Cutting through bullshit with a particle beam

Sometimes trolling through the comments section on other blogs is a pleasure. Especially so when it is a blog (and the only blog) I have been banned from. From time to time you read a comment that is so apt, such an elegant summary of the real matter at hand, that you just can’t help but say to yourself, through a tear stained laughter, damn that is spot on. So without further introduction here is said commentary lifted from the comments section over at WCI:

Greg Mankiw compares the current tax system to a hypothetical zero tax system.

To make it a fair comparison, one should wonder what would be the working opportunities for M. Mankiw in a state of total anarchy without any public infrastructure, police, public education, public health agency,…
My best guest is that M. Mankiw would be a peasant giving a part of his crop to the local warlord for protection…

Posted by: Mercure | October 12, 2010 at 08:33 PM

Sounds about right.

The rich get substitution effects and the poor get income effects

It is pretty much understood that the basic orthodox labour market model is agnostic insofar as income and substitution effects are concerned. If for example real wages increase workers may choose to work less because they can consume more leisure with less hours of work or workers may work more hours because the opportunity cost of leisure has gone up. Which effects dominate workers’ incentives are not predetermined by the standard labour market model.

Implicitly, however, we can glean what mainstream economics tends to think are the incentives facing different classes (economic classes that is) of workers. In Mankiw’s recently ridiculed here, here, here and here article in the NYT, he argued the impact of a tax increase on the economic class of ‘workers’ at the top of remuneration scale was a decrease in the real wage which would be met by a substitution of more leisure for less work as the opportunity cost of leisure had been cheapened by the tax increase. Simply stated this class of workers would respond to a decline in their real wage with a union strike like reaction.

So far so good. I do not imagine it inconceivable that those workers with compensation packages that put them in the top 1% of income earners could choose to work less hours if they were faced with a wage cut with one important caveat. They would have to have the type of job which allowed them to control their hours of work and or have sufficient means to withdrawl from the labour market altogether aka independently wealthy. For example, an NHL hockey player cannot say to his coach I am playing one less game a year because of the increase in marginal tax rates; although he might try to make the team offset the tax increase with a higher salary. Thank god for salary caps.

However, when we turn to lower classes of workers we find that Mankiw argues that income effects dominate their incentives. In his introductory texbook he has the following to say about unemployment insurance:

So here Mankiw argues that workers respond according to income effects. Lowering unemployment insurance replacement rates would decrease unemployment because workers would have a greater income incentive to take a job.

What, therefore, accounts for the different reactions between these two classes of workers? Why that is will increased taxes on the rich (a decrease in the real wage) lead to a withdrawal from the labour market but a decrease in unemployment benefits (again a decrease in the real wage) increase the supply of labour. The answer of course is that most classes of workers are not independently wealthy and do not meaningfully control their hours of work. Workers have to work and outside of access to unemployment benefits they do not have the option of defecting from paid labour markets. Therefore whether income or substitution effects predominate is largely a function of class. Most classes of workers save for those at the very top respond to a decreased real wage either by seeking more hours of work through one of three ways: overtime, a second job or telling their teenager to go get a job and pay their own cell phone bill.

It is interesting that Karl Marx (well Smith too in some respects) were the first to recognize the differences between classes of workers what we once called proletarians and the bourgeoisie. But that is for another post.

Greg Mankiw turns down Riksbank Prize: Says he does not like the tax implications

Well no it was actually never offered to that scribbler of text books but if we follow the logic of what Mankiw was arguing in his opinion piece in the New York Times he never actually tried to win the prize because his taxes might become too high. Sad really that the idea of letting the Bush II tax cuts expire for the very wealthy has deprived the world and Mankiw of the Sveriges Riksbank Prize in Economic Sciences.

Mankiw also warns in his obit for meritocracy that it is not just the national glow from his prize that Americans will have to forgo if they let the Bush II tax cuts expire they will also have to forgo Rocky XI, Transformers IV, the next Wayne Gretzky, and all the good things mediocre people like to watch, listen to or have done to them.

