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An EconoFact interview of Larry Summers reveals that the former Secretary of the Treasury, Harvard President and eminent economist does not understand how tax statutes of limitations work. Here’s the quote in the context of his contending, which I fully agree with, that the Internal Revenue Service has been underfunded:

I was appalled to discover that over a three-year period late in the last decade there were a hundred people who had incomes of over ten million dollars who didn’t deign to file a tax return, and the government didn’t even manage to notice before the statute of limitations had run.

EconoFact Chats: Today’s Economic Challenges Larry Summers, Harvard University
Published on February 11th, 2024, pp. 5-6.

Tax statutes of limitation only begin to run against the government when a return is filed. So, if you haven’t filed, the statute has not started to run. Here’s the how the American Bar Association describes it (my emphasis):

No Return or Fraudulent Return. What if you never file a return or file a fraudulent one? The IRS has no time limit if you never file a return or if it can prove civil or criminal fraud. If you file a return, can the IRS ever claim that your return didn’t count so that the statute of limitations never starts to run? The answer is “yes.” If you don’t sign your return, the IRS does not consider it a valid tax return. That means the three years can never start to run.

Robert Wood, IRS Can Audit for Three Years, Six, or Forever: Here’s How to Tell

The code section is 6501 and as the IRS says, when you don’t voluntarily file a return:

We can assess tax at any time under the Substitute for Return program (See IRC 6020). If we file a Substitute for Return, the 3-year limit for assessment doesn’t begin. However, if you later decide to file your tax return, it does start the 3-year time limit for assessment.

IRS.gov

I didn’t try to hunt down the source of Summers’ assertion but assume it is likely the letter from the Senate Finance Committee to the IRS that I previously blogged about (in the section on Hunter Biden’s taxes) reporting nonfilers with very high incomes. The actual number for nonfilers with incomes greater than $10 million, contrary to Summers’ characterization of “hundreds,” was 58 according to the letter. The IRS is going after those taxpayers, of course, and has reported collecting some of the unpaid taxes in a subsequent press release.

Those of us who regularly make mistakes and misstatements can take comfort in knowing that we’re in august company. Thanks, Larry. This does not diminish the case for continued full funding of the IRS, but it doesn’t help to misstate the basis for it.

3/1/2024 update

With regard to pursuing millionaire non-filers, the IRS put out a press release on Leap Day updating its efforts. It has mailed out 25,000 CP59 notices to individuals who did not file tax returns since 2017 and reported income of more than $1 million. This press release makes it clear that the IRS has information returns documenting that income:

These are all cases where IRS has received third-party information—such as through Forms W-2 and 1099s—indicating these people received income in these ranges but failed to file a tax return.

IRS launches new effort aimed at high-income non-filers

The Service will also mail out 100,000 more notices to non-filers with incomes > $400,00 and <$1million. The nonsensical $400,000 threshold must be a result of Biden’s idiotic campaign tax pledge not to raise taxes on people with incomes below $400,000. At least that is the best I can figure. (Going after nonfilers is raising taxes? Yikes.) They will get kinder and gentler notices later, according to a WaPo story (Julie Zauzmer Weil, Thousands of millionaires haven’t filed tax returns for years, IRS says):

Eventually, the IRS said, it will send letters to non-filers at all income levels. The letters for people making less than $400,000 will focus on the fact that they might be missing out on a refund.

WaPo

The WaPo story has a telling quote from a former DOJ lawyer:

Failing to file one year can lead to a snowballing effect, a lawyer said. “They forget one year, and then the next year, they say, ‘Well, if I file now, I’ll get in trouble for the year before,’ … Pretty soon, 15 or 20 years later, they’re in a lot worse trouble,” said Rob Kovacev, a former Department of Justice attorney who said that more than 15 years ago, before IRS budget cuts, his docket was full of non-filer cases, some for very rich people.

WaPo [emphasis added.]

All this points out the corrosive effects of the GOP Congress’s starving of the IRS last decade and why there is no need to fabricate facts or embroider the case for preserving the funding, including the cuts that Kevin McCarthy (RIP) extracted as part of his deal to avoid default on the debt.

I don’t know why stuff like this bothers me, but it does. It’s a typical case of cheery-picking numbers to make something seem more persuasive. Normally I grit my teeth and ignore it when it’s not factually wrong, just a case of overreach. For some reason, I decided to post my thoughts on this one, even though I basically agree that the rate of growth of federal debt is too high.

The STRIB printed an opinion piece, Bruce Yandle, Americans aren’t as rich as they feel (10/26/2023), that makes an accounting point that the recent Federal Reserve Board publication that reported a generous increase in household net worth needs to be discounted by the increase in federal debt for the same period. It reports a 37-percent increase in median net worth and a 23-percent increase in the mean or average net worth.

Yandle casts it as too good to be true because the fed publication fails to account for households’ share of the federal debt and he assumes correctly that a portion of the increase is attributable to the COVID pandemic relief payments the feds made. Put simply, the feds borrowed money and distributed it to households. That money will show up in someone’s net worth and as a federal government liability. But we (or our children) will all have to repay it, so it’s somewhat illusory. His quote:

Let’s avoid that oversight. Consider that between 2019 and 2022, when household wealth was rising by 37%, the federal debt rose from $22.7 trillion to $30.8 trillion — a 35.6% increase. Some might say not to worry. After all, isn’t this debt we owe to ourselves? Well, most of it. Of that amount, $7.2 trillion was owed to foreign sources. (I should add that total federal debt now is $33.6 trillion.)

Bruce Yandle, Americans aren’t as rich as they feel STRIB (10/26/2023)

That seemed too close to be true – household net worth goes up by 37% and federal debt by 36%. Is all of the increase really due to federal COVID payments, financed by Treasury borrowing? The irritation is that he says nothing about what the aggregate numbers are. For an academic (Yandle is a retired business school dean), I assumed that couldn’t be an oversight. So, I checked.

The Federal Reserve publication reports an aggregate increase in household net worth of $28 trillion between 2019 and 2022. (I had to calculate it by multiplying the means by the numbers of households for years. Actually, I had to use the number of families, slightly different than households, because that was all that was in the report.) The Treasury reports a $8.2 trillion increase in outstanding federal debt between fiscal year end 2019 and 2022. So, comparing the two numbers, household net worth increased by a net $20 trillion after deducting the increase in outstanding federal debt. Yandle’s account implies all the increase is COVID pandemic relief. At least, I think that is what a normal reader would assume.

