I’m pushing hard now to finalise a draft of my book-in-progress,
It’s currently titled Zombie Economics:Undead Ideas that Threaten the World Economy. The title is pretty much locked in, but the subtitle is still open for change if anyone has any suggestions. You can read the first few chapters (not quite an up-to-date draft) at wikidot.
The chapter I’m working on now is Trickle-Down Economics, which seems a fairly soft target after the challenge of presenting a critique of the “micro foundations” approach to macroeconomics. But, there are still plenty of difficulties starting with the point that, of course, no-one espouses Trickle-Down Economics under that name. On the other hand, while the view that pro-rich policies will benefit everyone in the long run is widely held, I don’t know of a good general term that describes it.
Anyway here’s the opening section. As always, comments and criticism much appreciated.
Trickle down
Most labels are pejorative, and much of the time, ideas can be identified only by the labels attached to them by their opponents. So it is with the question of whether policies of income redistribution help or harm the poor in the long run. The claim that redistribution policies actually harm those they are intended to benefit and that reducing taxes on the rich would ultimately benefit the poor has long been derided as ‘trickle down economics’ (the phrase is widely attributed to humorist Will Rogers, and dated back to the 1930s). A more recent take on trickle-down is that of satirical magazine the Onion, which traces the process by which Reagan’s tax cuts and defense spending trickled down over two decades to produced the promised outcome ‘in the form of a $10 bonus, to Hazelwood, MO car-wash attendant Frank Kellener.’ Supporters of the claim return the favor, criticising advocates of redistribution as ‘class warriors’ who practise the ‘politics of envy’.Â
The ‘trickle down’ idea been summed up, more positively, in the aphorism ‘<a href=”http://en.wikipedia.org/wiki/A_rising_tide_lifts_all_boats”>a rising tide lifts all boats</a>’ attributed to John F Kennedy, and a favorite of Clinton advisers such as <a href=”http://www.washingtonpost.com/wp-dyn/content/article/2005/12/17/AR2005121700028.html”>Gene Sperling</a> and <a href=”http://www.nytimes.com/2007/06/10/magazine/10edwards-t.html?pagewanted=3″>Robert Rubin</a>. (It should be noted that this phrase is also used in the context of debates over free trade and over the effects of macroeconomic expansion. While it generally implies that we should focus on expanding aggregate income without too much concern over distribution, it is less sharply focused than the ‘trickle down’pejorative.
One important version of ‘trickle down’ economics is the ‘supply-side’ school of economics which came to prominence in the 1980s. The extreme claims made by some supply-siders, summed up in the so-called ‘Laffer curve’ threw this school into disrepute. However, more moderate versions of the same claims, referred to using such terms as ‘dynamic efficiency’, came to be widely accepted by mainstream economists, during the years of the Great Moderation.Â
#
Beginnings
Regardless of nomenclature, the near-universal prosperity of the postwar boom seemed to constitute a refutation of trickle down economics every bit as decisive as the refutation of pre-Keynesian economics by the disappearance of mass unemployment. Throughout the developed world, the growing prosperity of the years after 1945 was accompanied by reductions in income inequality and a softening of the differences between classes.
The experience of the US in particular was striking. Emerging as the unchallenged economic leader of the world after 1945, US firms were in a position to pay manual workers at rates that propelled them into the middle class. And the middle class itself grew and prospered to an extent that seem to portend the end of class conflict and even the end of class itself. The American middle class enjoyed living standards that outstripped, in many respects, the best that had been enjoyed by the rich in any other time and place.Â
All of this was achieved under policies that are, in retrospect, hard to believe were ever politically possible. Income taxes, a relative novelty at the time, were steeply progressive, with top marginal rates often exceeding 90 per cent. Inheritances were similarly heavily taxed, while ordinary people benefited from a variety of new welfare measures, such as the Social Security system in the US, which provided against the risks of old age, unemployment and ill-health.
Economic historians call the resulting period of high equality The Great Compression. It arrived with surprising suddenness as a result of the New Deal and World War II.
The Great Compression ended as suddenly as it began. From the early 1980s onwards, the gains in equality were reversed. This occcurred partly as result of the changes in the distribution of market incomes. Profits grew at the expense of wages and the distribution of wages became more equal. Changes in market income were reinforced by public policy. The steeply progressive income tax rates of the postwar era were replaced by flat tax systems, with maximum rates of 40 per cent or less. Initially, and to some extent even today, these measures were presented as providing tax relief to the ‘middle class’, an elastic term but one that is typically taken to include families with incomes ranging from the median to the 90th percentile of the income distribution or sometimes even higher. Increasingly, however, tax reductions were focused on those in the top 10 per cent of the income distribution.
The pattern set by the United States in the 1980s, was followed, to a greater or lesser degree by other English-speaking countries as they embarked on the path of market liberalism. The most striking increases were in the United Kingdom under the Thatcher government where the Gini coefficient (a standard statistical measure of inequality) rose from 0.25, a value comparable to that of Scandinavian social democracies to 0.33, which is among the highest values for developed countries. New Zealand started a few years later, but experienced even more radical reforms, cutting the top marginal rate of income tax from 66 percent in 1986 to 33 percent by 1990. Unsurprisingly, this pushed the Gini index from an initial value 0.26 to 0.33 by the mid 1990s. http://www.eastonbh.ac.nz/?p=333. Ireland, Canada and Australia all followed a similar path. The main EU countries resisted the trend to increased inequality through the 1980s and 1990s, but recent evidence suggests that inequality may be rising there also. http://www.poverty.org.uk/summary/eapn.shtml
#
Supply-side
As inequality increased, so did the demand for theoretical rationalisations of policies benefitting the wealthy, and in particular for reductions in taxation. A variety of ideas of this kind were put forward under the banner of ‘supply-side economics’.
