Sophists, economists and calculators

by Henry on May 16, 2005

John Sutherland splutters indignantly in The Guardian that Steve Levitt’s Freakonomics, hides “hard-core Reagonism [sic] and Thatcherism” under a mask of playfulness. His evidence for this? First, that Levitt is an economist:

Fun as it is to read, Levitt’s vision of the human condition is cold. The solution to every problem, whether political, moral, social or spiritual, is economics. The human animal is a rational-choice machine, driven by incentives and self-interest.

Second, that Reagan’s tax-cuts were “highly freakonomical” because they were counter-intuitive.

Cut the taxes for the rich, and the poor will benefit. How? Because of trickle-down. And the government will pull in more revenue. Why? Compliance: people don’t mind paying taxes, they mind paying excessive taxes. History has proved Freaky Ron wrong on the first count and perhaps right on the second.

Now fulminating opinion-pieces should perhaps be held to a lower standard of truth than serious journalism. But even so, this is still an exceptionally silly article. First, even if Levitt’s view of the human condition is cold and based on economics, this is by no means evidence that he’s a right-wing jihadist. If Sutherland really wants to see the argument that “the solution to every problem, whether political, moral, social or spiritual, is economics” developed at length, he only needs to go back and read Marx’s Capital. Second, Reaganite economics didn’t have much of anything to do with the kinds of arguments that Levitt is putting forward. Indeed, in an important way, they’re antithetical to the kind of social science that Levitt is trying to do. Contra Sutherland, the intellectual justification for Reagan’s tax cuts was, insofar as it was anything, the Laffer curve. To state it politely, the idea behind this curve was not driven by data. Levitt’s work, in contrast, isn’t scrawled down on the back of a restaurant napkin ; it’s driven by what the data show. This, I suspect, is why Levitt has some harsh words for John Lott in the book – cooking your numbers is a mortal sin.

I’ve read Freakonomics pretty carefully (you’ll be seeing more on this topic before the end of the week). My guess is that Levitt is somewhere to the right of the political center, but it’s only a guess. His broad political orientation is impossible to discern from his writing on economics. Sutherland’s article is completely off the mark, and is, in a certain way, anti-intellectual. He identifies a particular style of thought that he doesn’t like, and then damns it on the basis of its purported link to a right wing political agenda. And in so doing, he seems to argue that the examination of incentives and what they tell us about how to make policy is fundamentally morally problematic. That’s a far reaching claim, and, I believe, one that is deeply misconceived. Sutherland is usually a good book reviewer, but he’s gotten this one very badly wrong indeed.

(Thanks to Chris for the link).

{ 41 comments }

1

Simstim 05.16.05 at 11:23 am

I think the Graun hired Sutherland on the assumption that as he’s an academic then he can talk about anything academic. “What do you mean?!? Specialists?!?”

2

Matthew 05.16.05 at 11:51 am

I actually didn’t think the article was that bad. But I haven’t read the book.

What I thought was more strange was the example at the end. I couldn’t work out if he was saying it was a good idea, or a bad idea. I couldn’t work out if the £20,000 was meant to come additionally from the graduate, from the government in place of paying for the tuition, or from the government additionally to the course fees. And I couldn’t work out why anyone who gave it a second thought would think that a country could solve its pension problems by investing £20,000 per person and waiting for the magic of compound interest. Perhaps he is a Republican!

3

kharris 05.16.05 at 11:55 am

Sadly, many otherwise good reviewers fall down when commenting on books of popularized economics.

It is easy to guess where the assumption regarding Levitt’s politics comes from, if we assign certain attributes to Sutherland. (And why not? He started it!) If, for instance, Sutherland maintains a “politics first” view of analysis, then Levitt’s guns vs swimming pools risk analysis makes him an NRA member.

Levitt is, as you point out, rabidly the other way. Unless you can catch him picking research topics that seem to have a political spin, trying to identify his political preferences from his research and professional writing seems like a silly undertaking. He will follow the data.