Does he still have a point? Yes. The more nuanced concern is that federal debt is growing at a faster rate. It’s especially concerning if is growing faster than the economy and our implicit ability to repay it. You don’t need to cherry-pick numbers to make the point. That’s my point. For the period, federal debt grew at 36% (as he reported) and aggregate net worth from the Fed’s report grew at 25%. The two aggregate numbers are more apples-to-apples than his comparing total debt’s rate of growth to the growth in median net worth. I’m guessing he used the increase in the median (37%) because of its closeness to the increase in federal debt (36%). Makes the comparison look 1-for-1.

The bigger point to cheer regarding the Federal Reserve’s net worth numbers is that the median increase (37%) is so much larger than the mean (22.5%). That means that an average household’s net worth is increasing faster than that of the top wealth households, which dominate the mean. Table 2 shows that the top decile’s net worth increased by 18%, for example.

This effect likely results from what Yandle is pointing out – the COVID relief payments – which were a mildly progressive income redistribution. Flat grants going to most of the population, excluding those with high incomes, financed mainly by the progressive federal income tax and, of course, debt. They obviously had a much bigger effect in the lower part of the income distribution. But net worth still grew by much more than the COVID payments or the total growth in the federal debt (we were running big deficits even without the COVID payments).

This blog post by Noah Smith, Great news about American wealth (10/27/2023) provides a good case for celebrating the Federal Reserve report’s findings. A fair reading is that it does convey good news. The Yandle piece seems calculated to undercut that and in a way that is quasi-misleading. Why the Strib decided to run it is unclear (auditioning for Debbie Downer, perhaps?).

This is another in my series of bad high school book reports on nonfiction books that I have read recently. I write them to memorialize my thoughts in the vain hope that I will remember a bit more of what I read.

Author and book

Brad DeLong, Slouching Toward Utopia An Economic History of the 20^th Century (Basic Books 2022).

DeLong is a left-leaning econ professor at UC Berkley and a former treasury official during the Clinton Administration. He has a substack blog that I occasionally read for its acerbic commentary on economic, political, and social issues.

Why I read it

I’m particularly interested in economic history and DeLong generally has interesting insights and takes (unless your priors align with Milton Friedman and cause you to outright reject his viewpoint). He’s a colorful writer; the book reads more like a series of long commentary pieces, rather than an academic history. That’s a virtue and drawback. But it makes easy reading for a non-economist.

The book is in the tradition of old-fashioned political economy and attempts to put the sweep of economic history in the context of governmental, political, and cultural (broadly considered) actions. It focuses on what DeLong defines as the long 20^th century – 1870 to 2010. He rightly considers 1870 a hinge point when economic growth, fueled by some combination of technological and socio-political developments, accelerated to yield rapid increases in per capita income, especially in the Global North. For human history before 1870, economic growth varied between nonexistent or glacial, struggling to keep pace with or to slightly exceed population growth. That changed dramatically in 1870.

The book focuses on how that occurred and why previously unthinkable increases in economic well-being did not usher in anything like a social utopia. Getting a lot richer did not reduce conflict, social strife, and other ills. Money can’t buy you love, so to speak, especially when some others seem to randomly end up with a lot more of it. Conversely, the fact that there are a lot more riches to go around may simply intensify the human tendency (reflecting Augustinian original sin) to covet what your neighbor has or worse to try and take it, one way or another.

The story in DeLong’s telling is a matter of social-political institutions (the market, government, etc.) delivering economic growth but not distributional and other social outcomes that satisfy the populace. That wars, depressions, recessions, social strife, and inordinate concentrations of wealth and income characterized most of the period is obvious. Far from the improvement in human happiness (if not utopia) that someone in 1870 might have imagined if she presciently foresaw the economic growth that would occur.

DeLong’s book caused me to contemplate rereading Robert Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (Princeton U Press 2016), which I read when it came out. It could be considered a companion to Sloughing Toward Utopia. Gordon’s book an account of the nuts and bolts of the rapid economic growth in the second half of the 19^th century and the first half or so of the 20^th. It provides more specifics and is a great read, even if you’re not interested in economics. It details many of the advances the developed world made via technological improvements (e.g., electricity, telecommunications, cars, household appliances, and indoor plumbing and heating), along with public health improvements such as clean water and waste control, to name only a few. It reminds one of just how far we have come. Gordon expects such rapid growth cannot continue because of the inability to keep making such transformative advances. They slowed down after 1950 and the effects of the more recent IT revolution pale by contrast. At least, that is how I remember the book without rereading it.

These same developments are grist for DeLong’s narrative mill with its broader political and macroeconomic management scope. His concerns about lagging growth result more from flubbed social-political management than an inherent limit on human technological advancement, although they’re interrelated.

What I found interesting

The book was a fascinating read. I can imagine rereading it a couple of years – ideally if he updates and revises it.

It is full of interesting details (e.g., about people like Tesla, Hoover, and Trotsky and more minor events like the Boer War). The book is essentially DeLong’s take on what caused the successes and missteps in the socio-political management of the world’s economic order over the last century and a half. In his telling, it is an aggregate growth success and distributional and allocative failure. There was an interlude where the political and economic stars aligned – 30 Glorious Years of Social Democracy (1948-1973) DeLong titles it – but otherwise largely missed opportunities. We’re talking about the world economy, so governmental management is fragmented and subject to foreign relations vagaries with all the resulting complexity. The story finds residents of the Global North a lot richer but far short of utopia. But he’s still relatively optimistic.

The book goes mostly in chronological order with DeLong providing his analysis of events and trends from the Gilded Age, WWI, post-war era, Great Depression through the Great Recession. He uses the insights of economic analysis to explain a broad range of developments from colonialism, nationalism, the world wars to more obvious economic matters, like the recessions and lack of development in the Global South etc. Most of it seems credible to a rank amateur like me and almost all is interesting.

As he points out, the secret weapon of the economist is the ability to count. He uses that advantage to provide useful insights. A telling example is this quote that succinctly sums up a, if not the, crucial dynamic of WWII, the allies’ overwhelming economic advantage:

Set war production of the U.S. in 1944 equal to 100. By this metric, in 1940 Britain’s production was 7 and Nazi Germany’s and Japan’s were 11. In 1942, all the Allies together were producing 92 and Germany and Japan were producing 16. And by 1944, it was 150 to 24.

