What does Krugman think of the neoliberal policy revolution?
Paul Krugman replied to my critique of his comments on neoliberal reforms after 1980. First a couple quick points:
1. Krugman’s right that I didn’t really refute his specific point—that these reforms were associated with a slowdown in real income growth. Indeed I agree with that observation. I thought it would be more interesting to explore an implication that I believe 99.9% of his readers drew from the post—which is that the reforms did not boost growth in real incomes relative to the alternative of maintaining the 1945-80 economic model. I strongly disagree with that view. It would be interesting for Krugman to indicate whether or not that is his view.
2. It seems to me that he also changed the subject a bit with his discussion of hourly wages. His initial post looked at annual incomes, which is how I responded. In addition, I did concede at the end of my post that increasing leisure time in Europe explains part of the differences. I would point out, however, that part of that “leisure” is a much higher natural rate of unemployment among the young and immigrants than in America. And I seem to recall that liberals don’t like it when conservatives call unemployment “leisure.” In addition, if the leisure is triggered by tax distortions, it may simply encourage more inefficient home production, and less efficient market production. But yes, the extra leisure does have some bearing on the comparisons, as I conceded. And to be fair, Krugman refers to the working hours and retirement age differences, not the unemployment gap.
What I’d like to know is what Krugman thinks about the neoliberal revolution that swept the world after 1980. I define neoliberal reforms as:
1. Sharp cuts in the top MTRs
2. Deregulation of prices, trade and market access
3. Privatization of state-owned enterprises, services, and infrastructure
According to the various free marketing rankings, almost every country in the world became more neoliberal after 1980. Although neoliberalism is often associated with conservatives like Reagan and Thatcher, that is actually a misleading impression. I seem to recall finding only 4 countries out of 200 that hadn’t become more free market since 1980 according to the Heritage index, but my memory may be off. In any case, it is clear that even the Nordic countries, which Krugman seems to view as pretty good models, did a massive amount of deregulation, privatization and cuts in high MTRs after 1980. In my sample of 32 developed countries I found Denmark was second to New Zealand in the extent it moved toward freer markets after 1980.
In America the major neoliberal policy innovations were:
1. Deregulation of transport, communications, energy, and finance
2. Cuts in the top MTR from 90% to 28%
3. NAFTA and other tariff cuts
4. Welfare reform plus EITC
All of these had strong bi-partisan support, often from even liberal Democrats. Three occurred under Democratic presidents.
Obviously not every neoliberal reform was a success. Banking deregulation went poorly, and electricity deregulation in California went poorly. But even in the Nordic countries it seems the neoliberal reforms are accepted as being necessary. Indeed some of those countries have privatized many governmental services that are usually government run in the US, such as airports, air traffic control, postal services, passenger trains, water systems, public schools, highways, etc, etc. I seem to recall Krugman occasionally criticizing those on the right who see privatization as a panacea, but don’t recall him expressing an opinion on those trends in Northern Europe. The European countries have also continually slashed their corporate tax rates, to levels far below the US. How does Krugman feel about that? Some have no capital gains taxes, or inheritance taxes. What does Krugman think of moving to a progressive consumption tax regime? More than almost any other blogger I know, Krugman’s posts can be read two ways; as a sensible liberal, or as a knee-jerk leftist. Partly this may reflect his choice of topics–right now he may consider refuting conservative nonsense to be his most important duty—perhaps that makes him seem more left wing than he really is.
My point is that it isn’t obvious that a liberal like Krugman would oppose the general thrust of the neoliberal revolution. I doubt he wants to go back to an era where many western governments owned big manufacturing firms like steel and autos, set airfares, and had 90% tax rates. On the other hand his posts on the topic often suggest that the 1945-80 period was a sort of Golden Age, and we’d be better off trying to recapture that era.
Perhaps he’d respond “it’s complicated” and favor some reforms but not others. I imagine that he has a fairly sophisticated view of the issue, but it isn’t obvious what that view is from reading his posts. And his supporters often seem to view the entire neoliberal revolution as some sort of right wing plot, when if you look internationally it was adopted almost everywhere, and often by left-leaning governments. (Even where there was no hidden racial agenda, which Krugman suggests influenced Republican policy after 1980.) The evidence also shows that countries where the electorate have a more idealistic or civic-minded culture (Denmark) reformed much faster than cultures where the electorate had a less civic-minded culture (Greece.)
In my last post I argued that the growth of the 1950s and 60s resulted from a technological revolution that began in the 19th century and hit a wall around 1973. At that point growth slowed almost everywhere in the late 1970s and 1980s, even before neoliberal reforms were put into effect. Indeed that’s partly why they were put into effect. And the evidence shows that the faster reforming countries did better than the slower reforming countries. When economic growth was simply churning out more steel and more washing machines, everyone could do it. Even the flawed Soviet model. But we can’t go back to that world, it’s gone forever.
PS. I’m sure Krugman’s too busy to repeatedly respond to my posts. Perhaps his readers could point me to Krugman posts where he discusses neoliberal reforms in other countries. I recall one where he was skeptical of Chile’s success, and that’s why I pointed to the Chile/Argentina comparison. But how about Northern Europe?
PPS. I need to slow down. Here’s what I should have responded to:
We can try to parse whether that’s true “” but in any case it’s not a response to my original point. That was about the claim, quite common on the right, that the US economy was stagnant until Reagan did away with those nasty New Deal policies “” a claim that is simply, flatly, false. The era of strong unions, high minimum wages, high top marginal tax rates, etc. was also a period of rapid growth and rising living standards. That doesn’t prove causation; it does disprove the widespread dogma that these things are always economically devastating.
The Soviet regime produced very rapid growth in living standards between 1945-73. I claim that that record of success doesn’t disprove the assertion that by the 1980s that same system was “economically devastating.” The US system during that period was far better than the Soviet model, but also had features that undermined performance in the long run.
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24. May 2010 at 09:31
Personally, I think Krugman is just filling a niche as a famous left-leaning economic intellectual. The problem is, he’s resorting to telling the left what they want to hear.
Either way, his observations seem to me to be like somebody who travels someplace and proclaims “wow life is so much better there” and ignores the reasons behind them, as well as the costs.
It’s easy to visit France and say “wow, they work shorter workweeks and have so much free time” but you never visit the high-rise outer suburbs where immigrants and even their native-born children can’t get into the tightly regulated job market.
As a Canadian, I’ve noticed how people have pointed to our banking system as sound due to prudent regulation, but other than lending standards for mortgages the system here is actually quite a free banking setup. It’s extremely easy for a bank here to expand across provincial lines than a bank in the united states can across state lines.
As for your last response, you could also add that if I start spending on credit cards/lines,etc I could have a rapid expansion in my standard of living, but that would eventually come to a halt when I ran out of it and it gets more expensive to finance. Most of the west was living on borrowed time and it came to a head in the late 1970s.
24. May 2010 at 10:14
Energy “deregulation” in California was NOT a neoliberal reform. It was a Democrat policy that did not deregulate the market — it created massive moral hazard and allowed looting while retaining massive anti-free market regulations. You can’t “half deregulate” and such “half deregulation” has nothing to do with neo-liberalism.
