Progressive bloggers have many admirable characteristics. They try to rely on real science, not junk science. They look for public policies that reduce suffering. But when it comes to government they often become slightly unhinged, adopting the sort of “faith-based” reasoning that they tend to deride in conservatives. Recently I’ve notice three blog posts by Greg Mankiw that (directly or indirectly) challenged progressive faith in big government. All were derided by progressive bloggers, but in each case Mankiw was clearly right.
Part 1. In May 2010 Greg Mankiw reported some data on tax revenue per person in some big economies. From that data I’d guess that the US and European tax systems raise roughly equal amounts of revenue per person, even though US taxes are slightly less than 30% of GDP, and European taxes are closer to 40% of GDP.
Mankiw didn’t even comment on the data, he merely reported it. But the post received all sorts of criticism, none of it valid. I’d go much farther than Mankiw. I’d argue that this data is strongly supportive of the view that both the US and Europe are near to tops of the Laffer Curve for total taxation. I did not say then, nor do I claim now, that we are precisely at the top. But I also don’t see any reason to believe that if we raised taxes from 28% to 40% of GDP, that revenue would rise anywhere near proportionately, with no change in GDP per capita.
The progressive response is that the Laffer Curve idea is far-fetched, and that higher tax rates don’t reduce GDP per capita. Instead they argue that the lower European GDP/person represents mysterious cultural differences, a preference for leisure. Even worse, this cultural trait developed only recently, as during the 1960s (when French tax rates were similar to those in America), they worked just as hard as we did.
All this may be true, but progressives can’t point to any European models (except perhaps special cases like Norway and Luxembourg) that raise the sort of revenue they claim the US would raise if we boosted taxes as a share of GDP to European levels. For instance, in Mankiw’s data the Germans raise $13,893/person with taxes of 40.6% of GDP. The US raises $13,097/person, with taxes of just 28.2% of GDP. The progressive denial of the Laffer Curve is an implied claim that if we raised our tax rate to German levels, our GDP would not decline, instead we’d raise an astounding $18,856/person in tax revenue, despite the fact that no other major country with Euro-style tax rates comes close to raising that kind of revenue. Quite a leap of faith.
Part 2: Then Mankiw linked to a post showing the US tax system was more progressive than most other systems, again without much comment. Once again progressives rushed in to attack his (implied) claim. Matt Yglesias :
As I’ve long said, I think progressives do tend to overemphasize the importance of progressive taxation as opposed to adequate taxation. But people should have the facts. The rich pay a huge share of the total taxes in the United States because they have a huge share of the money.
And Brad DeLong:
Second, the U.S. income tax system is not more progressive than the systems of other industrialized nations. The rich in the U.S. pay a greater share of income taxes because the rich in the U.S. capture a greater share of income.
But these attacks were wrong, as anyone who has read the important work by Peter Lindert would immediately have known. Lindert showed that Europeans were able to raise more tax revenue only by having more regressive tax systems than the US, i.e. tax systems that relied more heavily on consumption taxes. This is now pretty much common knowledge in the public finance area. But many American progressives keep insisting that we can get closer to the (egalitarian) European model by making the US tax system more progressive, by having the rich pay more.
There is a respectable counterargument to all this. The regressivity of European taxes is offset by the much greater progressivity of their social insurance programs. So the more thoughtful progressives (including Yglesias, and I’d guess DeLong) will often acknowledge that higher taxes on the middle class are also necessary, but then we can have a decent system of social insurance for the poor, plus high speed rail. The problem with this argument is that we’ve just seen that it is not at all clear that the US can raise all that much more revenue. If we raised our tax ratio to 40% of GDP, who’s to say we wouldn’t start working German-style hours? This is double trouble for progressives. Any attempt to raise more revenue will require much more regressive taxes, and that merely gets you a higher share of GDP, in absolute terms you probably wouldn’t raise much more revenue.
I have a different solution. Recognize that $13,000/person is enough revenue (if used wisely) to provide for a decent society. (Canada spends less.) Stop spending $15,000/person on Medicare in counties like McAllen Texas, where per capita income is only about $15,000. Decentralize everything and level the playing field by giving lump sum grants to counties based on per capita income levels in those counties. Don’t try to raise lots more revenue, try to get much better results with the revenue we already raise. Spend less on the military. Use ideas from Singapore (which provides universal health care at a very low cost to the taxpayer.)
Part 3: Progressives also seem to have excessive faith in fiscal stimulus, despite the fact that for decades our best macroeconomists have been saying that that fiscal stimulus is a bad idea. These progressives counter that fiscal stimulus is needed because the Fed can do no more at zero rates, even as the very same progressives bash the Fed for not doing lots more at zero rates. In March 2009 Greg Mankiw pointed out that the CEA growth projections for RGDP seemed to violate research showing a unit root in RGDP. The CEA forecast negative 1.2% growth in 2009, and then roughly 4% a year out to 2013. That’s a total of 15.6% RGDP growth between 2008 and 2013.
Paul Krugman had a scathing attack, arguing that you’d expect above trend growth during the recovery. Greg Mankiw challenged Krugman to a bet, and Krugman refused. I have no problem with that, as I don’t do bets on macro outcomes (I believe in targeting the forecast, so there is nothing to bet on in my view. We immediately know all we need to know after policy initiatives.) Nevertheless, we are now about half way through that 5 year period, and it is pretty obvious that Mankiw’s going to be roughly correct; total RGDP growth during 2008-13 will come in way under 15.6%. For progressives, that was another triumph of hope over experience.
[O]n the local level, it seems even conservatives have no real doubt that federal spending can create jobs. What about at the national level?
The Congressional Budget Office certainly has no doubts about it. A CBO report last month said that provisions of the American Recovery and Reinvestment Act, the stimulus bill passed in early 2009, had the following effects in the fourth quarter of calendar year 2010:
- Raised the level of inflation-adjusted gross domestic product by between 1.1 percent and 3.5 percent.
- Lowered the unemployment rate by between 0.7 percentage points and 1.9 percentage points.
- Increased the number of people employed by between 1.3 million and 3.5 million.
- Increased the number of full-time-equivalent jobs by 1.8 million to 5.0 million as additional workers moved from part-time to full-time work.
I have a number of posts showing that Krugman, DeLong, Dean Baker, etc, all falsely claimed that evidence of regional growth after fiscal stimulus was evidence that the multiplier was greater than zero. Of course that’s engaging in the fallacy of composition. And what can one say about the CBO estimates? They plug numbers into a model that simply assumes fiscal stimulus works, and the model tells us that fiscal stimulus did in fact work. The modern macro models that were dubious of fiscal stimulus tended to assume central banks were engaged in inflation targeting, and hence would offset the fiscal stimulus. But these pro-stimulus studies typically assume no monetary offset, despite the fact that the Fed recently adopted QE2 precisely because inflation was falling below their comfort zone.
Progressives believe that the US can raise lots more revenue, that the US tax system is not progressive enough, and that fiscal stimulus can work. Those are all examples of the triumph of faith over reason. Blind faith in government that can only lead to bad outcomes.
PS. Recently I’ve been way too nice to Mankiw. Just to show he’s not bribing me, I’ll criticize him here for not being tougher on the Fed—not encouraging more unconventional stimulus.