Maybe you are looking forward to a particular actor’s next movie or a particular novelist’s next book. Perhaps you wish that your favorite singer would have a concert near where you live. Or, someday, you may need treatment from a highly trained surgeon, or your child may need braces from the local orthodontist. Like me, these individuals respond to incentives…..And, to be sure, the looming budget deficits require hard choices about spending and taxes. But don’t let anyone fool you into thinking that when the government taxes the rich, only the rich bear the burden.

Sad really that silly socialists think they can tax the rich=talented and the poor=mediocre won’t suffer.

Excuse me I have to go vomit now and do some more genuine reading say of press releases by the American Mortgage Bankers Association on how they are just trying serve the American people.

I think it is just wonderful that in the pursuit of science so many economists spend such a disproportionate amount of their time conjuring up convoluted reasons why you can’t tax the rich or if you do tax the rich how they will then pass along the misery to their lessers in one form or another. The irony of course is that they inadvertently make the Revolutionary Marxist argument for outright appropriation as reform is futile.

David Henderson makes one good point on Canada’s budget triumph

Note, if you are pressed for time just scroll to the last paragraph for the punch-line.

Seems like everyone is picking on poor David Henderson of GMU for his working paper Canada’s budget triumph. The thrust of the paper is that Paul Martin Jr’s 1996 budget proves that through austerity you can spur economic growth. Or simply stated, that austerity = stimulus. As Stephen Gordon–and Stephen is no pinko progressive–pointed out, the paper is disingenuous in two major respects.

First, private sector employment had already recovered by 1996. And second, interest rates had fallen nearly 9% from the onset of the recession prior to the 1995-96 budget. This in and of itself probably helps explain why private sector employment had recovered prior to the 95-96 austerity budget. As Stephen also points out interest rates would fall another 500 basis points after the austerity budget to their lowest level in living memory (exaggeration but close given what counts for memory these days). The culmination of which was a massive depreciation in the CAD dollar such that Canadian exporters got a 10% boost in their competitiveness without having to lift an eyebrow. The bottom line is this: Henderson’s paper is wrong because the austerity budget came after the recovery had well begun in Canada and was further helped along by interest rate cuts and a depreciating dollar.

What Stephen does not explicitly remark on unfortunately–although he does implicitly by including public sector employment in his graph–is that the austerity budget and the cuts to the public sector contained inter alia helped keep labour markets very depressed. Indeed, it would take nearly 8 years for unemployment to drop to its post recession levels.

Paul Krugman picks up on Stephens remarks over at his blog which is fitting given that Henderson specifically tries to link the Canadian experience of 1996 to current American problems. As both Stephen and Paul point out the two simply are not amenable: private employment is not back to its pre-recession levels and the FED has no more room to reduce interest rates. It was a little disheartening that neither Stephen nor Paul chose to ask the question if the 1996 austerity budget nonetheless fit with the Canada of today. That is a more interesting question; namely, will austerity today produce the same results as it did (not) back in the mid 90s. My answer would be no for the following reasons.

Canada has been witness to a steady appreciation of its dollar. This means that much of the capacity in the manufacturing export sector is likely not coming back. To the extent that commodity exports will continue to thrive is of little importance from a labour market point of view because as pointed out in a previous post these sectors are employment lean sectors. That is, you need a 5 % increase in total value added, just to get one percent of growth in employment. So unless agriculture fishing and forestry are driving the commodity exports then resources are not going to make up for the loss of manufacturing jobs.

Second, and related to the first. Commodity markets are relatively strong (that is prices are high). This was not the case back in the 90s. Interest rates are already very low (1%) so there is not much stimulus to be gained there either and the BOC is not talking about funky QE tricks either (which probably would not work anyway). The implication on interest rates is doubly bad news for Canada. Not only is there not much room to cut rates, not much evidence to suggest it would but but there is also thus no instrument (politically viable that is) to depreciate the CDN dollar. The Canadian dollar is thus out of the stimulus picture as well.

The Canadian austerians, from the Federal government (and members of the loyal opposition), to the provincial governments, down to the op-ed pages of the Globe and Mail are busy clamouring for both tax cuts and fiscal austerity. And it looks like the corporate tax cuts are a done deal.

