Monday, December 20, 2010

Useful facts about economics for lefties

Two useful resources for lefties:

1. via Duncan, an IMF research paper on how increasing workers' wages is key to preventing future financial crises:

"For long-run sustainability a permanent flow adjustment, giving workers the means to repay their obligations over time, is therefore much more successful than a stock adjustment, unless the latter is extremely large.

Any success in reducing income inequality could therefore be very useful in order to reduce the likelihood of future crises...[for example] a switch from labor income taxes to taxes on economic rents, including on land, natural resources and financial sector rents...And as far as strengthening the bargaining powers to workers is concerned, the difficulties of doing so have to be weighed against the potentially disastrous consequences of further deep financial and real crises if current trends continue."

If we want to reduce the risk of another economic crisis, and are worried about the level of debt which households and government has, then the evidence here is that it is essential to strengthen the bargaining power of workers against investors (defined as the top 5% wealthiest).

2. The Realignment Project demolishes the arguments put forward by right-wingers in favour of the Laffer Curve:

"A progressive counter to this theory would be to ask – what about government spending, or in other words, social consumption? Because what the Laffer Curve leaves out, and this is endemic of conservative thought, is what taxes pay for. Keep in mind that the premise of the Laffer Curve is that revenues decline because people stop working when taxes eat up their income. However, if we think of taxes as financing the collective or social consumption of goods – what scholars sometimes call the “social wage;” think things like Social Security and other forms of government-provided income – then a decrease in after-tax wage income might be matched by an increase in the social wage, such that real income doesn’t change at all and eliminating any disincentive effect. Indeed, when we think about the actual distribution of income, taxes, and public benefits, for many people the change in income might actually be positive."

Specifically, government action to create jobs can create all kinds of positive benefits:

"By showing how the huge dead-weight loss of unemployed labor – both in terms of lost consumption and lost production – has to be included as an “opportunity cost” inherent in the laissez-faire model, the Baxter Cycle shows that government efforts to provide equal protection against unemployment can actually raise production and produce a more prosperous, more secure, and more just outcome.

And ultimately, this is why conservatives want to believe in an economic law that limits the size of government and proclaims the futility of expansion – because a government that can alter that balance between individual and social consumption threatens the assumed inevitability of the free market. And a theory that suggests to the contrary that the people have the ability to change how consumption is organized for the better is quite powerful weaponry in the rhetorical battle over taxation and government."


At 4:09 pm , Blogger MatGB said...

"Keep in mind that the premise of the Laffer Curve is that revenues decline because people stop working when taxes eat up their income. "

Straw man argument, that's not what's claimed. My position is that the laffer curve is real, can be demonstrated, but the argument is over where it takes effect.

In the 70s, whent he top rate of income tax was 90%, did the highest earners stop working?

Or did they instead reward themselves differently, with things like executive bathrooms with gold plated taps, and chauffeur driven company cars?

Other than that, there's some good stuff there, but if the basic premise of the Laffer Curve is going to be misrepresented or misunderstood, then an attempt to debunk it is doomed to fail.

If I have money to spend (it has been knwon to happen occasionally, not often with Jennie off sick at the moment, but), then I'll choose what to spend it on. IF one item I enjoy is taxed heavily, another that I enjoy eaually not, or subsidised, I'll go with the latter (that's the basic of pigouvian externality taxes after all).

Investors do the same sort of thing, they're looking for the best utility from their money, if one form of investment or method of taking money is taxed heavily, they'll look for something that isn't.

Hence we should move to taxation on stuff like property, especially Land.

Also? High redistributive taxation with strong public benefits is how the Scandinavian model broadly works. But they also have a very free market underpinning to the actual economy.

At 4:47 pm , Blogger donpaskini said...

Hi Mat,

Agree on property and specifically land taxes (as also suggested by the IMF report).

Not sure I agree that the critique of Laffer Curve is a straw man, though. Laffer does explicitly argue that people stop working when taxes eat up their income:

"The economic effect, however, recognizes the positive impact that lower tax rates have on work, output, and employment--and thereby the tax base--by providing incentives to increase these activities. Raising tax rates has the opposite economic effect by penalizing participation in the taxed activities."

At 4:59 pm , Blogger Steven Attewell said...

(The author in question)

What Don said. Laffer does claim that there's a work deterrent, but if the argument is instead about tax avoidance, that's a really weak argument since: A. it then becomes a question of tax design, rather than rates (since you can design an income tax to treat perks as income), and B. it's not clear that you actually get more revenue if you decrease the rates if people are straight-up avoiding; after all, it's hard to beat a 0% rate.

At 5:56 pm , Blogger MatGB said...

Oh, I've no doubt it's one ofthe arguments Laffer uses, but it's not the only, and it's not the one I'd concentrate on.

Essentially, if Laffer's wrong, then the arguments about putting up taxes on alcohol, tobacco and environmentally damaging stuff are also full of holes.

Haven't time (or indeed mental energy) to read (or reread) the full reports right now, but the quote you exeprt makes it look like the work disincentive is the only effect on the Laffer Curve, that's palpably not the case (and it's not tax avoidance to reduce pay and then take other perks)

At 2:32 pm , Blogger Falco said...

"then a decrease in after-tax wage income might be matched by an increase in the social wage, such that real income doesn’t change at all"

This cannot be right. You are assuming no loss at all through inefficiencies in the redistribution process.

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