Relatively Minor?

So, I continue to be annoyed with Jonathan Chait's book. Here's the sort of thing I have in mind. Page 19:

From 1947 to 1973, the U.S. economy grew at a rate of nearly 4 percent a year — a massive boom, fueling growth in living standards across the board. During most of that period, from 1947 until 1964, the highest tax rate was 91 percent. For the rest of the time, it was still a hefty 70 percent. Yet the economy flourished anyway.

None of this is to say that those high tax rates caused the postwar boom. On the contrary, the economy probably expanded, despite, rather than because of those high rates. Almost no contemporary economist would endorse jacking up rates that high again. But the point is that, whatever the negative effect such high tax rates have, it's relatively minor. [emphasis mine]

My response to this was: huh? Two things Chait either does not understand or takes pains to ignore: (1) the relevant counterfactual and (2) the compounding nature of economic growth. He concedes that these astronomical rates put a brake on growth — and for about a third of a century (i.e., the '47 -'73 boom plus the following downturn until the '8os cuts.) So what would the growth rate have been with much lower tax rates? I don't know. Depends on how much lower, obviously. But, other things equal, higher. (Anyone know of a rigorous estimate?) And Chait agrees.

Now, if it had as much as 1 percent higher on average, that's going to be close to the difference between GDP per capita tripling rather than doubling over that time span — which is to say, the difference between what we got and twice as much. Obviously, an additional doubling of GDP is not minor. Even were the increase in growth from lower taxes only a couple added decimals on the average growth rate, over 30 years it still would have added up to something much more than “relatively minor”. Does Chait think that something like a 20 or 30 percent higher average income in the lowest decile would have been “minor” for the poor? What if that amount was larger than all the money actually spent on poverty over that period?

U.S. GDP per capita is now about 30 percent higher than much of Europe's. There is good evidence that this has to do with incentives to work, definitely including tax rates. Is this difference “relatively minor”? What do you suppose Chait would need to know to admit that the effects of high tax rates on growth and well-being are “major”?

More Chait Action

Jonathan Chait replies to my criticisms. He basically seems to me to say:

(1) Like the author of The Party of Death, I am completely confused by why anyone would think this book is a partisan hatchet job.

(2) Low taxes are actually good. I just have a hard time saying that clearly.

(3) George W. Bush's tax policy made the system less progressive, and ran up the deficit, which is a problem for me for reasons I won't disclose.

(4) People who wanted to privatize social security are either stupid or lying when they tell you that they would have made it more progressive. I could tell you why, but I won't.

(5) The state really does own everything, and cutting taxes for the rich really is upward distribution. I have arguments to that effect, but I'd rather not debate it. Instead, I'd rather discuss my book in a way that takes all my wildly contentious normative premises for granted, while still pretending to be a pragmatic empiricist.

Meanwhile, I've added a follow-up post on why Chait's class war thesis really is incredible.

TPMCafe Book Club

I'll be joining Stephen Moore, Megan McArdle, Ross Douthat, Ezra Klein, Paul Krugman, and Jonathan Chait over at TPMCafe for a discussion of Chait's new book, The Big Con: The True Story of How Washington Got Hoodwinked and Hijacked by Crackpot Economics. Chait's first post is up, and, at a glance, he appears to me to make a number of questionable claims. I think I may chime in later today. Stay tuned. 

Joe Sixpack on Taxes

Regarding the supply-side foofaraw, I loved this comment by “8” on this Alex Tabarrok post:

How hard is this to understand? The taxpayer doesn't care about maximizing government revenue.

Politician A: Mr. Joe Sixpack, we can maximize government revenue by raising taxes by 10%, because you see, we'll only lose 9% to slower growth, so our revenue actually increases! Then we can spend it in lots of ways to make you happy!

Joe Sixpack: So, you're raising taxes by 10% and you're going to slow the economy?

Poltician A: Don't look so glum! It's for the children!

Politician B: Me cut taxes. You keep money, economy grow fast. Ugh. Me like cookie.

Joe Sixpack: I pick B.

That pretty much gets to the heart of this. Or, as NBER chief Martin Feldstein puts it:

financing additional government spending by an acrosss the board rise in all marginal tax rates would make the cost per dollar of government spending equal to $1.76.

These two facts — that the actual revenue is only 57 percent of the static gain and that the deadweight loss is 76 cents per dollar of revenue — should be central to any consideration of tax policy. And yet they are not.

