Bryan Caplan  

Government Conspiracy to Silence Mankiw

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The Tallest Pygmy... Where Is the Political Flynn E...
Mankiw calculates that McCain's tax plan slashes his return to work by 83%.  Obama's plan slashes his return to work by 93%.  Doesn't anyone in politics want Greg to keep working? 

The funny thing about his post is that it probably inspired some people to root for higher taxes.  I bet this guy for one is overjoyed: "Bigger government, and Mankiw shuts up?!"


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COMMENTS (28 to date)

But the return to blogging stays exactly the same under both plans.

Frejus writes:

The analysis is bogus. If Mankiw doesn't pay taxes, his kids inherit even more government debt that will require them to pay higher taxes.

That's the problem with the conservative/libertarian policies that past 20 odd years. Billing the future.

El Presidente writes:

10,000 style points

ROFL

This is not the first cost-benefit analysis I have seen which fails to consider any benefits, but it is interesting. Microeconomists already know that the utility of work and leisure are such that as the wage progresses upward past a certain point, a person prefers increased leisure to increased income from work. The imposition of taxes changes the point at which individuals would prefer more leisure, but so what?

The starting point for comparison, a situation in which there are no taxes, is ludicrous, and this analysis fails to take seriously the notion that people make choices at the margins. What it tells us is that his estimation that he is sated is probably accurate. At least, it's accurate enough for him to easily dismiss the prospect of working more. One could use that logic to say that everybody who earns as much as or more than Greg is probably sated too, and thus they are slacking off because they would just rather not work. Interesting in light of the criticism leveled against people on welfare (i.e. they won't work more because they aren't desperate enough).

I'm a casual fan of Mankiw, so I am disappointed that he's decided to scale back. Maybe we can take away his wealth so that we can get him to work harder. That's why we keep median real wages from growing as fast as productivity, so people work instead of spending time with their children, right? Then again, why stop with Mankiw? I suppose it's not so bad, so long as he still gives us his really good stuff and the stuff we lose is just marginal work. I mean, if he didn't really need the extra money all that badly, how hard was he really gonna work for it anyhow?

I do like his suggestion of what he'll do with his extra time. Bravo! But I am concerned that, even making enough to be sated, he would forgo that quality time if we just payed him enough to do it. Maybe he should let his children set the price instead. "How much money would daddy have to make for you to want to see him less?" He's a pretty good guy, so I think they'd pick a really high number. If Mankiw is so concerned about his taxes affecting his children, maybe he should set up a trust for them, bill his clients through it for that extra work, pay himself a pittance from it, and avoid estate taxes altogether. He'd still have to pay capital gains, but that would be a lot less, no?

The better comparison would be between the status quo and either plan. Of course, that would be less dramatic. It would also include some measure of the benefits of more progressive taxation, such as greater revenue stability. That could reduce government borrowing and interest payments, the nation's tax liability, and crowding out of private investment in the long run.

Jayson Virissimo writes:

"That's the problem with the conservative/libertarian policies that past 20 odd years. Billing the future."-Frejus

I'm curious which libertarian you heard advocating increased spending financed by debt. Do you have any links for me?... I doubt it.

Greg writes:

It's a neat thought experiment, but I agree that comparing against zero taxes and neglecting to consider whether his children will have to finance a bigger deficit or face lower economic growth due to government debt crowding out private investment are a bit too facile.

It would be interesting to see the conclusions extended to the current tax regime: "Holy crap, I've been working too much. I'm going to go spend more time with my kids under any conceivable tax structure in the US."

Greg writes:

Bryan, I also think you should cite Mankiw's figures while noting that he's comparing to a baseline of zero taxation. Otherwise, the natural assumption is that the plans cut his return to work versus the current tax structure, making the statement a bit misleading.

RubberCity Rabble writes:

I'm not an economist, just an irrational person trying to make sense of the world. It seems
economists like to make up thought experiments, as Prof. Mankiw does in his blog about work
incentives. Please consider this experiment:

Imagine there's a brilliant professor who feels financially comfortable. Colleagues tell him, "you should write a textbook for our field!" Does the professor take out a piece of paper and use Mankiw's formula to calculate the potential net earnings for writing the book? Perhaps so - after all he is a brilliant fellow. But is that the only "calculation" he makes? I believe this imaginary professor would take other factors into consideration: sharing his wisdom with others; adding to his reknown in his field; tackling a challenge different from his teaching and research; creating a revenue stream independent from his university employment; consulting with other experts in new and different ways; etc. Some of these other incentives will likely increase his long-term earning potential (though difficult to quantify with any precision) and some are strictly personal satisfactions.

Surely the professor's incentives involve more than just the after-tax book royalties. These other incentives are not at all trivial as motivators to do the work. Will the professor really deny himself (and the potential audience for his book) all the other benefits solely based on the calculation that his royalties will be taxed higher than his first dollar? How rational is that? Doesn't this thought experiment suggest that the marginal tax rate won't alone predict whether or not extra work will be undertaken? So don't we need a more complete model to predict whether and how the marginal rate will really affect future economic activity?

