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Tony Quain
Tony Quain is a commentator on free-market economic theory and policy. He has a Ph.D. in economics from George Mason Univ. More >>
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Inequality today
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Link: http://economics.mit.edu/files/9834

Sorry I forgot to post this earlier in the week (this article came out last week and was published on RealClearPolicy on Monday).
Two Harvard/MIT economists take apart Piketty's "laws of capitalism".

Thomas Piketty’s recent book, Capital in the Twenty First Century, follows in the tradition of the great classical economists, Malthus, Ricardo and Marx, in formulating “general laws”to diagnose and predict the dynamics of inequality. We argue that all of these general laws are unhelpful as a guide to understand the past or predict the future, because they ignore the central role of political and economic institutions in shaping the evolution of technology and the distribution of resources in a society. Using the economic and political histories of South Africa and Sweden, we illustrate not only that the focus on the share of top incomes gives a misleading characterization of the key determinants of societal inequality, but also that inequality dynamics are closely linked to institutional factors and their endogenous evolution, much more than the forces emphasized in Piketty’s book, such as the gap between the interest rate and the growth rate.

And the conclusion:

Piketty’s ambitious work, fashioning itself after Marx’s Capital, has focused a great deal of new attention on inequality. Piketty pro¤ers a bold, sweeping theory of inequality applicable to all capitalist economies. Though we believe that the focus on inequality and the ensuing debates are very healthy and constructive, we have argued that Piketty goes wrong for exactly the same reasons that Marx, and before him Malthus and Ricardo, went astray: his approach and general laws ignore both institutions and the ‡exible and multifaceted nature of technology shaped by institutions. We have further suggested that the history of inequality over 20th century in economies such as South Africa and Sweden shows why the focus on top 1% inequality is unsatisfactory and why any plausible theory of inequality has to include political and economic institutions at the center stage. We have also provided a brief outline of a framework that squarely puts the spotlight on institutions, their nature and evolution in the study of inequality.

Link: http://www.nationalreview.com/article/386516/taxes-look-canada-amity-shlaes

Amity Shlaes on the increasingly competitive tax system in Canada, compared to the U.S.'s increasingly un-competitive one:

Canada has emerged competitive: A 2014 KPMG study of tax costs for business ranked Canada first among ten major countries, its costs 46.4 percent lower than those in the United States.


Another feature at work was Canada’s awareness that nations have to compete to draw business. Such awareness is simply lacking in the United States. The fact that the world runs to us (buys our bonds) when the U.S. is in trouble has reinforced our provincialism. The fact that the Chinese government does so, for its own reasons, also supports our national illusions. But tax inversions reveal what the bond prices do not: U.S. tax rates are too high. Our system of worldwide taxation, taxing companies wherever they work, causes them to shift to nations like Canada, which taxes companies only for their Canadian activity.

Instead of making our corporate tax code more competitive, President Obama blasts corporations for leaving the country and calls tax inversion an unpatriotic tax loophole. Would he call an individual who left America to live someplace else, even if that individual still does business here, unpatriotic? Do we call immigrants unpatriotic when they leave Mexico or China or India to come to the U.S. to enjoy our freedoms? What if the person who leaves the U.S. was once an immigrant, and now they are simply returning to the country of their birth? Are they unpatriotic?

Patriotism in the U.S. is for the most part (to put it lightly) about our freedoms and our ideals, not our ethnicity, language, or even culture. It is about the principles that underlie low taxes. So if someone leaves the U.S. because we have betrayed those ideals, who is to blame?

Link: http://cafehayek.com/2014/08/minimum-car-price.html

Saw this from yesterday. Let's apply supply and demand principles to ... labor markets! Why people have to be told this is sadly a great failure of the economics profession.

Link: http://www.aei.org/article/health/global-health/how-the-world-is-becoming-more-equal/

Read this excellent eye-opening article in the WSJ today.