It is possible that the state can make its citizens better off by taking $1.76 to spend $1.00, if those very expensive dollar bills are spent on highly valuable public goods folks can't coordinate to provide privately. But I reckon this kind of bona fide public good is a pretty small part of the existing budget.

Also,  people's money is, well,  their money, and it is obviously wrong for other people to take it from them absent a special justification. If the government is taking more than is justified, then it should cut taxes and cut spending. It happens that the government is taking more than is justified. So it should cut taxes and cut spending. It seems like a number of folks on the left are practically hyperventilating with excitement over this supply side business, but it strikes me that 8 has both the economics and the politics right.

Epistemic Public Service Announcement

Ezra notes, with apparently incredulity, that

there's no outlet in the world that publishes as many economists — and good ones, too, Nobel Prize winners — as The Wall Street Journal editorial page. We know, and many of those economists know, that that editorial page is mendacious, extremist, and intellectually sloppy. But they nevertheless publish there, lending their titles and credibility to an outlet that continually promotes a fundamentally poisonous and empirically laughable ideology.

Yes Ezra, we know you disagree with the politics of the WSJ editorial page. But I'm sure it seems to many intelligent people that the collected work of Robert Kuttner, the founder and editor of Ezra's magazine, is extremist and intellectually sloppy (if not always mendacious) and “promotes a fundamentally poisonous and empirically laughable ideology.” Yet Ezra still chooses to write for The American Prospect. And so do many perfectly respectable academics. Why? Probably because its editorial vision is closer to their views than the relevant alternatives. And, just perhaps, the economic outlook of the Journal editorial page is closer to the views of many Nobel Prize-winning economist than the relevant alternatives, as inconvenient or annoying as that fact may be to some people. Opinion pages and magazines are not scholarly journals. It's pretty tendentious to suggest that the Journal's page is singular in its transgressions against academic evidential standards.

Of course, all this opinion-mongering continues ceaselessly because there are real, substantive empirical and moral disagreements, none of which may be settled simply by humbly claiming all virtue and forcefully declaring the other guys to be bad people indifferent to the truth.

Prebuttal on Immigration and Poverty

One of the Economist's Free Exchange bloggers, with whom I mysteriously seldom disagree, last night presciently rebutted Robert Samuelson's deplorable column today in the Post. Samuelson, like Robert Rector, who the Economist blogger was addressing, advises that we reduce the poverty rate by allowing fewer poor people to cross our borders—which is to say, by promoting poverty. As the Economist blogger put it:

It takes a special kind of brazenness to propose a reduction of the national poverty rate at the expense of ensuring that more people stay poor by denying them opportunity to set foot in the nation.

If Mr Rector cared about actual human poverty, as opposed to some statistic about the number of Americans beneath what he agrees is an arbitrary line, he'd favour an increase in legal immigration and some kind of guest-worker program. If these policies were to inflate American poverty rates, as they surely would, that would be something to be proud of. From a humanitarian perspective, if a wealthy nation's poverty rate improves, then it isn't letting enough poor people in.

Rector and Samuelson seem to be in the grip of what I like to call the Augusta National Golf Club model of the nation state. It's our club, so we can keep women (or poor people, or anyone) out if we like.

Who's Afraid of Mexicans?

People who never encounter them.

Kerry reports at Reason that state and local tough-on-immigration laws come primarily from places next to no one immigrates to.

In a report to be published by the American Immigration Law Foundation (AILF) in September, [San Diego State sociologist Jill] Esbenshade finds that almost 80 percent of the localities where ordinances have been discussed had below the national average of Latino population share in 2000.

I found this contrast especially illuminating:

Meanwhile, Missouri’s newly deputized immigration enforcers have claimed the right to detain even immigrants who would not otherwise be arrested. As Gov. Blunt fills the state's detention centers, he might ponder the last time the state experienced an “unnatural influx” of migrants. In the first half of the 20th century, another politically unpopular group—Southern blacks—flooded into Missouri, bringing culture and identity, barbeque and blues. School kids learn to call that the “Great Migration”; politicians refer to today’s “immigration crisis.”

Yesterday's cultural synthesis is today's cultural amnesia, I guess. Which reminds me that I keep forgetting to visit Kansas City's American Jazz Museum.