Sloughing Toward Utopia, p. 307.

It’s important to keep in mind that changing a few events – political or military – could have altered the course of the war and resulted in a Nazi German hegemony in Europe, as inevitable as the numbers make the Allied victory seem. I think the numbers also provide insight into the Ukrainian War, which increasingly looks like a war of attrition with its resolution crucially depending upon the political will of NATO countries, especially the USA, to provide continuing economic backing of Ukraine.

The remainder of this section describes a couple themes and concludes with a list of items that interested me even if a minor part of DeLong’s narrative. None of this does justice to the book’s sweep and its addressing myriad eras, developments, and problems. My goal was to keep this under 2,000 words. Spoiler alert: I failed.

Sources of growth

DeLong attributes the breath-taking growth over the long 20^th century to three factors. Human advancement is inherently a social endeavor, requiring collaboration and cooperation. Success or failure depends upon social organizations to harness and aggregate individual human capacity:

• Globalization – essentially the revolution in transporting goods and people (railroads, steel-hulled ships, internal combustion engines, etc.) and communication (telegraph, telephone, radio, television, etc.).
• The industrial research laboratory – collaboration and standing on the shoulders of others is essential to the incremental and development of transformative technology essential to rapid growth.
• Development of the bureaucratic corporation – this enabled marshalling the resources (financing) and implementing the technological improvements to fund and sustain the industrial research laboratory.

Hayak v. Polanyi dialectic

The tension over how much to rely on laissez-faire market forces (the Hayak or libertarian pole) versus governmental intervention (the pole that seeks to satisfy social expectations of fair distributional outcomes, Polanyi rights in DeLong’s terminology) is an, if not the, overarching theme of the book’s narrative. The Hayakian extreme elevates the market to be the primary principle of social organization. DeLong’s oft-repeated chant to characterize the libertarian tendency to glorify the market almost as an end, rather than a means, is: “The market giveth. The market taketh. God bless the market.”

As a neoclassical-trained economist, DeLong recognizes the virtues of the market to maximize production and consumption by harnessing incentives and human nature. Societies ignore that reality at their peril (see chapter 8, “Really Existing Socialism,” on the USSR repeated failures as result of ignoring that reality); growth withers. I was unfamiliar with and have not read Polanyi. DeLong uses him as the intellectual underpinning for social democracy, i.e., sanding the rough edges off market allocations to meet social expectations of a just and ordered society (even putting aside market imperfections and failures that Hayakians presumably would abide the government correcting) so work and notions of merit realize their rewards. There’s a strong element of earned merit. Here’s one of DeLong’s characterizations of Polanyi rights, crucially differentiating them from rote redistribution to achieve equal outcomes:

People seek to earn, or to feel they have earned, what they receive – not to be given it out of somebody’s grace, for that is not respectful. Moreover, many people don’t want those who are ranked lower than them to be treated as equals, and may even see this as the greatest violation of their Polanyi rights.

Sloughing Toward Utopia, p. 429 (emphasis in original).

DeLong evaluates the long 20^th century under this dichotomy. Here’s my simplistic pigeonholing of the eras for Global North economies based on his dichotomy as I think he sees it:

Era	Economic regime
Gilded Age (1870 – 1914)	Hayakian laissez-faire
WWI	Planned economy – German war economy misled Lenin and Stalin as to its workability
Roaring 20’s and Great Depression	Laissez-faire, but advent of fascist and communist control
WWII	Planned economy (rationing, price controls, etc.)
Glorious years of social democracy (DeLong’s title for 1948 – 73)	Closest to Polanyi rights ideal
1975 onward	Neoliberalism – laissez-faire light

At one level, this dialectic frame allows DeLong to apply his ongoing case against neoliberal economic policies, which anyone who casually reads his commentaries and blog will be familiar with, to early and mid-20^th century history. That naturally adds credibility to his political and economic views on current affairs. Put another way, current shortcomings of neoliberal orthodoxy were presaged by the failures and successes of late 19^th and early 20^th century, when they are properly understood. He casts it the other way, of course, and professes to exercise more reticence in his analysis of the late 20^th century to ensure objectivity because of his active participation in an ongoing debate, lacking the detachment expected of a historian. A cynic would assume he’s just trying to buttress his advocacy of a social democratic order.

I’m generally sympathetic to his policy views, for what it is worth. The case for even libertarian-light policies in anything resembling a democratic order are nonstarters. The fact that so many right-wing elites (see Club for Growth, Americans for Prosperity, WSJ editorial page, and many more of similar ilk who are the core donors of the GOP) is a testament to denial of practical reality and belief in the ability modern PR and political advocacy technics to fool a large share of the public almost all the time. The populist takeover of America’s dominant conservative party punctuates the practical unreality of libertarianism.

Misc items that interested me

A few items in the book that I found interesting or were new to me:

• Until I read the book, I had not thought much about the ambiguous economic motivations for and benefits of colonialism and the apparent ongoing debate on that (DeLong doesn’t take or have a clear position). My guess is the motivation is more psychological (machismo and urge to explore and dominate, say) than rationally pursuing economic advantage.
• Throwing nationalism into the mix is further confounding. The Boer War provides an example of economic irrationalism of colonialism and nationalism – its costs in money and human life vastly outweighed any plausible benefits but the war was very popular in Britain. The current resurgence of nationalism, evidenced by the War in Ukraine, e.g., raises the specter that we’re returning to something like the world before WWII.
• Herbert Hoover as a sort of Forest Gump in the first half of DeLong’s century. He’s in colonial China (that’s where he made his fortune), post-WWI food relief czar, directing relief in the 1927 Great Mississippi Flood, president during the Great Crash and Depression, remaking the administrative state after WWII, etc.
• All the horrors of WWII and fears of totalitarian communism scared the U.S. into an uncharacteristic bipartisan shouldering of the burden of a responsible hegemon, in the form of the Marshall Plan, containment, etc. These fears overcame the Republican tendency to isolationism, Democratic opposition to defense spending, and almost universal opposition to foreign aid. This is maybe half the political explanation for DeLong’s Glorious Years of Social Democracy.
• I was unaware of Botswana as a success story of the Global South.
• DeLong’s typology of recessions and depressions (monetarist, Keynesian, and Minskyite). I’m not competent to judge its validity but found it interesting. (Disclosure: I avoided taking macro, assuming it had no practical application for someone on my career path. It wouldn’t have had, but management of the national economy through fiscal and monetary policy is an important and interesting issue.)

