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How much social insurance?
Brad DeLong writes:
I don't understand how any professional economist can disagree with the fact that more technology-driven inequality should call forth more social insurance in response.
I do think taxation should be progressive, but the comparative statics are tricky. If absolute standards of living are rising, and credit constraints are being relaxed, economic failure often means no cable TV rather than starvation. That militates in favor of less social insurance, noting on the other hand that we can afford it more as well.
Furthermore greater productivity for the high earners can mean greater deadweight loss from the taxes and in the longer run less innovation and lower living standards (a prize to the first person who in the comments shouts "trickle down!" and accuses me of believing in discredited supply side notions; I'll also recognize that well-spent government revenue can raise rather than lower the living standard).
Whether "the rich would have worked virtually as hard for less" will depend on social norms. I personally think that "shop at Barney's slurp my sushi run a hedge fund psycho norms" -- at least concentrated in a few percent of the human race -- may be better for humanity than the sanity promoted by Bob Frank and Montaigne. The thing is, part of the craziness of these people might include them not wanting to give away half or more of what they earn.
Of course we could calm these people down altogether (or maybe not, or maybe letting them run a hedge fun is calming them down), but I'm not sure we want to.
What about me? I could read Epictetus all day long for free, listening to my already-purchased Indian classical music CDs and blogging for you all. But at fifty percent marginal rates of taxation or higher, I would work considerably less at the margin. I don't look at a budget, to me the extra work "just don't seem right." Maybe it's because I don't play the ultimatum game like a chimpanzee. But in any case for many people I think there is a significant notch effect at about 45-50 percent and up for the tax rate.
I might add that serious egalitarian-oriented health care reform -- if indeed it succeeded -- would significantly lower the case for greater progressivity of taxation.
Posted by Tyler Cowen on October 13, 2007 at 04:41 AM in Economics | Permalink
Comments
What are you, some kind of trickle down supply sider!
Now onto the serious comment.
"I don't understand how any professional economist..."
That's because DeLong doesn't buy into the distinction between an economist and a moralist. I believe an economist should be a model-builder--someone with a good theory that if you do more of X you get more of Y, etc. No moralizing necessary, but we all get a clearer view of how the world works. A moralist provides statements with the word "should." As in, people should do this, or the government should do that. There is a well-grounded philosophical discipline around which to discuss "should" statements, and most people who call themselves economists (Tyler excluded) are ill-equipped to deal with it.
As for the economics, sure government spending could, in economic theory, raise social welfare. But unlike economists like Dani Rodrik who are quick to provide all the theoretical constraints under which markets must work to be efficient, I think public choice theory provides far more convincing constraints under which government action is likely to actually produce an efficient outcome.
But most of the people arguing for government action are not doing so as economists, but as moralists willing to sacrifice economy. I don't mind that, as long as the distinction is honestly proffered.
Posted by: M. Hodak at Oct 13, 2007 7:05:31 AM
Wow. Anyone who so sloppily tries to pass off a bald normative assertion as a positive statement shouldn't get to keep his university professorship. No "under Rawlsian ethics" or "assuming risk-aversion and a monotonic collective utility function, the utilitiy-maximizing redistribution will shift..." Just: "science proves my ethics", bang, so there. Presumably having observed how well this technique worked for Al Gore, Brad has decided to adopt it.
Would someone who knows what steps DeLong is leaving out here care to fill in the rest of us?
Posted by: David Wright at Oct 13, 2007 7:48:48 AM
i agree with what Mr. Hodak. Economists should stop preaching morality, but present clear pictures, both sides of a situation. Moralities change as gains of a certain situation change when parameters change, so its best left to the government to decide whats best for its people. We should do what we do best, that is analyse a situation from all sides, no matter how much we are ridiculed for saying "on the other hand".
Posted by: rahul at Oct 13, 2007 7:49:47 AM
The last sentence is quite good.
Posted by: sa at Oct 13, 2007 7:51:19 AM
"Maybe it's because I don't play the ultimatum game like a chimpanzee."
Taxes aren't the ultimatum game. In the ultimatum game it is cost-less to accept the offer. With respect to taxes, you have to do the work to collect the money.
Posted by: OneEyedMan at Oct 13, 2007 10:27:31 AM
That's because DeLong doesn't buy into the distinction between an economist and a moralist.
