Thursday, September 06, 2007

Economic crackpottery? An interesting read... 

An interesting book out in the USA doing a hatched job on such supply-side concepts as the ‘Laffer Curve’ (which purports to show that cutting taxes can lead to an increase in tax revenue). The argument of the book by Jonathan Chait is that an economic cult has driven out sensible economic discourse and tries to show the nature of that cult.

If it is a cult, what are its traces in the UK? Supporters of the
Laffer Curve in particular might like to review the arguments of this book.

Excerpts for Chait’s book ‘The Big Con’ are in ‘The New Republic’ this month.

Like most crank doctrines, supply- side economics has at its core a central insight that does have a ring of plausibility. The government can't simply raise tax rates as high as it wants without some adverse consequences…... And there are justifiable conservative arguments to be made on behalf of reducing tax rates and government spending. But what sets the supply-siders apart from sensible economists is their sheer monomania.

And the core of the argument under attack?

The core principle is that economic performance hinges almost entirely on how much incentive investors and entrepreneurs have to attain more wealth, and this incentive in turn hinges almost entirely on their tax rate. Therefore, cutting taxes-- especially those of the rich, who carry out the decisive entrepreneurial role in the economy--is always a good idea.

Chait says of the propounders of such theories that “'some of them (are) ideological zealots, others merely greedy, a few of them possibly insane".

The work of two authors (George Gilder’s “Wealth and Poverty” and Jude Wanniski’s “The Way The world works” come in for particular rubbishing:

The literary and intellectual style of "The Way the World Works" is immediately familiar to anybody who has ever sorted submissions at a political magazine. It is the manifesto of the misunderstood autodidact--an essay purporting to have interpreted history in a completely novel and completely correct way, or to have discovered the key to eternal prosperity and world peace, or some equally sweeping claim. The Way the World Works fits precisely into this category, except that, rather than being scrawled longhand on sheaves of notebook paper and mass-mailed to journalists, it was underwritten by the American Enterprise Institute, has been published in four editions, and features introductions attesting to its genius from such luminaries as Bartley and the columnist and ubiquitous pundit Robert Novak.

Another interesting read, too many books to catch up with …sigh.

Jonathan Chait “The Big Con: the true story of how Washington got hoodwinked by crackpot economics” Houghton Mifflin Sept 2007

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The Laffer curve does not say that tax cuts are always good though.

It says that there's an optimal level of taxation to maximise government revenue. It is thought most governments are actually above this point.

I think that's perfectly reasonable - if you tax too much you reduce economic activity and therefore takings, as well as making the incentive to avoid taxation higher.
Also the costs of collection go down with simpler tax systems, and simpler ones are often lower.

People who support tax cuts below this point on the curve have other reasons - shrinking the state, its functions and its power mostly (a noble aim in my book).

Tax cuts for the rich - well, if you're taxing them until their pips squeak then you're actually going to get little tax revenue from them since they have the resources to avoid it (inheritance tax is easily avoided by the rich for instance) so lowering taxes makes sense, hence the increase in revenue which can come from a flat tax (although they never say if other taxes do increase or not).

So, the Laffer curve seems sensible to me, but its use by politicians to justify some things is just window dressing to disguise other motives.
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