linking to (if you see what I mean), but well worth your time, the entire blog post:

70% of us think that the average household income of the top 1% is more than ₹2.5L. In fact, a majority of us guess it is more than ₹5L. Similarly, a majority of the respondents assume that the average income of the top 10% of households is more than a ₹1L… We think of the top 1% as super-rich people. A majority of the respondents estimate that all of the top 1% have 4-wheelers. And 70+% feel that at least 90% of the top 1%-ers have 4-wheelers.

http://gulzar05.blogspot.com/2020/09/more-india-middle-class-facts.html

Robin Hanson wonders about taking rest:

While we seem to “need” breaks from work, many of our break activities often look a lot like “work”, in being productive and taking energy, concentration, and self-control. So what exactly is “restful” about such “rest”?

https://www.overcomingbias.com/2020/11/why-do-we-rest.html

Notes on “Does Palantir See Too Much?”

Just this past weekend, I finally got around to finally finishing The Lord of The Rings.

I know, I know. Spare me.

Worse, I finished the movies, not the book, and I do not have the faintest idea about when I’ll get around to reading it, but that is a story for another day. (Heh.)

Today’s notes, coincidentally, are about Palantir, but the new age one, not the panopticon from Tolkein’s universe. The new Palantir is a firm started by Peter Thiel, and is the subject of a rather long (and very nice) profile of the firm and it’s Chief Executive Officer, Alex Karp.

First, what is Palantir Technologies? Here’s Wikipedia – note that I have combined sentences across different paragraphs in this excerpt:

Palantir Technologies is a public American software company that specializes in big data analytics. Headquartered in Denver, Colorado, it was founded by Peter Thiel, Nathan Gettings, Joe Lonsdale, Stephen Cohen, and Alex Karp.

The company is known for three projects in particular: Palantir Gotham, Palantir Metropolis and Palantir Foundry. Palantir Gotham is used by counter-terrorism analysts at offices in the United States Intelligence Community (USIC) and United States Department of Defense…

…Palantir Metropolis is used by hedge funds, banks, and financial services firms…

…Palantir Foundry is used by corporate clients such as Morgan Stanley, Merck KGaA, Airbus, and Fiat Chrysler Automobiles NV

https://en.wikipedia.org/wiki/Palantir_Technologies

… and here’s the NYT amgazine story:

Its two primary software programs, Gotham and Foundry, gather and process vast quantities of data in order to identify connections, patterns and trends that might elude human analysts. The stated goal of all this “data integration” is to help organizations make better decisions, and many of Palantir’s customers consider its technology to be transformative.

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

But the story gets more interesting in the very next line in the article…

Karp claims a loftier ambition, however. “We built our company to support the West,” he says. To that end, Palantir says it does not do business in countries that it considers adversarial to the U.S. and its allies, namely China and Russia. In the company’s early days, Palantir employees, invoking Tolkien, described their mission as “saving the shire.”

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

There’s two questions at play here, really. First, what does Palantir Technologies do (that’s the first excerpt from the NYT story)? And second, why does it do what it does (and that’s the excerpt right above)?

Now, the reason I find this so interesting is that the instinctive argument that you might want to make against Palantir Technologies is “but privacy!”. And the second excerpt above is, in a sense, Palantir’s response.

Although Palantir claims it does not store or sell client data and has incorporated into its software what it insists are robust privacy controls, those who worry about the sanctity of personal information see Palantir as a particularly malignant avatar of the Big Data revolution. Karp himself doesn’t deny the risk. “Every technology is dangerous,” he says, “including ours.”

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

Technology is technology – what you do with it is what matters is a rather old argument, but that’s the argument that is being used here. There’s more though – if we don’t, somebody else will. Better the known devil, etc.

Once the data has been integrated, it can be presented in the form of tables, graphs, timelines, heat maps, artificial-intelligence models, histograms, spider diagrams and geospatial analysis. It is a digital panopticon, and having sat through several Palantir demos, I can report that the interface is impressive — the search results are strikingly elegant and easy to understand.