Ed writes:

"That's the problem with the conservative/libertarian policies that past 20 odd years. Billing the future."

Amazing, even though Libertarians have never had any kind of significant political success, we have evidently been running the country for the last twenty years. Funny, I thought it was the Republicans and Democrats. I wish someone had told me, I missed the whole thing.

Frejus writes:

Grover Norquist has been the primary adherent of the "drown the government policy" for many years. Even Bryan Caplan has supported that policy on this blog--he argued a few weeks/months back that it seemed to be working--in other words, run up enormous deficits in order to reduce future government services (as debt servicing takes over much of spending).

In other words: force the future to pay for services of the past.

Therefore, I think it easy to argue that tax the future has been a libertarian supported policy. Not an libertarian authored policy perhaps, but I think Grover Norquist is an influential libertarian and he basically authored that policy.

Libertarians sold their souls supporting Republicans and policies such as tax the future. They are now paying the price--further banishment into the politically irrelevant wilderness.

John Jenkins writes:

@ Frejus, so you don't have any evidence is what you're saying?

Mike writes:

You folks missed Mankiw's point! He was not telling you how he behaves. He was trying to illustrate the economic disincentives to work associated with taxes. Of course, he is going to self actualize and if the personal satisfaction of that self actualization outweighs the economics so that he is willing to, in effect, do it for free then it is still a labor-leisure issue. His self-actualization is not labor but leisure. For most people who are not endowed with his talent his economic analysis comes into play.

The proof is in the pudding. Ed Prescott has addressed the issue of taxes affecting work behavior. He argues the price elasticity of labor is around 3! If that is so then you are going to have to find hidden talents seeking self actualization in all of us to overcome the negative affects of taxation on the drive to work. Good luck on that score!

For those who are interested there is an excellent survey article on Prescott's work in this area ("European Vacation: Why Americans Work More Than Europeans") which can be found at http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3346 ,I recommend it highly

BTW, Greg actually demonstrated his revealed preferences about labor-leisure when he shut down access to his blog so it is now a monologue. He found it more trouble than it was worth. In his own non-financial way he demonstrated his labor-leisure trade-offs. Let's hope we can at least continue to listen to his monologues. We hope he doesn't choose to take his own version of a European vacation.

Mike writes:

Using Mankiws example, I did some quick calculations for grins. Using McCain's and Obama's tax systems (using the Wall Street Journal's estimates) Mankiw's example of a $1 investment produces a future value under a tax free world of $28 if it yields 10% return over 35 years, in McCain's tax world it yields $4.81, and in Obama's world it yields $1.85.

If you calculate the after-tax internal rate of return of these values you get 10%, 4.6%, and 1.8% respectively.

Considering you can get about 4.6% yield in tax-free municipal bonds, McCain's tax plan is about where you would want it to be if you don't want people to alter their investment and labor choices. Under the Obama plan you will see people fleeing from investing in private capital for public capital. This would result in a shortage of private capital and a decline in productivity growth.

Is that what we want to see?

Ivan writes:

Freyus: "The analysis is bogus. If Mankiw doesn't pay taxes, his kids inherit even more government debt that will require them to pay higher taxes.

That's the problem with the conservative/libertarian policies that past 20 odd years. Billing the future."

Maybe, just maybe, you can consider decrease in government spending? Many countries all over the world did exactly that (Ireland decreased gov consumption as percentage of GDP from above 50% to 33%). And then, lower taxes are not the road to higher debt. That's real libertarianism. Your analysis blaming "libertarianism" for government debt is, therefore, bogus.

Prakhar Goel writes:

@Freyus

Mankiw's analysis is not quite bogus. Any cash that his kids directly inherit is theirs to spend as they please and any memory they inherit is theirs to cherish. If it goes towards reducing govt. debt, well, thats just not very useful for them (especially if they are in the upper economic echelons of the US). Furthermore, when it comes to paying the US govt. debt, we have something of a prisoner's dilemma. Mankiw certainly does not have the resources to pay of the multi-trillion dollar debt or to even make a dent in it. Any contribution he makes over his lifetime will be insignificant when compared to the sheer size of it. Thus, if he does not contribute and a large number of other people do, it makes no real difference. If nobody is contributing (they all like their kids), then his hard-working contribution will make no real difference and so, he may as well spend more time with his kids. Either way, the optimal strategy for him is to give as little in tax as possible.

Greg writes:

@Prahkar

Your argument seems to assume that taxes are voluntary and that one can free ride. Tax evasion aside, that isn't really the case. All the Mankiws combined do have the resources to make a dent in our debt. How to prioritize that use of funds is another matter.

