While most Americans are celebrating Thanksgiving, I’ll be in London, giving the annual Hayek Memorial Lecture sponsored by the Institute of Economic Affairs. Topic: Is the World Over or Under Populated, and How Would We Know? Tickets are required but free, and are available here. If you come to the talk, don’t leave without saying hello!
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In my dream, Greg Mankiw and Larry Summers are advising a friend about weight loss.
Mankiw says: If you eat fewer calories, you’ll lose weight.
Summers replies: Not so fast! Sometimes if you eat less ice cream, you crave more cake. Then your calorie intake won’t change and you won’t lose weight. Greg’s advice is fine as an academic theory, but I doubt it will work in practice.
(Note here that Greg never mentioned ice cream in the first place.)
Of course Greg is 100% right, both in theory and in practice. If you eat fewer calories, you will lose weight. Summers responds that if you don’t eat fewer calories, you might not lose weight. True, but entirely off the mark.
I mention this because Mankiw had a recent blog post where he argued that if you cut taxes on capital income you’ll see a big rise in wages. (I happen to have blogged about this twice already in the past 24 hours, but those posts are irrelevant here.) Summers has replied that Mankiw is right in theory but likely to be wrong in practice, and lists three reasons. The first of those reasons comes down to saying that if you cut the corporate income tax, corporations are likely to end up paying more in other taxes, so you haven’t really cut the capital tax after all.
(Note here that Greg never mentioned corporate taxes in the first place.)
Okay, fine. So if you haven’t cut the capital tax, then Greg’s observation doesn’t apply. Likewise, if you haven’t really cut calories, you shouldn’t expect any weight loss. That’s not remotely a refutation.
Continue reading ‘Weight Loss Advice From Big Name Economists’
Earlier today, I blogged about Greg Mankiw’s calculation on the effects of capital tax cuts.
Following a tax cut, Mankiw computes the ratio of the long-run increase in wage payments to the short-run shortfall in government revenues, and, with reasonable assumptions, shows that this ratio has an astonishingly high value of 3/2.
I know how to make that ratio even higher.
The Mankiw Plan is: Cut capital taxes today and watch wages rise tomorrow. The Landsburg Plan is: Cut capital taxes tomorrow and watch wages rise the next day.
Under the Landsburg Plan, the short-run government revenue shortfall (today) is zero, while the long run increase in wages is positive. That gives me a ratio of infinity, which beats Mankiw’s 3/2 ratio by a factor of … infinity.
This is not meant to cast doubt on Mankiw’s result (which is entirely responsive and relevant to the current public debate he was addressing); it is meant to cast light on what’s driving it. When you cut taxes, government revenue falls by more in the long run than in the short run. The long run fall in revenue is what’s driving the wage growth (as I showed in my earlier post), and what drives the result is that the long run fall in revenue is greater than the short run fall. If you can drive down the short-run fall, you can drive up the ratio.
Greg Mankiw has a provocative post on how wages are affected by a cut in the tax rate on capital income. The short version: The effect is huge. If the government commits to a permanent tax cut that costs it $1 in revenue this year, then in the long run, annual wage payments will rise by $1.50 (and the annual revenue shortfall will be even less than $1).
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That strikes me as huge. Wages grow by more than government revenue falls — in fact, by a factor of about 1/(1-t), where t is the initial tax rate. Mankiw’s $1.50 comes from plugging in an initial tax rate of 1/3.
Although Mankiw’s calculation is simple, straightforward and convincing, it managed to drive me crazy for a substantial chunk of a day, because I didn’t really understand what was driving it. Now I do. So let me explain.
Readers: I need your help!
More than once, my blog readers have proved themselves to be cleverer, smarter and more insightful than I am about a great many things. I need your cleverness, intelligence and insight now more than ever.
Yesterday, I delivered a manuscript to my editor at Houghton-Mifflin. Sometime in 2018, this manuscript will become a book. What it needs is a title!
The book is a compendium of puzzles and brain teasers designed to teach lessons about economics, statistical inference, and related matters. A recurring theme is that what’s “obvious” is often wrong. Here is a brief excerpt from the introduction.
The title should be catchy, clever, attention-grabbing and indicative of the content. What, specifically, should that title be?
