Tag Archives: Arnold Kling

On consumption and wealth

These two pieces are some of the best economic writing I’ve read in the last couple of months, and I thought that they were really important, because they articulate a position that is far more intelligent than the knee-jerk GOP narrative that unfortunately takes up too much space in the public discourse.

In any case, here is Karl Smith on why taxation should focus on consumption, not wealth:

This is why its important that we keep our eye on consumption, not income. There is no inherent social harm in someone amassing a large fortune. Nor, does it necessarily contrast with our Rawlsian sense of justice. It matters crucially what they do with that fortune.

If they spend it all on gold rims and mansions in the Hills, then by all means tax that. However, it they keep putting the profits back into the business to create bigger and better organizations, then we should let that process feed on itself, rather than slowly bleeding it.  Nor is there any particular reason why we should want to tax away income that was going to go to charity in the end.

Yes, many of the wealthy spend their money on lives of luxury while poor children attend classes in broken down schools. But, then go after the life of luxury, not the wealth.

And here is Arnold Kling, in an essay called When Labor is Capital:

From our more Austrian perspective, the Keynesian prescription will fail. Government spending tends to create or reinforce unsustainable patterns of production—temporary housing booms, transitory increases in auto sales, and the like. However, there is no reason to expect unsustainable patterns of production to stimulate the creation of sustainable patterns of specialization and trade. If anything, it would seem likely that government support for unsustainable patterns of production could make the market’s recalculation problem more confusing. It will delay long-term recovery, rather than hasten it.

Some Keynesian economists have proposed an even more unlikely solution, which is to revive the New Deal program of government-created jobs, as in the Works Progress Administration. This idea represents a complete denial of the contemporary reality that labor is capital. Real employment in today’s economy represents a long-term investment, not short-term make-work.

What needs to emerge are new, sustainable patterns of specialization and trade. Government does not have much incentive to create sustainable patterns of specialization and trade. In fact, the political system tends to favor subsidies to outmoded and unsustainable businesses.

Government could reduce the cost of investing in labor-capital. If it can be done in a fiscally responsible way, it would help to reduce the marginal tax rates on investment (the corporate profits tax) and employment (the payroll tax). This may require offsetting tax changes, such as eliminating the mortgage interest deduction or the deductibility of employer-provided health insurance.

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Important Words from Arnold Kling

President Obama is getting flack from the nutjob nativists for his decision to grant temporary amnesty to Haitians illegally in the United States. This seems like the charitable thing to do to me; economist Arnold Kling at Econlog also notes that it is the libertarian thing to do:

Finally, on another subject, a reader asked me to say more about Haiti. Jeff Sachs offers a predictable proposal for a massive infusion of aid. I have to admit that compared to other things our government does with our money, I see little reason to object. But the libertarian approach to Haiti instead would focus on opening our doors to refugees.

Look at the track record of refugees in America. It seems to me to have worked out remarkably well in most cases, both for the refugees and for America. Now, compare the track record of American military occupation and nation-building, or the track record of foreign aid to underdeveloped countries.

It is my feeling that one of the great failures of the Republican Party is that it cultivates this ethos that America’s greatness and glory is beyond reproach and that America’s status as the sole remaining global superpower gives it the moral right to war with nations and intervene militarily in places like Iraq for the purpose of liberating others. But this dodges the lessons from our history; generally, our attempts at Third World nation-building and geostrategic dominance have met with muddled success at best and spectacular failure at worst.

I can explain this in another fashion. An integral part of the conservative narrative is that A) market solutions work and are generally superior to government policy, B) that the best government is limited government and here you find particularly good defenses of federalism. Both of those ideas seem fundamentally sound to me. But the narrative becomes intellectually bankrupt where it becomes part of the other narrative of American power and dominance. That’s because the narrative of American power as an unequivocal force for good is also a narrative of superior American knowledge and expertise coupled with moral obligation.  But this narrative does not wholly manifest itself as American exports of the ideas of economic liberty and freedom; it also manifests itself as geostrategic meddling, coupled with economic imperialism and schizophrenic focus on particular problems as they are relevant. Many of our problems in the Islamic world, for instance, are rooted in our defense of dictatorships against the Soviet threat, when we should have been directly supporting democracy and economic liberty.

It seems to me that Arnold’s argument is exactly right. The tragedy in Haiti deeply saddens me, but the deeper tragedy is also rooted in the inability of Haiti to sustain economic development and build the institutions that are key to rising GDP and human welfare. We shouldn’t forget that Haiti’s economy and government were critically damaged by a US occupation to preserve US economic interests in the nation, regardless of what the nation’s citizens actually wanted.

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