Methinks writes:

Rabble,

Some of these other incentives will likely increase his long-term earning potential (though difficult to quantify with any precision) and some are strictly personal satisfactions.

err...none of the things you mentioned are worth time away from his kids if the financial gain is not large enough. That was his point. The non monetary satisfaction of work would have to exceed the satisfaction of being with his family by more than it does today to compensate if taxes increase.

So don't we need a more complete model to predict whether and how the marginal rate will really affect future economic activity?

No. The satisfaction each person gets from his job is highly individual and some people will work harder for less money than others will work for more money. However, the point is that if you generalize across the population, the higher the tax rate, the less incentive people have to work because they have to give up leisure time to do it. Workers will reduce amount they work at the margin - that is, with every increase in taxes. I'm sure you get a lot of satisfaction from your job, as do I. However, I may no longer get enough satisfaction from my job to continue working as hard if I have to pay 50% of my earning to the IRS versus 40%. Others will reduce the amount they work at 40%, still others at 55%, etc. The higher the tax rate goes, the more workers have incentive to reduce the amount they work and in aggregate, we'll work and produce less. Since we can only consume what we produce, the standard of living will drop.

Complicating this is the progressive nature of taxes. High paying jobs are usually very demanding and high stress. If one can reduce the amount one works without stopping altogether and keep more of one's income, it's often an attractive alternative because there are many satisfying things in life than work.

Methinks writes:

Greg,

It's a neat thought experiment, but I agree that comparing against zero taxes and neglecting to consider whether his children will have to finance a bigger deficit or face lower economic growth due to government debt crowding out private investment are a bit too facile.

I think the zero baseline was brilliant. If he had chosen any tax rate at all as a baseline, he would be accused of endorsing that particular tax rate. That wasn't his point. He was merely trying to show how much incentive is eroded as tax rates increase.

Also, I don't think his children will necessarily face higher government debt. To assume that you would have to take government spending at current or higher levels as a given. Nor can you assume that government will suddenly use any increases in tax revenue (if there will be one - I think the point is that there won't) to pay down the deficit instead of pissing it away on new entitlements created by politicians eager to be re-elected. You're going to get lower economic growth because the incentives to work and invest will be lower with higher taxes - particularly on the most productive long before you have to worry about government debt crowding out private investment for Mankiw's children.

Frejus writes:

Mankiw's analysis is bogus for another reason: Only economists and financial types plan their activities based upon analysis such as he puts forth. Creators operate according to deeper non-financial drives.


El Presidente writes:

Jayson Virrisimo,

I'm curious which libertarian you heard advocating increased spending financed by debt. Do you have any links for me?... I doubt it.

How old are you? I only ask because Reagan seems to qualify quite nicely, and it's possible you don't hear his echo in todays politicians if you never heard him to begin with.

He remarked in his first inaugural: (http://www.reaganlibrary.com/reagan/speeches/first.asp)

"In this present crisis, government is not the solution to our problem; government is the problem. From time to time we've been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else? All of us together, in and out of government, must bear the burden. The solutions we seek must be equitable, with no one group singled out to pay a higher price.

I think that qualifies him as a libertarian.

Then later he said: (http://www.hbci.com/~tgort/empire.htm)

"At the same time, however, they must be made to understand we will never compromise our principles and standards. We will never give away our freedom. We will never abandon our belief in God. And we will never stop searching for a genuine peace. But we can assure none of these things America stands for through the so-called nuclear freeze solutions proposed by some.

The truth is that a freeze now would be a very dangerous fraud, for that is merely the illusion of peace. The reality is that we must find peace through strength.

I would agree to freeze if only we could freeze the Soviets' global desires. A freeze at current levels of weapons would remove any incentive for the Soviets to negotiate seriously in Geneva and virtually end our chances to achieve the major arms reductions which we have proposed. Instead, they would achieve their objectives through the freeze.

A freeze would reward the Soviet Union for its enormous and unparalleled military buildup. It would prevent the essential and long overdue modernization of United States and allied defenses and would leave our aging forces increasingly vulnerable. And an honest freeze would require extensive prior negotiations on the systems and numbers to be limited and on the measures to ensure effective verification and compliance. And the kind of a freeze that has been suggested would be virtually impossible to verify. Such a major effort would divert us completely from our current negotiations on achieving substantial reductions.

This would either disqualify him as a libertarian, or it would suggest a program of massive military spending financed by deficits because he insisted that taxes were evil and progressive taxation most of all. So, was Reagan not a libertarian, or are the deficits authorized at his behest not rightly attributed to him?

This is the fundamental problem with a libertarian philosophy in a democratic republic. It says that government should not be involved until there is an emergency, which is perhaps the most reliable way to guarantee both an emergency AND government involvement. Instead of saying "government is the problem (and we're here to murder it)", it should say "government is not working as well as it should, and we intend to improve it so that we will have to use it less".

Methinks writes:

This would either disqualify him as a libertarian, or it would suggest a program of massive military spending financed by deficits because he insisted that taxes were evil and progressive taxation most of all. So, was Reagan not a libertarian,...

