by Tyler Cowen
on November 2, 2012 at 2:31 pm
1. The pulled report on taxes and the economy.
2. There is no great stagnation: texting while skiing.
3. Some economics articles on natural disasters.
4. Does this elephant speak Korean? Another story here, and video here.
#1 – real side commentary on today’s Republican party which won’t encourage intellectual debate on any topic at all.
Obviously I meant to type ‘sad’ instead of side. It’s time for this election to be over!
What’s that box? It doesn’t seem to be associated with the articles, though I can’t read #1 because of the crazy formatting.
http://en.wikipedia.org/wiki/Chinese_room aka Chinese Box
The characters on the box refer to a painting of Emperor Taizong receiving the Tibetan ruler Songtsän Gampo. Does use of the picture imply opposition to Tibetan independence?
#1) So what is the alleged wrong here? I have no idea what the relevance is.
These ‘money’ quotes will help clue you in:
“There is not conclusive evidence, however, to substantiate a clear relationship between the 65-year steady reduction in the top tax rates and economic growth. Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.
However, the top tax rate reductions appear to be associated with the increasing concentration of income at the top of the income distribution. The share of income accruing to the top 0.1% of U.S. families increased from 4.2% in 1945 to 12.3% by 2007 before falling to 9.2% due to the 2007-2009 recession. The evidence does not suggest necessarily a relationship between tax policy with regard to the top tax rates and the size of the economic pie, but there may be a relationship to how the economic pie is sliced.”
But what about effective rates? Is that addressed?
“Analysis of such data suggests the reduction in the top tax rates have had little association with saving, investment, or productivity growth.”
Say what? It’s a polemic in a cap and gown. Of course it should be pulled.
There’s the conservative response to reality in a nutshell.
Look. The GOP didn’t want to debate the report or analyze it or try to refute it. That’s too hard. They might have to do arithmetic. Much easier to just suppress it.
Absolutely a polemic.
The CRS is not supposed to have an editorial dog in those fights. It’s supposed to present the evidence, and there’s ample evidence contrary to the position it states here.
Look. Im not in favor of anyone, conservative or liberal throwing out a bunch of normative BS and calling it a claim to reality. It’s no party’s job to refute a factual report, but its certainly the CRS’ job to create factual reports. The fact that they, and increasingly everyone else in government is unable to distinguish between fact and opinion is definitely objectionable.
Guess what, Mike.
That’s what they did. They presented the evidence, and the GOP didn’t like what the evidence showed. Sorry about that, but it’s true.
The people unable to distinguish between fact and opinion are the Republicans, not the CRS. Actually it’s worse than that. The GOP fundamentally doesn’t believe there is such a thing as a fact that disputes their world view. The party is an intellectual disaster area.
Guess what, Mike.
That’s what they did. They presented the evidence, and the GOP didn’t like what the evidence showed. Sorry about that, but it’s true.
* By “they”, you mean a non-economist Democratic partisan who works for the CRS.
* By “evidence”, you mean a year by year regression that any undergrad econometric student would point out couldn’t possibly answer the question being asked of it. Telling me that the 1990s (generally) yielded higher growth than the 2000s despite higher tax rates doesn’t tell me much.
* By “showed”, you do not mean that the article gave anything beyond laughable treatment to the wealth of scholarly research and economic theory to be found in Barro’s Macro book (which itself goes through a litany of sources, but which Hungerford dismisses as ‘theoretical’), or the Engen and Skinner overview that Hungerford cited but clearly didn’t understand.
Because, if he did, he would understand the idea at issue here is that lower taxes create small but persistent improvements to growth generating large cumulative improvements to our lives. That’s not, I guess until recently, something I thought was a fact Democratic leaning economists sought to avoid. Hell, the Romers are Democrats, and they basically wrote the book on endogenous growth theory. Of course, Christina Romer was also criminally misused, underused, insulted, and ignored by this Democratic administration.
So, yeah, I guess if they’re going to bag on Cristina Romer (and yes, I know she would probably publicly and academically walk back some of their findings on the tax->investment relationship, but not the general thrust), they might as well do it by talking up some anonymous hack of a bureaucrat doing regressions on Excel in between his usual work of checking on his daily eBay auctions.
I agree that the actual econometrics isn’t very rigorous and I personally don’t put much stock in the results. I’d counter that I can’t recall any empirical paper on this issue that’s sounded very convincing one way or the other.
If you can point me to a rigorous empirical paper that shows evidence of the relationship between top marginal rates and growth rates, I’d love to see it.
As for theory, etc. Try this on:
Imagine one person has a machine that prints money. The more time he spends running the machine, the more money he can print, but he does not enjoy the that time. He does it though because he can spend that money to make the machine bigger so that it can print even more money per unit of time he spends running it. When he is not running the machine, he relaxes on the beach and sets some money on fire. He very much enjoys this. It gives him much joy (and is the reason why he tries to improve his machine, so he can have even more money to set on fire). Sometimes, randomly, the machine runs fast. Other times, it runs slow.