4

Isaac 05.16.05 at 12:02 pm

More a title review than a book review.

5

Milton Keynes 05.16.05 at 1:29 pm

It’s not ‘fulminating’ and ‘indignant’, it’s amusing, okay? Lighter in tone that the Crooked Timber baseline, to say the least.

6

The Unknown Professor 05.16.05 at 1:59 pm

My first thought was that Sutherland needs to either drink less coffee or get out more. For someone referring to Levitt as having a cold view of the world, he seems far too lathered up. It seems to me that people without basic understanding of economics have problems with the ideas of tradeoffs and incentives. After all, we should be able to get what we want, when we want it without giving anything up, dammit!

7

Tim Worstall 05.16.05 at 2:07 pm

I’m slightly confused by the insistence that the Laffer Curve is incorrect (I take it that this is what you mean without politeness). Can someone (seriously, this isn’t a snark or anything) help me out?
Tax of 0% and of 100% quite obviously results in no revenue (after an adjustment period, of course. Roy Jenkins’ more than 100% tax on unearned income one year did raise revenue because it was retroactive.)
So lowering rates from 100% to 99% should increase revenue, from 1% to 0% reduce it. We appear to have a curve.
So what’s wrong with the Laffer Curve then?
I do understand that if it exists we can then all argue about exactly where we are on the curve, will raising or lowering rates from their present value increase or decrease revenues, but I don’t get the problem with the existence or not of the curve at all.

8

roger 05.16.05 at 2:20 pm

Tim, try the other side. If you raised taxes from 0 percent to 1 percent, would you raise revenues?

Only in a world where government agents existed without pay. Without having a bureaucracy to tax, or a court system, or police, it is doubtful your one percent raise would bring in any taxes. It would be unenforceable. If you don’t believe me, look at Afghanistan at the present moment — or look at how international businesses were begging the Russians to collect taxes at the end of the nineties.

Among other things, the Laffer curve denies the “multiplier” effect from government outlay. I think that is a professional tic of conservative economists — until, that is, they great drafted into the Bush administration, when they all experience amazing conversions to the multiplier effect.

9

Henry 05.16.05 at 2:29 pm

Tim

I’m not arguing with the basic claim that there are decreasing marginal returns to tax collection, and that at a certain point you create incentives for tax evasion that outweigh the revenues that come in. Nor do hugely punitive top marginal tax rates make any sense to me. What I’m saying in shorthand here is a little more complicated. The Laffer curve didn’t even begin to provide the sort of empirical support that one would want for a wide-ranging set of taxcuts, that wasn’t limited to the top marginal rate. What Sunderland just doesn’t understand in his article is that Levitt only makes claims from data, not from curves drawn on the back of napkins. Depending on the exact shape of the curve you could make pretty well any damn argument you wanted, in the absence of good empirical data on the topic. And people did – there were some extremely dubious claims and predictions floating around on the basis of the curve. Nor is it just me as a lefty who is saying this; ask “David Stockman”:http://en.wikipedia.org/wiki/Laffer_curve.

bq. [T]he whole California gang had taken [the Laffer curve] literally (and primitively). The way they talked, they seemed to expect that once the supply-side tax cut was in effect, additional revenue would start to fall, manna-like, from the heavens. Since January, I had been explaining that there is no literal Laffer curve.

10

Felix Deutsch 05.16.05 at 2:59 pm

. He identifies a particular style of thought that he doesn’t like, and then damns it on the basis of its purported link to a right wing political agenda.

Sounds just like a certain economist bloviator recently discussed on this blog.

11

RSL 05.16.05 at 3:00 pm

I haven’t read Levitt’s book yet, so I can’t comment on whether Sutherland represents Levitt accurately or not. However, after reading Sutherland’s review, it seems to me that his real objective is to attack the idea that free markets are the best–and maybe the only legitimate–way for humans to make decisions about the collective good.