And this brings me to the one thing Henderson got right in his paper (pp17-19) but Stephen and Paul failed to note. Namely, Martin RAISED taxes including corporate and capital gains taxes but not personal income taxes in the 93 and 94 budgets. So I guess you can raise taxes on capital and not retard private sector employment growth. Who knew?

The Limits to the NDPs War on Consumption Taxes: and the Crisis on the Left

Usually the NDP frames their stance against the Harmonized Sales Tax as not being one of anti-tax but one of being anti-regressive taxation. This is a view I am sympathetic to. However, some real-politic concerns have slowly started to change my mind. I say slowly because back in Grad School I was willingly to put up with a never ending series of accusations that I was a petite bourgeois tax renegade by no less than my supervisor and 8 years later I have not been fully convinced. But let me indicate the three most important arguments that have been moving my mind however glacially on the subject.

My graduate supervisor’s point, and one which I was sympathetic to, but just not enough to bring me around on the issue was about the tax base. His argument was that as long as progressive income taxes were in the political firing line progressives would need to fight to keep the tax base and that meant consumption taxes. Indeed Swedish social democrats used largely this strategy to maintain funding for a high quality and efficient social democratic welfare state. Note: Sweden has both higher income taxes and higher consumption taxes than Canada.

The second argument which has started to move me around on this issue is over the question of broader political strategy. Just how will the Carole James NDP in BC, if it were to gain office, manage to raise taxes of any form after having thrown the party’s lot in with what can only be described as Vander Zalm’s petty populist tax revolt? By ranging themselves against consumption taxes does the NDP really think that to the median voter that is a green light to raise their income taxes? So whatever the truth of the NDP’s position against regressive taxation it does not mean they are going to get progressive taxation. I dare Carole James to make increased progressive income taxes the centre piece of the next campaign. Simply put the discursive consequences of being against regressive taxes probably are equivalent to being against taxation in general. In my mind this is the strongest argument against the NDPs war on consumption taxes.

The third argument is the Pigou argument. Simply stated economic activities involving demonstrable negative public externalities ought to be taxed. Tax what you don’t want and redistribute to what you do want. In principle I get the logic here, where it breaks down is getting a political consensus on what we do want and don’t want.

The reality is that there is simply a massive public aversion to higher taxes of any form and there does not seem to be strong consensus on redistribution. So even when we can find an example of where a government has been able to increase regressive taxes there has been only tepid nod to redistribution. Exhibit A would be the last budget in Quebec.

There is a good article, Fueling the Tax Revolt: What’s Wrong with the NDP’s Anti-HST Campaign by Matt Fodor, in The Bullet on all of this including the NDPs various predicaments. I will quote at length the conclusion:

Ironically, the U.S. and Canada in fact have more progressive tax systems than Denmark and Sweden. Taxation rates are higher in the Scandinavian countries at all income levels. Thus the highest earners pay a higher level of income tax, but so does the working class – the ratio between the top bracket and what an average worker pays is smaller in Scandinavia. In 2004, the combined level of personal income taxation and social security contributions for an average production worker was 24.1% in the U.S. and 25.1% in Canada – compared to 33.7% in Sweden. And the average production worker in Denmark (44.1%), along with Germany (44.5%), paid the highest among OECD countries.

All countries use taxes and transfers to counter inequality, but the Nordic social democracies mainly rely on transfers. Transfers as well as taxation, have a role to play in terms of reducing inequality. In a paper for the Ontario Fair Tax Commission – which was established by the Ontario NDP government as a means of exploring tax reform – Lars Osberg stressed that transfers must also be taken into account when one speaks of progressivity:

“In practice, the tax and transfer systems are inevitably closely linked – indeed, it can be argued that transfer payments are ‘negative taxes.’ The net impact of taxes and transfers on individuals is the difference between payments made to and payments received from government. This net impact is relevant for equity purposes. Although some tax choices (such as a value-added tax) may be regressive, taking a higher percentage of the income of the relatively poor, the tax/transfer system as a whole may be progressive, if expenditures benefit primarily the less affluent (as in Sweden).”[11]