There are many more, but I won’t go on because I’m already over my 2000-word budget. Reading the book stimulated lots of speculation about various plausible counterfactuals that could have changed the trajectory of history for good or ill, a fun waste of my time.

What disappointed me

The breezy and confident style of much of the book (DeLong does frequently admit that he doesn’t have the “answer” or economic explanation for a variety of observed phenomena) made the book readable and entertaining. But it also created some nagging doubts in my mind.

Along those lines, some bits left me hanging or wondering if they were more appropriate to a blog post or column than a carefully written and edited book on economic history. For example, in making the case against the The Bell Curve’s pop science hypothesis of a genetic link between race and intelligence, DeLong observes (p. 377) that all of humanity has less genetic variation than a baboon troupe. I haven’t paid attention to The Bell Curve, assuming it is just a latter-day effort to cloak race prejudice in pseudo-scientific and statistical clothing. That practice has a long and sordid history, including spawning eugenics policies based on it in the early 20^th century U.S.

DeLong’s observation caught my attention as perhaps a telling criticism that I hadn’t heard. I checked and he is correct about the difference in the amount of genetic variation between apes and humans (see, e.g., here). But he did not expand on it and to my amateur mind (after some but not rigorous thought), it was not clear why it matters. I suppose more variation in traits could increase the probability that two traits (intelligence and race) are linked, but that’s not obvious to me and DeLong doesn’t go into it. Why would more variance in the number of traits in a population increase the probability that two specific traits (not any two traits, mind you) are linked? (I have assumed that intelligence is due to many genes and is very difficult to measure because it varies a lot and that the invalidity of the idea or intelligence as an objective thing or the ability to measure with an IQ score/test is the core of the problem but have not read or thought about it.) Not a big deal but including stuff that doesn’t seem thoroughly thought through mildly irritated me.

DeLong admits he doesn’t fully understand or have an explanation for the varying or lack of growth in Global South, although he does provide a lot of interesting insights and observations in that regard. He briefly discusses (in a couple of contexts) Argentina’s interesting case and his explanation for its stalled growth (worse actually). I was familiar with that story and think his explanation makes sense. I was disappointed, though, that he did not spend more time on Chile, the arch type Hayakian example of how to develop the Global South (beyond glancingly castigating its authoritarian abrogation of democratic principles to implement its libertarian goals).

SALT connection

NA

Addendum

There was a symposium on DeLong’s book that makes many interesting points. He has a response here summarizes the criticisms, accepts some and explains why he decided not to cover points/criticisms that he should have spent time on some issues or developments.

The five basic criticisms, all errors of omission, are:

• Technological progress underemphasized
• Demographic changes overlooked
• Failure to cover global warming, fossil fuels use and other environmental issues
• More coverage of capital-labor struggles
• Scandinavian countries’ remarkable success in balancing economic growth with social equity certainly deserved more focus.

We just got Florida’s equivalent of Minnesota’s Truth-in-Taxation statement (i.e., how much next year’s tax will be under the taxing jurisdictions’ proposed levies) for the condo my wife inherited on her mother’s death last year.

The notice contained a surprising revelation. Florida provides a special property tax exemption for widows and widowers, which of course we will be losing. Back when I was working, I spent time thinking and writing about income tax marriage penalties and bonuses. But one built into the property tax and limited to surviving spouses was a new to me. Or maybe this is a special form of a single bonus? (The income tax does have a one-year surviving spouse status that confers bonuses on widows and widowers.) The exemption amount is a trivial but was just increased by the Florida legislature. I guess widows have a lobby in Florida.

A much more generous homestead exemption is provided to resident homeowners, which I knew about and knew we would be losing. That’s no surprise and is common in many states. Minnesota has a more generous one, albeit (of course for Minnesota) value limited. Florida’s predictably is a flat amount ($50,000 of value) for any home, regardless of its total value. Mar Largo probably qualifies if part of it is deemed a home. We’re in some of the same taxing districts.

The nastier surprise the notice contained was the fallout from Florida’s version of limited market value, which caps the annual value increase at 3% for homesteads and 10% for non-homestead property. A transfer allows an increase to full value. In our case, that meant a near 4X increase in value with an equivalent effect on tax. Welcome stranger.

That underlines the fundamental unfairness and distortions caused by provisions like Minnesota’s old limited market value law and the current version in Florida, as well as California’s Proposition 13. For years many other property owners were unnecessarily subsidizing my mother-in-law. Now, we’re on the other side of the equation. Over long periods of time, the distortions keep multiplying. Prop 13’s distortions are mindboggling. Value caps are very popular politically, of course, and extraordinarily difficult to undo.

This post is not SALT related. I have slid into occasionally blogging about the opioid epidemic via book reports on Deaths of Despair and Empire of Pain. As a result, I now tend to take more notice of items related to the epidemic, which appears to be increasingly infecting Minnesota. This post reports on two items that caught my attention.

Supreme Court review of the Sacklers’ personal liability?

When I wrote my report on Empire of Pain, I assumed that the Second Circuit decision, In re Purdue Pharma, LP, 22-110(bk) (2^nd Cir. May 30, 2023), upholding the bankruptcy court’s release of the Sacklers from personal liability beyond their $6 billion contribution would be the final word.  Supreme Court review seemed unlikely, even though there is a split in the circuits as to whether the bankruptcy code allows it.

The Solicitor General has, however, filed a request for a stay with the Supreme Court in order to file a petition for cert on behalf of the US Trustee. I assume that materially increases the chances for Supreme Court review. Traditionally that is the case when the Solicitor General weighs in on a case. After I wrote this, but before posting, SCOTUS granted the stay. The Court’s order treats the stay as a grant of cert.

I know nothing about the merits, although I did read this piece by two Alabama bankruptcy judges summarizing the issues. It suggests there is more authority supporting the release than Empire of Pain suggested, at least as I recall. (Aside: Based on that piece, John Oliver did a show on the issue. I missed that since my television watching is limited to NBA and MLB games and PBS. It must reflect that the legal issue has become modestly high-profile in some circles, at least for something that esoteric legally.)

