Thursday, April 21, 2011

Krugman Calls Out Bizarre Incoherent Economists

Paul Krugman singles out Steve Landsburg and Alex Tabarrok for one of the wackiest theories I have ever heard of (And in the field of economics that says a lot). Krugman correctly calls the theory bizarre.

Landsburg writes, and Tabarrok endorses, the idea that the government can't raise revenue by taxing idle rich people. Yup, can't be done, says Landsburg. Here's Landsburg explaining his theory:
 Stevens wants to tax the “idle rich”, her Exhibit A being Robert Kendrick, heir to the $84 million Schlage Lock Company fortune. According to Ms. Stevens, Mr. Kendrick appears to do pretty much nothing but park and re-park his four cars all day long. Taxing people like Mr. Kendrick, she says, has to be part of any solution to America’s fiscal crisis.

Here’s what Ms. Stevens misses: Assuming the facts are as she states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.
Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick, by Ms. Stevens’s account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.
Tabarrok over at Marginal Revolution calls this an "excellent economics puzzler" that is "quite right". In fact, it is simply dumb. I mean really dumb. Krugman even spotted it.

Krugman does go off on a tangent on what the purpose of taxes are, which has nothing to do with this "puzzler". But that's Krugman, you can't expect him to get the entire analysis correct. But at least he is solid enough to spot real dumb.

Here's the problem with Landsburg's theory. Taxing the idle rich does not in any sense mean you have to tax their consumption, which Landsburg defines as near zero (and implies that's the only thing that can be taxed). The very definition of idle rich means they have "idle" wealth.  Landsburg amazingly ignores the fact that this "idle" wealth can be taxed, and is indeed generally taxed, at the federal level via capital gains taxes, taxes on "passive" income and estate taxes.

This most assuredly raises government revenues. Indeed, in the case Landsburg references, the man is worth $84 million. And the columnist proposing a tax on this man's idle wealth is proposing an estate tax of 100% of the man's wealth over $2 million. Somehow Landsburg in his nutty model, with the approval of Tabbarok, has manged to ignore a tax of $82 million on the estate of one person. In Landsburg's model such taxation won't increase government revenues, since he has designed out of his model the very tax that the columnist is proposing. How nuts is that?

On its surface the idea that you can't tax the idle rich to increase government revenue sounds like a nutty view. A little thinking and its obvious that it is nutty. Landsburg and Tabarrok are basically ignoring an idle rich man's savings and cash balances as part of their economic model and assuming that the only thing that can be taxed is his consumption, which they define as near zero. This is a totally bizarre theory which demonstrates the sad state of much economic theorizing today.

Krugman is right, when he says:
...there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.


  1. That last comment there by Krugman looks awfully similar to a point I've made more than once over the years. It's also something Murray Rothbard has said quite often. Isn't a vortex to hell supposed to open up or the apocalypse comes when Krugman sounds like Rothbard?

    Remember kiddies:
    B.S. = We all know what that means
    M.S. = More of the Same
    Ph.D. = Piled Higher and Deeper

  2. It would have been much better for him to get behind the notion of "idle wealth". While it is possible that his wealth could be stashed in a manner that would not have much impact on the economy, it is far more likely that it is out trying to multiply. Leaving aside for the moment that fact that it is Mr. Stevens own damn money, who do you suppose would have a better chance (and motivation) at making the money grow: Stevens, the government or any of the economists named in this piece?

    Folks can babble about the seemingly ill gotten gains of speculators, but making money grow requires one to invest it where it is most needed when it is most needed. Money grows when it makes itself useful.

  3. Landsburg's point works perfectly. The point is that taxing idle resources is equivalent to printing up money. After all, that money had not been previously flowing through the economy and thus did not have the ability to affect the price of money. After the government taxes this money it will use it for its own consumption which will mean more money being bid against the same goods and services thus leading to a decrease in the price of money. This will mean that the cash held by the feds will not buy as much. Thus the taxation is futile. This is how I understand it. For more, see Landsburg's follow-ups as well as Bob Murphy on this.

