French economist Thomas Piketty is raising a ruckus

[Sam_Stone]

@Lantern

Sam Stone,
Romer/Romer is an interesting new methodology but some economists are skeptical that their division of endogenous and exogenous is that clear-cut, for example a good case can be made the early Reagan and Bush tax cuts were endogenous responses to a downturn.

That’s a different argument. No single paper or study is a slam-dunk closure of debate. That includes this paper and it also includes Piketty’s book. They are contributions to the literature, to be weighed against other evidence. As in most things involving economics, you’re almost never going to get widespread agreement.

Even if you take their numbers at face value the paper definitely doesn’t show that Keynesian fiscal stimulus is a bad idea particularly in an economy at the zero lower bound. Romer herself was a strong supporter of a bigger stimulus inside the Obama administration.

Are you seeing the context of this thread? It has nothing whatsoever to do with Keynesian stimulus. What we’re talking about here is a permanent state of taxing the wealthy and re-distributing the assets to reduce wealth inequality. Some people on the left have now adopted ‘fiscal stimulus’ as some kind of free lunch, that you can raise taxes with impunity whenever you want because… Keynes.

Neither does the paper show that raising capital gains taxes to say where they were 10 years back would damage the economy and as mentioned Romer supports increasing such taxes.

Only if the money is used to reduce the deficit. And that’s consistent with her paper, but not with the notion that we should raise capital gains tax permanently for no reason other than to extract wealth from those who earn them.

I am not still clear why you feel this paper supports your position. It’s an innovative method but not particularly radical in its conclusions. Economists have known for a long time that deficits can sometimes damage the economy and there are other papers which show that more persuasively than Romer/Romer.

Then you should tell the other participants in this thread. Absent the zero-bound problem of monetary policy and the recession-led drop in consumption that may support fiscal stimulus in some cases, running big deficits and increasing taxes (that aren’t used to reduce deficits) will cause a drop in GDP growth. That’s what the best economic evidence tells us, and that’s the argument I was making in this thread. Romer and Romer’s paper provides some good evidence that deficits and tax increases reduce economic growth.

As to the other paper first note that it’s from 1970 to 1997 and includes a vast range of countries including some poor countries that were basically socialist in the 70’s. It looks at a period where corporate tax rates fell from around 41% to 35 % on average and the latter number is still pretty high . Looking at the regressions I am pretty dubious about some of their controls; for example I don’t see oil prices or savings rates which had a big impact on growth rates in many of those economies. All in all it doesn’t show that corporate tax rates are too high in the US economy today or that an increase in revenue by closing corporate loopholes would damage the economy.

There is quite a bit of evidence that raising corporate tax rates and capital gains taxes does not result in a whole lot of revenue for the government. Here in Canada, we cut our corporate tax rates and capital gains taxes quite substantially, and our revenue went up.

And for the purpose of this particular debate, note that we’re talking about long-term effects, not short-term. The left is advocating for permanent higher taxes on the wealthy to lower wealth inequality. Many taxes will result in a short-tun revenue increase, but over the long run revenue is decreased due to the negative effect on growth.

I don’t know why you think it’s a great revelation that Romer thinks that tax increases will have some disincentive effects. Most taxes have some disincentive effects according to basic economics.

I don’t think it’s a revelation - I’ve been arguing that for decades. It’s the other people in this thread who seem to think that such tax increases are free or cost very little that need to be told this. Welcome to my side.

For that matter virtually every major industry has some combination of imperfect competition, asymmetric information and externalities creating some degree of market failure.

The trick is to figure which taxes have large disincentive effects and which market failures are large enough require correction.

Of course. We could debate this for a long time, as I think this issue is complex and there are few easy answers on the right or the left. But it has nothing to do with this particular debate, which is about the wisdom of large permanent taxes for the purpose of constantly redistributing wealth to reduce wealth inequality. That’s what Piketty proposes.