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

Elsewhere in the article, the author speaks about how the work isn’t glamorous, and is really just glorified plumbing. Well, maybe – but as anybody who has lived in a house will tell you, it is plenty important. Good plumbing is plumbing you don’t notice, but reap the benefits of – and that seems to be Palantir’s USP.

While Thiel provided most of the early money, the start-up secured an estimated $2 million from In-Q-Tel, a venture-capital firm that finances the development of technologies that can help the C.I.A.
Karp says the real value of the In-Q-Tel investment was that it gave Palantir access to the C.I.A. analysts who were its intended clients.

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

Did In-Q-Tel pay to help start Palantir, or did it hire consultants for 2 million dollars? Did Palantir agree to work for only 2 million dollars to get access to the CIA?

Bottom-line: the world is a non-zero sum game.

According to Thiel, their conversations generally took place late at night in the law-school dorm. “It sounds too self-aggrandizing, but I think we were both genuinely interested in ideas,” he says. “He was more the socialist, I was more the capitalist. He was always talking about Marxist theories of alienated labor and how this was true of all the people around us.”

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

This excerpt is from a section which is about Karp figuring out his education and career, and we learn about his Jewish, rebellious background as well. I found this clip interesting because from Peter Thiel’s viewpoint, succeeding in selling the idea behind Palantir to Karp is one of the biggest validations there could possibly be. If he bought into the story, well, there must be something to it. Second, what better way to maintain checks and balances than to have somebody like Karp running the show?

In fact, Thiel hiring Karp for this job becomes more and more interesting the more you learn about Karp. Thiel has a quote in the article about needing someone who was smart and scrappy, but left unsaid, perhaps, is someone who was very unlike Thiel. And not just unlike Thiel, also unlike the typical CEO. A person who worries about the alienation of labor, likes solitary pursuits, and dreams of being an intellectual in Europe isn’t the person you would have in mind as the typical CEO of a firm like Palantir. But that, it would seem, was the whole point. Well, that, and being a bachelor by choice wouldn’t hurt, given the traveling nature of the job.

(Although there is a section in the article in which Karp insists that he being who he is hasn’t helped him or Palantir.)

Karp and Thiel say they had two overarching ambitions for Palantir early on. The first was to make software that could help keep the country safe from terrorism. The second was to prove that there was a technological solution to the challenge of balancing public safety and civil liberties — a “Hegelian” aspiration, as Karp puts it.

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

Karp and Thiel make for a Hegelian pair themselves!

When I asked Thiel about the risk of abuse with Palantir, he answered by referring to the company’s literary roots. “The Palantir device in the Tolkien books was a very ambiguous device in some ways,” he said. “There were a lot of people who looked into it and saw more than they should see, and things went badly wrong when they did.” But that didn’t mean the Palantir itself was flawed



He continued: “The plot action was driven by the Palantir being used for good, not for evil. This reflected Tolkien’s cosmology that something that was made by the good elves would ultimately be used for good.”



A moment later, he added: “That’s roughly how I see it, that it is ultimately good and still very dangerous. In some ways, I think that was reflected in the choice of the name.”

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

I found this fascinating, and I also found it useful to think about this from the Wikipedia article about the original Palantir:

A major theme of palantír usage is that while the stones show real objects or events, they are an unreliable guide to action, and it is often unclear whether events are past or future: what is not shown may be more important than what is selectively presented. Further, users with sufficient power can choose what to show and what to conceal

https://en.wikipedia.org/wiki/Palant%C3%ADr

The technology is what it is – and as Karp himself points out, it is susceptible to misuse. More importantly, the technology in combination with the person(s) who are using it is, at least potentially, an even more dangerous tool.

Karp made clear that he was opposed to Trump’s immigration policies: “There are lots of reasons I don’t support the president; this is actually also one of them.” He told me that he was “personally very OK with changing the demographics of our country” but that a secure border was something that progressives should embrace. “I’ve been a progressive my whole life,” he said. “My family’s progressive, and we were never in favor of open borders.” He said borders “ensure that wages increase. It’s a progressive position.” When the left refuses to seriously address border security and immigration, he said, the right inevitably wins. To the extent that Palantir was helping to preserve public order, it was “empirically keeping the West more center-left.”

