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Assorted links
1. The Laffer curve, by James Surowiecki
2. What have we learned from market design? -- Alvin Roth tells us, ungated version here
3. Felix Salmon summarizes my talk, on the economics of blogging, an excellent post; further commentary here
4. How not to bore others in conversation, hat tip to Ben Casnocha
5. How to build your long-term memory
Posted by Tyler Cowen on October 25, 2007 at 03:53 PM in Web/Tech | Permalink
Comments
The article on long-term memory points out that it is a waste of time to study what you already know ("over-learning"), and you should instead periodically review what you've studied.
The simplest way to achieve this is spaced repetition, and there are any number of software packages which implement it, some of them free. Based on a quick numerical self-evaluation of how well you remember any particular item (say, clicking on a button from 0 to 5), the interval for when to reschedule it for the next review is adjusted to be shorter or longer. Over time, all items to be remembered get reviewed at individually appropriate intervals, not too soon and not too late. Simple but quite effective. Done properly, you never forget the items under study.
Posted by: at Oct 25, 2007 4:23:55 PM
The article on the Laffer curve may be right or wrong--I don't know. But it eally doesn't wrestle with the appropriate set of literature--Lawrence Summers, Martin Feldstein, and so on.
Posted by: steve at Oct 25, 2007 4:39:46 PM
Surowiecki sounds pretty sure of himself. Can someone familiar with the relevant studies provide a ruling?
Posted by: TR at Oct 25, 2007 4:58:08 PM
I skimmed the New Yorker article, but I'm still not clear on his claim. Is he claiming that the Laffer Curve is incorrect in theory, or that we just happen to be to the left of its apex under our current tax regime?
Posted by: Steve at Oct 25, 2007 5:06:11 PM
I didn't find any false or questionable claims in the Surowiecki piece. Personally I might have stressed more the work on incentive effects by Feldstein, Summers, and others but I think the piece is right on the mark.
Posted by: Tyler Cowen at Oct 25, 2007 5:17:31 PM
Al Roth's talk at google is worth watching:
http://video.google.ca/videoplay?docid=8717497583686568676&q=al+roth&total=161&start=0&num=10&so=0&type=search&plindex=0
Posted by: MikeG at Oct 25, 2007 5:22:55 PM
One thing I have been wondering about laffer/supply side recently is the untold factor of time. Nobody talks about how much time we have to regain that money. For example, there are arguments against "Super-Kyoto" (the one that would be needed to actually work) saying that yes, we can pay x% of gdp now, or allow the economy to grow, such that the final payment would be less painful. (sorry I don't have a link right now)
You could say that the time periods needed are politically inexpedient and therefore, it is irrelevant from the perspective of politicians, but this is different from saying we are absolulely on one side of the curve.
Posted by: anomdebus at Oct 25, 2007 5:26:00 PM
Are you ever going to mention the global James Watson Witch Hunt that has been going for the last week?
Posted by: Steve Sailer at Oct 25, 2007 5:39:28 PM
While I agree with Surowiecki that the Laffer Curve, like most economic theories that happen to play nice politics (an alternative example would be externalities), the logic of the theory is used without evidence to serve political talking points. However recent history and politics should not be held against the theory itself. Historically, it is likely that we have resided on the backward-bending portion of the Laffer curve. Especially during the 40's and 50's as income tax rates reached the low 90's in percentage (See Page 10 of the pdf at http://jross08.googlepages.com/SylizedFacts.pdf ). If we've been there once, we could go there again and the Laffer Curve should stand as an argument against that trip.
Posted by: Justin Ross at Oct 25, 2007 6:25:13 PM
But it eally doesn't wrestle with the appropriate set of literature--Lawrence Summers, Martin Feldstein, and so on.
Oh, yeah? He DID bring on the appropriate figures: the consistent deficit run by most GOP Presidents in his lifetime. Reagan and other supply-siders've been telling us for years that cutting taxes won't result in deficits because we get enough extra taxes from extra economic growth.
