David R. Henderson  

Tysonomics

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In today's Wall Street Journal, Laura D'Andrea Tyson has a defense of "Obamanomics." At least that's the title the Journal gave it. The article is worth looking at for a number of reasons:

1. In discussing President Obama's spending plans, Professor Tyson uses the term "investments" instead of the more-accurate term "spending" 7 times. This is reminiscent of how the Clinton administration categorized new spending when she was in that administration.

2. She starts out by saying that Obama "inherited an economic crisis worse than any the nation has experienced since the Great Depression." It's legitimate for an author to start that way if she tells us, somewhere in the article, her basis for that claim. She doesn't.

3. She states: "These changes [Obama's proposed tax increases on high-income people] will affect only the top 3% of taxpayers, the group that has enjoyed the largest gains in income and wealth over the last decade." This is probably false. A substantial percentage of people making over $200,000 in future years will be people who were not making that much in past years. She completely leaves out the fact of income mobility.

4. In justifying Obama's plan to limit deductions, she asks as a rhetorical question: "But why should a family in a higher tax bracket get a bigger break on expenses than a middle-class family?" Um, because they pay a higher percent of their income in taxes, both on average and on the margin.

5. Tyson states, "Those who stand to lose from these changes [the tax increases] are already protesting." Not quite true. Some of those who stand to lose are protesting. More important, many of us who think we will never make $250,000 a year are protesting. Notice the insidious way she has undermined the opposition. The subtext is that they're just out to defend their own self-interest. She leaves out two motives, both of which are behind my protests and, I would bet, those of many others: (1) we think it's unjust to make high-income people, who already pay a disproportionately high share of their income in income taxes, pay even more, and (2) we think it will have harmful consequences for the economy.

6. She states:

Critics of a cap-and-trade system are correct when they claim it will raise the prices of goods and services whose production and use emit carbon. That's exactly the point: Higher prices are necessary to encourage energy efficiency and the development of renewable energy, to discourage carbon emissions, and to reduce the societal costs of global warming.

This is one of the few good pieces of reasoning in her article. Notice, though, that the only way this increases "energy efficiency" in the economic sense is if energy is underpriced and the only way she can establish that it's underpriced is to establish that the externality from carbon emissions' addition to global warming is substantial. This she does not do.
Notice also that she admits that the price will be higher. That will be important when the issue is debated and various people advocating carbon permits claim that it won't raise prices of goods and services.

7. She argues for "reducing the nation's dependence on foreign oil," but fails to say why that is important. That's not surprising, because it's hard to make a case that reducing "dependence" (a misleading term) on foreign oil is a good idea.

8. One of the few saving graces (though, in my view, not saving enough) of an auction plan for carbon permits is that the revenues it generates can be used to reduce marginal tax rates, whether on individual income, corporate income, or taxed commodities like cigarettes, alcohol, imported shoes, imported trucks, or imported textiles. (All 5 of these commodities are subject to federal taxes.) The deadweight loss from a tax is proportional to the square of the tax rate and so reducing marginal tax rates reduces deadweight loss substantially. A 10-percent cut in a marginal tax rate would reduce the deadweight loss from the tax by 19 percent. But Tyson admits that 80% of the revenues would be used to a finance a tax credit for all but the highest-income people. The tax credit would be "refundable," a euphemism meaning that people who don't pay any income taxes would receive it. And, of course, over the phaseout range of the tax credit, so that we can make sure those high-income people get none of it, marginal tax rates would rise. Net effect: not less deadweight loss, but more. And the remaining 20% of the revenues? It "will be used to "finance investments in energy efficiency, clean energy and smart-grid technologies." In other words, the money would go to "winners" that the federal government picks. Do you feel reassured?


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COMMENTS (26 to date)
BL writes:

"Do you feel reassured?"

N-O. In fact, after reading this op-ed this morning I am becoming increasingly less confident about the ability of the Obama team. They honestly believe that 3% of producers should fund practically all the functions of the government. And when some of those producers complain, they are called out on the carpet as a bunch of ungrateful sots.