  4. In fairness, the focus here and of Krugman seems to be on his use of the word revenue early on, which he has misused. He seems to be saying that taxation of "idle resources" is always a zero-sum game. Later on he says that the state can indeed increase revenue with this type of taxation. I seem inclined to largely agree that taxation of truly idle cash (under the mattress) would be a zero-sum game as it is inflationary, if it has remained idle long enough to have lost all influence on prices. This is seemingly immeasurable in detail, but easily understandable in aggregate. In a very awkward and unfinished way Landsburg seems to say that with this type of tax the state is gaining only at the public's expense. Instituting a 99% Duck Tax and collecting the $9 trillion sitting in Scrooge McDuck's vault (it has been there in secret since 1984) would double M2, not the stock of goods and services.

  5. I am not sure what Ms. Stevens even means by "idle". Is she referring to the fact that this wealthy chap does nothing productive all day or is she talking about his wealth? Common sense tells me that she has no clue about this mans wealth or how it is invested, so that leaves me to assume that this dimwit Stevens has made the assumption that if an individual is idle so to must be their wealth. That is not only absurd but very illogical. Of course, the immorality of Ms. Steven's thinking exceeds even her stupidity. Following Ms. Stevens logic, perhaps the government should confiscate/steal the idle money sitting on the balance sheets of corporations and banks.

  6. I would call into question the very concept of "idle wealth." I would imagine that is EXTREMELY rare. Most "idle rich" are living off investments and don't have money piled up in their basements. These investments are working as stimulus at least as well as any government program (apparently, even if the investments are all overseas ala Federal Reserve bailouts). Even if the money is in a bank, it is theoretically available for other people to borrow and use.

  7. Bigger Is Not Always Better

    The WalMarting of America where Volume Dealers take the lion share of the spoils. It is in my view a top heavy system that will overburden the foundation of American invention and new job creation (through self employment and small businesses). It started with the outrageous self employment tax by R. Reagan and continues through lobbying in congress. Quick immediate increases to bottom lines by CEOs and immediate short term results by politicians so they can win popularity polls and elections and big salaries. These (blind to long term good for this country) jerks are going to destroy this country. Not since 1929 (ring a bell?) have the incomes of the top 1% been as high as they are now and at the same time max capital gains taxes are at the lowest. Any skillful, greedy, back-stabbing jerk can get rich if they have no sense of right or wrong or long term good. Bloomberg mentioned possible restraints on executive's compensations such that they will receive said benifits way down the road if their greed hasn't destroyed the company first. It's a great idea, but will it ever get implemented? I doubt it, and why should it have to be law? For years those in banking and congress and at the heads of corporations were assumed to be the cream of the citizen crop, but these days that assumption has been proven false. Banks have suckered naive Americans into way more debt than they can handle just like they did back in the 80's to the farmers and then committed fraudulent forclosures on their victims and have gotten away with it.

    The rich don't creat jobs. they invest in hedge funds that destabilize the market just like Long Term Capital Mgmt did in the 90's. We are not experiencing inflation! Commodities have been driven up by fear and greedy bankers and hedge fund speculation. The average American's 401k hasn't got a chance. The system is corrupt because those at the top are corrupt.

    See below for the smoking gun in the hands of government, corporations and the hyper-obcenely-rich:

    Wages of private sector workers compared to public sector (second graph down):

    Corporate Taxes:

    On the charts below notice how extreme incomes and low cap gains tax coincides perfectly with 1929 and present day.

    Chart of top 1% income:
    Cap Gains Tax Rates:

    Also look here for another chart that has two peaks (1929 and today):

    But this one takes the cake:

    Republican Scam:

    Stop worshipping political idols! Vote Out All Incumbents! Last time it was Democrats. This time make it Republicans. (They resist tax increases for their rich buddies.)

    Impose Term Limits! Let em know we are still out here and we mean business!
    It's time for the lying Republicans to go! Next time it will be the Democrats turn again!
    Throw em out!