I also read a good summary and blog post about it by Dylan Pahman, Which Inequality? Trends Toward Equality in Lifespans and Education

The current focus on income inequality, instead of equality in general, misses a lot. Like the narrowing of inequality in life expectancy, health outcomes, and education. One interesting point Pahman makes:

More poor people living longer means more poor people, which contributes to greater income inequality due to the increase in population. That is, for example, the inequality between three rich people and three poor people is smaller than that between three rich people and nine poor people, even when those nine are better off than the three poor people in the first comparison.

... which is useful perspective on global income/wealth inequality.

But the larger point to be taken from his and Eberstadt's articles is that there is more to life than money, and many of the non-pecuniary drivers of human happiness and well-being are getting better for everybody, especially those without money. Which further means that the importance of money (both income and wealth) is generally decreasing, as basic needs for the world's poor are being satisfied like never before (mostly due to globalization). So rather than economic inequality becoming a raging front-burner issue, it should (and eventually will) fade further and further into the background, despite the rants of upstart French economists.

Economists believe that utility, not money, is the ultimate good (or at least is more encompassing). Income inequality is a proxy for economic inequality, which is a proxy for utility inequality, i.e. some people being "better off" than others. I am not saying that it should be the goal of the state to pursue that, rather than let the chips fall where they may. But for those who do think "equality" is a noble ideal, think broader. If life expectancy, health outcomes, and personal education fulfillment are components of personal utility right alongside economic well-being, then the narrowing of inequality in these areas should matter right alongside economic inequality.

Link: http://m.nationalreview.com/article/386088/vacations-and-vocations-kevin-d-williamson

Excellent article.

Beyond all the politics (i.e., personalities) of it, Williamson makes this point:

At a DNC fundraising dinner in 2010, President Obama boasted: “We provided health care to 4 million children.” Of course he did nothing of the sort, but there is an entire cracked political philosophy in the president’s error: Who provided health care?

Politicians do not provide health care. Doctors, nurses, technicians, orderlies, pharmaceutical researchers, medical-device manufacturers, and junior senators from Kentucky volunteering in Guatemala provide health care. Politicians do not feed the hungry — farmers, grocers, long-haul truckers, and Monsanto feed the hungry. They neither sow nor reap. Barack Obama gives the impression of being a man who probably couldn’t change a tire, but we have persuaded ourselves — allowed ourselves to be persuaded — that such men must be central to our lives. The wheat farmer in Kansas or the contractor in Pittsburgh? All they do is keep the world fed and housed.

I think the true motivation of America's elite class (this applies mostly to liberals, but also some conservatives) is quite different than most people think. They do not want to help people, at least not in any meaningful way beyond the superficial. They want to take the value of what other people produce, and claim it for themselves. Knowing that they can't get away with using (or spending) this value themselves (as kleptocrats), they do the next best thing: they force other people to cough up the dough, then direct it to some constructive or charitable purpose, and then claim that the construction or the charity is their doing, as Obama does in the above quote. Why bother spending years of blood, sweat, and tears to build an industrial empire from whence you can be a great philanthropist (like Vanderbilt, or Cernegie, or Rockefeller)? Instead just become a legislator or administrator, sign on to some vastly expensive entitlement program funded by taxpayers, and then claim that all that spending and all its beneficial consequences were your creation. People just might believe you.

One reason why progressives create dependency programs instead of helping people help themselves: it's much easier to claim credit for the sustenance of people on a government plantation than to claim credit for the successful lives of people who live independently.

One thing I've noticed recently is the lapse into confusion of short-term macro-economics with long-term macro-economics, and more specifically the confusion of economic expansion with economic growth.

Economic expansion is when the under-utilized capacity of an economy, represented by capital and labor, is put to greater use through greater investment and consumption purchasing (as Keynesians would say, aggregate demand) that in turn causes employers to hire and businesses to add inventories and capital. When the economy is not at full employment, there is room for economic expansion.

Economic growth is when the economy becomes more productive with the same labor and capital inputs or adds productive capacity by adding labor to the labor force. It is not the same as expansion. Think of a pie. Expansion is filling the pie dish up; growth is making a bigger pie dish. In many ways, economic expansion is macroeconomic (making sure we are using what is there) while economic growth is micro-economic (finding ways to make people more productive in particulars).

