I stand in awe of Steve Landsburg’s mind, though sometimes I question the uses to which he deploys it. For example, I’m sure the math is correct (given his assumptions) behind his latest, counterintuitive result:
[E]ven in a thoroughly non-Keynesian world where markets work perfectly…and recessions cure themselves, we might still want [a destructive] hurricane.
Or, because we can’t always call forth hurricanes when we need them, we might want our government to simulate their effects by diverting funds from useful to destructive spending projects — or just occasionally showing up at people’s houses and trashing their furniture.
Here’s why: Hurricanes make us collectively poorer. When we’re poorer, we work more. When we work more, the government collects additional income tax revenue. But — taking total government spending as given — the government can’t continue to collect additional revenue forever; sooner or later it must lower tax rates. (This assumes we’re on the good side of the Laffer curve…) When tax rates fall, labor markets work more efficiently. So much so, in fact, that the efficiency gains can more than compensate for the initial destruction.
Now I know a bunch of you are going to go nuts over the premises in Steve’s argument above, most notably the idea that the government would hold total spending constant in the face of an influx of new revenues. But still, I like to play new games, and I’m willing to abide by Steve’s rules. Here’s what I think:
==> A previous, super-counterintuitive Landsburg result is that we should (he claims) encourage more people to sleep around, in order to reduce the transmission of HIV. But, assuming the spread of HIV is akin to a hurricane and stimulates more spending on health care treatments etc., I now conclude that Steve’s new result proves he was wrong about HIV, just like I said at the time.
==> Let’s drop the cuteness and focus on Steve’s new result. In conventional Pigovian terms, what’s going on here is that there is a “market failure.” When you’re deciding how much to work, you’re considering the after-tax return (and other advantages such as developing your human capital) in light of your forfeited leisure. But if the government indeed holds spending constant, such that more work on your part leads to lower marginal tax rates, then you are conferring a positive externality and thus aren’t working enough.
So, in order to correct this market failure, the government should either (a) subsidize you–with the money for the subsidy being raised ideally through a new lump-sum tax–for working more, on the margin, or (b) should tax you (on the margin) for not working.
I’m not going to check the math, but it would be neat if the Pigovian optimal solution turned out to exactly counterbalance the distortions of the income tax, so that we replaced it on net with a lump-sum tax that brought in the same revenues.