[Sam_Stone]

@Budget_Player_Cadet

Then you’d do considerably worse in predicting future events than those who, you know, actually analyze things. I realize that this is a popular opinion these days, but contrary to popular belief, economics is neither easy nor impossible, and actually having a clue what you’re talking about really helps you from falling into some very basic traps in thinking. The problems we’ve had in the economics profession have been failures of observation (people not understanding just how serious shadow banking was) and failures of application (people refusing to apply models that have proven themselves to work because it is politically expedient not to do so). The models themselves do a damn good job.

You should read Nate Silver’s new book. You might not be so quick to claim that economists are good at predicting the future. He does a pretty good breakdown of the evidence that shows that economic forecasts really aren’t much better than flipping a coin. Even forecasts just a few months in the future are not much better than chance.

I’ve made the same point before - look at the CBO’s forecasts for GDP, and compare them to what actually happened. You’d do just as well just looking at the average and doing a regression to the mean from wherever you are, without any other economic data at all.

Economics has many valid uses. It can help us understand the economy and how it works, and perhaps it can help us formulate policy to fix some short-run problems. But our ability to model and predict the future is pretty much nonexistent. The economy is a complex adaptive system, and such systems are notoriously hard to predict.

[Stringbean]

@Sam_Stone

You should read Nate Silver’s new book. You might not be so quick to claim that economists are good at predicting the future. He does a pretty good breakdown of the evidence that shows that economic forecasts really aren’t much better than flipping a coin. Even forecasts just a few months in the future are not much better than chance.

I’ve made the same point before - look at the CBO’s forecasts for GDP, and compare them to what actually happened. You’d do just as well just looking at the average and doing a regression to the mean from wherever you are, without any other economic data at all.

Economics has many valid uses. It can help us understand the economy and how it works, and perhaps it can help us formulate policy to fix some short-run problems. But our ability to model and predict the future is pretty much nonexistent. The economy is a complex adaptive system, and such systems are notoriously hard to predict.

If I go on record predicting that China will suffer a major housing crash in the next decade, like many economists predicted would happen in the United States during the early 2000’s, will that convince you that learned hypothesizing is more valid than “flip-a-coin” analysis?

[Subterraneanus]

Welcome to 1867.

[bldysabba]

@Stringbean

If I go on record predicting that China will suffer a major housing crash in the next decade, like many economists predicted would happen in the United States during the early 2000’s, will that convince you that learned hypothesizing is more valid than “flip-a-coin” analysis?

Many economists predicted? Care to quantify many? Some did certainly, but the problem was that too few did so. How do you know which ones to listen to?

[Batistuta]

@bldysabba

Many economists predicted? Care to quantify many? Some did certainly, but the problem was that too few did so. How do you know which ones to listen to?

You listen to the ones who can support their predictions with 700 pages of well-researched evidence that has received almost universal critical recognition?

[Sam_Stone]

@Stringbean

If I go on record predicting that China will suffer a major housing crash in the next decade, like many economists predicted would happen in the United States during the early 2000’s, will that convince you that learned hypothesizing is more valid than “flip-a-coin” analysis?

First of all, that’s not the type of prediction I was talking about. I was talking about things like forecasts of GDP for the next 10 years (or even the next year), models of the effects of macroeconomic policies like Christina Romer’s stimulus estimates, etc.

Suggesting that a bubble will pop ‘within the next 10 years’ is not exactly an earth-shattering prediction. If you want a better test than that, how about you look at all the data, read as many economic analyses as you want, and then tell me which year the bubble will pop in the next ten. Then I’ll simply roll a 10-sided die, and use that number for my prediction of the year. Then we’ll see who’s closer.

Of course, one trial won’t mean much. Either of us could simply get lucky. We’d have to repeat the bet dozens of times to separate out the signal from the noise. But Nate did a pretty extensive analysis of predictions from economists for historical events in the past, and found almost zero accuracy. Even a few months before the crash of 2008 there was no consensus that a crash was coming soon. And after the crash, estimates for the depth of the recession and the speed of the recovery were wildly off the mark. This has been the pattern throughout modern economic history.