The term ‘supply-side economics’ dates back to the 1970s, when it was popularized by Jude Wanniski, then an associate editor for the Wall Street Journal, and later an economic advisor to Ronald Reagan. Wanniski, a colorful figure, did not let his lack of academic credentials deter him from taking on big names in the economics profession including not only Keynes and his followers but Milton Friedman. [1]
The central idea of supply-side economics followed directly from the negative conclusions of new classical economics regarding the possibility of successful demand management. If, as the new classical school believed, such demand-side policies were bound to be ineffectual or counterproductive, the only way to improve economic outcomes was to focus on the supply side, that is, to increase the productive capacity of the economy. Although many different policies (improved education, for example) might be advocated as ways to improve productivity, Wanniski focused on the kinds of policies favored by economic liberals, such as reduced regulation and lower income taxes.
Wanniski started the process with his ‘Two Santa Claus’ theory of politics. This was the idea that, in a contest between one political party (the Democrats, in the US) favoring higher public expenditure, and another (the Republicans) favoring lower spending, the high-spending party would always win. Hence, the correct political strategy for conservatives was to campaign for tax cuts, without worrying too much about budget deficits. Any problems with budget deficit would be resolved by the higher growth unleashed by improved incentives and reduced regulation.
This idea was taken much further at a famous lunch meeting between Wanniski, Donald Rumsfeld, Dick Cheney, and University of Southern California economist Arthur Laffer. These four, relatively obscure figures at the time, were to play a central, and disastrous, role in the economic and political events of the next thirty years. Everyone knows the story of how Laffer drew a graph on a napkin, illustrating the point that tax rates of 100 per cent would result in a cessation of economic activity and therefore yield zero revenue. Since a tax rate of zero will also yield zero revenue, there must exist some rate of taxation that yields a maximum level of revenue. Increases in tax beyond that point will harm economic activity so much that they reduce revenue.
Wanniski christened this graph the ‘Laffer curve’, but as Laffer himself was happy to concede, there was nothing original about it. It can be traced back to the 14th century Arabic writer Ibn Khaldun, and Laffer credited his own version to the nemesis of supply-side economics, John Maynard Keynes. And while few economists had made much of the point, that was mainly because it seemed to obvious to bother spelling out.
What was novel in Laffer’s presentation was what might be called the Laffer hypothesis, namely that the US in the early 1980s was on the descending part of the curve, where higher tax rates produced less revenue.Â
Unfortunately, as the old saying has it, Laffer’s analysis contained a mixture of correctness and originality. The Laffer curve was correct but unoriginal. The Laffer hypothesis was original but incorrect.
More sophisticated economic liberals could also see that the Laffer hypothesis represented something of an ‘own goal’Â for their side. If the debate over tax policy turned on whether tax cuts produced higher revenue, and were therefore self-financing, the advocates of lower taxes were bound to lose, at least in policy circles where empirical evidence was taken seriously. Embarrassingly for their more sophisticated allies, supply-siders made, and continue to make, obviously silly arguments.
 Fairly typical is the claim that, despite cutting taxes, Ronald Reagan doubled US government revenue, a claim made by commentators like Sean Hannity, and derived from the work of rightwing thinktanks such as the Heritage Foundation. Leaving aside the fact that revenues did not in fact double under Reagan (the Heritage institute figures add in some of the first Bush presidency, such claims ignore the fact that tax revenues, and the cost of providing any given level of government services, rise automatically with inflation, population growth and increases in real wages. Even with cuts in tax rates, revenues are bound to rise over time as the nominal value of national income increases.Â
For the Laffer hypothesis to be supported, tax cuts would have to increase revenue more rapidly than would be expected as a result of normal income growth. In fact, as the US Office of Management and Budget reported , “Income tax receipts grew noticeably more slowly than usual in the 1980s, after the large cuts in individual and corporate income tax rates in 1981.” (Quoted by CBPP http://www.cbpp.org/cms/?fa=view&id=119)
#
The dynamic trickle down hypothesis
Mainstream market liberals were generally disdainful of the ‘voodoo economics’ of the Laffer hypothesis. But they nonetheless accepted to the central postulate of trickle-down economics, namely, that policies favorable to the wealthy will, in the long run, produce benefits for everyone, compared to the alternative of progressive taxes and redistributive social welfare policies. Rather than rely on the simplistic, and easily refuted, Laffer hypothesis, market liberals claimed that the trickle-down effect would work through so-called ‘dynamic’ effects of free-market reforms, and particularly tax reforms.
As with other economic terms, such as ‘efficiency’, the appeal of this argument depended, in large measure on conflating the ordinary language meaning and connotations of ‘dynamic’ with the technical economic meaning. In technical terms, ‘dynamic’ effects are those realised over time, as the capital stock in an economy varies. But in political discussion, it is easy to slide from this use into rhetoric about dynamism, sclerosis and so forth.
