In my past confrontations with Sumner when I question something he's said he has said that I don't understand economics and that he doesn't have the time to explain very basic things that all real economists know as elementary fact.
One subject he has done this on is the question of a consumption tax-he claims to be for a progressive consumption tax and when I questioned him on the desirability of this his answer has been in effect 'Well if you understood public finance you'd understand.'
While in a way you could argue that this is just a condescending cop out on his part, I've decided to take seriously the request of mainstream econ that those who criticise it at least acquaint themselves with what it really says.
http://diaryofarepublicanhater.blogspot.com/2014/04/ive-listened-to-nick-rowe-but-what.html
Although strangely, mainstream economists today evidently think it's an absurd waste of time to ask what Keynes actually said.
http://diaryofarepublicanhater.blogspot.com/2014/05/katrik-athreya-modern-macroeconomics.html
So what does standard econ say about savings? I'm talking about its impact on the economy. The idea of a progressive consumption tax always strikes me as problematic on a few levels. At the most basic level of course I think its fair to at least question whether a consumption tax even can be progressive or if progressivity and a consumption tax aren't two mutually exclusive things. The reason for this is that the poor save a much larger percentage of their income than the rich. Even in the short time I've lately had a little more income I see this is clearly true. My absolute spending has gone up a lot since March but not my spending as a percentage of income.
Now, whether or not it can be is a reasonable question and there is nothing that I have recently read about in standard econ-and I don't think you get more mainstream then what I'm currently reading: Gre' Mankiw's textbook and Athreya's Big Idea in Economics-that shows that this very question is somehow ignorant or shows a failure to grasp 'public finance'-when I've questioned Sumner here he's sniffed that it's too long since he took public finance for him to remember the exact arguments but that nevertheless PF shows that this is a silly question. He doesn't know why or can't explain why it's silly but he knows it is from some classes he took years ago but he can't recall what they said.
I've read a little bit on this idea of a progressive consumption tax and remain pretty skeptical but it does seem that it's theoretically possible-if you have a big enough exemption-like making the first $30,000 exempt; I'd probably prefer to see it phased out at a higher level though this in itself is not so easy to do in reality; then we have the question of how this tax can be levied. One way suggested is to send a voucher to low income folks at the start of the year-I'm guessing the tax year. In this way the price of consumption goods would be raised but they'd be compensated via the voucher.
These questions I'm raising here are technical/logistical-can a CT really be progressive? and how is it to be levied? Yet my skepticism is also more fundamental and philosophical. Even assuming a PCT is possible why is it more desirable than a progressive income tax? Usually proponents talk about things like the PIT distorting economic activity and its 'dead-weight loss'-see I have been reading Mankiw! How else would I use a term like 'dead-weight loss?'
Yet what they never mention is that a consumption tax also has a dead-weight loss. Even more fundamentally, they never spend enough time on the fact that a higher savings rate necessarily means a lower consumption rate. Sumner has a near religious belief in the virtues of a higher savings rate-he believes that a miser is somehow selfless while the spendthrift is selfish.
http://diaryofarepublicanhater.blogspot.com/2014/04/noah-smith-and-sumner-on-neo-fisherite.html?showComment=1399187698840#c272293933132006137
Yet why should this be? His answer is that the savings will be used in later investing, necessarily. This is something, of course, that Keynesian econ denies. Often though standard econ-in this context I'm taking Athreya and Mankiw as standard and a Keynesian idea like the Paradox of Thrift as heterodox-has little time for Keynesian econ here. Yet what's interesting is that you don't even need the Paradox of Thrift, or a heated debate over Say's Law-does Supply really create its own demand? and what does saying so really mean?-to make this point.
If you read Mankiw Principles of Economics pg.537 you read that: "The growth that arises from capital accumulation is not a free lunch: It requires that society sacrifice consumption of goods and services in the present in order to enjoy higher consumption in the future.' So even within the context of a Republican economist like Mankiw it seems that one really should take this into consideration before calling for a higher savings rate-note that here we're presuming Neoclassical econ is right and that the Paradox of Thrift is all wet-ie, an increase in savings necessarily really does lead to higher capital accumulation.
"If for example the savings rate in one country is 30%, while in another it is 40%, then a realistically parameterized Solow-Swan model predicts that in the long run, the higher-saving society will enjoy a constant 15% advantage in income levels, but will grow at exactly the rate as its more profligate cousin."
https://read.amazon.com/
Now here's the kicker:
"But notice that, in so doing, it gives up 10 percentage points more in consumption during every period."
The argument for higher savings is that lower consumption today means higher tomorrow. However, in this case of a permanent higher savings rate consumption is permanently lower. So even if you wanted a higher savings rate-which always bear in mind, necessarily means a lower consumption rate-the alleged benefit of preferring future over present consumption is out the window if this higher savings rate is permanent.
So it's clear that Sumner's practice of arguing for a 'progressive consumption tax' simply by saying the words public finance won't get it done for him. There are some very good reasons to question the very concept of a PCT and if you don't like the Paradox of Thrift you can do so using the tools of Mankiw, Solow, and Athreya.
Often, Krugman is accused of somehow being a dishonest economist who lets his political biases trump his good economic sense. Why is not a word said about Mankiw's support of Mitt Romney's tax schemes in his 2012 election-along with Glen Hubbard? He clearly knows better.