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

To understand a big data firm started by one the world’s most successful VC’s, one should end up reading about a German philosopher from the 18th century – for what could possibly more Hegelian than that excerpt?

And finally, the last sentence in the article:

“Palantir,” he said, “is the convergence of software and difficult positions.”

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

That, it would seem, is a reasonably good way to understand Pater Thiel’s investment philosophy!

Read the whole NYT article yourself (at least twice, if you ask me).

Five Articles/Posts for the 3rd of July, 2020

  1. “Accordingly, antifragile systems and organisms tend towards a common theme: bottoms-up decision-making, rather than top-down decision making. Antifragility requires real options, and real options are low-cost. Antifragility is only successful if you can actually detect, react, and grow in response to deviations from your present state in real time; the only way you can feasibly do this is for disorder detection and response to take place at a small enough resolution, and tight enough turnaround time. Top-down systems have a hard time with antifragility, because for them, all options are costly.”
    ..
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    I’m late in posting this, having read this a while ago, but a useful essay by Alex Danco on how to think about anti-fragility, the term coined and popularized by Taleb. There are a lot of very useful ways to think about anti-fragility, but this essay explores immunity and how to think about our bodies immunity from the prism of anti-fragility. I found it especially useful to think about our bodies (which are at risk from the virus) and our governments (which are supposed to help us protect ourselves against the virus) and ask which is more anti-fragile, and why.
    ..
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  2. Kevin Kelly (a man worth learning more about) recently posted “68 bits of unsolicited advice“. Each advice is worth reading – here’s one that is easy to understand, difficult to implement on a sustained basis. Ask me. I should know.
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    “Being enthusiastic is worth 25 IQ points.”
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  3. “Grades destroy curiosity. Too many kids learn for the sole purpose of raising their GPA because that’s what the system incentivizes. From an early age, I observed that my success in school depended more on my grades and less on how much I learned. In college, even though I wrote essays on my own and worked as an intern in New York City for companies like Skift, I was almost kicked out of my fraternity because my GPA was below 3.0. Likewise, my college counselors evaluated me on two metrics: grades and SAT scores. Neil deGrasse Tyson once said: “When students cheat on exams, it’s because our school system values grades more than students value learning.””
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    Read this essay by David Perell. Please. Read it.
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  4. This link came to me via Recommendo, which is a newsletter I have subscribed to about a month or so ago. Worth a ponder, it is about the art of critical thinking.
  5. Great visualizations, as always, from the NYT. This one is about the spread of the coronavirus in the USA.

Links about these changing times

  1. Agnes Callard on wanting to feel pain:
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    “We don’t consciously choose to feel pangs of guilt or waves of regret, in the way that we consciously choose what novel to read. Still, we can assimilate the two sorts of cases if we introduce a hypothetical: Imagine you are offered a pill that would make you immune to regretful or guilty thoughts. Would you choose take it? If your worry is that those thoughts are important for steering you away from future wrongdoing, let me assure you I’ve built that functionality into the pill: You won’t behave any worse for having taken it. You’ll just stop having negative feelings.”
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  2. Via MR, social distancing and examinations in South Korea. (I’m not a fan)
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  3. Scott Adams has been calling it correctly for a while. Read more Dilbert!
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  4. Again via MR, a lovely list.
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  5. What will change, culturally speaking? Telecommuting will be the default, and in the years to come, maybe you’ll have to ask the manager for permission to go to office.
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    “But the pandemic is forcing these investments in industries where telework is possible, with more people learning how to use remote technology. As a result, we may see a more permanent shift toward telecommuting. As the economist Susan Athey recently told the Washington Post, “People will change their habits, and some of these habits will stick. There’s a lot of things where people are just slowly shifting, and this will accelerate that.””

Non-medical, non-economics links about Covid-19

David Brooks in the NYT:

Viktor Frankl, writing from the madness of the Holocaust, reminded us that we don’t get to choose our difficulties, but we do have the freedom to select our responses. Meaning, he argued, comes from three things: the work we offer in times of crisis, the love we give and our ability to display courage in the face of suffering. The menace may be subhuman or superhuman, but we all have the option of asserting our own dignity, even to the end.