His main point (which is actually a valid one) is unfortunately obscured by clumsy writing that betrays a lack of real understanding of economics. His point would have been clearer if he had edited what I believe are the core sentences of his article to read something more like what follows:

The vision of the human condition advanced by laissez faire economists and policymakers is cold. In their view, the solution to every problem, whether political, moral, social or spiritual, is the free market, in which decisions are made solely by individuals driven by incentives and self-interest. Collective forms of decision-making (such as regulations enacted by legislatures) or decisions made on the basis of ethics, aesthetics, or other non-market forces are invalid. Only decisions arrived at by individuals competing to maximize their self-interest are legitimate and good.

This is not so much an attack on economics in its entirety, but rather an attack on a particular reductionist ideology that puts absolute faith in the power of markets to produce the best possible results.

It’s an interesting paradox that the folks who decry the loss of “traditional moral values” are often the very same folks who advocate market solutions for most social problems. I’ve always thought there was a huge contradiction in these two views: if one accepts the idea of an unregulated market being the ultimate way to arrive at the collective good, then one must also accept the proposition that “if smut sells, smut is good.” If you decide that smut is bad anyway, you need to admit that the market doesn’t always lead to the best possible outcome, as the stunning success of the pornography industry demonstrates.

12

asg 05.16.05 at 4:09 pm

I am not sure such a rewrite would have helped the Sutherland piece much.

In their view, the solution to every problem, whether political, moral, social or spiritual, is the free market, in which decisions are made solely by individuals driven by incentives and self-interest.

I know no one who believes this. I do know people who think individuals should be free to govern themselves according to whatever they like, be it ethics, self-interest, aesthetics, or whatever, subject to respect for others’ rights, and that such an approach maximizes everyone’s well-being, but somehow it seems like you are not talking about that.

Collective forms of decision-making (such as regulations enacted by legislatures) or decisions made on the basis of ethics, aesthetics, or other non-market forces are invalid.

The free market is a collective form of decision-making, barring extreme market power held by one individual or firm (which is rare in the absence of state intervention). It is not majority rule, granted, but majority rule is not a necessary characteristic of “collective decision-making.” And I think when you say “invalid” what you mean is “inefficient.” Whether those are the same thing depends on whether one is a utilitarian or some other sort of strong consequentialist.

This is not so much an attack on economics in its entirety, but rather an attack on a particular reductionist ideology that puts absolute faith in the power of markets to produce the best possible results.

It seems to me more like you (and Sutherland) are attacking a caricature. I have never understood why lots of people acting on the basis of their own consciences and interests is “cold”, and why those same people being told what to do by a mixture of elected and unelected other people is somehow more… “warm”? I dunno.

if one accepts the idea of an unregulated market being the ultimate way to arrive at the collective good, then one must also accept the proposition that “if smut sells, smut is good.”

And similarly, if one accepts the idea of legislatures making rules by democratic procedure as the ultimate way to arrive at the collective good, then one must also accept the proposition that “if people vote for less welfare, less welfare is good.” Yet somehow people who believe in the moral primacy of democratic decision-making also often believe that more welfare would be good. Do you think that is a paradox? I don’t.

If you decide that smut is bad anyway, you need to admit that the market doesn’t always lead to the best possible outcome, as the stunning success of the pornography industry demonstrates.

This is a non sequitur, as you need to define the set of possible outcomes before declaring that the market doesn’t lead to the best possible one. (What if all other possible decision-making procedures lead to more smut consumption?)

13

john c. halasz 05.16.05 at 4:26 pm

rsi:

The key to understanding the contradiction in the rightwing coalition that you identify is that what its adherents idolize is the “discipline” of the markets, so only certain forms of smut are bad, just not the kind that makes one feel “bad”.

14

John Quiggin 05.16.05 at 4:57 pm

To expand on Henry’s point, there’s nothing original about the Laffer curve. What was interesting in Laffer’s argument can be called the Laffer proposition; that the US in 1980 was on the declining part of the curve.

