Calling the Kettle Black: Sumner on Zombie Ideas

     He wrote a post about the top income tax rate, asking which country has the highest rate for the rich. 

     "Taxes are fiendishly complex, so this post might have some errors.  I’m trying to see where America ranks in terms of “top income tax rate.”  Just to be clear, I am not including wage taxes, or corporate income taxes.  Nor am I interested in the maximum MTR associated with benefit and deduction phaseouts.  You’d have to be a rocket scientist to figure all of those out.  I’d like to rank countries according to the MTR as one’s income goes out towards infinity.  I believe the top 6 countries are:

1.  Aruba  58.95%

2.  Sweden  56.6%

3.  Denmark  56.4 55.6%

4.  Netherlands  52%

5.  Spain  52%

6.  US  51.4%  (but only in California.)

[Sources here and here]

     "Our top rate in a typical state is about 48%, which is roughly 10th in the world.  The top federal income tax rate is 43.4% (39.6% plus the 3.8% medical income tax.)  I got the California number by assuming their 13.3% top rate was deductible against the 39.6% federal rate, but not the 3.8%."

     http://www.themoneyillusion.com/?p=24759

     He's always been terribly worried about that 3.8% medical income tax:

     "Canada seems to have a top rate of 54.75% in Quebec, but only about 45% in a typical province, and about 42% in populous Ontario.  Their top federal rate is 29%.  (I assumed local taxes are not deductible at the Federal level, otherwise their rates would be lower.)  Progressives want Canada’s health care regime.  I want their banking system, military, and income tax regime.  And their sound public finances.  Oil-rich conservative Alberta’s top rate is 39%, versus 43.4% in oil-rich conservative Texas."

      I can just see all the people leaving Texas for Alberta just to avoid paying a slightly higher tax rate. Sumner then complains that there are all these 'Zombie ideas' gaining traction:

      "Recently a lot of zombie ideas have been resurrected by progressives (and even some conservatives.)  These include 75% tax rates, much higher minimum wages, and guaranteed annual incomes.  I realize that lots of people are worried about inequality.  But there are sensible ways to address the issue (i.e. wage subsidies.) Let’s not shoot ourselves in the foot.  There’s a reason that Aruba is the only country in the world with a top rate above 57%."

     This is a trick he uses a lot-steal a liberal phrase-'zombie ideas' is actually used by Keynesians and liberals to denote bad ideas-basically pre-Keynesian ideas; I think you can make the case that there are two kinds of economic ideas-Keynesian and pre Keynesian. The pre Keynesian ideas are all basically about placing microeconomics in the rightful place of macroeconomics. 

      http://www.amazon.com/Zombie-Economics-Ideas-Still-among/dp/0691154546/ref=sr_1_1?s=books&ie=UTF8&qid=1384822055&sr=1-1&keywords=zombie+ideas+in+economics

     Big surprise-Sumner's idea of a zombie idea is raising the minimum wage. 

     "Regarding the minimum wage, here is some data for Western Europe:

    "There are nine countries with a minimum wage (Belgium, Netherlands, Britain, Ireland, France, Spain, Portugal, Greece, Luxembourg).  Their unemployment rates range from 5.9% in Luxembourg to 27.6% in Greece.  The median country is France with 11.1% unemployment."

    "There are nine countries with no minimum wage (Iceland, Norway, Sweden, Finland, Denmark, Austria, Germany, Italy, Switzerland.)  Five of the nine have a lower unemployment rate than Luxembourg, the best of the other group.  The median country is Iceland, with a 5.5% unemployment rate. The biggest country in Europe is Germany.  No minimum wage and 5.2% unemployment. Still want to raise our minimum wage to $10?"

    Uh, yes-why do you ask? This is another classic Sumner move-provide data that's supposedly shows a correlation and leaving it there. Obvously the minimum wage is the problem-even though Britian didn't have a minimum wage to relatively recently 

   "Germany used to have really high unemployment.  Then they did labor reforms to allow more low wage jobs, combined with subsidies for low wage workers.  Now they don’t have high unemployment.

Still want to raise our minimum wage to $10?"

    Yes, I do. Sumner didn't even try to give us any reason to think there is a causation at work. A $10 minimum wage is going to destroy the job market? How then did we have a minimum wage of $16 in 1969 and we had a very low unemployment rate. In fact you could draw a correlation with the subsequent failure of the U.S. MW to keep up with productivity or even the rate of inflation and a drop in productivity and a drop in employment. Does it seem very unlikely that a lower MW could lower productivity? Well a Sumner move is just to give you the correlation without worrying about causation. 

     As for the MW there are a few points to keep in mind. The U.S. MW was created not based on a debate among economists but because of a political demand for it. The MW was passed because the country wanted it-it was a political and social decision not an economic decision. Even till this day economists are about split on the impact of the MW-half think it harms the economy half don't. The empirical record certainly seems to show that if it has an ill effect, it's tiny. 

      Of course, this is why Sumner likes to say that there is no such thing as public opinion in economics-he meas that he thinks that the average Joe is incapable of understanding economics so, ideally he shouldn't have any power to decide-this is the basis of Sumner's dogmatic preference for the Fed rather than the Treasury handling demand stabilization during a recession. 

       I've often argued that Sumner does support austerity-whatever he may try to claim to the contrary. It follows if we follow him in buying into the idea that the monetary authorities have total control over demand side issues-this leaves the fiscal side of policy only concerned with the 'long run' and this leaves them-if they observe Sumner's edict that they keep out of demand side policy-with nothing but supply side policy decisions: ergo, Sumner's preferences-cutting the size of government, cutting taxes for the rich, hopefully getting rid of MW laws. 

        Monetarism-market or otherwise-has always had this supply side, austerian agenda. Think about it: the most successful Monetarist natural experiment was Chile where there was no democracy. Supply side economics on the other hand is two things more than anything:

        1. Another pre-Keynesian theory in that it retreats back to microeconomics in setting fiscal policy

        2. Regressive. Read a smart and fairly honest SSer like Larry Lindsey. It becomes clear in reading him that regressive tax policies are preferable based on his model. 

     http://www.amazon.com/Growth-Experiment-Revisited-Americas-Recovery/dp/0465050700/ref=sr_1_1?s=books&ie=UTF8&qid=1384823814&sr=1-1&keywords=larry+lindsey

         A zombie idea is a pre-Keynesian idea, and Sumner is King of all pre-Keynesians-that is to say of all the Zombie ideas.