Military is one of the few legitimate functions of government. Thus, military spending is libertarian indeed. What's not libertarian is the vast number of entitlement programs funded by taxpayers. Since Reagan was not a king, he couldn't by himself significantly cut entitlement spending and pork. He had a democrat congress to work with. Entitlements should have been cut to fund military spending.

This is the fundamental problem with a libertarian philosophy in a democratic republic. It says that government should not be involved until there is an emergency, which is perhaps the most reliable way to guarantee both an emergency AND government involvement.

No, it doesn't. What libertarian literature says that governments have any function beyond defense, maintaining rule of law and caring for those who can't care for themselves (invalids & children). I'll throw in indigents as well, but nowhere have I seen a libertarian "emergency" provision that allows government to swoop in and take control over the economy.

"government is not working as well as it should, and we intend to improve it so that we will have to use it less".

Good luck with that. The people you want to make "better" have other ideas and they have the power to force you to do things at gunpoint. Heil Waxman!

El Presidente writes:

Methinks,

Good luck with that. The people you want to make "better" have other ideas and they have the power to force you to do things at gunpoint.

I am those people. I have the guns and I'll use them to keep me in line if I have to. :)

All kidding aside, it is somewhat ironic to propose buying more guns on the government tab and then decry a government that would make a person do things at, of all things, gunpoint.

"nowhere have I seen a libertarian "emergency" provision that allows government to swoop in and take control over the economy."

And nowhere did I say that an emergency would be limited to the economy or that an emergency couldn't be ginned up in another policy area. We have some recent and prominent examples of emergencies that we did not respond to well and ones we responded to with great force which did not exist. In essence, we've ignored real crises when we didn't want to act and created fake crises when we wanted to act but needed a reason. You may say they were not libertarians, but they were sure using some of libertarians' best rhetoric to get/keep their jobs. The problem is that libertarians who believe their philosophy will make everything work seemlessly require the average person to respond calmly to crises. They don't. They lean on government and bad things happen. Those who are comfortable with bad things would willingly devolve to "nature red in tooth and claw." I've never seen a libertarian bumper sticker sporting that tag line. I wonder why?

mike writes:

Oh, I finally get it!

All we have to do to make the economy grow more is to get zillionaires to work harder since their marginal productivity is so high! Tax those poor folk instead. Since their productivity is so low, getting them to work less won't really hurt economic growth anyway.

That makes a lot of sense.

Methinks writes:

El Presidente,

it is somewhat ironic to propose buying more guns on the government tab and then decry a government that would make a person do things at, of all things, gunpoint.

I refuse to believe that you're stupid enough to believe that I meant the literal gunpoint. I was talking about the ability of government to throw you in jail for violating any law it passes, regardless of how arbitrary it is. If you don't believe it's the government's job to run the military, that's a separate discussion.

In essence, we've ignored real crises when we didn't want to act and created fake crises when we wanted to act but needed a reason.

Vagueness doesn't serve your argument - whatever it is.

You may say they were not libertarians, but they were sure using some of libertarians' best rhetoric to get/keep their jobs.

I did not say that Reagan was not libertarian. I said he was constrained by the system in which he operated. Socialists have long been using the language of liberty to cloak their collectivist agenda. What does that say about libertarians. Nothing. If I tell you that I'm fighting for your freedom as I shackle you and enslave you, will you label me according to my words or according to my actions?

The problem is that libertarians who believe their philosophy will make everything work seemlessly require the average person to respond calmly to crises.

What libertarian believes that allowing individuals to have the power to make their own choices will result in seamlessness? Where is this promise of Utopia? Straw men are so easy to slay.

They don't. They lean on government and bad things happen.

True. I am from the Soviet Union and I saw what a reliance on the government tested at the limit was like up close and personal. Those who were well connected or incredibly immoral stole and cheated their way to a better material existence. Those who still wanted to hold on to some shred of humanity lived, as my the Russian saying goes, "in the ass". The problem with looking to government to make things better is the price of government intervention is mucch higher than the random outcomes of free markets. It seems that Americans want to find this out the hard way.

Those who are comfortable with bad things would willingly devolve to "nature red in tooth and claw."

Yet, it's societies with the most collectivization where individual freedom is most restricted that this happens the most. Most Europeans (for I lived in Europe) and Russians are vicious to one another. In the Soviet Union, people sold their families and neighbours to the KGB for a slightly less dingy apartment or more bread. Today, they murder people for a couple hundred bucks and for being from the wrong (darker skinned) part of the empire (they also are rarely jailed for these murders). It's a lovely place. Lives are cheap when one human being is interchangeable with another. Relatively more free and capitalist America, on the other hand, is outraged when someone is so much as unkind to someone and gives more to charity than any other country on earth and its poorest live better than the middle class in most socialist countries. If I'm not being forced by government to hand over my money to a government Nomenklatura who will take a hefty chunk for themselves before it redistributes any at all (in the most humiliating way, incidentally) to the "poor" and which is accountable neither to me nor the poor, I will find charities who must compete for my donations by proving that they are getting results. If the government comes after my income, I will spend all my time and excess money sheltering it from taxes. You can't legislate compassion. Hmmmm....perhaps it's collectivists who should slap that bumper sticker on their cars. It seems that they are the least compassionate of all. They would rather everyone live much more poorly than allow some people to get a larger portion of a much larger pie. Forced poverty. That's what socialists call "compassion".

