Still not blogging (Comments on Brink Lindsey)

Although I’ve temporarily stopped blogging, I felt an obligation to say a few words about Brink Lindsey’s new paper on entrepreneurship and free markets.  Brink’s been very supportive of me, and I am quite sympathetic to the arguments he makes.  The basic premise is that entrepreneurial capitalism is especially important when a country is near the technological frontier, and when there is great uncertainty about which products to produce, and how to produce them.  And that means that free market policies that promote entrepreneurship are now more essential than ever.

To see the distinction between the “what to produce” and the ”how to produce” questions, consider Viagra and Facebook.  Viagra was a product for which the need was well understood (as rhinos have learned to their dismay) but where it was not understood how to produce the product.  Facebook was a discovery of a need that had been heretofore overlooked.  Entrepreneurial firms are especially good at solving these sorts of questions, although that doesn’t necessarily mean the firms must be small (as we saw with Viagra.)  Central planning is relatively good at producing steel and washing machines and apartment buildings–well understood needs with easy to follow blueprints for production.

In an earlier study I found that if one excluded size of government, the country with the world’s most market-friendly policies was actually Denmark.  So if Brink is right, you’d expect tiny Denmark to be an entrepreneurial hotbed.  I decided to check out the ranking on entrepreneurial activity by country, and came across this survey for 2010:

Denmark: The entrepreneur’s paradise

Entrepreneurship is a hot political topic at the moment. David Cameron in a speech to the Conservative Spring Conference stated that he was on the side of ‘go-getters’ who would create growth and jobs in the British economy. Britain could certainly do with an infusion of entrepreneurship according to the Global Entrepreneurship and Development Index (GEDI), a new measurement of enterprise and entrepreneurial activity created by Zoltan Acs of George Mason University, Laszlo Szerb of the University of Pecs, and Erkko Autio of Imperial College Business School.

So Denmark isn’t just the most free market economy, and the most egalitarian, and the most civic-minded, and the happiest.  It’s also the most entrepreneurial.  And is has the world’s best restaurant.  Thank God the weather will always be awful.  Oh wait  . . .  global warming is coming.

Brink didn’t focus on the role of finance, but it seems to me that finance is far more important in an economy where it’s not clear what needs to be produced nor how it should be produced.  So I’d expect the share of national income going to finance (broadly defined to include finance-like activities within firms) to rise sharply in a high-tech economy on the technological frontier.   That’s not to deny that there are enormous problems with our actual finance system, associated with moral hazard and risk-shifting.  But it remains an open question as to which factor best explains the rising share of GDP going to finance.

And since high-tech activities are often low MC/high fixed cost activities, income should become more unequal.  Of course economic inequality has little to do with income inequality, and it is economic inequality on which we should focus.

I also think it’s important to distinguish between socially productive entrepreneurship and socially unproductive entrepreneurship.  The latter takes advantage of government subsidies like Medicare (see McAllen, Texas) and/or regulatory arbitrage.   The best way to promote socially productive entrepreneurship is not by trying to directly promote entrepreneurship, but rather by promoting free (and non-distorted) markets.

[On the other hand Paul Krugman assures us that the problems in McAllen, Texas should not occur, as doctors are motivated by a code of ethics, not self-interest.]

PS.  One problem with vacations is that others beat you to the story.  I have been growing increasingly dismayed by progressive blog posts on taxing the rich, and was planning a post pointing out that it was impossible to tax Bill Gates and Warren Buffett more heavily, as no plausible tax regime would lower their consumption bundle (or even the consumption bundle of their heirs.)  Alas, Steven Landsburg beat me to it.  I guess it attracted a lot of criticism.  My reaction:

1.  I’m shocked that people found his argument novel or controversial.

2.  I’m shocked that progressive bloggers that are so dismissive of no-nothing conservatives are themselves so ignorant of public finance 101.  Tax incidence is all about expected future consumption streams, as is pretty much all of economics.  I thought people knew that.

3.  Neither party is being honest with its supporters.  If we don’t cut spending (and neither party wants to) we will need a progressive consumption tax—which will place a heavier tax burden on almost everyone (except Gates and Buffett.) 

Back to non-blogging oblivion.


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113 Responses to “Still not blogging (Comments on Brink Lindsey)”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. April 2011 at 13:54

    Thats not exactly Landsburg’s finest blog post. While the San Francisco journalist’s column is inane, it doesn’t say that the millionaire consumes zero. Her complaint is that he doesn’t produce anything of value.

    There’s a legitimate lesson to tell about tax incidence there, but it’s not the one Landsburg is making.

  2. Gravatar of aretae aretae
    21. April 2011 at 13:57

    Semi-completely unrelated…I’d love a clear explanation of how much and why/whether this guy is wrong: http://unqualified-reservations.blogspot.com/2011/04/on-monetary-restandardization.html
    On second thought, the name of a book that explains it would be fine instead, as you seem otherwise busy.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    21. April 2011 at 14:52

    Now that I’ve read DeLong and Krugman’s contributions, it’s not clear who comes out looking the worst analyst. To paraphrase John Gielgud to Liza Minelli, normally one would have to sit on a barstool for hours to hear such profundity.

  4. Gravatar of Scott Sumner Scott Sumner
    21. April 2011 at 15:32

    Patrick, I took it as assuming that no plausible tax change would reduce the guy’s consumption.

    Aretae, People keep telling me I should pay attention to gold. But when I read their explanations, they make no sense to me. Why not zinc?

    Patrick, Yes, it was as if they had never studied the theory of tax incidence, they seem perplexed by what Landsburg was saying. Landsburg may have oversimplified slightly, but none of the counterarguments by those guys or others made any sense.

  5. Gravatar of Richard A. Richard A.
    21. April 2011 at 15:44

    Here is Krugman on manned space flight back in 2003–
    http://www.nytimes.com/2003/02/04/opinion/a-failed-mission.html

    Indeed, manned space flight in general has turned out to be a bust.
    The key word here is ”manned.” Space flight has been a huge boon to mankind. It has advanced the cause of science: for example, cosmology, and with it our understanding of basic physics, has made huge strides through space-based observation. Space flight has also done a lot to improve life here on Earth, as space-based systems help us track storms, communicate with one another, even find out where we are. This column traveled 45,000 miles on its way to The New York Times: I access the Internet via satellite.

    Yet almost all the payoff from space travel, scientific and practical, has come from unmanned vehicles and satellites.

  6. Gravatar of biL. biL.
    21. April 2011 at 16:15

    I’d comment, but I’m still not reading your blog.

  7. Gravatar of Cameron Cameron
    21. April 2011 at 17:56

    Does anyone know if Macroadvisers monthly NGDP data is still publicly available? They seem to publish graphs on their blog, but the raw numbers are obviously much better.

    Along similar lines, I found this blog post quite interesting.

    http://macroadvisers.blogspot.com/2011/03/announcing-mas-who-moved-markets-2010.html

    It seems to show that more dovish fed members pushed 2 year yields down while hawkish members moved them up. Of course, here at The Money Illusion we are all know that lower yields might not mean easier money, and that markets shouldn’t be effected by what they already know. Any comments?

  8. Gravatar of marcus nunes marcus nunes
    21. April 2011 at 19:24

    @ Cameron
    A few weeks ago I found out that Macroadvisers does not make available their monthly NGDP/RGDP data online anymore! Pity.

  9. Gravatar of j j
    21. April 2011 at 20:17

    Not your central point, but I was also pretty puzzled by Krugman’s “Patients are not consumers” post, especially since he’s actually referenced Gawande before in the context of another health care debate — http://krugman.blogs.nytimes.com/2009/06/21/live-long-and-prosper/.

    If I had to square the circle, I’d guess his point is that consumers/patients are uninformed and therefore vulnerable; both professional ethics and government might be considered needed but partial solutions to the information problem.

    Always enjoy your posts, thanks.

  10. Gravatar of Idle Millionaires and Monetary Policy «  Modeled Behavior Idle Millionaires and Monetary Policy «  Modeled Behavior
    22. April 2011 at 00:51

    [...] problem that I think is misunderstood by many looking for contradictions (including my favorite blogger). PK’s hypothetical model assumes that government > no government. So if G is at 0, then [...]

  11. Gravatar of Stephan Stephan
    22. April 2011 at 06:35

    “Back to non-blogging oblivion.” Sounds good to me ;-)

  12. Gravatar of Alex Godofsky Alex Godofsky
    22. April 2011 at 06:42

    Scott, Landsburg chose a spectacularly poor way to demonstrate his point about tax incidence. In particular, his claim:

    Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer.

    drove me nuts. We live in a world with insufficient aggregate demand. Even (especially) if neither Landsburg nor his heirs were ever going to spend that money, the government confiscating and spending it would be expansionary fiscal policy and a net gain to society.

  13. Gravatar of Stephan Stephan
    22. April 2011 at 06:53

    @Alex
    Exactly! But in Landburg’s full capacity full employment economic nirvana there’s no room for such pessimism.

  14. Gravatar of Jay Jeffers Jay Jeffers
    22. April 2011 at 07:31

    @Alex and @Stephen,

    I can’t get a reply over on Lansburg’s blog (aside from a couple of amens) so maybe I can play devils advocate with y’all.

    See I made essentially the same point (but I’m having small doubts). Someone even went so far as to posit a homeless man doing nothing productive with his time (not by choice) and posited that Mr. Kendrick was keeping his “idle” money under a mattress (Landsburg was fine with this assumption). Add that I’m hungry for dinner. So the government takes $100 from under Mr. Kendrick’s mattress and gives it to the homeless man under the condition that the homeless man cook me a dinner. At the end of it all, the homeless man is $100 richer, I’m full, and it clearly hasn’t harmed Mr. Kendrick because in the hypothetical that money truly is idle.

    OK so Landsburg’s response is that the burden then falls on dollar holders, because the injection of $100 extra dollars (previously idle) into the economy has lowered the value of their dollars. The lesson, “The burden *has to* fall somewhere.”

    This got me to thinking, you know, maybe we should think a lot harder about not hurting bankruptcy attorneys in poor towns, or repo men, or aspiring prison guards, or people like that, when we go to improve the economy. Of course this is tongue and cheek, but I think it perhaps illustrates the point that perhaps someone somewhere has to bear a burden.

    That’s very “big picture” so to get back to the topic, I don’t think Landsburg is saying that burdens exclude the possibility of net gains. He simply insists that a burden exists somewhere from a tax.