John Authers in Bloomberg:

For now, the approach being adopted across the West is Rawlsian. Politicians are working on the assumption that they have a duty to protect everyone as they themselves would wish to be protected, while people are also applying the golden rule as they decide that they should self-isolate for the sake of others. We are all Rawlsians now.

How long will we stay that way? All the other theories of justice have an appeal, and may test the resolve to follow the golden rule. But I suspect that Rawls and the golden rule will win out. That is partly because religion — even if it is in decline in the West — has hard-wired it into our consciousness. And as the epidemic grows worse and brings the disease within fewer degrees of separation for everyone, we may well find that the notion of loving thy neighbor as thyself becomes far more potent.

And on that note, this by me from a couple of days ago.

A cartoon from the New Yorker about social distancing and how to do it “right”.

Also from the New Yorker, Siddhartha Mukherjee, writing like only he can:

But three questions deserve particular attention, because their answers could change the way we isolate, treat, and manage patients. First, what can we learn about the “dose-response curve” for the initial infection—that is, can we quantify the increase in the risk of infection as people are exposed to higher doses of the virus? Second, is there a relationship between that initial “dose” of virus and the severity of the disease—that is, does more exposure result in graver illness? And, third, are there quantitative measures of how the virus behaves in infected patients (e.g., the peak of your body’s viral load, the patterns of its rise and fall) that predict the severity of their illness and how infectious they are to others? So far, in the early phases of the covid-19 pandemic, we have been measuring the spread of the virus across people. As the pace of the pandemic escalates, we also need to start measuring the virus within people.

And finally, Ben Thompson, probably the only writer alive who can build a story linking Compaq and the coronavirus.

 

Econ101: Policy Responses to a Pandemic

If you haven’t played it already, go ahead and give this game a try: The Fed Chairman Game. I have a lot of fun playing this game in class, especially with students who have been taught monetary policy. It usually turns out to be the case that they haven’t understood it quite as well as they think the have! (To be clear, that’s the fault of our educational system, not the students.)

But the reason I started with that is because the game always throws up a scenario that mimics a crisis, and asks you what you would do if you were the Chair of the Fed.

In this case, policymakers the world over are now staring at a very real crisis, and they need to be asking themselves: what should we do?


 

There are two broad answers, of course: monetary policy, and fiscal policy.

The Federal Reserve has cut interest rates to zero, and while it has other tools to stimulate the economy, a crisis like this requires fiscal as well as monetary responses. The legislation passed thus far has been important, but another round of fiscal policy will be required immediately to fully address this crisis.

A robust fiscal response can provide income support to households, ensure broad and continuous access to safety net programs, provide incentives for employers to avoid layoffs, provide loans to small businesses, give liquidity cushions to households and firms, and otherwise stimulate the economy.

That’s a write-up from Brookings. The specifics follow in that article, but the article makes the point that more of the lifting will need to  be done by fiscal, rather than monetary policy. And that is true for a variety of reasons,  which the article does not get into, but long story short – fiscal, more than monetary.

But, ok, fiscal policy of what kind? Should we give money to firms or to workers? Here’s Paul Krugman with his take…

And here’s Alex Tabarrok with his response:

So what’s the correct answer? Well, as we’ve learnt before, and will learn again, macro is hard! In an ideal world, all of the above, but as is manifestly clear, we are not in an ideal world. If we must choose between giving money to firms or to people, to whom should we give it? My opinion? People first, businesses second. This is, of course, a US centric discussion, what’s up with India?


 

Here’s, to begin with, a round-up from around the world – you can search within it for India’s response thus far.

Calls are getting louder for governments to support people and businesses until the new coronavirus is contained. The only questions are how much money to shovel into the economy, how to go about doing it, and whether it will be enough.

Already, officials from Paris to Washington DC are pulling out the playbook used in Asia for slowing the spread of Covid-19: they’re restricting travel and cracking down on public gatherings. While those measures have the potential to reduce deaths and infections, they will also damage business prospects for many companies and cause a synchronized worldwide disruption.

