Well, Iran Seems Reasonable

Much has been made of the presidential candidates' differing stances on initiating diplomatic talks with Iran. Obama has held that he would be willing to open discussion - below the presidential level - with Iran without any preconditions. McCain has argued that such a stance is dangerous and would not engage Iran diplomatically without their having met certain conditions precedent.

The WSJ today posted this interesting article about what the Iranian government thought about all this diplomatic talk. They admitted to having two preconditions of their own before they'd consider diplomatic discussions with us. As we might have expected from Iran, those conditions are entirely fair and reasonable:

"Mehdi Kalhor, Vice President for Media Affairs, said the U.S. must do two things before summit talks can take place. First, American military forces must leave the Middle East -- presumably including such countries as Iraq, Qatar, Turkey and anywhere else American soldiers are deployed in the region. Second, the U.S. must cease its support of Israel. Until Washington does both, talks are "off the agenda," the Islamic Republic News Agency reports. It quotes Mr. Kalhor as saying, "If they [the U.S.] take our advice, grounds for such talks would be well prepared."

Yes, well...I think it's safe to say that neither of those two conditions will be met in the foreseeable future (though I am with them on that first one). What's interesting about the article, though, is that it's titled "So Much for Obama's Diplomacy." Apparently, the author of this article thinks he is devastating Obama's stance and winning the debate for McCain. But is that what's happening here? I think not.

Three years ago, my friend Rob and I entered into a debate round against a formidable Harvard team. They proposed that the United States should reauthorize political assassinations of foreign leaders and diplomats. Wow, I thought, this will be easy to defeat - killing is bad! So Rob and I spent a good 25 minutes listing and analyzing the myriad negative consequences of reinstating political assassinations. In their final speech of the round, Harvard dropped a bomb on us. Their argument went like this: "Well...we never said we'd actually USE the assassinations...we just see no reason to indiscriminately take it off the table. We, Mr. Speaker, give you more options than those jackasses!" They blindsided us by shifting the debate. Needless to say, we lost.

Mr. Obama, I will speak to you now. You went to Harvard (law), use their tactic - it's a debate winner! Remember that, because Iran is insisting on these ridiculous preconditions that will never be met, it's likely that this entire policy debate is a wash, because we will NEVER engage in summit discussions with the Iranians! Contrary to the belief of the author of that WSJ article, this fact cuts in your favor because, if the Iranians ever were to reconsider their position, you would give the United States more options than your opponent! You would not categorically reject unconditioned talks. And like I said, it's entirely likely that Iran will never agree to any talks anyway.

Seriously, though...McCain's stuck in the position poor Rob and I were. His only real argument against Obama's viewpoint has been that unconditioned talks would "legitimize" Iran's government. Odd...do we not recognize the legitimacy of Iran's government? Oh we do, right. Are we really a culture who would believe that we endorse the views of any government we engage in diplomatic discussions with? I can't believe that. Thus, Mr. McCain...you might as well just move on from this line of argument. Obama has successfully blindsided you with an "options" move. I know, I know...what a Harvard thing to do. Bastard.

~JSK

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Though I partially concur with the point being made about Iran, I disagree with your analysis of this being the infamous "options" scenario. Being an option would be keeping this idea on the table, which is quite different then what Obama has been saying for the last two years, which is essentially that he is attacking Bush for not talking with Iran. This says he just doesn't want this as an option, but rather that we should do it. That distinction is quite important.

However, both Obama and McCain have shifted their positions in Iran quite a bit, at least in rhetoric over this election cycle. In the primary, Obama suggested that unlike Bush, he would make it a priority to have high level or even presidential level talks with Iran as soon as he was in office. This then shifted eventually to leaving it open as an option and then only an option at lower diplomatic levels. McCain in turn, adamantly argued against any level talks without preconditions, which then transformed into simply no high level or presidential talks and now seems to be hinting to be open to lower level talks. The fact is that what both of these men are now suggesting we do actually comes pretty close to the current policy, as Bush has eased his position himself quite a lot and we already have had numerous talks with Iran at 3rd party locations such as the Middle East summit in Baghdad this past year. This seems to not be picked up by anyone. It would appear the media is enjoying letting the campaigns try to paint each other as being extreme.

