I am supposed to be preparing for a debate that will occur in a few hours so I need to keep this brief. Go read Landsburg’s post on a journalist’s silly recommendations for tax policy. The stipulated facts (which I haven’t verified) are that some rich guy is sitting on $84 million and he literally doesn’t spend any of it; he just drives around his fleet of cars. (I guess he must buy gasoline once in a while.) So the journalist wants the government to tax that guy.
Landsburg says that we don’t even need to worry about whether it is fair or unfair to go ahead and tax the guy out of his fortune, because it’s impossible:
Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But [the rich heir], by [the journalist’s] account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.
Ah, says [the journalist] — but there’s still that $84 million in the bank. Surely we can tax that, no? That, right there, is the heart of [her] confusion. She thinks that green pieces of paper, or a series of zeroes and ones in a bank computer, can somehow help supply the government’s demand for actual goods and services. It can’t.
OK we all see what Landsburg is driving at, I hope. It’s true, if you want to do the Bizarro World of the Liquidity Trap where the laws of economics become inverted, then Landsburg’s argument falls apart. (That’s not surprising, since Landsburg is basing his arguments on the laws of economics.)
Now enter Paul Krugman:
Brad DeLong and Noah Smith have some fun with a bizarre post by Steve Landsburg — even more bizarrely endorsed by Alex Tabarrok — in which Landsburg asserts that you can’t tax a man if you can’t persuade him to reduce his consumption.
There are multiple things wrong with this claim, but the most fundamental, I think, is that it represents a remarkable misunderstanding of the reasons why we have taxes in the first place. They don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency.
Consider first the taxes raised by, say, the state of New Jersey. Chris Christie doesn’t tax me because he wants to reduce my consumption; he taxes me because NJ needs money to pay its bills. It’s true that in the short run, if we ignore the legal restrictions on state borrowing, he can spend more than the state takes in in taxes; but over the longer run the state must, one way or another, collect enough revenue to pay for its spending.
Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)
So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.
Congratulations, Dr. Krugman: You are doing EXACTLY what the MMT people do. They say the government can’t ever go insolvent because it can print money. You (quite correctly) point out that green pieces of paper aren’t really the issue, and that without real resources to facilitate things, the printing press would just lead to rising prices.
This of course is exactly what Landsburg is saying. Suppose there were thousands of people like the heir, who had a trillion dollars in paper currency sitting in their basements where it had been “idle” for years. Now the government has a huge budget deficit, and has two choices: It can either run the printing press and create $1 trillion in new currency, or it can seize the $1 trillion that (by hypothesis) would have stayed in the hoards for at least the next 50 years.
Apparently Krugman thinks the first option would cause price inflation and would just be a trick in terms of maintaining solvency, whereas the second option would be perfectly fine.
And you have to love this concluding paragraph from Krugman:
Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.
Exactly, I hear you brother! And I for one am really annoyed at all these economists running around, trying to write pop books and appear on TV, acting as if this is all a big show. Can’t we just have economists who write journal articles and stop making wiseacre remarks about everything? Why, I even hear that there’s some guy calling himself a “standup economist.” Man that kind of showboating annoys me.
UPDATE: I want to clarify that I’m not even endorsing Landsburg’s argument in the grand scheme. In particular, it worries me that he is committing the same mistake as people who say Bernanke’s money-creation will only affect the economy “once it leaks out into the system.”
So in my example, you could argue that the trillion dollars in currency sitting in people’s basements was exactly the equilibrium amount of purchasing power they wanted to hold, and so when the government seizes it, they will bust their buns creating another trillion dollars’ worth of output, in order to replenish their hoards. Hence, the government really just seized their output.
But that’s not the kind of argument Krugman was giving. Instead, he was focusing on solvency, on the fact that the government needs to come up with green pieces of paper to pay its bills. And that is exactly the position of the MMTers, and why they think taxes are superfluous for the purposes of solvency.
Final note: I haven’t read DeLong or the others yet. If they are making the subtle point about cash balances serving a purpose too, and being able to influence production behavior, then I may side with them over Landsburg. My narrow point in this post is that Krugman totally fell on his face when trying to show how dumb Landsburg is, and then he doubled down with the hilarious line about PhDs not seeing how it all fits together.