The crucial distinction between the two is that while dynamic effects, in the technical sense, can raise or lower the level of national income in the long run, they do not, in standard economic models, affect the long-term rate of economic growth, which depends ultimately on productivity. Standard economic analysis suggests that the adoption of tax policies more favorable to owners of capital will increase savings and investment, and therefore raise the level of national income in the long run. This idea formed the basis of a number of ‘dynamic scoring’ exercises aimed at estimating the effects of the Bush tax cuts of 2001. Supporters of the Laffer hypothesis hoped that these exercises would show tax cuts paying for themselves in the long run.
Dynamic scoring analyses typically found some positive effects on capital accumulation, but they were too small, in terms of their effect on incomes and tax revenues to offset the cost of the initial costs. The most optimistic study, undertaken by Greg Mankiw, former chairman of President Bush’s Council of Economic Advisors and Matthew Weinzierl found that, assuming that the conditions of the standard neoclassical model were satisfied, dynamic effects would offset about 17 per cent of the initial cost of a cut in taxes on labor income and about 50 per cent of the cost of a cut in taxes on capital income.
However, as subsequent analysis showed, these results depended critically on technical assumptions about how the tax cut was initially financed. Mankiw and Weinzierl assumed that tax cuts are associated with expenditure cuts sufficient to maintain budget balance, and that these expenditure cuts do not create any additional market failures (that is, that the expenditure in question was a pure transfer). Eric Leeper and Shu-Chun Susan Yang examined the case when, as actually happened with the Bush tax cuts, the cuts were initially financed by higher debt. In this case, it turns out that dynamic effects can actually increase the initial cost of a tax cut.
A further difficulty was that, since the increased income was the result of additional savings, it could not, in economic terms, be regarded as a pure economic benefit. The relevant measure of economic benefit, netting out costs from benefits, is the change in the present value of consumption, which is typically much smaller than the final change in income – even for large tax cuts, the net dynamic benefit is rarely more than one per cent of national income. The same point may be made in terms of the effects on the government budget. Even if tax cuts eventually generated enough extra revenue to match the annual cost of the cuts (and of course they never do!) the budget would still be in long-term deficit because of the need to service the debt built up in the transitional period.
The implications for the trickle-down hypothesis are even worse. Under standard assumptions about the way the economy works, all the benefits of additional investment go to investors (or those whose savings finance the investment). That is, cutting taxes for the rich may lead them to save and invest more, thereby making themselves still richer, but there is no reason to expect any benefit for the rest of the community, except to the extent that the cost of the original tax cut is partially defrayed.
Finally, and most importantly of all, the neoclassical model used to derive estimates of dynamic benefits implicitly incorporates the efficient markets hypothesis. The extra investment generated by more favorable tax treatment is supposed to be allocated efficiently so as to produce sustainable long-term economic growth. Until the financial crisis the experience of countries that followed this logic and cut taxes on capital income appeared to bear out this view. Iceland, Ireland and the Baltic States among others, experienced rapid economic growth as a result of high domestic investment and strong capital inflows.Â
But the economic crisis proved that this apparent success was built on sand. Much of the extra investment went into real estate, or into speculative ventures that collapsed when the bubble burst. Having cut taxes drastically, governments were left with inadequate financial resources to convince (now-cautious) investors that their bonds were a safe investment.
[1] He was later to become one of the first commentators to suggest, correctly, that Saddam Hussein’s ‘weapons of mass destruction’ had been found and destroyed by the UN weapons inspection process.
{ 46 comments }
Buce 12.11.09 at 5:44 am
Maybe I missed it, but I’m surprised you didn’t pick up on trickledown as “feeding the sparrows by feeding the horse.” Google is remarkably thin on this one; I have always believed it was Daniel Patrick Moynihan but maybe not.
Martin Bento 12.11.09 at 6:15 am
Two quick things:
“Leaving aside the fact that revenues did not in fact double under Reagan (the Heritage institute figures add in some of the first Bush presidency, such claims ignore the fact that tax revenues, and the cost of providing any given level of government services, rise automatically with inflation, population growth and increases in real wages. Even with cuts in tax rates, revenues are bound to rise over time as the nominal value of national income increases. ”
You need to close the parenthesis here.
As far as Laffer claims, it might be worth mentioning that Charles Gibson made such a claim in the form of a question during the ABC presidential debate of 2008. To wit:
” And in each instance, when the [capital gains tax – M] rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.
So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected? ”
Here’s the URL:
http://abcnews.go.com/Politics/DemocraticDebate/story?id=4670271&page=3
As many have pointed out, the effect Gibson is claiming is a very short term one due to people gaming the system. Knowing a tax cut is coming, they do not take the capital gain till the rate decreases. Hence a one-time blip.
Ken Willis 12.11.09 at 6:30 am
The last sentence in this paragraph struck me as wrong:
The implications for the trickle-down hypothesis are even worse. Under standard assumptions about the way the economy works, all the benefits of additional investment go to investors (or those whose savings finance the investment). That is, cutting taxes for the rich may lead them to save and invest more, thereby making themselves still richer, but there is no reason to expect any benefit for the rest of the community, except to the extent that the cost of the original tax cut is partially defrayed.
Business investment is what creates jobs and jobs create paychecks for people so they can buy the things they need. I don’t understand how anyone can think that allowing people to keep more of their money to invest rather than giving it to the government does not help “the rest of the community.”
MO at the car wash may have got a ten dollar bonus but that is not the extent of his benefit derived from lowering taxes on others who are paying at the top marginal rate . The investors who provided the capital that the owner of the car wash was able to borrow to open the business enabled MO to have the job itself, not just the $10 bonus.