El Presidente writes:

Methinks,

I was talking about the ability of government to throw you in jail for violating any law it passes, regardless of how arbitrary it is.

What law passed by government is not arbitrary, and how is one more or less arbitrary than another?

If you don't believe it's the government's job to run the military, that's a separate discussion.

I do believe it is the government's job to run the military. I do not believe it is the military's job to run the government, fiscally or otherwise.

If I tell you that I'm fighting for your freedom as I shackle you and enslave you, will you label me according to my words or according to my actions?

I would certainly note the distinction between your words and actions. I'm not sure I would label you in accordance with either. The dissonance is precisely my point. When somebody argues for libertarian principles we call them a libertarian. When they run up huge war debts (hot or cold) that shackle others, we say they were constrained by things outside their control. It's hogwash. It's a get-out-of-philosophical-jail-free card. Constraints exist before during and after these events. The point at which we recognize them is not the same as the point at which they come into existence. They exist even when we are not pushing against them.

They would rather everyone live much more poorly than allow some people to get a larger portion of a much larger pie. Forced poverty. That's what socialists call "compassion".

I don't know these people, unless you are saying I am one of them. I was clear. I favor capitalism and property rights. There are benefits to both consolidation and redistribution. I would choose stability over volatility. I believe everybody should have to work in order to earn a living.

I also believe that capitalism is vulnerable to anticompetitive behavior which is easiest to execute when one has considerably more leverage than one's competitors; one instance being when wealth is consolidated. I believe that while stability can be purchased at too high a price, volatility can instill fear which is never conducive to productivity. And, I believe that everyone who is willing and able to work should receive a living wage.

These are not radical principles or the earmarks of communism, collectivism, socialism, or whatever else you'd like to associate me with. If that's how you intended to pigeon-hole me then you've missed your mark.

Vagueness doesn't serve your argument - whatever it is.

Ignored: New Orleans.
Made up: Iraq.
Clear?

Methinks writes:

El Presidente,

I do believe it is the government's job to run the military. I do not believe it is the military's job to run the government, fiscally or otherwise.

Cute but meaningless hyperbole.

When they run up huge war debts (hot or cold) that shackle others, we say they were constrained by things outside their control.

What about when they run huge entitlement programs and interference in the economy in the form of regulation (which, I assure you, protect only the regulated from competition) that shackle others? Why the outrage since we both agree that running the military, therefore spending on military, is an appropriate function of government but nowhere in the constitution is redistributing wealth a function of government? Military spending "shackles" very little of our GDP as compared to entitlements.

I don't know these people, unless you are saying I am one of them.

Well, I do and I don't remember accusing you of being one of them. I don't know enough about you to accuse you of anything of the sort.

I would choose stability over volatility.

Wouldn't we all? That's not the issue. The real issue is the price of that stability and, so far, countries that have bought stability are the only ones that have imploded.

I also believe that capitalism is vulnerable to anticompetitive behavior which is easiest to execute when one has considerably more leverage than one's competitors;

I'm with you right up until this point:

one instance being when wealth is consolidated.

wealth "consolidation" (we'll deal with the appropriateness that term later)is not the same as power consolidation. The most Bill Gates can do to separate you from your house is offer you compensation large enough for you to willingly relinquish your property. However, if Bill can buy a senator or two, he can get government to confiscate your property. As long as government is not limited, people will find a way to harness it for their own ends. Here I might remind you that the government critters accept a wide range of currencies, so you need to expand your definition of "wealth".

And, I believe that everyone who is willing and able to work should receive a living wage.

Great. So you believe in capitalism, but you don't believe that people should be paid what they're worth but some arbitrary number you came up with. Allow me to remind you that people lived on less than $1/day for most of human history. That sounds like a great wage floor for me. I do pay my housekeeper $25/hour plus a giant year end bonus because she is totally worth it. If you force me hire everyone at some arbitrary rate, I will fire my so-so lawn maintenance people to keep my housekeeper and they will have to go back to Mexico. How are you going to reconcile a higher unemployment rate with your belief that everyone should work for a living?

These are not radical principles or the earmarks of communism, collectivism, socialism,

You can be as indignant as you want. Your indignation doesn't make you something you're not and doesn't shame me. You are not who you think you are. You claim to support capitalism and property rights but then want to deny workers the right to negotiate the price of their property - their labour. You don't like volatility, so you want to force those who don't mind it to buy your version of "stability". I'm not pigeon-holing you. Those are your arguments. Puffery and indignation are only impediments to real discussion and I suggest you abandon your hurt feelings as I never intended to have an emotional impact on you and feelings frustrate debate.