If the Court grants review, it will be a case worth watching. The text of the Code does not explicitly authorize it, so authority is derived from the general grant of authority (the statute’s “necessary or appropriate” clause). One might assume that will cause soul searching by textualists and/or justices who don’t want to imply powers from broad general grants when major questions are involved. Perhaps that will not be an issue, because here it requires implying powers to be exercised by the bankruptcy court, not an administrative agency. Strictly speaking (IMO) it should not matter whether the grant is to an administrative agency (i.e., Chevron deference to an expert administrative agency) or a judicial entity (bankruptcy court). But I doubt conservative justices worry much about the courts (themselves) usurping Congress’s responsibility.

Epidemic benefits the GOP?

The jarring – at least to me – findings of a draft research piece caught my eye in a Thomas Edsall NY Times column. Carolina Arteaga and Victoria Barone, Democracy and the Opioid Epidemic (July 24, 2023). The authors assert that “the opioid epidemic substantially increased the Republican vote share [in congressional and presidential elections].”  Page 3. The basis for such a seemingly outlandish assertion by academic economists (at the University of Toronto and Norte Dame) intrigued me so much that I had to read the piece.

As a preliminary matter, I’m skeptical when economists apply their methods outside traditional areas for economic analysis (here political science). In my view, behavioral economics has called some of those efforts into question, such as some of Gary Becker’s work, despite his Nobel Prize. For example, it seems questionable whether decisions to commit crimes or to consume highly addictive drugs, as a general matter, are driven by homo economicus type calculations. (Disclosure: In another life, I fell into the thrall of Becker’s approach in writing a senior seminar paper on crime.)

Here the authors are using econometrics (i.e., statistical techniques) to measure whether the geographic areas that were more affected by the opioid epidemic showed changes in their partisan voting behavior. Analyzing such a question requires creativity in using data, similar to examples in the popular book, Freakonomics. The authors rely on Purdue Pharma’s strategy of initially marketing OxyContin to the cancer pain market and, then, to prescribers treating chronic, rather than mortal, pain in those same geographic areas. That strategy concentrated initial use and abuse of the drug in geographic areas with high cancer mortality. Other research has shown that those areas are strongly correlated with opioid prescription levels and overdose mortality. Thus, cancer mortality by geographic areas provides a way to identify geographic areas in the before times (pre-OxyContin) to test the effects of the epidemic on voting behavior. Clever idea.

The authors find a big effect on voting behavior – increasing the Republican vote in presidential and House races – after a lag. Figure 3(a) from their paper (copied below) shows the quite dramatic correlation. CZ in the title refers to commuting zones, the term for the authors’ constructed geographic areas where they measured cancer mortality, opioid prescriptions, drug overdose mortality, and voting behavior. OxyContin was introduced in 1996 and the effect starts being statistically significant in 2002 but becomes most dramatic in 2010, which was a Republican wave election, and persisting thereafter.

The relationship’s ability to predict the probability of Republican wins, per the authors’ statistical analysis, only starts in 2012. According to them, that may be because the affected areas were not in the baseline “swing” political areas, requiring more vote changing to yield wins in many cases.

The effect is quite strong, as the graph visually suggests. As they state:

We estimate that an increase of one standard deviation in cancer mortality in the baseline period [1982-1996] increased the share of votes for a Republican candidate in a presidential election by 12 percentage points.

Carolina Arteaga and Victoria Barone, Democracy and the Opioid Epidemic, p. 10 (July 24, 2023).

The obvious concern with efforts like these is to make sure that correlations are not spurious or random. While that doesn’t ensure the relationship is causative, it increases the chances. Two strategies are to (1) make sure that there is a solid theoretical reason to posit a causal relationship and (2) use various statistical methods and tests that decrease the chance you’re measuring spurious correlation or using bad data. Both are necessary and neither is foolproof, of course.

Theoretical basis for a relationship

The rationale for requiring a social science based or logical rationale for causation is obvious. The world is full of random correlations. Consider the long running trope about the relationship between Super Bowl winners and stock market performance that the media regularly reports on. Obviously random but still a correlation.

One easily can assume logically that the adverse social effects of the opioid epidemic had political repercussions. It has and is causing a lot of deaths (700,000 nationally according to the CDC) in addition to adverse health, economic, and social effects on families and communities. It seems reasonable that could affect political behavior. I suppose, it’s a small step to conclude that may take the form of a reactionary turn to the right and, thus, Republican support. The authors cite to a small literature (3 studies) finding such effects: two showing that the severity the 1918-19 flu pandemic in German and Italian areas correlated with increased support for Fascists and the other that areas with more incidence of the Black Death in the Middle Ages had increased antisemitism.

Statistical tests

Caveat: I’m not a statistician, so the following observations are just amateur guesses. The authors appear to me to do their best to apply statistical tests of reliability but face some challenges. Two key assumptions underpin their analysis (p. 9): (1) that cancer mortality rates are a good predictor of higher opioid abuse because of Purdue Pharma’s marketing and (2) absent that marketing and abuse, voting behavior in the impacted areas would have been about the same, on average, is in unimpacted areas.

The first of these isn’t very difficult for me to accept. The causative relationship seems pretty clear. The Sackler’s marketing was effective, and abuse and death rates followed by most accounts. You can see this in their Figure 2 (p. 20, not copied) and it is detailed in Empire of Pain.

The second, the link to political/voting behavior, is where there is more uncertainty in my view. The authors strain to find an appropriate placebo check, using diabetes and flu, which is not too convincing to me for rejecting that cancer incidence is not a proxy for a vector of demographic and economic variables that are the real explanation (more of my thoughts below). They test and statistically reject two common explanations for the increasing Republican vote share – the Fox effect and areas particularly hit by the last decades’ growth in Chinese imports. Yes, there is research that shows that relatively more exposure to Fox News increases Republican vote shares. That was another instance of clever use of data (channel numbers used by the local cable carriers).

My take

I have long been puzzled about the cause of or explanation for the increased dominance of Republicans in rural areas, both in Minnesota and nationally. That is partially what generated my interest in the paper and its potential piece to resolving that puzzle. But I wish the authors had tested whether average education levels in their commuting zone (geo areas) explain some of the increased Republican vote share.