Carl The EconGuy writes:

I thought Tyson's article on Obaminal economics was remarkably clear. It's nothing to do with efficiency, but all about distributional justice, as defined by the majority's right to take your income and give it to someone else. She advances no empirical justification for any of their policies whatsoever. It's about Takings. It's not about growth and economic welfare. That does not leave much room for debate, now does it?

AB writes:

I have an honest question that I probably should have studied in my college econ classes.

Is there numerical or emperical proof that that supports either the so called "Soak the rich" tax policy or the so called "trickle down" tax policy?

I have heard both arguments and done a small amount of research, but can't seem to find a sure conclusion. I also think it's relevant to the times, does anybody have sources that could help?

Les writes:

AB:

At the top of this page, click on the link "Encyclopedia" and select the article entitled "Taxation." I think you might find it helpful.

Dezakin writes:

From what I can tell, economists dont have any clear argument one way or the other. They have too many hands. When an economist argues for or against redistributionism, its from social preference because apparently economists cant even get a clear handle on what happens when they have an extra 100 dollars in their pocket.

El Presidente writes:

David,

Professor Tyson uses the term "investments" instead of the more-accurate term "spending" 7 times.

Would you be so kind as to produce and defend an economic definition of investment that precludes the government from doing it? I hope you have a better reason for suggesting this change in language than, "because I said do".

BL,

They honestly believe that 3% of producers should fund practically all the functions of the government. And when some of those producers complain, they are called out on the carpet as a bunch of ungrateful sots.

They honestly believe that nobody else can afford to because the wealth got stuck at the top. When it is more evenly distributed taxes should be as well. Since I too favor broadly distributed taxation, I can't wait for that to be viable. So, what's the holdup? Lets get out there and make sure _everybody_ has money to pay taxes. We wouldn't want anyone to be left out, would we?

Carl Again writes:

El Presidente, ponder this.

If you take all the economists of the world, and lay them end to end, they still cannot come to any conclusion about whether forcible income redistribution is good or bad. They get there only by making subjective value judgments, i.e., they stop speaking as economists, and begin speaking as political actors. Be wary of that distinction.

The only taxes economists can possibly justify are the ones associated with market failures, and even that is very, very tenuous -- read your Wicksell, Coase, and Arrow's Impossibility Theorem. A proper reading of Keynes won't save you in today's situation, certainly not with respect to pure income redistribution -- which he might have favored, but not as an economist, only as a political animal.

Thus, Tyson's obamanomics has nothing, absolutely nothing, to do with economics, as she advances nothing but platitudes in favor of her position. That's ok, as political dialogue goes, but it's not economics. I don't mind her liberalism, she's entitled to that, but her economics is poor.

El Presidente writes:

Carl Again,

If you take all the economists of the world, and lay them end to end, they still cannot come to any conclusion about whether forcible income redistribution is good or bad. They get there only by making subjective value judgments, i.e., they stop speaking as economists, and begin speaking as political actors. Be wary of that distinction.

Who would lay them end to end? Stand them up and let them talk to one another. Maybe they'll figure it out. :-)

I'm academically and professionally qualified to speak as both. They are not incompatible.

Those who lack passion are sociopaths. Those who are overwhelmed by it are psychopaths. Those who harness it are neither. Which sort of economist would you have me be? Which sort are you?

[R]ead your Wicksell, Coase, and Arrow's Impossibility Theorem.

Thank you for the suggestions. Perhaps they do deserve another look. If I might be so bold as to offer a reply, try some Mohammad Osman Gani. Let me know how you like it.

SheetWise writes:

The Newthink concept that the government can both spend and save the same money has been a fundamental belief and talking-point of liberal politics for decades. The nuances of Newspeak have evolved remarkably well and been adopted quite successfully by the new media.

Once you can convince people that consumption is savings, there are very few obstacles you are likely to encounter on the road to serfdom.

M writes:

As I've noted elsewhere, the argument that only the top 3% of income earners will pay the expansion of government is patently false.

