Thanks to everyone who commented on my last two posts, especially the many people who disagreed with me. Two things I will admit I got mostly wrong:
1. I was wrong to say there was “no case” for the tax bill. Aside from all of the minor provisions which can be good or bad, the case for slashing corporate rates is that they’re more distortionary and less efficient than other forms of taxation. Thanks to everyone who pointed this out to me.
2. Several people brought up problems with the article saying CEOs say they will just give the money back to shareholders, most notably that giving money back to shareholders may stimulate the economy in other ways.
But two things I still think are true:
1. Seriously, guys, I admit I don’t know as much about economics as some of you, but I am working off of a poll of the country’s best economists who came down pretty heavily on the side of this not significantly increasing growth. If you want to tell me that it would, your job isn’t to explain Economics 101 theories to me even louder, it’s to explain how the country’s best economists are getting it wrong. You may find this book review relevant.
2. I stand by my claim that I care less about economic growth than about where the money goes. That includes caring less about distortionary taxation, deadweight loss, and all those other concepts.
Suppose Alice is an effective altruist who supports whatever charity you think is most important and does a really good job of it. Every dollar she spends saves multiple lives. She lives in a town of 1000 people where nobody else is an effective altruist and everyone else just lives a pretty decent life and spends their extra money on, I don’t know, breeding virtual cats or something.
A demon places a curse on Alice’s neighbor Bob. Every time Bob pays a dollar in taxes, it destroys a random two dollars’ worth of wealth somewhere in the town.
The town elders meet and decide that for some reason they have to lower taxes either on Alice or Bob. The economic case for Bob is overwhelming – taxes on him are especially inefficient because of the extra wealth they destroy.
Still, I would want a tax cut for Alice. It seems like the only important thing that happens at all in this town is Alice’s charitable donations. The amount I care about this town’s utility focuses pretty much entirely on that. We could give the break to Bob, and have a nominally better economy, but it would just lead to more people buying virtual cats. It could be that the extra two dollars’ of wealth destroyed by Bob’s taxes was some sort of useful machinery, and so taxing Bob harms economic growth. Again, it is hard to care, except insofar as that hurts Alice, the only person in town whose wealth matters much for anyone’s utility.
I can imagine a world in which Bob’s curse was stronger, and every dollar Bob was taxed destroyed a million dollars in value, and soon any tax on Bob meant the citizens of the town were starving to death and all of them including Alice went bankrupt. But right now the tax on Bob isn’t big enough to be worse for Alice than a tax on Alice, and since Alice is the only important person in this situation, I don’t care.
I can also imagine a world where a wise economist comes to town. She says “Alice’s work is the most important thing in this town, but taxing Bob destroys wealth for no reason. Some of the town elders support tax breaks for Bob, and others support tax breaks for Alice. But we can give the tax break to Bob, and then all the people who saved $2 each from the curse not being activated can give $1.50 to Alice. That way Bob is better off, Alice is better off, and potential curse victims are better off.”
This is the best argument in favor of wealth creation instead of redistribution. But right now we’re not doing that. We just create the wealth and then don’t redistribute it, except through charity, which is a rounding error, and taxes, which everyone agrees this bill causes there to be less of. If we actually had Pareto-optimal wealth redistribution, then of course, create as much wealth as possible and redistribute it Pareto-optimally. Since we don’t, we’re kind of stuck.
My takeaway from this story is that in societies with a lot of marginal-value-of-money inequality, economic growth is potentially less useful than working to keep the money with people who can spend it on higher-marginal-value things. Consider three variables:
1. How low is the marginal utility of money for the person holding the average dollar, if no efforts are made to redistribute it?
2. How much economic growth are we sacrificing by choosing redistribution?
3. How high a marginal utility of money do we get by redistributing it?
Point 1 is why I stress the research showing increasing inequality eg most money going to people rich enough not to really have much use for it.
Point 2 is why I stress the economists saying that the gains from cutting corporate taxes really won’t have that much effect on growth.
Point 3 is the one I’m least sure about. If the government were a perfect effective altruist, it would be no contest – them having the money would be thousands of times more effective than random corporations (or even random middle-class people) having it. Even if the government were to give the money as a tax break to the working classes, it still seems really obvious to me that the increased utility swamps any effect from higher economic growth. In reality, the tax cut is being funded by increasing the deficit. I don’t know whether that means we need to compare it to whatever is bad about having a higher deficit, or else take as a given that the deficit has a certain amount of slack, and then compare it to other things we could do with the same money.
Imagine the government went $100 billion into debt to build a giant bronze statue of George Washington. Should we be debating whether running up the deficit is really that bad? Should we be debating the artistic merit of giant bronze statues of Washington, and whether it’s actually a pretty good statue that boosts tourism in the area? Or should we be comparing it to the best possible use for that money?
(added: I would be 100% happy with a bill that cut corporate taxes exactly this much, then raised taxes somewhere else in an equally progressive way, causing there to be the same amount of taxes with less distortion)
The fairest thing I can think of is to compare this use of $100 billion to just spreading $100 billion evenly among all the government’s existing priorities.
Suppose that this tax cut was vastly better at stimulating economic growth than any reasonable person expects, and it increased growth by 1% per year. Then it would create $200 billion in value. With extreme good luck, 3% of that might go to the poorest quintile, giving them an extra $6 billion.
Or suppose the government keeps the $100 billion and distributes it evenly according to its existing priorities. Half of the budget is entitlement programs, and 32% of those go to the poorest quintile, so they would get an extra $16 billion.
I’m sure these numbers are wildly off. But it’s hard to come up with remotely plausible numbers in which the poor and working-class are better off with the tax bill than without it. I think the assumptions I plugged in were overly generous: the bill won’t really increase growth 1%, and although poor people have 3% of income they get much less than 3% of economic gains. Still, even under these generous assumptions, this bill gives poor people less money than the default case of not doing it.
One could argue that poor people are better off with $6 billion in actual money than $16 billion in government programs purporting to help them. But although I agree there’s a multiplier, I don’t know if it’s this big. And government programs would also disproportionately help the poorest of the poor, compared to economic gains which would disproportionately help the richest of the poor.
I think the marginal utility from an extra dollar to the poor (and the working class, etc) is orders of magnitude higher than the same dollar going to something else. So if you want to get me to support the tax bill, don’t tell me yet another reason why you think it would make the economy more efficient. Tell me why I’m wrong about this.
[EDIT: Commenters point out I was mistaken about the speed at which this would compound. See here. If the real growth from the bill was as high as 1%, it would probably be better for the poor than the lost government spending; if it were lower, it would take several decades to break even. So the best way to convince me to support this bill would be to find a plausible estimate of what level of growth is expected. My best guess from the economist poll is still “approximately zero”. ]
Regarding tax cuts and growth, here is one thing to keep in mind (although I can’t necessarily say this is what the economists had in mind): We operate under an inflation constraint: the Fed eases/tightens monetary conditions accordingly. At times when we are well below the inflation target (i.e., a lot of slack resources) stimulus is more likely to increase growth, as the Fed will not tighten until inflation accelerates. At times like now when we are reasonably close to our inflation target and there doesn’t appear to be much slack in the labor market, you are likely to get a quick tightening reaction from the Fed in response to stimulus. This would dampen or possibly eliminate any growth boost from stimulus. This is called the “monetary offset.”
Of course, the “free lunch” is any policy which enhances productivity – adds to demand but also creates sufficient new supply or frees up resources such that inflation remains subdued. Economists seem to think that a simpler and more efficient tax code could be productive, but most do not seem to think this tax bill fits that description.
Scott, thanks for this series of posts. I’m way out of my depth when it comes to economic matters, but the posts — and the discussion around them — are teaching me.
Don’t learn from me – I’m also out of my depth – but there’s some good discussion in the comments.
I think Scott’s whole framework for this question is way off. When one person spends money it goes to another person. When one person puts money in a bank it is loaned out for useful investments. Even in the extreme case where the money is put in a mattress, it deflates the currency and raises the value of everyone else’s money.
The only thing that actually matters is real resources, not money. So actually free college is very wasteful because it would massively increase the demand for education and use up a huge amount of labor (a real resource) in satisfying all this demand, but it would likely provide little or no benefit as the marginal college student probably already loses money by going to college over the next best option. We probably over-incentivize college attendance already. So we are wasting precious resources in a very real way while at the same time destroying resources with deadweight loss from the tax collection.
Virtual cats don’t consume any real resources so they don’t really matter. You may think it’s best to take money from everyone else whose activities you don’t value and give it to people whose activities you do value but that’s a dubious proposition at best. I really don’t want the government deciding whose activities are worthwhile and then giving them everyone else’s money. I imagine that would have rather predictably bad consequences.
Can’t say he didn’t warn you…
It is also very relevant to the considerations on cost disease post. For some reason, unlimited money supply towards subsidizing health care and education hit some kind of diminishing returns. I wonder why that is so.
That will happen if you don’t put the necessary cost controls to the entities providing health care and education.
At least in the japanese health system, last I checked, they force all health providers to be non-for-profit, and the government negotiates regularly with them the costs of the health services provided.
As long as the government is signing a blank check for subsidies, costs will grow and grow because why would a for profit company reject free money?
>So actually free college is very wasteful because it would massively increase the demand for education and use up a huge amount of labor (a real resource) in satisfying all this demand, but it would likely provide little or no benefit as the marginal college student probably already loses money by going to college over the next best option.
I highly doubt it.
Take a look at the real wages for people with a college degree vs those without. Not only is there a huge gap between the two, that gap is getting larger over time.
If you beleive in the efficient market hypothesis, that strongly implies:
A: There is a real difference in how much productivity/ wealth an average college educated person can create compared to a person without college education
B: It looks like w are STILL not producing enough people with college degrees vs people without college degrees to meet economic demand. If we had too many people going to college, the market value for someone with a college degree should be falling when compared to people without college degrees. Instead it is actually rising.
This can’t be just selection or “gatekeeping” or whatever; not that those aren’t parts of the picture, but they don’t explain the size of the gap, and they certanly don’t explain the gap growing.
The most likely explanation here is that more education really does result, on average, in workers producing more wealth later in their career. And if so, getting more people who are academically and intellectually capable of doing college but can not financially afford it right now to go to college will probably cause economic growth.
(Now that doesn’t mean that Bernie’s plan is the most efficient way to do that; I think there are probably better ways to do it. But if you are claiming that more education won’t benifit the economy, you’re going to need to explain why most of the data seems to show the opposite.)
Those who doubt the value of college typically explain away your data by appeal to the “signaling” value of college. This is controversial, of course, but that’s the position to argue against.
Links if you need em:
Agreed about signaling. The other counterargument is that even though the average college grad is more productive than the average non-college grad, the marginal student (the one who wouldn’t currently go to college but with a little push/subsidy would) receives zero or negative net benefit from it. I believe Bryan Caplan has data on this.
In other words, there’s no point in saying: Hey look at those gifted kids who made a bunch of money after graduating from MIT! This means we should send the kids who barely got through high school to college too!
A good test is to look at the productivity of people with equivalent IQ’s with and without a college degree. I imagine if the signaling component was removed then the difference would be small.
Ask just about anyone how much of their college education they use in their current job and the answer will be “not much”. This isn’t to say college has no value, it does, but the value is vastly over-rated in some cases and making it an expensive high debt load gate keeping function is detrimental to society.
Bryan Caplan posts on this:
For my two cents, doesn’t this depend on how you see the current situation? If your prior is that there are a lot of poor people who would be great college students but cannot afford it under the current system, then making college free would have big beneficial effects for them. If you assume that most such kids are already getting good scholarships, then the biggest impact on making tuition free would be on really marginal students, who almost surely get the least possible benefit from going to college.
College is never “free” to society. Just because the government pays for it doesn’t make it any less of a drain on society if it isn’t proving value for the cost. It is arguable that the cost hiding for college has already contributed to increasing tuition fees. If the government pays for everything, colleges will be even less competitive.
I think most business effectively use college degrees as a replacement for (amazingly illegal) IQ tests. People aren’t really advancing in IQ at college, perhaps they marginally do.
As Caplan says, the real losers here are students with high debt loads who either failed to complete college or have a low value degree from a marginal school.
I highly doubt that signaling accounts for all of it, or even most of it, just because the gap is so large,and still growing.
>College graduates, on average, earned 56% more than high school grads in 2015, according to data compiled by the Economic Policy Institute. That was up from 51% in 1999 and is the largest such gap in EPI’s figures dating to 1973.
If a company or business could really save more than a third of their labor costs by spending some time trying to find the smart but non-college educated worker, people would be doing it on a large scale. And that would be bringing down the gap between college educated and non-college educated; instead, the gap is steadily getting wider every year.
I have no doubt that signaling here has some value, but it can’t be anywhere close to that amount. This is a classic one of those “if you $20 bills lying on the ground of Grand Central station, and it’s still there a week later, and nobody’s picked it up, you’re probably missing something” situations. If corporations were paying $15,000-$20,000 extra each year for each worker in order to get for college grads, and they really could save most of that by spending a fraction as much resources looking for smart and reliable non-college grads, then you’re talking about a trillion dollar bill lying on the ground, and hundreds of thousands of entrepreneurs and businesses and companies just walking past it every day without anyone picking it up. It just seems extremly unlikely.
It’s much more likely that on average, in general, more education also directly increases how productive the average worker is. This isn’t exactly a radical assumption, it’s something most economists have assumed for a long time. If you think that that is true in general, then the economic data and wage disparities make a lot more sense.
Edit: Also, IQ tests might be illegal, but there are lots of other ways an employer could estimate the intellegence of people applying to work there. If there was that much money lying on the table for the first employer to figure out a good “technically not an IQ test” workaround I can’t imagine that it wouldn’t have already happened.
Anyway, you don’t need to assume that IQ increases in college for college to be useful; it’s likely that people learn other skills in college that have value, everything from writing abilities and communication skills to abilities to find and research information on their own to find reliable answers to questions to what are often called “critical thinking skills”. Those are specific skills, they won’t necessarily raise your IQ, but they may make you more productive in a wide variety of modern workplace environment.
There are apparently a whole bunch of folks who believe (at least implicitly) that most of the benefit of college is in the signaling; therefore, the primordial chaos of capitalist opportunity-grabbing has predictably come up with a handful of alternatives that mimic the signaling aspect of college while sacrificing everything else in the name of saving money. It’s probably too early to decide whether or not they’re successful*, but Indeed is a generalized example. CodeFights might be a specific (if kind of tacky in ways I can’t easily translate to direct words) example that attempts to isolate talent signaling and cut out other noise entirely.
LinkedIn might be a more illustrative example even if it’s not necessarily “successful” in the sense that you don’t get permission to cast wide nets with your profile until you’ve filled in all your profile forms, one of which is “Education”. But anecdotally, I’ve been contacted by recruiters who found me on LinkedIn, and then in later follow-up interviews kept having to ask me to remind them where I’d gone to college. (They had enough notes to ask detailed questions about what I’d done for Company X, what I learned at Conference Y, or how Mutual Acquaintance Z was doing, so the apparent unimportance of the degree I’d been instructed to print at the top of my resumè was fairly memorable.)
* depending on one’s definition of success, but I can’t think of a definition by which these would pass other than “exists and has managed to persuade investors to send some money its way”. I am fallible; correction would be welcome.
Cause and effect here are intertwined. Smart people go to college many times because there are statistics that smart people read that say college grads make a lot more money and it is a gatekeeper to a successful career, not because they recognize some other obvious inherent value. It’s a self reinforcing mechanism. The question is whether what you get in college is actually worth $100K or more. Smart people don’t try to get a business to hire them out of high school based on their talent because too many businesses use a college degree as a prerequisite for a job. There isn’t a market here for this and it’s a huge career risk to try this route, but I think it is an open question as to whether there should be a market here.
Maybe those 4+ years do add some special sauce that is truly valuable, but beyond platitudes like critical thinking there seems to be a lack of compelling arguments. Some professions such as law and medicine obviously need real training, but it isn’t obvious a radiologist needs to learn general medicine. It is justifiable to learn how to effectively communicate verbally and in writing, to experience different cultures, etc.
I only want college to continuously justify its own existence and that its current format shouldn’t be a given. It is amazing how little progress has been made in decades to a bored teacher droning on in front of captive students in a room. This area is ripe for disruptive innovation.
I posted this link below, but it looks like there is pretty clear evidence that people with a college degree have significantly higher average earnings than people without one even after you adjust for intelligence. So it can’t be just that.
Now, none of this means that the current college format is optimal. Just that, in general, more education usually makes most people more economically productive, on average. I do think it’s very possible that something close to the same quality of education might be able to be delivered online at a much lower price, but that’s a separate question.
In the U.S., someone who wants to be a lawyer will normally have four years of undergraduate schooling followed by three of law school. I believe the European pattern combines those and takes less than seven years. I’m not sure if the same is true for medicine.
Perhaps someone from that side of the Atlantic can confirm or correct this.
You’d have to adjust away things like “conscientiousness” too. I used to not be motivated; I wouldn’t have made much money. Now I’m motivated and taking college much more seriously, to the point where I will probably graduate and wouldn’t have before.
Of course, the problem is that you can’t actually do that – I’m asking too much. So I acknowledge the issue there. That’s what it is, though.
(Also, how do you filter out some form of deadweight loss? I.E., employers will take a deadweight loss of hiring a potentially worse candidate with a college degree – in an ideal model they wouldn’t, but they do, which provides a real-world income advantage to going to college, but one based on misperception, or willingness to misperceive in exchange for a cheap and easy filtration mechanism.)
They aren’t, I’ve tried. It is the incredibly lucky exception that gets this chance. The rest of us are declined the opportunity at the gate. At least with most established cos and likely the majority of startups (with the exception of various founders/early-entry folks in computer tech).
It took me until 29 to get an AS and 34 to get a BS. Even inside the company I was working at between 29-34 I couldn’t get a break without the BS, despite having a manager who thought I was capable of BS or MS level work.
There are so many who don’t cut it even at the AS/BS/MS level that the cos save their valuable HR resources on filtering after reflexively filtering for the diploma. The only way around this filter is a known patron or personal fame.
There must be more than just signaling to the economic value of hiring a college student, but it is very possible it is not just the knowledge acquired in it.
The obvious suspect is networking. In fact, for some of the most prestigious colleges, networking is an important part of that prestige, and that is a self fullfilling prophecy which is hard to do anything against.
There’s also the part where, if a college grad student has more chances, for WHATEVER REASON AT ALL, of getting a good job than a non-grad, he will acquire experience and networking in that job that the people who didn’t get the job will not.
It’s true that a lot of people will say that they do not apply much of what they learned in college at their job, but they surely apply what they learned at their job, at their job, and that is a clearly marketeable skill.
Which is an argument for skipping college and entering the work force, but -admittedly, some- college grads may skip the entry level jobs and go directly to the valuable-experience-accumulating jobs.
Am I supposed to assume that the people with a college degree are earning those real wages because of that college degree? Am I supposed to assume that those without college degrees would earn the same real wages if only we were to give them college degrees? Because I’m going to want evidence on those claims specifically, not the trivial observation that people with college degrees make more money than those without.
Smart Alice has a college degree, Stupid Bob does not. Because she is smart and college-educated, Alice earns $80K/year where Bob earns only $40K. Giving Stupid Bob a college degree isn’t going to change that. Also note that the analysis doesn’t change if we s/smart/blue-blood and s/stupid/colored.
Assuming that college degrees cost $100K to provide, or roughly the same NPV as a $10K/year income difference. Anything remotely resembling an efficient market will, to the extent that it is capable of identifying the Alices, find a way to front them the money for a college education while telling the Bobs to take a hike (or pay for college out of their own pocket as a luxury good). If college is “free”, i.e. subsidized, and particularly if we exaggerate how superlatively good college degrees are, the Bobs are all going to go to college as well. Being Bobs, they are still going to earn $40K/year. All free college does, in this case, is waste $100K and four years per Bob.
Where’s the evidence that the lack of a college degree is the only thing stopping Bob from earling $80K/year?
IQ does have an impact on earnings, certanly, but even if you account for that, college grads of a certain intelligence level have significantly higher earnings then non-college grads of the same intelligent level, according to the research I could find.
This study was from 1992:
Scroll down to Table 2, on page 7. Now, intelligence has a big impact on earnings, no question. But within each intellegence catagory, people with a college education had significantly higher earning then people of the same intelligence without a college education; for people the study authors categorize as “cognitive ability level 5”, college grads earned $631 a week, and non college grads earned $447 a week. For people in cognitive ability level 4, it was $561 vs $340. For people in cognitive ability level 3, it was $503 vs $320. Ect.
It looks like there is a lot more going on here then just intelligence-based selection effects.
I think employment is a pretty efficient market, and wages there probably say quite a bit about worker productivity. I think high school students trying to decide if it’s worth it or not to borrow money to go to college or not is not even close to an efficient market, and I don’t see how it could plausibly be expected to be one. (Note also that either Alice or Bob in your example would probably be able to pay back the college loans eventually, $40,000 isn’t a lot but a college loan with a 25 year repayment schedule is only a few hundred dollars a month at most and even bankruptcy can’t clear college loans, so an efficient lending market will gladly lend to either one of them.)
There are generally three kinds of smart people who fail to graduate college:
1. People who lack conscientiousness or ambition.
2. People who have those but have determined that college is not necessary to achieve their ambitions.
3. People who had outside circumstances get in the way of college. But eventually in life, these people decide to become a #1 or #2: either lack of degree isn’t affecting them as their career is already a huge success, or it’s hindering them but they don’t care enough to pick up a degree somehow as the years go by.
Now, we all know some famous super-rich people in category 2, but people in category 1 vastly outnumber them. One of the smartest people I know flunked out of college, still lives with his parents, and alternates between working lousy jobs and not working at all.
He is not this way because he failed to graduate college. He failed to graduate college because he is this way. He is a good friend of mine and absolutely brilliant, but I probably would never hire him for a job, unless he had solid evidence that he mended his ways and turned his life around.
Evidence like…already having success at a good job, or finishing college! And since I’m one of his best friends and wouldn’t give him a job, he probably would have to finish college, despite the fact that I don’t believe he would learn anything of value at college.
In a society where going to college is the standard, businesses are taking a risk by hiring non-grads. And they don’t have to take that risk, because all the good jobs have tons of highly intelligent applicants who went to college. Maybe they could occasionally find someone 2% better who didn’t go to college, but the risks and resources involved in considering them simply aren’t worth it.
The crappy thing is that appropriate remediation for these lacks can take place in K-12 and college; the research has been done.
College is a place where dreams go to die. There is a promise to it embedded in our cultural milieu that it all too often fails to live up to. I am convinced that those who least care about learning, but most care about completing a credential, are those most well adapted to it. While those who most care about learning are tortured by the ad hoc structure which encourages learning to the test and then forgetting what you’ve learned as fast as possible to stuff in more unrelated knowledge during the next semester.
“Smart Alice has a college degree, Stupid Bob does not.”
Does every positive-negative trait comparison have to put a woman in the superior position? We are raising a generation of young men who believe they are innately inferior because of this female supremacist messaging.
Alice and Bob are the foo and bar of people in thought experiments. I think you’re over-politicizing this.
Has anyone gone to something called a “liberal arts college”?
If so, did you find your liberal arts education valuable? And why so?
ksvanhorn is learning about microaggressions. Learning is fun!
Bob in this example is a nickname for Roberta; no males harmed in the making of this hypothetical.
Kids who go to college have lots of advantages. Their parents tend to be wealthier. They tend to be more intelligent. It’s arguable that they’ll work more hours.
But even absent all those things; Imagine someone spends 4 years working and they earn 80K over those 4 years. Add that to the 80K that tuition will cost from some institutions. that’s 160K. Now imagine that that money compounds over 60 years at 7% per year. That’s $10,540,405.00 extra in investment income.
There’s more to this equation than ‘lifetime earnings.’
At a paltry 5% that’s still $3,193,718.28
The interest rates you are basing your hypotheticals on are nominal, not real–in part compensation for inflation. I believe the typical real interest rate over the long term, the nominal rate minus the inflation rate, is from one to two percent.
No, I have to disagree. Your chief argument seems to be that the real wages for people with a college degree versus those without, but the average wages of most people after inflation don’t follow the number of degrees out there. That is, more education does not create more high-paying jobs. All it does is increase the competition for those jobs. For illustration, consider the fact that high school was once where college is now. You had to have a high school education even to be considered for a good job. Then when almost everyone did, what happened? It was no mark of distinction any more. Jobs started going to those with the distinction not only of high school, but of college. Now even college isn’t much of a distinction any more. I’m sure you can see the pattern and extrapolate it.
“If we had too many people going to college, the market value for someone with a college degree should be falling when compared to people without college degrees. Instead it is actually rising.”
I think that’s far too complicated a dynamic simply to be able to look at a simple correlation and decide its meaning. Inflation would be a good analogy for complexity. Back when TARP and all that government spending was being considered, people were saying that that massive an increase in the money supply would cause massive inflation. It has not. In this case, how vigilant have economists been against p-hacking, and how hard have economists looked for skewing or disproving factors? For example, what if the college-degree-return numbers are being skewed by sky-high growth in one particular sector, such as Silicon Valley? That would certainly make for a poor argument in favor of increasing the number of English majors, or in fact most majors. Have economists been adjusting for the local cost of living in calculating whether a wage increase is a real increase in job profits, which is a far better thing to consider for policy purposes than a crude national equation of number-of-increase-of-degrees-divided-by-number-of-increase-of-dollars (or vice versa).
And, too, your argument doesn’t address the we’ve-picked-the-low-hanging-fruit aspect of Scott’s argument. As we educate more and more people, the chances of an increasing percentage of people being marginal students, who really can’t handle college work and shouldn’t be at college, goes up and up. That would mean that past educational-returns arguments are irrelevant.
It’s not any particular piece (distortions, deadweight) per se. The argument is a bit different, and admittedly, a shade handwavy. Here is a good summary of it. Basically, growth in the form of GDP per capita is really well correlated with living standards. If you grow grow grow, you have much more resources with which to help everyone. But you have to have a solid foundation of growth for a long period of time. It’s kind of like the EA concept of “investing to give”.
So, it’s somewhere in between these situations. Plus, we’re not talking about just the current citizens of the town. If you can harness exponential growth consistently, and you can increase the time constant even a little bit, you’re going to diverge far ahead of where you would have been.
Going back to the video I linked, the “looking back to the past” example is how US GDP per capita has grown exponentially for a couple hundred years. If the difference between that and another country is that we managed to unlock just enough of a difference in the time constant of growth, then the comparison starts to change. Over the course of a couple hundred years, you can have a population that is really equal… all living like the average [insert poor country here] person… or you can have a nation that rapidly rises to the point where we literally make jokes about First World Problems.
Again, I am basing almost all of this on the claim (pretty well-established by now I think) that the past 30 years of growth have been unique in going almost entirely to the rich.
I recently saw a paper saying this reversed something like last year, but I’ll need a little while longer to believe that’s consistently true.
It’s fairly easy to demonstrate that this isn’t true, A few people have pointed out that that math behind this assertion, when it comes to things like wages, is suspect. You can also just look at consumption patterns. These can be blatant, e.g. 30 years ago no one had smart phones, or more subtle, the number of cars or housing square footage per person is way up. It is unarguable that the median consumption of a huge variety of goods is going up. If incomes weren’t going up as well, then these goods would have to be paid for with less consumption of other goods, but other than those made technologically obsolescent, can you name any goods people are consuming less of?
I think you’re misunderstanding Scott’s point. The percentage of wage growth that has gone to the non-rich has been very low; you’re talking about living standards, which is not the same as wage growth.
Where are you getting this from? Over time, technological improvements, economies of scale, etc, allow us to provide better goods for cheaper. To simplify, these goods are “paid for” in fewer worker-hours because they cost fewer worker-hours (and fewer of other inputs) to produce, not because the wage per worker-hour is necessarily rising.
You’re essentially saying, as far as I can tell, that living standards simply cannot improve without corresponding wage growth. But this isn’t necessarily true. If I create a vaccine that cures cancer tomorrow, that doesn’t necessarily mean that wage growth will increase, even if living standards skyrocket.
You’re making a distinction without difference. The purpose of wages is to buy goods. If you make X dollars an hour, and the cost of the goods you buy falls, your real wages have gone up. And that’s not me talking, that’s how the CPI that measures inflation is calculated, taking a basket of goods seeing how their price changes from year to year. Living standards can’t grow without effective wages growing, because higher living standard for the same amount of work is quite literally the definition of wage growth.
Lets back up. Earnings growth is typically measured by taking nominal wages (how many dollars earned) and correct it for inflation, which is a measure of how much you can buy with your dollars.
It’s an account identity that earnings = consumption + savings.
So if we observe consumption going up, it must therefore be true that either earnings went up or savings went down. Consumption has gone up a lot. In contrast, the rate of savings has gone down only a little bit.
Hence, earnings must have gone up.
I don’t know what that personal saving statistic is measuring, but it seems like I’ve been hearing for the last 20 years that personal debt is ballooning. Is that narrative wrong, or does your statistic not measure debt as negative savings? (Not a rhetorical question, I actually want to know.)
Savings is defined in that graph as personal income less personal outlays and taxes. Debt would not be counted against that number, although money used to service an outstanding debt would be. (For net worth less debt, I think the keyword you’re looking for is “wealth”.)