Here’s the FT from two weeks ago about the impending slow down:

Venu Srinivasan, whose company TVS is one of India’s largest makers of motorcycles and scooters, said the business had lost about 10 per cent of production in February owing to a lack of Chinese-made parts for the vehicles’ fuel injection system. He added that TVS has now managed to find a new supplier.

But Mr Srinivasan said he was bracing for India’s recovery to take longer than anticipated. “One would have expected a V-shaped recovery, but instead you have an L shaped recovery,” he said. “It’s been the long haul.”

R Jagannathan in the LiveMint suggests this:

This is how it could be designed. Any unemployed urban youth in the 20-30 age group could be promised 100 days of employment and/or skilling options paid for by the government at a fixed daily rate of ₹300 (or thereabouts, depending on city). At an outlay of ₹30,000 per person annually, the unemployed can be put to work in municipal conservancy services, healthcare support, traffic management, and other duties, with the money also being made available for any skill-acquiring activity chosen by the beneficiary (driver training for Ola-Uber, logistics operations, etc). All companies could be given an opportunity to use the provisions of the Apprentices Act to take on more trainees, with the apprenticeship period subsidized to the limit of ₹30,000 per person in 2020-21. If the pilot works, it could be rolled out as a regular annual scheme for jobs and skills. Skilling works best in an actual jobs environment.

 

He also mentions making the GST simpler, which the Business Standard agrees with:

Certainly, the rationalisation of GST will also affect government revenues. However, a simpler and more transparent system would allow greater collection and reduce evasion. The government will receive a windfall this year from lower crude oil prices. The moment to move on the structural reform agenda is now. The GST Council has done well to address the inverted duty structure in mobile phones. Further rationalisation will give confidence to the market that the government is serious about reforms. It was promised that GST would remain a work in progress, and that the GST Council would act often to improve it. So far, however, the changes have been marginal and haphazard. A more structured and rational approach, which outlines a quick path to a single rate, would pay dividends for the economy in the longer run. It would also be an effective way to manage the immediate effects of a supply shock such as is being caused by the pandemic.

Also from the Business Standard, a report on the government now considering (not happened yet) relaxing bad loan classification rules for sectors hit by the corona virus. That’s pretty soon going to be every sector!


 

Assorted Links about the topic – there’s more to read than usual, please note.

Here is Tyler Cowen on mitigating the economic impacts from the coronavirus crisis.

Here’s Bill Dupor, via MR, about the topic:

First, incentivize behavior to align with recognized public health objectives during the outbreak.

Second, avoid concentrating the individual financial burden of the outbreak or the policy response to the outbreak.

Third, implement these fiscal policies as quickly as possible, subject to some efficiency considerations.

Again, via MR, New Zealand’s macro response.

Arnold Kling is running a series on the macro response to the crisis.

Claudia Sahm proposes direct payment to individuals:

This chapter proposes a direct payment to individuals that would
automatically be paid out early in a recession and then continue annually
when the recession is severe. Research shows that stimulus payments that
were broadly disbursed on an ad hoc (or discretionary) basis in the 2001 and
2008–9 recessions raised consumer spending and helped counteract weak
demand. Making the payments automatic by tying their disbursement to
recent changes in the unemployment rate would ensure that the stimulus
reaches the economy as quickly as possible. A rapid, vigorous response to
the next recession in the form of direct payments to individuals would help
limit employment losses and the economic damage from the recession.

Here are the concrete proposals, the entire paper is worth a read:

Automatic lump-sum stimulus payments would be made to individuals
when the three-month average national unemployment rate rises by
at least 0.50 percentage points relative to its low in the previous 12
months.
• The total amount of stimulus payments in the first year is set to
0.7 percent of GDP.
• After the first year, any second (or subsequent) year payments would
depend on the path of the unemployment rate.

 

Macroeconomics IS HARD!

Economics in the times of COVID-19, there is already a book. I learnt about it from Tim Taylor’s blogpost. I have not read the book, but will soon.

The NYT, two weeks ago, on the scale of the problem facing policymakers.