More Bathtubs

By James Kwak

Last week I criticized David Brooks for not understanding the difference between stocks and flows (that is, between your paycheck and your bank balance). (Paul Krugman instead criticized the Tax Foundation, the source for Brooks’s error—I wonder why?)

It turns out that a lot of people make this kind of mistake. Difficulty understanding stocks and flows may be a fundamental cognitive error such as anchoring or availability bias. In one experiment by Matthew Cronin, Cleotilde Gonzalez, and John Sterman, more than half of a group of students at MIT Sloan—one of the top business schools in the country—could not figure out, from a chart of entrances to and exits from a department store, when the most and fewest people were in the store. These errors turn out to be robust to different framing stories, different ways of presenting the data, and even when getting the questions wrong meant you had to stay in the room for an hour.

The underlying issue seems what they call the correlation heuristic: people think that the behavior of a stock (the amount of water in the tub) should be similar to the behavior of its inputs (the rate at which water pours from the faucet). This is especially a problem when it comes to understanding climate change. In another experiment, most people thought that stabilizing emissions was sufficient to stabilize the level of carbon dioxide in the atmosphere; if you think about it, though, you should realize that if you want the level to be stable, inflows have to equal outflows (and right now inflows are about double outflows).

This fallacy may be one thing that leads people to adopt a wait-and-see approach to climate change. On a correlation heuristic-influenced view, we should wait until bad things start happening in year X and then reduce emissions (because reducing emissions will reduce the level of greenhouse gases in the atmosphere). But if we want to stabilize greenhouse gas concentrations at the year X level, we would have to immediately reduce emissions to the rate at which they are absorbed by plants and oceans—which right now would require a 50 percent reduction in emissions. (And this leaves aside the fact that climate change itself lags behind greenhouse gas concentrations, so keeping concentrations stable will not prevent climate change from continuing.)

The national debt situation is complicated (and helped) by the fact that (according to most people) what matters is debt as a percentage of GDP, not in nominal terms. So spending is the inflow, but there are two outflows: tax revenues and economic growth. (Or, to put it another way, the bathtub is constantly getting bigger.)

Still, I don’t think this gets David Brooks off the hook. Thinking that the impact of a tax increase on the national debt will equal one year’s incremental tax revenues goes well beyond the correlation heuristic. That’s more like thinking that a salary increase and a bonus are the same thing, or confusing the speed and the range of a car.

47 responses to “More Bathtubs

  1. Well, an even more obvious example of this fallacy is the perpetual focus on incomes (who makes the most money) rather than assets (who controls the most wealth) in both the discussion and implementation of policy.

    Simply put, why tax income at all? Unless you work in law, finance, or management consulting (*), your income represents actual useful work you have done… So why should we tax that? Why not tax assets, which just sit there contributing nothing to anybody?

    That is, why not abolish the income tax and extend property taxes to (a) apply at the Federal level and (b) include all assets? A simple flat tax on total assets would be naturally progressive (poor people have fewer assets, by definition) and would encourage wealthy people to DO SOMETHING rather than sitting on their butts doing nothing.

    (*) a topic for another time

  2. Michael M Thomas

    Three cheers for Nemo. For years, in my NY Observer col and elsewhere, I railed against the semantic confusion of “income” with “wealth.” We need to tax wealth, specially once we understand all the ways in which wealth is built or accumulated.

  3. Just to be anal-retentive (and yes, I argue that it’s hyphenated.) isn’t your analogy backward? You say “the difference between stocks and flows (that is, between your paycheck and your bank balance).”

    Wouldn’t your bank balance be your stock and your paycheck be your flow?

  4. Three cheers for you Michael. I miss your writing.

  5. “This fallacy may be one thing that leads people to adopt a wait-and-see approach to climate change.”

    That would be about four people. I make a small joke.

    If you want to talk about stocks (a term I’ve never heard in this context) and flows, explain why with atmospheric CO2 at its current level, the flow of energy into the earth and the flow of energy out of the earth are equal as evidenced by the recent unchanging global temperature.

  6. Wholeheartedly agree — and also think this goes beyond most people not understanding stocks versus flows: in my experience the average smart person on the street doesn’t understand GDP, government deficits, trade deficits, government debt, etc.

