You would tend to think so if you listen to folks like Scott Sumner-a long time advocate of a "progressive consumption tax"-yes, the scare quotes indicate skepticism of any consumption tax being progressive.
"Most people regard consumption as being much more equal than income, which is then much more equal than wealth. But this is a cognitive illusion, as wealth is basically the present value of future expected consumption (for yourself, plus those you donate to.) What causes this confusion? It’s partly life cycle effects and consumption smoothing, which I’ve already discussed. It’s also partly due to the fact that the rich tend to have lots of easily measured wealth (financial assets) whereas the poor and middle class rely more on (difficult to measure) human capital as a form of wealth."
http://www.themoneyillusion.com/?p=19884
I see now that Steve Roth over at The Angry Bear Blog has a new piece about the question of whether a reduction in consumption spending leads to an increase in investment spending. Interesting as I just finished Larry Seidman's The USA Tax: A Progressive Consumption Tax.'
http://www.amazon.com/The-USA-Tax-Progressive-Consumption/dp/0262514532/ref=sr_1_fkmr1_1?s=books&ie=UTF8&qid=1367700163&sr=1-1-fkmr1&keywords=Larry+seidman+usa+tax
While I have always been instinctively skeptical of this concept-isn't a progressive consumption tax a contradiction in terms?-I try to keep an open mind. I had heard some aspects of these so-called progressive consumption taxes that intrigued me. Perhaps it could work?
Seidman's USA Tax-which is no defunct, was a proposal of Congressmen Republican Peter Domenici and Democrats Sam Nunn and Bob Kerrey in the 90s-claims to be just as progressive as the income tax. He argues that while a sales tax, vat tax, or flat tax are all regressive-he thinks the flat tax could be made very mildly regressive by a an exemption for the very poor-the USA Tax-and similar proposals-can be made every bit as progressive as the income tax while away any discouragement of saving and investment. Of course that last part begs a question which is a trouble I have that we'll get back too...
What I did like about the USA Tax was:
1). Graduated rates
2). a new payroll tax credit to go along with the EITC which would remain and a credit for Social Security for low income folks.
Yet the trouble I have as I hinted at above, is how do we know there's this barrier to saving and investing? And isn't encouraging saving also discouraging consumption? He claimed though that the falling U.S. savings rate hurt the U.S. economy. He was writing this in 1997 so he didn't realize that the 22 year productivity slump had ended two years earlier-and would continue till 2005 thanks to the Internet boom.
Seidman did allow that increase in saving meant a drop in consumption and would have to be done gradually if we were to avert a recession. So the plan is to not let the rise in investment happen to quickly but rather faze it in over 10 years.
Seidman argued that while output is driven by 80% consumption and 20% investment the goal should be permanently alter this, bringing investment to a higher percentage of say, 24% while bringing consumption down to 76%.
By encouraging savings-by making all saving tax exempt this would lead to a major increase in saving; however, not too fast so that consumption growth would still remain positive but somewhat slower. It would drop to 1.5% while investment would raise to 6%. Then after half a decade consumption will drop to 76% of output and saving to 24%; thereafter consumption and investment can again grow at the same rate of 2.5%, with output somewhat raised.
Investment, consumption, and output will thereafter raise at a permanently higher level-during the half decade phase in consumption per worker did drop temporarily but investment rose. So for a short term sacrifice in present consumption, future consumption is raised along with investment-in both the short and long term.
I find all this quite dubious. I certainly don't get why consumption is seen as just taking from the economic pie and contributing nothing. I think Keynes was right in arguing that because you don't spend today is no guarantee that you will spend tomorrow.
Of course, a Sumner will just say Wow! How can anyone deny the accounting identity S+I?
http://diaryofarepublicanhater.blogspot.com/2012/01/scott-sumner-becomes-even-more-shrill.html
Steve Roth makes the point in his piece that this particular identity often confuses things. He makes the point that less consumption spending is not the cause of more investment spending: that we spend less today doesn't mean we will spend more tomorrow.
"At risk of stating the obvious, in this post I’d like to highlight a pernicious misunderstanding that I find to be widespread out there in the world."
"Most people regard consumption as being much more equal than income, which is then much more equal than wealth. But this is a cognitive illusion, as wealth is basically the present value of future expected consumption (for yourself, plus those you donate to.) What causes this confusion? It’s partly life cycle effects and consumption smoothing, which I’ve already discussed. It’s also partly due to the fact that the rich tend to have lots of easily measured wealth (financial assets) whereas the poor and middle class rely more on (difficult to measure) human capital as a form of wealth."
http://www.themoneyillusion.com/?p=19884
I see now that Steve Roth over at The Angry Bear Blog has a new piece about the question of whether a reduction in consumption spending leads to an increase in investment spending. Interesting as I just finished Larry Seidman's The USA Tax: A Progressive Consumption Tax.'
http://www.amazon.com/The-USA-Tax-Progressive-Consumption/dp/0262514532/ref=sr_1_fkmr1_1?s=books&ie=UTF8&qid=1367700163&sr=1-1-fkmr1&keywords=Larry+seidman+usa+tax
While I have always been instinctively skeptical of this concept-isn't a progressive consumption tax a contradiction in terms?-I try to keep an open mind. I had heard some aspects of these so-called progressive consumption taxes that intrigued me. Perhaps it could work?
