Asymptosis

In the grand conservative tradition of cherry-picking convenient quotations, Greg Mankiw pulls one from Christina and David Romer’s paper, “The Macroeconomic Effects of Tax Changes” (PDF).

Tax changes have very large effects on output. Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.

While ignoring an equally or actually far more important statement, given current conditions. (Also cherry-picked. But fair’s fair.)

…tax increases to reduce an inherited budget deficit do not have the large output costs associated with other exogenous tax increases. This is consistent with the idea that deficit-driven tax increases may have important expansionary effects…

I’ve been spending a lot of time lately pondering James Livingston’s insights on how modern, high-productivity, post-industrial economies work, as expressed in two of his posts which I link to and encapsulate here.

What finally closed the loop for me was re-reading Ray Kurzweil and others on past trends, and what the future holds: exponential growth in productivity.

Note the logarithmic scale.

I think I can best encapsulate my conclusions by asking a question: What would happen if labor productivity increased a thousandfold? So creating a certain amount of stuff/goods/prosperity currently requires a thousand workers; suddenly, it only requires one.

Imagine the world Kurzweil describes–in which one person using computer-driven nanotechnology can take the wood in your house and reconfigure the atoms into latticed nanomaterials sufficient to build several skyscrapers. It can convert a pile of dirt into a thousand Thanksgiving dinners. Who gets “paid” for that? (If this future seems fantastical, imagine living in 1508 or 1808 and looking forward to the way we live today. And remember: that efficiency is increasing far faster today, and the pace of that increase is itself increasing.)

Those 999 workers suddenly have no “legitimate” claim to any of that stuff, because they don’t do anything to “earn” it. Those kind of claims are inscribed in both law and practice, so those 999 workers don’t get any of that stuff/goods/prosperity/money. How could they? They’re superfluous.*

Put aside for a few paragraphs the ultimately inescapable issues of fairness, equity, and “just deserts.”** Can such an economy work?

No. Because those 999 people don’t have any money to buy the goods that the one person produces. And there’s no way that one person can purchase/consume all the goods produced. So they don’t get purchased. So they don’t get produced.

The economy–which is essentially a huge logrolling enterprise–stalls and stops.

This is a simplistic thought experiment. In particular, it assumes that the same amount of goods will be produced–ignoring the inevitable efforts of those 999 people to produce more goods, and get paid for them. (As productivity increases so the one guy can produce everything everyone “needs,” they will be increasingly unsuccessful in doing so because their labor becomes steadily less valuable.)

It’s simplistic, but it still represents–accurately and increasingly–the state of modern economies since the industrial revolution. The spectacular efficiencies of technology and corporate capitalism make labor (especially low-skilled labor) increasingly valueless. So in the real world a few people make a lot of money and a lot of people make less money. Absent some intentional intervention, it’s an inevitable result of rising labor productivity.

Left to its own devices, this system will inevitably grind (or crash) to a halt as more people fall off the log. That one person can’t keep it rolling while all the others drown nearby.

So why does the log keep rolling? Because of redistribution in modern, prosperous economies. It maintains the necessary level of “aggregate demand” as productivity increases.

Free markets don’t achieve that distribution or maintain that demand (as explained above, they work in the opposite direction), so government has to do it—for the good of all, including the one person standing there all alone on the stationary log.

It’s no coincidence that:

1. Every thriving, prosperous, modern country has significant redistribution systems–social support services, infrastructure spending, wage laws, labor protections, and yes, welfare. There are no exceptions. (The relative merits and demerits of those systems require far lengthier discussion.)

2. The two great economic crashes of the past century occurred when social support systems were at a historically low ebb, and inequality (in wealth and income) was at an apogee.

A certain amount of government–and redistribution–is not simply desirable in a high-productivity economy; it’s necessary for a modern economy to operate. The U.S.–taxing 28% of GDP compared to Europe’s 40%–has been the epicenter of both of the the aforementioned crashes. The only modern economies (of any size) that tax less than the U.S. are Mexico, Japan, and (barely) Korea.

At 28%, the U.S. appears to be teetering at the bottom edge of the range in which a modern economy can prosper and thrive.

Or…it’s already tipped off the edge—again.

* A semi-aside: who gets that one job? It looks decidedly like a matter of luck. Any number of the 999 could do the job just as well. Perhaps “merit” is the criterion, but merit is both widespread and difficult to gauge. Even if you use smarts and industry as the measures, let’s face it: some people are just lucky enough to be born smart and industrious; others aren’t. (And let’s not even get started on the lucky-sperm contest for being born wealthy.) Meanwhile, most of those 999 people have no hopes of landing the one job; remember that by definition, 50% of people have an IQ below 100.