Pollsters and political scientists have pointed out the correlation (at least in the last few elections) between educational attainment and the Republican vote. More specifically, white college educated voters are trending away from voting Republican, while white voters with only high school educations, especially males, are trending Republican. Second, Case and Deaton, Deaths of Despair, points out that a prime antidote to deaths of despair (suicides, drug overdoses, and alcoholic cirrhosis) is a college education. That raises in my mind whether that is some or much of what the authors are picking up in their analysis. It would be nice to see how many of their affected areas have variations in those measures (prevalence of college degrees and being targeted by the Purdue Pharma marketing), which may allow sussing out the differential effects. More generally if the epidemic is hitting white rural areas heavily (it is) and those areas are trending Republican for an array of reasons, the incidence of the epidemic just be a convenient proxy. That’s my nagging concern, anyway.

My bottom line is that the study is intriguing and, at a bare minimum, plausible but I remain less than convinced.

This is another in my series of bad high school book reports on nonfiction books that I have read. I write them to memorialize my thoughts in the vain hope I will remember a bit more of what I read.

Author and book

Patrick Radden Keefe, Empire of Pain (Penquin Random House 2021)

Why I read it

Previous reading (e.g., Deaths of Despair) convinced me that the opioid epidemic has had profound effects on America – economic effects (like reduced labor participation) and decreases in life expectancy (Atlantic), human aguish, and more. Media stories, including Keefe’s New Yorker article, made me aware that Purdue Pharma and the Sacklers were central players in these developments, if not the primary culprits. The incongruity of their philanthropy and inhumane callousness, along with the charitable contribution tax issues and others’ recommendations, sealed the deal.

It’s an easy and gripping read: three flight cancellations and an unplanned night in the O’Hare Holiday Inn Express was all it took. I didn’t make notes, so am doing this from memory.

What I found interesting

As often seems to be the case, the actual details provide an interesting story on multiple levels. It’s a classic American rags-to-riches story of three brothers, second generation Jewish immigrants, who grew up in poverty in the Bronx and all became entrepreneurially minded physicians who made their money peddling/manufacturing drugs.

The brothers for many years were a collaborative trio who followed the lead of the oldest, Arthur, into psychiatry and transitioning into advertising, manufacturing, and selling drugs. The family ultimately splintered into two branches, reflected by the two drugs, Valium and OxyContin that were the main sources of their wealth.

Selling drugs

Arthur was the patriarch and motor behind their initial success. He made his money from Valium via his ad agency and other mechanisms. That financial success funded the purchase of Purdue Pharma, an obscure company that made its money selling over-the-counter laxatives, for his brothers. They converted the company into the powerhouse seller of pain killers. Arthur remained a passive owner until his relatively early death, which caused the Arthur branch to sell its stake. The other two brothers, Mortimer and Raymond, ran Purdue Pharma and made their money from its sale of OxyContin. 

In both cases, the story is largely one of navigating (gaming might be more accurate) drug regulation and relentlessly overselling the benefits of the drugs, while minimizing the undesirable side effects to the point that they were virtually invisible. This was bad enough with Valium, but became a societal disaster with OxyContin, causing death and destruction across a large swath of America.

At the governmental level it is a story of regulatory failure and borderline, if not outright, corruption that enabled this to occur in both cases. On a business level, it is an ethical failure – they used secrecy to avoid conflict of interest rules, misleading (to put the best construction on it) marketing, and on and on. On a personal level, it shows a complete moral failure – the pursuit of and preservation of wealth without regard to the effects on human beings. How the latter occurred is unclear – whether a true lack of any moral compass or simply the ability of the human mind to rationalize what is in one’s personal interest.

I don’t recommend reading this book, if you’re susceptible to conspiracy theories on how the system is rigged by political elites. It will surely cause you to descend farther down that rabbit hole. I’m always skeptical of purveyors of such explanations, but the book shows a kernel of truth underlies the instinct to believe the system is rigged.

The Sacklers strategically used their wealth to buy reputation, political influence, and (of course) make more money, while avoiding legal consequences for bending/breaking legal rules in doing so. Big law firms, lobbyists, PR firms, and various string pullers intervene at crucial points to avoid both criminal and financial liability (beyond trimming a few billion off their net worths). Two examples:

• Avoiding criminal liability. During the latter days of the second Bush administration, a top political appointment in the DOJ truncated a long-running criminal investigation by the US attorney for West Virginia. That resulted in pleas by employees to lesser charges that prevented holding the Sackler family members themselves accountable. The details are naturally obscure, but Keefe paints a picture that makes it clear that their money and political connections were instrumental in stopping the traditional legal squeeze to get employees to testify against higher-ups (i.e., the Sacklers themselves here). The vast trove of evidence amassed is convincing in demonstrating that family members were themselves driving the bus.
• Minimizing financial liability. Their blue-chip lawyers hand-picked a judge who used the corporate bankruptcy proceeding to protect the family’s personal fortunes in the state lawsuits seeking to hold the company and them personally liable. That was done even though the family members were not part of the bankruptcy case, had systematically extracted billions from the company when the litigation risk became apparent, and very well may have been personally liable under tort law.  As a lawyer I can understand intellectually how that case can be made but it seems a perversion of the bankruptcy process to shield a non-party from personal liability for actions. According to the book, there is only one other similar case (the Dalkon Shield bankruptcy involving the defective IUD, which is well known to Minnesotans).  

Art collecting and philanthropy

Arthur became an uber art collector serendipitously (stimulated by buying a Chinese table for his new house from a collector) and pursued it obsessively. This led to him to amass a stupendous collection of objects and to the family’s quirky and fraught relationship with the Metropolitan Museum of Art. When Arthur died, he held one of the largest private collections of Asian art, some of which was housed in a private enclave at the Met.

The family used charitable gifts to arts, medical, and higher educational institutions to build/buy their reputations. That they were buying reputation is obvious from their insistence of extracting naming rights at every turn. Anyone who has visited east coast museums knows that to be the case; Sackler galleries, buildings, and similar are ubiquitous. Their central role in the opioid crisis has caused many of these institutions to now refuse their money and to go through the legally difficult task of removing their names from galleries, buildings, hospitals, and so forth. The book documents much of this exercise and the activists, some of whom were recovered addicts, who pushed for this (e.g., the book recounts in detail the efforts of artist Nan Goldin).