Tim Worstall 12.11.09 at 9:43 am
Minor point: worth perhaps pointing out that your Gini figures are post tax and post benefit system. For purely market incomes they are of course much higher (.48 for US and Sweden, .50 for UK or thereabouts). I won’t go into my favourite rant about how rising within country ginis are global, leading us to suspect that there might be a global cause, like, umm, globalisation (with the desirable effect of falling global gini by Milanovich’s Concept 2 and 3 measures).
I’d also point out that “trickle down” does work. The 19th century shows us that. There were no major redistributive efforts (Bismark aside perhaps with social insurance) and life did indeed get better for the poor over the century. The question isn’t therefore whether trickle down works but whether some other system works better (obvious point, yes, but this book is for generalists, not for those who would already assume that, no?).
Finally, a pet peeve about “supply side”. Yes, I know I’ve lost this little linguistic point, but while there were indeed those who claimed that lower tax rates pay for themselves that wasn’t the be all and end all. It was, as you briefly mention, about reforming the supply side of the economy. Which covers a lot more ground than just tax rates. Everything from privatising (say) British Telecom to reducing union power, banning closed shops and (if only they had!) reducing the exclusionary powers of the professions. The currently fashionable idea of a financial transactions tax would be, in this expansive meaning of supply side, a supply side reform.
Kenny Easwaran 12.11.09 at 9:51 am
I must say, I got a bit lost in the discussion about “dynamic effects”. Especially the paragraph beginning “A further difficulty…” I didn’t really understand what was going on. I don’t know exactly what an “economic benefit” is, so I don’t know why increased savings does or doesn’t count as one.
kid bitzer 12.11.09 at 12:02 pm
comment on the subtitle:
apparently within the genre of zombie fictions, “undead” has a special sense that is not directly recoverable from “un-” and “-dead”. (i speak as someone who has never watched or read any zombie fictions). to say ‘zombie john is undead’ means, maybe, “zj is a continuation of john, who died, but unlike ordinary continuations of people who died, zj refuses to moulder in his grave”. so “undead” means “dead, but behaving in non-standard ways” or something like that.
whatever it means among zombie aficionados, it naturally brings to my mind a different idea: ‘x is undead’ suggests to me that x is not dead. that’s all. to say that these ideas are undead seems to me to deny that they are dead. like, maybe someone else said “marxism is dead!” and you are responding, “no, marxism is not dead. it’s an undead idea. it still has life in it.”
whereas what you want to say is, i assume, “these ideas are dead. really dead. but they are behaving in some non-standard ways, e.g. being given more credence than dead ideas deserve.” or something of that sort. (probably more about how their activities are pernicious and parasitical etc.)
i’m just reporting from outside the community of people who are up on pop-culture, that some of us will hear your subtitle as saying the opposite of what you intend it to say.
so i’d recommend something like “dead ideas that won’t stay buried”, or “dead ideas that threaten the world economy”, or any number of other things. but not “undead”, unless you want to be misunderstood by non zombie-fans.
ajay 12.11.09 at 12:26 pm
I don’t understand how anyone can think that allowing people to keep more of their money to invest rather than giving it to the government does not help “the rest of the community.â€
Depends what they invest it in. And, for that matter, what the government spends it on. Doesn’t help the community much if the money goes overseas or into value-destroying asset bubbles.
I’d also point out that “trickle down†does work. The 19th century shows us that. There were no major redistributive efforts (Bismark aside perhaps with social insurance) and life did indeed get better for the poor over the century.
Depends how you measure it. Height’s a good proxy for general health and nutrition: Americans born in the late 19th century were on average shorter than ever before (back to mid-18th century) or since, because of their terrible diet and poor public health. Adult life expectancy also fell sharply. And that’s average figures, not just for the poor.
In terms of purchasing power (Speenhamland allowance) the late 19th century British urban poor were poorer than their counterparts at any other time in history.
“For many Britons in the laboring classes, the Industrial Revolution took away what they once had centuries before, and only grudgingly gave it all back by the close of Victoria’s reign.” http://www.victorianweb.org/history/work/nelson1.html
Zamfir 12.11.09 at 12:31 pm
Tim W, your 19th century example shows that the rich and the poor can grow richer together, the “rising tide” argument. No one really doubts that that can happen, although a debate can be had to what extent that is the most likely outcome.
The trickle-down argument is a step further, and says that the rich getting richer is the driver, or at least a necessary condition of the improved conditions of the poor. Even if there is truth in that, one can easily postulate an equivalent trickle-up argument that claims that the current rich can only be that rich in a world of well-off normal commoners. It’s not obvious at all that the net effect runs in one direction.
Zamfir 12.11.09 at 12:36 pm
@ Kid Bitzer, I would say ‘undead’ means that zombies and vampires and god knows what should be dead, but for unnatural reasons do not behave that way.
Which is probably close to what JQ is intending for the zombie ideas.
alex 12.11.09 at 12:47 pm
@KB: anyone who’s ever bumped into the idea of a vampire, a zombie or whatnot of that genre has a fair idea of what ‘undead’ means. And trust me, in the current culture that’s hard not to do. Those who claim otherwise come close to putting themselves in the ‘What is a “supermarket”?’ Dotty-old-judge category…
kid bitzer 12.11.09 at 12:47 pm
and it’s great that jq intends that, but i wonder how many people will understand his intentions. “undead” is still a piece of genre-specific technical jargon, which to the uninitiated sounds like a denial that the thing is dead.
alex 12.11.09 at 12:52 pm
Meanwhile:
“Depends how you measure it. Height’s a good proxy for general health and nutrition: Americans born in the late 19th century were on average shorter than ever before (back to mid-18th century) or since, because of their terrible diet and poor public health. Adult life expectancy also fell sharply. And that’s average figures, not just for the poor.