It was bad policy designed to benefit big businesses SOLD under the false label of “deregulation”.
You’ve beeb fooled by dishonest hype from lobby captured politicians in the party machines in California — and from leftist enemies of the free market.
24. May 2010 at 10:25
It seems like most neoliberal reforms were cautiously taken and virtually all “half deregulations” to a degree.
24. May 2010 at 11:22
I don’t read him regularly enough to give specific instances of his thoughts on neoliberal reform, but I can say that I must be in that 0.1% that read him initially in the way that he just clarified. I enjoyed your first post as well, but my immediate reaction was “that was a great post by Scott, but what the hell does it have to do with what Krugman said?”.
Maybe some people with an ideological knee jerk viewed him the way you’re suggesting. I doubt it’s 99.9%. His post was written in pretty plain English – I’m sure I’m not the only one that read it the way that I did.
I think Krugman will also make broad introductory statements, but always critiques very specific elements of neoliberal reforms. I’ve never heard him say high marginal tax rates are fantastic. I’ve never heard him praise price controls. I’ve never heard him critique the principle of privatization (perhaps sometimes the manner of it). I’ve never heard him crticize trade liberalization. You hear him raising issues with (1.) liberalization that leads to unstable capital flows, and (2.) certain financial deregulation. These are very specific cases. I think its important not to conflate that with opposition to a lot of the great stuff that formed the bulk of these “neoliberal reforms”.
24. May 2010 at 11:47
I think you should recognize that it is an article of faith by ‘pop economics’ in Republican circles that the Regan revolution was nothing short of amazing and almost all good since then has derived from it. These days supply side economics seems on its last legs but it still lives, added a slightly more academic tinge to Regan worship.
Krugman’s point clearly is that while there are merits to lower MTR and deregulation it clearly didn’t change the economic world for the US. Keep in mind there were serious economic pundits who predicted economic recession from increases Bill Clinton made in marginal tax rates!
He did point out multiple times that he wasn’t claiming the post WWII boom happened due to high marginal tax rates or that many reforms in the 80’s weren’t necessary. But I think the Republican meme of ‘cut taxes, deregulate, and all is well always’ and its inverse ‘all problems stem from tax increases or regulation’ is false.
24. May 2010 at 12:27
Clinton had the good luck to raise MTR while energy prices were falling. Plus Clinton, to his credit, was a free trader – more then Reagan actually.
Reagan changed the direction of the economy – and the same model was used by much of the world.
Without Reagan could Clinton have pushed for welfare reform, etc?
Tax increases distort behavior away from productive activities into tax avoidance activity.
In the same way, government regulations care very little about efficiency – they are usually designed for social engineering and some political notion of fairness. As frequently as not it becomes a way to reward friends and punish enemies. A drift into crony capitalism.
It is hard to say bank was deregulated – the upside was deregulated but the downside was subject to implied government bailouts. I wouldn’t call that deregulation.
Wage and price controls helped increase war production but is hardly a model to operate under long term.
Periods of mass destruction of population, by war or disease, are frequently followed by periods of rapid growth. The need for innovation and productivity increases are acute after such episodes. It was true after the black plague and after WW’s.
24. May 2010 at 12:33
“Maybe some people with an ideological knee jerk viewed him the way you’re suggesting. I doubt it’s 99.9%. His post was written in pretty plain English – I’m sure I’m not the only one that read it the way that I did.”
It was certainly enough people such that he had to post a clarification to explicitly state he was not implying causation. You’ll notice comments on Krugman and DeLong’s blog from both sides of the aisle that reflect this.
24. May 2010 at 13:07
@Greg:
On the other hand, Texas energy deregulation was neoliberal. And as a result, prices went down and choice went up.
24. May 2010 at 13:14
“Reagan changed the direction of the economy – and the same model was used by much of the world.”
DanC, I have to disagree with you. Though Reagan did do a great deal, he also benefited from much of the deregulation that Jimmy Carter and Ted Kennedy did, such as in trucking, airlines, etc. It’s unfortunate that they don’t get a lot more credit for what they did, but part of it was that it was done too late. Reagan did reduce taxes and (badly) proceeded with bank deregulation. To understand badly, one just has to look at the savings and loan crisis later in the decade.
Also, Thatcher had a much greater world influence on liberalization as the swing from statism to liberalism was much more apparent due to the fact that they were so much more statist to begin with. The modern concept of privatization of huge state enterprises began there. Also, she began her monetarist policies over 2 years before Reagan was elected.
Don’t get me wrong, Reagan did a great deal in shifting the mood of the people, but directly I think that his policies were less critical to the overall move to liberalization.
24. May 2010 at 13:39
Ok, I’ll give some comments as they come up:
“But even in the Nordic countries it seems the neoliberal reforms are accepted as being necessary.”
You know, or should know, that there’s trend, or fad behavior. It’s common for people or organizations to follow the same trend, or current “what’s thought of as the thing to do”, even if it’s later found to be wrong. Remember when people all over the west were eating lots of white pasta becasue they thought it was healthy, and that all fats, of any kind, were bad? Then they found out that was wrong and led to obesity, high triglycerides, etc. (what science points to strongly now is predominantly unprocessed or little processed vegitables and fruits).
In the 60s corporations all over the world were going to huge conglomerates, acquiring businesses in very different areas that they had little competence in running. Then we learned, and went towards “core competence”, but often too far with businesses getting too thin.
I could go on and on. We see all the time trend behaviour among western nations, to an extent among almost all nations, becasue of communication and similarity, but often these trends are wrong, and we learn.
The global trend in the last generation was to the right, but after the Depression it was strongly to the left. Just becasue European nations moved to the right over the last generation doesn’t mean that was a good thing or more eficient or maximizing of total societal utility.
24. May 2010 at 13:56
“In my last post I argued that the growth of the 1950s and 60s resulted from a technological revolution that began in the 19th century and hit a wall around 1973. At that point growth slowed almost everywhere in the late 1970s and 1980s, even before neoliberal reforms were put into effect.”
Ok, first off, at that point we had a severe oil shock, and mistakes were made globally in new monetary strategy.
Now, science and technology is a good point. There should be an attempt to tease it out, but it’s not some completely exogenous thing. Scientific and technological advance is extremely dependent on advancement in basic science. And basic science (and medicine) because of gigantic externalities, free rider problems, inability to price discriminate leading to gross underproviding, enormous free market problems, will be grossly underprovided and underutilized by the pure free market. A left model of much higher taxes (on the wealthy) used for much higher investment in basic science and medicine, where the results are made freely available in journals (and today the internet), instead of kept secret at some for profit company to maximize competitive advantage, would result in far faster advance of science and far greater utilization of discovery.