Tax angle

The Sackler story has a few interesting tax angles. Their abuse of charitable contribution incentives is a recurring theme. A central element of the deduction for charitable contributions is the concept of “disinterested generosity”; most of their contributions likely flunked this test. Their actions and private correspondence make it clear that many of their contributions were really a matter of building business and personal reputations, neither disinterested nor generous.

Arthur’s 1960s transaction with the Met reveals how they pushed the legal envelope to and likely beyond its limits. It also reveals the complicity of elite charities in fleecing the government. (A reality that comes through too often in my reading of Tax Court cases.) In this transaction, the Met sold Arthur some of its Asian collection at the prices it acquired them for in the 1920s, in other words, at a bargain basement price. He, in turn, gave them back to the Met and claimed a deduction for their current fair market value. As part of the deal, he received the right to store some of his collection at the Met in a private, locked enclave. The Met obviously hoped this was a prelude to donation of the stored objects in the future. This transaction is questionable on several levels – whether it was a charitable gift at all, the value given, whether he realized income in return, etc. I do wonder if he and/or the Met got a tax lawyer to sign off on it. In my view, it barely passes the straight-face test, but I can imagine that analyzing each step separately one could strain to say it might be legal. As an aside, I can’t recall seeing (e.g., in a tax court case) the IRS apply the step transaction doctrine to a charitable contribution case. This arrangement would seem to call for it.

Mortimer renounced his US citizenship, apparently for tax reasons.

Finally, the family extracted billions in dividends and other distributions from Purdue Pharma, when the legal liability handwriting was on the wall, and sent much of it to classic tax havens. That was likely intended primarily to hide or immunize the assets from legal liability, given the pending and prospective civil litigation, but I expect that tax avoidance was also a secondary motivation.

What disappointed me

The biggest disappointment is that the book does not provide much insight into the psychological basis for their decisions. How could they put the relentless pursuit of profits – including from obvious illegal activity (pill mills) that they were aware of and chose not to report to the DEA or police – over the destruction of human lives. On the surface, their values look amazingly close to those of an organized crime family, but with expensive consultants and lawyers who ensure that their actions have either a patina of legality or the ability to have underlings take the fall.

Keefe could not answer the basic questions about their psychological motivations because the family members would not talk with him, and he had little access to their private papers. He did have access to extensive emails that litigation generated. Those emails revealed that key family members (not just company employees) knew what was going on in detail and encouraged it. They don’t seem to break from a creed that pain relief through highly addictive opioids was beneficial and that a small minority of abusers (whether because of moral or genetic factors) were acceptable collateral damage. (Even that most optimistic construction does not get to profiting from massive sales, maybe 10% of the total, to pill mills, in my mind.) If that truly is what they believe, it is a conclusion only a self-motivated, super-rationalizer could reach, probably because of the insulation from reality that being surrounded by a layer of sycophants provides.

The book’s account of their never ending pursuit of ever more wealth combined with use of that wealth to fund reputation building philanthropy proved to me the validity of Schopenhauer’s famous quote:

Wealth is like sea-water; the more we drink, the thirstier we become; and the same is true of fame.

SALT connection

The book simply solidified my view that the charitable contribution incentives need major reforms. Hard to tell how much was made with appreciated assets, since Keefe did have or did not report on that detail.

Update – 5/30/2023

The Second Circuit upheld the bankruptcy court’s decision to extend Purdue Pharma’s chapter 11 case to provide civil immunity for the Sacklers in return for their fixed monetary contribution, preserving most of their wealth. NY Times story. I assume that this will end the saga, since the Supreme Court seems unlikely to hear the case if an appeal is pursued and it’s not apparent anyone will attempt to do so. My knowledge of bankruptcy is limited to one law school course, but this strikes me as an area that could be addressed.

Timothy Taylor has an excellent Strib column (Carbon tax medicine is a better Rx than green subsidy sugar) on the policy benefits a Pigouvian tax on activities that impose public costs (externalities) over subsidizing behaviors that avoid those costs (e.g., the superiority of a carbon tax over credits for EVs and heat pumps).

Taylor is a Mac econ prof and the editor of Journal of Economic Perspectives, an AEA journal that is pitched at a level that a college econ major can understand (versus AER which requires a facility with math and more willingness to slog through equations). He has a blog, the Conversable Economist, which I read regularly, and is great at explaining economic concepts and research for lay readers. I recommend him highly.

The column is based on a Brookings Economics Study Paper (summary, full paper) evaluating the Inflation Reduction Act, which is an uber example of green subsidies. The authors estimate that the incentives will be more effective than the government economists estimate (i.e., they will reduce taxes by a lot more than the Joint Committee estimates suggest). FWIW, they still think those higher costs exceed the social costs of carbon emissions by almost two and a half times. Taylor’s point is that we could have the same benefit at a much lower cost with a carbon tax.

It takes him until midway through the column to get to what I consider a, if not the, key point:

Both carbon taxes and green energy subsidies provide an incentive for a shift from carbon-heavy to lower-carbon or non-carbon sources. However, carbon taxes also encourage conservation of fossil fuels by raising their price. Subsidies for green energy will not have this added conservation effect. [Emphasis added.]

Timothy Taylor, Carbon tax medicine is a better Rx than green subsidy sugar STRIB (May 3, 2023)

That is a huge advantage. It makes the incentive effects much more effective because they directly reduce the undesired activity. The Brookings Paper estimates that using subsidies is 5X more expensive than a carbon tax for equivalent carbon emission reductions. (See section 6.5 of the full paper, pp. 48 – 50, for the numbers Taylor cites.) Let that sink in an 80% off sale.

Subsidizing green activity is very much a second-best approach. To illustrate why, consider the EV subsidies that go to altruistic environmentalists. Pejoratively they may buy an EV as much to demonstrate their green bona fides as to actually reduce carbon emissions. For example, someone who trades in a Prius that they don’t drive very much for a Tesla. That may not be a total waste of public money, but it would be much more effective for someone who drives a gas guzzler a lot to ditch it for an EV. Or more simply for everyone who buys gas to pay the full price, including the external social costs, so their decisions are aligned with their preferences, enhancing general welfare. The paper addresses the much more complicated situations with electric generation. Incentives for wind and solar do nothing, for example, to distinguish between the higher carbon emissions of coal versus natural gas they displace. The former should be discouraged more than the latter.