“In terms of purchasing power (Speenhamland allowance) the late 19th century British urban poor were poorer than their counterparts at any other time in history.”
Weeeell, yes, but OTOH an awful lot more of them were alive than had been the case 100, 200 or 500 years earlier, and in that sense they were definitely ‘healthier’. Late C19 society was doing an ironically good job of countering Darwinian pressures on population-size and reproduction, enough to make the ‘social Darwinists’ worried about the ‘underclass’ and its refusal to stop breeding like rabbits… [Of course, they were doing it by exploiting fossil fuels, as they had been for a century or so, and now we know they shouldn’t have, and it would’ve been better all round without that pesky industrial revolution, but then likely as not none of us would be here to debate the point…]
JoB 12.11.09 at 1:10 pm
Isn’t it really the libertarian argument: the less income is taxed the more it is put to the right, buzzword: innovative, use (conversely – the more is squandered in an attempt to increase the level of laziness at the expense of the thrifty).
PS: I haven’t time to read the excerpt quietly today but in intellectual honesty it would in my view also have to deal with the difference principle (which is trickle-down really, albeit with limits that zombies would never accept – or at least would accept some weak version of trickle-down as potentially just and fair).
derek 12.11.09 at 1:14 pm
The 19th century doesn’t show that trickle-down works, it only shows that trickle-down happens a bit, whch we already knew. For it to show that trickle-down worked, the 19th century would have had to have, not just the absence of redistribution, but the removal of previous redistribution. The trouble with that is that redistribution was as absent in previous centuries as it was in the 19th. Therefore the increase in prosperity cannot be credited to trickle-down policies.
But I would say that the increase in redistributive policies in the 20th century (i.e. the repudiation of trickle-down) accompanied by an incredible increase in median prosperity, pretty much does show that trickle-down results in less prosperity than redistribution, and redistribution leads to more prosperity than trickle-down.
Put it this way, give more money to the workers, and they’ll be happier and work harder; steal their work and leave them with nothing, and they’ll be sad and not work as hard (hey, I’m only applying the same psychological model to workers as supply-siders would have us apply to the rich). Money given to the workers will trickle up, leading to more wealth for the rich as well as the poor — a rising tide lifts all boats, no? That’s what money does, it trickles up, not down.
P O'Neill 12.11.09 at 1:34 pm
I think it’s important to note the role of 1970s inflation in undermining the previous “compression” consensus. Inflati0n pushed a lot more people into higher tax brackets and trashed their controlled interest rate bank accounts. One reason for the emergence of a lower tax + financial deregulation constituency.
alex 12.11.09 at 1:38 pm
sigh, no, because workers are lazy, and will just stop working if their basic needs are fulfilled. This is why they invented advertising, so an endless stream of new basic needs can be programmed into workers. Entrepreneurs, OTOH, work for the love of it, and fast cars, mink-lined underpants and yachts are just external signs of that true love. Or something.
ajay 12.11.09 at 1:52 pm
OTOH an awful lot more of them were alive than had been the case 100, 200 or 500 years earlier, and in that sense they were definitely ‘healthier’.
That’s not a very useful sense to be healthier in. There are a lot fewer Swedes alive today than there are Congolese. Doesn’t mean that the Congolese are healthier. It’s not like GDP: if you have a population of a million with health 3, it doesn’t mean that you’ve got a total of 3 million health points.
mink-lined underpants and yachts are just external signs of that true love
Conclusion: entrepreneurs wear their underpants on the outside.
alex 12.11.09 at 2:41 pm
@17: no, but seriously, the capacity of an econ0my to sustain life isn’t relevant to health? In C19 Britain there wasn’t some other, external and better-off part of the world to charitably import doctors, vaccines, surgical equipment, antiseptics, etc etc etc, like there is into Africa today. If the UK population was going to grow, it had to do it by surviving on its own terms. And it did. If you want to rule that historical comparison as irrelevant, OK, but let’s be fair and rule all historical comparisons out.
Matt McGrattan 12.11.09 at 2:58 pm
Anthropologists often talk about populations being less healthy after, say, the introduction of agriculture. It’s a standard historical process: changing technology allows a larger population, each member of which is individually less healthy than members of the preceding population.
After the transition, the individuals concerned _are_ pretty clearly less healthy on any standard measure of health.
The other measure: the ability of an environment (social, economic, geographic, etc) to sustain populations at a particular density is clearly an important one, but it’s an ecological measure, not a measure of health. The two measurements are orthogonal to each other.
someguy 12.11.09 at 4:06 pm
Who is your target audience?
Mike C 12.11.09 at 4:08 pm
Could the population argument be made clearer if, instead of merely looking at the population size, we looked at %-rate of increase, and even more so, at birth rates and death rates? Not that I have any of these onhand.
oriskany 12.11.09 at 4:16 pm
How about “Zombie Economics: Undead Ideas that Threaten the Sublime and Funky World Economy that I Crave”?
kid bitzer 12.11.09 at 4:54 pm
#10–
oh sure, i realize that this is a minority report from clueless aging gafferdom. and i am aware, at second hand, that there are popular films now about zombies etc. but for myself, i still find that it takes processing-time to get to the intended reading.