But with that said, my thoughts. The entire main focus over Iran is obviously their nuclear program. Either way, I think we're in trouble if our goal is to stop them from achieving this. Despite the official Iranian line about creating reactors for electricity, its pretty obvious that no country is willing to absorb major sanctions and diplomatic conflict just for electricity, especially when the country is sitting on a huge oil reserve and the country lacks a tremendous amount of more basic infrastructure. They have their heart set on achieving this, and there is nothing we can really do about this. So a few points:

How we got here: We basically screwed up with this in two areas. First, through our actions with North Korea in the 90's as well as more recently, when they achieved a weapon, we showed the world that a country working towards weapons could use that as leverage to extort aide packages and other giveaways. Dealing with the problem that North Korea was trying to developed a nuclear program, the Clinton administration, via Secretary Albright gave a whole host of aide packages to North Korea as well as nuclear materials if in return they gave up pursuing nuclear weapons. They took our aide and then developed a weapon anyway. The Bush administration in turn, has offered even more aide packages to give up these weapons programs. The result is that the world has seen that nuclear programs are great leverage in getting what you want.

Mix this with the fact that the US is considered by many, particularly in the Middle East, to be very weak and without a stomach. A few examples: a letter between militia groups in the 1983 Lebanon bombings stated, "If we kill 15 Marines, the rest will leave." We did nothing when Saddam kicked the weapons inspectors out in the 1990s. Bin Laden referred to the US military as a "paper tiger." Essentially there is precedent that the US will do little even if it sees a nation as being belligerent.

Second, is where I agree with with both Obama, and presumable JSK, is that yes, the invasion and following [mis]management of Iraq has only intensified Iran's abilities because of fueling a very strong anti-Americanism in the region, while at the same time, we removed Iran's biggest regional rival that kept it in check.

So Now What? So this leaves us in a big jam. I'm not sure what talks are supposed to achieve. I don't buy into the argument that our problems with Iran are simply a "lack of understanding". They want a nuke for the reason already mentioned, but also so they can intimidate and gain power in their region against rivals such as the Saudis. Our larger problem is that we have almost no leverage with Iran. We already largely don't trade with them, so no more sanctions can be placed. The UN won't place more sanctions because Russia and China want access to their oil fields, and Europe won't push too hard because they are worried about Russia, which holds them hostage via natural gas supply. Iran knows that we can not exercise any military action, both because we are logistically bogged down in Iraq and Afghanistan, but also because of those two wars, there is absolutely no political will to take action against Iran within the US. And even if there was, what are we going to do? Take over another country, and then we have all the problems we have in Iraq?

So sticks are off the table; maybe we can offer carrots, but that is exactly what one of the goals of trying to achieve a nuclear program is. If we comply, this will further entice more nations to develop weapons, just as our North Korean example likely did. In the past with other nations, such as the Soviets, there were many bargaining chips available. But in this case having high level talks (and give Iran that propaganda tool) is one of the only, even if very limited, bargaining chips we have. Part of this is because we are tied down due to the Bush administration's past insistence on denying talks, calling Iran the "Axis of Evil" and so on. Any policy change now would seem to be a sign of weakness and defeat, which will be used politically within Iran and as propaganda with other countries to bolster anti-American sentiment, strengthen internal power and hurt the US position, and in the end they don't actually and their program. Either way we are in trouble.

The only way in my opinion that we can do anything with Iran is find some way to play the internal powers against one another. Ahmadinejad has little official power, but the theocracy has allowed him much leeway partially because he has been able to bolster the diplomatic position of the country within the Middle East and the perceived leadership role of Iran through feeding on Anti-Americanism (partially due to Iraq). Furthermore, the theocracy fears him, because unlike most past presidents who came out of the theocracy, he has his ties with the military, and if he feels that he is being pressured, as along as he stays relatively popular with the people, he could likely initiate a coup (or at least that's a possibility). The key is to weaken Ahmadinejad's internal position so that the theocracy feels comfortable reining him in. Perhaps some carrot can be offered, for instance helping to refine their very heavy crude that they can't process, so his ability to keep using anti-American sentiment is less convincing. But this leaves open the extortion problems earlier discussed. Quite honestly, the only thing I see working is oil has to come down in price and stay down for a while so that the sanctions on Iran actually become crippling as their export dollars decrease. Other then that, talks or no talks, I don't think this debate has any real positive consequences either way outside of our own election battles. We have basically messed up on this for almost 20 years and talking or not talking isn't immediately fixing it.