I can even think of a scenario where changes in the market cause both debt and savings numbers to rise: imagine an increase in property values such that average mortgage payments go up. The outstanding mortgage would be debt (though a mortgaged primary residence usually isn’t counted in personal debt statistics), and the portion of those payments going to equity would be counted as savings.
IIRC, the vast majority of the runup in that debt is mortgage debt, which is also very heavily subsidized.
For some reason, I can’t reply to Stucchio so I’ll simply reply to my own post:
the rate of savings appears to have fallen between 50-60%, based on the linked graph. Without knowing more or less anything else, this seems a strike against the argument that savings has only fallen a little bit while consumption has skyrocketed.
Additionally, the argument that consumption going up leads to living standards going up seems, on the face of it, to require some pretty serious assumptions. It seems like it could also reflect rent-seeker power in the marketplace. Most of Scott’s arguments about cost disease center around the idea that people are paying more and more for the same services, without necessarily leading to quality increases. How can we square this with the idea that more consumption = higher standards of living?
@Jeff Daniels, in absolute terms the decrease in savings rate was 5-7% of income. Therefore, it can only explain a 5-7% rise in living standards.
Similarly, Scott’s post on cost disease ignores a very important factor. People consume more medicine than ever before, and it includes lots of goods that had infinite cost in past periods (e.g., the expensive back surgery which allows me to walk did not exist before the mid 2000’s). More people get degrees than ever before. Houses are twice the size of houses in the 70’s. Etc.
If the story of living standards/real income going down were true, we should be driving fewer cars, living in smaller houses, eating less guacamole and avocado toast, going to college less, suffering more from diseases that were curable 30 years ago, etc.
This is an important point. The quality of goods must also be taken into consideration. How much of consumption is in goods with average high turnovers (e.g. smartphones and computers) which didn’t exist earlier, or at least not with the same turnover rate?
Is the typical non-gamer really gaining from buying a new computer just to run the newest iteration of Firefox (which is currently a memory hog)? Security concerns (or just keeping up with the Jones’) may ‘force’ them to upgrade, even if they otherwise wouldn’t have.
How many new cars have been purchased mainly because of smartphone integration or Uber mandates, when otherwise the owner would have been happy driving the old car into the ground?
Scott’s post didn’t necessarily ignore the fact that we’re consuming more healthcare/college/etc. He simply pointed out that commensurate to its past benefits, the quality increases don’t seem to justify the price increases.
[Relevant: Rand found that nearly all of worker wage growth over the last ten years went to health care expenditure, causing a nearly 30% increase % of GDP spent on health care. They also conclude that the increase in prices were not worth it for the average citizen.]
The newly-created-previously-impossible back surgery point is an interesting one. If taken to its logical conclusion, it implies that part of the reason these costs are going up despite a questionable increase in quality for everyone is because there are extreme outliers who are helped MUCH more than they otherwise would have been, and the rest of us shoulder the cost.
So you’re implying that contrary to Rand’s analysis, the price increase perhaps was worth it for a small subset of otherwise-untreatable people. If true, I find this an interesting point. I agree that this trade-off might be worthwhile, but I think it’s a a bad idea to place the burden for this expenditure solely disproportionately on middle- and lower-class citizens. Not only does it very obviously breed resentment (the US being a nice case study), but it seems to run counter to the idea that letting citizens keep more of their income will inevitably lead to them creating more wealth with it.
>If incomes weren’t going up as well, then these goods would have to be paid for with less consumption of other goods, but other than those made technologically obsolescent, can you name any goods people are consuming less of?
I mean, malls and retail stores are taking a big hit right now, despite the economy having fully recovered, and it’s not just because of Amazon, online shopping doesn’t account for all of it. It looks like middle class people seem to be spending less money “shopping” for the kinds of things people used to buy in malls then was true a few decades ago.
My first order assumption, looking at the real inflation-adjusted wages, would be that middle class people are spending about the same amount on luxury goods as they were 30 years ago, and it’s just going to different places; maybe more on smart phones and less on designer clothing or whatever.
I don’t think this theory is implausible, but I’ve not found any evidence of it. The price of some goods, like clothes iirc, has fallen and so we’re spending less money on them but we’re buying more articles of clothing of higher quality on average, as far as I know. The same is true of almost every other area of consumption I’ve looked into, excluding things like VHS players and tape decks. It’s perfectly possible there are real consumption holes, but where?
The thing is, if the price of some goods falls because of technological improvement, that is a deflationary force that is going to show up as part of the official inflation numbers. (In fact, technological deflationary force may be part of the reason inflation has been so low in recent years.)
But because that’s already been accounted for in the inflation numbers, I think the theory “goods are cheaper so people can buy more of them and spend less money” can’t explain away what you’re trying to explain a way, since we’re talking about inflation-adjusted wages; basically, you would be double counting those cost reductions if you apply it to both the inflation numbers and then again to the after-inflation wages.
That is; inflation takes into account the average spending (the “typical basket of goods”) of the average individual. So maybe the price of cloths went down but the price of medicine went up, something like that; it’s all tracked in that inflation number.
Today I do not have a smartphone. Given how prevalent the assumption of smartphone ownership has grown along with the ease of apps, this leaves me in a relatively more impoverished state than the theoretical me would have been 30 years ago when almost no one had simple cell phones. At least then I could put coins into a parking meter instead of paying the cost of having to call a phone number to pay (which I did not notice was an option the one time this occurred, so I ended up parking blocks away in a garage and walking).
This is from 5 years ago now. Even back then, about half of people in families earning less than 15k a year (well below the poverty line) had smart phones. If you lack a smart phone, you are almost certainly choosing not to have it, not unable to acquire one.
This is true, but it’s also true that with my debt load and other mandatory expenses the cost of a smartphone and plan for each member of my household would have a noticeable negative impact. It has usually been the case in recent years that $50 per month is a big deal. I could save enough to cover that, but it would be difficult, lead to arguments, etc….
All of this is to say that owning a smartphone is not just a benefit, it is also a tax (or a toll, if you will).
Owning a phone, of course, comes with costs as well as benefits, there’s no doubt. but the option to own one is almost pure benefit.
Agreed. But as of now the cost of a smartphone versus the cost of the cheapest feature phone is way too costly versus benefit for those of us who don’t call or text often. The more society adapts to the expectation of a smartphone, and eliminates the ability to navigate the economy without one, the less this is true. Free smartphone emulators can only hold this off so long.
Right now I can do two feature phones for about $11 per month + the initial low cost of the phones. The cheapest smartphones would be about two to three times that cost per month (plus more expensive on the initial cost), and/or would only function as a smartphone (or even phone) when near wifi.
30 years ago I could have gotten by with pocket change and pay phones for the most part.
Looking at inflation calculators it looks like the cost of phone service has stayed about the same, except for the initial cost of the phone, while the capabilities have gotten better. So I guess this is a net win on average.
It’s at least been claimed that a chunk of that is due to:
1) CPI being a poor measure of “real” inflation
2) Much of the middle classes’ added income coming in the form of things like health insurance, which doesn’t show up as wealth. Health care getting super expensive is its own problem of course, but a bit different than “no more new money is going to the middle / working class”.
I lack the credentials to really evaluate that claim, but someone brought it up in the last thread.
One you left off the list: massive changes in the average household size over time. What we usually measure is reported income per household but the top 10% of households actually contain more than 10% of the people. If you merely measure income per person instead of per household, measured inequality drops a lot. We have to adjust for the fact that a pair of 26-year olds living separately today (in two households, with two incomes) probably would have been married 30 years ago (in one household, with a combined income). As we’ve gotten richer, one way we express it is by spending more time in school and in a career before getting married (and also by being quicker to divorce) – this plays havoc with some of the statistics.
Rather than dispute the factual claim (which I don’t know), I would say that the perspective I presented doesn’t care all that much. In the video, they talk about how for most of history, most countries were all about the same – really really poor. Then, “divergence – big time”. The US and some other countries shot way way ahead. For many more decades than you’re talking about, on the world scene, you could say, “Most of the gains went almost entirely to the rich.”
But at the same time, this growth was in a reinforcing, positive-feedback loop with productivity improvements. Most often, this came in the form of increases to knowledge or technology. The best part about that is that most of those things are relatively easy to spread! There is still some unknown (and maybe some special sauce) to getting those improvements spread everywhere, but once China can produce, say, solar panels for pennies, then it’s relatively easy to distribute them (along with, say, books, or water pumps) to extremely poor areas. (Certainly relatively easy compared to how easy it is for a world full of counterfactual countries that haven’t unlocked solar cell tech yet.)
We don’t actually know where this story ends. Are we still in the land of divergence? For example, is AI tech going to cause everything to diverge even further, delivering all the gains (and a universe of computronium) to Calculon Prime? Maybe. As of right now, it looks like a lot of the world is actually catching up (again, see the video; I’m pretty sure it’s in that one; the whole course is a bit slow, but has some good stuff). I don’t think it’s unreasonable to tell a story that goes like this, where they’re catching up as those productivity improvements spread (and maybe we hit diminishing returns).
I think there’s plenty of opportunity for work that tries to identify when gains-going-to-rich is pure rent seeking (by, say, getting gov’t giveaways) and when it’s due to actual growth and improvements (Zuck got extremely rich, but in another sense, he brought a lot of utility to a lot of people). I think most people with an economics bent say, “Growth is really really important; a part of growth is reducing rent seeking; redistribute whatever you need in order to satisfy your moral impulses at each moment in time, but please don’t sacrifice growth, because it literally unlocks new worlds.”
I’ve seen those studies as well. But they always talk about take home salary rather than total compensation, and total compensation just keeps going up as healthcare costs increase. You’re getting the same health insurance card that you got in 1980, but that card is worth way way way more. And I’ve never seen a study of worker compensation that accounts for that fact.
This isn’t my area of expertise, though, so maybe I just haven’t run across the right papers.
I hope this doesn’t violate the rules or etiquette of the site, but I believe my comment refuting the wage stagnation hypothesis is being missed in all the comments. I would just relink to the prior comment if I knew how, but don’t so I will repaste it at the risk of being a bore.
It is absolutely incorrect that median incomes are not rising in the US over the past few decades. Most estimates, when adjusted for transfers and taxes, proper inflation, household size, and non monetary benefits reveal that median incomes have increased somewhere in the neighborhood of 40 to 60%. This however still grossly understates welfare gains to real families as it excludes movement up to higher classes as people age and it ignores that the average is being weighted down by the influx of 40 million immigrants over the last 30 years or so.
Here are references:
The first is from the Minneapolis FED. I encourage everyone to follow the link for details.
“The main finding is that—after adjusting the Census Bureau data for three key factors—inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006.
Here is a preview of the key data issues that lead to the higher estimates of median household income growth.
1. The price index used by the Census Bureau overstates inflation, and thus understates income gains, relative to a preferred price index.
2. A changing mix of household types leads the overall median increase to understate the median increase of most household types.
3. The Census Bureau measure of household income understates income growth by excluding some rapidly growing sources of income.”
For additional elaboration here are three other good links which explain the income gains…
And remember, most of these don’t counter for the effects of immigrationo, which totally distorts real gains for real families (specifically including those immigrating).
Yes it is true wages have increased faster in developing countries (catch up growth) than in developed countries for decades. However wages and incomes have increased here a lot too. I can supply substantially more links on wages, or better yet on per capita consumption patterns, which are even more striking in how the contradict the stagnation hypothesis.
I’m a little annoyed that this post is being ignored, because Scott uncritically accepting the ‘no growth since the 70’s’ idea is so shocking. Scott, you’re intelligent, you’re statistically literate…why in the world are you buying into that talking point? A stripped down, not-incredibly-useful-but-totally-deadened-to-inequality measure like median personal income is up something like 25% since 1979 (a cycle peak, by the way) in constant dollars. Something like that should make you immediately suspicious of any claim that incomes haven’t shifted.
Seriously, the idea that any significant chunk of Americans haven’t seen increases in well-being since the 70’s is such obvious ideological fluff it’s disappointing to see it be taken so unquestionably here.
Median weekly earnings for full-time wage and salary workers has gone from $373 in 1987 ($809.91 in current dollars) to $859 in third quarter 2017.
This is a per-worker increase of 6% on an inflation adjusted basis.
For men this is $433 ($940.19) in 1987 to $937 in 3rd quarter 2017 (a 0.34% decrease). For women this is $303 ($657.91) in 1987 to $767 in 3rd quarter 2017 (a 16.6% increase).
And none of this accounts for any increase or decrease in part-time versus full-time employment.
So, yeah, more women working would lead to an increased median average income, since the median is no longer being dragged down as much by those without any job and those with only a part-time job. This could easily lead to a 30%+ increase in median per person (not per worker) income, but this is hardly an apples-to-apples comparison.
And these stats don’t even attempt to adjust for the increased median age of full-time workers, or of the general populace (an increase of over 5 years since 1987). So hypothetically the median male worker is now being paid about the same as a male worker 5 years younger in 1987. Which isn’t a gain at all – we expect to be paid more the older we get. (BLS only goes back to 1996 when the median worker was ~3.7 years younger)
The used-to-be typical male-earner single income household, or male full-time female part-time household, is likely to have stagnated.
Saying ‘yeah, but women!’ seems…I dunno, not that serious an objection. Personal income is based only on those with actual incomes, so it’s not just women joining the workforce, it’s women’s incomes rising dramatically over the period (to give you an idea…1979 median personal income of women with incomes was roughly $13,000 in 2013 constant dollars, in 2013 [the year I made the spreadsheet I’ve got from FRED data] it was about $22,000). While men’s median personal income in constant 2013 dollars wasn’t dramatically different over the period (roughly $35,000), that follows a dramatic decline from 2001 that had only just troughed out in 2012 (from a peak of over $38,000 to trough of just about $34,000).
I’ve looked at the more recent data but never updated the spreadsheet. The general post-2012 trend of very slow growth was still there, IIRC.
It’s pretty clear that incomes have, in fact, increased, so saying, “Yeah, but it was mostly women”, isn’t something I can take as actual objection.
The ultimate problem and the strength of my reaction, however, comes from the falseness of the narrative those statistics are being used to push. No, the divergence didn’t happen in 1980 with Reagan, it happened in 2001 when our ‘recovery’ from the dotcom crash was generated by a housing bubble rather than an actual economic recovery. The real economic stress that people feel these days is driven by our economy having spent the last decade and a half moving through a series of false periods of growth and a terrible crash, not anything that happened before that. The problem is the policies pursued (mostly monetary policies) since then, not anything that came before.
You can see this when you move away from the ‘idiot-check’ metric of median personal income and into more descriptive (but more sensitive to issues like inequality) ones like total compensation, which shows a divergence from productivity after 2003, exactly when the housing bubble really got off the ground.
Not according to the BEA. “Per capita personal income–personal income divided by population” Unless you’re talking solely of the denominator, which is fine. But there you’re talking about a life-style change with consequent impacts on those who don’t change for whatever reason.
And I don’t get why you stated this since this is the whole point. Unless it’s an argument against stagnation, which is fine, but I don’t see boom-bust as preferable to stagnation, especially when the bust is drawn out compared to that of higher incomes. In fact, comparing it to the bad effects of a government shutdown versus a budgeted cut in funding, boom-bust is arguably worse than stagnation.
You’re looking at the wrong statistic. Per capita personal income is an average, median person income is…a median. It’s a median of all those persons who have incomes. Putting a bunch of people without incomes at the bottom would actually pull the median down, anyway, since you’re increasing the number of people in the bottom 50% but not the top, moving the median down the scale (because it stays put at the 50th percentile and the addition of a bunch of zero incomes at the bottom pushes the whole pile upward, putting a person with a lower income at the 50th percentile).
Well yeah, boom-bust is bad, but we had that before 1979, too. Median personal income for men in 1968 was $35,090. Median personal income for men in 1976, eight years later was….$35,089. There was a run-up in the middle that broke in 1973. There was never a period of ten years where median personal income only increased. Even the boom times of the 50’s and 60’s saw reverses in 1957-8 and 1968-70.
I don’t know if I’d say boom-bust is worse than stagnation, though. We dealt with boom-bust in the 80’s and 90’s without massive social upheaval and the rise of idiot-economics. The problem ends up being when monetary policy can only blow financial bubbles that deliver growth to a small portion of the population and leave everyone else out, something that has only been happening since about 2003. People get desperate and economics is hard so they listen to the first populist idiot who can speak to them in their language.
I mean, 1979 has always struck me as kind of a funny time for propagandists to pick, anyway. It lets them blame everything on Reagan, but the peak median income (prior to 2001) wasn’t in 1979, but 1973, when it hit a level just short of $38,000 (and, of course, women’s median income was much lower, leading to overall median personal income being higher even today, after a decade and a half of sort-of stagnation, than back then). In 1979 we were in the middle of something like today’s stagnation — where there was growth, but it is slow and anemic, struggling to reach a previous peak it would never attain. Real, solid median personal income growth for men only really returned in 1986.
Coincidentally, people were buying into all kinds of kooky ideologies then, too. Just like it took the monetary authority trying something new then, hopefully our money power today will try something a little better than the craziness they’ve attempted in the last decade and a half that will bring us out of the doldrums.
I don’t know that he’s all that accepting; he did write this a few years ago, at least.
From a global perspective, this claim is absurdly false. One story that applies to the U.S. is that the integration of China and its hundreds of millions of low skilled laborers into the global economy has put a lot of downward pressure on the low end of the U.S. wage distribution, independent of any structural changes in the U.S. economy. Most of this low hanging fruit has been picked, and, as this story goes, we can expect wage growth and labor’s share of income to resume the trajectories we are used to, at least until the low hanging fruit of low-wage AI’s ripens on the vine.
The other way to look at that is that last 30 years of growth have made a lot more people rich. The middle-income group has been shrinking as people move into the higher income group.
(looking at it as classes seems wrong, as they are not classes in the traditional sense of poor non-working class, working class, rich non-working class )
I think growth beats distribution generally. E.g.
Source: link text
Agreed except that middle-class incomes have been essentially stationary for the past thirty years of growth. We’ve had almost a whole economic doubling without any of it going to the bottom 90%.
Middle class incomes have been almost stationary but now there are two per household! To be fair a lot of this can be described as ‘monetization,’ women doing things in the marketplace instead of doing similarly (some would argue more) valuable things in the home. Like, a woman cooking at home instead of working at mcdonalds is better not just because of love n relationships n shit, but because she isn’t as good at making pathologically tasty food. So everyone isn’t so damn fat. We’re getting less babies too, and if you consider babies valuable that’s a big loss.
On the upside, FREEDOM and MORE ECONOMY. Those are pretty unambiguous, I think. People are very definitely richer. Better lives – maybe, maybe not. Richer? For sure, a typical middle class household today is much richer than a typical household three decades ago.
Both of those claims are politically popular but seem…unlikely. Frankly, it’s the kind of thing I’d normally have expected you to write a really long essay debunking. Do you have a preferred source? On the other side, here’s Ben Shapiro’s take:
Middle Class Income Not Stagnating (National Review).
Vague memory of having looked into it once and deciding it was true. I agree I should probably look into it further and write a post on it.
FRED has some nice plots including household size over time, which is one of the relevant factors.
When you do, one of things you may want to think about, which hadn’t occurred to me until a commenter here pointed it out, is the fallacy of composition if you include in the average immigrants who arrived during the period you are looking at. You could have a situation in which every single person in the world had gotten better
off during that period but median U.S. income hadn’t changed.
How you do the calculation taking account of that I leave to you.
The other big issues are household vs individual and non-monetary income.
I’m not endorsing the analysis of this particular article, but the census does appear to have income data for native born vs. foreign born vs. immigrant populations. Unsurprisingly to me at least, non-native born citizens have slightly higher incomes than native born, and both are much higher than non-citizens.
@DavidFriedman, regarding immigrants, there’s actually some data on this. Unfortunately the original study has fallen prey to linkrot, but I wrote about it some years ago and reproduced one of the graphs:
The gist is that the PSID study allows us to longitudinally track the children of American parents, and these folks saw income growth.
Suppose you were not a doctor, and were instead poor/middle class. Would you be indifferent between living in 2017 and 1970?
If you are not indifferent, then the claim you’ve made must be false.
I’m pretty sure I would at least be indifferent, and 1970 might win big. Though Scott’s preferences may be different than mine, of course.
Having lived in both, I much prefer 2017. But of course, my circumstances in 2017 are not the same as they were in 1970, when I was a graduate student.
I certainly wouldn’t be indifferent. All that horrendous cost inflation in health care has allowed me to walk, via medical treatments invented long after 1970.
Are you willing to give up all medicine invented since 1970? No more wikipedia, slatestarcodex.com, tinder, or similar things? You’ll live in a house approximately half the size of current houses, and have a 5-10% chance of not even having indoor plumbing.
The idea that 1970 living standards were even in the same ballpark as modern ones strikes me as completely insane.
I think you might be surprised how many actual poor people would pick 1970. Sure, you need to give up your iPhone and your Xbox, but on the other hand, you can get a full time job without a college degree, and with that one income, buy yourself a nice house and live comfortably.
Take a poll of my home town, which as I have mentioned before is in that part of the Rust Belt that has been turned into something like a third world country by our economic policies over the last 40 years, and I think you’d find a very significant part of the population willing to hop in that time machine. Maybe even a majority.
MrApophenia, “Something like a third world country?” I’m giggling because I’m in India right now.
It’s not hard to get a job and buy a house. The US is currently below the natural rate of unemployment, and houses are quite affordable in areas that aren’t NYC/SF.
Your claim that people would move back to 1970 to have a job and a house is silly. Americans are already so comfortable that moving to a different state isn’t worth it, why would they give up the massive creature comforts they already get?
That is highly variable depending on where you live. In my aforementioned home town, property values are garbage, so you can buy a reasonably nice house for less than it costs to buy a new car.
However, the area is still full of people who rent (or still live with parents, or crash on whatever couch or floor will let them) because it doesn’t matter how cheap property is when the best available job is a part time shift at a convenience store or a Wal-Mart, if you’re lucky enough to get one of those.
I am aware that this state of affairs is not the case everywhere in the country. But it is absolutely the state of affairs in huge portions of the country. There’s a reason the mortality rate is rising among rural Americans for the first time in decades, mostly due to suicide or drug addiction. So many people are killing themselves out of hopelessness that it is having a major impact on national health outcome statistics.
Boy, sounds comfortable to me! Those darn poors don’t know how good they’ve got it!
MrApophenia, I think (don’t have the stats to back it up) you’re effectively comparing a prosperous region in 1970 to a not prosperous region in 2017. For any one location it’s absolutely true you might be better off to be a median resident in 1970 than in 2017.
So for instance, in the city of Detroit, there were far more decent jobs in 1970 than there are today. I think there’s a decent chance there were more decent jobs in 1970 than there are people living there today, as the population is less than half of what it was. But on the flip side, say, metro Atlanta today has more than three times the population it did in 1970. People have been moving there because there is opportunity there.
So I think there’s maybe decent argument to be made that someone on the 25th percentile for income would be better off in 1970 Detroit than in 2017 Detroit. But I’d be shocked if that same person would be better off in 1970 Detroit than 2017 Atlanta.
That seems like a reasonable distinction to make. But then, one of the most substantive effects of the last several decades of economic policy has been to drastically reduce the prosperity of large areas of the country. It’s not just specific cities, it’s a significant portion of the North American land mass.
And as has been discovered by economists in recent years as they try to explain why their predictions about the impact of global trade on the American economy largely did not pan out, picking up and moving to a new, prosperous region is actually very difficult in its own right, much more so than their models anticipated.
Separate from that, even in comparing regions of comparable prosperity between both eras, though, I still suspect a lot of people would choose the industrial economy over the service economy. If you don’t have a college degree, you were better off in the 1970 economy, no matter where you lived.
(Thought exercise – instead of asking either the typical poster on this board, or the typical person in my home town of Rust Belt Post-Apocalyptic Dystopia, NY, instead imagine going to your example city of Atlanta, and asking every Starbucks barista whether they’d buy that time machine ticket.)
That’s a good reason to prefer 2017, and I’d prefer 2017 too if it applied to me. But it doesn’t, and I don’t think it applies to many people. And would you have been able to afford the relevant treatment (or have had it rationed to you in a country with a different healthcare system) if you were
(you’re intending to compare hypothetical poor/middle class in 2017 with hypothetical poor/middle class in 1970, right?)
Sure. I don’t think I’ve ever used any, don’t think anyone in my immediate family is taking any. A few of us have had MRIs, but they weren’t terribly informative to the overall course of treatment as I recall. Certainly wouldn’t have been worth it if they hadn’t been mostly covered by insurance. We all wear glasses, but I’m told they had those in 1970.
In a heartbeat. I don’t have a smartphone, no social media under my name, don’t play vidya, and increasingly suspect that the Internet in general is a bad habit that I ought to kick.
On the other hand, that house could be somewhere like the Berkeley Hills while being comfortably affordable on a poor/middle-class salary. (I grew up in a fifties tract house, lots of our neighbors were old folks who bought as cops or schoolteachers back in the day, and those houses are going for over a million now.). So how much do positional goods matter? Your mileage may vary.
Right, exactly how you adjust for circumstances makes a big difference here. Are we supposing some kind of Rawlsian veil of ignorance, with all its inherent problems and contradictions, behind which we choose whether to be dropped into a random body in 1970 or 2017? Or are we transported back to 1970 in our current bodies, with all the information we currently possess about our health, skills, etc.? Do we have higher childhood lead and air pollution levels and more trans fats but less exposure to phytoestrogens, more sun, more physical activity, a generation or two fewer of low infant mortality causing de novo mutations to accumulate?
My wife had a rare form of cancer and we were able to afford the emergency, experimental treatment (essentially surgical evisceration followed by a poison rinse then chemo & rehab) on my insurance from working at a not-quite entry level engineer position at a chemical company (nowhere near 6 figures, but salaried). With some out of pocket paid for through frugality and donations. If you had asked me 6 years ago I would have said we didn’t really partake of any medical advance since the eyeglasses, but nonetheless, we had our turn.
I know someone who is probably worse off than I financially who had not only her own cancer but her young child’s as well to deal with. I do not wish to know the financial details, but prolonged treatments are being provided, even when she has to borrow money to drive half of California to get him to them.
$currentyear ain’t all bad.
Short answer: probably not, and anyway I still like 1970 better. Long answer:
This is necessarily a personal anecdote, but it’s kind of what you’re asking for by arguing along the lines of “when would you rather live?”.
In 2017, I live in a house that was constructed in the early 1960s. It may have been expanded some over the years (it was certainly relocated at one point), and it is probably more recently-built than the type of house you’re arguing was common in 1970. (If you were trying to argue Scott’s specific point about the past thirty years of growth exactly, you should have chosen 1987 anyway, but whatever.)
On the other hand, I share this house with four other adults, all of whom are working. I work a full-time, salaried job, and my gross income by itself (before tax, but also before employer-sponsored benefits, 401(k) matching, etc. are taken into account) is triple the Census-Bureau-reported household total income for the block group I live in. None of my housemates earn quite that much, but two of them do, also individually, make more than the median household income for our block group. So, why are we all pooling our money to pay rent to a guy who doesn’t live here?
One answer is that property values in our city currently are prone to increases based on speculation, and there have been recent supposedly-short-term surges due to not-100%-economic issues like nearby cities experiencing worse climate change effects than us. Another is that we all frankly suck at negotiating. But another thing I’ve noticed about the census data for our block group is that my housemates and I are all 15-20 years younger than the Census-reported median age of our neighbors, and based on conversations with my very nearest 5 neighboring houses (entire block group not surveyed), they’ve been homeowners since they were about my age. Meanwhile, I’m putting what I can in savings… and I might have enough to make a down payment on a kind-of-crappy 1-bed home in 2.5 years, if I’m careful and property values abruptly freeze instead of continuing the trend of the last 15 years.
This is far from the amount of solid data I would wish to see before making a decision re: economic policies applied to a large country. It does not account for my ancestry (which would have been less advantageous in 1970), my profession (which was very different in 1970 and might not have admitted me, though other relatively-lucrative professions might have been available), or any number of other considerations/adjustments. But, if I assume the existence of a fantastical machine that can transport my consciousness into the body of someone about my age, with about my levels of resourcefulness and overall competence, with approximately my social status, geographically near my current community, and so forth, with the key difference being that this other body lives in a parallel reality where all technological and social progress is approximately equal to 1970s U.S.A., I would go without hesitation.
@mrapocrophenia, I can assure you that however difficult it may be to move from Detroit to Atlanta, it is far harder to move from Jemalpur to Mumbai. Yet millions of people here in India are doing exactly that.
Why don’t Americans do the same?
Does an Urdu speaking Bihari villager know more about Mumbai and how he can become prosperous there than an English-speaking internet connected American knows about Atlanta?
Are those Atlantans (the city too busy to hate) somehow more racist than the people of Maharashtra, who reliably vote for Shiv Sena? (Shiv Sena policy position: ban Uber because lots of Ubers are driven by Biharis.)
To me, the most likely answer is that the combination of their living standards + local communities provide them something that modern Atlanta/Texas prosperity does not. These folks know more than you do about their situation and make choices accordingly.
@psmith, positional goods are almost by definition a zero sum game. Exactly 50% of the population is below the median.
It sounds like you might be saying that certain positional goods (e.g. spots at Harvard, houses in Berkeley) have not increased as rapidly as the population, therefore it’s difficult to obtain them? Is that a fair summary of your position?