At least when linked explicitly to the curve, the Laffer proposition was original. It was also wrong.

15

radek 05.16.05 at 5:07 pm

“So what’s wrong with the Laffer Curve then?”

Well, there’s really nothing wrong with it as an idea. The ‘controversy’ is more about where on the curve we are – below or above the tax rate which would maximize total tax revenue. If we’re above then there’s a free lunch – decrease taxes and increase revenues.
Obviously the shape of the curve between 0% and 100% matters. If it ‘leans left’ then tax rev is maximized at a pretty low tax rate – so a left leaning Laffer curve justified right leaning tax policy. And vice versa.
The shape of the curve’s gonna depend on elasticities of demand and supply of whatever it is you’re taxing. If it’s a consumption tax on a good then it’s price elasticity of demand and supply. If it’s an income tax then it’s labor supply elasticity.
So if labor supply is really elastic then small changes in after-tax wages will cause big changes in labor supply. So the dead weight loss is bigger. So the Laffer curve would be left-leaning, again justifying a policy of low taxation. Opposite with inelastic labor supply.
So some folks who usually advocate cutting taxes on the basis of the Laffer curve also tend to believe that labor supply is pretty damn elastic for other reasons (it helps if you wanna explain business cycle as originating from random technology shocks, rather than monetary monkeying around). The more traditional view is that labor supply is fairly inelastic so the Laffer curve would be right leaning, justifying higher taxes.

Now, people will usually tell you that we’re on the left side of the Laffer curve – i.e. have not reached the point where tax rev is maximizied. And then they will proceed to scoff at the idea in general. Mostly they’re right. But there are some instances you can find of economies on the wrong side of the Laffer curve which cut taxes and increased revenue. I believe Sweden in the 80’s is one. Also different groups of people have different Laffer curves (since their labor elasticities are different). And some folks face really high marginal tax rates. So the Laffer thing does seem to apply to those in the highest tax bracket to some extent – unfortunetly for equality minded folks. Robert Barro has some evidence on this in one of his books.
Anyway…

16

seth edenbaum 05.16.05 at 5:17 pm

Max Speaks.

“If Sutherland really wants to see the argument that “the solution to every problem, whether political, moral, social or spiritual, is economics” developed at length, he only needs to go back and read Marx’s Capital.”

I don’t even know where to begin.
Marx atttempts to use economics precisely to escape it. The goal and the means may be paradoxical but he was pretty explicit. This is just free market Stalinism, meaning of course that unlike the original this one is hip and sexy.

17

Bernard Yomtov 05.16.05 at 5:42 pm

So what’s wrong with the Laffer Curve then?

Others have pointed out that we don’t know where we are on the curve. But another problem is that the fact that it is zero at 0% and again at 100% doesn’t tell us much about what happens in between. Why does there have to be only one maximum, for example? Why can’t it be flat over some range? Why can’t it look, as Martin Gardner once famously asked, like a big tangle of string in between.

So before we even wonder where we are on the curve we are making some assumptions about its shape.

18

Henry 05.16.05 at 6:06 pm

Seth – Max is wrong here – or more precisely, he’s attacking a claim by Andrew Samwick which is itself wrong. I address this at (much) greater length in a post that will be up in a couple of days. And you’re flat out wrong on Marx. Does Communism in some sense ‘escape’ its material base? Hardly. Marx doesn’t for a moment argue that we can escape economics – instead he proposes that a different (albeit rather imprecisely defined) economic system would be far more compatible with human freedom and happiness than the one we have now. And where on earth is the “free market Stalinism” in _Freakonomics_? Have you read the book? It doesn’t sound like it.

19

seth edenbaum 05.16.05 at 6:30 pm

Henry, I’ve read various excerpts from the book and and spent some time at the Freakonomics blog. I also spend most of my time on this page arguing against reductivist descriptions of/prescriptions for human behavior.