Billikin 12.11.09 at 5:25 pm
Trickle down footnote:
The fly agaric mushroom is poisonous, but, like a toxic things, will get you high in moderation. The Russian aristocracy used to have parties where they ate fly agaric mushrooms. The mushroom’s toxin is not well metabolized by the body, and mostly passes into the urine. During such parties peasants would gather out on the street and drink aristocratic urine from the gutter to get high.
:)
John Quiggin 12.11.09 at 7:14 pm
@KB I’m going to go with the majority here – having called the book “Zombie Economics”, I’m pretty much counting on my target audience having some familiarity with the conventions of the genre (bad luck to anyone who is hoping for a discussion of underdevelopment in Haiti, I guess). Also the phrase “dead ideas” has been, as it were, done to death. Every good subtitle I came up with using this phrase had already been taken/
@Billikin, this is great, even better than the horse and oats (Galbraith I think) mentioned by Buce #1. I think it could go as a chapter quote – do you have a good source?
John Quiggin 12.11.09 at 7:20 pm
@JoB I’m not denying that the Khaldun/Keynes/Laffer curve has a downward sloping component, so that, for high enough initial tax rates, tax cuts that benefit the rich would also provide additional revenue and therefore help the poor. That’s what’s required for the difference principle, and was the topic of our Cohen debate a while back.
I’m criticising what I call the “Laffer hypothesis” namely that under the tax-welfare system prevailing now (or in the 1970s when he drew the curve) we are on the downward sloping side of the curve.
kid bitzer 12.11.09 at 7:22 pm
totally fair. you’ll get a hipper readership that way, as well.
gmoke 12.11.09 at 8:32 pm
Even if trickle down economics works you’re still being pissed on.
Billikin 12.11.09 at 9:38 pm
@ John Quiggan:
It has been a long time, but, IIRC, I read it in a book called “Life on Man”. Or perhaps in “Napoleon’s Glands”, but the first one, I think. :)
Billikin 12.11.09 at 9:45 pm
derek (#14): “But I would say that the increase in redistributive policies in the 20th century (i.e. the repudiation of trickle-down) accompanied by an incredible increase in median prosperity, pretty much does show that trickle-down results in less prosperity than redistribution, and redistribution leads to more prosperity than trickle-down.”
Do not forget the recent experience with trickle down economics. Since 1980 the gov’t has embraced trickle down economics. Result: The rich have gotten much richer, while the median income has stagnated. It is hard to find the evidence that prosperity has trickled down during that time. :(
Billikin 12.11.09 at 9:47 pm
@ John Quiggin
Oops! Sorry for the misspelling. :(
john c. halasz 12.12.09 at 4:53 am
Well, just as a first order issue on this otherwise banal exercise, it neglects to mention that 1) wage labor incomes are a key component of aggregate demand, such that the motives for renewed investment involve a) the sensed presence of aggregate demand and b) the pressure of wage costs to raise productivity through capital investment and thus increase actually and potentially aggregate output; 2) that cutting taxes on capital incomes doesn’t by any means incentivize, let alone guarantee, any real investment in improved capital stocks, but, more likely, simply provides monetary funds for bidding up financial asset prices based on extant capital stocks, since financial “investment” and real productive investment are, by no means, the same “thing”.
Martin Bento 12.12.09 at 6:36 am
P. O’Neil, the previous chapter John posted here was partly dedicated to that topic, and other parts of the book hit it as well.
Alex, In the early Maoist period, the population of China expanded greatly. Then came the Great Leap Forward and other idiocies and the largest famine in human history resulted, leading eventually to the single child policy. Nonetheless, the population at the onset of that famine was larger than the pre-WW2 population. It is possible these starving people actually had more aggregate resources, even more aggregate food, than the previous smaller population, though I don’t know whether that is true. Shall we consider millions starved and reduced to cannibalism a measure of health because of total population size? And, of course, the population kept growing at a good clip despite all that until the 80’s, perhaps not coincidentally the decade when China’s living standards began improving.
Much of the developing world has broken its pattern of famine by reducing population growth. See India. Or, in an earlier time, see the US and Europe. Shall we consider the non-starving Indian population of today intrinsically less healthy and prosperous than it would have been had it kept populating beyond the rate it could support?
Having more people is not an intrinsic virtue and should not be in the calculus of comparing living standards.
Martin Bento 12.12.09 at 6:50 am
John,
Ken Willis said:
“Business investment is what creates jobs and jobs create paychecks for people so they can buy the things they need. I don’t understand how anyone can think that allowing people to keep more of their money to invest rather than giving it to the government does not help “the rest of the community.—
This is the catechism and is, of course, wrong as a general proposition, though there are parameters within which it is valid. Government spending also creates jobs, for one thing.