    My attempt to remedy this situation, even if only minimally and at the margin:
    http://cs702.wordpress.com/2011/09/29/on-the-economic-situation-of-the-u-s/
    Feedback, suggestions, and corrections always appreciated.

  7. Michael M. Thomas,

    Is it your position that both income and wealth should be taxed? If so, why.

  8. @ameyer32 “Just to be anal-retentive (and yes, I argue that it’s hyphenated.) isn’t your analogy backward? You say “the difference between stocks and flows (that is, between your paycheck and your bank balance).”

    Wouldn’t your bank balance be your stock and your paycheck be your flow?”

    No, not in their world. Their world is working like crazy in keeping the hose turned on sucking it up their way – so they are correctly managing the formula for themselves – stock is their paycheck and flow is their back balance (stock it up to flow to me)

    I have no argument with hyphenating anal and retentive.

  9. Yo Speed. Don’t forget the oceans. Recent studies show that the interior ocean has been soaking up the energy while the surface has not warmed, much.

  10. @NEMO, lobbying, then buying, congress is hardly doing nothing.

  11. Krugman criticized the Tax Foundation instead of Brooks for two reasons:
    1. He believes the Tax Foundation is run by dishonest movement conservatives. See The Tax Foundation is not a reliable source and Apparatchiks. Since it is the ultimate source of this nonsense, he criticizes it.
    2. Brooks is a fellow NY Times columnist, and the Times doesn’t like columnists to call other columnists names. That said, Krugman is implying that Brook is not knowledgable in the last paragraph.

  12. @nemo and @michael, good thoughts, yes, but a pure tax on wealth would hurt the retirees who somehow had saved enough to provide for their own retirement. Perhaps there should be a threshold; trouble is, the threshold these days for a safe retirement is so high that you have to be top 5-10%…

    Athough a consumption tax isn’t popular, I kind of like a wealth + consumption tax; makes people do something with their money, but not spend it all on cr*p. Again, there’s the regressivity issue.

  13. Shouldn’t we really be arguing for a stiff tax on congress, since it represents a large concentration of wealth “which just sit(s) there contributing nothing to anybody?”

  14. Isn’t the whole point of being a columnist for NYT (or any other publication that assumably takes pride in its reputation) is that you look at issues at a deeper level and look past the surface appearance that your readers might fall prey to, instead of the reverse, that your readers would constantly catch errors in your math, your economics, and your “analogies” between topics that bear no correlation really at all?????

    If I am a columnist, I want to see the political affiliation of The Tax Foundation (there usually is, even sometimes when they label themselves “non-partisan”), I want to see if my source material’s facts bear scrutiny before I write them in my column or express them in a misleading way to my reader. If nothing else, to save embarrassment with my “editor”.

    I know the “editors” at New York Times must be scathing because Paul Krugman said he couldn’t go to Zuccotti Park with OWS protestors, as much as Krugman “really really wanted to go” (cough cough bullsh*t!! cough cough) because Krugman’s NYT leaders might think him an “activist”. The real reason is not that Krugman is a p*ssy who couldn’t bear to stand together with regular NYC people, shake their hands and hold a conversation with them for 10—15 minutes. That wouldn’t “kill” Krugman. He’s just not going because if he went there it would upset the NYT.

    Mr. Brooks, let me show you how this is done: “I want to apologize to my dear readers. On date X, I wrote about X, and I was wrong about X. I won’t make the same mistake about X again.”

    Apologizing for an error in facts means you’re human. Not apologizing when called on an obvious error means you’re a jack*ss.
    Others have made David Brooks’ same error: http://blogs.telegraph.co.uk/finance/edmundconway/100003506/the-boe-on-how-doing-nothing-will-boost-the-economy/

  15. These leaders of today can’t even teach you how to keep ones mouth clean, I bet some wash theirs with chocolate in the morning, and then carry it around all day. How on Gods green Earth does anyone expect them to agree on the debt situtation or climate change, or any really important issue. They won’t, and that is why we have a political stalemate.

    All across America, the’re standing in line,
    with white lipstick and one thing on their mind.
    Hey little freak, with the lunch pail purse,
    underneath the crowd, your just a little girl.
    Dancing at the zombie zoo, dancing at the Harlem zoo,
    painted in a corner, and all they want to do,
    is dance down at the congressional zoo.