Someone at the old American Constittution Society blog wrote a post asking less than half in jest if Law and Economics was the new Marxism. I repeated here my response at the time.

I’ll wait for the longer post

20

mw 05.16.05 at 6:56 pm

In their view, the solution to every problem, whether political, moral, social or spiritual, is the free market, in which decisions are made solely by individuals driven by incentives and self-interest. Collective forms of decision-making (such as regulations enacted by legislatures) or decisions made on the basis of ethics, aesthetics, or other non-market forces are invalid. Only decisions arrived at by individuals competing to maximize their self-interest are legitimate and good.

This is not so much an attack on economics in its entirety, but rather an attack on a particular reductionist ideology that puts absolute faith in the power of markets to produce the best possible results.

I think this is wrong, rsl, in a profound and critical way. Consider emissions trading schemes (including, of course, Kyoto). The broad policy goals (driven by ethics, aesthetics, and other non-market considerations) are not determined by the market, but the methods of achieving the goals ARE determined by a market of self-interested individuals and organizations seeking financial opportunities within the agreed upon framework.

Markets, provided the right incentives, aren’t the enemy of the common good, but by far the most effective way of achieving it.

21

Henry 05.16.05 at 7:35 pm

Seth – I’m still honestly puzzled. Where’s the Stalinism in Levitt’s book or writings?

22

anno-nymous 05.16.05 at 7:39 pm

For what it’s worth, Levitt claims to be completely apolitical, though he of course doesn’t mean that he wouldn’t take sides if one party denied some empirical result. In my heart of hearts, I have to believe the man is rooting for Democrats these days. But he doesn’t vote.

23

seth edenbaum 05.16.05 at 8:51 pm

Henry- I was being a wise-ass of course but since you asked:

I don’t like greed and I don’t respect individualism as a moral philosophy. I recognize I’m an eccentric and therefore an individualist whether I want to be or not, but I’m not greedy, and the ideology of freedom is as problematic, if not more so, as the ideology of obligation; there is still something to be said for the pursuit of virtue, but modern logic talks of the virtuous results of unvirtous desires. Brad DeLong goes back and forth between discussions of Thucydides and of his cool new toys as if there were no contradiction, and there is.

The market is sexy. It’s desire: desire for pretty cars and pretty girls and pretty houses. And people can construct arguments to defend desire, even when the results are pretty shallow empty stuff.
I’m not going to go of again on language or food or culture as the products of a collective. I’m not going to go off on a discussion of the pleasures of skill or mastery as opposed to the teleology of truth. I’ve done that hundred of time by now (at CT alone): science as “The never ending search for facts” etc. But mastery is hard work, whether it’s the mastery of the violin or of the performance in a court, of law or basketball, And skill has a moral dimension, one that is undermined by the argument that whatever is cool, is cool., or any other from a low common denominator of human effort, for example the logic of the Chicago school, which says not only that the individual is unimportant but also that the individual has no obligation to be other than he or she is assumed to be. No wonder my father felt betrayed by the hippies. He was smart.

Greed exists, it even does some good, but only if it is restrained. All society is coercive, the questions are the how and why;
but to remove human telephone operators and replace them with computerized and false friendly voices is the Stalinism of convenience. I don’t want things made easy. I don’t want to be passive. I crave experience.
That is the context in which I make wise-ass comments.

24

RSL 05.16.05 at 9:21 pm

Asg

You make several good points in critiquing my attempt to refine Southerland’s argument–and particularly in my attempt to define the ideology that I believe Southerland is arguing against. So let me try to restate what I said earlier, taking into account your comments:

Southerland’s main point as I read his article is not to argue against the science of economics in general but against a specific type of economic ideology (namely laissez faire). His article is therefore not “anti-intellectual” as Henry suggested, but simply a (poorly written) critique of a particular economic-politcal ideology that underlies much of the so-called right-wing’s domestic policies in the U.S. and Britain.