Except, what we've actually gotten was lots and lots of debt.
Justin and Steve, he acknowledges that it probably DOES work in much-higher-tax regions. He's just talking about how it's working out for America under GOP Presidents.
Posted by: Jon Kay at Oct 25, 2007 8:08:11 PM
I am a bit of a supply sider i.e. You can over-tax and over-regulate the economy. If people and companies are spending a great deal of resources on avoiding or meeting government intrusions how can that not reduce potential GNP.
Posted by: DanC at Oct 25, 2007 9:46:12 PM
anomdebus,
I've thought about that too. At first I thought maybe the appropriate measure is whether tax cuts increase growth more than the cost to finance any debt they bring on. Of course the growth would be working on revenues as a whole so a smaller growth rate would be needed.
Posted by: at Oct 25, 2007 10:22:47 PM
anomdebus,
Ok Idid a little calc in excel with very steady rates, no other changes.
I figured the initial drop in revenue was 5%. The economy/tax revenues grew at 3%, and the cost to finance govt debt was 5%. Under those assumptions the tax cuts would have to cause the economy to grow an extra 0.43% or more annually for me to say they increase the PV of govt revenue.
Posted by: at Oct 25, 2007 10:33:07 PM
Look at the labor supply of France for a direct effect of over taxation. The situation is direct evidence of the existence of the Laffer curve. France has such a high tax on labor it forces people out of the labor market. It is not surprising that it is hard to control all variables in order to isolate the effects and prove the existence of the Leffer curve, but it is very intuitive.
Posted by: Mike at Oct 26, 2007 12:00:36 AM
nameless with the spreadsheet, wouldn't the needed ADDED growth rate be 5.25% (e.g., total of an unlikely 8.25 growth)? After all, you now need 5% more money to get back to where you start.
Posted by: Jon Kay at Oct 26, 2007 2:39:05 AM
The first false claim in Surowiecki 's piece is the title "The great lie of supply-side economics." - for which he supplies a false definition.
Supply side does not promise tax cuts will always pay for themselves; but that , depending where you are on the Laffer curve, that they will not decrease revenues dollar for dollar.
Mankiw has it put at 50% return on capital gains taxes, and somewhere around 35% for income tax cuts for where we are on the curve now. If we were on the right side of the curve, they would pay for themselves. When defined like this, I don't know of any economist who would dispute this.
But Surowiecki frames the argument that supply side means that tax cuts always pay for themselves, which is, of course, false.
Any candidate making such a claim should be called on this, but Surowiecki has done nothing to diminish supply side theory.
Posted by: Tom at Oct 26, 2007 9:27:53 AM
Politicians running for office couldn't tell you where the point is that government revenue is at the apex. And which sounds more appealing to a voter?
A) Government revenue 10% lower due to tax levels above maximization, economy slows.
B) Govrenment revenue 10% lower due to tax levels below maximization, economy accelerates.
In the long run, however, you have to show why economic growth would be faster under higher taxes than lower taxes. In any given year, we can say that we are above/below the optimal tax rate, but does anyone seriously believe that if we reduced taxes from 35% of GDP to 15% of GDP for a decade, that government revenues wouldn't be much higher in 2018 when rates went back to 35%, then they would if we hold taxes level for the next 10 years?
Posted by: 8 at Oct 26, 2007 10:51:47 AM
Jon Kay,
A tax cut "pays for itself" if the dynamic effect of the tax cut is suffient to pay the interest on the debt that is floated to fund the tax cut. The deficit can increase in the short run (which might be pretty long), but in an NPV sense, the government's budget position has improved.
For fun, I just worked out the math. The break even condition is:
B2/B1 >= (T1*r+T2)/T2*(1+R)
where
B1=initial tax base, B2=tax base after tax cut
T1=initial tax rate, T2=tax rate after tax cut
r=real interest rate on government debt
For example, if T1=.2, T2=.15, and r=.025, then B2/B1 >= 1.008.