It should be stressed that progressive taxation must remain on the agenda for the Left, and that the shift away from progressive taxation (including in Scandinavia) over the past two decades remains a concern. In Canada, the case for far more progressive taxation remains especially compelling. Jackson points out that the income gains of the 1990s went disproportionately to the wealthiest 10 per cent of Canadian families – and these income gains were more pronounced the further up the income ladder. And while the effective income tax rate for most Canadian taxpayers declined only slightly, it declined much more sharply for the very wealthy. The phenomenon of rising incomes at the top, Jackson observes, can only be effectively countered by progressive taxation:

“Canada needs to pay much more attention to income tax progressivity given the steep increase in top incomes, which is now the key driving force of rising income inequality in Canada and other ‘neoliberal’ advanced capitalist countries. Transfers counter inequality by raising the lower end of the income distribution, compared to the middle and the top, while progressive income taxes counter inequality mainly between the top and the middle and the bottom of the distribution. If inequality is now being largely driven by the growth of the income share of the very top, progressive income taxes must play a larger role in our redistributive policy arsenal.”[12]

In spite of the NDP’s denunciation of the ‘regressive’ HST for taxing ‘ordinary Canadians’ rather than corporations and the wealthy, it has failed to put progressive taxation back on the agenda. Besides symbolic gestures opposing the latest round of tax cuts by Liberal and Conservative governments, the NDP has been unwilling to call for increased income taxes for those with the highest incomes. By failing to do so, claims that the party is not “anti-tax” just “anti-regressive tax” ring hollow. The declining progressivity of the Canadian tax system remains a core concern, and an issue that certainly should be taken up by the NDP. However, the key lesson of Nordic social democracy – that a well-financed welfare state necessitates the use of consumption taxes and other so-called “regressive” taxes – remains essential.

There in fact is a compelling case for consumption taxes on socialist and ecological grounds. Social democrats, include those in Scandinavia, have been rightly criticized for pursuing ‘shared austerity’ policies that redistribute income within the working class/middle class while having abandoned policies that target capital. That being said, socialists ought to defend policies that redistribute income from higher-income workers to low-income and unwaged workers on solidaristic grounds. As the Nordic social democracies have shown, this is done through sales and turnover taxes. There is also a ‘public goods’ argument. The taxation of private consumption can fund the provision of public goods (such as parks, public transit, public housing, etc.) that are more ecological than private goods. Furthermore, public goods provision has the effect of decommodification which is as important as progressive taxation in terms of moving toward socialist relations in capitalist societies.

The global economic crisis has resulted in a hard-neoliberal turn toward fiscal austerity and public sector wage restraint and cutbacks. Such an anti-austerity campaign necessitates at the minimum reversal of the Harper government’s cutting of the GST from 7 per cent to 5 per cent, a move that was opposed by the NDP but goes against the spirit of the anti-HST campaign. As Mel Hurtig observes, Canada already ranked number 27 out of 30 OECD countries in terms of taxation of goods and services in 2003. While “someone buying expensive jewellery or new Bentley will save a bundle…a 1 or 2 per cent saving on even inexpensive household items represents only pennies. Yes, pennies to a poor person are important, but 2 per cent of the cost of a million-dollar house could pay for a big pile of groceries for many poor families.”[13]

The GST cut costs the national treasury billions of dollars per year. The restoration of the GST to 7 per cent alone would significantly offset the cuts to the public sector. Further increases to the tax are essential components to the improvement and expansion of public services. Transfers to low-income households could be significantly increased as well.[14]

The building of an anti-austerity campaign that makes the case in support of expanded public services is not likely to come from the NDP leadership, given its opportunistic stoking of anti-tax politics on behalf of so-called “working families,” as well as its muted opposition to current attacks on public sector unions. It is a matter of some urgency to re-imagine what a new anti-neoliberal alliance will look like in Canada. The union movement in Canada is, for the most part, providing almost as little leadership in social struggles. Public sector unions in alliance with users of public services ought to take up the leadership here, but they will only be pushed to do so to the extent a new left begins to emerge inside the wider union movement. But it could be argued that private sector unions and social movements – anti-poverty, feminist, environmental, and other organizations – are in an even worse state of disorganization. This speaks – like the debate over the HST as a whole – to the wider crisis of the left in Canada. An anti-austerity campaign needs to be equal parts a fight against neoliberalism and building a new left. •