I think you are right to point out that markets are a form of collective decision making in the sense that multiple inviduals participate and the market balances the interests of those individuals. You are also right to point out that most laissez faire ideologues do believe that individual self-interest should be defined broadly to include one’s personal morality, ethics, etc., as well as one’s monetary interests.

However–and I think this is the heart of Southerland’s argument–the laissez faire ideology tends to restrict the ability of individuals to assemble outside the market to make decisions based on their collective assessment of what’s morally, ethically, aesthetically, politically, socially, or spiritually desirable. To the laissez faire ideologue collective decision making processes outside the market are generally viewed with suspicion and often considered invalid because they are assumed to be inefficient or unlikely to maximize benefits when compared with the laissez faire market-based decision making process. So while laissez faire markets in some sense may be collective and may allow individuals to consider their non-monetary self-interest in their decisions, they limit the vehicles for collective decision making and therefore provide very limited opportunities for individuals to come to a collective consensus on desirable outcomes or to act together to attempt to achieve those desirable outcomes in any way other than through their individual economic choices.

A few other quick points:

Laissez faire is often considered “cold” because it limits the freedom of individuals to make decisions through any forum other than the market, leaving people at the mercy of the market. For people who believe that the market doesn’t always produce the best possible outcomes for society (and that alternative decision making process may produce better results in some instances), this seems cold.

If the people decide less welfare is good, I may or may not disagree with their decision, but at least there’s a forum in which I can try to win people over to my view. The extreme laissez faire approach seems to get rid of the forums outside the market altogether.

Mw

I am not as anti-market as you assume. In fact, I would agree totally with your conclusion if you just modified to read as follows:

Markets, provided the right incentives, aren’t the enemy of the common good, but are often (though not always) the most effective way of achieving it.

It’s the absolutist position that market-based approaches always lead to the best possible results that I disagree with (and that other approaches can only produce worse results). I suspect Southerland is far more skeptical of market approaches than I am, but I do think there is a valid point he is trying to make: that the almost religious faith in market-based solutions to the exclusion of other approaches is misguided in certain situations.

25

Eli Rabett 05.16.05 at 11:30 pm

Good that someone else is a Freakazoid cartoon fan, or has no one notices http://www.relaxorium.com/freak/

26

abb1 05.17.05 at 4:18 am

It’s the absolutist position that market-based approaches always lead to the best possible results that I disagree with…

More precisely, I think, what you (and I) disagree with is that market-based outcome is the definition of the best possible result. But then we have to define what ‘the best possible result’ is.

27

abb1 05.17.05 at 4:20 am

test

28

mw 05.17.05 at 6:48 am

I am not as anti-market as you assume. In fact, I would agree totally with your conclusion if you just modified to read as follows:

Markets, provided the right incentives, aren’t the enemy of the common good, but are often (though not always) the most effective way of achieving it.

How about ‘usually (but not always)’? With the additional comment that, historically, regulatory schemes have been used where market-based approaches would have been better much more often than the reverse (in fact, I’m not sure I have a real-world counter-example where markets were used and regulation would have been better). It’s not hard, though, to point to inappropriate regulatory approaches. Take ‘CAFE’ fuel-economy standards in the U.S., for example. Simply imposing higher gas taxes and letting the market sort out how to respond to them would be far better. Higher mileage vehicles are one possibile choice, but so are working closer to home or living closer to work (possibly driving changes in housing development patterns), telecommuting, greater use of alternate forms of transport, cutting down on frivolous trips, sharing rides, paying closer attention to maintainence, replacing old gas guzzlers, driving the family’s smaller vehicle more and larger one less, and so on. The CAFE regulatory approach provides incentives for exactly NONE those latter possibilities.