Does Cowan? My impression is that no group conflates economics with morality more than libertarians.
Posted by: Bernard Yomtov at Oct 13, 2007 10:44:14 AM
I don't understand how any professional economist can disagree with the fact that more technology-driven inequality should call forth more social insurance in response.
Hmmm. Technology-driven inequalities are sharpest between residents of Western countries and those who live in the third world. DeLong is a professional economist, so let's take him at his word. Clearly, we need a globalized social insurance plan, perhaps run by the United Nations. Who could possibly disagree? Not Brad DeLong, that's for sure. I eagerly await his concrete proposals.
Posted by: at Oct 13, 2007 12:17:04 PM
Interesting point about healthcare. i like the way it resonates with the basic principles of the Declaration of Independence: we're all guaranteed life, liberty and the *pursuit* of happiness.
as best I can tell, the US accommodates liberty quite well. while we can quibble about the impact of warrantless wiretapping, the reality is that our freedom of movement both within and outside of this country is unparalleled in the history of human kind.
the ability to pursue one's happiness is also quite high in the US. no one is "forced" to do anything in this country. we do place a great deal of responsibility on the individual to find ways of supporting themselves. but that's part of what happiness is all about. if there's anything about the pursuit of happiness we could improve, it's our system of early education. if we don't instill in the next generation the skills required to succeed in the modern world, it will be difficult for them to maintain the standard of living the current generation enjoys. deteriorating living standards are never a good recipe for happiness and social harmony.
that leaves life. i think most neutral observers could agree that there is tremendous inequity in the American system of healthcare. now, i'm not sure any of the national health systems are better, since they usually achieve equality by delivering a poor standard of care to everyone, rich or poor. but it seems to me that there are fairer, more efficient ways to manage the allocation of healthcare resources than the current system. the trick, i think, is to come to some type of societal agreement about what basic level of service to which each American is entitled, and then figure out ways of harnessing private markets to deliver that basic level of services in the most efficient way. if certain individuals then decide that they wish to consume more healthcare services than the base-level allotment, so be it. but it should be very clear that those services are provided by private businesses and paid for by private invididuals.
Posted by: taylor at Oct 13, 2007 12:51:58 PM
What is the equilibrium solution? The models I've seen produce a power law or similar curve of income with an increasing concentration at the top. Basically, money makes money. The rest is in the details.
The problem is that when the average keeps rising, but the median stays put or falls. Fewer and fewer people are benefiting from the system. The usual way around this, dating from pre-biblical times, is to provide some way for money to flow from the top to the bottom. If you don't do this, eventually growth stops and the average starts to fall to no one's benefit.
In our society, we call the top to bottom flow social insurance.
Posted by: Kaleberg at Oct 13, 2007 1:04:30 PM
Am I the only one who is sick of people claiming government redistribution spending is compassionate?
Stealing money from someone for the purpose of giving it to someone you prefer is not compassion. It is only compassion when you give your own money and when you do it voluntarily. To that end, government redistribution spending reduces the ability, and inclination, of people to actually be compassionate and voluntarily give to the needy.
I think the most compassionate economic system is the one that reduces the amount of people under poverty over time, and which enables individuals to give.
I think the least compassionate system is the one that insitutionalizes poverty by trying to make it more liveable and creating a permanent underclass who has an insane effective marginal tax rate when going from idle poverty to work.
I wish redistibutionists, of both the coercive big government variety and the voluntary charity types, would focus more on outputs rather than inputs, i.e. focus more on what happens to recipients than on what "donors" give.
Posted by: happyjuggler0 at Oct 13, 2007 2:10:29 PM
Furthermore greater productivity for the high earners can mean greater deadweight loss from the taxes and in the longer run less innovation and lower living standards (a prize to the first person who in the comments shouts "trickle down!" and accuses me of believing in discredited supply side notions; I'll also recognize that well-spent government revenue can raise rather than lower the living standard).
Personally I think that one can make a huge case that for the top 0.1% of wage earners, the decline from 90+% of wages being taxed to 28% being taxed (and partially back up again) is the single biggest cause of their exploding incomes and that this is exactly as TC outlined in his post, namely "insane" people who continue working long past the point where a seemingly sane person would have retired, and that they wouldn't do this if the government got the bulk of their spoils.