Public Investment, Insitutions and the Boomer Greed Hypothesis

That would seem to be the policy advice emanating from both New Keynesian and Post Keynesian economists. With capacity under-utilization and insufficient private investment there is neither an argument about inflation or crowding out to be made. Yet the discourse on fiscal consolidation is not really a mystery. Thirty years of the Sky is falling, the Sky is falling from the usual suspects has a way of becoming common (read median voter) sense. Now they want an adult conversation after having given succour to Victorian nonsense about fiscal chastity and “less is more.” My sense is the horse is out of the barn and it will take a generation before we can have an adult conversation.

There is a generational element to this. We can call this the Greedy Boomer Hypothesis (GBH). The boomers made off like bandits. Their parents received steady real increases in wages in step with productivity; near full employment in the labour markets; when they left the house they got to take advantage of the universal programs that were created by their parents and previous generations (and here I include unions); and later universal programs that they would create. Yet as soon as they started moving through their best earning years and into retirement they began supporting the dismantling of the public supports they took advantage of. That public health care is something they still support is more than a little telling. There are of course class dynamics at play here that I will not bother elaborate on. Class like the occupation of Palestine is something serious academics do not talk about.

What seems evident is the boomers are not going to go for increased public investment because in their median brain the basic equalities are: increased public investment = increased taxes = lower standard of living in retirement. I could read back the arguments over CITs and capital gains in this light: where for example, are retirement savings parked? The reaction over trusts is rather telling in this regard too. And the list goes on: Unions negotiating for protecting the integrity of pensions while agreeing to a 25% pay cut for surviving workers. Want a national securities regulator? All you have to do is convince the boomers it will secure their investments.

Do not get me wrong I am all for solidarity (indeed I think it is a great idea and an even better practice). I spent my 15-28 with my cohorts in the labour market with the reality of a 19 -25% unemployment rate. And when I did make the choice to retrain what did I get? The trebling of my tuition and a 40,000$ student loan. Apparently higher education had magically become a private good once the boomers were done with it. You can in fact take the greedy boomer hypothesis pretty far.

We could characterize neoliberalism as a system—partly—designed to ensure that the younger generation works harder for less in order to ensure the living standard of the last generation in their retirement. This analysis is of course as highly flawed as the median boomer thinking that austerity in the progeny is the key to the satisfaction of the needs of the progenitor. But Not unlike the peasant response to have more children the more scarce food becomes. But the boomer greed hypothesis is limited: there are poor boomers who will go from poor to impoverished in their old age—and it must be added never took advantage of the Glorious Welfare State that temporally was. There is also the fact that the successful upper middle class boomers have done a great job of making in family generational transfers to their children in order to make up for the savaging of public institutions: just where do you think couples in their late twenties and thirties get those down payments for buying a house? So try as we like the question of class cannot really be suppressed. Neoliberalism then is partly about protectionism; about freezing the opportunities for vertical betterment. The upper class—you know those people you do not know and never will—are perfectly happy with the median boomer mind set. They sit on top of the pyramid and by definition do not really need public institutions outside of courts to settle contract disputes. Everything else from roads, to police through to health care and education they can afford on their own: and increasingly the more so inequality grows.

I am not going to conclude with some perfunctory paragraph on the limits to the median boomer mind and the consequences of its myopic vision. It is pointless.

Why increasing tuition fees is not the solution to adequately funding university education in Quebec

Quebec need not go down the same ideological road to policy making as English Canada. It is quite nearly always the same plaint: low tuition = low quality university education. With the implicit or explicit always being higher tuition = high quality university education. Indeed this is the form that Lucien Bouchard’s recent pronouncement on tuition fees takes. It is reported that Mr. Bouchard opined:

“Quebec universities are dangerously underfunded compared with those in Canada and North America.…. These precarious finances have now reached a critical stage. If nothing is done, it is students themselves who will suffer first. And surely, inevitably, so will all of Quebec society.”