  16. Gvts have been taxing wealth for centries, that is why in the disguise of religon they left Europe to find a more favorable land. Unfortunitly the same forces that brought wealth abroad, have reestablished themselves throughout the free world and have been attempting to finish their work. Not with out resistance I might add, and more to come.

  17. That’s the one – if you want to stop the bath over-flowing you have to turn the tap right off [and if you can unblock the plug-hole] i.e. stop net-emissions completely to stop atmopshere/ocean concentrations rising: –
    http://www.gci.org.uk/animations/BENN_C&C_Animation.exe

  18. For all those folks who have a tax that they think should replace all other taxes, do keep in mind that the central purpose of taxation is to raise money to fund government operations. Over the years, a set of non-normative guidelines for making a tax system serve that function well have been developed. To the extent that a tax fits the guidelines, it has practical merit. The US has a fleet of tax laws, many of which serve to undermine revenue collection, but the main tax categories all do what they are meant to do – raise revenue efficiently.

    While there are economic and fairness arguments to be made regarding taxing work or investment earnings or wealth, none of those arguments have much to do with the goal of simply bringing in revenue. They also amount to a struggle over who pays. There’s no doubt that social policy is already imbedded in tax system, but most of the proposals that get attention – including 9-9-9 and wealth taxes and land taxes – represent the triumph of social policy over efficient revenue collection.

    But yeah, tax the rich.

  19. Yo hiramlevy. If by “recent studies” you mean this (my bold) …

    To find out the mystery, Gerald Meehl, lead author of the study that revealed the connection between global warming and temperature hiatus caused by ocean’s heat absorption, and scientists at the NCAR in Colorado ran five simulations on a computer model that studied the complex interactions between the atmosphere, land, oceans and sea ice.

    The study revealed that temperature has already increased by several degrees in this century and will increase more in the coming days but the hiatus period will interrupt the increase. During this period, the missing temperature will lurk inside the deep ocean.
    http://img.ibtimes.com/www/articles/20110919/216084_global-warming-deep-ocean-research-science.htm

    A simulation on a computer model is a hypothesis, not a proof. No such missing temperature has been either measured inside the deep ocean or detected traversing the not-deep ocean on its way down.

  20. @Mr.P +1

    @Nemo – excellent idea. Reward work with lower tax rates than non-work. We’ve reached a point where maybe even a flat tax would be more progressive than what we have. As long as it taxed all forms of income. Not that I think it should be 9%, mind you…… ;-)

  21. @Annie thank, but to me the flow would be your paycheck (the dollars per pay period coming into your account) and the stock would be your bank account balance at a particular time, say Oct 17. I’m trying to understand if I have the concept right or if I have the two backwards.

  22. ameyer32.

    You have it right. Money flows from one pocket to another, from one person to another, from one account to another.

  23. @kharris

    The economic and fairness arguments may not have anything to do with the goal of raising revenue, but I don’t think they should be ignored. Any decision one makes when implementing, removing or changing a tax has some economic and fairness impact on some set of individuals. It is impossible to generate revenue to run the government without any economic impact on the society at large. What kind of impact and who it will impact are exactly the fairness issues that must be brought into any discussion of taxes.

    The social policy embedded in our tax code may be the result of a deliberate attempt to enact a certain social policy or it may be a unintended consequence, but either way, the social impact can not be removed from the discussion.

  24. “Mark Twain used to say that while history may not repeat itself, it certainly rhymes.”

    http://www.zerohedge.com/news/guest-post-hows-social-unrest

  25. As far as taxing wealth goes, why not reinstate the estate tax? I don’t know why they ever did away with it in the first place.

  26. Don’t think James Kwak does justice to climate debate skeptics. I’m not saying just wait and see but there are reasonable ways of attacking the problem that don’t require drastic action on CO2 emissions, for instance ocean iron fertilization. The oceans are a huge “stock” of carbon, something like 38,000 gigatonnes compared to 750 gigatonnes in the atmosphere. Ocean iron fertilization may be able to have a huge impact on the “flow.” Note also that the normal ice age cycle has drops of 10 degrees C (compared to 6 degree rise in climate models) and 100ppm CO2. Of course the ice age drops happen over thousands of years instead of hundreds of years. Mr. Kwak seems to assume the only answer is large cutbacks on emissions of CO2 and in general that we have accurate enough models of the environment to understand what the best way forward is. At the very least the economy is likely to pay a short term price for cutting CO2 emissions, we should be cautious that it is worth the price.