-EJB



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Well, the entire last three-quarters of your response is a nice detailing of the history of our relations with Iran and one possible course of action (playing the sides against one another). I'm not going to disagree with the historical part because I think we've all come to realize that once North Korea was able to weaponize their nuclear program, the US lost much credibility in the eyes of other countries looking to bolster their global position. It's interesting, though, that you went with the idea of attempting to get the theocracy to reign in Mahmoud. I would've thought - and would propose as the better or more likely option - that we'd go for the academics and youth culture, who have shown an amazing openness towards Western culture. The theocracy stays in power because they use fear to control the larger population. In reality, it is only a few, very vocal, extremists who are dictating the current anti-American policies of Iran. If we can sell ourselves to the new generation of Iranians, it is entirely possible that they could form the new ruling class and begin to tear down the cultural divide erected by a few religious extremists.

But I do disagree with your observation that this is not an options case. You only mention one real reason for not calling this an option case and that is that Obama would actually utilize the option his side is offering. But that alone cannot distinguish this Iran example from any other "options" example. Obama wouldn't necessarily engage in these discussions (plus, with the Iranian demands in mind, it's unlikely he'll have the chance). But even if he WOULD, it's still an options case - the Harvard team could very well argue that they'd use assassinations and they'd still have a valid options argument. This is because an options case is just simply defined by one side of a debate incorporating all of the other sides' options/benefits, but adding just one more of their own. So Side 1 has A amount of options. Side 2, to pull a successful options argument, would simply argue for A+1. That is what Obama is doing here.

Whether Obama's and McCain's policies are indistinguishable currently is really a mystery. I could sort of see why you'd argue that they're functionally the same, but I don't think this is simply a case of pure rhetoric. The statements of each candidate - regarding this issue - mean more than simply the words they use. The candidates' positions inform people of their general disposition or philosophy in regards to foreign policy. The fact that Obama's plan began with a more open and receptive stance than McCain's allows us to validly assume (for now) that Obama would simply be more flexible in foreign policy. Whether this is a good thing or not is a matter of debate - but their stances do reflect the very opposite world-views they hold. So before we go all consequentialist on this topic and just claim that either 1) both views collapse into one simply because they would likely lead to the same outcome; or 2) this debate is meaningless because the policies share a similar end-goal, let's also realize that the means to the end says as much or more about a candidate than simply looking to and judging their goals.

~JSK

The 95% Tax Cut Myth

Sen. Obama often uses the line that if elected to be President, his plan would cut taxes for 95% of earners. First off, one has to make the assumption that this could even be feasibly done considering our fiscal situation. Estimates of his spending and tax plans state that he would increase the deficit by about $280 billion per year by the end of his first term. And this assumes Iraq spending comes to an end, and includes a very generous estimate of what his health care policies will cost; his campaign vaguely argues it can find unspecified $93 billion per year in "health care savings" within the existing budget programs. To be fair, Sen. McCain's proposals would also increase the deficit by about $230 billion per year according to the same linked study.

But if one can get beyond all this reality, there remains the myth that Obama really would cut taxes for 95 percent of people. The Wall Street Journal has a pretty good article in today's paper explaining how most of these "tax cuts" are really just welfare payments. As the article explains:

For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase "tax credit."

The truth is that most of these "tax cuts" are due to creating a laundry list of "refundable" tax credits. What this means is that if you qualify for a credit worth x amount of money, put you pay less then that amount in taxes, the government refunds you the additional amount in excess of your taxes. The result is that what is described as a tax cut is really just a welfare payment via the tax code. Realizing that the term "welfare" is not a good political starter, his campaign has disguised it as "tax cuts."

According to the the non-partisan Tax Foundation, under his plan, 44 percent of all tax filers would pay no income taxes (up from about 32% currently), with the bulk of these people receiving back more in their annual refund than what they paid in taxes. The result is a $647 billion increase in transfers via these credits over the next ten years to over $1 trillion, or 4 times more then what is currently transferred through "welfare."

Furthermore, these tax proposals have a major problem that conventional welfare programs also have, that being the welfare trap. This is the dynamic that occurs when people who are receiving payments are disincentivized from working more or harder to get off of welfare because doing so would cause the benefits one receives to phase out with more income. The result in that the policy increases the amount of poor and government dependents (or at least reduces income mobility). Similarly, because these tax credits phase out with greater income, the marginal effective rate of taxation on low income workers will become very high under Obama's plan as seen by the chart from the Wall Street Journal (keep in mind this is for only one scenario of tax credits). Why would a low income worker put additional effect in overtime for example, if 35 to 4o percent of that gain would be lost in income taxes and phasing out credits? And that is only the Federal Income Tax. That does not include payroll taxes or state and local taxes. The combined marginal rate would likely be closer to 45 to 55 percent.