    Thoughts?

  15. Gravatar of Jay Jeffers Jay Jeffers
    22. April 2011 at 07:32

    Stephan, not Stephen, sorry..

  16. Gravatar of ssumner ssumner
    22. April 2011 at 07:54

    Richard, I completely agree with Krugman on manned spacecraft.

    BiL, That makes me realize how silly my post title is.

    Cameron and Marcus, Too bad they’ve stopped publishing their data.

    There are times where lower short term rates may reflect an expected liquidity effect from easier money. Like almost everything in macro “it depends.”

    J, I agree that professional ethics are a very good thing. But there’s much more consumer-like behavior than he’d admit. In almost all my medical decisions I’ve been a reasonably well informed consumer–that includes some modest operations. Obviously there are cases where he is right, but we’d like to introduce market efficiencies where ever possible–and there are lots of cases where it is possible. I could have easily paid all my operations and tests and drugs out of pocket–but without insurance I would have (and should have) chosen to spend far less on medical care. His argument is essentially a denial of the assertion I just made. I prefer DeLong’s HSA idea.

    Alex and Stephan, In tax incidence studies you always want to rule out Keynesian demand-side considerations. That’s because AD policies have no long run effect on real output, and hence we can take long run real GDP as a given. At best, demand side policies can help stabilize the business cycle, reduce the volatility of RGDP.

    But there is a more important reason for leaving out demand side considerations. Questions of tax incidence are implicitly questions of fairness. The assumption is that X amount of taxes will be paid. The question then is whether making the tax code more or less progressive, actually shifts the burden on to a different set of individuals. That’s the interesting question that he was addressing, and was the only question that I addressed. If Landsburg claimed that Keynesian demand stimulus cannot boost output in the short run, then I’d say he was wrong, but that’s a tangential issue to the fairness question.

    Jay, His response on the $100 is the same as mine. On the prison guard question you need to avoid the “broken windows fallacy.” Thus if prson guards were locking up pot smokers, and if tax attorneys were helping people evade taxes, they could be doing something else much more useful. They’d lose some income in the transition phase, but in the long run society would be better off if they produced something more useful.
    (I hope my friend in Culver City didn’t read this.)

  17. Gravatar of Jay Jeffers Jay Jeffers
    22. April 2011 at 07:54

    BTW, Alex @6:42, I agree that the original formulation was misdirecting.

    This may be because I’m a layperson, but the fact that DeLong and Krugman spent time talking about what counts as a tax, the English use of the word “tax,” etc, suggests I’m not alone.

    When I hear that it’s impossible to raise revenue from taxing the likes of Mr. Kendrick, I’m not sure if the claim is that no revenue can be raised, no tax can be imposed on Mr. Kendrick, or taxing Mr. Kendrick will raise no revenue. Turns out all are literally false. Again maybe economists already know that who’s *really* taxed is the one who bears the burden, but that’s not how I talk. And again DeLong and Krugman seemed to have seized on the literal meaning of the original formulation as well.

    But anyway, now that I know it’s really about burdens, I’m warming up to it.

  18. Gravatar of Ben Ben
    22. April 2011 at 08:01

    Great thing about RSS feeds- I can get your posts even without checking the site. So even if your current blogging retirement continues, a post like this every few weeks or so would still be excellent (I just started reading you two weeks before the tragic news, and still trying to get my intuition on monetarism up to speed). I hope the extra time is helping, though; I know how you feel.

  19. Gravatar of Jay Jeffers Jay Jeffers
    22. April 2011 at 08:07

    Good point on the prison guards Scott. Had I said ‘tongue in cheek,’ rather than what I did say, “tongue and cheek,” (pfft) I think my humor would have been better signaled.

    When looked at from the big picture, “Don’t hurt the repo men” doesn’t seem like a very sympathetic cry. But silly as it sounds, thinking that way helped me see the possibility that someone, somewhere, has to bear a burden (looking at the big picture). Narrowing down that thinking to the topic at hand, perhaps someone somewhere has to bear a burden of a tax, even if it’s marginal, and even if the net effect of the spending (made possible by the tax) is positive.

  20. Gravatar of ssumner ssumner
    22. April 2011 at 09:23

    Jay, As an anaology, oil companies write out checks to the US government for the excise tax on gasoline, but consumers end up bearing the burden through higher prices.

    Thanks Ben, You can always skim some of my earlier posts–you might find something of interest.

    Jay#2, I see your point. Finding the indirect effects is one of the keys to economics.

  21. Gravatar of Jay Jeffers Jay Jeffers
    22. April 2011 at 09:47

    Scott,

    Point taken on the excise tax. Makes me wonder if the choice between taxing consumers directly at the pump or indirectly through oil companies is six or half dozen (I know which one is more politically expedient).

    On your friend in Culver City, may he lock up many rapists and murderers.

    BTW, No need to reply, (unless I’ve made a grave error on the six or half dozen point that I must be disabused of, lest I poison the minds of others).

  22. Gravatar of Jay Jeffers Jay Jeffers
    22. April 2011 at 10:29

    And no need to reply to show that I (for some reason) assumed your friend was a prison guard rather than a tax attorney.

    (I’m out on that one)

  23. Gravatar of Cameron Cameron
    22. April 2011 at 10:37

    Marcus: that’s too bad. I suppose I can estimate the new numbers based on percentage changes they give and on the old data I have. Do you know if they revise the data?

    Scott: I was more surprised by the fact that yields changed in relation to a members hawkishness. I suppose that implies the fed is more divided than previously thought. Not sure if that’s good or bad.

  24. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    22. April 2011 at 11:30

    As Scott said, the problem with Landsburg isn’t the Keynesian point. It’s that the millionaire is in fact consuming things that can be taxed away (and the journalist didn’t claim otherwise, contrary to Landsburg). He’s consuming leisure activity by moving his cars around, he lives in a house in the neighborhood, presumably he wears clothing, and eats to have the strength to engage in his ‘fun’

    So Landsburg is open to criticism, but DeLong and Krugman are apparently tempermentally incapable of capitalizing on the opening. That, and that Landsburn is correct on the broader point.

    Mark Steyn had a nice piece on taxes this week that DeLong and Krugman would do well to ponder:

    http://www.steynonline.com/content/view/3951/28

    ———-quote————
    ‘If you drive a car, I’ll tax the street
    If you try to sit, I’ll tax your seat
    If you get too cold, I’ll tax the heat
    If you take a walk, I’ll tax your feet
    ‘Cause I’m the Taxman
    Yeah, I’m the Taxman…’

    I love the way the weenier rock critics piously explain that these examples are humorously exaggerated for rhetorical effect. Harrison’s view of the Revenue as a micro-regulatory tyranny has come to pass. I employ a young lady who works for me in New York City. A few months back, we received a notice at corporate HQ in New Hampshire that we had failed to pay the “New York Commuter Mobility Tax”. This is a tax on businesses that operate in New York to cover the infrastructure deterioration caused by employees leaving home for the office every morning and vice-versa every evening: “If you drive a car, I’ll tax the street”. As it happens, my employee works from her home. But we still have to pay the “commuter mobility tax”. She commutes from her bedroom to whichever room she keeps the computer in: “If you take a walk, I’ll tax your feet.” When I mentioned this on the radio, she emailed back: “It’s worse than you think. I live in a studio apartment.” In effect, New York taxes her (or rather me) for sitting down in her own home: “If you try to sit, I’ll tax your seat.” As for “If you get too cold, I’ll tax the heat”, how else would you sum up carbon credits? A year or two back, in the interests of “taxing heat” to save the planet, the European Union was considering a levy per cow on bovine flatulence emissions. Even Harrison didn’t foresee that one:

    If you own a farm, I’ll tax your cart
    If you own a cow, I’ll tax his fart
    ‘Cause I’m the Taxman
    Yeah, I’m the Taxman…

    But he got to the heart of the matter:

    Now my advice for those who die
    Declare the pennies on your eyes
    ‘Cause I’m the Taxman
    Yeah, I’m the Taxman.
    And you’re working for no one but me.

    On Tax Day 2011 in America, there are no 95 per cent marginal rates. When you do that, as Harold Wilson discovered, the celebrity class tends to decamp, as the likes of Roger Moore and Michael Caine did, to Switzerland and Hollywood. And, however they toe the party line on world poverty or climate change, their very mailing address is more potent a political statement than anything else. So today Big Government leaves the super-rich to twitter on about sustainable development and gay marriage and other topics and instead levies the supertax on generations of children and grandchildren as yet unborn. The last thing Obama needs is any of his Hollywood pals trending Harrison-like on the government monopoly.
    —————–endquote—————-
    I

  25. Gravatar of Morgan Warstler Morgan Warstler
    22. April 2011 at 15:07

    1. Scott, it simply isn’t true that both parties are not honest… not equally. Forget SS and Medicare.

    GOV2.0 is capable of cutting $500B+ per year in public employee compensation without batting an eye… and we’re likely able to trim that by closer to $1T annually five years from now – if we’re entrepreneurial with Gov.

    2. Which is HOW and WHY your dichotomy is wrong in regard to entrepreneurs:

    In the public space, we KNOW what government needs to do: transfer funds, maintain accounts, security, regulation, etc.

    And yet the only “central planning” that we need is a central plan to let hackers, start ups, SMBs log-on, bid, provide, etc. A central plan to decentralize isn’t a central plan – it is admitting central planning fails. Period.

    Imagine a teacher market as dynamic as the programmer market – your stats, your feedback from parents of all types, your testing, your day to day work product – all PUBLISHED – hell but a streaming video camera in every classroom 24/7/365…

    Now toss contracts, and every year let school jockey for whatever teachers they can get hold off, build classes anyway they want.

    That’s an entrepreneurial/market approach that allows us to see things we haven’t seen before… watch this:

    http://www.ted.com/talks/salman_khan_let_s_use_video_to_reinvent_education.html

  26. Gravatar of Andy Harless Andy Harless
    23. April 2011 at 06:20

    Scott,

    I think you had better write your post on the impossibility of taxing the rich anyhow, because I don’t think Steve Landsburg really nailed it. The issue that needs to be addressed (as per Noah Smith’s criticism of Landsburg) is why anyone would leave income on the table. Noah argues that local nonsatiation implies that everyone will eventually consume all their income. That’s the question that needs to be answered if Landsburg’s position is going to be viable. Why would the Gates family and the Buffet family plan to face Armageddon with positive asset balances? Part of the answer is uncertainty, and I haven’t really thought through how this affects the argument. Another part is charity: i.e, the more income one has, the more marginal income one is inclined to spend on others, so the incidence of the income tax is increasingly on the beneficiaries of ones charitable contributions. (In fact, as the marginal propensity for charitable giving becomes high, the deadweight loss associated with the income tax becomes very high, because it affects both the utility that the recipient obtains from the contributions and the utility that the giver obtains by giving. Noah Smith would argue that you are still taxing the giver, but obviously it’s a very inefficient tax.) Maybe there’s also some irrationality involved, or maybe nonsatiation is wrong, but if one thinks such things, the issues ought to be brought out in the open.