I suppose if I did care a lot about status, that might bother me. Likely the solution would be to increase these status goods, but it’s far from clear that this tax bill would affect that at all.
I remember 1970, all too well.
I would much much prefer 2017, even if I was as poor as I was in 1970. In either actual dollars, nominal dollars, or just in goods owned and services used.
Let’s start with being able to breathe (remember smog days, and indoor smoking, and factory chimneys without scrubbers, and leaded gasoline, and..), and move on to being able to breathe during spring, using a pill that costs less than an aspirin…
If you would prefer 1970 over 2017 through a veil of ignorance, you are either an idiot, or you are lying.
I wonder how much of this is due to rises in healthcare costs? Ever since this EconTalk episode, made a compelling case for rising healthcare affecting low earners much more than high earners, I’ve wondered how much it has contributed to the stagnant low income wage problem.
Actually, the very same IGM economist panel you cite re: the tax plan also answered this question, and economists agree – income numbers understate gains in the standard of living for the median income:
I think that is false on a global scale.
This is quite heartening
Sure the American middle class lies at the bottom of that valley, but I suspect their gains went to the spike at the 50th percentile rather than the one at the 99th.
Global income growth really just looks like historical patterns where you get a new tier on top of the economic pyramid. As happened before when the US market was nationalized by automobiles. As happened before when the US urban market was nationalized by rail. As happened before that when the British metropolitan market was nationalized by shipping cargos. As happened before that when Rome/China built a major road/canal network.
As happened in all previous eras, high cost labor now has to compete with cheaper competitors which drags down wages. It really does look like the container ship/internet is following in the mold of previous disruptions. The poor who have access double their income. The wealthy who control the disruption get obscenely rich. The high labor cost wage earners take it on the chin.
You mean maintain their previous standard of living.
No, they “only” see their incomes increase by 40 to 60 percent over the past three decades. There has been no stagnation of median incomes when properly adjusted for PCE, benefits, taxes and transfers, household size (# workers per HH), and immigration. I certainly agree with Autor that developing world entrance (aka China) into modern world has held down the rate of increase, but it has still increased, and as Autor suggests the one time impact of a billion new workers in one generation is now past.
There has been no great stagnation.
The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade
David H. Autor David Dorn Gordon H. Hanson
No, I mean their relative position and trend line expectations falter.
Going back to at least the Swing Riots, it is not actually falling incomes that drove outrage and discontent, but loss of position and esteem. People with actually falling income tend to be too busy coping to care that much. People in fear of not reaching their benchmarks develop complexes and are more prone to riot or vote in extreme political parties or platforms.
And lest we forget, people progress through the deciles in life. Pretty much everyone starts adulthood in the bottom quarter of their local wealth distribution. As they get older they typically ascend to higher deciles. Virtually none of the famed top 1% lived their entire lives there. Even if a decile truly has not gains in income, the individuals passing through it typically will continue to accrue income, wealth, and consumption.
Exceedingly few people have had no net income gains in the past few decades. Of those who have, even fewer still have had actual drops in quality of life. Of those who do have drops in quality of life, I suspect the overwhelming majority are due to medical issues, divorces, or other factors fairly heavily removed from income and unlikely to be terribly effected by any government policy.
Nonetheless, failure to meet expectations does result in a lot of people “taking it on the chin”.
Isn’t this contradicted by your point that people move through deciles? If people move through deciles then their is only a shift in WHEN you experience the position and esteem. If you go from 70 to 80 to 90 then you have increased position and esteem relative to the 80th percentile at the begging and end, and reduced in the middle. The social upheaval that I think about when the middle class revolts (french revolution etc) occurs when the middle class can’t break into the aristocracy at the top.
No, the trouble is that people do not gain the amount of social esteem and rights that they expect. For instance, very few people expect that in their early 20s they will be making their peak wages, owning their own home debt free, married, or supporting kids. Everyone is okay with that because people are rational and expect that they will invest some time in finding a job, moving up the ladder, and saving wealth.
This held true back in the days of apprenticeships (dozens of years before you could practice on your own at full wages and social standing) to peasants (years between when you started in the fields and became strong enough/experienced enough to work most efficiently). People are fine with the poverty inherent to grad school, provided they see their path of progress as they expect it.
What leads to trouble is if a person expects to start at the 12th decile at twenty, get to the 25th at thirty, the 40th at forty, and retire at the 65th. The fact that they move from 30th to 40th by the time they are fifty is not cause for rejoicing.
People expect to accrue esteem and wealth over time. They expect to be at least as wealthy as their parents’ generation averaged at every stage of life. When expectations falter, historically, we had riots. The average Breaker in the Swing riots actually had a decent amount of wealth, income, and social standing … it just was less than he expected with the promise of further insults to come. He was particularly worried that he would not be able to pass on valuable skills to his children.
People are not dumb, when the second derivative turns negative they react even before they have suffered an absolute decline. They feel as though they have taken it on the chin, and worse that their children and their in-group will take it harder on the chin.
The American middle class expected the straight-line trajectory of WWII – 1990 to continue. We it did not, they began to react accordingly. This is pretty similar to the reaction of the 20s and 30s. The straight-line growth of 1880-1910 faltered with WWI. Hot water, for instance, so explosive growth in this period. Wood stoves were dying out. Sanitation was vastly improved. Automobiles fell drastically in price and the infrastructure for travel improved markedly.
The fact that the average depression era family had access to radio, movies, electricity, and hot water was far from sufficient to offset their diminished life trajectories. They revolted and voted in all manner of people who promised to do things differently – the modern Labour party, the Socialists, and of course the New Deal wave.
Like now, people were worried about new competition. Like now, they voted against free trade. Like now, they were far more anxious than their objective economic status would indicate.
Regarding your hypothetical of Alice, Bob, and the demon. Let’s say I agree with your reasoning, and we convince the elders to increase taxes on Bob. We destroy some wealth, but we keep as much as we can with our do-gooder. Ok great. Then what happens? Now it’s the next election cycle. Does the rationality of our prior decision change any? What stops the iteration? Why dont we just continue down to 0 wealth (approximately) making rational decisions based on your preferences the whole way?
Isn’t this just the inverse of the situation where we prioritize wealth creation and more wealth creation and then wonder when the tricking down is gonna happen?
Yeah. The thing with GDP per captia is that it’s a measureable and objective (well, mostly) number that everyone generally agrees is a pretty good thing to maximize.
Whereas, suggesting the economy should be run based on a really smart guy who decides where the “best” place to use resources is sounds like… uh… well….
For as often as he occasionally gets lumped in with libertarian thought, Scott seems to be suggesting some sort of benevolent dictatorship model here? The poor should get more because he says they should get more.
Certeris paribus, yeah. But it’s lookin’ like ceteris ain’t fuckin’ paribus.
You can easily imagine increases in the amount of spending being the result of the cannibalization of the productive economy by gamblers, hedonists, and rent-seekers. It’s easier to imagine because it’s happening.
The free market wasn’t that damn free in the golden era of technological progress. Lotta restrictions by government and powerful workers’ interest groups. And when the ‘free market’ does produce a golden goose, it’s by having a firm getting so powerful it destroys the competition, and thus has the surplus to spend on improvements and the ability for a strong leader to lay out and impose his vision.
Companies get powerful by inventing products people like. Google didn’t take over internet search and then develop their algorithm. Apple didn’t take over the computing market and then develop the iPhone.
I’m not seeing that at all. You can find out what people in general want to maximise by asking them. Voting is a form of asking. So Scott is saying that the bill is bad from the POV of a block of people who didn’t vote for Trump. And maybe not good from the POV of those who did.
You can’t find out what people want by asking them.
More than 1/4 million people signed a petition asking the US Goverment to build a Death Star (https://www.washingtonpost.com/news/post-politics/wp/2013/01/12/white-house-rejects-death-star-petittion/?utm_term=.15b383b5ae34).
Just because they say they want it, doesn’t mean they really want it, along with the consequences that go with it.
If you want to know what people really want, you have to look at the decisions they make in real life. Talk is worthless.
Actually revealed preferences are useless because they only work on perfectly rational people.
Revealed preferences only work perfectly on perfectly rational people.
Stated preferences don’t even work perfectly then.
Asking isn’t perfect, but if you want certain information about people’s preferences, you will have to give them money to watch how they spend it, which can get much more expensive than asking.
Even giving away money isn’t enough to get information about trolley car preferences.
Eventually, the villagers no longer have room in their budget for cat-breeding. This means that Alice can no longer claim to be an utility monster (under this scenario’s assumption that cat-breeding is a really inefficient money-to-utility conversion). So the next time the elders decide to lower taxes, they will lower Bob’s.
(This is analogous to the real-life argument “if effective altruism took over all charity donations, wouldn’t Africa be choked with bed nets while our local beggars starve?”)
Even that theoretical brake on Scott’s death spiral is perhaps optimistic, because it assumes that the context will be the current situation where we think in terms of trillions and billions. But as we slowly get down closer and closer to 0, there will always be “room in the budget” because we will just start talking about ever-more-austere budgets.
In the first year. Compound it for four years and they’re getting an extra 6 billion in the first year, 12 billion in the second, 18 billion in the third and 24 billion in the forth (plus change), for a total a little north of 60 billion. 16 billion a year in entitlements for 4 years is 64 billion, so entitlements still come out narrowly ahead over that timeframe, but it should be obvious where this is going.
The real power of growth isn’t just a slightly bigger pie, it’s that it builds on itself, like a recursively delicious von Neumann pie. Economic growth could only not beat flat benefits in the long run if growth has become completely decoupled from lower and middle-class real income, or if the benefits themselves spur an equal or greater amount of growth. And then of course there’s the question of whether a tax bill like this does spur growth (I am not convinced the answer is “yes”, although my stock ticker seems happy). Those are all worthwhile discussions that we could be having, but I’m sorry to say that the analysis above is just naive.
OK, so instead of using Scott’s wildly optimistic 1% growth estimate let’s use an estimate that mainstream economists actually think is plausible. Which is. . .what, exactly? Because the closest thing to an estimate I’ve seen is “no substantial effect.”
Not my concern. I’m trying to show Scott that his math doesn’t say what he thinks it says, not to defend the tax bill. Like I said in my second paragraph up there.
Wait, where are you getting that the amount doubles each year?
If economy grows at 1% per year, in the second year it would be 1.01, and in the third year it would be 1.0201. If the poor get a constant 3% of the economy, they would get:
Year 1: 0.03
Year 2: 0.0303
Year 3: 0.0306…
It takes a really long time for that process to make a difference.
Your 6 billion is the excess over baseline GDP that flows to the poor in the first year after implementation: 1.01 * (large number) – (large number). To get the corresponding number for the second year we do 1.0201 * (large number) – (large number), which is about 12 billion. And so forth.
The other piece of magic here is that GDP is a flow, not a stock: the wealth produced in a year, not the total wealth in that year. So to get the total amount of benefit to the poor you want to be looking at the integral of excess GDP over N years, not at its value after N years.
Thanks, that makes sense.
How long can the real economy continue growing exponentially?
No one knows, but the first place I’d be seriously worried about it stalling is when the demographic transition finally runs out of steam in the Third World and global population growth flattens out, and that’s not supposed to happen until around 2050 IIRC.
There’s a whole lot of “what if” between now and then, though, and the idea that growth is driven mainly by population pressure is already pretty speculative.
Which country are we talking about ? If it’s the USA, then our economic growth is definitely past its peak. The economy will continue growing for a while, but at a much slower rate than our rival countries, e.g. China, possibly Saudi Arabia, and maybe even India (though that one is iffy). My guess is that at some point, maybe 20..30 years from now, economic growth will effectively stall.
Saudi Arabia’s got the resource curse to deal with, and its economy’s extremely lopsided; I don’t think it’ll do well long-term. China is a serious contender and it’s been growing at 4-5 times our growth rate for a couple of decades, but that seems to be faltering; it’ll probably still grow faster than we’re growing for a while, though. India has a lot of potential if it can get its shit together.
None of that really matters w.r.t. American growth, though. My reasons for thinking that it’s driven by global population would need an effortpost, and I don’t feel like producing one right now, but it’s related to America’s status as an academic, finance, and entertainment hub and would be seriously compromised if that status is. But like I said, this is all at “this is a pet theory that seems worth exploring” epistemic status.
This is not a thing that you can reasonably know with the level of confidence you imply in this post.
I’m fairly confident about my prediction, but I’m nowhere near certain; that’s why I said it was “my guess”. That said, Nornagest might be correct about Saudi Arabia’s resource curse; it all depends on how valuable oil will continue to be in the coming years.
It’s like you don’t even believe in the intelligence explosion.
Shocking, I know 🙂
when the demographic transition finally runs out of steam in the Third World and global population growth flattens out
Somewhat off-topic, but as a person around in the 70s when the Population Bomb was the thing* that was going to wipe us all out and our children would be living on top of one another in a dystopian cannibal frenzy and gnawing the bones of their ancestors which they had dug out of their graves for nourishment (and where the child-free of that era dressed up their distaste for having children in the high-minded garb of being responsible and stewarding the scarce resources of the earth), it amuses me to see global population growth decline seen as a worry 🙂
*One of the things, at least. The 70s had a lot of “the sky is falling and we’re all gonna die!” going on, which as I’ve mentioned before makes it extremely hard for me to take the UFAI and global climate change existential threat(s) as seriously as perhaps I should, since I’ve lived past at least four separate “this is absolutely going to be the end of humanity” events: the New Ice Age (which never happened), the Population Explosion, the Oil Has Run Dry (not quite yet), and of course the ever-popular Nuclear Armageddon (getting a new lease of life with the wacky hi-jinks of Cousin Kim and Grandpa Donnie!).
Everyone falls for a “world is going to end” propaganda pitch exactly once in their life. When I was a teen I feel for a “missing link in the food chain” argument that posited that one species going extinct would cause a domino effect in the food chain leading to mass extinctions. Environmental scare story du jour.
Mass extinctions are still a thing of course. It’s not a coincidence that many climate skeptics were alive and well in the 1970’s.
Well, it bears keeping in mind that there are gradations of trouble between “baseless scare” and “existential threat”. For example, UFAI Singularity is a fantasy, but the possibility of some rogue human getting his hands on killer autonomous drones is quite real. Global warming won’t kill us all, but I wouldn’t invest in beachfront property if I were you (nor property in Arizona, for that matter). If you already did, don’t worry, your massive financial loss will have lots of company. Nuclear war probably won’t destroy all of humanity, if it does happen; but if you’re living in a major city, it will likely destroy you personally. Oil is getting more and more difficult to extract, and its supplies are finite; this means that political instability in the oil-rich countries is going to get worse, not better.
All of these problems can be mitigated, but not if everyone just dismisses them, on the assumption that existential threats are overblown and anything less is not worth caring about.
I invite you to read Ch. 13 of IPCC AR5, Sea Level Change.
When you are done reading this and you are hopelessly confused about how different the media coverage is to the IPCC assessment, you won’t be alone.
As an example Florida building codes are for 100 year storm surge levels. That puts all homes built over the past several decades about 20 feet over sea level depending on location. The worst case range of the worst case scenario in AR5 is 3 feet by 2100. The median is 18 inches depending on assumptions. Meanwhile observations have been stable at 1 inch per decade for about the last 30 years.
Coastal real estate is selling just fine. If you are buying a new home I would recommend you plan for 3 feet of SLR over the life of the home.
But, but, but, I read an article that said 2M! Well if the rate of SLR changes by 10x starting tomorrow we might get there.
At the moment, the only risk of nuclear war seems to be with North Korea. Between a limited number of bombs and missiles, problems with accuracy, and reduction via anti-missile defenses, I think the odds of destruction for a random major city are well below even.
Back when the worry was a full scale exchange with the Soviet Union, on the other hand, your claim was not an unreasonable one.
Isn’t the issue that you are mulling about spending rather than taxing?
Would it not be more effective to argue for changes in spending?
It isn’t as if there is not plenty of taxation. Is that money spent effectively?
Economists have a poor record. The experts lack expertise. It’s not so much that they are bad or dumb as that it’s not a subject that has yet yielded to inquiry. It’s complicated as well as complex. And so, the views of a group of economists, however large, seem to have little predictive value.
Rather than debating whether the reforms would in fact lead to increased wealth, or even just avoid decreasing wealth if reform doesn’t happen, would it not be more effective to debate spending? Changes to spending could be done in any case.
Perhaps a butter vs. guns spending debate would be more effective.
The Alice and Bob hypothetical seems confused – “destroys a random two dollars’ worth of wealth” is underdefined.
It’s also abstracting away from the fact that work is what creates things of value, instead treating each member of the town, or perhaps each household, as an atomic consumer with an income, who can (through unspecified means) transmute their dollars into things of some value. This might actually be a good approximation of many suburbs, but it’s not a good approximation at all of a whole economy like the US, which engages in some trade but does a lot of production for internal consumption. This is an especially important omission because we’re talking in part about corporate taxes, not just taxes on wages or consumption.
Instead of thinking of money as a value-substance that goes places, and prices as identical to value, we should note that money is a claim on the production of others. In addition, things like the high price of housing express scarcity rather than abundance, which implies that not all profitable processes are in fact generating things of worth that can be given away.
Likewise I’m not sure the question of “growth” is all that coherent here, and suspect that it would be better replaced with more concrete questions.
Short of simply implementing NIT or UBI you can’t really tax the poor less since they already effectively pay no income tax, don’t have capital gains, etc. So I just fundamentally cannot understand any notion of a tax break that doesn’t disproportionately affect those who pay taxes—disproportionately.
I don’t care about economic growth either and think the government needs to get out of the business of tinkering. Unfortunately if any nation can gain by tinkering over those that don’t, then tinkering will be the order of the day. My only concern are policies which entrench wealth and/or income. Economic mobility is vastly more important to me than trade deficits/surpluses or any particular tax rate. There’s no point in pretending to have the dream of being better if you will never leave the bottom quintile because we’ve structured society in such a way that it critically depends on the top quintile to keep it together, as the very things which would cause churning within income brackets would represent too much risk of the system collapsing so all policies ensure the top stays the top.
As I understanding it, economic mobility is still good but has been decreasing in the US. I suspect it is due to increasingly bought tax laws in terms of deductions and exceptions, rather than any particular tax rate (since it is also my recollection that government receipts as a function of GDP are not well-correlated to tax rates—but fair warning I have this understanding most recently though not exclusively from a Prager U video).
Your point in the other post was that if you give the bottom quintiles tax breaks they spend them and it ends up in the top quintiles’ pockets anyway, but it benefited poor people along the way, is exactly how inflation occurs, because if the money is flowing up then it necessarily means goods and services that weren’t being consumed are now being consumed and the increased demand will raise prices. Good if you’re in some kind of confidence death spiral but maybe not very good otherwise. Inflation is one of the worst taxes, as it is effectively a tax on savings. You might be tempted to think this hurts the top as much as the middle but it really hurts the people who need to save to get out of the bottom.
Payroll taxes take a big bite out of poor people’s incomes!
But they aren’t really taxes. They are involuntary pensions that people get back when they retire. Even payroll taxes are progressive because the poor get back more than the rich when they retire as proportion of the amount they pay in. There are plenty of valid arguments against social security, but conflating them with income taxes is not one of them.
The employed poor start working younger than the middle class so pay for longer and die younger so collect for a shorter length of time, both of which push the balance against them. I don’t know what the net effect turns out to be, but it isn’t obvious that it favors the poor.
This is the big lie that social security is built on. There’s no lock box. The government isn’t saving money for you. They are spending it on other things, and will tax someone else to pay for your benefits when you retire.
The country’s best economists aren’t getting it wrong, they’re simply answering a question that was pretty obviously designed to elicit the answer “no”. I agree with the economists – I’d have answered similarly given those questions – but their answers are essentially irrelevant to the questions you actually care about. They mostly didn’t say the bill was a terrible idea, they merely answered the question as stated, including that weasel-word “substantial”.
I mean, heck, the bill probably *is* terrible – historically most big tax packages of this sort either are terrible or have parts that are terrible and require later fixes so our priors ought to be set accordingly – but this survey doesn’t show what you think it does.
I still think that poll of economists is not asking the question you’re attributing to it, namely — “should we pass this tax bill?” It’s asking whether it’ll significantly increase GDP, and most of the economists’ comments point out that the GDP depends on other, larger things beside the tax code. But they’re not saying it’ll decrease GDP, or that the bill’s not worth passing. They’re not even saying it won’t increase GDP, just that it wouldn’t by that much.
The question also makes a big deal about “assuming no other policy effects”, which — in the political process — isn’t nec a realistic assumption. Scott Sumner, for example, initially had good things to say about the tax bill, partly because he assumed democrats would roll back the estate tax provision (which the GOP didn’t have going into affect till 2024 anyway, partly because they probably realize a democrat will come in in 2020 and reverse it).
I would be willing to bet that if you asked these same economists, “is this tax bill better than the status quo assuming nothing better comes along” you’d see different results.
The only thing I am using the using the poll of economists for is to determine whether the argument that the bill is good because it will increase GDP is correct.
If the problem is that it would increase GDP less than some amount classified as “substantial”, then that’s what my argument in Part II is for. 1% growth would certainly be substantial, so economists say it would be less than 1%, so I’m being sufficiently conservative with my numbers about how it’s not as good as other things.
This is an odd thing to say, in that Scott Sumner thinks repealing the estate tax is a good thing.
Ok you’re right, he supported it in spite of that then I guess. My bad. But he did say he thought democrats wouldn’t let it get repealed, and they shouldn’t complain about it being regressive for (in part) that reason:
One of these “uses” requires taking a hundred billion dollars away from people who presumably earned it fair and square and don’t want to give it to you, and finding a way to rationalize why this isn’t armed robbery. One of them doesn’t.
Taxation isn’t always theft; it is possible to genuinely rationalize taking a hundred billion dollars of other people’s money for the public good. But no such rationalization is an unlimited license to take as much as you want for whatever purpose you think is best. The fact that you got away with taking roughly the same hundred billion dollars last year, is not license to do so this year. Particularly if your metric is “the fairest thing I can think of”, the difference between taking other people’s money and not taking other people’s money, is absolutely huge compared to any marginal difference in the efficiency of allocation after the fact.
It is possible that you can convince me that taking this hundred billion dollars from its the lesser evil. Heck, I can convince me of that. But you will never be able to convince me that taking a hundred billion dollars from people is morally equal to not doing so, so that we can skip directly to efficiency of allocation without weighting the morality of the involuntary taking at all.
It is armed robbery. Why’s armed robbery bad? Seems to me if you can get away with it it’s incumbent on you to do it. By -get away with it- I mean have positive all-considered EV, not just survive unhanged.
One of these “uses” requires taking a hundred billion dollars away from people who presumably earned it fair and square and don’t want to give it to you, and finding a way to rationalize why this isn’t armed robbery. One of them doesn’t.
I mean, if you’re a utilitarian coming at the standpoint of whether these tax cuts reduce or increase net suffering in the country or the world at large, it doesn’t make that much of a difference. (I’m not a utilitarian, but that seems to be the framework these posts are exploring the question from–not “is it right” but “is it a net benefit.”)
I’d generally agree that letting people keep more of what they earn is fundamentally different than giving them money. So tax breaks are fundamentally different from, say, corporate subsidies.
Still, even assuming tax breaks are a moral good because they mean less armed robbery of citizens, the government could just as easily give fewer tax breaks to billionaires and more tax breaks to middle class and poor families. The general consensus seems to be that this will benefit the middle class slightly for a short while and then not benefit them at all after that. It seems that they decided they were going to continue to rob the middle class at the same rates so that they could stop robbing a small handful of people at the top.
If you’re the sort of naive utilitarian who says “I can calculate net suffering/pleasure for any proposed monetary allocation”, or the slightly less naive utilitarian who says “I can appoint a group of technocratic politicians who can calculate…”, then such calculation leads inexorably to the conclusion that all of a society’s wealth must be assigned to the utilitarian calculators, less possibly a properly-calculated luxury spending allowance. Empirical observation shows that whenever we do this, we wind up with nearly mountains-of-skulls level economic catastrophe.
Scott isn’t either sort of naive utilitarian. He knows this. So it’s worth reminding him that, for the sake of this particular $100 billion, he is following a path of “reason” that leads inevitably to communism and catastrophe. Then ask him to justify why we should make an exception for this particular $100 billion, before going on to determine how it can best be allocated for the common good.
If, under the next administration, President Not-Trump-But-It’s-Not-Hillary’s-Turn-Either proposes a different tax cut that more heavily benefits the middle class, the same logic applies. First determine whether there’s a special exemption to the general rule of not taking people’s money just because you think you’ve calculated the optimal-utility distribution for it. If not, then tax cut. If yes, then calculate optimal-utility distribution (which may also involve a tax cut).
This applies to all possible tax cuts, and it applies regardless of the theoretical existence of other possible tax cuts.
First determine whether there’s a special exemption to the general rule of not taking people’s money just because you think you’ve calculated the optimal-utility distribution for it. If not, then tax cut. If yes, then calculate optimal-utility distribution (which may also involve a tax cut).
You’re talking about an idealistic scenario where the government takes exactly as much as it needs to take in order to function and provide necessary services, and no more. While I’m sure most people agree in theory that that would be a good thing, no one agrees on what that amount is or what should or should not be cut, and every time someone tries to cut a particular program it ends up pissing someone off and the people who want that particular program push back. No one agrees on which services the government is or isn’t obligated to provide.
The practical reality we’re dealing with is that we’re all enmeshed in the current system where the country is deeply in debt and paying for programs that citizens have come to feel entitled to and to rely on. Most people don’t want social security and Medicare to be cut, and those are by far the biggest money-eaters; liberals like to talk about cutting defense spending and conservatives talk about cutting welfare and foreign aid, but the latter is not very big and the former is only like 16% of the budget and pretty necessary. The idea that we can wipe the slate clean at this point and start from a baseline of no taxes and then only tax according to special exemption status doesn’t strike me as realistic.
That being the case, I think the government has to take an approach of trying to cut taxes while determining which tax cuts will help the largest number of people while not causing catastrophic damage to the existing system that most Americans are (or will be) dependent on. And I think “take less money from the richest people while continuing to take the same amount of money from the other 99%” is not a great approach.
Nor, so far as I can tell, is it the approach in the current bills.
Reducing the corporate income tax doesn’t qualify, for reasons discussed here at length–corporations aren’t rich people, and the actual consequence of the cut is to benefit lots of people of varying incomes. Increasing the individual exemption is a bigger percent tax reduction for lower income people. Limiting the mortgage deduction is a higher cost for richer people.
and the actual consequence of the cut is to benefit lots of people of varying incomes.
I’m mostly going by reports about what economists are saying about the bills, which is that the tax benefits to lower and middle income people will be short-term and comparatively small. Maybe they’re wrong, or maybe the reports are oversimplifying what they’re saying. But based on what I’ve heard, I’m kind of doubtful that I’ll see any big reduction in my own taxes.
I think you missed the fact that my comment was explicitly about the cut in the corporation tax. That won’t show up in your taxes but it might show up in your income, or the price you pay for goods, or the value of any stock you own.
That won’t show up in your taxes but it might show up in your income, or the price you pay for goods, or the value of any stock you own.
That’s a big “might” though. I’d much rather just pay fewer tax dollars as opposed to giving more tax breaks to corporations and hoping that the price of toilet paper goes down.
And after enough times repeating the experiment, we start to suspect that maybe the mountains of skulls was maybe actually one of the terminal goals of the people who demand for confiscating all the money and giving it to the utilitarian calculators favored by the people so demanding it, instead of a regrettable side effect.
Yeah, right. Its it even ‘whenever’, since there are plenty of stable welfare society states. This is mythology.
I think JS was drawing out the logical implications of this kind of thinking. I.e. if it reasonable to give some of others’ wealth to enlightened technocrats to spend in a better way, why not give them all the wealth? But since giving all the wealth is known to lead to disaster, that raises questions about the benefits of giving just some wealth.
Another way to think about it is this: how do we know the prosperity of modern welfare states is caused by their redistribution policies, rather than by those parts of the economy that remained uncontrolled by the government? It may be that the deleterious effects of the government in those places are masked by the benefits arising from the private sector.
Nordic welfare states, by the way, rely heavily on a regressive VAT. They seem to be following the Trump model of taxing the middle-class rather than the rich.
This made me think that people give a ton of wealth to the likes of Gates, Bezos, etc…, but do so for a product in return. And with that wealth the enlightened billionaires arguably do good.
Perhaps the government could sell a product to billionaires? Perhaps it would be easier access to the reigns of power? Perhapss this is an argument in favor of selling official positions or amendments to bills?
I don’t think it would be, but this has piqued my thoughts.
In theory, the valuable goods and services that national governments “sell” to corporations and to billionaires in exchange for the tax bite is property right enforcement (cops against local thieves, the army and navy against pirates, privateers, and raiders), and a dispute resolution service of last resort (the courts), and a couple of pieces of public goods as the coordinator of last resort, such as currency, registries of deeds, environmental externality reductions, and so forth.
Generally, the quality of most of these goods has been dropping over time as each national government gets bigger and older, especially compared to the price that the governments have been charging for them.