-EJB


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Well, EJB, I have to say I'm a little disappointed in the subject of this post. Not because it involves economics (I am slowly learning to love the dismal science) but because you seem to disguise (or are ignorant of) the fact that this is not a WSJ piece. This information and research comes from the AEI, a noted conservative think tank (the authors are AEI "resident scholars"). Thus, I immediately am weary of the validity of its conclusions. However, as a court does when considering a motion for summary judgment, let's presume all facts and allegations to be true and proceed from there.

I will start by linking to these two pages, which I think are fair game, even though they're obviously Obama-campaign-run sites (since you opened the door by bringing in AEI articles). Each page contains various rebuttals and counter-availing considerations to the aforementioned article. Some arguments/considerations stand out, and I'll briefly highlight them below:

1) Let's be REALLY careful when we look at what this chart represents. I know you pointed this out already, but I'd like to reiterate: this involves marginal tax rates (not average tax rates) and it only involves a single, highly specific circumstance, i.e. a household with two wage-earners and two children, one in college and one getting child care. These somewhat drastic marginal rate differences would NOT show up in many other cases. And, as the WSJ article even points out, Obama's tax plan would actually increase the amount of money in pocket for low-income earners.

2) The idea in economics of bounded rationality. Bounded rationality theory simply notes that while most economic theories presume that humans are "hyperrational," there are all sorts of other concerns that make choosing the "rational" outcome infeasible. Bounded rationality's effects become even more noticeable and relevant in discussions of low-income earners. It's all well and good to argue that phasing out tax credits will increase marginal tax rates. Hypothetically, this will create a disincentive. But to then make the leap and claim that this disincentive will actually cause someone making less than $25k to reject a higher paying job is pure conjecture - and, I might add, blatantly counter-intuitive. There are absolutely no empirical studies to back up this theory. Plus, even if it were true, then the effect is ONLY important/magnified at the margins!

3) I won't go into much depth here, but there are plenty of philosophical problems with the "welfare trap" theory - to ground an entire argument on that idea is to build a house of cards. There are also proposed solutions to the "welfare trap" that Obama could then implement - for instance, a guaranteed minimum income or a negative income tax.

4) A public policy argument. Obviously, any tax cut for the middle or lower class will increase marginal tax rates (because they'll be phased out when you move up in tax brackets). So, if we're going to argue that tax cuts for the poor are bad, because it disincentivizes climbing the wealth ladder, is it then necessary to argue the contrary position (namely, that we must INCREASE the incentives for income mobility?) I'm not saying that this necessarily follows, but it seems like it could. This result would be highly problematic because it would involve one of two things, either: a) only cutting taxes for the extremely wealthy (may be a good way to incentivize people to earn more, as if they needed more incentive; but not a good way to increase government revenue); or b) increase taxes on the poor! Taxing poor people at a higher rate means they'll have all the incentive they'll need to get out there and work! In fact, let's just cut welfare altogether...the resulting increase in deaths and decay among the poverty-stricken will surely incentivize income mobility! No longer will anyone bask in the glory of being welfare-dependent. Which brings me to...

5) Lost in all this economic talk is the simple fact that Obama's plan would leave people at a given low level of income significantly better off.

And finally:
6) Marginal rate incentives are stressed entirely too much, especially when compared to effective rates, which have plenty of efficiency implications (considering that they describe what the private sector spends compared with the public sector). The chart itself, I believe, is rather meaningless.


EJB, I don't expect you to respond to each and every point and I don't actually disagree with the thesis of the original post. I have simply found and compiled any and all counter-arguments that I could find and submit them for your disapproval. Once again, I am playing out of my league, and I fully expect corrections that help me to see the errors of my post.

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First off, the article linked IS from the Wall Street Journal; however, the chart that I posted (also from the WSJ) used data from AEI. But in this line of attack JSK comes very close to responding in ad hominem. He is attacking the messenger (AEI), not the message. But then after placing that out there for the readers, he covers himself by saying essentially that we should assume it is factual. It is true that AEI is a think tank with ideological leanings, but so are all of them; it still produces academic work where methods are disclosed and information is sourced. This is far different from most campaign sites that JSK suggests are similar. The link regarding the deficit estimates for example borrows heavily from work from the Brookings Institute and the Urban Institute, both left leaning think tanks, though I did not discriminate there. Furthermore, as JSK points out (and he makes note that I also mentioned it), the chart is for one scenario. However, if you read the linked article, one can easily put together a whole host of likely combinations of proposed credits that a "normal" family would qualify for, and the results will all be similar even if they vary by degree.