    I find it interesting that the Keynesians and the anti-Keynesians seem to have switched sides on this particular issue. Usually it is the Keynesians who talk casually about consumption functions and the anti-Keynesians who insist that results must be derived from rational maximization. Personally, I’m something like an old Keynesian who doesn’t take much stock in the Lucas Critique, so I’m happy to disagree with Krugman et. al., just on the empirical ground that rich people seem to have a low marginal propensity to consume. But I don’t think Steven Landsburg, Alex Tabarrok, and Scott Sumner are in a position to be running away from the Lucas critique.

  27. Gravatar of Scott Sumner Scott Sumner
    23. April 2011 at 08:26

    Cameron, I suppose the strong Bullard response is related to the fact that he is perceived as a swing vote.

    Patrick, Good points on taxes. On Landsburg, I assumed that the guy’s consumption was so low, and his wealth so high, that no plausible tax would bite into his consumption. Obviously it can’t have been literally true, as no one consumes zero.

    Morgan, You said;

    “1. Scott, it simply isn’t true that both parties are not honest… not equally.”

    Which one is more dishonest?

    And do you sincerely believe the GOP really wants small government? After 8 years of Bush?

    Andy; You said;

    “I think you had better write your post on the impossibility of taxing the rich anyhow, because I don’t think Steve Landsburg really nailed it.”

    I do think it is possible to tax the rich, and indeed favor a progressive consumption tax. What I don’t believe is that the person who writes out the check to the government is the same person who bears the burden of the tax. As far as I know, ever single economics textbook in America supports my argument and is inconsistent with Krugman/DeLong.

    In addition, nothing I said is in any way inconsistent with the Lucas Critique or rational utility maximization. The Lucas Critique is as well established as any proposition in macroeconomics; I assume both DeLong and Krugman both accept it. Example: If you adopt a fiat money regime and start manipulating inflation, you won’t get the same inflation/unemployment trade-off as under a gold standard, when inflation was usually unexpected. I think everyone believes that, hence everyone believes the Lucas Critique.

    It’s standard public finance theory that in a world where capital is mobile and workers are not, labor will bear 100% of the burden of a corporate income tax. Obviously capital is not 100% mobile, but with globalization the (progressive blogger) assumption that corporate income taxes are actually paid by corporations looks increasingly silly.

    A rich person can do three things with wealth. Personal consumption, investment, and charity. If his level of personal consumption is unaffected by changes in the tax code, then someone else bears the burden of those tax changes. In the case of Gates and Buffett, it will be less money donated to charity; the poor kids in Africa would bear the burden of an increase in taxes on Gates. If it leads to less investment, then the burden of the tax would be partially borne by labor, who would have a smaller capital stock to work with, and who would receive lower wages. Gates has said he wants to leave only a very modest pot of money to his kids, hence no plausible tax change would reduce the consumption level of his kids. But even if it did, he wouldn’t be bearing the burden, his kids would.

    I was taught that the welfare effects of policy changes should always be evaluated in terms of consumption, as income is an extremely misleading concept. Anyone who really believes income matters should consider the following. There is no theoretical distinction between realized and unrealized capital gains. Thus during the housing boom, income (properly measured to included unrealized capital gains on houses), soared into triple digits for many middle class families in cities like Phoenix and San Bernardino. If you think that’s absurd, so do I. Which I why I keep insisting that people should stop talking about income, it’s a meaningless concept.

    Meaningless concepts: Inflation, income, interest rates.

    Meaningful concepts: NGDP, consumption, and asset prices.

    I’d like to write a macro textbook without using any of the three “i words.”

    Mankiw has a good post on all this:

    http://gregmankiw.blogspot.com/2011/04/people-talking-past-each-other.html

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    23. April 2011 at 10:18

    Never underestimate the the ability of politicians to game the tax system (Sonny Bono, RIP):

    http://seattletimes.nwsource.com/html/localnews/2014852156_truthneedle23m.html

    ————–quote————-
    What hospitals are really doing is trying to avoid budget cuts, at a time when every other state service is facing them.

    The “tax” the hospitals are referring to was actually created last year — at the request of the hospitals themselves.

    Here’s how it worked: Hospitals believed they were underpaid by the state for services to patients on Medicaid, the federal-state health-care program for the poor. They thought about suing, but instead decided to approach the state with a more constructive idea.

    Hospitals agreed to pay the state a per-patient “assessment” that would deliver $424 million to the state over two years.

    But that was just a budgetary shell game. The assessment was used to puff up [the state of] Washington’s Medicaid program, making the state eligible for more federal Medicaid dollars.

    The money was then sent back to the hospitals in the form of higher Medicaid payments — meaning they got back more than they paid in the assessments.

    The arrangement helped hospitals avoid budget cuts in a year that many other state services were being hammered. In fact, the hospitals received a 17.5 percent boost in their inpatient Medicaid payment rates and a 42 percent boost in outpatient rates.

    The deal helped ease the state budget shortfall, too, as hospitals agreed to let $50 million of the money go to the state general fund.
    ——————endquote——————

  29. Gravatar of Benjamin Cole Benjamin Cole
    23. April 2011 at 13:13

    Denmark may be the most entrepreneurial.

    I can say in the 30 years that I have been an off-again on-again financial reporter in Los Angeles, the venture capital tribe has exploded.

    What used to be nearly cast-offs (real bankers worked on Wall Street, or in commercial banking) with a few millions to dispose became guys with tens of millions, and now hundreds of millions of dollars at their disposal. There are man billion-dollar VC funds out there.

    I can tell you in energy markets, no good idea, and many mediocre ideas, goes unfunded.

    The upshot is that this is one of those areas where things may be better than before, as with airline and telephone regs, or the 90 percent top federal income tax rate (all alive in the early 1970s).

    Now, if we can just get that federal deficit under control. Why not voucherize the VA and put 300,000 federal employees back into the private sector?

  30. Gravatar of Doc Merlin Doc Merlin
    23. April 2011 at 19:18

    Excellent blog post Scott. Much agreement.

    WRT Denmark, i.m.o: Low barriers to entry and less-distortive taxes are more important than low government spending.

  31. Gravatar of Greg Ransom Greg Ransom
    23. April 2011 at 19:26

    This wasn’t true even in the time period I remember …

    Impotence was considered a psychological problem.

    “Viagra was a product for which the need was well understood”

  32. Gravatar of Greg Ransom Greg Ransom
    23. April 2011 at 19:28

    “Modern drug therapy for ED made a significant advance in 1983, when British physiologist Giles Brindley, Ph.D. dropped his trousers and demonstrated to a shocked Urodynamics Society audience his papaverine-induced erection.[38] The drug Brindley injected into his penis was a non-specific vasodilator, an alpha-blocking agent, and the mechanism of action was clearly corporal smooth muscle relaxation. The effect that Brindley discovered established the fundamentals for the later development of specific, safe, orally-effective drug therapies.”

  33. Gravatar of Greg Ransom Greg Ransom
    23. April 2011 at 19:32

    Does someone understand what entrepreneurship is who doesn’t recognize this as an entrepreneurial story?

    “Viagra was initially studied for use in hypertension (high blood pressure) and angina pectoris (a symptom of ischaemic heart disease). Phase I clinical trials under the direction of Ian Osterloh suggested that the drug had little effect on angina, but that it could induce marked penile erections.

    After Phase II testing of sildenafil for angina failed to show promising results, Pfizer decided to pursue its use for erectile dysfunction rather than for angina. The drug was patented in 1996 and approved for use in erectile dysfunction by the U.S. Food and Drug Administration on March 27, 1998. Viagra became the first oral treatment approved to treat erectile dysfunction in the United States, and it was offered for sale in the United States later that year.”

  34. Gravatar of Greg Ransom Greg Ransom
    23. April 2011 at 19:49

    This claim is at least empirically muddled:

    “Central planning is relatively good at producing steel and washing machines and apartment buildings.”

    What we know from the experience of the Soviet Block economies is that in all sorts of ways central planning was not good at producing even things like this. They didn’t produce the right kind of thing, they produced shabby goods, they produced too much, they produced at more cost than the value of what was produced, and on and on.

    Have you read anything on this topic?

  35. Gravatar of Greg Ransom Greg Ransom
    23. April 2011 at 19:51

    “Steel” isn’t just stuff — there are all sorts of special kinds of steel and different sorts of production processes, and different sorts of output products.

    This is an economists black board cartoon you are imagining, not the real world.

  36. Gravatar of Greg Ransom Greg Ransom
    23. April 2011 at 19:51

    Once again, your naivety STUNS me, Scott.

  37. Gravatar of Greg Ransom Greg Ransom
    23. April 2011 at 19:52

    Tell any steel manufacturer in America that steel isn’t an entrepreneurial product ….

  38. Gravatar of Greg Ransom Greg Ransom
    23. April 2011 at 19:53

    Try being non-enterpreneurial and survive in the apartment construction / building business …

  39. Gravatar of Greg Ransom Greg Ransom
    23. April 2011 at 20:27

    The whole point of Hayek’s essays in _Collectivist Economic Planning_ is that all production using capital goods requires constant entrepreneurial engagement, discovery, and judgment.

  40. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. April 2011 at 22:03

    Command economies produce lots of entrepreneurs — they are called black marketeers, fixers, etc. Then we have political entrepreneurs — such as (specifically ethnic politics entrepreneurs) Al Sharpton and Jesse Jackson.

    That key point is what sort of entrepreneurial activity your institutional structure encourages. (In some societies, being the local go-getting entrepreneur would get you killed for witchcraft: so if you are a smart local lord and don’t want the local tax-providing go-getters being burnt, arrange a test that accused are likely to pass as innocent: yes, Monty Python’s “burn the witch” scene was based on a real example.) It comes back to institutions!