Economists and political pundits are really good at coming up with post-hoc explanations for why their predictions were wrong. It doesn’t change the fact that they’re usually wrong - so wrong that they are nearly indistinguishable from chance if the prediction is more than a few months into the future. And in the case of fiscal crises, not even that long.

[bldysabba]

@Batistuta

You listen to the ones who can support their predictions with 700 pages of well-researched evidence that has received almost universal critical recognition?

You do realise that if their well researched evidence had received universal critical recognition, the recession wouldn’t have come as the surprise it did, right?

[Evil_Captor]

@bldysabba

You do realise that if their well researched evidence had received universal critical recognition, the recession wouldn’t have come as the surprise it did, right?

I think he’s making a sly reference to the book that is the topic of the OP.

[BrainGlutton]

From AlterNet – How Piketty’s Bombshell Book Blows Up Libertarian Fantasies.

To understand the libertarian view of inequality, let’s turn to Milton Friedman, one of America’s most famous and influential makers of free market mythology. Friedman decreed that economic policy should focus on freedom, and not equality.

If we could do that, he promised, we’d not only get freedom and efficiency, but more equality as a natural byproduct. Libertarians who took the lessons from his books, like Capitalism and Freedom (1962) and Free to Choose (1980), bought into the notion that capitalism naturally led to less inequality.

Basically, the lessons boiled down to this: Some degree of inequality is both unavoidable and desirable in a free market, and income inequality in the U.S. isn’t very pronounced, anyway. Libertarians starting with these ideas tend to reject any government intervention meant to decrease inequality, claiming that such plans make people lazy and that they don’t work, anyway. Things like progressive income taxes, minimum wage laws and social safety nets make most libertarians very unhappy.

Uncle Milty put it like this:

“A society that puts equality—in the sense of equality of outcome—ahead of freedom will end up with neither equality nor freedom.… On the other hand, a society that puts freedom first will, as a happy by-product, end up with both greater freedom and greater equality.”

Well, that turns out to be spectacularly, jaw-droppingly, head-scratchingly wrong. The U.S. is now a stunningly unequal society, with wealth piling up at the top so fast that an entire movement, Occupy Wall Street, sprung up to decry it with the catchphrase “We are the 99%.”

How did libertarians get it all so backwards? Well, as Piketty points out, people like Milton Friedman were writing at a time when inequality was indeed less pronounced in the U.S. than it had been in previous eras. But they mistook this happy state of affairs as the magic of capitalism. Actually, it wasn’t the magic of capitalism that reduced inequality during a brief, halcyon period after the New Deal and WWII. It was the forces of various economic shocks plus policies our government put in place to respond to them that changed America from a top-heavy society in the Gilded Age to something more egalitarian in the post-war years.

<snip>

The ironic twist is this: The reason a person like the fictional John Galt would be able to rise from humble beginnings in the 1950s is because the Gilded Age rentiers lost large chunks of their wealth through the shocks the Great Depression and the deliberate government policies that came in its wake, thus loosening their stranglehold on the economy and society. Galt is able to make his fortune precisely because he lives in a society that isn’t dominated by extreme concentrated wealth and dynasties. Yet the logical outcome of an economy in which there is no attempt made to limit the size of fortunes and promote greater equality is a place in which the most likely way John Galt can make a fortune is to marry an heiress. So it was in the Gilded Age. So it may be very soon in America.

[Lantern]

Top Marginal Taxation and Economic Growth

This seems a reasonably decent study which looks at the relationship between the top marginal tax rate and growth rates for OECD countries 1960-2009. That’s a reasonably large period of time with lots of tax changes and I think it makes sense to stick to OECD countries with similar economic systems and income levels. The paper finds basically a reverse U relationship i.e. tax rates only have a negative impact on growth beyond a certain point, around 50-60%.

That seems about right to me and I suspect you would get similar results with other rates like the capital gains rate. If you look at post-war US history and calculate the average of the capital gains and top marginal rate the lowest was in 2003-2013 hardly a period of strong growth. Even the bubble-driven growth years were mediocre especially when you look at median income.