The same goes for education and infrastructure (and this also feeds back into scientific advancement). All of these are extremely high return investments that will be grossly underprovided by the pure free market, but which can be provided at a far higher level by a left model of higher taxes used for far more spending on these things. Here’s a good example from a post of mine that was in Mark Thoma’s links:
Suppose the entire Bush II tax cuts, 1.8 trillion, which went mostly to the wealthy and super-rich, were instead spent on basic scientific and medical research. This would have increased total government spending on R&D over the decade approximately three fold. It would have increased total R&D spending from all sources, government and non, by approximately 50%.
[Calculations: Bush’s big tax cuts occurred in 2001, 2003, and 2004, with the biggest in 2001. Thus, consider R&D figures for 2002. In that year total government R&D spending was $77 billion. Total R&D spending from all sources, government and non, was $266 billion. The data source is the National Science Foundation (see table 1). I use the same categorization and data source as Brandeis economist Adam Jaffe in “Trends and patterns in research and development expenditures in the United States”, Proc. Natl. Acad. Sci. USA, Vol. 93, pp. 12658-12663, November 1996.
at: http://richardhserlin.blogspot.com/2009/10/lets-consider-magnitude-of-costs-of.html
24. May 2010 at 14:12
So, the deeper “fight for truth and/or public opinion” question is about the effect of regulatory and societal structures, tax rates, and the expansiveness of the government’s role in the welfare state on economic progress.
Let’s simplify the discussion by reducing these complex and multi-variable concepts to two measures: Economic Private-ness and Economic Performance.
Most on both the “right” and “left” will probably agree there is some sort of optimal result that is not a “corner solution” of Total Anarchy or Absolute Collectivism / Extreme Communism.
So the argument is about where the “optimum” in Private-ness is. Or, really, according to my impressions of Krugman, Delong, et al, which political party currently pursues policies that will keep and/or lead us closer towards that optimum – and which “political philosophy” of the parties is consistent with this “reality” and which is ideologically and fallaciously committed to a fantasy unreality.
So, let’s replace “Private-ness” with a political-realism measure consisting of a spectrum of policies which range from Democrat to Republican party desires. It’s rough, I know, but it sets up a kind of ability to do the experiment or data analysis that Krugman is suggesting – “Post-War and Pre-Reagan Golden Age America vs Post-Reagan-Ideologically-Corrupted America.”
The problematic measure remains “Performance” My question is what is the proper metric? Is it growth rates, household income levels, etc? None of these is satisfying since all seem problematic. A large, undeveloped, but stable and socially cohesive country able to borrow money cheaply abroad and build a “copy-and-paste” / “cookie-cutter” facsimile of an industrial society without having to go to the bother of research and development will experience rapid growth for decades (China?) just in “catch-up” mode.
I think the thing we’re looking for is not “catch-up” or “expansionary phase of production as it gradually reaches the entire market (‘more steel’)” but, especially in the case of the US and historical comparisons of the American economy post-WWII, what we want is some kind of measure of the ability to push-the-productivity-frontier relative to other leading nations in the world.
So, let’s say you have two countries, A and B with the following real productivity measures:
1980:
A: 100
B: 50
2010:
A: 120
B: 100
It looks like A only rose 20% while B rose 100%. But wait, in 30 years, B was only able to copy A’s old condition, presumptively using “existing” technologies, methods, ideas, etc.. But A was able to “push the frontier” out another 20% despite saturation, maturation, and was able to do it with it’s own research, development, creation of new “best practices” etc… I want a measure that makes those two changes look more equivalent.
When we talk about American performance and position in the world economy, I think we’re talking about our relative capacity to mine the frontier, pioneer new lands of creation, and further penetrate the realms of unexplored possibilities.
The institutions which accomplish these things are the ones we should be proudest of, and what I think we want in a “Economic Performance Metric” is a measure of how our institutions measured up to foreign institutions compared to whether “neo-liberal” or “pre-Reagan golden-age” policies were in effect.
So, any suggestions?
24. May 2010 at 14:23
“The Soviet regime produced very rapid growth in living standards between 1945-73.”
This makes the growth of heavily taxed and regulated mixed-market regimes seem downright sensible by comparison.
24. May 2010 at 14:45
“When economic growth was simply churning out more steel and more washing machines, everyone could do it. Even the flawed Soviet model.”
This may be far more that the Soviets started with rubble after World War II. Even if you’re extremely inefficnient, little productive, it’s easy to double a very small number fast. If your savings are $1, it’s easy to quickly double that even on a Taco Bell workers income. Then at $2 it’s still easy to double that again. Eventually you reach $1,000 and it then takes far far longer to grow to twice as much.
24. May 2010 at 15:21
I was reviewing the statistics concerning Soviet real GDP per capita growth and they did indeed have a good run. From 1946-1975 Soviet GDP per capita grew at an average rate of 4.2% annually compared to 2.0% for the US.
It’s hard to remember now but there was genuine fear that the USSR would eventually surpass us in GDP back then. I remember reading as a child in awe at the statistics on their rapid expansion of steel output, electrical production etc. It’s only with the benefit of hindsight that it seems utterly ridiculous now.
One testament as to how successful the Soviet economy was (at least by this measure) is how the former Soviet Union was faring 30 years later. Essentially GDP per capita in the former Soviet Union was no higher in 2005 than in 1975. It just goes to show that there are many other factors at work than just economic policy regime.
P.S. As a little piece of Soviet nostalgia I recommend “The Soviet Achievement” by J.P. Nettle (1967) written on the 50th anniversary of the Russian Revolution.
24. May 2010 at 16:03
Here’s his response:
http://krugman.blogs.nytimes.com/2010/05/24/did-the-postwar-system-fail/
24. May 2010 at 18:40
It seems to be an article of faith on the left that Reagan/Thatcher destroyed something fundamentally good about the American/British society, economy and polity. It also seems to be just as much an article of faith on the right that Reagan/Thatcher accomplished exactly the opposite.
It is frustrating for someone like myself who isn’t from either of these countries to be watching this spectacle. It seems obvious to me that the neoliberal revolution in the US and UK had some spectacular successes and spectacular failures, and it’s irritating how both sides insist on denying or ignoring:
1. The evidence of neoliberalism’s successes and failures in the US and UK;
2. The existence of other countries which had their own experiences with neoliberalism.
24. May 2010 at 18:41
Angry Bear puts forth weak arguments – quibbles really, but concludes SS is wrong:
http://www.angrybearblog.com/2010/05/why-scott-sumner-is-wrong.html
Regarding Singapore, it is number 2 in the Economic Freedom of the World Index (Fraser Institute)to Hong Kong´s number 1 position and New Zealand´s number 3.
24. May 2010 at 19:04
werent oil discoveries in the UK north sea a major factor in british growth after 1980? or have i been misinformed once again?
24. May 2010 at 19:13
Hylarides
Kennedy’s desire to deregulate trucking may have ben as much about political battles with the Teamsters as economic policy.
Reagan reflected a political movement, so the fact that Carter understood the changing economic view of middle america, against big government, and he started to implement those changes is not a surprise.
Of course people like Krugman, who hold the general public in contempt, refuse to acknowledge that the movement that elected Reagan in landslides was truly fed up with the big government institutions that the average person was dealing with.