  41. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. April 2011 at 22:05

    And, Scott, if you are going to do “still not blogging”, you need to enjoy still not king.

    And to finish up my previous comment, so the Danish example is a good one.

  42. Gravatar of Doc Merlin Doc Merlin
    23. April 2011 at 22:12

    Oh, I have to also agree with Greg Ransom here. The Soviets were NOT good at producing steel. They could produce a large amount of steel, just little of it was very good.

    Now the idea that they were good at producing washing machines is laughable.

  43. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. April 2011 at 22:29

    The controversy on Steve Landsburg’s post is quite a study in different uses of the word ‘pay’.

    Greg R: unless you have looked into it with some seriousness, it is easy to miss how chaotically dysfunctional command economies are and how the dysfunction gets worse over time. The worse silly things the US Federal Government does are generally pretty tame by comparison because they are embedded in a functioning, indeed vibrant, market economy.

    The closest comparison I can think of is when New York City was running rent control, New York State was giving priority for public housing for folk burnt out of their existing domiciles and the Fed was running a money expansion policy continually and seriously in excess of supply responses (see Scott, no ‘i’ word) so that city blocks burnt down, and have that sort of thing as an intensification of “normality”, to get a feel for how dysfunctional command economies can be. (The key bit in my example being New York City’s suppression of market responses: but in a command economy such suppression is pervasive — when your safety valve is the black market, you have a problem.)

    One of the most horrifying bits of economic/social analysis I ever read was Mancur Olson’s discussion of how purges made a command economy functional (by breaking up networks blocking the leader’s sources of information and levers of response).

  44. Gravatar of Lorenzo from Oz Lorenzo from Oz
    23. April 2011 at 22:31

    By ‘functional” I mean “producing what the leader wants”.

  45. Gravatar of Bob at Best Investment Bob at Best Investment
    24. April 2011 at 00:53

    See World Bank country rankings by ease of doing business. See http://www.doingbusiness.org/rankings. Denmark comes out sixth, after the US. Their ranking categories make sense, but they don’t specifically address the needs of technology entrepreneurs. Such entrepreneurs need a willingness to embrace calculated risks. That’s just what most governments can’t do. Governments assume that anything they’ve deemed worth doing must be done regardless of cost. This lack of an exit strategy and a discipline of investing proportional to risk is hard to do in the face of a public “mandate.” See Best Investment

  46. Gravatar of W. Peden W. Peden
    24. April 2011 at 06:08

    Greg Ransom,

    Adverbs are important. Prof. Sumner said that the Soviets were RELATIVELY good at producing steel; relative, I presume, to their performance in producing computers, which were both derivative of and inferior to computers from Western countries. (Interestingly, there was a renegade grey-market computing group in the USSR, who found loads of holes in the Soviet software world to fill, until they were shut down.)

    On the other hand, you seem to be criticising the proposition that “the Soviets were good at making steel”, which is curious because no-one here has said that.

    (Soviet televisions were also very unreliable. A significant number of fires in the USSR were caused by exploding televisions.)

    The most interesting thing about the Soviet steel industry, I think, is that they weren ever able to get the size of factories right. I remember reading a Canadian paper a long time ago that outlined how the Soviets went from producing oversized steel mills to undersized steel mills in the 1970s and 1980s. Many of the best steel mills from that period, made in Japan, had nearly twice the productive capacity of the new Soviet mills.

    The paper also argued that the problem in the Soviet industrial sector in the 1970s and 1980s was not primarily the incentive problem (people not following plans) but that the plans were making less and less sense. That would seem to support Prof. Sumner’s thesis that central planning becomes more and more inefficient (which is not to say that it was ever efficient) as economies become more and more complex.

    What’s most interesting of all is that, in an important sense, the Soviet economy was never centrally planned at all: prices in Eastern Bloc countries were set with reference to world prices (i.e. market-based prices) then distorted by the regime’s objectives. Von Mises’s socialist economic calculation problem tells us that central planning of production-for-use is (strictly speaking) impossible and nothing happened in the Eastern Bloc that should lead us to reject his insight.

  47. Gravatar of Scott Sumner Scott Sumner
    24. April 2011 at 06:36

    Patrick, Unfortunately a lot of that nonsense goes on all the time.

    Benjamin, Good ideas. But we need to fix private sector health care before we dump more VA people into the private sector. Our private sector in health care is so regulated as to be not much better than the public sector.

    Greg, Regarding the supposedly non-existent need for Viagra, I just have one response: Rhino horns. Rhinos are incredibly thankful to Pfizer.

    I agree that Viagra was an entrepreneurial activity, so I’m not sure who your criticism is directed against.

    Regarding Soviet steel; I said relatively good, not absolutely good. The Soviets were bad at almost everything, but even worse at food, services, and high tech goods, then they were at making steel.

    I love the story about Giles Brindley.

    You said:

    “Try being non-enterpreneurial and survive in the apartment construction / building business …”

    Have you visited China recently?

    Lorenzo, Those are good points.

    Doc Merlin, I said RELATIVELY good. Plenty of state-owned firms all over the world produced lots of steel and washing machines in the mid-20th century. The Soviet economy grew at a very fast rate, but not because they were good at farming or services or high tech.

    Lorenzo, You said;

    “The controversy on Steve Landsburg’s post is quite a study in different uses of the word ‘pay’.”

    Yes, but prominent economists should know better. The distinction between the legal incidence of a tax and the economic incidence of a tax is part of econ 101.

    Thanks for the “Still Not King.”

    Bob, Thanks for the info. Another ranking where Singapore leads the world, and yet my commenters keep telling me that Singapore is socialist.

  48. Gravatar of Scott Sumner Scott Sumner
    24. April 2011 at 06:38

    W. Peden. Exactly.

  49. Gravatar of W. Peden W. Peden
    24. April 2011 at 08:34

    On the Landsburg post-

    I agree with his basic point that government consumption can only increase at the expense of private consumption, leading to the obvious fact that one cannot tax the dead because the dead do not consume (outside of zombie movies).

    I think it’s been pointed out that there is a short-run sense in which this is not true e.g. spending Mr. Kendrick’s money under the mattress or putting it in a bank account increases the quantity of money in circulation. However, since money is neutral in the long run, this has no long-run effects.

    It is the difference between Gc and Gi (government consumption and government investment) that has me puzzled. Let’s assume the following case: the government taxes money from Mr. Kendrick and gives it to a sweet factory owner who wants to expand his production with some new lines. In this case, aggregate consumption increases because there is more to consume.

    I thought of this when considering some people’s responses like Dennis Boyle’s post at MR-

    Quote: “For the government to consume more goods and services, somebody else must consume fewer.” Replace “the government” with “a more productive industry” you’ll see that it is “quite literally impossible” for economic growth to ever occur.

    - which seems to ignore the difference between consumption and investment.

  50. Gravatar of W. Peden W. Peden
    24. April 2011 at 09:22

    Of course, in the above scenario, Mr. Kendrick still has not been taxed.

    The grain of truth here is that you can’t tax the dead. If the government tried to tax Abraham Lincoln, he could not do so. The idle rich, insofar as they are idle, are like Abraham Lincoln in this respect.

  51. Gravatar of Greg Ransom Greg Ransom
    24. April 2011 at 11:26

    The CIA was all wrong about Soviet Growth rates — U.S academics and gov bureaucrats attempted to destroy the reputation of the defector Soviet economist who explained why — the one who just died last week.

  52. Gravatar of Greg Ransom Greg Ransom
    24. April 2011 at 14:51

    Google “Igor Birman” “CIA”

  53. Gravatar of Greg Ransom Greg Ransom
    24. April 2011 at 14:56

    Hayek’s essays and books of the 30s & 40s explain why this is always the economic problem, is always an issue for producers:

    “uncertainty about which products to produce, and how to produce them”

  54. Gravatar of Greg Ransom Greg Ransom
    24. April 2011 at 15:06

    You’ve got a many-many problem here, with roaming levels of description and generalization, i.e. an untold number of things could functionally satisfy each question, or both at once — i.e. the very definition of an economic problem (as defined by Menger & Hayek in their work on production / entrepreneurial judgment / valuation).

    ” the distinction between the “what to produce” and the ”how to produce” questions”

  55. Gravatar of Greg Ransom Greg Ransom
    24. April 2011 at 19:23

    Rhino horn still sells — what is being sold isn’t a “given” and isn’t defined in advanced as a natural kind or by its physical properties. There are a whole range of thing desired here by this “need” — and a whole range of different “substitutes” and somewhat common products which might be discovered by entrepreneurial activity. This is Menger 101.

    So the “what to produce” here is clearly open-ended and subject to discovery and entrepreneurial opportinity — as the market shows. There are still penile implants on the market, surgical procedures or various kinds, allmsort of “virility” posions, there are testoterone injections, etc., etc.

    Thinking economically means thinking in terms of discovery and rivalry, not in terms of “givens”.

    Your distinction ultimately depends on not thinking economically.

  56. Gravatar of Greg Ransom Greg Ransom
    24. April 2011 at 19:23

    Rhino horn still sells — what is being sold isn’t a “given” and isn’t defined in advanced as a natural kind or by its physical properties. There are a whole range of thing desired here by this “need” — and a whole range of different “substitutes” and somewhat common products which might be discovered by entrepreneurial activity. This is Menger 101.

    So the “what to produce” here is clearly open-ended and subject to discovery and entrepreneurial opportinity — as the market shows. There are still penile implants on the market, surgical procedures or various kinds, allmsort of “virility” posions, there are testoterone injections, etc., etc.

    Thinking economically means thinking in terms of discovery and rivalry, not in terms of “givens”.

    Your distinction ultimately depends on not thinking economically.

  57. Gravatar of Scott Sumner Scott Sumner
    25. April 2011 at 05:27

    Greg, I am well aware of the fact that Soviet growth statistics were exaggerated. That has no bearing on my claim that the Soviet Union grew rapidly in the period after WWII.

    You said;

    Thinking economically means thinking in terms of discovery and rivalry, not in terms of “givens”.

    Surely it is both. There are givens, like the fact that people prefer eating to starving to death, and other things that need to be discovered by entrepreneurs, like the need for Facebook. That’s exactly my point. I can’t imagine what you are disagreeing with.

    And I’m well aware that rhino horn still sells.

    W. Peden, I think he was making a much more basic point (or perhaps I should say he should have been making a much more basic point.) The point is that if you hold the total amount of taxes constant, we would judge the incidence of changes in the tax code by looking at how people changed their consumption in response. It’s not possible to shift more of the burden of taxes on Mr. Kendrick, and less on other people.