I've read that in Sweden that there isn't a company in the top ___ of companies that has been started in the past 30 years. You can't say that about the US, and Americans in general (and others) are better off because of the latter.
When one considers that a huge amount, perhaps the vast bulk, of the wealth of these "insane" superrich is going to be donated to charity eventually, and combine that with the above reasoning, it seems quite foolhardy for society to try to bring the rich down a peg or two via punitive taxation in the name of "fairness".
Posted by: happyjuggler0 at Oct 13, 2007 2:33:20 PM
Bernard,
All of us are probably guilty of that conflation. It takes a lot of effort, requiring a clean separation of your analytical self from your moral self. One can make the case that we can never fully disengage from our morality. The way I accomplished something like that separation in my own courses is by challenging myself with this standard: if my students can tell my politics from the content of my teaching, then I'm a bad teacher. I really believe that. (Of course, all they have to do is go to my blog. But then, I have never advertised my blog to my students.)
Posted by: M. Hodak at Oct 13, 2007 2:39:38 PM
All of us are probably guilty of that conflation.
No doubt. Me too. But then why pick on DeLong? Why claim that you are virtuous about the distinction and he is not? Isn't it really that you just disagree with his views?
Posted by: Bernard Yomtov at Oct 13, 2007 2:58:29 PM
No, it's not that I just disagree with his views. I disagree with his conflation, which makes it impossible to meaningfully (rationally?) discuss his views.
I don't care for it when Tyler does it, either, and I think he should know better. But at least that conflation is not Tyler's m.o. (or Rodrik's either, which is why I respect Dani, even though I often disagree with him). I believe it is the m.o. of DeLong and Thoma.
Posted by: M. Hodak at Oct 13, 2007 4:32:44 PM
Tyler -
What are the Indian classical music CD's?
Posted by: Rich Berger at Oct 13, 2007 4:49:09 PM
My impression is that no group conflates economics with morality more than libertarians.
That's a failing of utilitarianism, upon which I don't think libertarians have any special claim. Is the argument for a minimum wage economic or moral? When someone makes an argument for, say, industrial policy based on some market failure, they are making an explicit economic justification (subsidies create jobs) for an implied moral outcome (jobs are good). When libertarians oppose this on explicitly moral grounds (freedom is good), they are accused of being ideologues who ignore economic arguments (free people might underinvest in the right industries). Maybe all you anti-libertarians could get together and agree on which set of accusations you want to make?
Posted by: Eric H at Oct 13, 2007 6:21:28 PM
Social Insurance: As originated by Bismark, it was indeed "insurance" in that it was a transfer of risk (that's what insurance is). It was indeed "Social" (pace Hayek)because there was a transfer to the society (general German public) as a charge on government revenues. It was a transfer of part of the risk of costs of living beyond the then life expectancy. On the then statistics it was a fairly cheap bet.
The term as used today is quite something else, not "insurance" at all, just transfers, without choice.
To "favor Progressive Taxation," (whether of revenues or of anything else - like size or value of landholdings or cattle) implies a selection of the reason WHY the tax should be "progressive." And that selection most often takes us to a determination of what are the functions to be assigned to the mechanisms of governments (that's all governments are- mechanisms), because the sole justification for taxation is to provide revenue for the functions of governments: Adorn the King; pave the roads; arm the defense; bread and circuses; Museums of Rock and Roll; and other important functions.
Now, to "promote domestic tranquility," by taking from some and giving to others (basic socialism) through political selections, so the "others" do not rise up and take for themselves, or squabble amongst themselves over the table scraps, is likely the cited function; whether empirically justified or not.
Shall the "Economics of taxation" determine the functions of governments; or shall the politically selected functions of governments determine the "Economics of taxation?" We can only make that water flow uphill that has come down from a higher hill - that's "progressive."
R. Richard Schweitzer
s24rrs@aol.com
Posted by: R. Richard Schweitzer at Oct 13, 2007 9:48:11 PM
Parts of your argument would be sounder, if health insurance cost as little as cable TV! (And if certain sorts of advanced information technology had not become necessary to remain an informed citizen -- although here, perhaps, cable TV fails us...) Or again, if static notions such as deadweight loss from taxes really made any sense in a dynamic economy. The money is always re-spent somewhere in the ongoing cycle, and usually in the blink of an eye, and until recently, credit wasn't a problem anyhow. There is no economy truly sacrificed. I can see the argument for the upper middle-class loungers in the Loeb Library, but do you really think the top 0.1% of the population will stop at making $10 million and not bother to go on to make $50 million, because of a 50% tax rate?