Krugman who backs a health care plan based on sham numbers is hardly a person who should be trusted.
If I must choose who to follow, between Reagan and Krugman, I pick Reagan. Reagan trusted people. Krugman trusts government.
24. May 2010 at 19:24
Scott, you and Krugman are talking past each other. You are both making good points, and those points are not incompatible.
Krugman’s point is that conservatives are obviously wrong to believe that high taxes and regulation spell doom for any economy ever. And that therefore they are wrong to claim that lower taxes and less regulation are always good. These are good points.
Your point that different eras call for different regulatory regimes, and that neoliberal reforms were fairly universal, is also a good one.
But you and Krugman could easily agree that there might come a time when the U.S. economy will benefit from higher taxes and more regulation. Nothing in the historical record precludes that possibility.
25. May 2010 at 01:15
“In addition, I did concede at the end of my post that increasing leisure time in Europe explains part of the differences. ”
Aaaaargh!
This is one that really annoys me. Sure, you can look at market working hours and make the claim that Europe has greater leisure. But that claim may or may not be true.
Only if you look at both market and household production hours can you take the residual (after personal care time) of leisure.
And the time use surveys really don’t indicate that Europeans necessarily have more leisure than USians. Because (as you might expect from higher MRTs) Europeans do more hours of household production.
Check out the Stiglitz/Sen thing for Sarkozy as an example. And I know of at least one paper which shows that the average German woman has less leisure than the averge USian woman: precisely because of more household production hours.
25. May 2010 at 01:35
q:
RE: “It was certainly enough people such that he had to post a clarification to explicitly state he was not implying causation. You’ll notice comments on Krugman and DeLong’s blog from both sides of the aisle that reflect this.”
I reread his posts again and I can’t find anything to suggest that he’s saying what Scott suggests he was saying. Come on q – even Scott admits he wasn’t saying what he said he was saying. There’s a point where you can’t expect someone to anticipate every way that people are going to read your post. How could he have made it any clearer? He stated several times what his purpose was and it was never to attack neoliberalism.
25. May 2010 at 05:17
Christopher, I agree about the French, if they weren’t being pressured by the government to work less, I’d be more impressed. I do think the growth up to 1973 was real, and was impressive. But it was due to technology, not policy.
Greg, I agree. I was giving the leftists the benefit of the doubt by including anything sold as neoliberalism. Bank deregulation was also not a free market policy, as banks were allowed to do whatever they wanted with taxpayer money. That’s not free market either. The problem is that some free market economists supported both policy shifts–that is a problem for neoliberalism.
David, yes and no. The CAB was completely abolished. So were many price controls. On the other hand we still restrict foreign airlines from flying in the US, so basically you are right.
Daniel, Do you agree with his views that those statist policies can’t be that bad, as the US grew fast in the 1945-80 period? If so, why doesn’t the same argument apply to the Soviet Union? The Soviets grew much faster than we did. And no, it wasn’t just a catch up from WWII, Soviet living standards moved far above the pre-war levels.
I believe the vast majority of his readers assume he opposes neoliberals. Obviously 99.9% is an exaggeration, but most would assume that. I don’t recall him ever saying anything good about privatization, deregulation, lower MTRs on the rich, etc. I assume he does agree with me on some of these issues. But if his opinions are always critical, when offered, then people will naturally assume he opposes the entire agenda.
Boonton, You said;
“These days supply side economics seems on its last legs but it still lives, added a slightly more academic tinge to Regan worship.”
Not only is it not on its last legs, but it has become mainstream economics. Even Laffer never argued that tax cuts would always raise revenue. Kennedy argued his tax cuts would raise more revenue, but I don’t think the Reagan administration made that argument.
You said;
“Krugman’s point clearly is that while there are merits to lower MTR and deregulation it clearly didn’t change the economic world for the US.”
No he didn’t say this. He has said numerous times that he thinks Reagan’s policy were a mistake, and merely helped the rich. He criticized Reagan’s policy of deregulation and tax cuts.
DanC, I agree on Clinton. He did three supply-side polices:
1. Free trade
2. Welfare reform
3. Lower taxes on capital
and one anti-supply-side policy
1. Higher MTRs on the rich
q, Yes, and of course he did to Milton Friedman exactly what he accuses me of doing to him. He criticized an argument Friedman never made about oil spills (just a week ago.)
Doc, yes, that’s a good example.
Christopher#2, I agree, and have argued neoliberalism was a bipartisan policy almost everywhere.
Richard; You said;
“The global trend in the last generation was to the right, but after the Depression it was strongly to the left. Just becasue European nations moved to the right over the last generation doesn’t mean that was a good thing or more eficient or maximizing of total societal utility.”
Obviously true, but the examples are relevant for several reasons. Krugman often suggests that the neoliberalism revolution in America was a right wing conspiracy by racist Republicans to screw the poor. Not in those exact words, but he is always trying to link up Reagan’s policies with the Southern Strategy. In addition, Krugman has said good things about the Nordic model. So I think it is interesting that they have adopted many of the the same neoliberal reforms as the US, and indeed in many ways have gone beyond the US.
Richard#2, I find your argument on science to implausible. We have already vastly increased federal funding on medical research, and are getting less and less for our money. The best minds are already working on the problems. If we double spending, we just add some mediocre minds, there is no evidence that you can cure cancer by just throwing money at the problem–we simply have yet reached the stage of science where we are able to address these issues.
But I’m all for cutting military spending–so we agree there.
Indy, It’s hard to objectively measure whose policy regime is best. To me, the most objective measure is “where do immigrants want to move?” The US does pretty well by that criterion. I’m pretty sure we are the most popular destination.
James, Compared to the Soviets, yes.
Richard#3, No the Soviet growth was also fast relative to pre-war levels.
Mark Sadowski, Samuelson said the Soviets would surpass the US in livings standards by 1990. That was the liberal view at the time. Krugman constant dredges up silly things said by conservatives in years past, but ignores equally silly things said by liberals that he respects.
More to come . . .
25. May 2010 at 06:52
R, Here is his clarification:
“Here’s what I think: inflation did have to be brought down “” and Paul Volcker, not Reagan, did what was necessary. But the rest “” slashing taxes on the rich, breaking the unions, letting inflation erode the minimum wage “” wasn’t necessary at all. We could have gone on with a more progressive tax system, a stronger labor movement, and so on.”
Anyone still think he favors the neoliberal revolution? BTW, the fall of the unions was due to technology, not policy changes. There were no significant policy changes. Clinton and Carter weren’t anti-union, and yet union membership plunged under their administrations.
johnleemk. I agree that we need to look at other countries. And that is what convinces me that they have done more good than harm. Britain didn’t grow faster after Thatcher, rather it reversed it’s relative decline compared to the continental countries.
Marcus, thanks, I just wrote a reply
rob, Production is now declining significantly, so it can’t explain the 1994-2008 catchup. It has been a net drag in recent years. Britain probably is too big for it to have much effect. BTW, Norway has less than 1/10 the pop. and even more oil–so it is a different story.