  58. Gravatar of Full Employment Hawk Full Employment Hawk
    25. April 2011 at 05:37

    “And since high-tech activities are often low MC/high fixed cost activities, income should become more unequal.”

    Since income in the United State has become much more unequal since the 1970s, such activities must have increased enourmously in the United States.

  59. Gravatar of W. Peden W. Peden
    25. April 2011 at 05:39

    Prof. Sumner,

    I see. One of the key problems (at least for me) here seems to be thinking of taxation in terms of nominal revenues vs. thinking of taxation in terms of effects on consumption.

  60. Gravatar of Scott Sumner Scott Sumner
    25. April 2011 at 05:46

    Full Employment Hawk, I think they have, although I’m not saying that’s the only factor. Measured income is not a particularly good indicator of economic inequality. For instance, income earned by the rich supposedly soared in 1988. No one really believes that happened, it was an artifact of a change in the top MTR.

  61. Gravatar of Scott Sumner Scott Sumner
    25. April 2011 at 05:48

    W. Peden The welfare effects of different policies on peoples’ utility is generally judged in terms of consumption over time. Not just taxes, but antitrust, price controls, subsidies, etc.

  62. Gravatar of Full Employment Hawk Full Employment Hawk
    25. April 2011 at 05:59

    “If we don’t cut spending (and neither party wants to)”

    Most progressives want to cut military spending. It is most conservatives who are opposed to this.

  63. Gravatar of StatsGuy StatsGuy
    25. April 2011 at 06:45

    ssumner:

    “I also think it’s important to distinguish between socially productive entrepreneurship and socially unproductive entrepreneurship. The latter takes advantage of government subsidies like Medicare”

    Ahem. You’re wearing those funky glasses again.

    I agree that it’s important to distinguish between production and unproductive entrepreneurship. Here are some “other” examples of unproductive entrepreneurship:

    White collar crime (ponzi schemes)
    Tax evasion
    Deceptive marketing (aka, lying about product claims or efficacy)
    Product counterfeiting (“arbitraging” a brand name from original manufacturer to counterfeit products)
    Setting up shell corporations to own assets to avoid tort liability for anticipated damages to private parties
    Frivolous lawsuits to extort money when it’s cheaper to pay than defend

    Scott – why do you begin by telling us how wonderful Denmark is, ‘even though’ it has lots of government, and then tell us that “bad entrepreneurship” is essentially caused by govt. subsidies? Or was that merely intended to be an example, not a definition?

  64. Gravatar of Greg Ransom Greg Ransom
    25. April 2011 at 09:01

    Scott, of course you can eliminate differences and make a huge class of things all of one kind easily by raising the level of description.

    Entrepreneurs are constantly discovery what things to combine at changing prices, including a changing combination of things — this is a core entrepreneurial function.

    And they are always discovering small and large variations in what is “needed” — the difference between various kinds of virility aids and various kinds of community sharing on the internet are not that big. Facebook is not much more than IM + photobucket + bogging.

    Scott writes,

    “other things that need to be discovered by entrepreneurs, like the need for Facebook. That’s exactly my point. I can’t imagine what you are disagreeing with.”

  65. Gravatar of Greg Ransom Greg Ransom
    25. April 2011 at 09:52

    Scott,

    Many different things can be a “writing instrument”, from a stick & clay tablet to an Ipad.

    Many different things can be part of the process of making, say, a pencil or pen — substitutes in the production equipment and in what makes up the pen or pencil, e.g. plastic, metal, wood, ink, carbon, charcoal, etc.

    So you have many kinds – one function, and one function – many production paths.

    A many-many problem.

    And the prices of all these inputs and their supplies are always changing, and the demands for variations on the “output” are continuous.

    These same considerations apply to “steel”, penile enhancers, “cement”, web interfaces, whatever.

    The entrepreneurial task involves _both_ sides of the many-one, one-many problem — constantly. See Hayek’s essays on “Collectivist Economic Planning” or Lachmann’s book on capital goods.

    What you don’t acknowledge is _why_ soviet output wasn’t what the neoclassically trained economists thought it was (e.g. Paul Samuelson).

    There are many grades and kinds of “steel” output, many grades and kinds “cement” output, many kinds and grades of “nail” output, many kinds and grades of “shoe” output.

    And many ways to make a shoe, a nail, a wash machine, or whatever.

    You can maximize output of nails by weight, by number, etc., as you can with shoes.

    The mass production of bad fitting, ugly size 12 shoes, or overly thin, easily bent nails at greater cost than is necessary can be a serious problem — a problem that requires entrepreneurial judgment and adjustment to overcome.

  66. Gravatar of Greg Ransom Greg Ransom
    25. April 2011 at 09:57

    In sum, question of “what to produce” and the ”how to produce” are always live questions for any mult-dimensional range of functional domains, are always interconnects, and always require entrepreneurial endeavour, and can’t be solved by the fiat of an ivory tower economists mapping out production and consumption in a math construct made up of “givens”.

    As Lange, Lerner and any number of former soviet economic officials.

  67. Gravatar of Greg Ransom Greg Ransom
    25. April 2011 at 10:02

    And note well. At one level of description these are functional equivalents.

    At a more fine grained level of description, these are unique functional niches, and they have widely differing functional multi-utility as well.

    It takes entrepreneurial endeavor to explore the constant changing demand for filling these different functional spaces, and to explore new dimensions in the functional space, particularly the multi-use functional space.

    I wrote:

    “Many different things can be a “writing instrument”, from a stick & clay tablet to an Ipad.

    Many different things can be part of the process of making, say, a pencil or pen — substitutes in the production equipment and in what makes up the pen or pencil, e.g. plastic, metal, wood, ink, carbon, charcoal, etc.”

  68. Gravatar of Greg Ransom Greg Ransom
    25. April 2011 at 10:05

    In all sorts of ways there is a greater functional difference in the “need” fulfilled by rhino horns and Viagra than there is between the “need” fulfilled by WordPress and Facebook or a discussion site and Facebook.

  69. Gravatar of Greg Ransom Greg Ransom
    25. April 2011 at 10:06

    Scott, have you read Menger’s _Principles_ on the subjectivity of economic “needs”?

  70. Gravatar of Greg Ransom Greg Ransom
    25. April 2011 at 10:08

    It’s hard to underestimate the significance of Menger’s _Principles_ on the subjectivity of “economic goods” for thinking about the logic of valuation.

  71. Gravatar of Full Employment Hawk Full Employment Hawk
    25. April 2011 at 14:05

    The comments on this post include a number of items dealing with the Landsberg posting. Therefore I want to make my contribution to this discussion.

    The current argument for raising taxes on the upper income group to reduce the deficit is for raising them under the present economic environment, not after the economy is back at potential output. Clearly the deficit hawks do not want to wait for the economy to return to potential output before reducing the deficit. Therefore Lansberg’s analysis is invalid in the current economic environment because the essential assumption that for government to consume more someone has to consume less clearly does not hold. Policies that succeed in moving the economy toward potential output make it possible for both the government and consumers to both consume more. Therefore there is currently a large free lunch lying on the table that is not being picked up.

    The objective of raising taxes under such conditions is definitely not to reduce consumption. Reducing consumption would only slow the recovery or even push the economy farther below potential output. Rather, the objective of raising taxes under the present economic conditions is to raise revenue for the government in order to reduce the deficit and therefore the amount of government borrowing. If taxes were raised on people (like Kendrick) who would not reduce their consumption, they would be paying more taxes in the relevant sense that the revenue of the government would increase and the deficit be reduced, even though it leaves their consumption unchanged. So under the current economic environment you can raise taxes on such people.

    More generally, if taxes are increased when the economy is below potential output to increase government revenue and reduce the deficit, the less this reduces consumption, the better.

    Landsburg’s argument that “Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less” is also incorrect under present economic conditions. (Unless, of course, the effect of the increased spending of the government is fully offset by the actions of the Fed, something the Fed shows no inclination of doing at the present time). The increased spending of the government will result in more goods being produced, so that the increased government consumption does not have to be fully offset by reduced private consumption. How much has to be offset that way depends on factors that go beyond what can be handled in a single post, but the government spending multiplier is going to be significantly more than zero. (The the simple Keynesian balanced budget multiplier provides the UPPER LIMITING CASE. The value of this multiplier is equal to 1 so that the increased government purchases come out of increased output, so that the amount of private consumption spending remains unchanged.)

  72. Gravatar of Morgan Warstler Morgan Warstler
    25. April 2011 at 14:25

    Sorry Scott, you have already admitted that Bush’s spend-all-the-money politics is good strategy vs. letting Dems spend it.

    The only way we’ll ever get a BBA is when they finally give up on the idea that Keynesian style deficit spending has helped them politically in the past 50 years.

    Once we gut the Public Employee Unions, the Dems will be done financially – the far left won’t even have a voice. They’ll then wake up and say, “we’ll do better if we enforce through balanced budgets” – and they’ll be right.

  73. Gravatar of Scott Sumner Scott Sumner
    25. April 2011 at 16:16

    Full Employment Hawk, Both parties have individual programs they want cut, and neither party wants to cut overall spending.

    Statsguy, I specifically said that unproductive entrepreneurship is due to more than one factor, so obviously my example wasn’t a definition, as you claim. I agree that our immoral tax code leads to lots of tax evasion, and that our immoral tort system leads to lots of frivolous lawsuits. Our silly copyright system overprotects intellectual capital, hence lots of the counterfeiting of Mickey Mouse, etc, is actually socially productive. So there I disagree.

    As far as Madoff, he’ll spend the rest of his life in prison. The reason I focus on regulatory arbitrage and subsidy ripoff is that these are socially unproductive areas where people make fortunes, and are widely praised as model citizens. It’s a much more systemic problem than the occasional Madoff. McAllen-type ripoffs are Madoff times 100.

    Denmark doesn’t have “lots of government” it has lots of government spending. There is a difference. Even the fire stations are private companies. Every rating I have seen has it as a top ten capitalist economy, even those that don’t rely on “good governance.” Why shouldn’t I praise their model?

    Greg, I am a fan of entrepreneurship, so you are preaching to the converted. And yes, I do realize that wants are “subjective,” whatever subjective means. (Try defining it sometime.)

    And I do realize that there is more than one way to skin a cat.

