13 Sep 2013

More Shifting Sumner Statements

Market Monetarism, Scott Sumner 37 Comments

For casual readers, I should probably clarify: Unlike certain Keynesian economists, I actually spend most of my time online reading the blogs of people with whom I disagree. For example, I probably would agree with just about everything posted at The Circle Bastiat, but that’s why you won’t see me commenting much on it. Rather, I like to have my views challenged, and I also like to go on the offensive when I spot mistakes and inconsistencies in my intellectual opponents.

Two of the people I read the most religiously are Paul Krugman and Scott Sumner, because (a) they are really sharp and have a well-developed worldview and (b) I think they are the leaders of the two schools of thought (Keynesianism and Market Monetarism) that pose the greatest threat to Austro-libertarianism. Since I have a good memory and spend so much time reading these two guys, I believe it is my duty to write it up whenever I spot problems; if not me, who?

Last preamble: I pick on Scott a lot, but it’s possible you could find similar flaws with anybody if you read him long enough. For example, Gene Callahan has pointed out that libertarian economists often warn that a tax on corporations will be “shifted” to other parties (such as the consumers or workers), but when it comes to figuring out the effective tax rate paid by “the rich,” the same libertarian economists will often use the statutory incidence of a corporate tax as if it’s coming right off the bottom line. So, I was glad when Gene pointed that out, because at the very least I want to be consistent in how I handle those two issues.

Now on to Scott:

==> On May 5, 2012 he wrote a post titled, “Our profession is wrong about what went wrong, and hence doesn’t know how to fix the problem.”

==> Then on August 29, 2013 he wrote a post titled that “Yes, the economics profession really does believe that low rates mean easy money.”

So it looks like the profession as a whole doesn’t really understand the wonders of Market Monetarism, right? But hang on:

==> Today Scott says that a letter signed by 300 economists supporting Janet Yellen is evidence that she is the better pick for Fed chair than Larry Summers.

And if the above isn’t enough, how about a cheap shot? Today Scott also explained that there are only two words’ difference between himself and Paul Krugman…

37 Responses to “More Shifting Sumner Statements”

  1. Major_Freedom says:

    A lot of politicos do this.

    Use the mob when it agrees, and don’t use the mob when it disagrees.

  2. random guy says:

    Someone needs to knock down Cullen Roche a notch or 12 though. He is obviously wrong, but most of the public doesn’t realize it, and he has serious potential to steal the Austrian’s thunder when the system blows up if he is able to come up with a plausible explanation for why he did not see it coming. It’s best to just go ahead and expose him now. Especially when he is writing articles like this one:

    http://seekingalpha.com/article/1685342-understanding-why-austrian-economics-is-flawed

    • joe says:

      Funny that when you try to get to page 2 they ask you to sign up. From page 1 it’s clear he doesn’t understand much about Austrian economics and merely learned what he knows by reading between the lines of op-eds written by Austrian economics.

    • Cosmo Kramer says:

      “There is always an excuse within Austrian economics that implicitly assumes government cannot spend dollars any better than a household.”

      Look at all government spending. As a whole it is VASTLY less productive than private sector spending. Enforcement of property rights allows the private sector to be productive, but there is “spending” and then there is waste http://www.heritage.org/research/reports/2013/08/federal-spending-by-the-numbers-2013

      “For that implies that households and businesses always make rational decisions”

      WRONG. People act in their rational self interest. The word “self” is key. ABCT proves that people do act irrationally….. duh.

      “as if choosing to have our government spend money on wars and welfare is all that much different than households spending money on the next release of the tech gadget they probably don’t need or the McMansion they can’t afford.”

      It is considerably different. Wars are entirely unproductive. Dead soldiers and bombs are terrible wastes of scarce resources. When we build a bomb and explode it, we have that much less material to use. It could have been used to build factory components which ADD to our wealth. Paying welfare admin workers to sit on their behinds is entirely unproductive. less than 20 percent of welfare costs are recipient payments, the rest is government waste. The admin paychecks aren’t for increasing goods per person, they are a DRAIN. They decrease goods per person.

      “the primary purpose of the central bank is not a conspiratorial attempt to enrich bankers, but to help oversee and regulate the smooth functioning of the payments system.”

      What a fantastic job it has done……

      “Austrian economists came out at the time saying that the increase in reserves in the banking system was the equivalent of “money printing” and that this would “devalue the dollar,” crash T-bonds and cause hyperinflation”

      I am still looking for a single Austrian that predicted hyperinflation.

      “It was standard operating procedure to see charts of the monetary base like this one followed by dire predictions of high inflation or hyperinflation.”

      There are a number of us that predict high/mass inflation. Gary North in particular. But he sees this further out, not imminent as Roche would have you believe.

      “So they assumed that more reserves would mean more “multiplication” of money and, thus, hyperinflation”

      Nope.

      “Austrian economists actually change the definition of inflation to serve their own ideological needs.”