Noah, You said;
“Krugman’s point is that conservatives are obviously wrong to believe that high taxes and regulation spell doom for any economy ever.”
Yes, but no sensible conservative believes that. Do you really believe that conservatives view the Eisenhower economy as some sort of disaster? I’ve never heard one say that. Rather they say the Kennedy tax cuts increased growth, which they did. I think it is more interesting to discuss whether these reforms helped or not, rather than attack the position of some loony conservative who isn’t representative of the movement.
Tim, Good point, but I mentioned that somewhere. I said the Europeans did more home production which was less efficient than market production. Perhaps it was in a different post.
Daniel, Read the Krugman quotation in my reply to R (above). I think his sympathies are pretty obvious. Yes, it is technically a positive statement, but normative implications are obvious.
25. May 2010 at 06:53
“The Soviet regime produced very rapid growth in living standards between 1945-73. I claim that that record of success doesn’t disprove the assertion that by the 1980s that same system was “economically devastating.” The US system during that period was far better than the Soviet model, but also had features that undermined performance in the long run.”
This is what I love about conservatives. So let me get this straight, when the United States had its biggest period of economic growth between 1945 and 1973 (With median incomes rising far faster than between 1982 and 2010), it was all a big accident. Like the Soviet system, it was unsustainable (even though it was sustained for 30 years). It is all a big accident, even though the data says otherwise.
Now, when the Reagan era of massive financial deregulation produced multiple market crashes, including the latest market crash causing massive unemployment, it isn’t because the Reagan philosophy of deregulation was flawed. No, now it is all a big coincidence.
So really what you are saying is that the record of massive financial success from ’45 and ’73 (Median incomes rising faster than another other time in the last century) does not prove that the new deal was right. And despite all of these multiple massive market crashes caused by poor regulation, Reagan’s philosophy of deregulation is fine. I find it interesting that you accuse Krugman of being a knee jerk leftist when it is so clear that no matter what the data says, you simply continue to insist that the data is irrelevant and your political philosophy must be right.
That being said, I am not disagreeing with many parts of your posts. Some of the neo-liberal reforms adopted by US and many other countries in the world were both useful and highly stimulating to growth. This includes NAFTA, Tariff Cuts, deregulation of certain sectors and encouraging private enterprise. However, deregulation the financial industry was a key mistake. Reducing the highest tax rate to 28% was devastating to the middle class leading to the largest class inequity America has seen in 60 years (CEO’s now earn 450 times the average worker as opposed to 30 times that they were earning in ’75). If you were intellectually honest, you would see that well. Please feel free to email me back with any response.
25. May 2010 at 07:39
DanC,
Yes I agree with the paradigm shift that brought Reagan in, but I was disagreeing with Reagan influencing the rest of the world. Also, I wasn’t defending Krugman at all. 🙂
25. May 2010 at 14:17
It’s a problem for classic liberalism that many are full of rhetoric but don’t have much understanding of institutions and regulatory detail — these people are often both poor economists and rotten “free marketers”.
But I don’t recall many “free marketers” advocating the California energy law — got any names?
Scott writes:
“The problem is that some free market economists supported both policy shifts-that is a problem for neoliberalism.”
25. May 2010 at 15:52
Sudarsan,
“Reducing the highest tax rate to 28% was devastating to the middle class leading to the largest class inequity America has seen in 60 years (CEO’s now earn 450 times the average worker as opposed to 30 times that they were earning in ’75).”
I don’t understand this point. How is reducing tax rates on the upper class supposed to devastate the middle class? In principle it shouldn’t matter. There are of course second order effects, but you seem to take it for granted that if the rich get richer, then naturally the poor get poorer, which is hardly true in the general case.
25. May 2010 at 20:09
johnleemk
“I don’t understand this point.”
Neither do I. It’s theoretically possible that 99% of all national income goes to that 1% but the remaining is 99% is still materially extremely well-off (albeit a bit envious I’d guess). Moreover, so long as increasing economic inequality makes everyone better off, the middle class should celebrate economic inequality. Redistributionists ought to be happy as well so long as economic inequality makes the “common pot” grow bigger.
Quite frankly, I don’t understand why economists should be concerned with “rising inequality” at all. Such issues belong to sociologists where it is assumed that economic inequality is a major concern.
25. May 2010 at 23:02
[…] revolution saw big changes in the way economies were organised across most of the world. Scott Sumner summarises the changes thus: 1. Sharp cuts in the top [Marginal Tax […]
26. May 2010 at 02:46
To what extent were Reagan’s tax cuts actually cuts and not just deferals?
The cuts made the rich better off, but the money paid to close the deficit the cuts created came later and from those less well off who hadn’t directly gained. A transfer from the not so wealthy to the ever so wealthy.
Isn’t that the point being made above?
26. May 2010 at 06:59
“Krugman’s point is that conservatives are obviously wrong to believe that high taxes and regulation spell doom for any economy ever.”
“Yes, but no sensible conservative believes that.”
Really? The standard position of the Tea Party/Libertarian/Republican/Fox news crowd is that any govt. involvement in the economy is bad, while tax cuts and deregulation are always good. What does it mean to say “sensible conservatives” don’t believe that, when the conservative media promotes exactly those beliefs, and a large part of the base they pander to believes it all? I check out the WSJ and NRO all the time and they do seem to believe this libertarian nonsense. Are they not “sensible conservatives”?
I also find it interesting that you still havn’t addressed the deficit spending of Reagan/Bush, or the fact that increased consumption has been financed with increased debt/loose credit.
I don’t think anyone wants to return to the days of 90% MTRs; for the past 20 years, the top rate has been between 30 and 40%; is the difference between a top rate of 35% and one of 39.6% the difference between liberty and tyranny?
26. May 2010 at 07:22
Hello Johnleemk,
I think Left Outside has already clarified parts of my point.
To clarify it further: The net discretionary expenses of the federal government did not reduce during that time (We still have an army, national defense etc). This means that when the maximum tax rate of the rich (Say we define rich as earning more than $500K a year per person) drops dramatically, then it is the middle class who have to shoulder that tax burden.
This also causes the government (with less revenues) to have to cut expenses or raise the deficit. This means that vital services like education (Public school funding), research (National Science Foundation), transportation (public buses) etc have to be cut. All of these cuts affect the middle class and the poor, not the rich. The same argument extends to deep cuts to safety nets to the poor (Social Security, welfare, temporary assistance to needy families, federally run soup kitchens etc)
Hence, when the rich are taxed at a ridiculously low rate, it is the poor who suffer the most. There was an article in the news a little while back of a hedge fund manager who paid less taxes that his janitor (http://news.firedoglake.com/2010/05/13/hedge-fund-manager-loophole-looks-like-a-goner/). Exxon Mobil made a profit of 17 Billion and paid no taxes in the US thanks to loopholes for corporate taxes rate. These are examples of the inequity of the tax system.
To Mikko Sandt
“Neither do I. It’s theoretically possible that 99% of all national income goes to that 1% but the remaining is 99% is still materially extremely well-off (albeit a bit envious I’d guess). Moreover, so long as increasing economic inequality makes everyone better off, the middle class should celebrate economic inequality. Redistributionists ought to be happy as well so long as economic inequality makes the “common pot” grow bigger.”