I have strong anicap sympathies, and it’s always enlightening to follow the arguments of people like David Friedman here showing how these various social technology infrastructure services can be provided in a minarch or anarch manner, but be they provided by governments or by anarch structures, they are still not-zero-cost services that have to be paid for. In a hypothetical anarch world, people and organizations will still have to pay for them. Instead of taxes, maybe by mutually agreed service fees and insurance premiums or something, but there will still be a bill, for the billionaires and corporations to pay.
In Torchship, an sf novel by a new writer that I liked a lot, one of the planets works this way:
Why do you think of currency as a public good? It can be and has been provided privately as an ordinary private good.
If that isn’t obvious, consider the simple case where the currency consists of gold or silver coins.
I can easily see special interest groups pooling their money to buy a councilorship.
With campaign finance limits (not necessarily applicable to the candidate themself) this could be a relatively democratic process. Even without them it could be relatively democratic. How many billionaires want to try to outbid e.g. the AFL-CIO membership?
Correction accepted, and is a mistake I should not have made, given my current work on hyperledgers.
Currency is not a public good, tho most widely used currencies are a government service.
How about “some goods that are generally currently government monopolies that generally work best with very wide coordination and generally open or universal availability”, such as currency, roads, and lighthouses.
Raising a question is one thing, inexorable doom another.
I’ve felt like the quality of the last few posts regarding taxes has been much lower than the average quality of Scott’s posts. I’m glad to see in this post that you are updating your priors a bit and factoring in new evidence. I don’t see this tax bill as a huge gain over the status quo, but I do think it is a gain.
To make some points that others have yet to make:
1) That Forbes article you linked that discussed the Atlanta FRB survey was a bit misleading I think. The distribution looks like for Hiring/Capital investment plans respectively.
Decrease Significantly: 1 and 1
Decrease Somewhat: 1 and 2
No Change: 59 and 46
Increase Somewhat: 31 and 40
Increase Significantly: 8 and 11
Obviously the somewhat/significantly isn’t strictly defined, but if we use numbers like 5% and 10% as ballparks, that means the average effect is 2.2% more hiring and 2.9% more capital investment. Given that US unemployment is like 4.1% as of October, we’re basically at full employment. Which means the only way to entice workers to join your company is to offer them a better wage. You can also now afford to do this because your tax rate is lower.
“But wait! That one CEO guy said that they’d just raise dividends and share buybacks”.
Yeah, that guy did say that, but I don’t think he is right. I don’t think anyone who has studied corporate finance would think hes right. Companys have a cost of capital, and this cost of capital dictates which projects they can and cannot do. If a company does projects that are profitable, but less than WACC then that company is basically burning money; it is not giving the required return that its debtholders/equity holders are demanding. When a company is evaluating projects it is the expected *after tax* cash flows that it cares about.
By way of example: if a company is evaluating some projects, it has a WACC of 10% and it is looking at the following projects: Project A with 12.5% pretax return, Project B with 10% pretax return, Project C with a 15% pretax return. It won’t do project B even with the tax cut, because after taxes it’s return would still only be 8%. Pre tax reform it wouldn’t do project A, but now 80% of 12.5% is 10% so now it makes sense for the company to do it (actually the company is indifferent at 12.5% pretax, but w/e), and Project C would get done pre tax reform and post tax reform. If a company just pays out dividends, people will stop investing in that company because they can get a higher return by investing money into companies that are actually doing these new “economically profitable” projects that spring up because of the tax reform. This also solves the skilled labor problem that he says is a bigger deal because now the after tax return of taking unskilled/semi-skilled people and training them changes at the margin to be a profitable project. Even at higher wages.
Another thing — many of these very wealthly people (Bill Gates, Buffett, Zuckerburg, everyone on this list) are choosing to give their money in effective, scientifically sound ways in order to maximize the most good for those who most need it. It’s not like it’s all yachts and caviar. Much of this money is doing more good than it would going through the legislative process, where it’d be allocated through the same messed up system (special interests, giveaways, grandstanding, next-election type thinking) that produced this tax bill in the first place.
I’d rather Bill Gates spend his money on anti-malaria or de-worming initiatives then the government spend on more defense spending or entitlements or agriculture subsidies.
Yeah, in real life, the rich are far more likely to be Alice, while the lowest quintile is far more likely to be doing things as generally non-useful as breeding virtual cats.
Speaking for myself, I wish I’d thought of doing a cat-breeding game on blockchain. That sort of concept is like catnip (pardon the pun) for a certain species of nerd.
Not gonna go out and play it, though.
The lower quintile aren’t the people who created the game, they’re the people dumping money into it.
Replace blockchain cats with Farmville or something for a more realistic comparison.
It wouldn’t be that hard to implement. And I’m elbows deep in sawtooth and etherium right now. Maybe I will knock one out sometime next year, if someone else doesn’t first.
Except when their experiments turn out to be duds (and possibly set the people experimented on further back than they would have been). But this is true for all programs regardless of funder.
$90 billion / 300 million is only about $300 per person in the US, so yeah, not a big deal. But divide that up between a randomly selected 300 thousand and you’re talking $300,000 per person, and 300,000 experiments. Would this be better than letting Gates’ foundation control it all, or worse?
The DOE national labs are funded by the taxpayers (at about $2.5 billion per year – easily affordable to Gates alone). Would anything like them still be around and doing good if it was left to the (rich) people alone?
PREACH! This is kind of how I feel when I hear Eliezer (et al) argue against raising/keeping the minimum wage. He/they’ll apply a chain of economic theory rules to explain how raising the minimum wage is bad, when what’s actually needed is a graph of all the horrible things that should’ve happened the last dozen times we didraise it.
The horrible things are invisible. No one is saying that minimum wage will sleep with your wife and eat all the food in your refrigerator. They’re saying that it will act the same way other price floors do, which when applied to labor will do things like push marginal people out of the labor market (whom you don’t see because you’re not marginal), create more economic pressure to offshore jobs, etc. We’ve definitely seen offshoring and we might have seen unemployment, but these are quite hard to unequivocally blame on minimum wage, because there’s a million other things going on at once and also because there’s legitimate dispute over how strongly the demand curve for labor responds to this sort of intervention. But the theoretical backing for some response is pretty damn unequivocal.
The main horrible thing is unemployment, which is visible.
There is no separate statistics for low wage unemployment. 4% of workers earn minimum wage. So if a minimum wage increase lead to 25% unemployment among those workers that is still only 1% of the total workforce and that change could easily be swamped by other changes. Especially since it is not all done at once but over months and years as businesses find ways to use less labor.
But keep doing this repeatedly, and the %s will accumulate.
Over time you not only have the people who otherwise would have been employed at the minimum wage and are now unemployed, you also have the people who otherwise would have been employed in their first job at the minimum wage ten years ago, didn’t get that job because of the minimum wage, and so didn’t make it to the next step up.
So even if the level of the minimum wage stays fixed (and nothing else changes), you would expect an increase in the negative effect over time. You would also expect that due to elasticities being greater in the long term than the short.
You’re pretty much saying that the effect on unemployment is too small to be noticeable.
I’m not Viliam, but the argument against increasing the minimum wage is not that it would have a substantial effect on the national unemployment rate, it’s that it would have a substantial effect on the unemployment rate of the people whose income it was supposed to raise. Since that is only (as per sourcreamus–I haven’t checked) 4% of the labor force, the effect on the overall unemployment rate is going to be small enough to be hard to distinguish from changes up or down for other reasons.
Anyone who fails to make that distinction either doesn’t understand the argument or is pretending not to.
How much effect it has on the least productive will depend on other factors, such as levels of welfare. You can’t determine anything in isolation, and it continues to be nonsense to insist on the negative effects if a NW when you don’t even know the level.
Various factors affect how much an increase in the minimum wage results in people who want to work being unable to find a job and how much worse they are as a result. But that is still a negative effect. The uncertainty is only in how big it is.
No. Having an MW and welfare is not a negative effect if welfare is high enough. Having no welfare and no MW can result is some people being paid too little to survive, which is definitely negative.
when what’s actually needed is a graph of all the horrible things that should’ve happened the last dozen times we didraise it.
Graphs which compare the rate of unemployment in a city or state pre and post minimum wage hike would definitely be useful data.
Didn’t Seattle raise its minimum wage to $15 an hour recently?
Yes, and the study commissioned by the city to answer this found that it hurt the city’s lowest wage workers:
The figures I remember from long ago were on the effect on teen unemployment and black unemployment of increases in the minimum wage.
As per our previous discussions, young people can treated separately if thats a problem.
The point isn’t that young people are a special group among low skill people, it’s that they are a group which is largely low skill, hence statistics for them give you some information on the effect on other low skill workers.
The debate on this subject in the economics literature is active and quite interesting. You can cite a dozen studies to show that raising the minimum wage does/doesn’t have a effect on a variety of indicators, including employment.
Of course, everyone seems to agree that a sufficient increase in minimum wage would have some distortion effects – say a $25/hr. increase. The debate seems to be more about what impact a smaller-but-still-substantive increase would have. I am personally partial to the argument that the main reason some studies (such as the Seattle study) showed negative impacts to increasing minimum wages, while others showed none, is because at a certain low level people are simply unwilling to work at any price, and in the US the minimum wage is often set below this level – thus making it moot. For example, if most low-skilled workers are unwilling to work for less than $8.50/hr, but the minimum wage is set for $7.25/hr, then minimum wage is irrelevant. Go ahead and raise it by $1.25 and you’ll see no employment effects.
Sure a couple people might be willing to work for less, but it won’t be an effect that rises about random sampling noise.
David Card, coauthor of the one prominent study I know of that didn’t find a disemployment effect (in one low wage industry over a fairly short period of time from an $.80/hour increase that happened in one of two adjacent states), said in an interview:
More generally, I think the amount of disagreement on this issue among academic economists gets greatly exaggerated because of the politics. The size of the disemployment effect is an empirical question. But I think it would be hard to find a competent economist who didn’t think that, as a rule, increases in the minimum wage tended to reduce employment for low skilled workers.
Exactly! So the debate often boils down to “should be raise the minimum, or are we at the point where we will start seeing undesirable effects by raising the minimum?”
But then I guess what’s the point? Is there a theory out there that there’s some sweet spot between $0/hr. and $100/hr. where you’ll see some positive benefit of the minimum wage but no negative impact? If so, what’s the expected magnitude of this effect? Why would we expect this sweet spot to exist at all? And why are we trying to thread the needle on this issue?
There have to be better ways to help low-skill workers than play around with their wages and job security without really knowing what we’re doing. At the very least, I don’t think it’s fair to criticize opponents of minimum wage for not wanting to take risks with poor people’s livelihood. If you are, though, at least do it like Seattle initially did and measure the effects and report them.
That depends on your criterion of benefit. If it’s “total income to workers who were getting the old minimum wage,” then the “sweet spot” is at unit elasticity of demand for such labor.
But that’s the wrong criterion in at least three ways:
1. The increased wages of those still employed aren’t coming out of nowhere, they are being paid by other people, probably consumers of the low wage labor. If your criterion is net benefit measured in dollar value, then the sweet spot is at a minimum wage of zero. People unemployed because of the hike are a net loss, people with higher wages only a transfer.
2. If you are a utilitarian you should still count the cost in point 1, but you will give it a lower weight than you give to the gain to those making the higher minimum wage because you expect that on average the latter have a higher marginal utility of income. So the sweet spot will be a lower minimum wage than the one that maximizes income to the low wage workers but may well be higher than zero.
3. On the other hand, leisure is also a value. A change that leaves the total amount going to low wage workers the same but reduces the total number of hours worked looks like a benefit to them, since most people have things they like doing better than working. I, for instance, who no longer have to work, have set my normal level of work at two hours a day, seven days a week, applied to all writing projects. And that’s for work of my choice.
And then there is the issue of the cost of keeping people from taking the first step up. And psychic effects, good and bad, of being a productive member of society. And …
My own view is that the optimal minimum wage is zero.
There’s three ways you can go. You can put the burden of supporting the least productive on the employer, on the taxpayer, or let them starve (or turn to crime).
Putting the burden on the taxpayer means subsided wages, which perversely incentivises employees to drop the wages of productive employees.
Putting the burden on the employer , on the other hand, incentivises them to make low productivity employees more productive through training , technology, etc.
But it’s important to remember that while everyone else is operating under no one starves constraint, libertarians aren’t.
The whole problem is incredibly easy to solve if you don’t mind poverty, immiseration and crime . Thats how our ancestors solved it, and thats how third world countries solve it.
And it is easy to get your preferred result if you entirely ignore the argument you are pretending to respond to, as you have just done.
A minimum wage law doesn’t put the burden on the employer–the employer substitutes other inputs for some of his unskilled labor and, since his competitors have to do the same, the price of what they produce rises. It puts the burden on the workers who have been priced out of the market and are now unemployed while raising the income of those who are still employed at the cost of whoever consumes what they produce.
There is more than one way to absorb costs. Price hikes are not invariably seen after the introduction of a MW.
The point of of upgrading technology is to do more with less. Why would that lead to higher prices?
The no-MW no-welfare combination supported by libertarians is not without it’s own knock-on effects. Someone who is not earning enough to live on has the choice of begging. borrowing, stealing or starving. All of those have externalities.
And the experiment has been run.
Putting the burden on the employer , on the other hand, incentivises them to make low productivity employees more productive through training , technology, etc.
They are certainly incentivized to replace low-skill labor with high-skill labor.
But you are just hoping they will do it by changing the low-skill worker into a high-skill worker. It’s much simpler to fire the low-skill labor and hire a high-skill labor.
If you are Larry the Low-Skill Worker, this sucks.
Maybe I’m wrong, but it sounds a little like talking past each other here. DavidFriedman is making an economics argument, saying there’s no free lunch, so if we create a benefit for one group we need to follow the costs to their logical conclusion.
TheAncientGeekAKA1Z seems to be saying, “yeah there are costs, and they’re borne by the employer; sure they could pass that along to the consumer, or fire workers, but wouldn’t it be better if they just accepted lower profit margins instead?” or some similar argument where the employer DOESN’T pass on the additional cost from raising the minimum wage.
Sure, that would be nice, but it’s not how it’s happened in the past, and there’s no reason to believe it will happen in the future. And since profit margins are often a percentage of gross income, if your aim is to ‘soak the rich’ by cutting their earning potential, you’ll find the poor targeting adversely impacts many other groups (the groups DavidFriedman is concerned about) before the rich start to cut back on their Yacht-of-the-Month Club memberships.
Unfortunately, we’ve learned through sad experience that the costs of anti-poverty programs are often borne predominantly by the poor. I don’t think there are many instances where there is an intent to harm, but the harm is there nonetheless. And ignoring it, or hoping private actors won’t choose to pass the buck but will instead choose to accept financial pain in a way they never have in the past is not a convincing approach.
I suspect a certain amount of this type of debate is based on what mixture of personal experience and statistics each person (including myself) is biased toward accepting. My bias tends to accept that there is a non-zero cost to any minimum wage that impacts people in a meaningful way, and that cost is overwhelmingly borne by the poor. Here’s my personal experience to that effect, which you may or may not find convincing:
I’ve known a number (>>100) of long-term low-skill workers throughout rural Ohio, Indiana, Kentucky, and Pennsylvania. Many have struggled off-and-on because they’ll get a decent-paying job, but then after a few years they either get fired because their position is replaced by some machine, or because the factory itself closes. I understand that manufacturing output has steadily increased in the US for decades, but they’re more interested in the number of manufacturing JOBS. Someone like Trump comes along and promises to bring those jobs back, and they are convinced he can do it, no matter how much I try to argue the basic economics of the situation.
A few years ago (2007?) I was reading an article where an economist toured a US factory (made-to-order parts for older cars – you go to AutoZone and order a fuel pump for 1993 Escort and they say “we don’t have it in stock, but we can order it in for you” – that’s this factory) and at one point during the tour the guide and economist are discussing one of the workers on the line. The guide comments that she’s a great worker, and it’s unfortunate that her job will be gone within five years. Shocked at the specificity, the economist asked for an explanation. Paraphrasing, he responded, “The machine that will do her job exists. It’s been invented. But our company has a policy that every piece of capital equipment must pay for itself within 2 years. Currently the cost of that machine for this position is $200,000. The annual cost to employ this woman (including benefits) is about $89,000. Once the falling cost of the equipment and the rising cost of labor cross the decision will be academic.”
I was discussing this article on the plane with a man in the meatpacking business. He mentioned they have similar policies in his industry. For example, the older machinery for cutting chicken fillets requires a worker to orient the incoming pieces of meat on the conveyor belt as they go into the fillet machine (which then uses high-pressure jets of water to cut the meat). The newer machines use a series of cameras to generate a 3D model of the meat on the line as-is and then automatically select the optimal position for the fillet within that. The water jets rotate to accommodate that position, and you end up with a more consistent cut of meat and 1 fewer workers on the line. Across the country, as the old equipment nears the end of its life cycle (and taking into account cost savings by eliminating 1 position) factories are beginning to replace their old machines with these new ones.
One final example: Lays used to use teams of about 20 people to remove ‘bad’ potato chips from the line. The problem is that this required the line to split from one conveyor belt going 40 mph to multiple going < 10 mph. The new process uses a camera that takes images of the line and selects objects that don't meet certain criteria. As the line speeds up, the chips come to a short gap in the line that the chips would normally sail right over. However, timed to the camera/software algorithm for removing bad chips, a series of tubes use a puff of air to remove bad chips from the line as they attempt to cross the gap. Lays can now produce chips that are more consistent, and faster, while eliminating the 20 or so low-wage QC workers.
The point is that this stuff is happening all the time. To people I know. It has been happening for decades, and will continue to happen for as long as this revolution in technology continues. The problem is that real people get stuck in the middle, and if we're honest with ourselves we have to admit we haven't found a good solution for that yet. Handing out cash just means people hop from low-wage job to low-wage job. They get the feeling the system is rigged against them, and they'll never get ahead. They vote for someone like Trump who promises to go after the "immigrants who are taking their jobs". You raise the minimum wage, and they find themselves hopping jobs faster, and they vote for someone like Sanders who promises to soak the rich "who are just pocketing all the extra profits and can't wait to replace you with a machine". You do nothing, and they still lose their jobs and take their grief to the ballot box to pull the lever for someone who'll promise to fix the problem.
But the problem isn't being fixed. Fundamentally, none of the solutions proposed deal with the real issue, which is this: your 15+ years' experience, a career, a legacy, and some well-deserved pride in your work disappear in one 5-minute meeting where your boss informs you that he's sorry but he doesn't need you anymore – nobody needs your skills anymore (because they're extinct); and you still have 15-25 years to go until retirement. You don't know how you'll feed your family, or face up to your children who have always seen you as their hero and a hard-working ladder-climber who can command respect because of your once-valuable skills and understanding.
In that situation, you don't want cash, you don't want a higher minimum wage, you don't want to go back to college and start all over again at the age of 47. You want the good old days – you want your job back. And you'll probably vote for the guy who promises to give it to you.
But who can’t.
OK, well that’s DT. What about MW? You seem to have conceded that all these layoffs aren’t being caused by the MW, because your $89k machinist is way above that level.
MW does prevent people being paid less than they can live on, and isn’t the sole cause of job losses. You and Friedman seem to be thinking in terms of dignity: I am thinking in terms of the more basic problem of how you prevent the least productive starving.
I am thinking in terms of the more basic problem of how you prevent the least productive starving
Flour is about $.30/lb at Costco. Flour is about 1600 calories/pound. The average adult male needs about 2500 calories/day
So at a wage of $10/hour, working 8 hours/day, in one day you make about 170 days worth of calories.
Obviously a full nutrition diet is more complicated than that and not everyone shops at Costco. But I think those numbers suggest how far people in a modern developed society are from facing literal starvation.
Already mentioned. You need to prevent employer dropping wages and collecting subsidies for productive employees. If you don’t want employers exploiting the facility, you need to hedge it around so much that it effectively becomes a subsidised internship.
Good luck cooking that if you’re living in your car.
You need to prevent employer dropping wages
No you don’t. Just like you don’t need to make sure that there are absolutely no welfare cheats.
I am confident that some of the wage subsidy will go to employers. But I am also confident that some will also go to employees, which is the nominal goal.
I’m not trying to make any of the alternate suggestions you keep pushing. Let’s give minimum wage a fair hearing first before move to other solutions. If MW works to reduce/eliminate poverty, why not focus on it? If it doesn’t work, does it matter that it doesn’t work less than some other flawed policy?
If there’s a policy decision that can eliminate the burden of poverty that many citizens bear, I’m interested in pursuing that policy decision. I’m not convinced by DavidFriedman’s flour argument for the very reason that it’s prone to producing some populist politician promising the world in exchange for votes and bad policy. In a (relatively) free market with a democratic republic like we live in, doing nothing – even if it REALLY is the best long-term poverty-reducing strategy! – has a proven track record of falling apart, since it is easily conquered, politically.
But if we actually care about reducing the burden of poverty, why are we so focused on minimum wage? Does it really show that much promise at reducing poverty? Perhaps you think it does, but forgive me if I’m unconvinced by the evidence and abundant prior experience. Almost no economist is arguing that a large sufficiently increase won’t have a net negative impact for the poor (i.e. a $20/hr. increase). The best possible outcome we could be looking at is that there’s some small-but-still-meaningful increase in minimum wage that we HOPE doesn’t negatively impact those it’s targeted to help.
But we’ve been at this game for decades now, with no clear answer as to WHETHER that is even possible, let alone to what extent it would help those in poverty. Look, I’m interested in helping reduce poverty, but I’m not married to the idea of a minimum wage. And I suspect if you’d never heard of it before and looked at the literature on the subject to date, you wouldn’t wouldn’t be enthusiastic about it either.
There are other solutions out there – many of them bad! But the sooner we accept that minimum wage just hasn’t produced anything like the poverty-reduction we were hoping for when we first started implementing it, the sooner we can move on to the tough job of figuring out something that works.
The real problem with this kind of program is that it’s a kind of zombie policy. Politicians love it because it’s easy to promise someone a pay bump in exchange for votes, and it’s easy to vilify the opposition for standing in the way of your promised raise. But seriously, it’s not a decision between a minimum wage hike and doing nothing. Nor is it a decision of an ‘all of the above’ approach. That never actually happens. There’s only so much you can accomplish, politically. It really is a decision between one more minimum wage hike that we hope (against all prior experience) will have an impact in reducing the burden of poverty, or we can try moving on. We can try something else – something that might not work! – and then maybe something else, etc. Until we find something that will make a meaningful impact.
Or we can keep doing the same minimum wage increase, tweaking it at the edges, and hope this time it will work where all previous attempts failed.
On the topic of *slight* differences in GDP growth not mattering very much I present a few examples.
The famous image of North vs. South Korea at night. From what I can tell South Korea has averaged ~5% over the last 50 years and North Korea ~1%. A 4% difference does not sound quite so large to me.
Another example: The divergence between Europe and China circa 1500. This one is hard to get exact figures for but it seems like what happened is the European countries averaged a couple tenths of a percent higher GDP growth over a few centuries and this really added up.
Edit: Using the sketchy figures from wikipedia on the GDP of countries in different time periods found here at
It seems like Britain’s (just the island’s) economy grew by ~12x from 1500-1820 and China’s by ~4x. Which means that Britain’s GDP grew on average ~0.007% annually and China’s by ~0.004% annually or a difference of ~0.003% annually hardly a very large amount at all.
And if those growth numbers seem low, remember that gdp/technological innovation/etc seems to be accelerating and so we’d expect growth to be considerably faster today than it was then.
Put another way, if you don’t believe in the Singularity and think the future of Earth is more likely to follow something like the Kardashev Scale, then we can predict a few different United States for the year 2400.
A.) 2400 where the US averages ~2% GDP growth: GDP about 3000 times larger than today.
B.) 2400 where the US averages ~2.5% GDP growth: GDP about 20,000 times larger than today.
C.) 2400 where the US averages ~3% GDP growth: GDP about 136,000 times larger than today.
I don’t know about you but I personally intend to be cryopreserved and live to see 2400 so I’ll take that additional 0.5% growth and take C thank you very much! (the numbers are still pretty convincing even ~50 years out so could greatly affect even the probability of being cryopreserved)
Right, that’s how I think about it too – even a really tiny increase in growth is absolutely essential. The difference between the country being 3000x richer and 136,000x richer is the kind of difference that could literally save the planet. When a rogue comet is discovered heading our way, being that much richer is the difference being destroyed versus being able to spot the problem and deal with it appropriately. I don’t grok people who claim to care about existential threat but aren’t worried about this sort of thing.
In the fable of the grasshopper and the ant, the ant is maximizing resource growth to prepare for winter while the grasshopper focuses on redistributing whatever resources are around now with no regard for the longer term.
This feels a little bit like Pascal’s Mugging, doesn’t it?
No, no, no, no, no stop making this argument tax breaks affect level, not growth
They only affect growth because of dynamics, statically there is no growth effect
And even if you do want to model the growth effect, it would be magnitudes lower than the short-term growth due to disequilibrium.
This mistake has been made over and over in these last three posts’ comments and it’s such an absurdly large difference in what the expected effects of tax cuts are, I fail to see how anyone who learns this wouldn’t have either a) supported much, much, much bigger tax cuts previously or b) changed their mind after finding this out. If you previously believed that there was an exponentially compounding effect of the size advertised (e.g. ~.5% GDP) I am really curious what your reactions are.
Also, I am willing to state on-record that if I am wrong about this, I will start supporting this tax bill.
I was specifically addressing the claim that slight differences in GDP growth don’t matter not whether or not the tax bill would achieve that. IIRC the Marxists have been making the claim for quite awhile that Marxism achieves superior GDP growth and I’m not endorsing Marxism.
Ah, sorry for the assumption!! I think that it could be taken that way given the context so I still think it’s important for the lack of relevance to be addressed.
The substance of the article you link appears to be either a tautology or a bald assertion: in a model where TFP growth is exogenous (a hard coded constant), tax policy (like everything else under the sun) doesn’t affect it.
But is that plausible? Improvements in physical and social technology, patterns of trade, etc don’t fall magically from the sky. They are produced by human experimentation, just like everything else the economy produces. And like all human activity they are affected by incentives.
An extreme thought experiment might serve to illustrate this:
Imagine that in the year 1700, aliens had instituted and carefully enforced a 100% tax on all human activities except primitive subsistence farming. Obviously this very bad policy would have had an immediate impact on the level of economic activity, as everyone doing anything else became a subsistence farmer or starved. Then on Jan 1 2018 the aliens eliminate the tax. Do you expect that the world economy would quickly (even over a human lifetime) equibrilate to its (real-world) present level? This is the result implied by the “exogeneous TFP growth” model. But of course a world of subsistence farmers would not have invented any of the productive technologies we have, or built the companies, or even increased their population to present levels. They would need centuries of growth to build our world.
(I’m not taking a position here on this particular tax bill.)
*Got a bit mixed up on the UK vs. China growth numbers. The UK seems to have grown ~0.7% annually and China ~0.4% annually from 1500 to 1820 for an annual difference of ~0.3%
This is kind of the whole issue. How much growth do we get? 3% doesn’t seem like a lot, but it’s really huge. But the tax bill isn’t expected to generate 3% extra growth. Closer to .03%, for Rhett reasons PSJ mentions below.
I think growth is amazingly important if we take the welfare of future persons seriously, and I think we should take the welfare of future persons very seriously. But that doesn’t entail that minuscule growth justifies massive expenditures. And that’s what the tax bill seems likely to do.
Let’s run with this. The outcomes of the statue: bronze & labor are consumed, some entities get a $100 billion transfer, money supply is diluted by $100 billion.
I don’t have a good way to evaluate the opportunity costs of bronze & labor. But, they’re not really central, since the actual tax-cuts don’t involve tying up large quantities of bronze.
The real effect is the money transfer.
Printing money doesn’t create or destroy real value. It just moves it around. Inflation takes value from people who cash or dollar-denominated assets. It gives to whoever ends up holding the new bills, plus anyone who owes dollar-denominated debts.
The total transfers are:
Corporations involved in Statue-Building = +X value
People who owe net debt = + Y value
People who own net dollars = – X – Y value
If you want to do class-analysis, we’d note that stock and dollars are both investments. We’re taking X + Y from some investors to give X to some other investors. On net, the X’s cancel, and investors lose Y.
That value Y is transferred to households who owe dollar-denominated debts Since the effect size scales with your net liabilities, the biggest benefits go to people who are, by definition, the poorest in the US.
So, yes, you should be asking if running up the deficit is that bad. You should be 100% behind sudden inflationary shocks.
This is a better thought out and presented version of an argument I was going to make; building a $100 billion statue isn’t lighting $100 billion on fire (figuratively). Especially if you’re in the economically depressed giant statue building segment.
You have a good first approximation–their price.
You need to first prove that virtual cat lives are less important than human lives.
I am not a fan of this series of posts either. The blog market is pretty efficient at complaining about trickle-down economics, so there’s little value-add here.
It’s also just… not that interesting. Observing that “this bill sucks” is not interesting–most bills seems to suck. When was the last time there was a bill where everyone said: “Man! This bill is really great. The US government sure knows how to pass quality legislation!” It’s only interesting to ask, “Is this more or less terrible than we expected?” Its terribleness can be taken for granted.
On this post (and every other post I write):
– 90 people complaining I am wrong and should feel bad.
– 10 people complaining that what I’m saying is too obvious and I’m wasting my time with stuff everyone knows.