Write a model of this. How does it differ from the standard “workhorse” neo-classical DSGE model (a la Kydland and Prescott’s “Time to Build…”)? The answer is, it doesn’t. Seriously, try it. Call that machine “k,” label the money that’s set on fire as “c,” call the random fluctuations in the speed of the machine, A, amount of time running the machine L, and the money it prints, y, the money spent fixing up the machine, I, and the happiness he gets from the time not running the machine and from burning money, U.
U=f(C,1-L), Y=f(A,K,L), Y=C+I. and say A evolves according to some AR(p) process. (Oh, I forgot, the money printing machine slowly wears out, so you need to replace the worn out parts too).
It’s the same thing.
To complicate things, add a monster who sometimes takes money from him, and coats it with a flame retardant that prevents him from setting it on fire (which gives him joy), and also prevents it from being spent improving his machine, but it’s better than nothing (ie, he gets some small amount of joy from collecting them). What effect does the monster have? No good effect obviously. He can’t burn the money (which he enjoys) and he can’t spend it to make his machine better either. The monster does nothing but get in the way. But that’s just an artifact of how this guy’s “economy” is constructed and the role I gave the monster. And it’s definitely not something I think should decide US fiscal policy.
Yes, it’s all very silly. Sometimes those silly stories offer great insight, and I’m not dismissing them outright, but when it comes to actual real life policy in the US, I want to see a rigorous empirical investigation. I’m not saying this paper was that (it wasn’t). But that doesn’t mean the opposite of it’s findings are “the truth.” That just means you shouldn’t put much stock in it. What “the truth” is has yet to be found with certainty.
And I also don’t really buy the results from models which could just as easily be a description of my silly man on the beach with a monster story from above. I realize the neoclassical model I’m poking fun of is much simpler than modern models, but I assure you that no matter how many bells and whistles you add, be they financial frictions, calvo pricing, a second or third type of agent, or whatever, I could write an equally silly story.
And I still haven’t even touched on the utility aggregation issues, problems associated with limiting your models to local approximations around a steady-state that are Lord knows how off for bigger deviations, or the issues regarding equilibria (both uniqueness or determinacy), or any of the other problems hand-waved away in so much theory.
They’re good stories, often insightful, but never forget that in the end, they’re just stories.
Alas I’m not a very good econometrician. I just know crap when I see it. And I’d agree that there’s not absolutely great empirics I’m aware of. That being said, I find the Romer and Romer articles highly persuasive in that they’re generally careful and relatively exhaustive narratives. I think, sans a few hundred additional years of data, that’s about the best we can get. The best econometrics can’t save you from not having enough data, and that’s the fundamental issue here.
We’ve got to rely on theory plus the best support we can find. Romer and Romer (http://www.nber.org/papers/w13264.pdf would be the prime one) generally find that tax increases are contractionary and tax cuts designed to stimulate growth tend to be effective. Interestingly, deficit closing tax increases appear somewhat less contractionary than increases to pay for prospective spending. Ricardo’s corpse and I think that’s interesting.
Regarding your model…. we need to consider time preferences. If the guy spends some time improving his machine, not just making it bigger, does it ever pay off down the road? The operative research is figuring out how much the monster gets in the way, so we’re not just making assumptions about it, but making informed assumptions because we come to understand monster behavior and its effects on us.
Well, Taxes are just a way to internalize the externality that is government spending. Without taxes, government spending is a weird prisoner’s dilemma that creates massive externalities for everyone involved. With taxes, a portion of those externalities are reduced.
All Taxes are Pigovian taxes for the externality that is the state.
The story is not so much the report. The story is the fact that it was withdrawn after Congressional complaints. See the following: http://www.nytimes.com/2012/11/02/business/questions-raised-on-withdrawal-of-congressional-research-services-report-on-tax-rates.html?smid=fb-share
Search long enough through government files and you will find a report that says anything you want it to say…or not say. This stuff isn’t peer reviewed and few people read it. Everyone so often drags things like this out at opportune times to say I told you so.
Give me a legal topic, and in ten minutes I can find two briefs on each side of the issue. They all appear well researched and well written, and most are entirely wrong because they contain arguments soundly rejected by courts.
I’ve got a buy rec and a sell rec on the same stock directly in front of me. Both recs are written by Ivy League MBAs, and both are based on objective financial statements and market analysis. I can’t tell you which one is correct, but I can tell you with certainty that at least one of them is wrong. For me, it isn’t even the rec that matters, but how well the stock fits into the existing portfolio bases on investor objectives.
There is no conspiracy. Nothing to see here. Move along.
That’s partly the funny part. Few people read or care about these reports. No one would have cared about this had the GOP not put up a stink. I think it’s an excellent example of the “Streisand Effect” in action.