Not exactly. Here is a quick exercise. Check out the Fed data for total family incomes between 1960 and 2010. For the top earners in America (The top 1% or the top 0.1%), their growth was orders of magnitude even after adjusting for inflation. I used the CEO’s as an example, but the Fed data is actually better to perform this exercise. Now using the same fed data plot the inflation adjusted growth of the bottom 10% of income from 1960 to 2010. You will be amazed by what you find. Their growth was marginal over 50 years. (This is not me making up numbers; this is simply the Fed data that you can reference). You can perform the same exercise for the middle quarter of Americans (earning between 40% and 60% of the median household income at the time). Compare their growth to the top earners. The top earners increased by more than an order of magnitude faster.
That was my point. While the common pot grown bigger, it is simply the ultra rich that are benefitting from the increase. Unfortunately, when 99% of the income goes to the top 1%.. the other 99% are rarely well off. They literally starve. I work at a soup kitchen. A little while back, I ran into a woman at a gas station who was shocked at the price increase. She needed gas but she was afraid that would use all her money and she would not have any to feed her children. I told her about my soup kitchen and she came over the next day. She was so ashamed as she never had to get food from someone else. If you think the other 99% is “Still materially extremely well off”, Please volunteer at a soup kitchen near you for the weekend. It will only be a few hours of your time and you will never feel the same way again. It may also be the most satisfying few hours of your life.
Now, just to clarify what I am saying. I am not advocating punitive tax rates of the 1940’s era (90%). That would stifle growth so much that both the poor and rich would lose (Like what happened to Soviet union under communism). I am advocating a slightly more progressive system. (Perhaps having the highest marginal tax rate at 55%). This would continue to inspire the ingenious and the bright to strive for more while providing more basic services to the poor (More federally funded school kitchens, better funding for public schools, cancer research, infrastructure, veterans benefits etc). This can also help cut our deficits sharply thereby guaranteeing us a better future.
26. May 2010 at 07:30
The last point I wanted to make was financial deregulation is one of the key causes of this crisis (Repealing the glass wall between investment and consumer banks etc). Deregulation also disproportionately helps the rich. Check out top earners in banks in the last 10 years. See the increases in Wall Street salaries in the last 30 years. However, the crash kills the poor. (Our unemployment is topping 10% and our deficit is soaring as we continue bailing out the rich while they give themselves massive bonuses for wrecking the system). Canada on the other hand barely had a bump in the road from this crisis thanks to stronger mortgage regulations. Again, my point isn’t to have so much regulation that it stifles creativity and enterprise. Some of Reagan’s key deregulations were excellent (and copied across the world as Scott pointed out). However, some if it should be reversed. Especially int eh financial sectors.
26. May 2010 at 08:26
Sudarsan, First you say I am all wrong, then you seem to say you agree with me:
“That being said, I am not disagreeing with many parts of your posts. Some of the neo-liberal reforms adopted by US and many other countries in the world were both useful and highly stimulating to growth. This includes NAFTA, Tariff Cuts, deregulation of certain sectors and encouraging private enterprise. However, deregulation the financial industry was a key mistake. Reducing the highest tax rate to 28% was devastating to the middle class leading to the largest class inequity America has seen in 60 years”
The only place I disagree is the 28% tax rates, which as you probably know collected more revenue than the 90% rates.
Yes, I think the 1945-73 period was a fluke in the US, North Korea, everywhere. It says nothing about whether the model was sustainable. We know from the countries that did not reform, where growth slowed much more sharply, that it was not sustainable. That was the point of my post.
And the recent asset price crash did not cause the recession, tight money in late 2008 did.
And I am not a conservative, I’ve said lots of good things about the Danish and Swedish models, which is certainly not what you’d hear from a conservative. I am a right-wing liberal, aka utilitarian.
Greg, No I don’t have names. But if you go to left wing blogs they are good at digging up embarrassing statements from free market-types. Milton Friedman praising Iceland banking deregulation, that sort of thing. So there is plenty for both sides to be embarrassed about.
johnleemk, Yeah, that makes no sense, especially as middle class rates were also cut.
Mikko, I look at inequality in a utilitarian perspective. Does income redistribution help or hurt aggregate utility? Sometimes it does, but usually it doesn’t. So I favor some ideas like universal health care (through forced HSAs with subsidies for the poor) and wage subsidies for low income workers, but not many other programs. On the whole I think we can deal with the problem of inequality without a massive state taking 30% to 40% of GDP. Forced saying addresses most of the problems that led to social insurance, and then a bit of subsidy for low income people does the rest. It’s silly for the left to argue the American middle class are “devastated” when they are probably the most affluent middle class in all of world history.
Left Outside, I thought Bush I and Clinton closed the gap with higher MTRs on the rich?
AYC, You responded to me as follows”
“”Krugman’s point is that conservatives are obviously wrong to believe that high taxes and regulation spell doom for any economy ever.”
“[i said] Yes, but no sensible conservative believes that.”
[you responded]Really? The standard position of the Tea Party/Libertarian/Republican/Fox news crowd is that any govt. involvement in the economy is bad, while tax cuts and deregulation are always good.”
There is no contradiction there at all. I believe higher taxes are not desirable, but they certainly don’t spell doom. And BTW, not all those people you cite are “sensible conservatives.” I don’t dispute that many people on both the left and the right say silly things. Do we need to respond to the average Tea Partier? How about those left wing groups that think Bush masterminded 9/11? Polls show a sizable percentage of Dems believe that. I don’t respond to those nuts, I respond to smart liberals like Krugman, DeLong, Yglesias, etc.
You said;
“I also find it interesting that you still haven’t addressed the deficit spending of Reagan/Bush, or the fact that increased consumption has been financed with increased debt/loose credit.
I don’t think anyone wants to return to the days of 90% MTRs; for the past 20 years, the top rate has been between 30 and 40%; is the difference between a top rate of 35% and one of 39.6% the difference between liberty and tyranny?”
You and I agree much more than you imagine. I think the deficits were bad, though nowhere near as bad as Obama’s deficits, obviously. I think Bush made a mistake pushing for the small cut in the top rate (which as you say means little) when he should have pushed for tax reform, simplification. So I am hardly a Republican ideologue. The Singapore fiscal plan I push on the blog is far away from Bushinomics.
Sudarsan#2, You said;
“To clarify it further: The net discretionary expenses of the federal government did not reduce during that time (We still have an army, national defense etc). This means that when the maximum tax rate of the rich (Say we define rich as earning more than $500K a year per person) drops dramatically, then it is the middle class who have to shoulder that tax burden.”
Again, I don’t think this is correct. The deficit was closed with lower spending under Clinton, and also tax increases on the rich. There was a modest rise in middle class taxes in 1983, (payroll) but that merely offset the earlier income tax cuts.