    Full Employment Hawk, I think everyone is missing the point here. This guy won’t bear the burden of a tax, if he’s not consuming. Make any assumptions about the productivity of government production you wish, and it won’t change that reality. Either someone else will bear the burden of the tax, or no one will (if some sort of Laffer-like fiscal miracle occurs, and government output doesn’t have to be paid for.) But if you are talking about raising taxes in a recession to reduce the deficit (which is the assumption you provide), that’s likely to reduce output, not raise it, so I wouldn’t expect any stimulus miracles.

    In any case, in the long run AD has no effect on output, hence public finance studies of taxes do (and should) ignore fiscal multiplier effects, and assume full employment. Each model has its uses, and Keynesian stimulus models should not be used to determine the burden of taxes. In the long run, SOMEONE will pay for every dollar the government spends.

    Landsburg was discussing tax incidence, something almost all his critics missed. He wasn’t debating Keynesian multipliers, indeed his argument has nothing to do with that issue. If there’s a multiplier, the rich miser still can’t be taxed. Someone else will pay, or no one will pay. It’s not that he’s ignoring Keynesian factors, they are irrelevant to his argument.

    Morgan, You said;

    “Sorry Scott, you have already admitted that Bush’s spend-all-the-money politics is good strategy vs. letting Dems spend it.”

    No I haven’t.

  74. Gravatar of Full Employment Hawk Full Employment Hawk
    25. April 2011 at 16:22

    “Once we gut the Public Employee Unions, the Dems will be done financially – the far left won’t even have a voice.”

    That is what the Republican attack on public employees unions is all about. It is not about balancing budgets, but, rather to give the right a monopoly on the debate on public policy and suppress alternative views. This is an example of what Naomi Klein calls “The Shock Doctrine.” The use of economic crises to promote right wing causes. There has been a lot of lose talk about fascism lately, but this actually is fascism.

  75. Gravatar of Full Employment Hawk Full Employment Hawk
    25. April 2011 at 16:58

    “I think everyone is missing the point here. This guy won’t bear the burden of a tax, if he’s not consuming.”

    Landsberg does not say “it is impossible to make the likes of Kendrick to bear the burden of the tax.”

    He says “it is quite literally impossible to RAISE REVENUE by taxing the likes of Kendrick” (Emphasis mine.) And that is patently false. If he is taxed, that is revenue for the government and (assuming spending remains unchanged) will reduce the deficit. Landberg’s post is not about who bears the burden of the tax but about increasing government revenue by taxing people like Kendrick to reduce the deficit. And that was what the post by Ms. Stevens that he criticised was about too.

    In light of Lansberg’s assertion that it is impossible to RAISE REVENUE by taxing him, it is discussions about incidence under conditions of full employment that are beside the point here.

    “But if you are talking about raising taxes in a recession to reduce the deficit (which is the assumption you provide), that’s likely to reduce output” Not if the taxes are raised on people like Kendrick who will not reduce their consumption. As I said, under conditions when the economy is below potential output, the less the tax reduces consumption, the better.

  76. Gravatar of Greg Ransom Greg Ransom
    25. April 2011 at 21:04

    Scott, I try to avoid the use of the word “subjective” and instead try to illustrate what is at issue and to use multiple alternative expressions. The word covers several different uses and conceptions in valuation theory and economic explanations, different uses economist fail to have clarity about, an muddle at the expense of drawing distinctions of consequence. Menger is especially good on this, as compared to most all other economists.

    I’m disappointed that you didn’t notice my effort and didn’t appreciate it, and seem not to appreciate either how your distinction is a distinction without a reality in the actual world, especially in the case of the example you give.

    “Greg, I am a fan of entrepreneurship, so you are preaching to the converted. And yes, I do realize that wants are “subjective,” whatever subjective means. (Try defining it sometime.)”

  77. Gravatar of Greg Ransom Greg Ransom
    25. April 2011 at 21:11

    But do you understand how this constantly presents an ever new economic discovery and adjustment problem for producers, involving both issues of what to make and how to make? Your discussion implied you don’t.

    “And I do realize that there is more than one way to skin a cat.”

  78. Gravatar of Morgan Warstler Morgan Warstler
    26. April 2011 at 05:42

    Scott, you specifically said that massive deficits in our current situation, will in your opinion be made up in cuts rather than taxes.

    Since there is NO option of not spending the money to get into this position, it was far better for the GOP to have spent it on their favored causes, than to allow the Dems to have it.

    I say this as a full throated libertarian, it annoys me to great end when libertarians play “pox on both your houses” – because current GOP strategy is the better game strategy of ONLY TWO CHOICES.

  79. Gravatar of Greg Ransom Greg Ransom
    26. April 2011 at 07:41

    I don’t think you get the concept of “entrepreneurship” in the technical sense of producer economizing & niche filling via discovery and adjustment as used in the economic literature, say in Peter Klein, or in the classic works of Mises, Hayek & Kirzner.

    Scott writes,

    “Greg, I am a fan of entrepreneurship”

  80. Gravatar of Greg Ransom Greg Ransom
    26. April 2011 at 07:50

    Hayek directly links the Soviet conception of push button, no-entrepreneurial-learning-required production directly to the failure of aggregate macroeconomic to understand the problem of re-calculation in the aftermath of a malinvestment/overconsumption fake boom.

    If you don’t get the real world of the constant adjustment process and re-evaluation probem — at you look at it as a bunch of “given” boxes in a math construct in the textbook — then you don’t get the central economic problem to be overcome _constantly_, and you don’t get the adjustment process — and how it can get systematically out of whack, and what is required via re-calculation to bet it back into order.

  81. Gravatar of Scott Sumner Scott Sumner
    26. April 2011 at 16:52

    Full Employment Hawk, Naomi Klein is not someone to cite if you want to be taken seriously in this blog. All ideologies use crises to push their agenda–the Obama people even admitted they were using the financial crisis to push their agenda. And being anti-public employee union hardly makes one a fascist, as Obama is more anti-union for federal workers that Scott Walker is for state workers.

    Landsburg certainly would agree that the government can force him to write them a check for a million dollars. But the tax money isn’t coming from him, that’s Landsburg’s point. We are talking about the theory of tax incidence. The person who writes the check doesn’t necessarily pay the tax.

    The government can raise money from oil companies by having them write checks to the government. No one denies the government can raise money that way. But consumers will be bearing the burden through higher prices.

    Since he doesn’t bear the burden, someone else must. If no one else does, then the government collects no net revenue, as any money from him is offset with a decrease from someone else.

    Taxes are a net reduction in AD, the only question is how much. They certainly don’t boost AD.

    Greg, You said;

    “But do you understand how this constantly presents an ever new economic discovery and adjustment problem for producers, involving both issues of what to make and how to make? Your discussion implied you don’t.”

    Yes I do understand, and no my discussion didn’t imply I didn’t understand. You misunderstood me, somehow thinking I was claiming central planning is good at making steel.

    Morgan, You said;

    “Scott, you specifically said that massive deficits in our current situation, will in your opinion be made up in cuts rather than taxes.”

    No, I expect higher taxes (and some cuts.) And unlike you I don’t think GOP spending ideas (space boondoggles, military weapons, farm subsidies, drug benefits for Medicare), is better than Dem programs (health care subsidies, high speed rail, etc.)

    BTW, thanks for the 100,000,000,000,001 dollars, I will enjoy showing them to my students.

    Greg, I agree with Hayek’s critique of Soviet central planning. I don’t recall ever saying anything good about central planning.

  82. Gravatar of Greg Ransom Greg Ransom
    26. April 2011 at 19:37

    Scott wrote in his original post,

    “Central planning is relatively good at producing steel and washing machines and apartment buildings–well understood needs with easy to follow blueprints for production.”

    Now Scott writes,

    “I don’t recall ever saying anything good about central planning.”

  83. Gravatar of Greg Ransom Greg Ransom
    26. April 2011 at 19:43

    Scott, these side distraction remarks are increasing evidence that you don’t get the core of Hayek critique of collectivist economic planning as articulated by Lange & Lerner, etc.

    Perhaps you don’t know who those guys are.

    Scott writes,

    “I agree with Hayek’s critique of Soviet central planning.”

    If you agree with it, well, what is it? Tell me.

    And tell me why it doesn’t apply directly undo your “what to produce” and ”how to produce” distinction.

    And tell me why it doesn’t directly apply to the core problems of macroeconomic busts and macroeconomic disequilibrium.

    Hayek makes the direct link. He says the issues are exactly the same, and these issues are at the core of his dispute with Keynes.

    You agree with Hayek. What are you agreeing with — it should be easy to say at least something specific.

  84. Gravatar of Full Employment Hawk Full Employment Hawk
    26. April 2011 at 20:52

    “And being anti-public employee union hardly makes one a fascist, as Obama is more anti-union for federal workers that Scott Walker is for state workers.”

    What I called fascist was the following position: “Once we gut the Public Employee Unions, the Dems will be done financially –the far left won’t even have a voice.”

    It is clear that now that the Supreme court has given the corporations a blank check to use their immense resources to influence government toward conservative interests, there is a concerted attempt by forces on the right to destroy Public Employee Unions because they provide more progressive forces with a source of funding for their side. The current drive against the public unions is not about economic efficiency or reducing deficits, but to cut the left off from an important source of funding, giving right-wing forces a monopoly on the political debate, and the quotation above clearly demonstrates that this is the case.

    A free society requires that the marketplace for ideas and concepts provides a level playing field for all such ideas, even ones one strongly disagrees with. The misuse of economic power to tilt the playing field toward one’s side and suppress views one disagrees with is a serious threat to our freedom and all genuine libetarians should oppose it. And, yes, I consider what is advocated in the above quotation as fascist.

    I am on this site because I substantially agree with your approach to monetary policy, but I have not made any attempt to conceal the fact that on most issues I am a progressive, and I make no apologies for that.

  85. Gravatar of Full Employment Hawk Full Employment Hawk
    26. April 2011 at 21:10

    “as any money from him is offset with a decrease from someone else.”

    That is only true if the economy is at potential output, which is currently not the case. And the issue is whether taxing him under present economic conditions is possible.

    My arguement is that it is. For, example, if the money is collected from him and is used to reduce the deficit, this will reduce interest rates, which will increase consumption and physical investment. Since, by assumption, he does not reduce his consumption, this will increase aggregate demand (or in a dynamic sitution increase NGDP growth) and therefore increase output, so that there is more goods and services available so that there does not have to be an offsetting decrease for anybody else.