For example, there is a nationwide shortage of dentists right now. Dentists are certainly to be in the $200k+ range and will respond to a tax increase like any rational person would: That last dollar of income is not worth it. They will cut back on hours worked, cut back on their staffing, and fewer people will take on the education investment and stress to become a dentist. Consequence: The price of dental services will increase further. Let's stick it to those rich people.

This can be applied to many areas of our economy.

Babinich writes:

Laura D'Andrea Tyson "starts out by saying that Obama 'inherited an economic crisis worse than any the nation has experienced since the Great Depression.'"

Please; either she's ignorant to history or she's lying.

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

The Sheep Nazi writes:

Would you be so kind as to produce and defend an economic definition of investment that precludes the government from doing it?

I'd be sort of interested to see a definition of investment that suggests it is ever a good idea to take a prospectus from Bill Clinton at face value. If I remember right it was he who coined this particular usage. For that reason alone I would suggest retiring it for a while. If your stock phrase sounds exactly like ninety days same as cash to the skeptics, then you are not going to win over very many skeptics.

A. Arvanitis writes:

Very good article.But I do not understand why lately everybody being so much into what the President will do about fixing our economy, and not giving attention on billions of dollars giving to other countries ,but not spending on us, the American people, who are the ones who pay for all of these "gifts" giving all over the world by any administration that passes from the White House. When finally will do something to stop that unnecessary spending. Help for the American people? what help. Tough economy? yes only for the middle class. Ans another think, will the politicians going to pay any taxes on the income they make every year or for them are exempts? And is President Obama will pay any taxes on the $500.000 he makes every year? After all he is one of the people making over $250.000 a year, as every other President did. Did any President pay any taxes from the money the were making while in the White House?
I do not know, and I'm sure a lot of people would like to have an answer about that, I know I do.
A.Arvanitis
https://c5worldwide.infusionsoft.com/go/60/aspaarva/

El Presidente writes:

The Sheep Nazi,

So . . . you don't have the definition I requested?

The Sheep Nazi writes:

It's right there in black and white, Prez. You invest when you volunteer your own money, to someone you trust will make you more. But yours wasn't a request, it was a put-down. A bad habit for a GS-12 to cultivate.

Jesse writes:

Babinich writes:
Please; either she's ignorant to history or she's lying.

Third possibility: your reading comprehension is sorely lacking.

superheater writes:

By any measure, things were as bad or worse in 1979 (Carter's Wonder Years) and Tyson reaches back to the depression. Why? To skip the dismnal failure peanut farmer and reference an event not linked with a Democratic administration.

Dishonest is the only way to describe this clod.

Jesse writes:

By any measure, things were as bad or worse in 1979 (Carter's Wonder Years) and Tyson reaches back to the depression. Why? To skip the dismnal failure peanut farmer and reference an event not linked with a Democratic administration.

First, the USA was not even in a recession in 1979; the deep recession you're thinking of started in July 1981 and ended in November 1982, although it is certainly true that this recession had its roots in the oil and energy crises of the previous decade.

Second, there are a number of measures by which our current situation is more troubling. We've had a bigger drop in the stock market and a bigger collapse in the financial sector. The current recession is already nearly as long as the 1981-2 recession, and every forecast I've seen projects it to go on for much longer. The unemployment numbers are similar.

I saw Richard Posner speak a few days ago; he used the word "depression" to describe our current situation. But then, he's always been an apologist for history's greatest monster, Jimmy Carter.

Dave writes:

One thing I liked about the article is that the author finally made it clear Obama is planning a poke in the eye to professional women by putting the tax increase on individuals over $200k and couples over $250k.

Of course, I actually hated the article, not so much for all the wrongness already pointed out, but for its oily fake compassion.

MHodak writes:

Would you be so kind as to produce and defend an economic definition of investment that precludes the government from doing it?