Keynesian economics has never been anything but the short-term goal of economic expansion--making sure we are getting the unemployed to work by stimulating (I would say beguiling) businesses to hire more people and open more stores with the expectation that they will be selling more products in the near future.

Yet lately I have seen many articles by economists on the left who seem to think that the conclusions of Keynesian economics (e.g., that the stimulus of greater consumer spending will increase economic output) hold in the long-term, not just the short-term. While it is not clear that they think deficit-spending is sustainable in the long-term (that the budget would never need to counter stimulating deficits with un-stimulating surpluses, at some point), it is clear that they think higher consumer spending, as it relates to national income, will result in greater economic output, or even economic growth. For example, Joseph Stiglitz wrote this:

Taxes on the rich and superrich, who save a large fraction of their income, have the least adverse effect on aggregate demand. Taxes on lower income individuals have the most adverse
effect on aggregate demand. Thus, increasing the progressivity of the tax system not only improves the distribution of income – reducing the inequality that has come to mark the country – but also stimulates the economy. And doing so is, of course, good for the country as a whole.

This is within the context of a call to increase the progressivity of the tax code permanently; not to get us out of our current economic slump, but as a permanent change in the structure of a tax system that is already one of the most progressive income taxes in the world.

Keynesian economics, which has always been a theory of macro-economic stabilization, smoothing out the business cycle and that sort of thing, is now being used to promote income and wealth redistribution by claiming that poorer people have higher marginal propensities to consume, and thus will boost aggregate demand more and thus increase economic output ... forever.

It is no surprise that left-wingers, who always have a myopic, short-term, snapshot view of the world, would forget the assumptions of Keynesian economics and thereby make the mistake of taking a simplified concept (i.e., priming aggregate demand for short-term economic expansion) and extending it everywhere. There are many reasons why one can not do this in principle, and many more why one can not do this in this case: (1) Keynesian economics must eventually balance deficits with surpluses in times of full employment or capacity utilization; (2) Keynesian economics does not have or intend to have a complete theory of savings and investment; (3) Keynesian expansions are intentionally counter-cyclical, and thereby not intended to be viable long-term policies; and (4) Keynesian macro-policy does not intend any improvements in productivity or population growth. These are problems with using Keynesian economics in the long-term, even if you believe that Keynesian economics works in the short-term. If you believe that Keynesian economics is fundamentally flawed (some economists) or has its flaws (most economists), the problem with extending the theory to macro-economics generally, not only in the short-term, are insurmountable. But in any case these problems are discarded because of convenience, ignorance, and political expediency.

Keynes' theory of economic expansion can never serve as a theory of economic growth. The sustained growth of economies can therefore not be explained by simplified concepts such as "the multiplier" or "the marginal propensity to consume". Those explain economic expansion (and explain it poorly), but can not explain economic growth. Therefore, attempts to claim that there is a viable theory of how economic equality causes economic growth can not be sustained, at least not by virtue of Keynesian theory.

Link: http://finance.yahoo.com/news/how-your-boss-will-run-your-life-in-a-few-years-165905475.html

It's pretty typical of left-wing types and their unwitting acolytes to generally have a positive view towards government and a negative view towards businesses. When you read an article like this, you begin to see how upside-down that thinking is.

It reads like a slackers lament, woe will be us drones who corporate overseers expect to work and will find ingenious and technologically inexpensive ways to find out if we are actually doing anything. Newman's opening sentence, "You might think the typical workplace is pretty Orwellian these days," may get smirks from twenty-somethings who compare corporate culture to college, but to those of us who have worked in corporate America for many years, that thinking is upside-down. It's not so much that corporations are any less draconian than they used to be, but the opportunities for employees to disengage from work and engage in play are increasing like never before. Internet, phones, and social media provide outlets for non-work behavior on-the-job just about anywhere, and the temptation to substitute facebook time for productivity time does not let up. To the extent that companies are trying to correct those impulses, it is only deserved.