One subject he has done this on is the question of a consumption tax-he claims to be for a progressive consumption tax and when I questioned him on the desirability of this his answer has been in effect 'Well if you understood public finance you'd understand.'
While in a way you could argue that this is just a condescending cop out on his part, I've decided to take seriously the request of mainstream econ that those who criticise it at least acquaint themselves with what it really says.
http://diaryofarepublicanhater.blogspot.com/2014/04/ive-listened-to-nick-rowe-but-what.html
Although strangely, mainstream economists today evidently think it's an absurd waste of time to ask what Keynes actually said.
http://diaryofarepublicanhater.blogspot.com/2014/05/katrik-athreya-modern-macroeconomics.html
So what does standard econ say about savings? I'm talking about its impact on the economy. The idea of a progressive consumption tax always strikes me as problematic on a few levels. At the most basic level of course I think its fair to at least question whether a consumption tax even can be progressive or if progressivity and a consumption tax aren't two mutually exclusive things. The reason for this is that the poor save a much larger percentage of their income than the rich. Even in the short time I've lately had a little more income I see this is clearly true. My absolute spending has gone up a lot since March but not my spending as a percentage of income.
Now, whether or not it can be is a reasonable question and there is nothing that I have recently read about in standard econ-and I don't think you get more mainstream then what I'm currently reading: Gre' Mankiw's textbook and Athreya's Big Idea in Economics-that shows that this very question is somehow ignorant or shows a failure to grasp 'public finance'-when I've questioned Sumner here he's sniffed that it's too long since he took public finance for him to remember the exact arguments but that nevertheless PF shows that this is a silly question. He doesn't know why or can't explain why it's silly but he knows it is from some classes he took years ago but he can't recall what they said.
I've read a little bit on this idea of a progressive consumption tax and remain pretty skeptical but it does seem that it's theoretically possible-if you have a big enough exemption-like making the first $30,000 exempt; I'd probably prefer to see it phased out at a higher level though this in itself is not so easy to do in reality; then we have the question of how this tax can be levied. One way suggested is to send a voucher to low income folks at the start of the year-I'm guessing the tax year. In this way the price of consumption goods would be raised but they'd be compensated via the voucher.
These questions I'm raising here are technical/logistical-can a CT really be progressive? and how is it to be levied? Yet my skepticism is also more fundamental and philosophical. Even assuming a PCT is possible why is it more desirable than a progressive income tax? Usually proponents talk about things like the PIT distorting economic activity and its 'dead-weight loss'-see I have been reading Mankiw! How else would I use a term like 'dead-weight loss?'
Yet what they never mention is that a consumption tax also has a dead-weight loss. Even more fundamentally, they never spend enough time on the fact that a higher savings rate necessarily means a lower consumption rate. Sumner has a near religious belief in the virtues of a higher savings rate-he believes that a miser is somehow selfless while the spendthrift is selfish.
http://diaryofarepublicanhater.blogspot.com/2014/04/noah-smith-and-sumner-on-neo-fisherite.html?showComment=1399187698840#c272293933132006137
Yet why should this be? His answer is that the savings will be used in later investing, necessarily. This is something, of course, that Keynesian econ denies. Often though standard econ-in this context I'm taking Athreya and Mankiw as standard and a Keynesian idea like the Paradox of Thrift as heterodox-has little time for Keynesian econ here. Yet what's interesting is that you don't even need the Paradox of Thrift, or a heated debate over Say's Law-does Supply really create its own demand? and what does saying so really mean?-to make this point.
If you read Mankiw Principles of Economics pg.537 you read that: "The growth that arises from capital accumulation is not a free lunch: It requires that society sacrifice consumption of goods and services in the present in order to enjoy higher consumption in the future.' So even within the context of a Republican economist like Mankiw it seems that one really should take this into consideration before calling for a higher savings rate-note that here we're presuming Neoclassical econ is right and that the Paradox of Thrift is all wet-ie, an increase in savings necessarily really does lead to higher capital accumulation.
"If for example the savings rate in one country is 30%, while in another it is 40%, then a realistically parameterized Solow-Swan model predicts that in the long run, the higher-saving society will enjoy a constant 15% advantage in income levels, but will grow at exactly the rate as its more profligate cousin."
https://read.amazon.com/
Now here's the kicker:
"But notice that, in so doing, it gives up 10 percentage points more in consumption during every period."
The argument for higher savings is that lower consumption today means higher tomorrow. However, in this case of a permanent higher savings rate consumption is permanently lower. So even if you wanted a higher savings rate-which always bear in mind, necessarily means a lower consumption rate-the alleged benefit of preferring future over present consumption is out the window if this higher savings rate is permanent.
So it's clear that Sumner's practice of arguing for a 'progressive consumption tax' simply by saying the words public finance won't get it done for him. There are some very good reasons to question the very concept of a PCT and if you don't like the Paradox of Thrift you can do so using the tools of Mankiw, Solow, and Athreya.
Often, Krugman is accused of somehow being a dishonest economist who lets his political biases trump his good economic sense. Why is not a word said about Mankiw's support of Mitt Romney's tax schemes in his 2012 election-along with Glen Hubbard? He clearly knows better.
Mike, Not sure if I've sent this to you before, so forgive me if it's so. A lot to digest here, but worth the read: http://www.columbia.edu/dlc/wp/econ/vickrey.html
ReplyDelete