But why is not the price of investment treated as reflecting supply and demand like anything else? I know in some abstract sense it is, but is it in practice. When we have an asset bubble, as we have had several, or when we have sustained asset inflation, as we have had since the early 80’s in the US, and, I imagine, most of the developed world, does this not say that the demand for profitable investment opportunities has risen faster than supply? And if the result if overvaluation of assets, does this not mean that either supply should be increased or demand curtailed? It is, of course, very easy to say “increase of supply is what we want”, but the free market notion is that these opportunities will just emerge or just be discovered (or dreamed up, depending on how you look at it). But if the price of assets, measured in P/E terms, is accelerating, is this not evidence that, in fact, opportunities are not emerging at the rate needed to accommodate the total investment capital. In that case, is it not legitimate to say “there is too much investment capital” – after all, all it is doing is feeding basically non-productive speculation? Yet it seems in economic discourse, at least as it manifests in the political sphere, one can never too rich, too good-looking, or have too much investment capital. I think we need to consider this possibility: that there is an optimal amount of investment capital at any given time, that it is less than infinity, and that asset inflation in P/E terms is good evidence that it is being exceeded, and that some of that capital would be better spent either by the government or in consumption, purely on efficiency grounds, in addition to whatever claims of justice, stability, etc. one might make.
JoB 12.12.09 at 10:44 am
26, fair enough but I think it would be better to face the complexity of admitting that it is OK ‘to a certain extent’, the issue being that it is very much NOK if – as I gather from what you say above (which I now have had time to read) – proposed to any extent. The zombie part of the idea is not the anti-egalitarianism of it but the libertarianism of it.
(It also disambiguates liberal from libertarian which might be still useful to do.)
On a (slightly) less theoretical plane:
“(..) That is, cutting taxes for the rich may lead them to save and invest more, thereby making themselves still richer, but there is no reason to expect any benefit for the rest of the community, except to the extent that the cost of the original tax cut is partially defrayed.”
Where, on a minor point, the last part of the sentence is quite opaque (at least to one as humble as myself) but on a more important point: this points to your earlier comments on the unfair rebalancing of risk & reward (which, I’m more & more convinced, is what holds your several critiques together as a fil rouge. My opinion is that the burden here is on us to say something more than that ‘there is no reason to expect’. Without more I fail to see why it would be bad policy (although I can see why it’s not particularly good, but imho, that’s not enough for your purposes).
Anyway, I still have my misgivings about your title. I still believe that if you’re going to have a title for an airport book shelf you should be more vitriolic (& less worried about the demonstration of your points). But if it’s your instinct is to construct rather than to tear down – as would be evident from what you submitted until now – maybe it isn’t too bad an idea to revisit your title choice – & go away from the fashion of anglo-saxonistic internet witticisms.
I propose: “How the strongest shoulders carry the least weight.”
Subtitle: “Tearing apart the Economic Consensus from 1979-2008.”
I’m not sure, but maybe a good copywriter can do something with those 2 sentences ;-)
Billikin 12.12.09 at 6:56 pm
A couple of proofreading nits: :)
“to obvious to bother”
too obvious to bother
“to offset the cost of the initial costs.”
to offset the initial costs.
Billikin 12.12.09 at 7:05 pm
I have a question.
“Finally, and most importantly of all, the neoclassical model used to derive estimates of dynamic benefits implicitly incorporates the efficient markets hypothesis. The extra investment generated by more favorable tax treatment is supposed to be allocated efficiently so as to produce sustainable long-term economic growth.”
Really? Maybe you covered this earlier, but what is the connection between the efficient markets hypothesis and sustainability? My impression is that, if anything, they are antithetical. If the connection is too involved to spell out briefly, a reference would be nice. Thanks. :)
Lee A. Arnold 12.12.09 at 11:11 pm
John: “…no-one espouses Trickle-Down Economics under that name. On the other hand, while the view that pro-rich policies will benefit everyone in the long run is widely held, I don’t know of a good general term that describes it.”
Isn’t it just another name for the classical tenet that capital investment spurs growth? IF you restrict the definition of “capital investment” to financial investment?
But really the capitalists aren’t entirely creative, and they want big payoffs fast — so at the margin, the money ends up in the financial casino.
Lee A. Arnold 12.12.09 at 11:12 pm
For an unimpeachable account of the 19th century: Alfred Marshall, roll the tape:
“…[E]arly in the present century, the commercial classes in England had much more savings habits that either the country gentlemen or the working classes. These causes combined to make English economists of the last generation regard savings as made almost exclusively from the profits of capital.
“But even in modern England rent and the earnings of professional men and hired workers are an important source of accumulation: and they have been the chief source of it in all the earlier stages of civilization. Moreover, the middle and especially the professional classes have always denied themselves much in order to invest capital in the education of their children; while a great part of the wages of the working classes is invested in the physical health and strength of their children.
The older economists took too little account of the fact that human faculties are as important a means of production as any other kind of capital; and we may conclude, in opposition to them, that any change in the distribution of wealth which gives more to the wage receivers and less to the capitalists is likely, other things being equal, to hasten the increase of material production, and that it will not perceptibly retard the storing-up of material wealth…
“A people among whom wealth is well-distributed, and who have high ambitions, are likely to accumulate a great deal of public property; and the savings made in this form alone by some well-to-do democracies form no inconsiderable part of the best possessions which our own age has inherited from our predecessors…”
Marshall, Principles of Economics, book IV, ch. VII, section 7 (1890)
Martin Bento 12.13.09 at 1:43 am
Lee quoted:
“The older economists took too little account of the fact that human faculties are as important a means of production as any other kind of capital; and we may conclude, in opposition to them, that any change in the distribution of wealth which gives more to the wage receivers and less to the capitalists is likely, other things being equal, to hasten the increase of material production, and that it will not perceptibly retard the storing-up of material wealth”
To further what I wrote above, if financial investment is bidding up the P/E ratios of assets, the economy cannot generate sufficient investment opportunities in the short run to make profitable use of the financial investment available. The government could take that money and put it in things like education, which creates capital of the sort Marshall is discussing, or redistribute it to consumers, which fuels demand, enlarging the market and leading to further financial investment opportunities down the road. So in the presence of asset appreciation, there seems to be a straightforward case for redistribution of wealth purely in terms of encouraging long-term growth, even leaving aside claims of justice and the like. One problem, of course, is that every time a bubble is noticed, there is a rousing chorus of “But this time it’s different!”. Let us admit that anything that is truly “different”, will not follow the rules of capitalism at all. Otherwise, we can treat extraordinary P/E ratios are prima facie evidence that capital needs to be confiscated. In the US, this is made somewhat complicated by the fact that so much capital is from overseas and therefore not available for confiscation by the US government, but that doesn’t affect the basic principle.