If you post what amounts to a conventional political position, do you expect different results? Half of conventional politics is obvious to half(ish) of people, and wrong to the other half.
But there has to be some point in arguing. Either I’m right and I convince other people, or I’m wrong and commenters convince me. I understand how rare this is, but it has to be at least theoretically possible, or what’s the point?
As a layperson with only the vaguest knowledge of economics, I find these posts interesting, FWIW. I neither strongly disagree with them nor consider them obvious.
You are wrong and you should feel bad 🙂 Political opinions are not immutable, but they’re pretty close. Convincing anyone of anything is going to take more than a blog post, even if it’s one of your blog posts. People who disagree with you feel exactly as strongly as you do that they’re in the right (perhaps even more so); because of their massive prior, every single piece of evidence they have confirms their beliefs — just as yours does. There’s still some point in arguing, but if you think you’re going to convince anyone of anything in a single post, then… well… you’re wrong and you should feel bad.
I feel the same way, actually. Although I think that the discussion is possibly even more valuable than the posts, in this case.
I want to second Hyzenthlay. Although the top-level posts haven’t been as high-quality as your normal posts, I have still appreciated them (and even moreso your willingness to seriously and genuinely engage with the points raised in the comments), and the discussion in the comments has been excellent, in my opinion.
Contra Bugmaster, I have reconsidered my position with respect to the tax bill (so they weren’t immutable), and my previous feelings were sufficiently strong that they would have influenced my future votes. I think this is an important issue, and I’m glad you wrote this series of posts.
I think there is significant value in arguing on this blog in particular. I participate in fewer discussions in other places now, because everywhere else I know I perceive to have a lower baseline of quality. This is especially true for heavily polarized political topics.
I at least frequently change or adjust beliefs based on blog posts and discussion in the comments. I would not believe that Sanders’ college plan was bad if not for this blog, for example. On many other topics, I have tweaked my confidence.
If you ever deserve virtue points, I’d argue it’s for the past 3 posts. I find withdrawing or adjusting public statements to be quite unpleasant, and I imagine it would be tempting to avoid topics like this for that reason, but again, I think there is good value in having them. Yes, the 3 posts may be “worse” on some metrics, but not, I think, on the metric that measues “how good is it that the post exists”.
For what it’s worth, I think arguing in favor of a mainstream-social-democratic position (like ‘trickle-down economics isn’t as effective as its supporters think’) is worthwhile on its own; there’s very much a libertarian consensus here when it comes to social welfare programs and government spending, and, well, I hope I don’t need to link to all the many good articles you’ve written about the dangers of socially-enforced consensuses.
If “every other post” means the two posts preceding this one, then yes. But I don’t think that’s at all true for all the posts you’ve written on this blog. I see a lot of commenters complaining here that _these three posts_ are not up to your usual standard.
Although you are right that other posts tended to have praise drown out criticism, bear in mind Scott has a quirk where criticism is magnified ten times and praise reduced.
I do think that the “quality” of these tax posts is lower than usual (in that you know the subject matter less well than usual), but thanks to your relentless willingness to engage and update, I’m convinced that their value is average or above.
Well I for one think you’re both obviously right and doing a public service by evangelizing a little for your obviously right position.
This is the same boat I’m in, for what it’s worth. Especially when we have people struggling to pay for the basics. In extreme cases, such as the homeless, people with medical conditions who can’t afford treatment, ect., it will be a really hard sell to me that the gains in utility from moving a few dollars their way wouldn’t be worth it.
I don’t think its a coincidence that the countries with the highest qualities of life have a healthy mixture of markets and social welfare spending, funded via progressive taxation.
I’m glad to see your thoughts move towards the economic, Scott. I think its a good avenue for your fantastic mind to venture.
For perspective, currently the us government spends about $1,100,000,000,000 per year on welfare. So if we lined up all the households in the US worth exactly a million dollars,
and took everything from them, that would total 1.1 million people’s entire fortunes reduced to nothing to cover welfare spending for this year. (There are about 125 million households in the US, so if we’re eating the rich, that would be about 1% of households).
Good thing the mean net worth of the top 10% (let alone the top %1) is over 5 million, so your hypothetical strays ridiculously far from reality. https://www.federalreserve.gov/publications/files/scf17.pdf
You use imagery of 1.1 million people becoming bankrupt on completely false premises to inflate the welfare cost of welfare (haha)
There’s no false premise and no inflation. Are you worried people will think that we literally line up only the people worth exactly $1 million at tax time? The point is to give people a sense of scale by putting the actual amount we spend into a comprehensible scale.
Other ways of slicing up the pie include:
* Instead of talking about seizing assets to fund our current welfare programs, we could look at the alternative of giving the poorest 1% of households $1 million per year, (or the poorest 10% of families $100,000 per year, or $10,000 per year to every household) with those funds.
* Seizing and magically liquidating the entire market cap of Apple (the world’s largest company) would mostly cover a year’s welfare for the US
* Eyeballing based on this page, the top 1% have at least $10M net worth per household. If the evil 1% used their magical rich-person-tax-evasion skills to avoid all taxes, and we stuck the entire $7 trillion US government budget (not just welfare) to the remaining richest 10% (excluding the richest 1%), seizing everything they own looks like it’d approximately cover it. For one year. Or we could use our magic liquidating trick to instead consume the entire value of the world’s 5 most valuable companies: Apple, Google, Microsoft, Amazon, Berkshire Hathaway to get about half a year of US government operating budget.
But speaking of inflation, let’s look at your source. Presumably you’re talking about table 2? You quoted the mean figure for the richest 10%, which makes mere millionaires look twice as rich as they are due to the billionaires skewing the average upward. So the average net worth of the richest 10% is $5.3 million, but the median of the 90-100th percentiles in the other column tells us that the 95th percentile family has $2.4M net worth, and the 75-90th tells us that the 82nd %ile is at $605k. So to make the ranks of the richest 10% in the US (90th percentile), you need somewhere between $600k-$2.4M — plausibly $1 million and definitely not $5 million.
Another way of slicing up the pie is literally the exact tax scheme we have now, which is notably non-apocalyptic and doesn’t invoke images of millions going broke. And yes, I used %10 as a replacement for the %1 used in the above comment, so the fact that the poorest among the %10 plausibly have ~1 million has little to do with the fact that taking 1 million from the top %1 would not bankrupt them.
Yeah, these are all bad ideas, which is why we don’t do them and no one is advocating for them. You sure read a lot into that one sentence I wrote about transfers.
There are ways to transferring more income to the poor that aren’t civilization-destroying. Just look at the Nordics, for starters.
It is good to give people a sense of scale. But if the “point” is giving a sense of scale, you need a norm. Going out of your way to make numbers seem big without norming them in an appropriate way precisely fails to give a sense of scale. It’s like showing a blown-up picture of a tardigrade to “give a sense of scale”. “I just want people to understand what monsters tardigrades are”.
@PSJ, once again, the point is to visualize the scale of the assets controlled by the government, not to propose actually collecting taxes that way.
@Guy, see above. Not a proposal. A way to visualize the quantities involved in the “few dollars” you mentioned. Your new proposal is “Nordic countries”, which likewise involves no quantities. Did you check how much it would cost (or save, for that matter) before proposing that? Because this whole post is pretty much about budgets and how they’re funded, not which small countries we wish we had the same welfare outcomes as. (Incidentally, a great article countering the myth of the Nordic countries as socialist utopia is “The next Supermodel”)
@Jack, what do you mean by “norm”? I’m not trying to make numbers sound big, I’m trying to make them sound exactly the size they are. 1 million x 1 million = 1 trillion. There’s no hidden scale as you propose in your tardigrade example. I even listed the total number of households in the US, so that people wouldn’t be left wondering if a million households is some negligible slice of the whole population.
The article has too narrow of a focus, without direct comparisons (including the U.S.A. vs. the other Nordic countries), it comes off as misleading.
Instead, look at the comparisons yourself in this article: Nordic Socialism Is Realer Than You Think
I think what Jack is saying is that most people don’t encounter such numbers in their everyday lifes (e.g. their bank accounts) so they don’t have any context for making sense of their scale.
The U.S. government maintains several public goods used by hundreds of millions of citizens (another number not usually encountered normally), so I don’t get a sense of how big or small spending of 1.1 trillion dollars is for an endeavor of this size. It is still useful (for me) when compared to other relevant figures like the tax breaks mentioned in scott’s post and the total expenditure. Less useful with things less directly related like the worth of a single company.
I still don’t see anything here that rises above being a generic pro-redistribution argument and can actually justify why more redistribution is better than less _at_current_margins_.
If you’re right, where do we stop? When we do as much redistribution as France? Greece? Venezuela?
If you can’t say where to stop and why, you aren’t doing an authentic cost benefit analysis.
If we were at Venezuela levels, economists would no longer be so sure that lowering redistribution wouldn’t help growth. Also, the vast majority of wealth would no longer be going to people who have low value for the marginal dollar.
I agree the very complicated hard-to-figure-out thing here is whether the tax bill would increase growth, which is why I’m relying on all the economists saying it wouldn’t. If we have an oracle telling us whether or not lowering taxes would increase growth, then I’m totally happy saying keep increasing redistribution until the oracle tells us we’re hurting the economy.
ah, ok. I guess that’s fair.
Weren’t a whole lot of economists predicting that the Soviet Union would surpass the United States well into the 70s?
They don’t say it will depress growth either. If you read the comments, most of them seem to say “this will have no affect.”
They sorta had an excuse, in that the Soviet state figures on economic production had very little to do with the actual reality on the ground. (It also helped that the things easiest to verify from the outside — heavy industrial shit like dams and cranes and tanks — were also what the USSR was best at.)
That made predictions about its future pretty much a referendum on how much you trusted the USSR, and while we (aside from a few apologists) can now say without getting into heavy politics that it was totally untrustworthy, I don’t think the same was true in the ’70s.
If I correctly remember the summary I saw, Samuelson kept claiming the USSR was catching up, edition after edition, despite the fact that the ratio of GNP was about the same, edition after edition. He just kept pushing the date at which the USSR would catch up with the U.S. farther and farther into the future.
And his argument wasn’t based on misleading Soviet data, it was based on the argument that they were investing a larger fraction of GNP than we were, which may well have been true. That simply ignored the question of how well they were investing it.
Even good experts who deserve respect will be wrong some percent of the time; you can identify their mistakes in the past, but unless you’re better than they are in general it shouldn’t make you stop believing them in the future.
I am unaware that anybody is holding these “experts” to any objective standard of performance. Expert opinion has become rather untrustworthy. Respect has become more about what school you went to, and less about actual performance.
And, why not, exactly?
“Because that would be terrible, and then we’re screwed”, while true, is not a persuasive reason.
That’s exactly my fear here too. If we just trust economists we’re liable to ratchet our way towards so much debt and so much socialism that some day we find ourselves in the same situation as Greece.
We know for a fact, that too much socialism is an unmitigated disaster. We know for a fact that some reasonable amount of socialism is workable.
Scott seems to want to edge towards more debt and more socialism until the economists all start screaming that we have to turn back. Scott is essentially saying “the guardrails will protect us”. I don’t think we should drive near the cliff at all. I think the guardrails are most likely to be missing on the most treacherous stretches of the pass.
But I do agree that if you trust economists to get this right, there’s not much more to say about it.
edit: Based on what little I know, I don’t think the tax bill is a good idea. It seems to be summarizable as:
* more debt
* less socialism
* passed with parliamentary tricks instead of under regular order
* purely vindictive tax increases on grad students and Californians.
I don’t think more debt is a good trade for the less socialism, and I expect all the things I don’t know about the bill are probably bad. So I’m against it. But I still don’t like Scott’s arguments against it.
Eliminating the deductibility of state taxes makes perfectly good sense for anyone skeptical of government spending. The effect of deductibility is that the federal government subsidizes the spending of state governments, which can be expected to lead to more spending by state governments.
The grad student change simply involves believing what the universities say they are doing and calculating taxes accordingly. Benefits in kind are taxable.
Sure, but it’s obviously going to be reversed the next chance the democrats get to reverse it. If they really wanted a durable reform on deductions they’d phase it in over several years so people have a chance to plan and adapt, and they’d pass it under regular order. That’s what strikes me as vindictive about it. Red ties in power this year, blue states get taxed. Blue ties in power next year, they’ll find a way to tax Alabama. It’s getting ugly.
Lowering marginal tax rates on the rich right now also seems to me like the most chickenshit possible form of “less socialism,” especially given how integrated the enterprises of most actually-existing rich are with the legal and regulatory apparatus.
The most effective arguments for why the tax bill is bad:
• it’s based on borrowed money, which our kids will probably have to pay back
• it raises taxes on me personally (and probably Scott, too)
The rest is big scary macroeconomics, a discipline which even Richard Feynman couldn’t understand 😉
this reads like someone trying to parody the left wing line about how republicans responded to Obama.
The best arguments for why it is good, as far as I can see, is that it reduces the corporate tax rate, reduces the mortgage interest deduction, and eliminates the deductibility of state and local taxes.
Whether on net it is good I don’t know, and I am sure there could be better tax bills–but possibly not ones that would pass.
There are two problems with the corporation tax. The economic one is that it disadvantages one form of business organization (the corporation) relative to others, and I can see no justification for a disadvantage on that scale. To really get it right you would have to make additional changes, either tax dividends and (inflation adjusted) capital gains at ordinary tax rates or attribute all corporate earnings to the stockholders, but reducing the rate looks like a change in the right direction.
The other problem is that it looks like a tax that nobody pays, and isn’t.
Publicly-traded limited-liability corporations are pretty terrible because they permit pretty much unbounded delegation of moral and legal culpability to a legal fiction governed by a poorly aligned optimization process. They also tend to grow to the point that they start bending the regulatory structure to entrench themselves.
Far from excessive, the corporate tax seems inadequate to deter this, and they should probably just be banned.
That seems about as equally helpful as your original posit.
Swiss cheese.Everything is suboptimal, but some kinds of suboptimality mitigate each other.
Saving or consuming is in my opinion one of the biggest questions to answer as a government and an individual.
A government that chooses growth indefinitely still allows individuals to make the choice for when and how much to save versus consume (benefiting themselves or others). The more government consumes the less individual liberty is possible.
Delaying gratification indefinitely or eating the seed grain are normally poor choices for an individual. I’d say it’s a matter of preference even if we’re bad at knowing/executing what our lifetime preferences are. Arguments to use government to correct for poor decisions could be valid, but you haven’t done a good job making that case.
Re: “Several people brought up problems with the article saying CEOs say they will just give the money back to shareholders, most notably that giving money back to shareholders may stimulate the economy in other ways.”
When I last checked, the distribution of stock ownership among US households was very much skewed toward higher income households. It was also skewed toward higher wealth households, though somewhat tautologically so. Insofar as you’re staking your position on the taxes not going to the poor or middle classes, I don’t think you have to admit being wrong about dividends in any substantial way.
Source: I looked this up about 5 years ago, when doing economic analysis was my job and I had access to great databases, but here‘s the top google hit appearing to confirm. I didn’t break it out by “inside vs. outside retirement accounts” at the time, but common sense suggests if you exclude retirement accounts, it’ll be even more skewed to rich people. This is relevant if you believe that household spending is less sensitive to dividends paid into retirement accounts than paid into regular no-penality-to-withdraw brokerage accounts. I think this is plausible, though I bet someone has studied it.
How about this list of 137 economists who support it? Maybe less prestigious ones (I see a lot more state universities instead of Harvard/Yale/Stanford), but they’re still professional economists. You’re making it seem like the only people who support it are fringe conspiracy theorists, and I really don’t think that’s true.
As for why the other poll could get it wrong…
. In particular, they might be guessing that the extra spending in GDP would be countered by the Fed raising interest rates. That could plausibly make us better off (spending more efficiently on real goods and services instead of tax accountants) without affecting the net GDP.
A list of N people who support something is much less useful than a poll of what percent of randomly selected (or selected for quality) people support something.
Some creationists were able to find 700 scientists who support creationism, and I have no doubt such people exist, but a poll of randomly selected scientists would have found this view was vanishingly rare.
See eg the Chinese Robber Fallacy
For reference, many of the 137 people who signed that letter are not economists, and some of them may in fact not actually exist.
An appeal to authority on evolution is not equivalent to an appeal to authority on economics.
I would be curious to hear folks thoughts on the rightful ownership of wealth.
I will make the argument that I “own” approximately 0% of the wealth that I accumulate. That is, my marginal value in creating this wealth is negligible, and so the rights that I have over how to allocate this wealth do not need to be very big.
What do I mean by marginal value here? I mean, take away from my wealth everything, minus the cost of replacing me with some units that generate an equal amount of wealth (sorta like a tax levied by your employer). From the remaining, take away anything that I wouldn’t have been able to generate if I wasn’t raised in a nice society that taught me how to do things (sorta like a tax levied by your government). From the remaining, take away anything that I wouldn’t have been able to generate had all the humans and pre-humans over the last several hundred thousand years figured out how to have good genes and not die (sorta like a tax levied by ghosts).
What am I left with? About 0%. Actually, maybe even 0^2 with the ghost tax.
And that’s about what I think my marginal value is. (This is not a sad statement, it’s more a statement of gratitude. It’s also not a statement about the worthlessness of individual expression — I rather think individual expression is critical to the whole operation.)
Of course, I don’t want to live in a society with 100% taxes levied by ghosts. That would be pretty annoying.
But what I’m saying is, I feel pretty silly claiming personal rights over my money.
I’m all for ghosts and governments and whatnot designing tax codes to maximize the stability of human civilization, but a “rational” design based on the private ownership of wealth seems like pure imagination…
If you’re going to not-count any of your wealth that is there because of other people affecting you, you have to count everything that you’re doing that affects other people’s wealth, for the same reason–if the wealth counts for the person creating the environment, well, other people create the environment that lets you get wealthy, but you create the environment that lets other people get wealthy. You have to count it for someone.
And if you do count it, on the average, the amount of stuff you do that helps others get wealthy will be balanced by the amount of stuff other people do that makes you get wealthy. So you may as well count it all for yourself anyway, and you’ll get the same basic result.
On average it will work out (barring effects about change over time–Adam and Eve deserved the most wealth of all), but “on average” is doing work here. This disconnects the amount of wealth Brian Clearey should feel entitled to from the amount of money and assets they currently own. So everyone, on average, is entitled to some sort of “human dividend” representing their role in society and the gene pool and so on, which if you wanted to calculate it carefully would vary wildly. But there is little reason, once you are valuing the sorts of things Brian Clearey is talking about (ie things for which there is rarely market compensation), to use an individual’s present wealth as a proxy for the amount of this dividend.
You’ve captured my intuition on this subject. My problem with “taxation is theft” (taken as the wham-bam moral argument it is meant to sound like) has always been that property is theft in the first place anyway.
if property is intrinsically illegitimate, theft ceases to be a useful concept.
I probably don’t want to have this conversation, but I didn’t say anything about intrinsically. I have encountered a variety of more or less compelling justifications for systems of property, few of which bear much relation to its current distribution. Also, it might be wrong to take something someone has become attached to even if their ownership of it was illegitimate in some sense, but the measure of that wrong will not necessarily be the property taken. And lastly, I am not committed to the use of any particular concepts. So you can see, this conversation would take us in not one but at least three wild and unproductive directions.
Theft (or takings, if you prefer) still moves things from place to place, or otherwise alters their existence.
Cut down a tree and the person who loved looking at it has lost, despite that person never having owned the tree.
Property can’t be theft in the first place, “theft” is taking property away, it is dependent on property not being theft.
I think you are saying the same thing cassander said above, so see my reply. Any given property system can be theft relative to a preferred property system. Brian Cleary’s comment contrasts the present property system with one where people have entitlements to wealth that they have created.
The steelman of property is theft is that no initial distribution of property is justifiable, even if transfers are.
But that steelman requires arguments that can be adapted to show that no proposed involuntary redistribution of property is justifiable either. Leaving you with two sorts of economic philosophies, those which say that since our ancestors were all thieves we should do some more thieving, and those which say that our ancestors were all thieves but we should stop doing that.
What is your definition of property that makes this work?
I guess you’d need a definition of property where the stuff stops being property once you’ve transferred it.
No, it can still be “property”. It’s just that all property is tainted by Original Sin, and only the State, acting as the People’s Earthly agent, can absolve it of its sinfulness.
I am somewhat skeptical of States that ask more than the traditional 10% in this role, though.
Yes, there are two different philosophies, not a single objective truth. You have snatched stalemate from the jaws of defeat.
If you treat property as nothing more than a legal construct, without any normative implications, this whole conversation gets a lot easier.
The conclusion becomes that property ownership is not theft, since the state is the entity that defines both “property” and “theft” (and the courts will sort out any contradictions and ambiguity). Likewise, “taxation is theft” becomes an equally incomprehensible statement.
If you have an opinion of what the distribution of resources ought to be, that’s cool, just don’t call that “property”.
You then have difficulty explaining how it is that property exists in stateless societies. Even, in a primitive form, in other species.
No, it’s easy. If property= legal allowance to use a resource, then if there is no law, there is no property.
You have some other definition of property which includes animals? Weird. It’s not wrong, since we are debating about definitions. I suspect my definition is closer to the way the word is most commonly used.
Another advantage of treating the word “property” and “legal property” as synonyms, is that it keeps people from being able to sneak in their pet ideologies into the definition. If you want to debate about what ought to be, please do, just make sure to keep your normative concepts out of your definitions, otherwise the exchange will be confused as it was above.
And yes, I realize that I could easily be accused of doing that here. But this way there there’s no ambiguity! No muddy question of “labor”, “social norms”, or “adding value”. “Legal property” is exactly what it says on the tin, you can go look it up at the courthouse if it is ever unclear.
Except for all the people whose pet ideology is that property is a thing that exists only when the government says it does. Attempts to redefine language so that thoughts noncompliant with the privileged ideology cannot be expressed, should be mocked, ignored, or otherwise suppressed as necessary.
Maybe, but I think we should give libertarians and anarcho-capitalists a break. They are good people, just blinded by their ideology. Can’t help but laugh at their re-definition of “property” as some metaphysical “extension of the self”.
But for real, do you plan on proposing your definition for the word property, or are you just planning on mocking my own?
In every debate over an ambiguous definition, one side accuses the other of trying to “redefine” it. Because our definition is, of course, the “original” one, and our opponent’s are the nasty re-definers.
The concept of “this is mine, that is yours” predates governments, it exists where government is weak, distant, fractured, or disinterested, and exists in small children. It also exists in other species, who have surprisingly clear and shared understandings of territory and of possession, even when not being actively immediately held and defended. It exists even more strongly where there are third parties standing back and watching various claims and assertions of “this is mine, that is yours”, and their opinions in many such cases are curiously consistent and coherent, often even against their own direct immediate interests.
It is a wise and stable government that codifies “legal” property in ways that are largely consistent with that curiously consistent and coherent group opinion.
And it turns out you can’t just New Soviet Men decree it’s abolition. It’s been tried, and it was a stupid idea back then, and it’s an even more stupid idea now.
Studying “property” is like studying ethics: admit that prior ethical intuition is a thing, and then start doing philosophical experiments where you make up a set of rules that appear consistent with ethical intuition, and then run those rules out to their limits to see where they become inconsistent with that intuition, and use that to explore what that intuition is, and how it differs between people (ref “High Energy Ethics”).
Just loudly and sneeringly asserting that only legal property is actually property is *exactly* like a loudly and sneeringly asserting that only (legalism|utilitarianism|deontologism|divine command|etc) is actually ethics.
I mean you can do it, but everyone else will start thinking either you are just performing, or trolling, or are just looking for an excuse to justify (stealing|being evil).
I’m less interested in insisting on my definition, than I am for people to come up with any sort of definitional clarity. And just to be clear, you are plainly insisting that property must be defined as “the group opinion regarding possession”. That’s fine, but I would say my position is equally and “loud and sneering” as yours here.
Regardless, defining “property” as “the group opinion regarding possession” isn’t a terrible route to take. An advantage is that it is a clear-cut process: Just take a few polls and try to tease out the general ethical consensus, and boom, there’s your answer. I like it in that it seems fairly value-neutral. Sometimes cultures share all resources. In some cultures people own other human beings. Sometimes the King owns everything. But since “property” isn’t a value-judgement, it’s property just the same. This I sincerely like.
The downside is that the social norms regarding possession can be extremely fluid. What is the norm today could be utterly taboo tomorrow. Just look at the rapid shift in young people’s opinions regarding capitalism/socialism.
Another downside is that with diverse subgroups, there may not be something that approaches a society-wide norm. In the expanding Red/Blue divide, society is being divided into radically divergent views on what the norm for possession is (and often coding these norms into separate local laws).
So this leaves “property” as always having to be tied to a specific time, place, and perhaps subpopulation, since the diversity of human experience re:ownership throughout the world has been so vast and fluid.
I’m sincerely almost on board with this definition.
Your paraphrase of what I wrote is not correct, but it is illuminating as to your own preferences.
When people start talking about the concept of ownership being “fluid”, historically they have wanted to declare or wish it to be more “fluid” than it is in their own current context, usually to their own benefit, often dressing it up in high ideals of betterment and progress.
There are probably people here who are willing to give you a benefit of a doubt, and extend the presumption of charity to you that you just want to dispassionately and rationally explore this particular topic because of intellectual curiosity.
Unless you do a lot better at demonstrating that you so want, I, generally, will not be one of them.
If you made it yourself, it’s yours
If you found it and nobody was saying “it’s mine!”, it’s yours
If someone gave it to you, it’s yours
If it’s in your pocket, it’s yours
If it’s locked up and the key is in your pocket, it’s yours
If you raised crops on it without paying rent, it’s yours
If you built a house on it, it’s yours
If you bought it from someone who wasn’t obviously a thief, it’s yours
If you took it from any of the above without permission, you’re a thief
If you see a thief, you should beat them up
“Yours” can refer to a person or a family, or sometimes to another sort of group but that’s when you’ll start needing laws and governments
These are the essence of property. How many societies have there been where these things weren’t at least 90% uncontroversially true?
@Standing in the Shadow
It would be helpful if you were not so cryptic. In this debate about the best definition of a word, you show up and start using the word in your arguments, and then berate me for not being able to correctly cypher your usage of it.
I would counter that people who legally own a large amount of property, have a vested interest in making the ownership norms less fluid than the rest of society sees it. For example, libertarians/capitalists saying that property is “absolute”, dressing it up in the language of natural rights.
So, are you saying that “property” is social norms regarding possession that are found in most human cultures? This seemed to be what Standing in the Shadows was saying as well, but he said I was misrepresenting his position. But this really really seems to be what you are saying here. If not, I swear I am not purposefully trying to misrepresent your position.
If this is your usage of “property”, then the taxation question is pretty easy to answer. It’s been around since the Sumerians, and has been a part of at least 90% of every civilization that has existed. The modern libertarian concept of viewing taxes as illegitimate is extremely rare in human history. Hence, taxes cannot be a violation of property.
Likewise, many modern concepts regarding possession that arose from the Western culture since the 1700’s do not transcend cultures across time and space. The norms regarding grazing land, for instance, and the entirety of intellectual property law (e.g., that someone can “own” an entire variety of plant).
The view of tax collectors as little better than thieves is also an ancient human tradition, as is seeing them as a necessary evil only because the other sorts of thieves are all much worse. Or maybe not even that; see e.g. Robin Hood. And it’s the anarchists, not the libertarians, who insist that all taxation is illegitimate. Libertarians will generally allow for taxes to pay for the police, courts, etc, but insist on reminding you that you are dealing with an evil nonetheless and that the tax question has in no way been answered as “maximize state tax revenues” or even “the particular amount you took last year and the methods you used are OK”.
As for the rest, grazing land has always been understood. Nobody made it, nobody raised a crop on it, nobody built a house on it, so it belongs to nobody in particular, rather like the ocean and all its fish. If someone builds a house in a corner of it, nobody else gets to graze their cattle on that bit. If someone raises crops on it, that becomes their property, and if it looks like enough someones are going to do that to crowd out the cattle-grazers you should maybe have your cows trample their crops before it gets to the point where they have a moral claim and a vested interest.
Government rules to prevent range wars are an artificial intervention that most people find an improvement over the range wars, but they codify rather than create property rights. Likewise patents and copyrights as an artificial improvement over the natural property right manifest in a trade secret.
Hmm, I’m going to need to see some polling re:taxes in order to buy that most people view it as theft. In this poll from Pew, what bothered Americans most about their tax system was: 57%- that “wealthy people don’t pay their fair share” and 11%- “the amount you pay”. Sure, no one enjoys having to spend money, but that’s a far cry from viewing it as theft.
IP is a strong deviation from the historical norm. Your list of concepts that you initially provided- they are balanced against eachother. One taken to an extreme will contradict the next. “Trade secrets” may have been a historical norm, but extrapolating that to “you can’t grow this species of plant which I am selling to you that produces its own seeds” runs contrary to “If you made it yourself, it’s yours. If you grew it, its yours…ect”.
I mean, if you could just hone in any any one historical norm, and extrapolate from that “improvements” than ran contrary to the other historical norms, then anything could be “property”. For example, I could say: “no one historically had exclusive control over the open ocean. Therefore, we are expanding this ‘natural right of non-ownership’ to all other things.” Seems like a stretch.