Seidman's USA Tax-which is no defunct, was a proposal of Congressmen Republican Peter Domenici and Democrats Sam Nunn and Bob Kerrey in the 90s-claims to be just as progressive as the income tax. He argues that while a sales tax, vat tax, or flat tax are all regressive-he thinks the flat tax could be made very mildly regressive by a an exemption for the very poor-the USA Tax-and similar proposals-can be made every bit as progressive as the income tax while away any discouragement of saving and investment. Of course that last part begs a question which is a trouble I have that we'll get back too...
What I did like about the USA Tax was:
1). Graduated rates
2). a new payroll tax credit to go along with the EITC which would remain and a credit for Social Security for low income folks.
Yet the trouble I have as I hinted at above, is how do we know there's this barrier to saving and investing? And isn't encouraging saving also discouraging consumption? He claimed though that the falling U.S. savings rate hurt the U.S. economy. He was writing this in 1997 so he didn't realize that the 22 year productivity slump had ended two years earlier-and would continue till 2005 thanks to the Internet boom.
Seidman did allow that increase in saving meant a drop in consumption and would have to be done gradually if we were to avert a recession. So the plan is to not let the rise in investment happen to quickly but rather faze it in over 10 years.
Seidman argued that while output is driven by 80% consumption and 20% investment the goal should be permanently alter this, bringing investment to a higher percentage of say, 24% while bringing consumption down to 76%.
By encouraging savings-by making all saving tax exempt this would lead to a major increase in saving; however, not too fast so that consumption growth would still remain positive but somewhat slower. It would drop to 1.5% while investment would raise to 6%. Then after half a decade consumption will drop to 76% of output and saving to 24%; thereafter consumption and investment can again grow at the same rate of 2.5%, with output somewhat raised.
Investment, consumption, and output will thereafter raise at a permanently higher level-during the half decade phase in consumption per worker did drop temporarily but investment rose. So for a short term sacrifice in present consumption, future consumption is raised along with investment-in both the short and long term.
I find all this quite dubious. I certainly don't get why consumption is seen as just taking from the economic pie and contributing nothing. I think Keynes was right in arguing that because you don't spend today is no guarantee that you will spend tomorrow.
Of course, a Sumner will just say Wow! How can anyone deny the accounting identity S+I?
http://diaryofarepublicanhater.blogspot.com/2012/01/scott-sumner-becomes-even-more-shrill.html
Steve Roth makes the point in his piece that this particular identity often confuses things. He makes the point that less consumption spending is not the cause of more investment spending: that we spend less today doesn't mean we will spend more tomorrow.
"At risk of stating the obvious, in this post I’d like to highlight a pernicious misunderstanding that I find to be widespread out there in the world."
"This is not new thinking. You’ll find a more sophisticated historical account, stated very clearly though in somewhat different terms, in the first few pages of this PDF. Still, despite decades of debunking, this misconception remains ubiquitous. I’d like to explain it in the simplest and clearest terms I can."
"Start here:
GDP = Consumption Spending + Investment Spending
Consumption Spending = Spending on goods that will be consumed within the period.
Investment Spending = Spending on goods that will endure beyond the period.
"Looking back at a period, from an accounting perspective, it’s obvious that if there’s less consumption spending, there’s more investment spending. This must be true, because that’s how we tally things up, once they’ve happened. There are two types of spending; every dollar spent last year must be one or the other. If there’s less of one, there’s more of the other."
"But people conclude: if there is less consumption spending, there will be more investment spending. (So we’ll increase our stock of real stuff, and we’ll all be richer!)"
"They’re confusing (and confuting) a backward-looking, historical, accounting statement with a forward-looking, causal, predictive statement. Because looking back, GDP is fixed. It has to be; it’s already happened! But in that very instant of thought, people abandon that fixed, historical perspective and think: if one component is smaller, the other will be larger."
"This makes no sense at all. Think about it: If people spend more on consumption goods next year, that will cause more production — including production of long-lived goods to increase production capacity. Investment won’t go down because people spend more on consumption.GDP will go up. Next year’s GDP (obviously) isn’t fixed."
"Likewise, people tend to think that less consumption spending means there will be a higherproportion of investment spending (so, relatively, more real-wealth production). Wrong again. The backward-looking Y = C + I accounting identity tells us exactly nothing about why people will make their spending decisions — what causes them to choose consumption vs. investment spending. They might choose to increase or decrease either or both, for myriad reasons. One doesn’t cause the other in some kind of simple arithmetic manner."
"This seems very obvious. But if you hold this firmly in your head as you peruse people’s statements out there in the world, I think that you will find that many of them do not have it fixed very firmly in their heads."
What we see is that the identify refers to history, but it is used erroneously to predict the future. I agree this error is very widespread, certainly throughout the world of economists.
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