  86. Gravatar of Full Employment Hawk Full Employment Hawk
    26. April 2011 at 21:22

    “Taxes are a net reduction in AD, the only question is how much. They certainly don’t boost AD.”

    I certainly agree that it will not increase it and that in almost all situtation will decrease it. But by assumption the tax will not cause Kendrick’s consumption to go any lower. In that special case the tax increase on Kendrick will not decrease AD.

  87. Gravatar of StatsGuy StatsGuy
    27. April 2011 at 04:26

    ssumner:

    “Denmark doesn’t have “lots of government” it has lots of government spending. There is a difference. Even the fire stations are private companies.”

    How is that different from McAllen Texas?

    By this definition, Medicare doesn’t actually have lots of government either, just lots of government spending, so that should be OK, right? The Medicare drug benefit from Bush _also_ didn’t create a lot of govt. employees, just government spending… also, OK? (TSA is another story – you win hands down on that monstrosity.)

    In my somewhat naive opinion, there is good government spending and bad government spending. It just so happens that we have a lot more bad government spending than Denmark. Why? A combination of corrupt political institutions that initiate the spending and corrupt institutions that conduct oversight, as well as nation size and culture and captured media and really weird political parties that think gay marriage is more important than a 1 trillion dollar deficit. Privatizing prisons doesn’t by itself “fix” their problems when states do not conduct good oversight (and indeed, it creates incentives for corruption in oversight processes). Privatizing Russia certainly didn’t “fix” Russia. Privatization (without really good oversight) just swaps one set of principal agent problems for another set.

    “Why shouldn’t I praise their model?”

    You should praise Denmark’s model! You should note, also, that several of the factors that favor the high entrepreneurship rating in the model rely on consequences for failure, which are socially and economically lower in Denmark. This is partly cultural, and partly due to government economic management, and the two are certainly related. If you believe their model, then you must also believe that egalitarian economic systems favor entrepreneurship. No?

    BTW, here’s an interesting unrelated news article today:

    http://healthland.time.com/2011/04/25/why-the-happiest-states-have-the-highest-suicide-rates/

    I could almost buy the spurious correlation argument (socially egalitarian states are northerly and have bad winters), BUT how does one explain Hawaii vs. New York?

  88. Gravatar of Doc Merlin Doc Merlin
    27. April 2011 at 06:29

    @Full Employment Hawk:

    ‘“Taxes are a net reduction in AD, the only question is how much. They certainly don’t boost AD.”

    I certainly agree that it will not increase it and that in almost all situtation will decrease it. But by assumption the tax will not cause Kendrick’s consumption to go any lower. In that special case the tax increase on Kendrick will not decrease AD.’

    Yes it will. It will lower someone else’s demand. You are thinking of this as a macro problem and using flows, don’t… its a micro-ish problem. Draw an Edgeworth box with 2 players and 2 goods and then tax one person who has a perfectly flat demand curve. Then see who suffers.

  89. Gravatar of Full Employment Hawk Full Employment Hawk
    27. April 2011 at 15:20

    “Draw an Edgeworth box”

    The Edgeworth Box analysis assumes that the economy is at full capacity. Its results are irrelevant to a situation in which the economy has a lot of idle capacity. The issue is whether he can be taxed under current economic conditions. To deal with such situations requires the use of short-term macroeconomic models that allow output and income to fluctuate.

  90. Gravatar of Scott Sumner Scott Sumner
    27. April 2011 at 18:03

    Greg, You said:

    “Scott wrote in his original post,

    “Central planning is relatively good at producing steel and washing machines and apartment buildings–well understood needs with easy to follow blueprints for production.”

    Now Scott writes,

    “I don’t recall ever saying anything good about central planning.””

    There is no contradiction. I said RELATIVELY good. Everyone must have a comparative advantage in SOMETHING, as Ricardo showed 200 years ago. The Soviet CA was in the industries I described. They were relatively bad at producing services, computer games, food, etc.

    On your second question, I agree with Hayek that entrepreneurs are better than central planners at deciding what to produce, and also deciding how to produce it. Which doesn’t contradict anything I said.

    Full Employment Hawk, You said;

    “It is clear that now that the Supreme court has given the corporations a blank check to use their immense resources to influence government toward conservative interests, there is a concerted attempt by forces on the right to destroy Public Employee Unions because they provide more progressive forces with a source of funding for their side.”

    Neither side is progressive, they are just two special interest groups trying to feather their nests. What do the teachers favor as a reform to improve education? Can you name a single progressive reform favored by the teachers union? (And don’t say more money, we already spend more on education than other rich countries.)

    As far as free speech, I favor zero government subsidies or barriers to free speech by any person or organization. “Congress shall make no laws. . . ” The idea that the corporations are conservative is a myth. Obama got more money from Wall Street than McCain, and outspent McCain overall. If leftist ideas fail, it won’t be because of lack of money.

    One reasons corporations have too much power is that in the 1970s the government put limits of donations from rich individuals. New York and Hollywood are full of rich liberals who’d like to give millions to progressive campaigns, but the government won’t let them.

    In the 1970s McCarthy raised millions from 7 rich liberals, and didn’t need money from corporations. After “reform” that would be illegal, now he’d have to sell his soul to corporations to raise money.

    Regarding Kendrick, even if you are right he’s still “The Man Who can’t be taxed.” You are decribing a Laffer Curve type situation where the government can raise money without hurting anyone. I doubt that’s true, but let’s say it is. In that case neither he nor anyone else has borne the burden of higher taxes. Instead the extra revenue comes from a rise in GDP. But that’s not what liberals are claiming when they say “tax the rich.” They aren’t saying “The rich won’t actually have to reduce their living standards, nor will anyone else, instead there will be more GDP so everyone will be just as well off as before, plus will have lots of extra money for high speed rail.” That’s a nice dream, and there’s even a tiny chance it’s true, but he’s still not paying the tax.

    But my other argument is there is a good reason why Keynesian stimulus considerations are generally kept out of tax incidence discussions. Over the course of the business cycle the argument will cut both ways. During some periods taxes might have one effect, over another phase of the business cycle it might have the opposite effect. It makes more sense to consider tax incidence in a long run steady state context, in my view.

    BTW, I don’t have any objection to you promoting progressive ideas, lots of my commenters are progressives.

    Speaking of which . . .

    Statsguy, You said:

    “How is that different from McAllen Texas?
    By this definition, Medicare doesn’t actually have lots of government either, just lots of government spending, so that should be OK, right? The Medicare drug benefit from Bush _also_ didn’t create a lot of govt. employees, just government spending… also, OK? (TSA is another story – you win hands down on that monstrosity.)”

    There are three issues here:

    1. Wasteful government activities (weapons system not needed, etc.)

    2. Government spending that promotes wasteful private sector activities (Medicare spending that leads to unneeded medical tests in McAllen)

    3. Relatively clean “transfers” (Social Security.)

    I’m saying Denmark probably does relatively more of #3, and less of #1 and #2, although I don’t doubt that even they have many problems. It’s a question of degree.

    You’d be surprised how much I agree with of the rest of your tirade–I make similar tirades. I’m not sure the cost of entrepreneurial failure is a big problem here, despite our weak safety net. Don’t we also have laws that make it easier for bankrupt businesses to start over, as compared to Europe? In any case, I’m all for a certain amount of social insurance, it’s just that I’d prefer we use Singapore’s low tax, high-forced saving model. Still, I’d pick Denmark’s model over 95% of countries, and I think it’s a close call vis-a-vis the US (which is an unusual view for a libertarian to hold, given Denmark has close to the world’s highest taxes)

  91. Gravatar of Full Employment Hawk Full Employment Hawk
    27. April 2011 at 20:09

    “You are decribing a Laffer Curve type situation where the government can raise money without hurting anyone.”

    Absolutely not. I am describing a situation in which, since the economy is below potential output an increase in aggregate demand will cause the economy to produce more so that there is more for both the government and consumers. This operates from the DEMAND side, while the Laffer curve operates from the SUPPLY side. Since by assumption Kendrick will not consume less when he is taxed, the tax revenue the government gets from him will increase AD (assuming that the Fed does not offset the effect with contractionary monetary policy, of course). In the example I used, the tax revenue is used to reduce the deficit. But if it were spent by the government, it would also increase aggregate demand. In each case the result is unambiguous because of the assertion that the tax will not cause Kendrick to consume less.

  92. Gravatar of Full Employment Hawk Full Employment Hawk
    27. April 2011 at 20:19

    “But my other argument is there is a good reason why Keynesian stimulus considerations are generally kept out of tax incidence discussions.”

    I agree with that, but my point is that tax incidence analysis is not relevant to determining whether Kendrick can be taxed when the economy is below potential output. Tax incidence analysis assumes a situation which does not exist at the present time. The person whose original post Landsberg was criticising asserted that he can be taxed. Short-term macroeconomics, which is the relevant approach for a situation when the economy is far below potential output demonstrates that she was right and Landberg was wrong.

  93. Gravatar of Full Employment Hawk Full Employment Hawk
    27. April 2011 at 20:51

    It looks like we are coming as close to a controlled macroeconomic experiment as we can reasonably get in Great Britain. The .5% growth in GDP in the first quarter just offset the .5% decline in the fourth of last year, so that during the last 6 months the British GDP remained unchanged. Since the Bank of England fortunately can carry out an independent monetary policy, it is in a position to offset the contractionary fiscal effects of the Cameron austerity policies with a more expansionary monetary policy, so that the rate of growth in the British economy continues like it would have been if the fiscal austerity program had not taken place.

    The best outcome, would be that the Bank of England does offset the effects and demonstrates that it is willing and able to offset the effects of the contractionary fiscal policy and keep the economy growing on an even path.

    However, I don’t believe this will happen. I will venture to predict that it will not do this. The Bank of England probably will not reinforce the contractionary fiscal policy with a contractionary monetary policy. But they will not offset, or at least not adequately offset, the contractionary effect of the contractionary fiscal policy of the Cameron administration, so that the contractionary fiscal policy will significantly slow Britain’s recovery, and MAY even kill it. In other words, we will get Keynesian results.

    The proof of the pudding will be in the eating and we will have to wait and see what happens. However this turns out, macroeconomics and monetary economics will greatly benefit because the information that will be gained will be very beneficial. However things are not as great for the people of Great Britain, who are being forced to act as guinea pigs in this experiment, especially if it turns out the way I predict.