In fact, the combination of high-mileage vehicles and cheap fuel are a perfect recipe for killer congestion–for large numbers of single-occupancy vehicles being driven on long and frequent commutes and other trips. Allow hybrids onto HOV lanes (as is being done) and you may create a perfect storm of regulatory stupidity. And congestion, of course, is a highly effective way to produce terrible fuel economy (not to mention increased pollution and lost productivity).

29

john c. halasz 05.17.05 at 7:16 am

mw:

But who exactly is it that opposes CAFE standards? And what is the political likelihood of (self-)imposing higher gasoline taxes? (That’s something those damn socialist EU countries do!) The point about regulation is that implicitly or explicitly, formally or informally, all social processes involve (self-)regulation. Granted there are significant problems with bureaucratic schemes of regulation: aside from inefficiency, coerciveness or perverse unintended effects, they are quite simply redundant, requiring a reduplication of efforts, not to mention their susceptibility to regulatory capture by the interests ostensibly regulated. Yeah, it would be nice if alternative means could be found to reach socially desirable ends. Regulatory schemes are provoked and generated by the effects of concentrated “market”-based interests and the predatory externalities they generate with respect to generalizable social interests. And they precisely enable those interests to continue in operation, while effecting some modifications in their behavior. It would perhaps be nice if there were some ideal set of market solutions to market-generated problems in an ideal market world, but that is not the real market world in which we live. And if markets are an implicit mechanism of social self-regulation, then equally they are themselves dependent on basic regulatory requirements, as well as, limited by the self-regulatory requirements of other social domains.

30

Tim Worstall 05.17.05 at 7:42 am

Thanks very much for the explanations on Laffer Curves. It’s made it clearer for me.

31

RSL 05.17.05 at 8:11 am

How about ‘usually (but not always)’?

I might accept that, too, although my acceptance would have to be based mostly on faith in the logic of the argument rather than on empirical evidence. One of the problems we have in debating which approach is best is our limited ability to do scientific tests where both approaches are tried in strictly controlled settings and we compare results. Usually, we are stuck with observing the results of the one approach actually adopted and making inferences about the possible results of alternative approaches that weren’t actually tried.

By the way, the examples you’ve given of market systems (Kyoto and gas taxes) are what I would call hybrid approaches. The “desirable outcome” is defined by some sort of deliberative process and then market-type incentives are imposed on the actual market by a governing body. It’s not quite laissez faire. I do agree with you that these hybrid approaches can be very effective, however, since they often allow us to take advantage of both deliberative decision making and the power of market-based incentives to influence behavior in desirable directions.

32

jet 05.17.05 at 9:23 am

If real GDP grew at 1.23% in the 70’s and grew at 1.25% in the 80’s, but US treasury income grew at 99% of GDP in the 80’s and only 90% of GDP in the 70’s, doesn’t that tell us which side of the Laffer Curve we were on in the 80’s when tax rates were cut? And it would seem that by looking at overall tax rate changes between the 70’s and 80’s, we could get a good idea of where we are now.
I picked the 70’s and 80’s because the difference in marginal tax rates was so drastic.

I got my real GDP numbers here http://www.eh.net/hmit/gdp/
And my tax income rates here http://www.infoplease.com/ipa/A0854973.html

33

CG 05.17.05 at 10:21 am

Here in Hyde Park I saw Steve Levitt buying ice cream from an ice cream truck for his two or three smiling children. One of them was adopted from China. How could he possibly be to the right of the political center?

34

Daniel 05.17.05 at 11:15 am

“Freakonomics” isn’t out in the UK as far as I can tell, but from the excerpts I’ve seen, I think my view of it is going to be much closer to Sutherland’s than to Henry’s. I’m having a hard time seeing why Levitt is anything more than the thinking man’s Steven Landsburg; addicted to “counterintuitive” explanations that aren’t counterintuitive (estate agents work harder when selling their own houses than selling clients? Say it ain’t so!!) and to “economic” explanations that also ain’t so (as far as I can tell from excerpts, he has a theory of young male involvement in criminal gangs which doesn’t include social status). I’ve heard mumblings from around and about that Levitt (in “Freakonomics” at least) is not so great at giving credit where due to his co-authors as well, though obviously I will only be able to judge this when I see the book. For the time being, I am possibly prejudiced against the book because of the glowing review that the awful Michael Lewis wrote, but I suspect that Sutherland might be on to something when he says that Levitt is a symptom of a particularly tiresome and annoying habit of thought among economists and their pop-intellectual groupies.