  27. Basically, as with economists/banksters, there is more than one tool in the geoengineers toolbox. Just got to make sure they are doing an honest job using those tools. (lying sack of s%&@ banksters)

  28. @bhan

    “As far as taxing wealth goes, why not reinstate the estate tax? I don’t know why they ever did away with it in the first place.”

    it was a disincentive to dying: nasty old rich people were shown to be living inefficiently long lives. The side effect of driving their clueless offspring into employment in lieu of a fat inheritance was also cited as a distinct drawback.

  29. @Speed – Thanks

  30. lecroyuser@yahoo.com

    This distinction is intuitive to anyone who took calculus, flow is the first time derivative of stock, and any relationship between stock and flow is a differential equation. These aren’t solved algebraically. A wait and see approach may have unexpected consequences in inflation targeting as well.

  31. Nemo,

    You say “Why not tax assets, which just sit there contributing nothing to anybody?”

    So, I ask you: Is a home or an office building or automobile an asset?

    If so, do you really think they contribute nothing to anybody? I happen to think my home (and my office and my car) contribute quite a bit to my well being AND I think they are all assets.

    We should all be aware that an asset tax will not result in universally good outcomes. The example of punishing seniors in retirement has already been made (and making this switch on them now, after they spent their entire lives paying taxes on income and saving some of the leftover amount would be punitive, I think. An argument that also applies to the replacement of the income tax with a VAT, by the way). There are many others.

    CH

  32. Both my home and my autos ARE taxed in the form of realty tax to the municipal government, and in the form of an ad valorem personal property tax with regard to my autos.

    I pay a steep sales tax to the state on most purchases, and then I get to deduct the realty taxes and excise taxes on my federal taxes, but then I have to remember to file my state income tax return.

    All these outflows depletes my bathtub. Too.

  33. from wiki – “In economics, calculus allows for the determination of maximal profit by providing a way to easily calculate both marginal cost and marginal revenue.”

    “Derivatives” is the sucking sound you’re hearing in the background – maximum unemployment is a derivative launched in 2008 – hence the millions unemployed in 6 months after that….and guess what? All that derivative trading is not taxed. Because it’s not an ASSet, I guess…?

    But good news, we just need simple algebra to figure out how many nimrods can fit into Kwak’s bathtub.

    We have the weirdest society one could ever imagine when slavery is the goal of manufacturing while avoiding on every turn letting anyone call it slavery…so are we not just deciding how much to tax the slave? They’re way ahead of Wall Street in Hatch land – the *poor* can afford to pay more!

  34. Speed,
    You are absolutely correct that model predictions are hypotheses until tested with observations. The good news is that ARGO floats were deployed starting in 1999 that measure T and S for the part of the ocean we are discussing. (by the way I wonder if baseline scenario is aware of this sub-topic being discussed) The bad news is that they were not fully deployed until 2005. http://www.argo.ucsd.edu/
    We are in the process of assimilating this data (models again) and I suspect that 5-6 years is not long enough for a clear signal, but I will check with my colleagues tomorrow. This data set should be used to test the NCAR model prediction and I suspect the folks at NCAR will be trying to. if not, I think I know some other folks who can take a look. It is a reasonable and very interesting hypothesis that they (NCAR) published. I will let you know what i learn tomorrow.
    Hiram Levy

  35. The tub is leaking, again, and we, the taxpayers, are getting soaked from the flow, and the game continues.

    BOA transfers DERIVATIVES to a subsidiary, one insured by FDIC……so we can get to eat it, once again.

    No wonder everyone is so upset at this bankster-created dystopia, a shitty world made even worse.

    http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html

  36. @David – That’s funny. Thanks.

  37. It’s interesting to me that Dr. Doom is saying at a London conference that QE is basically useless because all that happens with QE is it is held in excess bank reserves. I said that on this site multiple times many months ago (maybe over a year ago). If I remember correctly one of the more regular commenters here (StatsGuy?? I don’t honestly remember, so don’t hold me to that) was very vociferous in telling me that QE was going to be a savior (at least in part) for this mess.
    http://www.economist.com/blogs/buttonwood/2011/10/global-economic-outlook

    I have never been 100% against QE at certain times. BUT, QE is not, and will NEVER be a proper replacement for targeted and strategic government spending. And in the current setting where large banks are not loaning money, it’s nearly 99% useless. It’s even debatable that QE under the current situation makes things worse.