Ignored: New Orleans.
Made up: Iraq.
Clear?

Yes. Thanks. Do you know what's going on in New Orleans? If only government would get out of the way. The only thing rebuilding New Orleans is private enterprise. The only thing government is building there is a giant bureaucracy. Also, if you don't want to get flooded, don't live in a giant bowl in a hurricane prone area. It's just common sense. As for Iraq, that's debatable and a long debate at that, but I see your point.

El Presidente writes:

. . . [B]ut nowhere in the constitution is redistributing wealth a function of government?

That's not how I read it, but to each their own.

Article 1, Section 8

Powers of Congress

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

Military spending "shackles" very little of our GDP as compared to entitlements.

Define "very little" and I'll entertain that.

Not all "spending" is equal.

Social Security is a program of transfer payments. They have no direct effect on GDP. Their indirect effect is to transfer money to people who have a higher marginal propensity to consume. In that way, it may divert money to consumption from investment, but that's a long walk. So, subtract Social Security from your estimate of entitlements.

On Medicare, you have a point. It's in trouble, and deep. Whether or not we call it a program of transfer payments is open to discussion. However, it's not beyond repair, and a very good argument can be made that medical care produces a net benefit in worker productivity that military spending, excluding health care, does not.

People can't eat a Patriot Missile. A Sikorsky won't manage chronic disease. Military spending has a very limited return because military assets are used for non-productive activities: killing and destruction of capital, ostensibly to prevent others from doing the same. You would have to have a real threat and a calibrated response to justify the expense in terms of a return on investment. I would venture to say their return is much less than basic medical care, on average. What's more, the kind of military spending undertaken under Reagan didn't do much for our military; it was pork, the world's biggest bluff ever. The best that can be said for our military buildup is that there were advances in dual-use technology, but I'm confident we could have had just as much growth in technology at a lower cost if we had simply set out to incentivise R&D through research grants and the like.

So you believe in capitalism, but you don't believe that people should be paid what they're worth but some arbitrary number you came up with

I don't believe that one person should be allowed to set the worth of another so low that they are imperiled or so high that they can no longer relate to others. I think it is wise policy to set boundaries within which people are free to negotiate, and tax policy is a great way to do that. You can't really believe that anybody's labor is worth these wages, can you?

Larry Ellison, Oracle: $192.9 million
Nabeeb Gareel, MEMC Electronic Materials: $79.6 million
John Chambers, Cisco: $54.8 million
Mark Hurd, HP: $27.6 million
Jen-Hsun Huang, NVIDIA: $24.6 million
Samual Palmisano, IBM: $24.3 million
Wendell Weeks, Corning: $22.6 million
Joseph Tucci, EMC: $20 million
William Sullivan, Agilent: $17.4 million
Paul Otellini, Intel: $16.3 million
Steve Jobs, Apple: $14.6 million
Jonathan Schwartz, Sun: $13.5 million

Do you really think it is possible that Jonathan Schwartz created 270 times as much value as your housekeeper last year? Alright, maybe 270 is believable. But did Larry Ellison create 3,858 times the value that your housekeeper did? Saying that people are paid a market price is not the same thing as saying that people are paid what they're worth. If some of these people's salaries are unbelievably high, rest assured that many others are unjustifiably low. I don't pretend to be able to set wages for an economy, so I won't, but I can tell when prices diverge past the point of representing plausible comparative value. Consolidation of ownership makes divergent incomes more prevalent. It simply follows from the production function. If the income of capital and labor are divided in fairly constant proportion, and if capital is finite in the short run, then the more any person owns the greater their share of the nation's capital income will be. So, if 5% of our population controls 59% or more of our nation's net worth, then a small number of people are controlling a very large amount of wealth, and therefore considerable leverage. This leads to disparate incentives. They don't need government to get what they want, but they'll use it if it suits their purposes. Tax policy has a huge effect on their incentives and can guide them toward doing what is good for other people too, if we have the guts to use it.

I'm not worried about Bill gates in particular. I am concerned about the trend of divergence and the reality that people are losing touch with one another because they believe, and maybe rightly so, that they will never share the fate of the other person. That's a social and political problem for a democratic republic. The mantra "A rising tide lifts all boats" doesn't fit our circumstance. Arranging policy to maximize GDP in the short-run while disregarding distribution means that we don't really care if some of the boats take on water and sink as long as we raise the rest extra-high to compensate. Make as much money as you like, just as long as others are making oh, say, at least 1/150th of your income. We should be able to make due with that, right?

Methinks writes:

El Presidente ,

You missed my point entirely. I made no point about medicare and social security at all, so I can't "have a point" about medicare beyond the fact that it is not a legitimate function of government.