You said;
“This also causes the government (with less revenues) to have to cut expenses or raise the deficit. This means that vital services like education (Public school funding), research (National Science Foundation), transportation (public buses) etc have to be cut. All of these cuts affect the middle class and the poor, not the rich. The same argument extends to deep cuts to safety nets to the poor (Social Security, welfare, temporary assistance to needy families, federally run soup kitchens etc)”
This is completely inaccurate. Federal spending on education soared under Bush II, as did funding for medical research. US total spending on education compares very well to other countries, even in central city areas like NYC, Boston, DC, etc.
You said;
“Hence, when the rich are taxed at a ridiculously low rate, it is the poor who suffer the most. There was an article in the news a little while back of a hedge fund manager who paid less taxes that his janitor (http://news.firedoglake.com/2010/05/13/hedge-fund-manager-loophole-looks-like-a-goner/). Exxon Mobil made a profit of 17 Billion and paid no taxes in the US thanks to loopholes for corporate taxes rate. These are examples of the inequity of the tax system.”
Taxes should apply to consumption, not capital. That is why the sensible Nordic countries have much lower taxes on capital than we do. This has nothing to do with income distribution. Taxing capital is double-taxing future consumption. If you want more equality don’t tax capital, have a progressive consumption tax.
The 55% rate is defensible, although I’d prefer a bit lower, but only if applied to labor income. There should be no tax on capital, a point even many liberal economists who study public fiance agree on. The problem with our current income tax is that it taxes both labor income and capital (which is double taxation.)
No, getting rid of Glass-Steagall did not cause the crisis. We have plenty of regulation, the problem is that the regulators (in both parties) were encouraging banks to make as many sub-prime loans as they could. The Obama administration continues to encourage sub-prime lending through the FHA. So regulation is not the problem, moral hazard and bailouts of banks are the root problem. If you must have moral hazard (and it seems we must) then the government should require 20% downpayments on mortgages. But the grand financial “reform” package did not even ban sub-prime mortgages, which is the minimum step to be a credible reform. The regulators are in bed with the banks.
26. May 2010 at 09:48
Scott, thank you for your response. I’m not sure I buy that our increased consumption wasn’t debt-fueled though. It’s an issue that ought to be addressed in more depth, I think…
Also, with regards to household income, I know households have become smaller, but aren’t there also more 2-income households now than there were pre-1980? Sometimes I feel the focus on households is used to obscure the fact that individual incomes have declined…
“I think the deficits were bad, though nowhere near as bad as Obama’s deficits, obviously.”
Come on! Obama has been worse than Bush in this regard!? Cutting taxes is easy; but we have yet to see a repub president who also cuts spending; tax cuts and deficit spending seem to be standard procedure for them. At least dems try to fund their liabilities.
Finally, the left-wing nuts out there don’t get nearly as much airplay as the radical libertarians (they aren’t really “conservative” are they?). This may be entirely Rupert Murdoch’s fault, but we shouldn’t downplay the extent to which his media empire frames the public debate; frankly, I’ve had a hard time finding out what thoughtful conservatives have to say, because they seem to be greatly outnumbered by the nuts (and those who pander to them).
26. May 2010 at 10:20
AYC, You might look for a Will Wilkinson paper on consumption–it’s not my area.
You are right about the two income families. They play a much bigger role in inequality than people imagine. In Boston a typical cop married to a nurse have a $200,000 family income. A single 23-year old yuppie working at Borders books might make $25,000. My point is that the family income numbers don’t necessarily mesh with how we visualize “class.” It’s very complicated and both the left and right have good arguments. And the median family income might not be close to either of the examples I just gave. We are comparing apples and oranges.
Regarding Obama and deficits there are two issues. I disagree with his fiscal stimulus, but I understand the motive. The steady state deficit under Obama is also expected to rise, but I understand that from a certain perspective Bush was more reckless. It depends how you want to interpret the numbers. I had an earlier post arguing the health care numbers were wrong, and that it wasn’t self-fiancing. I am confident I will be shown to be right eventually.
Liberals often confuse radical libertarians with populist conservatives (like Murdoch). There is some overlap but also huge differences. Fox News was a big fan of George Bush, a radical libertarian’s nightmare. I agree the right has a louder voice in radio. TV news is still center left, except Fox obviously.
I’ve had recent post discussing a disturbing anti-intellectual trend on the right.
26. May 2010 at 10:21
I should have said “future yuppie”
26. May 2010 at 11:26
“I think Bush made a mistake pushing for the small cut in the top rate (which as you say means little)”
It doesn’t mean little to everyone; the effect on growth (“paying for themselves”) was little, and the effect on 99.9% of taxpayers was little, but the negative effect on the deficit was not little; only if you ignore those lost tax revenues can you say that Obama’s deficit spending is worse. I don’t think it’s beating up on the rich to point out that only the tiny minority who make much, much more than the top rate saw a siginificant positive impact from that tax cut.
It’s also worth pointing out that the Boston cop and his wife aren’t in the top bracket. IMO, the anti-tax crowd purposefully takes advantage of the fact that most people don’t really understand how marginal tax rates work; if the top rate started at 199K, the Boston cop would only pay that rate on $1,000, as I’m sure you know. It’s only when you make many multiples of the top rate that a cut of less than 5 % points matters…
And to be clear, I meant only economic libertarians, who are pretty hard to distinguish from populist conservatives on economic matters, especially when democrats are in office
26. May 2010 at 14:01
“Left Outside, I thought Bush I and Clinton closed the gap with higher MTRs on the rich?”
Higher on the rich, but not as high of course and not affecting the extremely rich quite as much. But then, I’m no expert on the tax structure of the US from Reagan to Clinton and onward. I assumed you agreed with the general thrust, that Reagan’s cuts were actually mainly deferrals?
27. May 2010 at 07:01
AYC, The main driver of the deficit under Bush was higher government spending, both military, and domestic (especially health and education.) The cut in the top rate had a very small effect on revenues. Much less than the standard estimates you see.
I don’t have a huge problem with $200,000 year people paying 35% tax rates, but it should be a payroll tax, not an income tax. The income tax should be abolished and replaced with a progressive payroll tax.
Aren’t populist conservatives the ones saying don’t touch my Medicare?
Left Outside, I don’t completely agree. Tax cuts can mean lower rates, or lower revenues, or both. Under Reagan it was both. The cuts in rates from the 70% level was important and will be permanent, in my view. Obviously revenue losses must be made up with higher taxes, lower spending or both.
27. May 2010 at 07:53
Krugman says the Bush tax cuts cost $1.8 trillion.
http://www.politifact.com/truth-o-meter/statements/2009/jun/24/paul-krugman/bush-tax-cuts-health-care-probably/
The left-leaning Center on Budget and Policy Priorities agrees with Krugman. The center’s 2009 report on the Bush tax cuts states:
“The 2001 and 2003 tax cuts added about $1.7 trillion to deficits between 2001 and 2008. Because they (were) financed by borrowing “” which increases the national debt “” this figure includes the extra interest costs resulting from that additional debt. This figure also includes the cost of ‘patching’ the Alternative Minimum Tax to keep the tax from hitting millions of upper-middle-class households, a problem the tax cuts helped cause. Over the next decade (2009-2018), making the tax cuts permanent would cost $4.4 trillion, assuming that the tax cuts remain deficit-financed.”