Newman outlines some specific gripes. Let's look at them:

  1. Companies will monitor employees like lab rats. Actually, I would expect that apart from your own home, private businesses will be one of the few places where government CCTV cameras won't be able to intrude. Newman says the monitoring will ostensibly be about employee health, but really be about productivity. I think people would welcome checks on productivity, as long as firms are up-front about it.
  2. Performance will be computed like an SAT score. Hip, hip, hooray! I've been dying for this. Who among us is not dismayed by the lack of objectivity and specificity of today's "performance reviews"? What better way to avoid workplace discrimination? Slackers may hate it, but most people want their employers to see them shine and recognize it. Pay for performance. Justice has arrived!
  3. Corporate indoctrination (aka brainwashing) will intensify. In the future, "rigorous recruitment processes [will] ensure new employees fit the corporate ideal"? Another winner! Who wants to work where they don't fit in?
  4. Contract employees will displace full-timers.More flexible labor contracts make for a more efficient labor market. The easier it is for a company to let you go, the easier it is to get hired. You won't be stuck in that job you took right out of college because you were always afraid of losing your benefits or being on unemployment for eons. It will be like someone being on a set meal plan (like in prison) suddenly able to make a different meal every night.
  5. Specialized skills will continue to bring top dollar. That's because specialization (i.e., the division of labor) is what gave us the wealth of nations. If it brings top dollar to business, business should pay top dollar for it.
  6. Workers with commonplace skills will struggle. Who would complain about this? I know: the guy who says, "I just want a commonplace skill." Humanity thrives on individuality, and now they will be paid for it!

Really, only the first of these has any kernel of "run your life" in it. Numbers 2, 3, and 4 are technological breakthroughs that will be more beneficial and helpful to workers than not. And numbers 5 and 6 are natural and necessary matching of value and compensation.

But the real point is, ultimately businesses only have as much power over you as you give to them, while ultimately governments have unlimited power over you despite your input. Your employment (if you work for someone else's business) is a mutual agreement that you give your time and effort towards some business goal in exchange for a bundle of pay and benefits. If a business wants a stricter interpretation of "your time and effort," and you don't like that, you can always leave. In most cases you can leave them more easily than they can leave you: workers have more power than employers in this regard. Government, on the other hand, you can not leave. Though some may say that it's really not that easy to quit one job and move to another, it is orders of magnitude more difficult to quit one country and move to another. And while there are thousands of employers to choose from (not to mention the possibility of creating wealth yourself), there are less than 200 countries. And given that an individual has a one-in-a-gazillion chance of having his single vote affect an election, the idea that democracy allows you to change your government is a joke.

If Mr. Newman or anyone else is afraid of having their lives controlled, government is the real menace. Imagine an employer who says, "you have to put 12.4% of your pay into my pension plan, where I determine the investments, that pays next to nothing, that won't pay at all if I go bankrupt or have other commitments, and where I can change the rules and increase your contribution at any time". Now imagine that that is every employer. Now realize that it is your government, in what is its least unpopular program. Who's the bogeyman now?

Link: http://econlog.econlib.org/archives/2014/08/our_poverty_and.html

An excellent article about the problem of poverty and the problem of undeserved guilt.

Caplan contrasts American poverty, which is largely (or somewhat) deserved, with African poverty, which is largely (or somewhat) undeserved.

Even if you maintain that African and American poverty are both forgivable, then, you should still concede that African poverty is more forgivable than American poverty. While the African poor could sharply improve their lives with better choices, even perfect choices are not a reliable way for them to escape poverty. Poor Americans, in contrast, can reliably avoid poverty with basic prudence: finish high school, work full-time, delay child-bearing, and stay sober. "I couldn't escape poverty even if I tried" has to be more forgivable than "I could have escaped poverty if I tried, but I sadly wasn't raised to try."

An excellent closing paragraph:

In addition, though, blame helps us correctly identify "problems." If your suffering is entirely your own fault, the main "problem" is not your suffering. The main problem is that the guiltless may feel guilty for failing to help you. Thus, if a woman catches her husband cheating and resolves to divorce him, the morally relevant danger isn't that the husband will feel sad, but that the wife will feel sorry for him. If your habitual drunkenness destroys your family and career, the morally relevant danger isn't that total strangers fail to help you, but that the fallout of your vices will weigh on the consciences of innocent passersby.

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