Thursday, December 4, 2008

MvNL: Death and Taxes without the Death part

Here’s an earlier response post to a Krugman post that I wrote up last week and forgot to post. Sorry for the delay, just found it in my e-mails to myself.

I suppose there’s something to be said about Paul Krugman: he inspires me to write on this blog. It’d be nice if the inspiration was traditional inspiration, rather than responsive, reactive inspiration, but it is inspiration nonetheless and the objective part of my mind says he deserves some credit. Without his blog, would I have written my last post? Would I have thought about so many issues so critically? Although I am in stark disaccord with the Nobel laureate on most policies, he has earned my thanks, at the very least, for his thought-provoking opining.

That said, I hate how he doesn’t post my comments on his page.

Last week, Mr. Krugman wrote up a blog post expressing his disgust with one of his colleagues, John Taylor, for suggesting that creating a permanent tax cut would be good for the economy. Honestly, this is no surprise for the Keynesian-minded Krugman, who believes that high taxes along with high government spending is the best thing a country could do for itself. Naturally, as a fiscally conservative utilitarian, I am fundamentally against this manner of thinking.

Not only that (and perhaps it is this aspect of Krugman’s writing that inspires me the most), but I can’t stand the authoritative tone with which he writes his articles. The series of inane questions early on in the blog post implies that the respective answers are simple and obvious. Notice how he says, “Taylor’s argument against the obvious answer — government spending as stimulus — is pure gobbledygook.” Not only does Mr. Krugman state matter-of-factly that his answer is the “obvious” one, but he name-calls the argument against it. What grade are we in?

An observant reader would also note that nowhere in this article does Mr. Krugman support his line of reasoning except through his blatant disagreement. The man is no fool; I understand he has likely written about such things before and felt he has already proven his point, and it is on us, as readers, to follow his line of thinking or to shut up and learn. I typically write the same way. Still, if someone is going to bash both a Republican administration as well as a recognized economist simply for saying something different than the person’s belief (and I feel like I’m being generous for omitting an adjective there such as “mistaken”), at least throw out some data, or a link to a past article. If one is content using his “logic” to solve the problem, be prepared for rebuttal with more logic, and cut the authoritative tone.
With all this in mind, I wrote up a response to his blog post expressing my discord and answering that barrage of questions with some logic of my own. I didn’t call him or anyone else names. I didn’t really put him down for anything except his apparent suspension of objectivity in favor of partisanship. Arguments are fine, and I would have welcomed his response to my contention. I did make a mistake though. Following my previous response’s clearance to be published, I figured he would have published last week‘s comment. The other day, I couldn’t find it, and with the lack of a message from saying “Your comment is awaiting moderation,” it appears I was just flat-out denied. It’s too bad; on MY blog, I’ll always post dissenters’ comments. I might not reply to them directly, but they’ll get to have their say. That’s my commitment.

Another one might be to always put a copy of my replies to Mr. Krugman’s blog here, for my own reference at least, on the “off chance” he doesn’t approve it. Lesson learned.

I realize I have mostly ranted and complained thus far in this post, and I’d apologize but, well, it’s my blog and I write what I want. For the readers who expect some sort of economic reasoning, however: fear not; if you’ve read this far you shall be rewarded with just that. So let’s start…

The first issue is that of the permanent tax cut. I have spoken of this before. The Laffer Curve is an economic concept I seldom dealt with at school, but one that makes a lot of sense, especially. Consider the economic incentive structures of the following scenarios: a 100% income tax economy and an income tax-free economy. Which one earns more money for the government? The initial answer might seem to be, the 100%, since 100%*x > 0%*x, with x being any income. But how many people would work if they don’t get paid (since all of their money gets converted into taxes)? Would you? I wouldn’t, I’d spend my time as leisure time. In reality a 100% tax rate and a 0% tax rate are the same in terms of tax revenue. However, the key difference lies in the incentive to be productive (a.k.a. to make money). At 100% tax, there’s no incentive. Going to work doesn’t earn any money, and at least not going to work allows for some free time, which has some value. When there is no tax, however, going to work earns money. Working more means more money. Working better means more money, as does working smarter. While both 100% tax and 0% tax might be the same for the government, in terms of national productivity they are drastically different.

Now, as I have also said before, I am not in favor of a country without a government. A government has its uses, particularly when there are market failures, and the government needs tax revenue to be effective. The shape of the Laffer curve starts to become clear with a change in taxes by 1% for both scenarios. A 99% tax economy is still probably short on productivity, but now at least there is a little bit of incentive to work, so some people will work and pay their taxes. On the other hand, a 1% tax economy still has a lot of incentive to be productive, and at least all those productive people will pay 1% of their income in taxes, thus generating some revenue (likely more than the 99% scenario). The equilibrium isn’t necessarily at 50%, but there will be a point where tax revenue could not be maximized by either raising or lowering the tax rate. That’s what the Laffer curve indicates.

That’s also what I feel like Mr. Krugman is ignoring. Certainly I am not always in favor of tax decreases nor am I always against tax increases (although I would give a strong “usually” to both of those arguments). I do, however, believe that the Laffer curve has merit and if Mr. Krugman agrees with that principle (which I would imagine would be a difficult admission if he did), I would like to see some evidence, at least, that perhaps we are on the 0% side of the optimal government revenue point. I currently do not believe we are, and in fact even if we were my personal political tastes would want to say, “So? The government still cannot spend my money more efficiently than me, even if they maximized their revenue from me,” but I would at least like economic data and analysis behind the claim that increased taxes is what the doctor ordered for our economy.

At the end of the post, Mr. Krugman alludes to an argument against the Employee Free Choice Act (that's the union's pro-EFCA site) where he paraphrases with “now would be a really bad time to make union organizing easier, because it would hurt business confidence in a recession.” Initially when I read this I thought he agreed with the criticism, and I had been truly surprised… it seemed very out of character for the liberal economist. But after reading it again today, I think he had laced his comment with some sarcasm. It’s unfortunate: I think unions are bad for US business by creating over-valuation for itself (i.e. labor) which causes US companies a disadvantage when competing with foreign companies (*cough* automakers *cough*).

And so my frustration builds. Thanks for reading, don't forget to follow the blog (box near the top of the column on the right) to see when I write updates, and as always feel free to comment.

1 comment:

Bobby G said...

I find it amusing that my comment never made it on to his blog comments.