One problem with this shared-human-tradition based definition of “property” is that it requires us to first answer questions that are unknown, and perhaps unknowable.
a: Property is X.
b: What is X?
a: The answer to that depends on figuring out what the ancient Sumerians really thought about taxes
Seems like the word doesn’t have much practical use in this manner.
But if property means “stuff I can control and you can’t,” then law is only one way of making something property, and not always an adequate way.
For details of what I think is a more useful approach, see this.
Getting back to the original, this doesn’t work. Theft requires taking from someone who deserved/owned/(insert preferred word) before. You then need a definition of ‘property’ where a person can deserve/own/(insert work of preference) something without calling it property. If ownership implies (insert preferred word) then the previous arrangement is then the initial, and therefore that arrangement doesn’t meet the qualifications of ‘all property is theft’ (or one of the prior situations that led to that one). Only a small subset of people actually believe this, but it isn’t consistent with the beliefs that later transfers of property are not also theft.
The steelman broadens theft into unjustifiability. It is not clear that simply stumbling on a resource by accident , and being able to exclude others form it, is the same thing as deserving it.
A world with 2 people, you and me. I stumble onto a single apple by accident, either I get the apple or you get the apple. Stating that I deprive you of the apple is the same as saying that you ought to have had the opportunity to deprive me of the apple. Splitting the apple in half is the same as saying that you ought to have the opportunity to deprive me of half the apple. This line of reasoning implies that the person who didn’t stumble on the apple has a higher claim on the apple that the person who did, and that they should own the apple. But then they have property which is unjust, and are thieves who deprived me of the apple, but if they then give me the apple then I am the thief, and then, and then and then. The only logical conclusion is that there is no property, but that conclusion means that transfers are also a form of theft. There is no coherent definition that allows “all property as theft but transfers are cool”.
If we’re trying (and we are) to account for the differences in income between people in the present day– all of whom inherited the same shared legacy from the ghosts, but built on it to widely differing extents– the ghost tax ought to drop out of the picture entirely. Even if I believed in the tax, I’d have to figure I owed a lot more to the ghost of John D. Rockefeller than to the ghost of some random farmer, just as people in the future will owe a lot more to Jeff Bezos’ ghost than to mine. Why not let him collect?
But then add all the things that “some units” were able to create elsewhere, because they didn’t have to be retasked with replacing you. Or count that in the “cost of replacing you”, in which case the cost of replacing you is substantial.
Then add everything that everyone else anywhere else was able to create because your efforts made their society marginally nicer.
Then add the net present value of everything that future generations of humanity will be able to do because of the good genes you will pass forward.
You’re asking for an impossible calculation because you are asking for each person to separately, and with great unnecessary repetition, integrate the whole of their diffuse interactions with the whole of human civilization. Rather like trying to calculate the cost of each pencil sold with a spreadsheet listing all of the production steps and resource requirements.
Every human civilization with enough surplus wealth to afford luxuries like pencils and time to spend pondering the question of how much of the wealth you accumulate you rightfully “own”, has adopted a decentralized technique to providing a good-enough simplification for such analysis. That technique points you your wages or salary actually being a very good approximation of how much wealth you ought to own.
You are welcome to disagree and reduce the valuation of your own proper wealth, based on privileged knowledge of your own secret lack of productivity. But if you want to adjust the proper valuation of your own appropriate wealth up, or to tell other people that they ought to claim only ~0% of what they produce/earn, that’s probably not going to be very persuasive.
This argument proves too much. If nobody matters– if everyone is worth nothing– then there is no value to human civilization, and we ought to drop the bomb tomorrow.
It sounds like you’ve been spending a lot of time with people who transmuted their Judeo-Christian myths of Original Sin into quasi-political viewpoints. Stop doing that– you’ll enjoy life more.
Jiro already responded to this mistake above, and see my response.
Perhaps I am missing something, but I don’t see how Jiro’s comment is related to mine.
Basically, the original comment that started this thread seems to be arguing that everyone who has property, or any other kind of material good, has it because of something that happened in the past, and therefore doesn’t “really” deserve it.
This is the same kind of argument you could make to argue that good people don’t “really” deserve any more moral credit than bad people, because they’re only good because of how they were brought up, plus a smattering of random factors and genetics.
And the answer is the same. Someone might be bad because of how they were brought up, but they are still bad. Someone might have property because someone in the past did something illegitimate, but they still have the property. The world is not perfectly just. Out of the crooked timber of humanity, no straight thing was ever made.
I’m saying the argument only proves too much if you make the mistake of discounting wealth owing to predecessors without counting wealth later down the line.
I don’t see what this has to do with moral responsibility for wrongdoing. On the contrary, OP seems to think it sensible to ascribe responsibility to people for wealth they have created.
Whatever money you have, most of it is what you got for your marginal (in the economic sense) contribution to the value of the final product (that is to say, your “final nudge” towards the final value of the product, the extent to which the product wouldn’t have had the value it has without your efforts).
The “societal” costs are already accounted for in the value of the capital that enabled you to do your part of the job – everyone else, back along the chain, back through time, has already been paid their marginal contributions.
That is to say, apart from the free-floating values that are shared (e.g. oxygen, genetics, your upbringing, etc., etc.). But they’re precisely the factors that make the least contribution to the value of the final product.
But anyway, your position is misconceived because property is the socially-agreed rules about who gets to control what when. The liberal (classical liberal, libertarian, but also still to some extent modern liberal) rule re. property is that whoever has control of something ought to be left in control of it until and unless they decide to cede control, or they’re verifiably doing harm (that is to say, that’s the compact the rest of us make, to leave others in control of their stuff, on those conditions, provided they do the same for us). The justice of being paid for one’s labour stems from that.
A lot of these kinds of Left-wing positions share the fallacy that there’s some panoptic stance that you can start from. That’s illusory. Stuff is always already controlled by someone, so the justification for a change in the rules has to be a justification for changing the rules from the rules that produce that distribution to some other set of rules, rather than a justification for rules that produce some particular pattern (e.g. equal distribution) starting from the basis of “everything unowned.”
Some left wing positions start from the assumption that there is an optimal distribution, others from the fact that the current distribution has no justification.
True, but on either basis you’d still have to justify a change in the rules that produced the current distribution.
IOW, so far, the mere fact that (as one assumes) there’s an optimal distribution (that’s different from the current one), or the mere fact that the current distribution has no justification – these aren’t in themselves justifications for changing the current distribution. (Changing the distribution might cause more problems than it solves, for example – you’d have to deal with that and other possibilities in order to justify the change. This is analogous to, in biology, desirable peaks in the fitness landscape possibly being unattainable from a given point, that type of thing.)
I’d add also, that (unless one is simply prepared to use force), one has to justify the change not just in the abstract, but to the current holders. It is after all self-steering human beings with their own ideas about what’s good that one is dealing with, not coloured balls.
I think the difference comes down to how we view the purpose of taxation. You seem to view it as a tool for social engineering while I view it as a tool to equitably and efficiently raise the money necessary to run government functions.
I don’t think the two views are necessarily incompatible, depending on what you mean by “government functions”.
By “government functions” I mean paying to run all the things government does.
In other words, I think if we’re going to have government assistance to some American citizens it’s best accomplished by a discrete spending program rather than via tax policy. Trying to social engineer outcomes by fiddling with the tax code is, IMO, a fool’s errand.
You are just kicking the can down the road.
Everything the government does is “social engineering” of some sort. Everything from the military to Medicaid push our society towards certain results.
At the end of the day, their are really two co-mingled but separate questions:
“What is the optimal level and distribution of government spending?”
“How can we provide for that spending?”
Well I agree which is why I think we shouldn’t use tax policy to try to do both.
Taxation can generally be justified on grounds of payment and/or redistribution and/or incentives. Corporate income tax can be justified on all three grounds.
You said (December 7, 2017 at 5:41 pm):
I found your blog a few months ago (I think the first one was on The Cost Disease, or maybe “Contra Grant”) and it is a rare jewel. This is maybe the first time I have commented, but your article quality and depth are excellent. Also amazing – the comment quality is very high. Not sure how you did that, but it’s quite something. And thanks current commenters.
So please keep going. Of course it feels like everyone wants to improve what you do – wrong! right but too obvious! – no, it’s not true. Many people just read and learn. Many commenters (most probably) really appreciate what you do.
In a world where most people are just shouting partisan slogans, it is wonderful to find a quality blog & discussion.
My comment (sorry), the last 3 articles read like someone who learnt most of their economics of taxation and public policy from reading media articles rather than from textbooks. That might be unfair/wrong. But that’s just how it seemed.
A few textbooks on taxation and public policy and then most media commentary seems pointless, as in missing the point. Suppose you went to write about the Google engineer but had no background in psychology, only media articles on psychology and a media reported survey by psychologists on the Damore memo. Probably your “Contra Grant” article might not have been very good.
Macroeconomics – “will this tax bill increase growth significantly?” and other big questions – is not much of a discipline. Macroeconomic models and insights have consistently failed to provide any insight other than “the economy next year will be similar to the economy of the last decade” – except when it’s not. Will factor x outweigh factor y? No one knows. But their confidence is high in their forecasting ability, much higher than their results suggest (worth an article from you).
Microeconomics – gives some clues. Is a high corporate tax rate a good idea? From how economists think about tax, generally no. It is quite distortionary. But microeconomics can’t predict that much about the future.
1. What do CEOs say they will do with the extra money? I think you’ve written about how competition works. Greedy capitalists will have an idea about keeping their money and spending it on pointless things. Oh no! Don’t let them keep it. Except, what happens when the corporate tax rate drops? After-tax company profits go up. Theory of competition. More new entrants. 2. In the end companies are not people, just media-hate figures. To get cash from a company to a capitalist requires paying personal taxation. I could write more but I’m sure you get the point.
Why does the EU have a low corporate tax rate (around 20%)? Are they governed by even more evil monsters than Republicans? No, they figured out that corporate tax is just another lever with distortionary effects.
Is the new tax bill “good”? Of course not. Econ 101 – the tax code should be a few pages with the least possible distortion and lowest possible rates to fund the worthy programs that the government plans (schools, police, health,
invading other countries, etc). No tax bill by any group of people that need to get elected will meet the standards written by tax economists.
Last question to ponder, and here is an interesting one. I learnt it reading a seminar of many economists discussing Piketty’s ideas (I recommend reading the whole set of papers, very accessible and great insights (about a slightly off-topic subject). The top 20% of tax payers now pay about 90% of the federal tax bill, but back in the 70s with higher tax rates it was something like 70%, and the top 1% now pay about 30% of the federal tax bill, but back in the 70s it was around 15%. Let’s increase taxes on high income earners? It’s not clear that the federal government will have more money for their programs. Probably less if history is anything to go on. Is that good?
Here is one quote:
Could you respond to what seems to be an obvious interpretation of the data in your last paragraph? That being: income inequality has increased (hasn’t it?). (Other factors: tax evasion has gone down (true? false? significant?) or high earners are paying more other kinds of tax.) Perhaps income inequality has increased so much that even though top marginal tax rates have gone down the wealthiest people pay a larger portion of taxes than they did before (has it?). The conclusion that increasing top tax rates would result in less money for programmes seems to depend on something not explicit in your argument. Increasing taxes on top earners may well decrease the proportion of the federal tax bill they pay, by reducing income inequality so that high earners have relatively less money and low earners have relatively more. But this doesn’t tell us about how this will all effect total revenue or revenue as a per cent of GDP or anything, does it?
All good questions. I recommend reading all the presentations given by the diverse economists than listen to me because there were a range of views that were very helpful.
1. Income inequality has increased – there are a number of reasons suggested.
2. Tax evasion has probably decreased (but that is almost impossible to know and was barely discussed, the reason is tax econ 101).
3. Tax avoidance (=minimization) has definitely decreased – this is another tax econ 101. One of the examples given in the papers was that in the 1970s around 75% (going on memory here) of municipal bonds were held by high income earners like doctors, dentists, accountants. Governments always provide ways to minimize tax (in this case municipal bonds were tax exempt) and high income earners take it. But what if you reduce the marginal tax rates for high earners? We find out by seeing the % of taxable income from high income earners. It went up even though tax rates went down. Instead of holding tax exempt municipal bonds maybe these people expanded their business? Or spent more in the economy?
On your last two sentences – it’s usually not clear what will be the net result of changes that have opposing effects.
My takeaway, and there will be many others from the commentary by this group of economists – if you want to maximize federal tax take don’t be too ready to increase marginal tax rates. Maybe next year you will take more. Maybe in 5 years you will take less. Or maybe the 1970-2010 experience is an aberration and it will work out wonderfully (for tax collectors).
Maybe “reducing (post-tax) income inequality” is a solution which lines up well with “lower federal tax receipts” and that might be an unpleasant outcome for some, but it is surely a possibility worth considering.
That’s helpful thanks!
The following quote highlights what is your basic, and fundamental misunderstanding of why growth is good.
For Alice to do good she needs money, so outside of sheer luck (lottery winnings or a rich relative) she has to produce a good/service on her own or find someone to hire her. Lets say she runs her own small business, so she needs some kind of capital, and she needs customers. For capital she has some money saved and goes to buy equipment, so she needs the people selling equipment to have money to start up and run their equipment manufacturing. She needs her customers to have purchasing power to buy her goods, for this they need jobs and for those jobs someone needs to have additional capital. You are at a minimum of 3 layers of capital (really its far more since her customers need to eat, live in homes etc and the producers of those goods need capital) and that capital needs maintenance so that it continues to run.
This is all a long winded way of saying that Alice’s charitable giving cannot be separated out from the economic growth of the past that allows her to have the discretionary income to save those lives (oh, and the bed nets she buys to prevent malaria require capital to produce and ship to where they are needed, with all the underlying layers there as well). Alice’s giving cannot be more important that economic growth because it is a subset of economic growth, and furthermore that same economic growth is what makes the overwhelming task of keeping people above the poverty line possible. Even if you make her a goddess who can bestow gifts from afar, sacrificing growth to her will only end up increasing the number of people she has to look out for.
As for the panel of expert economists, there is no consensus. Some of them added notes on why they thought what they thought. All of the comments submitted
Here we have a full spectrum that captures far more information that the question itself does. You have a few claiming that reforming the tax code can’t do anything, a few claiming other tax code changes could do something, a few claiming this tax change will do something positive, and a few claiming that this will do something negative, and one guy predicting the demise of the federal government in a decade.
Hey Scott, I recommend checking out this paper by economist J.W. Mason to get a point of view outside the neoclassical framework most people are using in these comments.
In brief, from 1945 to 2007 per capita economic growth increased at an average of 2.2 percent per capita per year. In 2008 there was a huge recession, and then afterwards instead of catch-up growth, it has been much slower than the previous average — only 1.4 percent. Mason argues extremely convincingly that we are still experiencing a substantial demand shortfall — essentially that we’ve been in a mild depression for 10 years and counting. In 2016 the deviation from the previous trend was $2.7 trillion. Talk about missing growth!
Funny how you never hear Republicans or business conservatives consider the idea that we could have trillions in free output. But I digress.
Models in which corporate taxes are “distortionary” and thus restrain growth implicitly assume there is no demand shortfall. If you are in a depression, this sort of streamlining policy won’t do anything, at least not immediately. Increasing the economy’s maximum speed isn’t going to do anything if it is already well below top speed.
Moreover, the very idea that high marginal tax rates and heavy corporate taxation is somehow growth-restricting is highly contestable. Economist Marshall Steinbaum argues that corporate and top marginal taxes are a key policy tool to keep corporations from being looted by shareholders and executives. Empirically, business investment was many times greater in the high-tax 1960s than it is today.
And overall, the fastest growth in American history came in the 30 years after 1945, when taxes on corporations, capital, and the rich were vastly higher than they are now. Conversely, the economic expansion after George Bush’s tax cuts on rich people and capital gains was followed by the second-worst performance in postwar history (after the current one).
By far the strongest ideological legitimation of rich-tilted tax cuts is that they’re going to unleash big time growth. It does make sense in the frictionless-planes world of neoclassical models. But here on planet Earth, the case is weak.
Here’s an exercise: Go ask those same economists what their predictions for the stock market and economic growth were on Nov 9, 2016. Here’s what one Nobel Prize winning economist had to say: “Still, I guess people want an answer: If the question is when markets will recover, a first-pass answer is never.” It’s not hard to guess who that was.
What? Nobody thought this might be a useful exercise? Let’s see how many thought we would have >3% growth the last two quarters and 4.1% unemployment. I tell you what, if all those guys predicted that performance then I’m all in on what they think now.
The only thing likely less reliable than climate models are economic models (p < 0.00001). Perhaps these economists will be right, but my guess is even if they are right, they stand a good chance of being "accidentally right" instead of masters of skillful prediction. If you haven't learned to take these predictions with a grain of salt, then you haven't been listening long enough. I'm sure they have some value, but how much? I think I'd like to see a track record of accurate predictions long before I give a flying f*** how stellar their resume is.
If growth really does happen, it also stands a good chance of having happened for reasons other than the tax bill. I can make one skillful prediction, all those economists will make this "not the tax bill" argument if growth does happen.
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Is there an irony that one theme in the comments is that mostly we are not good at economic prediction, and another theme is here what results my economic theory demonstrates will follow from this tax bill.
It’s a useful exercise to try to get right, and if we figured it out that would be a great thing. There seems to be glaring omission of previous failures and the uncanny coincidence of people following their political preferences after their alleged rational analysis. This formula is great at predicting predictions: Party in power predicts stellar growth, and party out of power predicts a recession.
As I think someone suggested earlier, it’s worth distinguishing macro from micro–or, as I would prefer to label it, disequilibrium theory from price theory.
The arguments for why some tax structures have more excess burden than others are straightforward price theory arguments, as are the arguments about tax incidence–who really pays–although in both cases there are a lot of possible complications. Economists tend to agree on the logic of the analysis, hence often on the sign of effects, but the magnitude of effects often depends on real world variables that we don’t have accurate information on.
Arguments about what effect a tax structure will have on employment, on the other hand, are macro, and much more disputable.
I don’t do macro.
Economic modeling, econometrics, is a mix of micro, macro, statistics and witchcraft. The system is much too complicated for a fully accurate model, so someone is trying to construct an approximation that does an adequate job of guesstimating net year’s GNP.
I don’t do that either.
@DavidFriedman, in economic modeling is it typical to give point forecasts or predictive distributions? I would think that part of the solution to not fooling yourself about the accuracy of your economic predictions is to do a Bayesian model in which you incorporate parameter uncertainty (and if possible, model uncertainty) into the predictive distribution, paying careful attention to uncertainty in all of your inputs.
I don’t do economic modeling. My guess is that both versions you describe get done.
Some confusion comes from the fact that “modeling” in economics describes two entirely different things. Econometric models are attempts to give a picture of a real economy simple enough to work with but complicated enough to give reasonably accurate quantitative predictions. I don’t do it.
But models can also be pictures of reality used to clarify the logical structure of a problem without trying to get the model close enough to the real world structure to use for predictions. In one recent exchange here I used a model where everyone had the same income to make a point about the relative dead weight cost of two different tax structures. It obviously isn’t an accurate description, but by eliminating one part of the problem it makes it easier to understand a different part.
The best empirical argument for the centerpiece of the bill — the corporate tax reduction — is the piles of offshore cash US companies are hanging onto. That indicates theres a strong distortionary effect to the current tax rate.
It seems most of the opponents of this bill think of a progressive tax system as a direction, not a position. No matter how progressive the tax system is, each change should make it _more_ progressive. Tax the rich to feed the poor until there are rich no more. Naturally I reject that. Just because a tax bill fails to make the bite taken by “the rich” (which includes many of the posters here) even more out of proportion with their income doesn’t mean it’s somehow bad.
I also dispute the idea that a dollar going to the poor has higher utility value than a dollar kept by a rich person. Many of the poor are poor largely because they are really bad at getting value for their dollar.
Imagine a house-share of 5 people, eternally cursed by a witch to live together. At the beginning of time, they mostly left each other alone, except for the occasional communal bill — which they split evenly.
Anne was earning much more than the others. She worked hard, took big risks with her start-up, but the effort seems to have payed off, and the cash was flowing in.
Bill, Cecilia and David were solid middle class. Not as rich as Anne (never really took the risks), but they all had solid jobs, a decent income, and lived comfortably.
Ethan was the one not doing well. He had had a troubled childhood, lived pay-check to pay-check, and drank often. No solid romantic partner. Sometimes he tried to get his act together, but the universe was always conspiring against him.
So the house changed its policies. Instead of splitting bills evenly, they exempted Ethan. Which meant Anne was picking up his share.
Then, there was the time when Ethan got sick. Not having any savings, the household payed the doctor fees. And household naturally meant mostly Anne.
Over the years, seeing Anne’s success, the household decided to increase Anne’s share of the bills. Eventually, she was paying for 80% of the common expenses.
The definition of “common expenses” had to change of course. They used to mean maintenance of the garden and the common rooms – areas everyone shared where the expenses were hard to divide up.
As of today, “common expenses” also include Ethan’s health insurance (and David’s health insurance), Ethan’s food expenses, tuition for Bill’s sociology PhD, everyone’s retirement…
And yet, the gap between Anne (who’s right now working on expanding her business) and Ethan has just grown bigger over the years. In fact, Ethan decided to drop out of the labor force. It’s not that he can’t work; it’s just … working is too much trouble, and somehow he always manages to get by on the cash from Anne. If he can’t get by there is always the possibility of convincing the others to pay a larger share on the welfare of the household…
[To note: plenty of people are poorer – much poorer – than Ethan. Not that it matters, the only morally important fact is his relative standing in the household. In particular, the gap between him and Anne…]
And why wouldn’t someone support this welfare household? Back in the old uncivilized days, there was this notion of freedom, of not interfering into others life. Not interfering even for an increase in total utility! People would make these scary though experiments of how utilitarianism logically implied that a minority could be oppressed as long as it raised well-being on average.
Thankfully, these ideological days are over. What matters today is (average) well-being. And the fact is that the marginal dollars matters more to Ethan (and David, and now Cecilia, and soon Bill), than it does to Anne. It might even be the case that the most efficient allocation is for only Anne working in the household, and her income to be redistributed to all the others. After all, Anne doesn’t suffer as much dis-utility from wealth generation than say, Cecilia.
Which brings us to the current controversy. Someone decided that it is time to roll back all the social progress of the past and cut Anne’s share of the common expenses from 80% to 75%. The argument is that the lower taxes would induce to Anne to work more, which would trickle down to the rest of the household over time.
Bill knows the trickle-down argument is nonsense of course. During his PhD (funded by Anne) he studied the elasticity of labor supply, and knows that cutting Anne’s taxes would only be a “give-away” to her. And it would require cutting essential social services…
“Anne… worked hard, took big risks with her start-up, but the effort seems to have payed off…”
“Ethan… had had a troubled childhood, lived pay-check to pay-check, and drank often.”
Getting a bit tired of these misandric, female supremacist stereotypes.
Actually figuring out “where the money goes” requires looking at the actual tax incidence, rather than just gesturing at the nominal tax incidence. The corporate income tax in practice gets paid by a combination of firms, investors, workers, and customers, and so the benefits of a CIT cut will be distributed among those individuals.
Robin Hanson or Nick Bostrom might say that even a .0001% increase in real GDP growth today is going to save like five billion trillion lives or something in the long run due to compound interest or inventing a cure for death five minutes sooner in 2593 or something equally absurd, but it’s somewhat compelling as an avenue of argument.
Another good argument might bring up things like dependence on government redistribution and distorted incentives increasing the risk of civilizational collapse, or causing spiritual malaise among those who nominally “benefit,” or some other hokey reactionary gut feeling — not sure how open you are to that voodoo. I’ll admit that personally having grown up in the bottom income quintile and being in the top quintile today, I have very little respect for or belief in the idea that the problem among those in the lowest quintile is a lack of government assistance or redistribution.
A libertarian might give you some kind of crap about lower taxes being appropriate because taxation is theft and theft is equally morally reprehensible regardless of the victim’s existing level of wealth or income but honestly that’s only going to jive with a small minority’s moral instincts.
Someone could argue that the economists saying this won’t result in growth are failing to take into consideration the increase in the number of jobs for poor people that will stay in the US because we’re becoming more competitive for corporations to locate jobs here due to international tax incentives — reducing the trade deficit, and long term resulting in more innovation and employment being located here.
But probably the strongest argument for cutting the government’s total level of intrusion on society is going to be repugnant to you: some of us worship at the altar of Gnon. Generally when I have this debate with someone I know, applying rationality to our positions gets me eventually to some kind of nonutilitarian position, but I know you’ve grappled with that and so there’s not really a point to going over the repugnant conclusion here when you’ve already read arguments on the subject from Land and other smarter, more eloquent people than I.
I would say given your personal values, it’s probably a rational choice not to support this particular tax bill. I also want to say I really appreciate the conversation you’ve been willing to have with your readership on this issue. I like the nuance you’ve arrived at in the current post a lot, and it’s posts like this that have caused me to binge read your whole blog.
Is there a particular reason to confine our analysis to domestic populations?
Since the 1980s the vast bulk of growth’s benefit has gone to the lowest global deciles, with many brackets more than doubling their income. Redistribution within America is moving money from the 99th percentile to somewhere between 60 to 80th depending on if you are looking at just federal poverty levels.
So our real question is how to we increase standard of living in Africa and the other poor places in the world if we really want to maximize utility.
So what do the American poor buy from poor parts of Africa? Very little. Most food for poor Americans is grown domestically and what the US imports from the poor parts of Africa is almost always controlled by the very wealthy there. Very little low end manufacturing is done in Africa, instead that goes to Asia where we are talking about the 40th percentile of global income (give or take). Raw materials for gadgets are sourced from Africa, but pretty much universally these are controlled by the elite in poor countries. Pretty much any cash handed to poor Americans is going to be very rarely seen by the global poor.
Suppose we manage to increase R&D a small percent. Well maybe it is medicine, great in 20-30 years after it is adopted in the west it will be available in the poor parts of Africa half the time. That is huge. Or perhaps it will go into something mundane like better cellphones … which will flood the poorer parts of the world with more old cellphones which connects the poorest billion to modern communications. Or maybe it will go into some sort of IP that the poorest parts of the world will promptly steal and use without hindrance because it is not worth the cost to go after them until they are earning enough money to no longer be abysmally poor.
And let us not forget that First World R&D often has spill over into Third World problems. Suppose we figure out how to create a viable HIV vaccine because it is cheaper than PrEP. Great we just doubled millions of lifespans. Or suppose we stumble across a technique that works for creating vaccines to both Histoplasmosis and Malaria. Now that is some serious gains. Materials science, biotech, AI, and many other R&D projects have the potential to be life changing.
Corporate R&D crosses borders much faster than cash flows.
But what about telling the American poor to take a leap and just sending the cash to the bottom billion?
Okay, so what exactly is the plan for systemically dumping $100 billion dollars and not having it all confiscated by local elites with guns? Even if the USAF just did literal helicopter drops, I suspect that the poorest people in the world would be promptly “taxed” or just watch inflation devour their windfall.
So what has worked for lifting the global poor out poverty? Capitalism.
Okay, but what about places where capitalism cannot reach? Well some of the huge advances came when Norman Borlaug used techniques developed by agribusiness to breed crops that could be grown in much greater abundance. By some estimates that saved billions of lives. Or how about cell phones. Millions of people have access to the wider world solely through technology developed so Westerners could first talk to each other about banalities whenever they wanted and now can post videos about it whenever they want. What is worth in some poor kids in Chad get internet access for the first time? Oh just something to the tune of all the library expenditures in the world prior to say 1980.
If you are serious about utility, then the answer will always be whatever helps the bottom billion the most. That will not be redistribution within the US. That will likely not even be redistribution anywhere. It will either be targeted R&D, regime change, or global economic growth & technology development. I would need some very convincing evidence not to bet on the latter.
Just was thinking about the parable:
What is the most effectively altruistic part of the American economy? Historically I would submit that it has been corporations that have saved the most lives. They developed early modern plant genetics. They mass produced life saving technologies like refrigeration and pharmaceuticals. They invested in industrializing India and China. The built the infrastructure to place the vast majority of human knowledge within grasp of every wired building on the planet.
Economic growth is the real Alice of the world. You can argue that the current tax bill will not give her any more money, but even low odds of Alice getting some miniscule faster compounding rate is insanely good reasons to go tax Bob instead.
This is a super compelling point that is often missed. But I think you could more fully develop the connection between R&D and economic growth. If all the biggest benefits of economic growth come through R&D, are there no better ways to achieve it? I mean, ways to maximize R&D that are not just, maximize economic growth. (And I’d rather skip lists of technologies created through public R&D versus private companies…)
I do not have the numbers handy, but there was a study or two I read a few years back that the biggest improvement in innovation comes from giving more people access to education. Pretty much universally, education increases the most when countries become wealthy enough to allow children to complete school. Japan, South Korea, Taiwan, Israel, etc. all became strong R&D centers only after there had been major economic growth.
Beyond that, it might helpful to grow the rest of the world to stop the brain drain where the brightest individuals in poor countries have to devote years of their lives into getting out. Spending years on emigration, foreign language acquisition, and acculturation is a pretty non-trivial cost.
The sheer number of good things that correlate with economic growth is just amazing. Education. Gender equality. Health. Lifespan. Environmental quality. Rule of law. It is hard to say that economic growth strictly causes all of these, but history suggests we should be really leery of anything that says it doesn’t.
