Arnold Kling  

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Feel free to put constructive questions in the comments. Here are two questions that I recently received, one on health care and one on Keynesian economics.

On health care, actually two questions:


You asked thequestion why is health care something we want/expect others to pay for but don't want to pay for ourselves. I'm wondering if people actually think of it that way? I think of it as pooling our money to insulate everyone. I see myself still paying for health care, just more indirectly. I'm paying taxes and/or premiums and in return I get my health care covered...Another question I have for you...I was under the impression that the Medicare fund is something that is invested in same/similar markets that individual savings would be invested in?

On the first question, if you are faced with a possibly unnecessary MRI, you don't think "I could be wasting money in my insurance pool." If you were paying for it yourself, you would worry about wasting money. Imagine we all had "eating insurance," where we paid a flat fee and then could walk into any supermarket or restaurant and get our food paid for by "eating insurance." In that case, you would never look for bargains or pass up an appetizing item because of cost.

On the second question, I hate to disenchant you, but just as there is no Easter Bunny, there is no saving going on in Medicare. Medicare is a transfer of taxes from young workers to old retirees.

Next, on Keynesian economics:


why can't money saved by Americans spur the economy as much as spending it? ...why wouldn't tax cuts - if people would save some of this money - work just as well as a program like TARP, without all the bureaucratic overhead? If people dumped some of their tax cut savings into savings accounts, then banks would have more liquidity to make more loans.

The question of why savings are not good for the economy is one of the most fundamental issues in economics. In textbook microeconomics, saving is good. In textbook Keynesian economics, saving is bad. In micro, saving helps support investment. In Keynesian macro, saving disappears down a black hole. This is really too big a question to deal with in one blog post. Sorry.

It is hard for me to defend TARP, because I am against it. But the idea is to give banks funds that improve their capital position, which in turn could raise lending by multiple amounts.

As an aside, I do not see how the same policymakers can support both stimulus and TARP. If you support the stimulus, it's because you believe there is a lack of demand for loanable funds. If you support TARP, it's because you believe there is a lack of supply of loanable funds.

I definitely oppose TARP. I would be in favor of a real stimulus, but the "stimulus bill" is a long-term spending increase that bears almost no resemblance to a real stimulus. Because of the difficulties with using spending in a timely fashion, I favored tax cuts as a stimulus. The tax cut I wanted to see was a cut in the employer contribution to the payroll tax, which would have stimulated employment and helped corporate balance sheets. (In the long run, if such a tax cut were maintained, the money would flow throw to wages.)


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COMMENTS (14 to date)
Greg Ransom writes:

Even in "textbook micro" the choice theoretic logic of savings is really massively inadequate - almost none of the micro logic of savings explained in Hayek's _The Pure Theory of Capital_ is completely absent.

E.g. the logic of choosing longer production processes because they give greater output is missing, e.g. choosing to take longer to create a net to fish with chosen over fishing with your hands -- which includes also the expanding of the range of goods which are productive economic goods (e.g. the materials used in the net, which were non-economic prior to the taking up of the more lengthy production process.)

The failure of understanding savings in macro is a reflection of the failure to understand savings in the micro.

Arnold wrote:


>>In textbook microeconomics, saving is good. In textbook Keynesian economics, saving is bad. In micro, saving helps support investment. In Keynesian macro, saving disappears down a black hole. This is really too big a question to deal with in one blog post.

Mr. Econotarian writes:

This seems pretty simple to me. Savings that go into investment and are then spent are good (such as a savings deposit I make that allows a bank to make a loan to a company that uses the loan money to buy a computer). Why should it matter WHO spends the money, as long as it is spent?

Savings that stay in my mattress / bank / etc. and are not used for spending are bad. That is a loss to the economy.


Richard A. writes:

Increased savings will decrease the velocity of money. Simply offset this decrease with an increase in the money supply to maintain a smooth growing nominal GDP.

Anon writes:

I was recently introduced to the idea of a land value tax. What do you think? Is this a more efficient tax than sales, property or income taxes?

Mattyoung writes:

I am with Greg on the exclusion of Hayek. My theory says that savings should increase at the same average rate one accumulates other goods; keep the leverage ratio constant.

Larry writes:

Why is a FICA cut better than a federally-funded sales tax holiday? The latter:

- affects everyone, not just workers
- is progressive
- encourages consumption without delaying deleveraging

dWj writes:

I supported a cut in the employer contribution to the payroll tax in large part on a theory of sticky wages, and the belief that they and associated collective action problems are leading employers to cut employment even though on aggregate it is not efficient for them to do so. Improving balance sheets is good, too, though; I was a bit irked that the discussion of the stimulus kept casting saved tax cuts as though they were ipso facto "wasted".

Arnold Kling writes:

Anon,
In theory, a pure land tax does not tax work or thrift or risk-taking, which other taxes tend to do.