Economic definition of investment: Providing cash for a project that will generate a return greater than the cost of capital

Government can't do it. Oh, I suppose they could in theory, and might on certain investments in public goods, but even there, the politics will overwhelm marginal benefits long before an economically rational actor would have exhausted them. Aside from public goods, the best guess as to whether or not spending qualifies as an economic investment is whether or not it is being made in the private market. Government 'investment' in a non-public good is an almost certain indicator that the investment is not economical.

REG writes:

Redistribution of wealth is nothing more than oppression of a particular group.
Are we Robin Hood?

El Presidente writes:

MHodak,

Economic definition of investment: Providing cash for a project that will generate a return greater than the cost of capital

Can you name an interstate highway that has negative returns?

Aside from public goods, the best guess as to whether or not spending qualifies as an economic investment is whether or not it is being made in the private market.

Oh, I see. And what is or is not a public good, the way you define it? It seems you may be confounding the attribution of costs and benefits with an assessment of the value created. You are right to distinguish public goods, but can you define them and can you say where their positive externalities stop creating value in private markets? If not, then your preferred dichotomy is incompatible with your definition of investment. I like the definition, just not the application. The return doesn't need to come back to the person who makes the payment in order for the project to create additional value. So, we must be clear whether investment seeks the creation of additional value or provides a particular return to the investor. These are not the same and do not always occur together.

Charlie writes:

"3. She states: "These changes [Obama's proposed tax increases on high-income people] will affect only the top 3% of taxpayers, the group that has enjoyed the largest gains in income and wealth over the last decade." This is probably false. A substantial percentage of people making over $200,000 in future years will be people who were not making that much in past years. She completely leaves out the fact of income mobility."

This objection makes no sense. If she had said something like, "This health care procedure will affect individuals in their 90s, the group that has faced the highest number of deaths over the last decade" would you think that the measure was aimed at the already dead?

And you baffle me by saying this is "probably false"? Once you intentionally misinterpret what she says how is it "probably false"? Is the "probably" meant to discount the very small probability that no individual from another tax bracket enters the top brackets and no individual that was in the top brackets leaves? I'm sure even that unlikely possibility is not worth a "probably" as I'm sure someone making 200K has tragically died in the last 10 years.

Of course, my comment is dumb and pedantic, just like much of your post. It was obvious what you meant just as it was obvious what she meant.

MHodak writes:

El Pres, I don't think you understood what I said. I didn't intend any non-standard definitions for any of the terms I used, and I didn't distinguish marginal benefits or economic value from social returns.

El Presidente writes:

MHodak,

O.K. You are using the formal definition of public goods. Got it.

Does education qualify as an investment? It's a post-experience good; pay and study first and get the return later, hopefully. It doesn't have to be a capital good to be an investment, does it?

What about preventive health care? It can increase worker productivity by decreasing absenteeism and extending the careers of people, our most productive assets. Sounds like an investment to me.

Your bias against government says nothing whatsoever about the nature and qualities of the things it is spending money on. If I were to spend money on college education you would call that an investment, I hope. If the government spends money on college education on my behalf does that magically change it from being an investment to . . . something else? Same books. Same classroom. Same professor. Same student. Same curriculum. Same experience. Different name?

If using good preventive care reduces my lifetime healthcare need and expenses, I would think you'd consider that an up-front expense that produces returns over time by reducing future liabilities against my prospective income. What's the difference when the government does it?

Some investments don't provide the expected rate of return. When that happens, you say you made a bad investment, but it's still an investment because you are spending money now in order to get a larger return later. We can do a lot to improve our return, but let's not play games with the language in order to persuade people that government is incapable of investing as a matter of definition.

Snark writes:

Ah, my favorite liberal economist! She’s much less persuasive on paper than she is in person. How sad that, for her (like Krugman), economics has taken a back seat to politics. All she’s doing here is taking advantage of an opportunity to articulate a vision of what broader economic policies aimed at liberal growth could mean for the future of her party. By endorsing Obamanomics, she’s attempting to demonstrate how “the full flowering of ideological conservatism predictably produced a record of middle class tax squeeze and financial turmoil.”

When I see her on television, however, I’m inclined to agree with everything she says.

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