We then asked the conservative Heritage Institute about the Bush tax cuts. Brian Riedl analyzes the federal budget for the group.
He said Krugman’s $1.8 trillion number only considers the government’s lost revenue, and doesn’t account for the economic activity that lower taxes generate. He said the number was “defensible, but an overstatement.” He estimates there would be a stimulative effect from tax cuts that could shave about 25 percent off that tally. Still, he said, Krugman is in the right ballpark for a static score of uncollected revenues.
“I can’t believe I’m actually saying one of Krugman’s numbers is defensible,” he added.
27. May 2010 at 09:09
“I find your argument on science to implausible. We have already vastly increased federal funding on medical research, and are getting less and less for our money. The best minds are already working on the problems. If we double spending, we just add some mediocre minds, there is no evidence that you can cure cancer by just throwing money at the problem-we simply have yet reached the stage of science where we are able to address these issues.” – Scott Sumner in these comments
I’d like to see some research cited to support this. I constantly see important work scientists would like to do if they could get the money. And it looks to me that a huge amount of advancement in science (and economics) is nothing that takes great brainpower, just a lot of time and/or money. So much of it is incremental; not great genius, but just trying different experiments, examinations, probes, doing fairly obvious attempts but ones that takes a lot of time and money to try by someone who has gone to school for a long time so they could get to the frontier of their sliver of specialty, and who has the money for the resources to try it.
Even if it were true that you need more top minds in science to really advance it strong, this would still be a strong argument for a lot more government spending on science in order to advance it a lot faster. Why? How many top minds go into finance or business because they can make millions or billions instead of five digit incomes as scientists? But why are the incomes so low in science? Is it because the scientists produce a lot less utility for society? No, it’s massively because of the gigantic externalities of what they do, that the vast majority of the value they create over years and generations is just given away; it can’t really be charged for practically. So, even if your limited top minds hypothesis were true, increasing government spending on basic science and medicine – as well as on education – could increase salaries, facilities, perks, scholarships, and prestige, and bring in a lot more top minds.
You argue that a doubling of spending on basic science and medicine would have a lower payoff than the first X dollars, but would it have a zero payoff? Obviously not, I don’t think anyone would argue that. So if this money weren’t taxed and spent on basic science and medicine (and education) would it be spent on something more growth creating over the long run? I don’t think that yachts and mansions would qualify, and that leads us into an enormous inefficiency of the pure free market, positional/context/prestige externalities. For a brief overview of that I suggest this Washington Post column from Cornell economist Robert Frank:
http://www.robert-h-frank.com/PDFs/WP.1.24.99.pdf
and a 2005 AER pub here:
http://www.aeaweb.org/articles.php?doi=10.1257/000282805774670392
And any arguments about the rich would work less with tax increases can be addressed with the income and substitution effects, the backward bending labor supply curve, and the empirical evidence. Here’s an article I like on that also by Frank:
http://www.nytimes.com/2007/04/12/business/12scene.html
28. May 2010 at 06:32
AYC, There are so many problems with that analysis that I don’t know where to begin.
1. Those are the total cuts, you were just talking about the top bracket.
2. Patching the AMT is bi-partisan, not a Bush cut.
3. I don’t agree at all with the static assumption, I find it completely indefensible.
4. Where is the data on spending increases? What if spending had stayed at year 2000 levels as a share of GDP? Much hunch is that this is a much bigger factor than cutting the top rate to 35%. Don’t forget that the dynamic effects are much larger at the high end.
Richard, I have read many articles saying recent progress in medical technology has been very disappointing. Discoveries are being made, but they aren’t being translated into new drugs and other treatments as fast as in the past.
Most public finance people don’t agree with Frank. The standard view is that there are very important efficiency costs to higher tax rates. Why else would hours worked be so much lower in Europe? Some point to culture, but the French worked just as hard as we did in the 1960s, when their tax rates were similar. It sounds nice to soak the rich, and if it works I’m all for it. But I am skeptical that you’d raise much more revenue with higher taxes on the rich. In the short run you’d probably raise somewhat more, but it gradually reduces capital accumulation, and with less capital worker’s wages fall and we get less revenue from payroll taxes, etc. Mankiw showed that other countries with higher tax rates raise about the same amount of revenue per capita as we do. We aren’t at the top of the Laffer curve, but for income taxes we are near the top (long run not short run, obviously. We could raise lots more revenue in the short run.)
28. May 2010 at 09:24
1. We both know cuts at the lower levels of income are like a drop in the ocean; the lion’s share of lost revenue was from the cut of the top rate (if I’m wrong, show me the numbers!)
2. Who cares if they were “bi-partisan”? So was the decision to go into Iraq! Did Bush oppose patching the ATM or did he support it? I don’t buy this line of reasoning at all….
3. The Heritage guy claimed 25% of the cuts paid for themselves; that leaves $1.35 trillion in lost revenue
4. That article is specifically about the cost of the Bush tax cuts, NOT the deficit in general; so spending increases aren’t relevent to the subject at hand.
29. May 2010 at 06:07
AYC, I think you are wrong, but don’t have the numbers in front of me. Off the top of my head I’d guess 50% of losses were from the top bracket. There were two tax cuts, I believe. One didn’t affect the top bracket at all.
2. The connection with Iraq is a stretch. The Dems wanted the AMT patch extended, they went along with Iraq. But I’ll drop that point if you object.
3. Those figures from the Heirtage are useless, as they include “tax cuts” like the child tax credit, that don’t cut rates at all. The efficiency cost of the cut in the top rate is genrally assumed to be much more than 25% and I’m sure Heritage would agree.
4. I agree that the Bush tax cuts made the deficit bigger–even the top rate cuts probably did. My point is that the spending increases were the biggest factor ballooning the deficit. Much more important than cutting the top rate. Especially in his first term, spending rose very rapidly. If Bush hadn’t increased spending the deficit problem would have been very small under Bush.
This is from Heritage:
http://www.heritage.org/Research/Reports/2007/01/Ten-Myths-About-the-Bush-Tax-Cuts
Nearly all of the conventional wisdom about the Bush tax cuts is wrong. In reality:
* The tax cuts have not substantially reduced current tax revenues, which were in fact not far from the 2000 pre-tax cut baseline and over the 2003 pre-tax cut baseline in 2006;
* The increased child tax credit, 10 percent tax bracket, and fix of the alternative minimum tax (AMT) reduced tax revenues much more than most of the “tax cuts for the rich”;
* Economic growth rates have more than doubled since the 2003 tax cuts; and
* The tax cuts shifted even more of the income tax burden toward the rich.
The Heritage growth argument looks silly in light of what has happened since 2007, but it supports my point about the revenue losses from the top rate being not that bad. And he doesn’t even mention the middle rates, just the bottom rate, AMT, and child tax credit. Now I think the top rate revenue losses were maybe 25% of the total.