Otherwise I entirely agree. I have been arguing in blog comments for years that egalitarian healthcare reform is very likely to reduce expenditures. Why is this? Because, like any coordinating innovation or institution, it can reduce costs. That can be deduced directly from Coase and Douglass North. Healthcare reform will also reduce nonmonetized space- and time-costs for a lot of the lower middle class -- like worrying about how to keep the kids healthy, not having to drive a long way to sit for hours in a county waiting room, going without one medicine in order to afford another, etc. etc. -- and that will increase worker productivity also, because it gives them a little more freedom at the margins. Why? Because despite all the college-overeducated "non-moral positivists" tut-tutting (in self-contradiction) about "incentives," Americans generally are not bums, and incentives work the other way too.
Posted by: Lee A. Arnold at Oct 13, 2007 10:13:31 PM
On further reflection, Tyler's views seem to meet Brad's criterion objective, Tyler simply takes a different route to get there.
Posted by: R. Richard Schweitzer at Oct 13, 2007 10:56:19 PM
Does anyone wonder if people who make a lot of money have higher desire for money and thus get more utility from money even though they have more of it? Does anybody wonder if some poor people have lower demand for money for long term benefits/returns and so more money might actually be destructive to them. Are people who spend all that they have now and fail to work hard or study hard, saying the they think that they have plenty? When I was in college people would sometimes say that foreign students from poor countries worked really hard, studying for long hours, because they wanted to get out of poverty, but people never seemed to indicate that they thought or expected poor Americans to considered by drive to escape poverty to work extra hard.
Posted by: Floccina at Oct 13, 2007 11:17:46 PM
As to "trickle down," some consideration should be given to the trickle down of the impact of taxation.
Simple case: Both Joe SixPack and Prof. Noel Sundregen, Ph.D. price their services on take home pay, "Wadda I get net?" "Wadda I have to have net?"
Raise the lawyer's taxes and his fees rise (to the extent of available elasticity) because he needs a net amount with two in college. Legal costs rise at his client corp., and pass through as costs of goods. It's probably a good guess that very, very few bear the total and final impact of the taxation that falls on them, and there are those better placed than others to trickle on down some of what gets laid on them, and they may not even be conscious of doing so; they only focus on how much they "need" for how they can, or want to, live, and try to price that into their work.
R. Richard Schweitzer
s24rrs@aol.com
Posted by: R. Richard Schweitzer at Oct 13, 2007 11:24:23 PM
The moral foundation of B. D. 's argument is flawed. Inequality in earned income is not bad. People who work harder or are more productive per hour should have a higher income because higher production is good for all of society. To justify taking from the rich to equalize incomes, you have to assume that their higher incomes are not earned but stolen from the poor as Marx etc. did.
Posted by: Dan Landau at Oct 14, 2007 10:42:18 AM
I do think taxation should be progressive, but the comparative statics are tricky.
Dr. Cowen, progressive taxation would be nice. However many forms of taxation, particularly Ad Valorem taxes, are regressive in nature.
Posted by: Neal Meyer at Oct 14, 2007 11:09:44 AM
Hey, I shop at Barneys. Prices are high, but I don't spend that much on clothes, and it would be an inefficient use of my time learning about men's suits.
When a friend got his first Wall St job, he went to Barneys and picked a suit. "Lovely suit," said the salesman, "and where will you be working, Sir?"
"Goldman," says my friend.
The salesman replaced the suit on the rack, and led him to a different rack, saying "I think you would prefer one of these, Sir."
Posted by: gorobei at Oct 14, 2007 1:09:03 PM
Republicans are quite right calling the Democratic health care plans "socialist," as they are nothing but egalitarian income redistribution programs. But what the Republicans fail to mention, is that their own so-called "free market" programs are not much better. In fact, Republicans are quite happy to mandate that everyone should carry insurance, even though this does not make sense for certain demographic groups, like university students. Politicians both left and right would just love being able to mandate what will go into these health insurance policies, as it would allow for endless symbolic debate on who is not helping "America's children" now.
Posted by: kurt at Oct 14, 2007 2:34:21 PM