[bldysabba]

@Evil_Captor

I think he’s making a sly reference to the book that is the topic of the OP.

Ahh. Thank you. I was focused on the immediate point under discussion. In that case, he should know that the book has received nothing like universal critical acclaim.

[psikeyhackr]

Like this is so complicated it needs 700 pages.

http://www.spectacle.org/1199/wargame.html

Double-entry accounting is 700 years old and grade school kids have smartphones in their pockets more powerful than 1970s mainframes and economists can’t suggest something as simple as mandatory accounting in our high schools.

It is nothing but game theory where most people are not told how to play.

:smack:

psik

[Great_Antibob]

@psikeyhackr

economists can’t suggest something as simple as mandatory accounting in our high schools.

What in blazes does accounting have to do with economics or what economists should recommend?

That’s like suggesting plumbing is like car repair. Sure, you might use a wrench in both, but the devil’s in the details. And everywhere that’s not the details, too.

[psikeyhackr]

@Great_Antibob

What in blazes does accounting have to do with economics or what economists should recommend?

That’s like suggesting plumbing is like car repair. Sure, you might use a wrench in both, but the devil’s in the details. And everywhere that’s not the details, too.

Yeah, an economy of pawns that can’t manage their money makes more sense to economists.

psik

[Budget_Player_Cadet]

@psikeyhackr

Yeah, an economy of pawns that can’t manage their money makes more sense to economists.

psik

Yeah, if you think the average person knows how to manage their money… well, you’re wrong.

[adaher]

@Lantern

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2267911

This seems a reasonably decent study which looks at the relationship between the top marginal tax rate and growth rates for OECD countries 1960-2009. That’s a reasonably large period of time with lots of tax changes and I think it makes sense to stick to OECD countries with similar economic systems and income levels. The paper finds basically a reverse U relationship i.e. tax rates only have a negative impact on growth beyond a certain point, around 50-60%.

That seems about right to me and I suspect you would get similar results with other rates like the capital gains rate. If you look at post-war US history and calculate the average of the capital gains and top marginal rate the lowest was in 2003-2013 hardly a period of strong growth. Even the bubble-driven growth years were mediocre especially when you look at median income.

Looking at top tax rates is useless though because of all the loopholes. Only the political unconnected ever pay the top rate on the bulk of their income.

This makes sense though. Politicians are rich. No one likes to pay high taxes. So naturally politicians will carve out loopholes to shield themselves from the high taxes. and of course some more loopholes for their political allies. By the time the dust settles, the only people paying the top rate on most of their income are the suckers who didn’t make the right friends.

Rather than look at income taxes, I think a more reliable indicator would be social insurance taxes, because those usually affect all workers and there are few, if any, loopholes. VAT rates would also be better to look at to measure the effect of taxation on an economy, assuming the VAT or other sales tax is a relatively straightforward affair. Income taxes are just too unfair, with two people with same income paying vastly different rates.

Or, as Milton Friedman recommended, stop worrying about taxes and just count spending as taxation. Spending is taxation, so looking only at % of GDP on government spending is a good way to look at the tax burden and its effect on an economy.

[Lantern]

Actually both mainstream economists and supply-siders consider the top marginal rate a crucial indicator of the incentives created by the tax system because people make decisions at the margins and rich people are disproportionately involved in running companies. So examining the relationship between the top marginal rate and growth is useful and the evidence seems to suggest that rates of 40-50% don’t reduce economic growth. Obviously it’s not the only thing that matters.

[adaher]

It doesn’t hurt growth, but it sure distorts the economy by forcing the rich to follow the politicians through their favored loopholes.

[BrainGlutton]

@adaher

It doesn’t hurt growth, but it sure distorts the economy by forcing the rich to follow the politicians through their favored loopholes.

Fairly spot analysis, except that, in that scenario, you are confused as to who is follower and who is leader.