If we actually had Pareto-optimal wealth redistribution, then of course, create as much wealth as possible and redistribute it Pareto-optimally. Since we don’t, we’re kind of stuck.
Do we need that? Compare the material condition of the poor in the U.S. to the condition of the poor in virtually any other society that exists or has ever existed. Quite a lot better, yes? The market may not be redistributing and its natural distribution may not be Pareto-optimal, but it’s pretty close.
Scott, I think you’re getting tangled up in knots here. There are two separate questions:
1. Will the tax bill produce enough growth to pay for itself?
2. Is it good to transfer money to people?
Some people think the tax bill will create so much incentive to invest and eliminate so many distortions that it will cause enough new growth to have zero deficit impact. Maybe they are right, maybe they are wrong. But tax bill defenders are not saying that increasing aggregate real output by going into debt is better than increasing poor people’s real purchasing power and going into debt. They are saying that we don’t have to choose because *we wouldn’t be going into debt at all*
I think this conversation has missed this point and so now everyone is having a discussion about whether increasing real output is better than redistributing existing output, which is a fine discussion to have but not one that’s particularly related to the tax bill.
There are no credible economists who think this bill will pay for itself. “It will pay for itself” is PURE propaganda from the GOP on this.
And it’s wrong to think that “will it pay for itself” has nothing to do with how much the bill will increase real output, because the (fanciful, absurd) mechanism by which this tax cut is supposed to produce more revenue is through increased real output, which can then be taxed.
The Republicans are saying that, even if we tax at a lower rate, the economy will grow SO MUCH that we’ll actually make MORE by taxing at the lower rate. In fact, however, the cost of this bill is orders of magnitude larger than even the most optimistic forecasts for increased revenue.
I agree, the point I’m making is that the discussion Scott is having about what the best use of borrowed money is has nothing to do with the tax bill because tax bill defenders are arguing that we will not have to go into debt. We can talk about whether they are right or wrong, but fighting over whether growth helps the poor is about as relevant to this bill as talking about bananas.
And my point is that the case that the bill’s defender’s are making is transparently a delusional fantasy. We might as well discuss potential legitimate justifications for the bill rather than the flatly absurd justification its authors are offering.
I think that’s a conversational twist that has certainly been lost on most people, but if we’re just free associating about why transfers to businesses might be better than transfers to the poor, talking about growth vs redistribution is also a bad way to think about it since both policies are stimulative to growth.
I believe the bill will pay for itself exactly as much as I believed the ACA would save the average family $2500 / year.
It’s really quite simple, this is a “starve the beast” method of lowering taxes and the economic hand waving is there for plausible deniability. The ACA had gobs of economic hand waving embedded in it. I’m sure all the waste fraud, and abuse savings came to pass, or not. Don’t get me started on doc fix.
People who want lower taxes should accept they will get less services. Many are completely willing to make this trade off. Others are not. If both sides aren’t pulling on the rope then we won’t get to an acceptable equilibrium.
The beast is going to spend something like 45 trillion dollars over the next 10 years. Depriving it of 2% of that money isn’t going to starve it. I don’t think anyone, even on the GOP side of things, is thinking they’re going to starve anything. They’re passing a tax cut because that’s what republican administrations do.
I have a more jaded take. Consider this ranked list of fiscal preferences:
1. Government spends within its means
2. Government spends outside of its means using somebody else’s money
3. Government spends within its means by sending the bill to me
4. Government spends outside of its means, using my money
#1 is off the table (source: the political history of the United States. What’s the rational course of action? Better to cut taxes now even if you can’t also reduce spending.
Modern conservatives have given up on achieving a fiscally responsible government. The only question now is who gets stuck with the bill.
The short version of the analysis that I use goes like this:
It’s true that (when comparing economies across the world), the major difference between economies is the overall standard of living. GDP per capita is the major driver of GDP per capita of the poor, and everything else. A consequence of this is that the best possible thing to do for the long-term good of society is to raise the economic growth rate, even by a little bit. Our grandchildren will thank us.
The problem relative to tax policy is that there’s no known way to raise the *steady-state growth rate* by rejiggering taxes. I admit I haven’t learned the details, but a pointer is at https://growthecon.com/blog/Taxing-GDP/
The best that could happen (and might happen if the tax bill is done right) is a *one-time* increment in the GDP. If you boost the GDP by 3% next year, that’s nice, but assuming everything else remains on trajectory, our grandchildren are only 3% richer, too. (Compared to an 0.1% increase in the long-term growth rate, which makes people 100 years hence 10% richer.)
It’s possible that in prior decades, when a major limitation on economic growth was the rate of accumulation of capital, changing taxes so accumulation of capital was untaxed might have helped. But the world is awash in capital (as witnessed by the low interest rates), and the growth rate is now limited by the accumulation of new “knowledge”. And a great deal of that is generated by relatively non-market processes.
The virtual cats analogy sounds like one of those things the right always accuses the left of saying, and the left never really wants to admit to – i.e., “We don’t care what you want, because you want things that are stupid and we’re smarter than you”. Whether it’s virtual cats or personal cars or Nickelback CDs or religion or cheap beer, there’s an ugly totalitarian strain peeking out whenever people say stuff like that.
Scott, all your posts deal with economic issues only. Did you not consider that this whole tax reform thing might primarily be a red-vs-blue thing? TRUMP CRONY ADMITS REPUBLICAN TAX PLAN IS AN ELABORATE MIDDLE FINGER TO LIBERALS
[doing profoundly stupid thing X] to own the libs has become a hilarious sad movement
It makes little sense to talk about the Pareto-optimality of wealth redistribution, since any arrangement of redistribution is Pareto-optimal almost by definition. For it to not be Pareto-optimal, there would have to be some different arrangement that makes at least one person better off and no one worse off.
Consider a model where we’re distributing a fixed amount of money among a given group of people who each want to have as much money as possible and have no preferences over other people’s wealth. In this model, Pareto-improvements are impossible, since any change in the distribution necessarily means that someone will get less money. Thus, any distribution of money is Pareto-optimal in this model.
Relaxing the assumption of a fixed amount of money gives us at least the theoretical possibility of changes that leave everyone with more or an equal amount of money, but good luck finding such a policy change in the real world. And if we additionally relax the assumptions about people’s preferences, things get even worse, as you now have to deal with envy, as well as various kinds of weird or irrational beliefs. In a nation of hundreds of millions, you’ll always find at least one weirdo who will disapprove any change. That’s why Pareto-improvements, applied to a sufficiently large and diverse group of people, such as the US population, are impossible and any given status quo is Pareto-optimal.
The reason I don’t find the deficit spending argument appealing is simply because I don’t expect the state to actually pay back it’s debts. The debt may still be manageable on the federal level, but I’ve just read too many public choice economists to expect rational disciplined behavior from public officials. Elected officials have no incentive to tell their constituents that the most popular programs (e.g. Social Security, Medicare, Military) need to take heavy cuts. Nor are they going to advocate for tax increases that actually bring in substantial revenue (e.g. increasing taxes on the middle and lower classes).
So if the debt is a runaway train regardless of what the tax burden is , why not lower that burden?
I don’t think it matters whether the debt will ever be paid back or not. The amount of things the government can do is still limited by money; if a tax bill reducing the budget by X is not passed, then other things costing X in total can be passed instead. Even if, hypothetically, making additional debt would not be effect neutral, government officials still believe that they are operating on some kind of budget, so the argument holds.
The government doesn’t have to pay back its debts, but it does have to pay the interest on its debt. That’s a huge constraint on the ability of the government to spend money on useful stuff.
You may believe that the government, going forward, isn’t even going to pay the interest on its debt. And you may be right. But the government not paying interest on its debt isn’t a funny “Ha, ha, silly bankers, loaning money to the government now they lose!” thing. If and when the government stops paying interest on its debt, really, if and when it becomes clear that the government will stop paying interest on its debts, that’s an instant financial catastrophe somewhere between Greece and Venezuela in its impact, and recovery will take at least a generation and probably the wholesale abandonment of the poor to “well, maybe we won’t let them starve, but that’s it”.
The worst thing about this tax bill, is that it brings us maybe 5% closer to that catastrophe.
Of course it has to pay back its debts. It can do so by borrowing again, but it can also (theoretically) borrow money to pay the interest on its debt.
Is there any limit?
Borrowing to pay for capital is investment–possibly bad, possibly good.
Borrowing to operating expenses is digging yourself a hole, but perhaps can be gotten out of if a good year comes.
Borrowing to pay interest seems like it’s starting an exponential increase in liability that cannot end happily.
Or, because unlike Greece the US government controls it’s currency supply, the government could just spend some number of years targeting very low inflation and interest rates, until the majority of its debt is set at the lower interest rate, then deliberately increase inflation for a few years to reduce the effective debt level to something more manageable.
I imagine you could successfully manage a cycle that way such that you could deficit spend for perpetuity without significant problem.
You can deficit spend for perpetuity so long as the debt is not excessively large. As debt level increases, you approach a singularity as the borrowing you have to do to make the interest payments A: becomes a significant source of debt itself, and B: drives up the market interest rate even at zero inflation.
Nobody knows what p(collapse:debt) looks like for debt-to-GDP ratios much above the current level, because there’s a distinct shortage of historic data beyond the current levels. That shortage is itself a bad sign.
But inflation can raise nominal GDP relative to debt, most of which isn’t inflation-indexed, meaning for practical purposes there is significant potential control over this ratio.
The critical thing is to begin the process before it becomes an emergency.
The act of beginning the process can make it an emergency, because the rest of the market won’t be blind to what you are doing.
Once you initiate the “inflate away your debt” plan, you actually do have to pay off the principle, not just cover the interest, because the market will jack up the interest rates to compensate for your expected future inflation. At best, you get to use an inflationary surprise as a one-time tax on cash-equivalent holdings. But there’s a finite amount of wealth available from such a tax, and it is economically disruptive to grab it this way.
I never said it was.
I think that’s a misleading way of putting it. We are already heading towards this catastrophe, and have been for quite a long time (with a few minor exceptions we’ve been running constant deficits since WW2). And there’s good reason to believe it will only get worse, tax cut or no (e.g. aging population reliant on social security).
Maybe you think that these tax cuts will make us hit the catastrophe sooner, and that that’s a bad thing. Fine. But it’s not as if we weren’t heading for the catastrophe, and these tax cuts increase the likelihood that we are.
Your 3 posts on the pending Tax Bill interested me, along with your willingness to engage commenters. So I decided to join in.
On the topic of the Corporate tax rate reduction, I think you are operating under a very common, but very serious, fallacy. You seem to be referring to “Corporations/Shareholders” and “workers/others” as distinct, separate, and even mutually exclusive groups. That is a gross fallacy and nothing could be further from the truth.
I would point out that there is a very, very high probability that you, and nearly everyone reading or commenting here, IS a Corporate Shareholder – either directly, via individual equity stock ownership – OR – indirectly, via ownership of a pension/retirement account (e.g., union pensions, CALPERS, CALSTERS,etc.) – OR – a 401K, IRA, Roth IRA, etc., etc. – OR – any/all of the above. I’d be willing to bet that every single one of those “best economists” you referred to has a retirement or pension account, and will thereby immediately benefit from a Corporate tax reduction.
So the benefits of a Corporate tax rate reduction accrue to lots of people, completely irrespective of how “rich” they are.
I’m not arguing that the (“rich”) folks who own the most won’t benefit the most. Just that ALL stockholders will benefit, and the vast majority of people in this country are in fact stockholders, one way or the other.
As far as addressing the “inequality” issue is concerned, my personal preference is for the Individual tax code to incentivize and encourage Corporate “ownership” (basic investment in corporations), especially for low-income and lower-middle income taxpayers.
For example, there was a feature added to the 2010 tax measure, and retained in the 2013 tax legislation (the current tax code), that allowed “Qualified Dividend” and “Long Term Capital Gains” income to be exempt from Individual tax for taxpayers in the first two income brackets (10% and 15%). I strongly endorse this type of Individual tax treatment – and I’ll be looking for it in the “tax reform” legislation to come. And I’d argue for it to be extended through to the 25% bracket as well.
(Full disclosure: I personally benefited, and will continue to benefit, from this individual tax reduction/exemption, due to the fact that I directly (and indirectly) own dividend-paying equity in Corporations.)
But my endorsement of this type of Individual tax reduction, as well as my endorsement of the proposed Corporate tax rate reductions, has far less to do with my personal benefit, and far, far more to do with the fact that it incentivizes ownership of Corporations/Business – particularly for lower and lower-middle income taxpayers – rather than penalizing them for ownership, in the tax code.
So I’ll finish with questions for you, Scott …
In the interest of addressing the “inequality” issue, doesn’t it make far more sense to enact measures that encourage, reward and incentivize “poor” and/or low income people to become the owners of the means of producing wealth? Are you only willing to consider measures that penalize everyone (and there are lots of us) who already are the owners of the means of producing wealth?
This is a great point, especially with the consideration that one of the pending economic crises the US faces is the impending massive pension bankruptcy that will occur with the retirement of the baby boomers- currently $1T underfunded. We need all the returns to shareholders that we can get.
Nitpick (not all that important for your conclusion, though it depends on the exact variables you plug into the hypothetical how extreme the effect is):
One random person saved $2 for each $1 that Bob previously paid in taxes, not everyone simultaneously. Everyone paying $1.50 to Alice under the assumption that they would have been hit by the curse would, for sufficiently high numbers of ‘everyone’ versus the number of dollars Bob spent in taxes, actually be losing money.
(Mind you, you may have meant it the proper way already (not like “all the people, all of which saved $2 due to the curse not being activated” but like “all those people who saved $2 each from the curse not being activated but no one else”), but I think in that case the wording is a bit misleading, since there is no way to determine who the affected would be, as the curse is random.)
I can also imagine a world where a wise economist comes to town. She says “Alice’s work is the most important thing in this town, but taxing Bob destroys wealth for no reason. Some of the town elders support tax breaks for Bob, and others support tax breaks for Alice. But we can give the tax break to Bob, and then all the people who saved $2 each from the curse not being activated can give $1.50 to Alice. That way Bob is better off, Alice is better off, and potential curse victims are better off.”
I know Sweet Fanny Adams about economics, but if I were one of the town elders (hey, every village needs its idiot), I’d be inclined to run Alice off and keep Bob. See, Bob’s curse destroys wealth – it’s not just “oh drat, that’s two bucks less I can spend on virtual cat breeding”, that’s two bucks gone “poof!” Two bucks may not be a lot, but spread that over a thousand or five thousand townspeople, and we begin to see a distinct dinge in the wing panel of the town’s economy.
So the curse means “don’t tax Bob and nobody’s money goes up in a puff of smoke” which is great for everyone.
Alice is not so great. Now my two bucks doesn’t go “poof!” but neither do I get to keep it to spend on virtual cats, put into the church collection plate, or put towards the price of a chicken fillet roll. It goes to Alice’s good cause, which may be a great cause, but is probably not “buy stuff from people in town for people in town”. So my wealth is as good as gone “poof!” in a cloud of smoke. I don’t see that I’m better off, I might as well have been cursed. You’re still taking my money away from me in a different form and giving it to Alice to spend as she likes, whether or not that spending benefits me or the town as a whole or even the nation.
So I’d keep Bob in town (because the curse is a great incentive) and I’d persuade Alice that she should move closer to where the donations to maintain the habitat of the Spreckled Graunch are being spent, namely that swamp in the middle of the Cambodian jungle. That way I and my fellow townspeople get to keep our two bucks and decide if we want to give it to the same kind of good causes, or to virtual cat breeders, or whatever we choose to do with it.
Now, I’d have a different opinion if it were “Alice is in charge of building roads connecting my town to the big city” and that’s where my two bucks was going, because a road to the big city is a benefit for me and I can see where that slice of my wealth is going.
So I suppose I’m saying I’m okay with taxes because I see the benefit of those and where the money is going (even if some of it is going to places/going in ways I don’t agree with), but I’m not so okay with “let’s give the money to Alice for her pet cause” – maybe I don’t like Alice’s pet cause, maybe Alice is diverting the money into her own bank account. A slice of the taxes being marked “for good causes” and Alice applying for a share of that slice along with everybody else’s good cause? Sure.
So how does this apply to the tax breaks and tax cuts? Hmm. Well, if the CEOs are going to be like Alice and give it to their pet cause/pay higher dividends to their shareholders, I’m not so happy (though dividend payouts are better than sticking it in a cash reserve account overseas where you have so much liquidity sloshing around you don’t know how to spend it). If the CEOs and their shareholders spend it on virtual cat breeding and this means the virtual breeder now expands their premises and employs six more code monkeys to keep up with the demand for virtual cats, then great!
While, your hypotheticals are interesting and, I think, correct. It’s worth mentioning that in this case there is no trade of between growth vs distribution. There is simply no reason to believe this would be growth promoting. Most economists don’t believe this would be growth promoting.
As additional evidence, contrary to the expectations of many people in America, there are actually a fairly large number of wealth developed industrialized countries in the world. Plus the US has a history of almost 70 years as a wealth developed country. There is a lot of data, all admittedly imperfect, on growth rates and tax regime changes. If you look at it, it wouldn’t cause you to expect growth rates to go up after this tax shift.
As a simple check you can do yourself, you can look up growth rates and tax rates in the US for the last 70 years or so and put them on a graph. If you think that tax rates take a few years to kick in or drive an effect, you could graph tax rates in year N vs average growth rates in years N+1, N+2, and N+3. Or do 2 years, or 4. Real effects are typically robust to small changes in how you choose to analyze a problem.
I notice several distinctions in how I view the relevant parameters-
A- Inflation is, basically, just another tax. Deficit spending just increases the money supply, reducing the real holdings of the people who already have money (mostly, the super rich). As such, my base prediction, for tax cuts without spending cuts, is that there will be no major differences. Inflation, as a tax, is fairly efficient, and mostly progressive. It also doesn’t encourage too much ridiculous behavior. As such, running massive deficits, rather than using other taxes, that tend to encourage ridiculous behavior, is a good thing.
B- When I hear “Leading economists” all I hear is “Well funded, left wing, special interest groups”. Basically, I’m confused why someone would bother giving Bayesian weight to these people’s opinions regarding a political topic. Furthermore, fundamentally, I don’t see having a college degree, or running a bank, or getting appointed to a political position, or even publishing papers about how to build fancy charts with various data, as evidence for understanding economics. Anyone can achieve these things if he just parrots the right lines, hangs out with the right people, puts in a decent amount of effort, and is decently intelligent. Furthermore, considering the requirements for becoming a “Leading economist” I cannot imagine a scenario where they would support Trump. The tribalism seems strong enough that, were Trump to completely adopt their ideal stance, they would still come out against his proposal.
On the other hand, as far as I can tell, CEOs as a general group, support the plan. Succeeding in the business world is a much more objective test than succeeding a college, and requires direct interactions with real economics, instead of theoretical interactions with imagined economics.
C- I consider sentient AIs to be moral actors. In addition, my assumption is that sentient AIs will live much better lives than humans. Humans strike me as being incredibly malicious and extremely fragile. Evolution decided to prioritize individual survival at an extremely high level, such that massive suffering occurs whenever anything, even very slightly, pushes a human towards death, and, furthermore, did this in an environment where death is entirely unavoidable and fairly frequent. Furthermore, evolution built in instincts wherein everyone not in the same tribe is an enemy, deserving instant death. I don’t see this as being necessary in future environments. AIs will naturally be friendly (with other friendly entities, such as each other) because resources are much more plentiful than during the stone age, and war is extremely expensive given modern/future weapons. Furthermore, AI will find pain to be much less painful, because they’ll recognize needless suffering and remove it from their psychology.
As such, I consider improving our technological capabilities, with the goal of creating super sentient AI, to be of the utmost importance, on a utilitarian basis. Anything that improves the economy tends to also improve technology, so economic strength directly translates into correct utilitarian behavior.
When I hear “Leading economists” all I hear is “Well funded, left wing, special interest groups”.
It depends on whose mouth that phrase is coming from, but I share your sentiment. Economists are a little more diverse than most of their fellow academics. The judgment of what makes one a leading economist is pretty obscure and seems ultimately to be “someone who graduated from an elite school who says things the media likes”.
With economics one could imagine that they could render opinions on falsifiable arguments, but I think what shows up in the media tend to be political opinions that are somewhat carefully crafted to not be falsifiable. “Substantial increase” is what exactly? They could actually put a number on it, or they could drill down into a more easily defined arguments.
The super rich don’t have money for the most part. Bill Gates doesn’t have X billion dollars in cash, he mostly has X billion dollars worth of stocks and bonds. Unless you believe that inflation doesn’t effect the nominal prices of stocks and bonds this doesn’t follow
Well the correlation between increasing the money supply and inflation is weak at best. Deficit spending in the US over the past 8-10 years has occurred with low levels of inflation, as it did in Japan for about the last 20 years.
Most money is owned by corporations (banks to be specific.)
Corporations are owned by humans, in the form of stocks and bonds (and other financial instruments).
Stocks, bonds, and etc. are owned by the super rich, who, therefore, own money. Of course, the super rich own other things besides cash, but that’s kind of beside the point. Basically, the super rich own everything, so all taxes naturally target them, and it doesn’t make much difference how you go about it. So, you might as well just tax efficiently, and not worry too much about the rest.
It is my belief that prices naturally fall over time (mostly due to technological growth). Furthermore, this deflation is almost purely a good thing. In other words, increasing the money supply linearly increases inflation, but there’s also a fluctuating amount of deflation that counterbalances this.
In fact, replacing a poorly thought out tax with straight increases to the money supply, improves the economy, and thus technological growth, and thus, deflation.
That said, there’s also another factor that affects money supply, particularly regarding banking. Some money isn’t “real money”. it’s sequestered in accounts that, legally, can’t spend the money. this fake money is counted as part of the money supply, but doesn’t have an effect on the economy, thus making the data look messy.
Anyway. If we really can run up massive deficits without causing any inflation, then deficits are an even better idea. Since I’m arguing that deficits are better than corporate income taxes, I don’t have to defend deficit spending from allegations of being perpetual motion machines with no cost.
It is? Most “money” in a bank is owned by bank customer’s, most of the assets that the bank actually owns are in the form of bonds of some kind.
Aggregate Cash and Equivalents of U.S. Firms is somewhere above 5 trillion.
Median liquid assets held by a household, age 35 to 50, income $55k to $91k is about 5K. Assuming this group is representative of the general population of non-super rich U.S. individuals, the amount held in individual accounts by this group is around 6 Billion. (I assume that it is not representative, and is in fact, way too high)
I don’t think there’s a great source/chart/whatever to demonstrate the data, but it seems fairly blatant. One issue I would bring up, is that dollars aren’t necessarily held by Americans. In particular, there’s another major actor I’ve ignored so far, foreign governments.
But, as I generally rate America above other nations, and, in particular, above foreign governments, this would also imply that running deficits and thus, taxing foreigners, should be fine.
600 Billion, not 6…
Total us assets are in the neighborhood of 70-80 trillion, with estimates of the top half owning 98-99% of that wealth, the top 20% owning 90% and the top 10% owning about 75% (depending on sources, methodology etc).
So for the top 20% own ~ 65 trillion dollars worth of wealth, making cash and cash equivalents worth well under 10% of their total wealth. Drop out the cash equivalents held by foreigners and its notably less than that. Meanwhile the bottom 50% own 1% of wealth, worth around 800 billion dollars, so unless their liquid assets are worth well under 80 billion, which is about $400 per person, they hold a significantly larger chunk of their assets in those equivalents than the rich.
So if you increase the money supply and there’s incredible technological progress (say, the interlinking of all human knowledge and communications) and prices rise only slightly, you would say that increasing the money supply had only a slight effect on prices?
What would have happened under a constant money supply would have been dramatically falling (real & nominal) prices due to (possibly) the greatest spurt of technological progress in human history. Somehow I had to work for 4 hours to buy a week of food, then the world’s greatest improvement in productivity occurred, then I still have to work 4 hours to buy a week of food? Nothing untoward has happened there? Nonsense!
The argument is ridiculous because no one’s asserting it.
Of course, under that scenario, the inflation did have a massive impact. However, the impact doesn’t show up in statistics, hence explaining why the massive increases in the Japanese money supply didn’t really correlate with anything, and why America isn’t currently undergoing sky high inflation. Also, why sudden bouts of massive inflation can occur without any obvious catalyst within the relevant field.
I am, of course, as my above arguments would imply, against almost all government spending. However, I recognize that most government spending programs are rather entrenched, and cannot be eliminated short of a massive breakthrough on a fundamental level, such as a new frontier, or super sentient AI. In any case, the absolute cost is irrelevant to the present issues, and I hold that the relative cost of deficit spending, is zero.
Someone is asserting it, hence my response:
Baconbacon: “Well the correlation between increasing the money supply and inflation is weak at best. Deficit spending in the US over the past 8-10 years has occurred with low levels of inflation, as it did in Japan for about the last 20 years.”
Are you posing a hypothetical, or arguing that this is what actually happened? The latter could only be true if Japan in the 90s onward experienced major technological advancement offsetting their deficits, but managed to constrain them to their island as countries with lower deficits that got their hands on them would have seen higher levels of deflation than Japan had (by this logic).
The quantity theory of money is either not true, or true conditional on a changing definition of the MS, which eventually becomes a tautology and not at all useful.
Or those other countries generally had an increase in their money supply. This is entirely possible even in the absence of printing CAD or whatever so long as those countries allow foreign sovereign debt to count as bank assets
Japan had a larger increase in their MS, and LOWER inflation (even deflation at times) than those countries. You can end up with the outcome by using a different ratio for each country, at each time, but again you just end up with an ad-hoc tautology where you look backwards and figure out what the ratio was, and then wait to see what the ratio is now.
Deficit spending is usually done by borrowing, not by printing money.
How do you know that these are the country’s best economists? To the extent that the selection process is described in the sidebar, this is a set of economists who are prominent in academia and with media recognition also considered as a factor. Economists working for the government, for corporations, for NGOs other than research universities, are explicitly not included. How valid is the assumption that the “best” economists are only found at major research universities?
I’d actually be interested in a rational approach to identifying the nation’s best economists. Aside from the one you’ll be hanging out with tomorrow afternoon, of course. But anything less than a classic Scott Alexander Deep Dive into the subject is likely to default to just “economists prominent in academia and the media”. With both academia and the media leaning conspicuously left – less so in economics than in e.g. gender studies, but still significant – that’s going to select preferentially for economists willing to pin their credentials to a “…Q.E.D., Republicans are Evil and Wrong” argument. See e.g. Paul Krugman’s Nobel Prize and subsequent career.
What’s the matter with Krugman?
Here’s a study examining various pundits and their track records when making predictions. Krugman comes out on top. He’s been correct on a number of non-trivial economic predictions: for example, he was confident early that quantitative easing would not trigger significant inflation. If you actually read his blog, he is very open about his methodology, and he fesses up when he gets things wrong. Noah Smith has photoshopped his head onto Voltron.
You might not like his politics, but on economic matters Krugman is very good. Can you point to another economist with a better track record?
Do you know where we can find the actual predictions used in the study? I’m interested in looking further into their methodology.
Sorry: this response is late, and also I have no idea. I have a vague memory of seeing the data the first time I saw this study, but I couldn’t find it when I wrote the comment, or else I would have linked it.
The reason I ask is that I specifically tried to back test Krugman some years ago (I think maybe it was in 2008 or so looking at earlier columns) and gave up after reading a few dozen articles and finding essentially no testable predictions outside of statements like “UE should be around the same level a year from now as it is today”.
A while ago, somebody on SSC made a quip about Krugman’s terrible predictions about the 2009 stimulus bill. The first hit on Google for “krugman stimulus predictions” is this article, laying out his math and predictions. Concluding paragraph:
Here, for reference, is the actual unemployment rate, which ended up peaking at 10% and coming down only slowly.
As I mentioned in my previous post, he was clear early on that quantitative easing would not lead to increased inflation or higher interest rates. I linked this pseudo-summary above, which links back to a few of his earlier posts where he made the claims.
Another interesting approach is to run the experiment in reverse. Every so often, as an exercise in epistemic hygiene, I spend some time reading through online criticism of Krugman to see if I can find anything damning. There’s no shortage of people lined up to take shots, but they never seem to land: lots of smoking straw-Krugmen, but no fire. (In the exception that proves the rule, Alex Tabarrok found an inconsistency between Krugman circa 2003 and Krugman circa 2012, only for Krugman to point out that he had highlighted that 2003 position as one of his biggest mistakes two years earlier.)
I realize that I am prone to confirmation bias here, but it is my genuine belief that Paul Krugman is an honest, talented economist who does his best to give unbiased evaluations. (Another example.) Counter-examples are welcome.
Here’s the Mises Institute fact-checking Krugman’s claim to be right about everything. One low point was Krugman’s claim that the sequester was “one of the worst policy ideas in our nation’s history” and “would cost 700,000 jobs”.
Yeah, I’ve seen that one. I don’t think it holds up.
Looking at the sequester specifically: first, it’s a bit lazy to claim this as Krugman’s prediction, given that he just linked to somebody else’s model. Much more importantly, though: it’s not at all clear that the model was wrong.