** The “fairness” argument has justifiable legs. That one person does all the work, so that person “deserves” all the returns for that labor. Counter: those 999 people are out of work (or receiving low wages while working hard) through no fault of their own; given the huge prosperity that productivity and efficiency provide, don’t they “deserve”–just by merit of being alive–to live decent lives? See “luck” in the previous footnote.

Update: Wrestling with The Luddite Fallacy.

I know: that headline is hate speech. But the fact is that it’s sometimes true.

Take education. Here’s the kind of reliable payoffs we get from investing there:

And this doesn’t even count the long-term aid to business that education spending provides.

Remember: few businesses are seriously constrained by a lack of investment capital (only 9% in the U.S.). Many are seriously constrained by a lack of skilled workers (35%).

Do the math. No private-market investor can expect those kind of returns. If rich people all gave a larger chunk of their (nonproductively-invested) incomes to government to invest wisely, everyone–including them–would be much better off.

Oh, hey: that’s called progressive taxation! And surprise surprise, it results in more growth and prosperity. Whodathunkit.

Here’s the central tenet of supply-side/trickle-down/voodoo Reaganomics:

If rich people get (and keep) more money, they will invest it and promote economic growth, so everyone will prosper.

That would (perhaps) be true if a shortage of investment were an important constraint on businesses and on economic growth. But according to the people who run those businesses, availability of investment money is the least important constraint.

A company called Grant Thornton runs an annual survey (PDF) of privately held businesses worldwide, asking them among other things what constrains their growth.

In 2007, only 9% of privately-held U.S. businesses (21% worldwide) cited a “shortage of long-term finance” as a constraint on expansion.

Constraints on Growth Reported by Privately-Held Businesses

Presumably even fewer cite it as a “major constraint.” Both domestically and worldwide, it ranks dead last on the list of business constraints.

(I can attest to this from personal experience. My partner and I had to make some small–low five-figure–personal loans while building a multimillion-dollar business. But we never tapped credit of any kind–though we could have, easily).

Understand: these are privately-held businesses being surveyed–not public corporations (which have far greater access to financing through debt and equity issues, and from massive global pools of private-equity and sovereign-wealth cash). These are the very hotbeds of entrepreneurship that supply-siders constantly tout as the innovative engines of economic growth.

A dearth of financing definitely isn’t impeding their growth. Grant Thornton’s 2007 study puts regulations and red tape at the top of the list, and it’s been there for some years. But in 2008 (for which I can only find global numbers), that changed.

A shortage of skilled workers in now the #1 constraint. (35% of businesses cited it.)

This is completely in keeping with the economic view so ably explicated by James Livingston, which I summarize and link to here. The fact is that wealthy people can’t find truly productive investments offering sufficient returns, so they turn instead to investments that don’t have anything to do with production or productivity. (Think: MBSes, CDOs, CDSes, etc.)

Since the greatest constraint on growth is currently a shortage of skilled workers, the best path to prosperity seems to be taxing those unproductive dollars and investing them in the thing that every economist (and most people and politicians) agree is prosperity-producing: education.

Making sure that wealthy people have plenty of money is not the way to produce prosperity. That’s a self-serving myth—one that needs to be soundly discredited.

I don't usually offer up whole posts from others, but Andy Borowitz pones this one. I can't improve on it.

Okay, I can't resist:

President-elect Obama's radical linguistic policy hasn't gone unnoticed by current White House occupants. At a meeting of world leaders this week, President Bush sought out a hotel waitperson who seemed willing to shake hands, and commented, "Looking into your eyes, I can perceive your heartstrings and discernate that you know the difference between elocutionariness, that type of big-brow word stuff, and what real American people elected me and other presidents like Ronald Reagan here for."

Hat tip: Kitty (thanks!)

World leaders won't even shake Bush's hand:

I wrote an email to economist Alan Blinder at Princeton last week (which he was kind enough to respond to), in response to his NYT piece addressing our current…issues.

“social safety net”…America’s is in tatters…we need both repairs and a new metaphor. Lyndon B. Johnson had it right when he called upon the government to provide a “hand up, not a handout.” The Obama administration should seek to create a new “social trampoline” that not only catches people when they fall, but also propels them back into productive employment. If properly designed, such a social trampoline would both ease the short-run pain of recession and facilitate the long-run adjustment to globalization.

This man was speaking my language, though not quite in my words. I sed:

Just to second your notion in the NYT of renaming the safety net. If I could give our new president one piece of advice, it would be that.

But…”trampoline” sounds decidedly…risky, unpredictable, unsafe.

How about “platform,” or “springboard”?

Professor Blinder liked the language.

This may seem like nothing but rhetorical spin, but it’s important. “Safety net” gives the impression of catching failures. “Springboard” is about encouraging achievers–giving them a place to stand, and a little extra bounce on their way up.