However, it's not beyond repair, and a very good argument can be made that medical care produces a net benefit in worker productivity that military spending, excluding health care, does not

If the point can be made, then make it. Simply asserting doesn't make it true.

"General Welfare" does not mean, as you interpret it to mean in the constitution - although, American socialists have long tried to reinterpret it. It does not mean redistribution of wealth and deciding how much material wealth people should have as those things impede liberty and pursuit of happiness, which are explicitly provided for in the constitution.

What's more, the kind of military spending undertaken under Reagan didn't do much for our military; it was pork, the world's biggest bluff ever.

In your opinion. I don't share that opinion. I don't much care about your opinion regarding Reagan's specific military spending as it does not in any way change the fact that military is a legitimate expenditure of government and I don't expect government to never execute decisions with bad outcomes - or overpay. God knows that the only thing the government is really good at is creating intractable bureaucracies and

I don't believe that one person should be allowed to set the worth of another so low that they are imperiled or so high that they can no longer relate to others.

You're not a capitalist. You're a central planner - a socialist. I'm not saying this to slander you. It's just a fact based on your desire to plan a society you hope will be more stable and more in line with your personal preferences and your belief that wealth is owned not by the creators but by everyone who happens to be living near the creators. I don't believe that you know better than my housekeeper and I what the value of her labour is to me or the value of my employing her is to her. If you think you do, state your case. To know that for anyone else, you'd have to be God. I also think you conveniently hide behind terms like "imperiled" and "relate to others". What does that mean? At what level is one "imperiled"? How do you determine if one can "relate to others" or not and why do you get to decide that one must "relate to others". Who are these "others"? I don't relate to crackheads. Does this make me bad? What kind of policy would you put in place to force me to relate to crackheads?

I think it is wise policy to set boundaries within which people are free to negotiate

Your ideas are not new. Price and wage controls have been tried before and have resulted in shortages and unemployment. I will not hire someone who does not produce more than I am paying him. He will not work for me if he is free to find a better paying job somewhere else. If his labour is of low value it is because he's not very productive and nobody is willing to pay him more. If you insist that he must be paid a minimum amount that is in excess of his productivity, he will not be hired at all. In your efforts to remake society, you have just denied this man an opportunity to work and yet you expect him to work for a living. Mind, you learn skills on the job and an opportunity for both promotion and to get a better job elsewhere and your wage controls deny the most underprivileged this opportunity. In your eagerness to make assertions based on vague terms, you failed to address this chink in your plan.

Do you really think it is possible that Jonathan Schwartz created 270 times as much value as your housekeeper last year?

Yes. I created a lot more wealth than my housekeeper did last year. In fact, the only reason I hired her is that it freed my time to create more wealth, since I make more than $25/hour. If you want to "equalize" our income and make me "relate" to her better, I'll have to fire here because the value of her labour to me will decline. I relate great to her, BTW. I own my business and she owns hers - our income disparity is of no consequence to either of us.

Saying that people are paid a market price is not the same thing as saying that people are paid what they're worth.

Two things strike me in this statement. First of all, people are paid what they're worth because employees are free agents and put their labour out for bid. If somebody is willing to pay them $X, then they are worth $X to the person paying them. Is my housekeeper worth $25/hour? Other housekeepers make a lot less and I pay the biggest bonus of any of her other clients, so maybe she's overpaid? Only I get to decide that as her employer. You don't have enough information. Which brings me to my other point - you think that the market is inefficient at pricing labour but you think that a central planner a billion times removed and with no knowledge of the work, the person or the skills will be more efficient at pricing labour. How?

I don't pretend to be able to set wages for an economy, so I won't, but I can tell when prices diverge past the point of representing plausible comparative value.

The second part of your statement and everything else you have written contradicts the first part of this statement.

So, if 5% of our population controls 59% or more of our nation's net worth, then a small number of people are controlling a very large amount of wealth, and therefore considerable leverage.

You've committed the lump of wealth fallacy. That 5% of the population created 59% of wealth. It wouldn't exist without them. There is nothing stopping anyone else from creating even more wealth (and the associated jobs for the people unwilling to put forth the effort and take the risk of investment). They only have leverage because of government interference. Limit government and the problem goes away.

Tax policy has a huge effect on their incentives and can guide them toward doing what is good for other people too, if we have the guts to use it.

See, now I thought that what's "good for the people" is wealth and the associated job creation. So, if you tax me more, I'll have less take home pay to pay my housekeeper and lawn care guys. Somebody will lose their job. The return on my business will be too low to justify the lack of vacations, risk and ulcers. I'll close it down, invest in tax-advantaged muni bonds and fire everyone who works for me. The IRS will no longer collect the huge sum in taxes it used to get from my successful business and my very productive employees. How is that "good for the people"?

The mantra "A rising tide lifts all boats" doesn't fit our circumstance.

How's that? Even our poorest have become wealthier over time.