Pretty ominous stuff. Luckily I have had the pleasure of teaching in universities from British Columbia to Ontario and now Quebec. And luckily, or unfortunately, I was in each province both as a student and then as a professor. So I can attest to the before and after of tuition hikes (well not yet in Quebec). Here is what I observed. While the need for tuition increases was always cloaked in the garb of quality education it has rarely resulted in higher quality university education. In both the cases of British Columbia and Ontario I observed the following:

(1) There was not an increase in professorial pay beyond the CPI (although some funds were made available to attract Stars).

(2) There was not a decrease in class sizes. They either remained the same or were scaled up so that the professor to student ratio was decreased; that is, more students per professor. And this has been at all levels from the bachelors through to the Ph.D.

(3) There was not an increase in the number of tenured faculty. In fact tuition increases were accompanied by an increase in a reliance on sessional faculty. And this is directly related quality. Sessionals get paid much less than their tenured counter-parts they must therefore take on a greater teaching load to make up for the difference; often teaching at two and sometimes different universities during the same semester. How much time do you think they can spend on quality education? Couple this with the increase in class sizes and the picture is less than high definition quality.

(4) Nor did I notice an increase in expenditure on support staff. The consequence of which is that for both students and faculty the level of administrative services is approaching that of Rogers or Bell: that is one level above Kafkaesque.

Nowhere in Mr. Bouchard’s comments was there any indication of what he meant by quality of education save for some vague reference to competitiveness. My suspicion is that what he really was talking about is a move towards greater cost recovery via user fees. That is, he thinks Quebec should be moving towards full cost recovery of the expense of running universities through raising tuition fees. That this much is a standard liberal economists preference is beyond doubt. Indeed, they have been the protagonists of this position across English Canada. And I have no doubt there is a cavalcade of liberal economists earning publicly subsidised salaries ready to throw in on Mr. Bouchard’s side.

Yet that Mr. Bouchard is little confused is evident by the fact that full cost recovery is predicated on the idea that the value of a post-secondary education accrues solely to the individual student (that is education is a private good) and not at all to society in general. Oddly at the same time he wants to maintain that the underfunding of Quebec universities, owing to low tuition, will eventually cost Quebec society in general (re-read the quote above). Either education is a public good with significant benefits flowing to society from an increase in the average age of the citizenry or it is private good in which the individual student captures most or all of the benefits. Mr. Bouchard wants it to be both. This is indeed a circle that is hard to square, although Bob Rae made a valiant effort at such double speak in his commission into tuition fees in Ontario.

Let us however leave the question as to the quality of higher education and the question over its public and private goods nature to one side. Let us assume all benefits of higher education solely accrue to the individual student. Let us further concede that university thus ought to be self financing: i.e., total cost recovery. There still remains the question of how to raise the money to do this.

Mr. Bouchard’s preference is apparently for front end financing a.k.a. tuition increases. But can this position be justified within the framework of a private goods approach to higher education. Normally yes. But the problem is that in Quebec and in the English Canada university education was previously heavily subsidised by the general citizen regardless of whether or not they went to university.

Let us Assume Mr. Bouchard gets his way and the liberals raise tuition next year three fold. On what basis, that is sense of justice, should it be that those who received their university degree this year and years past not be subject to any cost recovery? That is, if I received my degree three years ago I have the benefit of a high subsidy but those graduating three years from now must absorb a much higher percentage of the cost of their higher education. Simply put, I received a benefit the next generation of students will not. There is simply no way to justify this generational inequality of treatment.

However if the cost of higher education were to be financed through higher marginal tax rates then this disparity could be fully mitigated through a general tax increase on professional incomes (say above 70,000). To simply increase tuition amounts to an inter-temporal (intergenerational) transfer of wealth. Using the progressive tax system however would ensure that those who most benefit(ed) from a university education pay a proportionate share.