    I also want to add, for those readers who are economically illiterate ( i.e. David Brooks) this book would be very useful to you: http://www.amazon.com/Lost-Decades-Making-Americas-Recovery/dp/0393076504/ref=sr_1_1?s=books&ie=UTF8&qid=1307629044&sr=1-1

  38. I love you POTUS my Bro, but you would also do well to read this book.

    I mean, if you’re not busy reading Lincoln biographies written by plagiarists,
    http://www.slate.com/articles/news_and_politics/chatterbox/2002/01/doris_kearns_goodwin_liar.html

    http://www.forbes.com/2002/02/27/0227goodwin.html

    http://www.huffingtonpost.com/eric-j-weiner/doris-kearns-goodwin-worl_b_18139.html

    Don’t worry Mr. President, if you miss her, you can catch her on the Oprah channel, where she is lionized. (Lionessed??)

  39. hiramlevy,
    Here you go.
    http://www.nodc.noaa.gov/OC5/3M_HEAT_CONTENT/

    ARGO measures temps down to 700 meters. The paper under discussion postulates that the “missins heat” is below 1000 feet.

    I look forward to seeing an analysis of the data. In the meantime, the IBT article was more of a “we found that” than a “we think that” or a “we postulate that” or a “we hypothesize that.”

    To get back to the flows vs. stocks topic … wouldn’t it be nice if people studying climate measured energy flow into and out of the earth system. From a series of satellites for example? Temperature change is such a hard thing to measure accurately in such a large volume. And then to convert that to energy content (the real value we should be measuring) of such a diverse set of materials …

  40. The missing heat could very well be below the 1000 ft mark in the form of quakes, (they produce a lot of heat), and from multiple underwater nuclear explosions. And naturally heat rises fairly quickly in solid forms.

  41. Texace,

    Do you have evidence for this? Is there even a “back of the envelope” calculation of energy released by such natural events (underwater nuclear explosions?) and it’s effect on measured temperatures?

    Back to the topic under discussion … we’re talking about “heat” that is postulated to flow from the sun and be captured by the earth system but can’t currently be found. You are talking about another source of “heat” that is currently unknown, unseen and unmeasured.

  42. Speed,

    Here is one such attempt.
    http://www.agu.org/pubs/crossref/2009/2009JD012105.shtml

    Unfortunately the error estimates in the necessary satellite measurements make determining the small net energy imbalance difficult if not currently impossible.

    Hiram levy

  43. uh, ever been in a room full of people – maximum occupancy breached…? It’s hot real fast…

    Body temp of a human being is 98.6 F. (average) – so 7 billion people are walking around contributing a certain amount of heat :-)

    lots of *hot air*

    99% of the human body’s leukocytes being launched to tear apart the invader – why not calculate *risk* and *flow* based on that…? You are all attempting to dismantle the leukocyte – that is INSANE and against the laws of nature and a PERSONAL act of absolute violence against the individual. So much for getting a body NOT to reject a transplanted organ being a profit garnishing *derivative*

    But this is the job of *government*:

    http://en.wikipedia.org/wiki/Employment_Act_of_1946

    “….MAXIMUM employment, production and purchasing power….”

    Of course, here come the 1970s again when Psycho Heaven became the IDEAL worth EVERYTHING that stood in the way of its erection to be dismissed as *collateral damage* – the act was *amended* and all sorts of other molestations followed….

    The global economy is nothing but a massive heist on all people everywhere – just for the fun of the game.

    Psycho Heaven.

  44. Hey Speed,

    I am going to turn you over to the real pros and retire to trying to write my own papers, which is my day job.
    I very strongly recommend the following climate science blog by a true world class expert:
    http://www.gfdl.noaa.gov/blog/isaac-held/

    I specifically suggest 4. and 16.
    Good luck and good reading. Read both the actual Held blog and the extended discussion. It is very thoughtful and very good.
    Hiram levy

  45. Hiram Levy,

    I am familiar with Isaac Held’s blog. Been reading it since number one.

    I expect we’ll hear soon from UCAR about the “missing” energy …. er heat.

  46. Occupy Wall Street explained…..via cartoon.

  47. Relevant point of view. But to substantiate this, I believe you need to furnish more evidence. Or else the argument falls on its back.