Steven July 27, 2011 A few years ago, as I was entering into the fray of onnile dating, I exchanged a few emails with Kate (the years before the blog). I couldn’t quite figure out why she’d emailed me, as we didn’t have a lot in common. However, as I was recently separated, I didn’t think too much about it. *Anyone* would be better than the one I’d left.At the time, though, she lived in Everett, and I had enough wits about me to figure that was too far, especially since I was in Burien. I backed away before actually meeting her.Recently, though, I came across her onnile profile again (I’m back on the scene), but decided against emailing her. (1) I don’t think it’s worth trying to get a date just to find out whether she’s open about her blog. (2) In the back of my mind, I’m afraid she might say no.’ (I’m not very flirty in email, which seems to be a prerequisite of hers.)As lucky as a guy should feel to have her decide against a 2nd date, could you imagine being denied a 1st? The mind boggles.
The difference is the incentives. The lawyers who write those legal briefs are paid to take a particular position, and the MBAs who write those stock recs are often just talking their book.
In contrast, by design the CRS economists don’t have a financial interest in their reports. In fact, at many government agencies (although I don’t know about CRS specifically), employees aren’t even allowed to own stock in companies that fall within their subject area.
I’ll go one better.
I facebook and chat on my phone while rock climbing and mountaineering.
Another pretty good one, I dropped some friends off for a backpacking trip in a remote part of the Sierras. They got lost on the first day, all the trails were buried under snow still, but managed to get a text to me with their GPS coordinates so I could find them on a map, and texted them back where to go.
But, for their specific plans. The places I ski, the cell phone reception is pretty spotty, or completely absent. So, googles that show me my e-mail, not so useful.
No, the elephant doesn’t speak. Does no one read Pinker?!
Re #1. You are not authorized to discuss a CBO report pulled by the powers that be. The report does not exist, as that term is defined by me.
Don’t ever do that again.
We need a GS-14 to write a paper telling us that if we lower marginal tax rates, that, EGAD, people will keep more of their own money?
So if cutting taxes does not lead to economic growth, then I suppose raising them does? I sense a logical fallacy about to enter the room.
I swear I saw something here recently about GDP growth not being the same as growth in social welfare. Or maybe I just wish I saw that here.
Raising taxes is like eating Chinese food. An hour later, you just want to raise them again.
“So if cutting taxes does not lead to economic growth, then I suppose raising them does?”
Under some, but not all, circumstances – yes it would.
“I swear I saw something here recently about GDP growth not being the same as growth in social welfare.”
GDP growth is not the same as growth in social welfare. We might, for example, bring in policies that increased GDP but also increased inequality so that all of the GDP growth plus more would go to the top 1% and the bottom 99% would be worse off. The Romney/Ryan budget plan would probably have that type of social welfare reducing consequence.
Taxes spent on pure public goods could increase growth. We are way past that point, and government spends too much tax revenues on private goods.
Income inequality has nothing to do with social welfare except for those who model it as such. People having different incomes is a reality, but the economic concept of income inequality is a fiction, just like price gouging. There is no such thing.
I don’t know how much Bill Gates earns. I don’t care how much Bill Gates earns. If Bill Gates earns $1 billion more, it doesn’t deprive me of a single cent that I wasn’t willing to pay for a product he produced. His consumption doesn’t affect the prices of the things I buy. His production probably lowers the costs of things I buy.
If Bill Gates earns a billion dollars more, he probably produced at least a billion dollars of additional social welfare that didn’t exist before. His addition to the pie might make my relative piece look smaller, but I eat the same, if not more, pie.
In short, I don’t care if rich people get richer, and neither do you. These are just noises you make with your vocal chords to assuage your sense of guilt and remorse. If you really cared, you’d reach more deeply into your own wallet instead of grunting Marxist babble.
“So if cutting taxes does not lead to economic growth, then I suppose raising them does? I sense a logical fallacy about to enter the room.”
Yeah, but it’s yours.
If the finding was, “When taxes go down, growth goes down,” I could understand the logic of your snarky comment that this would imply that if taxes goes up, growth goes up. But that’s not the finding. The finding is, “There is no relationship between taxes and growth.” That implies whether taxes go up, or down, growth isn’t affected.
I’m not saying the finding is correct, just that the gic of your snarky comment makes no sense. To put it another way, they said there is no correlation between the two variables and you’re saying this implies there is a positive correlation between the two. As you can see, there is a logical mistake there, but it’s yours.
You’re so cool! I don’t think I’ve truly read through anything like this before. So good to find another person with unique thoughts on this issue. Really.. thanks for starting this up. This website is something that’s needed on the internet, someone with a little originality!
I can’t imagine a more target-rich environment for payday loan spam than an economics blog.
Its google farming.
Especially a British one on an American blog
The crazy part is that I don’t have a HUD on my motorcycle helmet. I saw those ski goggles a while back and I have a set on order because some guys figured out how to mount them on a motorcycle helmet. It shows your speed and has all those cool blue tooth features.
#1 – As I understand the report from a glance, the regressions are on contemporaneous growth rates and taxes, an alternative explanation is the reverse of the suggested causality.
Question: when are marginal tax rates going to be lowered, during slow growth and recessions or during high growth times? When you think of the political economy issues the result is trivial.
Then again that is if the whole relationship isn’t spurious. The tax rates don’t look stationary to me.
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