Not so incidentally, the compensation numbers you listed for the CEOs and entrepreneurs are not "wages". It's an important distinction. Also, unless you're a shareholder, what they are paid is none of your business. Do you know what I'm worth to my investors better than they do?

Trying to remake society into something that fits your personal definitions of "good" and "just" is not new. Would be central planners have been trying it without success for decades and, I'm afraid, this is what you're suggesting. The only thing they've managed to create is desperation, poverty and brain drains. Turns out, you can't legislate compassion, "relating" or value and no matter how hard you try, people respond to incentives. If your tax policy provides incentive not to work and invest, nobody will work or invest - just like in the Soviet Union.

Unfortunately, it seems that some people won't believe it until they experience it for themselves.

El Presidente writes:

You missed my point entirely. I made no point about medicare and social security at all, so I can't "have a point" about medicare beyond the fact that it is not a legitimate function of government.

You mentioned entitlements. Which entitlements were you referring to if not Social Security and Medicare?

"General Welfare" does not mean, as you interpret it to mean in the constitution . . .

You don't know how I interpret it, but I'll bite: How do you interpret it?

. . . [T]hose things impede liberty and pursuit of happiness, which are explicitly provided for in the constitution.

The word happiness appears nowhere in the Constitution of the United States. Perhaps you are referring to the explicit reference in the Declaration of Independence?

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

. . . (Your opinion) does not in any way change the fact that military is a legitimate expenditure of government . . .

I quoted Article 1, Section 8 of the Constitution, which says defense is a legitimate function of government and a legitimate cause for taxation. Did I argue that military expenditure is prima facie illegitimate, or did I argue that the particular expenditures chosen under Reagan were wasteful and impotent? Please read before responding.

You're not a capitalist. You're a central planner - a socialist. I'm not saying this to slander you. It's just a fact based on your desire to plan a society you hope will be more stable and more in line with your personal preferences and your belief that wealth is owned not by the creators but by everyone who happens to be living near the creators.

I wouldn't take it as slander, but it is nonetheless false. I'm not interested in setting quotas. If you think I'm a socialist then you should examine the ideas of Milton Friedman from his book "Capitalism and Freedom" and see if we're just a couple of pinkos.

http://en.wikipedia.org/wiki/Negative_income_tax

A negative income tax produces stability in an otherwise unstable system. It has little to do with my preferences. It was embodied in the tax policies of that great socialist Ronald Reagan as the Earned Income Tax Credit. You may have heard of it.

As for "creators", I have a great affinity for the work of renowned physicists who have demonstrated the the universe is finite. People do not create anything except value, and our concept of value, as you have pointed out, requires negotiated exchange. It is not a matter of creation and ownership, it is a matter of negotiation and agreement. If a large majority of Americans believe that many CEOs receive compensation in excess of their value, on what basis can you disagree, and why should the opinion of the minority matter more than the opinion of the majority in a democratic republic?

. . . [P]eople are paid what they're worth because employees are free agents and put their labour out for bid.

If I have everything and you have nothing, do I have to pay you more than subsistence to purchase your labor? If we have exactly the same amount, will that change the wage I must pay you? Let's live somewhere in the middle where we can negotiate and have different incomes and wealth, and let's agree to abandon the foolish pretense that a person's wage is always equal to their worth.

Even our poorest have become wealthier over time.

No, they haven't. They die on the streets every day. Come to LA some time and I'll show your our poorest. Then you can tell me how they're so much better off. If they have no wealth, they are not wealthy, thus they can not have been made wealthier. It's a fairly reliable truism. Are you certain that you can relate to our poorest? It doesn't seem like you've met any of them.

Not so incidentally, the compensation numbers you listed for the CEOs and entrepreneurs are not "wages". It's an important distinction. Also, unless you're a shareholder, what they are paid is none of your business. Do you know what I'm worth to my investors better than they do?

If, in exchange for my labor, I receive deferred compensation, or compensation in stock options, how is that substantively different than wages, and what makes it an important distinction?

The people I listed operate publicly traded corporations. What they make is my business because a grant of limited liability for damages is what allows their shareholders to make profits from the operations of their company and what allows them to receive such massive compensation. This incorporation is granted by government as a license to use a particularly lucrative form of business. It is a public trust, and so they are required to PUBLICLY disclose their compensation in accordance with GAAP and SEC guidelines. I repeat, it is my business.

I have no idea what you are worth to your investors. But, if you operate a publicly traded corporation, then you are worth more than you would be if they were wholly liable for damages on account of their investment in your business.

If your tax policy provides incentive not to work and invest, nobody will work or invest - just like in the Soviet Union.

Now I think we've hit the heart of your objection. If you could earn as much as 150 times (just to use a random number) the wage of the poorest worker, you wouldn't work or invest at all? You can still earn as much as people are willing to pay you. I haven't limited your wages. I don't understand what you are objecting to. All I've done is require you to raise all boats with your rising tide. Perhaps that's what bothers you. Can you clarify?

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