Rhetorical advantages aside (it’s a lot easier to sell Americans on opportunity than on rescue, as the Republicans demonstrated for thirty years), it frames the whole discussion as a way to make everyone more prosperous–a non-zero-sum game–and thus engenders policies and programs that pursue that goal.

Yes, social-support programs can give some people the incentive to screw off and game the government. But they can equally give people the stable platform they need to work their way up and into the greater economic system–to succeed.

Again, progressives need to stop playing defense in the prosperity game. It’s not equity versus growth; it’s equity and growth. The Republicans don’t have the pro-growth policies. We do.

Now that he’s finished his series of columns giving sage political advice to John McCain (hey John, how’d that Palin pick work out for you?), Bill Kristol thinks he has some good ideas for a Republican party that is wondering whether it has any apparent reason for  continued existence.

To begin with, Republicans should:

Emphasis, mine. Reality slip, Kristol’s. It pretty much embodies the conservative inability to distinguish between spin and reality.

He does acknowledge reality here:

Then after an obsequious nod to faux humility (“I don’t pretend to know just what has to be done”), he proceeds to tell Republicans just what has to be done:

This from the decades-long doctor of doctrinaire. Now he’s acknowledging that conservative economics is  simple-minded. (It’s nice to know that there’s such a thing as progress.)

Serious-minded utility maximizing, by the way–creating prosperity for all–is an obvious goal for everyone; the question is how to achieve it. Decades of postwar empirical econometrics demonstrate that progressives know the answers to that question. Conservatives have simplistic (he got that right) faith-based theories that aren’t borne out by the facts on the ground. Which leads to:

…they should depend less on abstract econometric models…

He doesn’t seem to understand that econometric models are rooted in data (though the analytic methods applied to this data are, of necessity, abstract). What conservatives have offered are napkin-scribbled economic theories and nostrums. When they use data, it’s almost uniformly cherry-picked, short-term statistical slices and dices creating rhetorical heat, not illumination. (This presumably because the long-term, big-picture data shows that their theories deliver less prosperity, not more.) Does Kristol think that “econometric” makes him sound knowledgeable and sophisticated? He should look words up in the dictionary before he uses them.

What else should Republicans do?

…take much more seriously
the task of thinking through what are the right rules of the road for
both the private and public sectors. They’ll have to figure out what
institutional barriers and what monetary, fiscal and legal guardrails
are needed for the accountability, transparency and responsibility that
allow free markets to work.

Notice his desperate avoidance of the “R” word (regulation). That aside, his advice here is excellent: Republicans should start thinking about creating good government, instead of destroying government.

In a final, frigid dose of reality, Kristol (while meaning something different) concludes his column by explaining the Republican party’s gravest problem:

…conservatives didn’t govern.

Problem is, we’ve already elected somebody who’s dedicated to doing that.

Maybe the Republicans can help?

The right-wing blogosphere has lately been touting a table that the Norquistina Tax Foundation cherry-picked from a recent OECD study, showing that the U.S. has the most progressive income tax system in the OECD–perhaps excepting Ireland.

This may well be true. But I’m not totally sure what they’re trying to say—except maybe that the U.S. tax system should be less progressive? This is the exact opposite of their typical equality arguments, though: we’re less equal, and we’ve grown faster (we haven’t actually, but they like to think we have), so we should be even more unequal. If that argument holds, shouldn’t we have a more progressive tax system?

In any case, it got me wondering: do more progressive tax systems in developed economies correlate with faster or slower growth?

Answer: more progressive = faster growth. The correlation is .13 (using either of the measures in the Tax Foundation table). Not a huge correlation, but it does show that a strongly progressive tax system does not hurt growth; if anything, the contrary is true.

There are no big X-axis outliers here (which tend to pull trend lines and correlation coefficients around inordinately), but it’s worth looking at a subset of countries that are largely similar, in hopes of ameliorating the effects of lurking, confounding, or otherwise pesky variables that might be polluting the analysis.

If you exclude very small, eastern European, and non-European countries. (Leaving Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Sweden, Switzerland, United Kingdom, United States), the correlation goes up to .21.

If you also exclude Australia, Canada, and the U.S., leaving only the advanced European countries — a nice, somewhat uniform comparison set — the correlation hits .36.

So we can say that at least for developed European countries, the Tax Foundation data shows (by social science standards) a strong correlation between progressive tax systems and increasing prosperity.

Is this what the Tax Foundation was trying to point out?

This is a single statistical slice/snapshot from a huge data set, and many things could paint a different picture: the taxes being analyzed in this particular table by the OECD, the Tax Foundation’s calculation methods based on those figures, the periods being analyzed (by the OECD and by me here, for growth), etc. I don’t know of any serious regression analyses that seek to control for these variables. I’d especially like to find any surveys or meta-analyses of such studies.