But now lets actually address some argument. My post basically had two parts following the discussion of the effect to the annual deficit. The first (and what the WSJ article focused on), was not an argument that these proposals would not have the direct effect of putting more money into lower income workers pockets. In fact, I think it is quite clear that I am saying it will do just that in that I am calling these proposals to be similar to welfare. The point of that discussion was not that it would or would not directly harm or benefit a poorer household, but that a huge growth in welfare programs is being disguised as "tax cuts." It would seem that JSK is making a counter to an argument that was not being made.

The second component is what JSK spends most of him time discussing. This is the notion of the "welfare trap" and the associated chart. Essentially the argument against this effect happening is that it ignores total income and that it is crazy to think that one would turn down a job advancement because of a large marginal rate. His argument that total income or total tax burden matters more then marginal rates with regards to behavior is a common one; however, it bucks the entire theory behind behavioral decision making. People make decisions on the margin; when the marginal benefit (or at least the perceived benifit) of performing an act exceeds the marginal cost (once again, the perceived) of performing it, one will engage in that act. This profound understanding came along in the 1870's in what would become called the Marginal Revolution . If you are interested in reading about the basic economics of this beyond what I put here, fell free to read the link (side note: I wonder if Marx, who like Smith based his thinking under the Labor Theory of Value would have had different reasoning had he lived 30 years later).

This marginal benefit/ marginal cost mechanism answers the classic Water/Diamond Paradox. That is why is water, which is essential to existence cost virtually nothing, but diamonds, which have virtually no practical purpose valued at such a high price?:

Human beings cannot even survive without water, whereas diamonds were in Smith's day mere ornamentation or engraving bits. Yet water had a very low price, and diamonds a very high price, by any normal measure. Marginalists explained that it is the marginal usefulness of any given quantity that determines its price, rather than the usefulness of a class or of a totality. For most people, water was sufficiently abundant that the loss or gain of a gallon would withdraw or add only some very minor use if any; whereas diamonds were in much more restricted supply, so that the lost or gained use would be much greater.

Similarly, when one is making the decision to work an additional amount, pursue a higher paying job, and so on, people base their decision not on the total income (price) that is received for their total labor, but rather the marginal benefit relative to the marginal cost of that additional action. It is true, as JSK states via Bounded Rationality, that people are not always making a calculated decision, but over time peoples actions through experience drift into this equilibrium. Think for a moment your decision to purchase a second hamburger after eating the first. You are not doing a detailed analysis of the marginal benefit to you in buying another, but through past experience, you know how fulfilling that second burger will likely be, and you make the marginal decision to stuff your self or not when you compare it in your mind to the cost of doing so.

I will give a historical example of the "welfare trap" due to the reduction of marginal benefits of working to support my case as well as a personal anecdotal example. The welfare reform of 1996 was explicitly enacted because the total amount of people on welfare, particularly people who didn't work at all, had been steadily increasing. This is because the program was completely based on meas testing where a family would receive cash and other benefits solely on their condition. So if an unemployed individual started working, then these benefits would phase out, and therefore the marginal benefit of working was greatly reduced. The 1996 reform in general, restricted access to welfare programs to able-boddied individuals who were not pursuing work or further education or training. The relative marginal benefit of working further increased with these reforms. As a paper by a fellow at the left leaning Brookings Institute stated (in case you still don't trust "right leaning" think tanks).

The 1996 reforms have been followed by a major decline in the welfare caseload, big increases in employment and earnings of single mothers, substantial increases in total income of families headed by mothers, and the biggest declines in child poverty since the 1960s.

Now as he points out, some of this improvement can be chalked up to strong economic growth in these years; however, there had been strong economic growth in the mid to late 80's as well and no such effect occurred, so it is pretty safe to say that at the very least a good portion of the improvement was due to these reforms.

Lastly, I bring attention to a personal example. During my last year of high school, i worked a considerable amount. When applying for federal student aide for college I learned that the way the formula worked was once a student surpassed a certain threshold in annual income (somewhere around $4000 thousand at the time if I remember correctly), each additional dollar earned translated into a 50 cent reduction in student aide for the year. Just like the phasing out tax credits that Obama proposes, I had a benefit phase out, which had the effect of raising my marginal "tax rate" to about 72 percent when all taxes were included. So what I did was quit my job two months early and I sat on my butt for the summer. It didn't matter that my total average tax rate for the year was much lower, because I had already made those decisions and it was the marginal rate that effected me at that point. I essentially was effected by the "welfare trap" where a social program benefit (student aide) disincentivized me from working further to benefit myself and in turn society. Marginal rates are important, and I didn't even understand anything about economics at that time in my life. :)

-EJB