That is, the tax cut must increase the tax base by 0.8% or more for the tax cut to be have positive NPV.
I'm not familiar with the technical literature, but the supply side position seems intuitively plausible in a wide variety of applications, once you frame the issue as an NPV calculation.
Steve
Posted by: steve at Oct 26, 2007 11:00:51 AM
1980
Federal Receipts: $517.1 billion
Federal Outlays: $590.9 bilion
1988
Federal Receipts: $909.3 billion
Federal Outlays: $1064.5 billion
CAGR Receipts: 7.31%
CAGR Outlays: 7.64%
Even if revenues are higher in the long-run, it's impossible to cut the deficit if you spend more than you collect.
Posted by: 8 at Oct 26, 2007 11:12:07 AM
Oops, I f-ed up the math. No wonder the supply side position looks so good. I'll try this again a little later...
Posted by: steve at Oct 26, 2007 11:14:06 AM
Unfortunately, politicians of all stripes have gotten into the habit of using the term "growth" in an imprecise way. Liberal democrats, for example, will argue that an increase in spending on a certain program from $100 to $105 is a "spending cut" because 105 is less than what was proposed in some earlier budget.
Romer and Romer conclude that tax cuts spur economic growth, but not enough to completely eliminate the impact of the tax cut. Suppose you start with an economy of size $100 and the tax rate is .20 (so tax revenues are $20), and you reduce the tax rate to .19. You do not see (say Romers) a 5% reduction in tax revenues. The economy grows to 103 (responding to lower tax rate), and tax revenues only fall by about 2% to 19.57.
Therefore, Bush is absolutely wrong to say "our tax cuts have reduced the deficit" if he means "reduced the deficit to a level that is lower than it would have been without the tax cut". But Bush is absolutely right to say "our tax cuts have reduced the deficit" if he means "reduced the deficit below what was predicted by static budget analysis at the time of the tax cut". If you hate Bush, you will argue (with some merit) that this second interpretation is a slippery one; but then you have to be equally critical of those who use the term "budget cut" to refer to lower growth in expenditures.
Posted by: howard at Oct 26, 2007 11:25:35 AM
I can't believe this is controversial: There is some point at which cutting tax rates on some activities will increase revenue from that specific tax.
Think of an example of something that almost no one would do for non-monetary reasons. Say, a 100% income tax on income earned from cleaning bed pans. Are you going to be collecting a lot of revenue from that tax? NO!
Now, say it's cut to a 35% tax rate. Someone will now be willing to clean a bed pan for $X and be left with $X(1-.35) after taxes. The government's revenues just went from $0 to $.35X. Does anyone dispute this? Now, the question is, at what rate(s) does the government maximize revenue? Clearly, in this simplified model, it must be more than %0 and less than 100%. I don't know what it is, but it sure makes sense to me to make damn sure your to the left of the revenue maximizing rate, and not the right. Right?
Posted by: Steve (w/ a capital S) at Oct 26, 2007 12:13:52 PM
My problem with the way the Laffer Curve is framed is that people on the right wind up as advocates for increasing government revenues.
People on the right side of the economic spectrum ought to be arguing for cuts in tax rates in order to cut tax revenues. Which brings up the 1000 pound gorilla that gets ignored during talk of the Laffer Curve: government spending. It needs to be cut so that personal spending can go up, skipping the bureaucrat middleman in the process which takes out an unhealthy chunk and forces us to consume things when if left to individuals they would have spent it quite differently.
Not to mention the deadweight loss caused by any form of taxation, especially higher taxation.
That said, the Laffer Curve is clearly not bunk at high rates. The US raised more tax revenue as a percent of GDP in 2000 under a 40% top tax rate than it did in 1980 under a 70% top tax rate. Clearly we were on the wrong side of the curve in 1980, something that those who clamor for more government spending ought to keep in mind.