35

radek 05.17.05 at 11:24 am

Nah, Freakanomics is a good read, albeit a quick one. Start to finish, two hours. And yeah, there’s a lot of hype around it. My own review would just say ‘wait till the paperback comes out, then it’s worth it’.
But do read it before writing criticisms.

36

MutantD 05.17.05 at 12:25 pm

I would agree that it’s an interesting quick read that at the very least gets you thinking about the topics he breezes through.
And it is less simplistic than “estate agents work harder when selling their own houses than selling clients? Say it ain’t so!!).”
The counter-intuitive point Levitt was going for is that the belief it’s in the best interest of the agent to get the maximum selling price for your house isn’t true.
The amount of commision gained from using a little extra hustle and waiting for a $10,000 higher bid isn’t enough to offset the gain from accepting a quick but lower bid with less effort on the agent’s part.

37

RSL 05.17.05 at 6:42 pm

Here in Hyde Park I saw Steve Levitt buying ice cream from an ice cream truck

Hyde Park now has ice cream trucks? Now that’s truly freakonomic . . .

38

Xboy 05.18.05 at 12:34 am

Since 1980, every increase in the US income tax rate has resulted in increased government revenues, and every decrease in the tax rate has resulted in decreased government revenues.
That’s empirical evidence of which side of the (completely notional) Laffer Curve we’re on.
Of course, big-business conservatives don’t give a shit about the Laffer Curve — it was just one of the shoddier temporary justifications for their permanent agenda: More Tax Cuts for the Wealthy, No Matter What!

39

abb1 05.18.05 at 3:44 am

About the curve thing: isn’t it kinda crude to consider ‘tax rate’ as a single argument for a flat curve? Our tax system has many different rates, different brackets; therefore instead of a simple curve you’d have to build a complex multi-dimentional function, correct?

I mean, you could raise the tax rate for one bracket while lowering the tax rate for another one or adjust thresholds for various brackets; the function you’re trying to optimize should have a large number of arguments.

40

jet 05.19.05 at 8:54 am

Xbox,
don’t be an idiot. Nominal GDP grew by 208% from 1980 to 1990. Nominal federal revenues gew from 517 billion to over 1 trillion in the same period (almost keeping pace with the GDP, but still growing at a higher rate than the previous decade, which had higher overall tax rates). The problem in the 80’s was that the only thing the Democratic Congress left in Reagan’s proposed budgets was defense spending. Most of Reagan’s other proposed spendings were radically changed, with the end result that while inflation adjusted revenue grew ~28% spending gew ~36%. And that ~36% can’t all be blaimed on defense. So it is obvious which side of the Laffer Curve the US was on in the 80’s.

Thanks for playing, but take your uneducated crap back to school (unless you can show your “empirical evidence”).

41

jet 05.19.05 at 9:16 am

Xbox,
It might also serve to note that in 1980 the top 1% of income earners in the US were paying 18% of all income taxes, in 1988 the top 1% were paying 25% of all income taxes, while having a much reduced rate. So even though the rich were getting richer than the poor, they also ended up paying more of the social burden of government.

What inferences can you draw from that concering the Laffer Curve? If you answered “lower taxes” you’d be right. Of course we can’t lower taxes now without cutting spending. I’m not sure which government programs that effect me, I’d prefer cut first. Would it be the DEA that I’d start with, the endless list of corrupt state bills, ag bills, corporate whore bills? If only I were king for a day.

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