If you look at the report Krugman cited, they were forecasting 2.0% GDP growth in 2013 and 3.4% growth in 2014, if the sequester came into effect. The 700K lost jobs were a result of slower growth in 2013, and represented a loss vs the counter-factual world in which the sequester never took place. The actual numbers were 1.7% in 2013 and 2.6% in 2014. If anything, the model was over-optimistic.
Now, maybe the model was poorly calibrated and expected growth that would never occur. But note that the Mises article never engages with the details of the mode. It just sneers at the idea that any jobs could have been lost while the economy was doing “quite well”. Could the economy have been doing better? That’s a really hard question to answer with any level of confidence — but one side is making a genuine effort to do so, and the other is trying to score Internet Argument Points.
Heck, one of the links from the Mises article was even updated to add: “Depending on how you calculate the baseline of job growth, Krugman could understandably think that the actual results are consistent with his claim.”
As another sign of the seriousness of the Mises piece, I especially like this bit: “Indeed, how $85.4 billion dollars in ‘cuts’ (from the next year’s budget not the previous year’s spending) could affect anything in a $17 trillion dollar economy is simply beyond me.” Well, $85.4B is about 0.5% of $17T, which coincidentally is nearly identical to 700K jobs divided by the 116M full-time employees in the US in 2013. If you’re going to make fun of something for being the wrong order of magnitude, maybe you should check your math first — especially in an article where you’re trying to call out somebody else’s errors.
This is the kind of article that ends up reinforcing my confidence in Krugman.
Where’s Alice getting her money from, the magic money fountain?
You can’t compare interpersonal utility.
You have no case to say that digital kitties produce less well-being than whatever Alice is doing. I have one point of evidence that they produce more utility: people voluntarily choose the kitties when given the chance. You have zero evidence that whatever Alice does actually produces more utility, and moreover such evidence is actually impossible to provide because you would have to compare interpersonal utility, which is inherently incomparable. What would it mean to say “The recipients of Alice’s charity value the charity more than someone else values a digital kitty” ? It would mean you can not only read minds, but also experience the subjective preferences of others as if they were your own preferences.
The closest we have to that mind-reading experience is watching what people do with resources available to them, in which case they do the opposite of the thing you claim. (I.e. they value digital kitties over whatever Alice is doing)
Secondly, to describe charity as “a rounding error” in the most charitable society in human history (in both absolute and percentage terms) is ridiculous.
That’s evidence that doing what Alice is doing produces less utility for the person doing it. The usual claim is that what Alice is doing produces lots of utility for the beneficiaries of her generosity, which is an entirely different question.
An entirely different question that turns on a comparison of interpersonal utility based on cardinal utility which you personally swear up and down you never do. Moreover, I just made an argument as to why it’s impossible, so… The closest we can come is observing individual behavior to see individual valuations, just like I said.
When did I swear up and down that I never compare interpersonal utility based on cardinal utility?
I’m not a utilitarian, so that comparison isn’t, by itself, sufficient to decide what I should do. But I have long argued against the claim that interpersonal utility comparisons are impossible. For instance in this blog post.
One general problem with modern economics is the tendency to only look at things from a national frame. Organizations have the flexibility to operate in more than one country. By continuing to have a non-competitive corporate tax rate, the US is creating a negative incentive for businesses to create wealth in the US. Tax rates in the US have effects on other countries, it is not zero-sum. Efficiency in the system has wide-ranging benefits.
These so-called experts have simplistic models that model the US as closed system, where only the outputs interact with an abstraction that represents other countries. In fact, the ratio of tax rates between countries means that internal changes in the US can affect the decisions of companies, consumers, and people in other countries.
Probably the biggest thing that could be done for the economy is to move from familial immigration preferences to skills-based preferences. Yet when Stephen Miller proposed this, it didn’t even make it to the starting line.
One general problem with money utilitarians is to assume that the poor people just want money. They do want money, but many of them want the dignity that comes with earning that money. Just giving it to them for doing nothing, not even risking small amounts in a lottery, requires a loss of dignity. This is why leftists that insult poor Republicans by calling them stupid for apparently voting against people that just want someone to give them money are really the ones failing to understand humanity. In their zeal to burnish the desire to feel good about themselves as taking money from the rich to give to the poor, the leftists miss that what many people want is to earn their money.
The Leftist approach to this is just to create tons of government jobs to employ people in bureaucracy. Unfortunately, these kinds of jobs tend to have a negative effect on other aspects of the economy, as someone has to pay the taxes to support these jobs. It is simply their axiomatic belief that working in a way that does not create wealth is better than working in ways that do. In fact, there are things better than jobs, which is the increasingly popular option of working for one’s self.
Does anyone have a (link to a) good summary of the empirical case for taxes affecting growth? I get the theoretical case, but real US gdp per capita over time seems pretty insensitive to changes in tax policy.
Apologies if this came up in the last 2 threads, I skipped them but thought Scott might find this useful.
Karl Smith has been busily defending the tax bill on Twitter at @karlbykarlsmith. Here’s a blog post from before the bill was written about what he anticipated in the tax reform discussions.
The defenses on Twitter mostly seem to center around the bill as the idea of tax reform rather than the actual one as written, to be honest. Lowering rates and eliminating deductions is always a Good Thing. I think Karl’s thinking that the unpopular reform-y bits (removing the state/local tax deduction, etc) will be kept, and the unpopular giveaways-to-the-rich bits (killing estate tax, etc) will just be undone whenever Democrats get back in power. But he’s definitely thinking Democrats would keep some of the unpopular middle-class tax hikes this bill puts in place, to raise more revenue for Democratic priorities that you can get from soaking the rich alone.
1. How low is the marginal utility of money for the person holding the average dollar, if no efforts are made to redistribute it?
This is impossible to know, but it’s non-zero in nearly all cases. The rich person who says, “yeah, I have enough mansions right now, I think I’ll just save up to buy an island someday” is almost certainly still storing their money in short or long-term investment vehicles. Growth requires investment, not just consumption. This is a point that became obvious in 2008 during the credit crisis – a crisis that was not helped by just giving a bunch of money to people to spend but not invest.
Suppose, however, that this money goes into off-shore accounts and is invested internationally. Sure, Nissan spends investment money in the US, but that’s certainly much less than the amount of the original dollar saved. The GOP plan tries to account for this by attempting to incentivize increased investment in the US. Hypothetically, this will cause more dollars to come into the US in investment than the amount of lost tax revenue. Hypothetically. The problem is that nobody really knows, so implementing an unproven hypothesis with no way to rigorously measure the effects is irresponsible. Spending $100 billion dollars in the process is … something else entirely.
2. How much economic growth are we sacrificing by choosing redistribution?
Let me explain how the country’s (world’s) best economists are getting it wrong: they never do better than random chance at getting it right. As others have pointed out, economist projections are entirely unreliable, and should not be used as an argument to authority, since these authorities have demonstrated they are unable to provide accurate predictions on topics such as these. If we’re being honest with ourselves, we should admit that this question is the one about which we should have the most uncertainty.
3. How high a marginal utility of money do we get by redistributing it?
I agree that it’s not a fair use of the term “investment” to take on a permanent $100 billion liability in exchange for a temporary, projected improvement. Both parties do this all the time, claiming “growth will make the added debt irrelevant”. Except we never actually accomplish the level of increased growth from spending/cuts that are claimed.
Projections are great when they’re right, but what about the historical performance of our projections? Ironically, from that perspective our new hypothesis should be that all current projections will be wrong – and not just in degree, but possibly also in direction! Honestly, we just don’t understand what we’re doing when we mess with the economy, despite many poorly-controlled “experiments” like the one we’re about enact. That’s not an argument to inaction. It’s an argument that we need measurement and accountability. Otherwise next time we contemplate this kind of thing we still won’t know whether it’s a great idea or a total waste.
Also, we should probably not spend $100 billion on something like this until we have good predictive evidence. Seriously, that’s too much money to just blow on something we can’t have any reasonable degree of certainty about.
I stand by my claim that I care less about economic growth than about where the money goes.
This view is on the wrong side of history. In practice, favoring equity in the equity/efficiency trade-off looks like trying to lock down existing patterns of production and trade, making assurances that people will continue to have tomorrow what they have today, with little upside but little downside. Modern Americans feel pretty well-off and would feel pretty good about their children and grandchildren enjoying the same standard of living that they have. But previous generations of Americans also experienced 2% growth on GDP-per capita and also felt that way. The progressives of 1917 feared the shift from agriculture to manufacturing, that the poor wouldn’t benefit from the associated economic upheaval. The 1977 progressives worried about the shift from manufacturing to services, out of areas of the economy where the working classes had more union protections. And in 2017 a big concern has been greater integration of the global economy, which enriches the few in a position to sell their products into a larger global market, but may leave behind the people that can’t.
In status terms, each of these upheavals has had winners and losers. In personal terms, the downsides of a dynamic all-against-all system can be very concrete while the upsides are very abstract. But in economic terms, we should all be glad that the worst instincts of the people that showed the most concern for the poor were held in check. It’s hard to make predictions, especially about the future, but the smart money says in 20 years you will reflect upon the bounty and whizbanggery of the modern world and tell yourself that 2017 Scott had it pretty good, but there’s no way you would want to trade places with him.
So, the economic productivity of the town is only important insofar as it benefits Alice, and the benefit to Alice is only important because Alice sends so much of her money away from the town, and the reason this is desirable is because Alice’s town does not need the money, and somewhere in the world is a poorer town that does. The system would be even more efficient we could skip the step of having (Alice’s business ?? a wise economist ?? a virtuous government) collect money from the town to give to Alice, and just install Alice as Kwisatz Haderach of the whole planet so that she can collect money from everybody without needing proxies, and then give it to My Favorite Charity.
More seriously: I certainly agree with this chain of logic and really would want to push it further into a full redistribution-of-wealth scenario. I see some irony in this situation where my ideal outcome—cash leaving the town’s local system to spread and spill over into other towns, until most of the world’s population has roughly the same level of wealth, even with a moderately-sized net loss as a tradeoff—is something I would visualize more-or-less the same way as the way I’d explain entropy to a child. Meanwhile, a hypothetical individual operating under a philosophy that is politically opposite to mine would probably want to defend the town’s wealth at all (outside) costs, keeping the in-group’s system neat and orderly. Which of us serves Moloch?
So, Scott’s original post asserted that “Americans have antibodies against socialism.” But it seems manifestly clear that Americans do NOT have antibodies against entitlement spending. In fact, the latest Republican budget is a perfect example of this.
Can anyone give an example of a US entitlement program that was started and later disbanded or reduced? The only example I can think of of entitlement spending going down is probably the US paying less in military pensions, as the soldiers in the relevant wars got old and died. For example, I’m sure that spending on Civil War veterans went up, and then went down as they all died off. But for every other entitlement program (medicare, medicaid, social security, government pensions, public school teachers’ pensions, etc.) spending has gone up and up.
Experimenting with new entitlement programs looks a lot less appealing if they are essentially irrevocable committments. And it seems to me like they are.
fun fact, we’re still paying Civil War pensions
I have been a huge fan of progressive taxation until recently. Now I’m ambivalent.
It’s conceivable that increased investment dramatically increases GDP. Indeed, this is implied by the Solow-Swan Model. Nonresidential-investment is 21% of GDP, and the fact that the optimal savings rate (according to Solow-Swan) is 40%. From this the model implies that a increase in the savings rate by 1% will boost long-term consumption by 1.9%. Since 60% of income should go to laborers, this should boost long term laborer consumption by 1.9% too. As I argued last thread, a $1 tax-cut to corporations should result in about 70¢ of additional investment, so a $1 tax cut to corporations should boost long-term laborer consumption by $1.33.
This means if you blindly buy Solow-Swan a $100 billion tax-cut to corporations should increase long-term laborer consumption by $133 billion (about 0.6% of GDP in the long-run isn’t terribly significant). This makes it *more* effective than simply cutting the taxes of laborers.
Obviously this isn’t a slam-dunk argument, because
(1) Solow-Swan is a nice theory but it isn’t exactly perfect as a model of growth
(2) it’s possible that investment *increases inequality* – e.g. by buying machines that replace 10 workers with 1 engineer or unionized taxi drivers with lower-paid Uber ones.
Given this, isn’t the burden of proof on liberals (of which I consider myself) to show that investment causes inequality growth? [as opposed to changes in culture, technology, institutions, etc]
What proportion of increased labor income turns into investments? Such as small business startups? Does this grow the tax base faster than the trickle-down effect?
Liberal institutional democracy supporters don’t prefer labor-tax-reduction versus company-tax-reduction per se, they just want the hoi polloi to participate in the investment decisions.
The US personal savings rate is 5% – about 14 times less than a cut to corporate taxes. So, I don’t think a labor-income tax cut would be nearly as effective at boosting long-run growth.
If liberal institutions want a large group of people to participate in investment decisions, they’re going about it all wrong. Social Security, for instance, vastly reduces the incentive to save.
There are a number the government could increase both the amount of savings and the number of people doing it. The obvious solution is to legally require companies to offer diversified pensions – make employee registration either mandatory or the default.
Alternatively, offer to match the first $10k people save – we already allow people to set aside tax-exempt savings, but most Americans don’t face a high marginal income tax rate, so instead of matching these Americans, we’re giving them a tiny ~15% bump.
Less controversially, we can use education: make teaching about retirement saving mandatory in school, air commercials encouraging people to save for retirement – at the very least counter the misconception that consuming always helps the US economy, as this is only true during recessions.
I support all these policies for the same reason I support lower corporate tax rates. However, given that we are so far below the optimal non-residential investment rate and given that the major parties have shown no desire (and have no incentive) to increase savings through policy, lower corporate tax rates seem like the best achievable.
You may find this blog post semi-useful. It’s by an economist who I find has a knack for avoiding too much jargon and explains things from a ‘system’ point of view. link text
My own TL;DR:
– Rich people save more of each dollar given to them than poor people. Poor people (who have unrealized needs and wants) tend to spend their dollars.
– If your economic system is having a difficult time finding enough saved dollars to steer towards productive investments, you could increase economic growth by giving rich people more money.
– If productive investments in your economic system are not constrained by savings, then giving rich people more money is not likely to increase economic growth.
– Looking at the world, there are multiple markets that show distinct signs of being in a bubble, interest rates are relatively low compared to historical norms, and companies have been buying back their shareholders equity rather than investing their cash at rates that are relatively high compared to historical norms. I think it is harder to make the argument that savings are a constraint on investment than vice versa.
The main problem I have with this article is that there what is the “constraint” doesn’t make economic sense. There shouldn’t be any constraints – just diminishing returns.
It shouldn’t be the case that we’ve “used up” all potential investments; instead, we’ve used up all investments whose rate of return is below the equilibrium interest rate. If we saved more, that interest rate would fall and investment would rise.
The amount an investor benefits from investment is equal to the interest rate. The Solow-Swan model predicts that about 60% of GDP will go to laborers. If investment boosts GDP by $1, this means the investor gets 40¢ and the laborers get 60¢ more. This implies that for every $1 an investor earns, laborers earn an additional $1.50. The model predicts this is true *regardless of how much people save*.
You can reject the Solow-Swan model, but if you want to show that the poor don’t benefit, you ‘ll have to use a different model and show that it fits reality better.
> It shouldn’t be the case that we’ve “used up” all potential investments; instead, we’ve used up all investments whose rate of return is below the equilibrium interest rate.
1. I’m assuming you meant to say “we’ve used up all investments whose rate of return is above or equal to the equilibrium interest rate” (not important, just clarifying)
> The Solow-Swan model predicts that about 60% of GDP will go to laborers. If investment boosts GDP by $1, this means the investor gets 40¢ and the laborers get 60¢ more. This implies that for every $1 an investor earns, laborers earn an additional $1.50. The model predicts this is true *regardless of how much people save*.
The point is that it won’t increase growth, because the additional savings won’t result in additional investment. It’ll result in additional debt and/or unemployment.
From the article, describing situations where prior to the reallocation desired savings roughly equals actual savings:
But the rich do save more than the poor, so how is it possible that there is no increase in total savings if there is a transfer of wealth from average households to wealthy ones? The savings of the wealthy have definitely gone up.
But total savings don’t rise because something must happen to reduce savings elsewhere. As consumption declines, those who produce consumer goods and services must cut back, and as they do so, they must fire workers. These workers shift from zero or positive savings to negative savings, so that the reduced savings of the newly unemployed counter the increased savings of the rich.
There are three things that may temporarily interfere with this process. First, as consumption drops, and before businesses that produce consumer goods and services cut back and fire workers, they will see inventory rise or profits decline. Rising inventories cause (unwanted) investment to rise so at first it seems as if points number 4 and number 6 have taken place. But as declining profits reduce business savings, these will counter the rise in the savings of the rich.
Second, the additional wealth of the rich pours into real estate markets and sets off a speculative real estate boom. This causes a rise in real estate development. In such a case, investment rises temporarily along with debt and at first it seems again as if point number 4 has occurred.
Third, the additional wealth of the rich pours into the banking system and banks respond by lowering lending rates and relaxing lending standards. Riskier or more optimistic households that had previously been unable to borrow for consumption are now able to do so, and so consumption does not decline even as money is transferred from average households to wealthy ones. In that case, total demand is unchanged. There is consequently no reduction in GDP, which means that the savings of the rich rise as the savings of the ordinary and poor decline, and GDP is maintained by a rise in debt.
Yep – I meant above the equilibrium rate.
The issue is that additional savings *must* result in additional investment. The author assumes there’s some fixed amount of “desired investment” without acknowledging that the amount of desired investment depends on the interest rate. If banks have extra money sitting around, real interest rates will fall, and businesses who couldn’t exceed the current interest rate will be able to exceed the new, lower one. This is a point the author of the article has no problem acknowledging as true for consumers borrowing money, but doesn’t recognize that the exact same thing is true of businesses. It is this false belief that renders most of the article incorrect.
The author states
That’s not true. GDP remaining constant is a sufficient but not necessary condition for a decline in consumption to accompany an increase in savings. The Solow-Swan argument works if you assume a rise in the savings rate – assuming a rise in absolute savings isn’t necessary. Ultimately, the author of this piece doesn’t provide any model or any arguments/evidence against the standard Solow-Swan model, and doesn’t address the fact that the standard macroeconomic model predicts increased savings rates will lead to high long-term equilibrium consumption.
In response to your quoted bit, inventories will rise in the *short term*. In the long-run, people who used to work in consumer-facing industries will be fired, but they will be hired by firms in producer-facing industries. That is, people who used to produce TVs will now produce the machinery to make TVs. Likely, some workers will be pushed out entirely, but (1) its not clear that that will be a large number and (2) even this structural unemployment will go away with time.
Indeed, much of the article is focused on demand-side economics and the assumption that how economies work in short-run matches how they work in the long-run. I agree that a tax-cut for the wealthy might plausibly reduce growth next year, but the author provides no evidence that the eventual equilibrium will be net-harmful.
This sums it up:
First, most wealth that gets created gets spent on something; that redistributes it (in the ordinary meaning of that term, not the gerrymandered one you appear to be using) from whoever spends it to whoever provides what they are spending it on. “Spending” here really includes investment as well–i.e., basically anything that doesn’t involve taking some of the wealth and just hiding it under the mattress. Investment means you’re investing in something, which means you’re giving wealth to someone else to use to create more wealth. Not calling that “redistribution” just obfuscates what’s going on.
Second, with the meaning of “redistribution” you appear to be using, no redistribution can possibly be a Pareto improvement, because if it were, you wouldn’t need to force people to do it–they would already be making the exchange voluntarily (i.e., by spending/investing, see above). So you are also using the term “Pareto optimal” incorrectly.
Finally, you have not at all mentioned the real problem with taxation, which is that having the government do just about anything, and funding it through taxation, is pretty much the least efficient way of getting that thing done. So reducing taxation, and thereby reducing the scope of what we expect the government to do, is always worth considering as a general rule. Any valid argument against a particular tax reduction has to take that into account.
In order for this to be a valid argument against tax reduction, it is not sufficient to show that the loss in growth is at least compensated by the gain in average marginal utility. You also have to show that taxation and government spending will actually achieve what you have shown is theoretically possible. If you have such a demonstration, by all means give it. But I won’t be holding my breath. 🙂
The term “pareto-optimal” has come up, and I think the idea needs some explanation, both because the literal meaning may not be familiar to many and because it turns out not to be very useful.
A Pareto-improvement is a change that benefits someone and harms nobody. A situation is Pareto optimal if no Pareto-improvements from it are possible.
The existing outcome for a large group of people such as the population of the U.S. is by that definition almost certain to be Pareto optimal, since any change is almost certain to make at least one person worse off.
The usual way of evading the conclusion is to introduce potential Pareto improvements. A potential Pareto improvement (aka Hicks-Kaldor improvement) is a change which, if combined with a suitable transfer, would be a Pareto improvement. So a change that makes you a hundred dollars better off and me ten dollars worse off is a potential Pareto improvement–combine it with a transfer from you to me of at least ten dollars (and less than a hundred) and you are better off and I am not worse off. But actual proposals for changes don’t include those transfers, so are not Pareto improvements.
I regard the whole apparatus as a way of pretending to avoid interpersonal utility comparisons while actually making them on the implicit assumption that everyone’s marginal utility of income is the same. Demonstration left as an exercise for the reader.
I prefer to do the same thing openly, by using the definition of economic improvement given by Alfred Marshall, who largely invented modern (i.e. neo-classical) economics a bit over a century ago. Consider, for any change, everyone it effects. Ask for each of them how much he would be willing to pay to get or to prevent the effect of that change on him. Add the numbers up (payment to prevent counts as a negative). If the sum is positive the change is an economic improvement. A situation where no improvements are possible is efficient.
This gives you almost exactly the same result as the Hicks-Kaldor approach (I have an old article demonstrating a special case where it doesn’t) but is, in my view, a more honest way of doing it. It’s what “efficiency” usually means in the context of economics.
Hm, yes, I see what you mean. However, I think there needs to be a qualifier here, since if the existing situation really were Pareto optimal, no voluntary exchanges would take place. For example, I think I am reasonably justified in believing that when I buy groceries at the store, the exchange makes both me and the grocery store better off, and makes no one worse off than if the exchange had not taken place. If that is true, then the existing situation cannot be Pareto optimal.
The qualifier, then, would have to be that the existing situation is Pareto optimal with respect to involuntary changes–changes that at least some people have to be forced to accept whether they would choose to or not. I agree that any such change is almost certain to make at least one person worse off (and probably many more than that for a group the size of the U.S. population). Which I think is just one way of stating the usual libertarian argument against involuntary changes.
The fact that you buy onions today makes the price of onions higher than it would otherwise be, although by a tiny amount. That makes other buyers of onions worse off and sellers better off. That is a wash in terms of Marshall improvement, since the two effects cancel, but it means that your market activity isn’t a pareto improvement.
Ah, got it. So the overall transaction, since the exchange is positive sum with respect to me and the grocery store taken in isolation, is a Marshall improvement (since the externalities to other buyers and sellers cancel), but not a Pareto improvement (since there are negative externalities which are not compensated by transfers).
Please read http://www.vixek.com/Efficient%20Market%20Hypothesis%20and%20its%20Critics%20-%20Malkiel.pdf
Related to the above. I’m reasonably new to SLC, and I’ve been really, really impressed. But I’m a (very mediocre) economist, and when SLC gets into economics, it’s a bit like when something you actually know about is in the news – it’s nearly always reported inaccurately. This raises the question: is SLC like this for most things?
Just to note: I don’t know what the tax cut actually entails beyond what this post explains, but I agree with the general thrust of this post – the economists *probably* know better than other people. Somtimes they don’t, though.
I’d like to recommend these blogs for anyone that wants to get clever layman informed about economic stuff –
All British, but I genuinely can’t find anything as good from the US, except Krugman when there’s a “wonk” warning, but expect lots will dismiss him as a crazy left wing socialist. Which is quite funny if you’re not from the US… and makes SLC’s sceptcism about socialism pretty funny from over here. No offense.
Krugman pontificated the night of Trump’s election that he (Krugman) expected that the stock market wouldn’t recover the entirety of Trump’s term in office.
IIRC, it’s up 30% over the last 13 months.
So, yes, Krugman is a “crazy left wing socialist”. He’s also provably wrong. Because whatever he once might have been, now he’s a political hack, with nothing of value to offer.
And, with all due respect, if Krugman’s your idea of a “good economist”, I’m dubious that the British ones you have to offer would be worth the time to read, either.
How’s that different from “Alice by night goes to town and steals valuable items of 2$ value, destroying half of their value in process, and sending the rest in order to save lifes somewhere outside the world?
Seems to me the same scenario.
What I read you as saying is “I think money should go to people doing things I value, rather than people doing things other people value.”
The first response to that is “well, duh! So does everyone else!”
The second response is “we had an election. Your side lost. Feel free to be upset about that, but don’t expect anyone else to care. The fact that your side lost means that your principles don’t get to dominate. That is, after all, the point and purpose of having elections: to decide whose principles get to be made into law.”
The point of the arguments you so blithely dismiss is that they strive to be from neutral principles, which is what you need to do if you want to discuss policy with people who don’t share your postulates.
One of the likely reasons for the economists’ lack of enthusiasm is that it is easy to get confused about the relationships between corporate taxes and economic growth. I think a few things to keep in mind include:
-While there is some labor elasticity in the face of marginal increases in taxes (at least relative to our current tax schedule), it’s often overestimated. It strikes me as likely (though I don’t have empirical evidence; doesn’t mean there isn’t any!) that corporate behavior is even more inelastic, save perhaps for their approaches for optimizing their tax bills. And anyway, companies respond to their actual tax rates, not the headline rates. It’s not like they all get fooled by a lower headline rate with fewer carve-outs. That’s just foolishness, but most commentators talk that way.
-While returning value to shareholders can be a source of economic growth, particularly insofar as it supports people who spend most of their income (that’s not who gets most of it), or as it keeps pension plans afloat (that’s better), it’s probably not as effective as investment, at least when investments are likely to generate significant productivity yields. Given our corporations’ lack of willingness to invest (probably because the returns will be poor), returning money to companies is mostly just a tax break for wealthy shareholders.
-Many of the “distortions” aren’t distortionate. For instance, most R&D has significant positive economic externalities, which means that the normal market incentives provide inadequate incentive for an economically optimal level of research. Some of the imbalances in the code are specifically designed to correct for market failures, and thus improve distortion. That being said, it should be admitted they can create perverse consequences though (elaborate efforts to reclassify certain behaviors as R&D, for instance).
Nevertheless, some of the distortions are real. A high headline tax rate and a complex tax code means many small businesses will pay higher rates than large businesses. In addition to their other scale efficiency challenges, this significantly disadvantages them, and tilts markets further from perfect competition and more toward excessive concentration. I get the drive for it. But it seems foolish and callous that this might come at the cost of the government fisc, or the people who are most in need.
I think this is way too broad a statement. Certainly some R&D has significant positive economic externalities, but I don’t think it’s very well known what percentage of all R&D that actually is. I wouldn’t be surprised if it’s a rather small percentage, since much R&D is funded by governments, not private corporations or individuals.
I’m having some trouble following this line of reasoning, and I think it’s probably that I have an inadequate understanding of what a “positive economic externality” is.
That said, I’m not sure it matters whether the benefits of R&D funding are large or small; to the extent that a bunch of the comments here in favor of the bill seem to be relying on advancements in medical technology, mobile devices, etc. to argue that a rising tide lifts all ships, it seems like the relevant point to make here is that these advancements in technology come from R&D, and enough technological advancements have thus far come out of that to make the investment worthwhile. The percentage of useful R&D research out of total R&D research (as measured by some fixed-but-arbitrary unit of resource expense) is obviously part of the equation, but so is how much you value the future output of the research, which is one of those unknowable-but-guessable things that itself contains some subjective factors….
It may be worth remembering at this point that research into the Polio vaccine was funded by a private organization (see! The best research isn’t funded by governments!) and its success is widely attributed to the genius of Jonas Salk, specifically (see! The best research is produced by individuals!), but also that the private organization in question was a nonprofit founded by Franklin D. Roosevelt, that funding for the nonprofit was famously collected by asking families to donate $0.10 per child, and that, once the vaccine was determined to be a success, Salk refused to apply for a patent, rhetorically asking if it would be appropriate to patent the Sun. (So, you see, the best research is funded by large collectives and led by crypto-socialists!)
Governments funded analog calculators, ENIAC, the Enigma Machine, the machines that beat the Enigma Machine, *IPRNET, and a bunch of other less-snappy-but-still-critically-important technologies fundamental to the entire field of telecommunications as we know it. Private ISPs brought these to the rest of the world, making Internet access and all the nearly-free exchange of knowledge that comes with it available to anyone who can pay a smallish admission fee. Public libraries (at least in communities that haven’t defunded them to oblivion) make this available even to those who can’t. But on the other hand, the same private ISPs seem to have successfully convinced certain parts of the government to ruin it for everyone, even other big private corporations.
A positive externality is when William Shockley moves into the neighborhood causing the real estate prices to skyrocket. Since Shockley doesn’t get the money from the increase in real estate value, it’s external to his business. Probably the owners of the property don’t get all of the positive value either, so the other residents are getting something out of it. (The real estate value is easier to put a number on.)
An important point I hadn’t seen in the news (though it has little direct bearing on this discussion–just thought folks browsing the comments would find it interesting): people in each income category are paying almost exactly the same share of federal taxes as before. Millionaires actually pay a tiny bit larger share in the new bill.