Posted by: happyjuggler0 at Oct 26, 2007 1:06:21 PM
My comment is for the long-term memory blog, which i agree with. As being a college student who is constantly craming in material for a test, i may be able to remember portions of what i reviewed but give me the same test a few weeks later and i probably would not be able to answer all of the questions. Being in college, i am so busy all of the time and find it hard to have plenty of time to study. The night before tests i try to learn everything when i should have been looking over my notes everyday and learning a little bit at a time. Also, when it comes to learning, i am a visual learner and could look at charts or pictures and remember that than writing down my notes. I work better with hands on activites. After reading this blog i have realized that i do cram and "over-learn" which is not going to help me in the long run and i should try to change my ways of studying!
Posted by: Stephanie at Oct 26, 2007 3:24:44 PM
In 1960 with the top marginal income tax rate over 90%, it is damn near obvious that cutting that rate would yield greater tax revenues. Who wouldn't get on board for a free lunch like that. (Funny though, it took 20+ years.)
In 1980 the top rate was something like 60% and cutting it could also have resulted in greater tax revenues, but it is not obvious that it would. Then again, if you cut all marginal rates, the loss of revenue from taxpayers faced with lower marginal rates might swamp increased revenue from those at the top rate. Yet even here the tax-cut advocate might claim his tax-cut would increase revenues if he thought the economy would grow for reasons unconnected to the tax cut. That's cheating, but perhaps effective politics.
But now with the high marginal rate at 35% it is hard to claim that tax cuts won't cut revenue. Tax-cut advocates should be arguing that we will be better off if tax cuts let individuals spend their own money than if the government gets to spend it. And I think that was tax-cutters have been saying for hundreds of years, but it was downplayed when the easier Laffer argument worked.
Surowiecki, Jonathan Chait, Paul Krugman are all making hay by claiming dishonest and flakey supply-siders are the intellectual backbone of tax cut advocates. Is that empirically true? Are there no better advocates on our side? I don't think so, but to take the offensive we need to distance ourselves from the Laffer argument. It was valid and important up thru the early 1980's perhaps, but we need to get back to more traditional arguments now.
Posted by: John Kunze at Oct 26, 2007 4:55:16 PM
I can't believe you linked an article that links to huppi.com
There is that, and there is the fact that he claims that it is the Laffer curve and supply side that is indisputably wrong, rather than arguing that its simply taken too far, which is much more reasonable, whether or not I agree.
And there is the fact that he mentions behavior and he mentions that "people will invest less because more of the earnings will be taxed" but nowhere does he mentions that businesses will invest less simply because they HAVE LESS if they are taxed more. In other words, what goes to government to spend is not being spent by the businesses that earned that revenue, or the consumers that earned that revenue. And government is WASTEFUL.
Its just an incredibly poorly thought out article that is awfully sure of itself for being so full of crap. Kind of like huppi.com
Posted by: liberty at Oct 27, 2007 4:31:49 PM
Assume:
1) the government does not borrow to cut taxes
2) the government does not attempt to capture the new revenue immediately. i.e., a cut of x dollars persists for T years.
3a) assume that the tax-cut is targeted at the top bracket, which is to say that most of the 'returned' taxes feed investment activity not consumption
3b) government spending is predominately consumption not investment
4) private sector investment yields 10%
5) the marginal tax-rate is 30%
Then tax-cuts do pay for themselves in ~30 years time.
x*T < 0.3 \sum_{t=1}^{T} (exp(0.1*t)-1)
This is the power of compound interest.
BTW, this has nothing to do with the Laffer curve which is concerned with direct (nonpayment) and indirect (inactivity) tax evasion. The Laffer curve tells us that the loss (LHS) is over-estimated.
Tuning these parameters in various ways will create a net surplus from tax-cuts within five years time.
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