    While I would prefer that the Bank of England does fully offset the effect, I will also admit a good degree of ego satifaction if my view of what will happen turns out to be correct. But is will feel sorry for the British working people because I am a Full Employment Hawk for Great Britain too.

  94. Gravatar of Full Employment Hawk Full Employment Hawk
    27. April 2011 at 20:55

    I actually intended to post the above message below the Other Activities (bumped) post.

  95. Gravatar of Full Employment Hawk Full Employment Hawk
    27. April 2011 at 21:13

    I have moved the posting to the Other Activities (bumped) post. Please ignore the posting in this location.

  96. Gravatar of liberal liberal
    28. April 2011 at 07:15

    Scott Sumner wrote, “The government can raise money from oil companies by having them write checks to the government. No one denies the government can raise money that way. But consumers will be bearing the burden through higher prices.”

    To the extent the tax falls on natural resource rents, the cost to the consumer will be exactly zero.

  97. Gravatar of liberal liberal
    28. April 2011 at 07:16

    “Facebook was a discovery of a need that had been heretofore overlooked.”

    Collecting rents arising from network effects is a “need”?

  98. Gravatar of OGT OGT
    28. April 2011 at 09:19

    Having only skimmed the Lindsey paper, let me say that I am very skeptical that the dichotomy he suggests exists based on my readings in development literature, being an entrpeneur is probably much harder in a less developed economy and just as important to growth.

    As Dani Rodirk relates, one of the reasons poor countries are poor is the lack of understanding of what can be profitably produced in the local market, and an inability of first movers to internalize the gains from discovery.

    Also, if you look at the Hidalgo-Hausman ‘product space’ model you see that product development is generally path dependent within an economy with economies generally moving to developing products whose imputs or skills are related to what the already know how to produce.

    Economies grow by upgrading the products they produce and export. The technology, capital, institutions, and skills needed to make newer products are more easily adapted from some products than from others. Here, we study this network of relatedness between products, or “product space,” finding that more-sophisticated products are located in a densely connected core whereas less-sophisticated products occupy a less-connected periphery. Empirically, countries move through the product space by developing goods close to those they currently produce. Most countries can reach the core only by traversing empirically infrequent distances, which may help explain why poor countries have trouble developing more competitive exports and fail to converge to the income levels of rich countries.

    http://arxiv.org/ftp/arxiv/papers/0708/0708.2090.pdf

    (Check out the graphical representation on pages 8-10!)

  99. Gravatar of Scott Sumner Scott Sumner
    29. April 2011 at 08:05

    Full Employment Hawk, You said;

    “Since by assumption Kendrick will not consume less when he is taxed, the tax revenue the government gets from him will increase AD”

    No, it might cause others to consume less.

    And no, he can’t be taxed in the sense of bearing the burden of the tax, which is what economists mean when they talk about tax incidence. So Landsburg is 100% right, even if you bring in all the Keynesian assumptions that you want.

    FEH, I don’t agree on Britain, but responded on the other thread.

    Liberal, Yes landowners may absorb some of the tax, but as a first approximation it will be consumers. If the US puts another 10 cent tax on gas, the pump price will rise by something between 9 and 10 cents.

    You said;

    “Collecting rents arising from network effects is a “need”?”

    I never said collecting rents was a need, I said providing a site where people can interact was meeting a need, which seems beyond dispute, given the popularity of Facebook.

    OGT, I don’t dispute that entrepreneurs are helpful at any stage of growth, but we’ve seen relatively non-entrepreneurial economies grow really fast during the catch-up phase, then hit a wall when reaching 75% of US GDP/person. Japan for instance.

  100. Gravatar of Greg Ransom Greg Ransom
    2. May 2011 at 08:04

    I get it Scott.

    You don’t want to think about what you’ve already decided, and you’d rather not think about any facts and arguments which challenge your priors.

    All part of not wanting to engage in a genuine conversation.

    E.g. the fallacies, misunderstandings, bogosities from the economic point of view expressed here:

    “To see the distinction between the “what to produce” and the ”how to produce” questions, consider Viagra and Facebook. Viagra was a product for which the need was well understood (as rhinos have learned to their dismay) but where it was not understood how to produce the product. Facebook was a discovery of a need that had been heretofore overlooked.”

    And here:

    “Central planning is relatively good at producing steel and washing machines and apartment buildings–well understood needs with easy to follow blueprints for production.”

    Got it.

  101. Gravatar of Doc Merlin Doc Merlin
    2. May 2011 at 08:18

    @Scott:
    “Central planning is relatively good at producing steel and washing machines and apartment buildings–well understood needs with easy to follow blueprints for production.”

    No it wasn’t. Thats just straight up false. The products were incredibly shoddy and terrible. Even when given good plans, factories, etc, it would fail miserably.

  102. Gravatar of Rien Huizer Rien Huizer
    2. May 2011 at 12:03

    Scott,

    I like yopur non blogging persona better than the blogging one. This post has lots of things that show you have the right ideas but unfortunately, you live in the wrong world. Maybe it is time to wonder why the Danes have a government that is less vulnerable to capture than the US. I do not know and I doubt anyone “knows”. However I suspect that in Denmark (a) it is harder to steal from your countrymen (they are virtually your neighbours) (b) Danes tend to be very well educated in more than just the schooling sense, and their media are pretty aggressive (c) Danes live in a country where the big regulatory decisions are made at the EU level, hence the corrupt (at least from countries without influence) face higher hurdles.. Time to follow your instincts and dive into comparative political economy but without the burden of academic garbage (trying to be quantyitative with ridiculously small samples) that the professionals carry.

  103. Gravatar of Scott Sumner Scott Sumner
    2. May 2011 at 18:15

    Greg, You said:

    “I get it Scott.
    You don’t want to think about what you’ve already decided, and you’d rather not think about any facts and arguments which challenge your priors.
    All part of not wanting to engage in a genuine conversation.”

    1. Conversation would be easier with someone who stuck to the issues, rather than engaging in personal attacks.

    2. I presume you know that since the time of Ricardo economists have distinguished between comparative advantage and absolute advantage. All countries have a comparative advantage in something, so one shouldn’t be shocked if someone declares failed state X is relatively good at producing product Y.

    Doc Merlin, See my answer to Greg. Central planning is much better at making steel than growing food or developing Facebook. Note I said relatively, not absolutely. I agree that the products were often very shoddy, although recall that much of the centrally planned output was produced in Western Europe (British Steel, etc.)

    Rien, Greece is also required to follow EU mandates. That didn’t seem to work out too well. But seriously, I agree that the EU probably slightly reduces corruption, in net terms. You can google an SSRN paper I wrote called “The Great Danes” if you want to see my pre-blogger views on culture and economics.

  104. Gravatar of Philo Philo
    14. May 2011 at 18:20

    You write: “A rich person can do three things with wealth. Personal consumption, investment, and charity.” I believe economists define ‘investment’ in such a way that there is a fourth possibility: hoarding money (not included under ‘investment’, in economist-speak).

    Strictly speaking, ‘burden’ should probably be defined as *loss (= reduction) of utility* (i.e., of *happiness*); this is not quite the same as *loss of consumption*, since utility can be derived from activities that do not involve consumption, and consumption might fail to increase the consumer’s happiness. But *loss of consumption* is close enough for most purposes.

  105. Gravatar of Scott Sumner Scott Sumner
    16. May 2011 at 05:18

    Philo, I’d consider money hoarding to be like buying T-securities, and hence a form of saving. So I do think it leads to investment, as it means someone else buys fewer T-securities, and more corporate bonds.

    I agree that burden should refer to utility, which of course can’t be measured directly, so we use consumption a sa proxy. BTW, it’s also not clear that utility equals happiness, both terms are exceedingly ambiguous, with unclear definitions.

  106. Gravatar of Bababooey Bababooey
    19. May 2011 at 14:53

    and if tax attorneys were helping people evade taxes,

    I would gladly change professions if we adopted a nice, self-reported, annual consumption tax. I’d take time to understand how you economists conceptualize tax incidence, because I could not follow your description of tax incidence studies. Until that day, its a nice living.

    Bababooey, in CxC

  107. Gravatar of W. Peden W. Peden
    20. May 2011 at 16:58

    Samuel Brittan endorses NGDP targeting- http://webserver.forest.org.uk/resource.aspx?id=36426

    - suggesting that NGDP will soon be implemented, fail disastrously, and Samuel Brittan will denounce NGDP targeting as “mumbo-jumbo” and find some new idea to endorse.

  108. Gravatar of Scott Sumner Scott Sumner
    21. May 2011 at 08:47

    Bababooey, My two greatest wishes are to deprive macroeconomists and tax attorneys of their jobs. NGDP futures targeting makes all us macroeconomists obsolete, just let the market determine monetary policy. And a simple tax system deprives you of a job. Both of us unemployed–what could be better!!

    W. Peden, Good, but I don’t agree with the last part–the fall in NGDP was the cause of the recession–at least the global recession.

  109. Gravatar of W. Peden W. Peden
    21. May 2011 at 13:59

    Prof. Sumner,

    I suppose the problem is that economic analysts often lump together Primary and Secondary Depressions (if I may steal some terminology from von Mises) into one big, singular, unidirectional causal event of the “lightning and thunder” type. In truth, depressions are far more complex, which is why there are still legitimate historical debates about the Long Depression, and indeed even earlier depressions.

  110. Gravatar of ssumner ssumner
    25. May 2011 at 12:55

    W. Peden. I agree.

  111. Gravatar of John Martin http://maleextrareviewsblog.com/ John Martin http://maleextrareviewsblog.com/
    26. September 2011 at 21:06

    2Philo
    You write: “A rich person can do three things with wealth. Personal consumption, investment, and charity.” I believe economists define ‘investment’ in such a way that there is a fourth possibility: hoarding money (not included under ‘investment’, in economist-speak).
    But the hoarders are the ones who end of with wealth that gets passed through the generations

    John

  112. Gravatar of ssumner ssumner
    28. September 2011 at 16:31

    John, Hoarding is just an interest free loan to the federal government.

  113. Gravatar of Randy Cox The Penny Capitalist Randy Cox The Penny Capitalist
    4. December 2011 at 19:35

    We must cut spending, but we need to increase revenue to pay for spending that we’ve already done that we shouldn’t have.

    After we cut spending, we need to increase tax a little to pay off the debt. What government has ever paid off its debt?

    We need real money backed by gold. We will not do any of these things; therefore we will never solve these problems

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