As an aside, if you look up Spencer Heath MaCallum, you will find the idea of abolishing government and instead having owners of land make up rules and charge rent. The idea is that to maximize profits in a competitive market, landlords would establish good rules.

Anon writes:

Thank you for your answer! I'll be sure to look him up.

I know it may seem contradictory to be concerned about sprawl as a libertarian, but what do you think about a land tax as a conservative/libertarian alternative to an urban growth boundary (a solution sometimes proposed out west). It might push land in the center of metropolitan areas (where land values are often higher) to the front of the development queue, and it seems less coercive.

A land value tax also seems like it might be a better way to fund rail transit systems than general revenues, if you believe the benefits of rail transit accrue in large part to the owners of land next to stations (think Rosslyn, Clarendon and Ballston).

Prakash writes:

Hi Arnold,

The demographic trends changing the world - Rich countries are getting older and poor countries are full of young people. Rich countries have to keep taxes high and continue increasing taxes to support their population. At a point in time, young people in rich countries will start leaving for other countries. At the same time, the other tendency is rich countries try to attract more young people from elsewhere to balance their pyramid.

1. Culturally, where do you think the equilibrium will go? Will european countries become more anglophone or hispanic to attract the young ?

2. What should a developing country, competing against developed countries, do to avoid a brain drain in this scenario, ?

DanT writes:

I like the "eating insurance" idea, but not the name. I would call it "hunger insurance".

PRO: Who could oppose hunger insurance? There are hungry people in this country who need to eat. People can die from not eating. This is a basic human right! Only inhuman monsters who want people to die oppose hunger insurance!

CON: There is no way to tell if people actually are hungry and need food, so we must provide it whenever asked for. People will increase use of more costly immediate anti-hunger providers (restaurants and prepared food delivery) which would proliferate while self-help providers (grocery stores) would decrease. The cost models don't take that into account, so costs would spiral out of control.

PRO: Increased efficiency, reduced spoilage, and portion control would solve any resource problem. Besides, we'll make the evil businesses pay for it.

CON: Businesses just pass on costs to the consumer, so this is bad for the economy. The only way hunger insurance works is if it is heavily regulated: what and how much people eat (restaurant weigh-ins - only salad for overweight people).

PRO: We will pass a law to prohibit businesses from passing on hunger insurance costs to the consumer. We welcome the additional regulation of our troubled anti-hunger system to bring stability and safety to food supplies and delivery. We can literally have our cake and eat it too.

Yikes. Don't spread this around, the idea might catch on.

fundamentalist writes:

"In textbook Keynesian economics, saving is bad."

Hayek: "John Stuart Mill’s profound insight that demand for commodities is not demand for labor, which Leslie Stephen could in 1878 still describe as the doctrine whose “complete apprehension is, perhaps, the best test of a sound economist,” remained for Keynes an incomprehensible absurdity" (Collected Works, vol. 9., p. 249).

Mainstream econ perpetuates Keynes' fallacy and fails the acid test of sound economics.

El Presidente writes:

Arnold,

Imagine we all had "eating insurance," where we paid a flat fee and then could walk into any supermarket or restaurant and get our food paid for by "eating insurance." In that case, you would never look for bargains or pass up an appetizing item because of cost.

Is health care really that appetizing? Are there throngs of people who would be eager to have bypass surgery just because they could? Are there children everywhere who are longing to have casts on their limbs so that they can be immobile like their classmate with a broken bone? The appetite for health care is somewhat different than the force that drives one to a Las Vegas buffet. Certainly you aren't asserting that there are no other opportunity costs that would discourage gluttonous consumption of health care services, are you?

For those of you interested in a better response to the saving good/bad dilemma and the fallacy of composition that Keynes pointed out, you'll need to consider the utility of money, its role in marketing clearing, and the side effects of using it inefficiently. For Keynes, saving wasn't bad, but it needed to correlate precisely to investment and it needed to have a higher social utility (measured by aggregate output) than consumption. When it met those criteria, it was a good thing as far as Keynes was concerned. When it didn't, Keynes called it hoarding. There is a similar and perhaps more intuitive explanation offered by Mohammad Osman Gani here. Check it out.

El Presidente writes:

Arnold,

As an aside, if you look up Spencer Heath MacCallum, you will find the idea of abolishing government and instead having owners of land make up rules and charge rent. The idea is that to maximize profits in a competitive market, landlords would establish good rules.

If this is true, why couldn't you achieve the same outcome with competing governments as landowners using a property tax as a benefit tax(i.e. Tiebout sorting)? I don't prefer it, but the argument you suggest doesn't really preclude it. The problem occurs with the charging of rent in an unregulated yet consolidated market. Let's call it the economics of gravity. We are all terrestrial beings and thus we will be in contact with the ground or with something contacting the ground for the vast majority of our natural existence. The privilege to charge people to use what they cannot avoid using is a lucrative racket. A sanctioned capacity to charge whatever the "market" will bear is all the more enticing. We had this arrangement several times in our history. Is that the best way to do things?

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