The fundamental problem is (at least) twofold:

• Human nature prefers positive incentives (subsidies) to negative incentives. This is Taylor’s main point (Mary Poppins’ spoonful of sugar helping the medicine go down in his column). That flows through to politics and is also reflected in the old adage about catching more flies with honey than vinegar.
• Our politics have demonized taxes. This manifests itself in Grover Norquist’s tax pledge, which I have routinely inveigled against, and the GOP’s reflexive endorsement of constantly cutting taxes and against ever increasing them. It’s mindless but has proven to be politically successful enough to scare many Democrats into supporting only taxes that they can claim most voters won’t ever pay (e.g., people who make more than $400,000 in the case of Biden).

That tax aversion has our politics in a veritable death grip is a longstanding pet peeve of mine. Taxes are simply a means to an end. Primarily, they are the necessary price of public goods and services, government. Taxes can also function as useful public policy tools as Taylor’s column points out. Tax aversion has become so engrained that the term “tax” has sloughed into close to a synonym for penalty or punishment in the popular lexicon.

I may be making too much of the role of the tax pledge and the GOP’s demonization of taxes as responsible for taking Pigouvian taxes off the policy table. After all, the de facto GOP position is that climate change isn’t a problem. Even if then, the factors that Taylor talks about might prevent enactment of a carbon tax anyway.

Glimmer of Hope

Since I take heart at the appearance of the smallest of cracks in the tax pledge, the House GOP’s debt ceiling bill provides a glimmer of hope. Per Howard Gleckman (Forbes):

House Republicans have, at least temporarily, redefined what they mean by a tax increase. By doing so, they have turned their backs on their decades-old pledge to never, ever, not under any circumstances, raise taxes. * * *

The crack in the GOP’s implacable opposition to tax hikes came in the Limit, Save, and Grow (LSG) deficit reduction and debt limit bill the House passed on April 26. Nearly all of the bill’s $4.8 trillion in deficit reduction would come from spending cuts. But, according to the congressional Joint Committee on Taxation, the bill also would reduce the deficit by about $515 billion over the next decade by repealing the green energy tax credits that were included in last year’s Inflation Reduction Act * * *.

Howard Gleckman, House Republicans Rethink Tax Increases, At Least For A Minute (Forbes May 4, 2023).

Progress would be to replace the green tax credits with a very modest carbon tax – one that would raise maybe $100 billion as a tradeoff. Thus, getting the same reduction in carbon emissions (per the Brookings Paper), while reducing the debt by $600 billion ($100 billion from the carbon tax revenues and $500 billion from ditching the green tax credits). I like to dream. It’s impossible to even increase the gas tax to recover the user cost of the road system incurred by fossil fuel burning cars. Any carbon tax is a pipe dream, unfortunately.

Of course, the House GOP debt ceiling bill also repeals IRA funding for the IRS, thereby adding to the deficit and abetting noncompliance.

Update: 5/24/2023

After posting this, I came across this article in Roll Call (thanks to Bruce Bartlett’s Senate testimony on the debt ceiling). The article is based on an interview of Grover Norquist and explains how he twisted himself into a pretzel to agree that House’s debt ceiling legislation’ does not violate ATR’s pledge to never increase taxes, even though it repeals IRA’s green tax credits. According to the article (not my checking of ATR’s website), 189 GOP House members signed the pledge. So, if the legislation violated the pledge, it obviously never could have passed the House.

The article is worth reading, if only to see the very tendentious reasoning Norquist went through. His rationalizations include (1) rejecting the official JCT score in favor of assurances by GOP leadership as to the effects, (2) treating the legislation’s repeal of expanded IRS funding as a tax cut (me: not paying legally owed taxes has become a tax cut!), and (3) concluding that the D’s would never agree to repeal of the credits anyway in a final deal, so it doesn’t matter. You can’t make this stuff up.

According to the article despite JCT saying it would increase taxes:

Norquist relied largely on an informal analysis of the bill by GOP leaders who said they believed it would reduce taxes. He said the tax impact of the debt limit bill is murkier than is usually the case because the estimated cost of the energy tax credits has been rising, and some of the credits are refundable or transferable.

Roll Call, Tax pledge’s father bestows blessing on GOP debt limit package

Jason Smith, chair of Ways & Means, provided the necessary assurances, as described in the article (my emphasis added):

Smith wrote to McCarthy that the bill “will yield a reduction in taxes for the actual American taxpayers” even though JCT said it would increase revenue.

“With ‘direct pay’ and ‘transferability’ features, Democrats designed this ‘green’ corporate welfare to function like direct government spending, rather than traditional tax credits that reduce taxes owed,” Smith wrote. He added that “much of this can and should be treated as direct outlays to the federal government.”

Smith didn’t say how much of the “score” should be reclassified as outlays. But he added the bill’s cost estimate may also undershoot actual real revenue reduction from other provisions in the bill, namely the $191 billion projected loss from repealing new mandatory IRS tax collection funds.

Id.

But treating the refundable and transferable credits as outlays (JCT does that only for the refundable component) and using CBO’s estimates of how much revenue the expanded IRS funding would raise (i.e., treating the resulting noncompliance as a tax cut) still was enough to offset the cost of the credit repeal. So, Smith had to turn to the administration’s talking points on how CBO’s numbers were too low:

Smith pointed to prior White House budget office and Treasury estimates that the IRS funding could yield $296 billion in direct revenue collections, rising to as much as $440 billion when accounting for indirect effects like the deterrent effect on tax avoidance.

Taking the high end of the administration estimates would negate much of the revenue gain from the energy tax credit repeals, even before any reclassification as outlays, Norquist and top Republicans argue.

Id.

I should not be surprised with either ATR or GOP. Upon emerging from the debt ceiling negotiations with the White House, GOP leadership’s constant manta is “spending is the problem” and, thus, they will never consider revenue increases, including tax expenditure cuts beyond the green credits. This is from the folks who when they were in full control constantly cut taxes (e.g., Bush 1, Bush 2, and TCJA, as well as repealing some of the ACA’s payfor taxes) and never cut spending (in fact, they increased it in multiple ways, including two wars, No Child Left Behind, and Medicare Part D to take a few bigger examples). If spending is really the problem, what the heck were they doing? Waiting for bipartisan cover for unpopular spending cuts, perhaps?