This also has two added benefits. First, those students who choose to go into lower paying professional jobs like k-12 education, social services, etc., are not unduly burdened by student debt. And second that the prospect of arduous student debt does not deter those from lower income families from pursuing higher education. Well it may be true well targeted bursaries for lower income families could ameliorate this problem to some degree. However in practice the calculation of lower income is not so easily defined and when coupled with the first point the raft of bursary programs necessary to compensate is unduly complex when compared to the relatively simple instrument of progressive marginal tax rates. That Mr. Bouchard has only thought the matter through to the extent of increasing tuition rates suggests that he, like the liberal economists he appears to be taking his crib notes from, is unduly burdened by a simplistic ideology when what is really called for is a pragmatic and realistic approach to policy making.

If we take both of these points together we can conclude that the demand for higher tuition fees has little to do with higher quality post-secondary education and everything to do with cost recovery. This being the case it stands to reason that all the generations which benefited from a higher education degree should shoulder the burden and not just the future crop of university students.

Quebec need not go down the same ideological road to policy making as English Canada.

Mankiw and ignoble GDP growth fictions

A great example of arguing from theory rather than fact. Is there any robust proof this is true? Not really, next to none. Clinton raised taxes and growth was higher than before he increased taxes. And the post war record of increasing taxes and robust growth suggest something else is going on then dreamt up by Mankiw. Anyway it must be nice to never have to check in with the facts and just read-off from the holy-writ. At this point Pravda was more enlightening…at least they tried to warp the facts to fit the line. Apparently the conservative wing of liberal economics is now both value and fact free.

Second, the Fed could easily overestimate the economy’s potential growth. In light of the large fiscal imbalance over which Mr. Obama is presiding, it’s a good bet he will end up raising taxes for most Americans in coming years. Higher tax rates mean reduced work incentives and lower potential output. If the Fed fails to account for this change, it could try to promote more growth than the economy can sustain, causing inflation to rise (bold added).

Laughed out of the Laffer curve

In class today I presented a seminar on, among other things, the uses and abuses of the Laffer curve. Why it is not called the Laffer bell curve I have no idea; it is always drawn like one. The students were kosher at the extremes: a tax rate of 100% was likely to lead to near zero income tax for the state; similarly they totally grasped as would anyone that a 0 % tax rate times anything was zero. But then the chuckles started.

I suspect it would be a stronger argument if the Laffer curve was bell shaped but at the summit it was flat over say a range of at least twenty percent. The students simply would not buy that a reduction from say 60% on the income of the supper rich to 40 % would not only yield the same but greater tax revenues for the state. And it did not matter how many ad hoc conjectures I threw in: increase in hours worked from the supper rich and the increase in support staff that implied and thus the increase in national output and thus a larger economic pie to tax.

It was more than just that they did not believe that people worked that way it is that they immediately understood it as trojan horse for the rich to decrease their marginal tax rates. 30% of 10 million is still 3 million who would not take that? But I had to explain for the super rich the labour market really is a choice between leisure and income. And when you are super rich you just might ask yourself do I really need another million dollars?

But then there were the questions about the augmentation of state revenues through a reduction in the top marginal rates. And I said I only know of one: Russia. To which we all had to laugh.

Oh my! Krugman jumps ship

Judging by Krugman’s online post today Same as he Ever Was, he has jumped off the good ship Obama. If Krugman is gone then that means a hole ship load of progressive activists are too (not that Paul leads them but rather is a bell weather of sorts). Watch demobilised progressives sit out the next congressional cycle and then the next presidential race. The republicans have won the day and perhaps the field through no merit of their own.

Same As He Ever Was

These days quite a few people are frustrated with President Obama’s failure to challenge conservative ideology. The spending freeze — about which the best thing you can say in its favor is that it’s a transparently cynical PR stunt — has, for many, been the final straw: rhetorically, it’s a complete concession to Reaganism.

But why should we be surprised? Here’s one from the vault. Two years ago, I was deeply frustrated with Obama’s apparent endorsement of the Reagan myth.

There was a lot of delusion among progressives who convinced themselves, in the face of clear evidence to the contrary, that Obama was a strong champion of their values. He wasn’t and isn’t……