John Quiggin 12.13.09 at 3:06 am
#40 (and some others): As the final paras of this excerpt imply, I’ve treated the role of capital markets in more detail in the EMH chapter, making the point that a sharp increase in P/E ratios should be treated as prima facie evidence of a bubble. The current chapter will mostly be about the empirical evidence on how different income groups have fared under market liberalism. Banal, of course (#32), but it still has to be said, and drearily said again until the message gets through.
Martin Bento 12.13.09 at 5:54 am
Fair enough John, and I realize that. My assertion, though, which I recognize is mine and not yours and not something I would expect you to put in the book, is that the bubble is prima facie evidence that there is too much capital seeking investment and an appropriate policy response would be to forcibly repurpose that capital, not solely to burst the bubble, but also because the bubble indicates that capital that can usefully be invested at this time has been exceeded, and the government could find better uses for that money. This also applies to long-term asset appreciation beyond inflation as conventionally measured, something that, as I argued in the previous thread on this book, we have seen since 1980 in the US, and, I would imagine, other developed countries.
John Quiggin 12.13.09 at 6:20 am
I think we are agreeing furiously here, Martin. The EMH chapter includes a defence of public investment, which is (to me, anyway) the obvious way to forcibly repurpose capital investment.
john c. halasz 12.13.09 at 8:54 am
BTW this sentence is not clear: “The crucial distinction between the two is that while dynamic effects, in the technical sense, can raise or lower the level of national income in the long run, they do not, in standard economic models, affect the long-term rate of economic growth, which depends ultimately on productivity.” Both “national income” and “economic growth” are measured as GDP, no? So what’s the distinction being made? Is the claim that increasing the level of savings and thus (sic?) the level of investment will decrease current consumption, but increase future output and thus potential consumption, though the trade-off is measured in terms of PV of current consumption? That still doesn’t make entire sense, since, though S=I is a short-run accounting convention, there is nothing per se to guarantee that increased money capital will go to investment in real and improved capital stocks, nor that such real investment would work in expected financial terms, if it does occur, while, in fact, the extension of credit for investment is not entirely based on the supply of prior savings, and productivity-enhancing improvements in real capital stocks are themselves a source of increased savings, insofar as they lower unit output costs and raise the actual and potential level of surplus output. But then the whole issue of underlying sets of available technical possibilities, as a key to improved productivity and thus profitable investment is elided from the “picture” in this approach, apparently assuming that if enough money capital is thrown at the problem, some optimal set of possibilities will be automatically discovered and implemented.
At any rate, “trickle down” economics is nothing new, but perennial. The propagandists for capitalist interests are always claiming at once that there is a surplus and a dearth of capital. If capital is in oversupply, the asset prices are bid up and returns fall, but that just is taken to mean that low returns and high barriers to entry must be remedied by easing conditions for capital investment. That such claims are illogical or contradictory doesn’t, unsurprisingly, render them any less vociferous and effective. And if formal technical models are set up to sustain such claims through carefully selecting their parameters and assumptions,- (for example, failing to model any distinctive, independent role and dynamics for the financial system, while converting the constraints and long-run dynamics of production systems, through mathematical devices, into as-if market transactions, so that it is all a matter of a single continuous system of nominal price adjustments, which guarantee an automatic general equilibrium efficiency optimum, in which distributions of income play no role in determining the level and composition of effective demand),- doesn’t render them any less ideological.
mpowell 12.14.09 at 10:06 pm
Bento: I agree with your point (which is not directly what John’s book is about, but is related). It seems that capitalism is ordinarily quite well suited to delivering goods to people. After all, this is what it is supposed to be good at, right? It works quite well on the supply side. It is actually the demand side that seems to suffer when corporations gain so much power versus labor that they can squeeze down wages. It is really quite amazing to me that supply side economics could form the fundamental basis for so many people’s understanding of our economy’s functioning today.
derek 12.15.09 at 12:36 pm
I missed the discussion of how “more people” doesn’t necessarily mean “more health per person”. That reminds me of the pro-population argument that because a bigger economy with more workers produces more, then “more people” must mean “more wealth per person”. No, not if we trash all the natural wealth around us, and end up living in tinier houses than the previous generation. The economy may be buzzing with all the extra busy workers that the higher population results in, and the rich may be wealthier from all the extra labor. But the median wealth will go down, not up.
Some say technology and its benefits are a lagging indicator of population, that population causes prosperity. I say that’s backwards, like saying that climate change causes CO2. Technology and prosperity cause population, not vice versa. (yes I know there actually are mechanisms by which warming causes CO2, resulting in a feedback cycle that makes teasing out cause and effect, lead and lag, very hard. I don’t believe prosperity and population are anything like that hard to sort out)
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