      Nope

      “In Austrian economics inflation is not the standard economics concept of a rise in the price level. Inflation in Austrian economics is just a rise in the amount of money.”

      Nope. There is price inflation and monetary inflation. We could say the supply of money has increased, but many simply choose to say monetary inflation.

      “But there is a more egregious and nefarious error in this “decline” of the dollar myth. It completely misunderstands how living standards can rise even while the money supply rises.”

      Wrong. Wrong. Just stupid and wrong. There is no Austrian that doesn’t understand this. We look at # of dollars and what they will buy. Increasing supply at will is redistributive.(cantillon) Productivity can increase, but it should have increased MORE.

      “In other words, the money supply has technically increased, but we’re not worse off because of it. We’re better off because of it. What’s happened since 1913 in the U.S. is just one gigantic version of the washing machine example where our living standards have exploded through the roof in tandem with a rising level of credit and an innovation boom that human beings have never come close to experiencing in the past.”

      Classic… complete confusion of correlation and causation.

      “First, they assume the government controls the money supply ”

      Say what?

      “It’s actually controlled primarily by private banks in a market system that Austrians should love.”

      Austrians don’t know this? This is a great secret?

      http://mises.org/daily/6065/

      Ooops, I just exploded most of Roche’s article.

      “Second, they move the goal posts on the definition of inflation to imply that inflation is always and everywhere a bad thing (which, it can be, but generally isn’t).”

      We don’t change the definition. There is always a price level change and always a monetary + or -. AT WILL (for free) increases or decreases in the supply of money is destructive in nature. It distorts existing contracts. It redistributes wealth. There is NO NEED to alter the money supply. There is a money supply that is sufficiently large for trade to prosper. Again, he confuses correlation and causation. Just imagine how fantastic the 20th century would have been without the explosion in the size and scope of governments.

      “That really just scratches the surface on some of the flaws in Austrian economics. ”

      Okay Roche, now what you need to do before you criticize a POV that got entirely wrong…….
      http://mises.org/literature

      They are free, you have no excuse to be so obscenely wrong.

      • Cosmo Kramer says:

        I do hope that RPM spends more time combating MMT/MMR.

        • Bob Roddis says:

          Rohan Grey, the MMT law student behind the endless series of pro-MMT seminars at Columbia law school (of which the Murphy /Mosler debate was one) keeps having me read journal articles that undermine his theory. Prof Farley Grubb insists that the US Constitution effectively banned the creation of paper money by the government — because the big bankers wanted the sleazy job for themselves in order to rip off the public. Who knew?

          http://tinyurl.com/k3842e5

          Prof. Grubb thinks that the way the constitution was written on this subject was terrible (but true).

      • Innocent says:

        “I am still looking for a single Austrian that predicted hyperinflation.”

        I think we can all agree that this is increasing money supply, that in and of itself means there is inflation does it not? Now I know what he means, which is an increase in CPI. CPI cannot increase unless there is an increase in competition for goods or money is devalued and trade goods must be purchased for more than before from trading partners. Since China ( last I checked ” has pegged its currency to the dollar and THEY are where we get most of our goods this means there cannot be inflation on that front barring competition for resources..

        SO yes I think that there has been hyperinflation of the money supply. I also think that the competition for goods has been in stocks rather than goods on the street, and yes I do believe that this is causing a distortion of the market place on several levels. Does this translate to higher CPI? Not really, you have to hit a full employment before that will happen. And we are still VERY far away from that.

        What should be happening is deflation in order to create equilibrium between demand and supply. Until that happens welcome to slow growth.Just my opinion which is most likely wrong on the matter lol.

        • guest says:

          So Where’s the Inflation? Tom Woods Talks to Mark Thornton
          [WWW]http://www.youtube.com/watch?v=n0RusrwYsRE

        • Cosmo Kramer says:

          I don’t think anyone would agree with your definition of hyperinflation. Hyperinflation is not explicitly defined, but is typically defined as 10-50 percent (or more) increase in prices monthly.

          Price level increases or decreases by themselves aren’t the cure or the ailment. It is what brings them about. This is why productivity increases are ALWAYS warranted deflationary effects. Confiscatory deflation is always a bad thing. A government increasing money supply by 10 percent to fund itself is always bad. (there are honest and dishonest ways to fund government)

          ” I also think that the competition for goods has been in stocks rather than goods on the street, and yes I do believe that this is causing a distortion of the market place on several levels. Does this translate to higher CPI?”

          See my post here, taken from p 64-65 of “Dying of Money”

          http://consultingbyrpm.com/blog/2013/09/paul-krugmans-problem.html#comment-73174

          To me, there is no difference between a guitar and a share of Fender stock. Yet only one is looked at in terms of price inflation.

          The short answer is that the price level should be whatever it ends up being. Gasoline prices exploding means something, and the market needs this information to make decisions moving forward.

      • guest says:

        “There is always an excuse within Austrian economics that implicitly assumes government cannot spend dollars any better than a household.”

        “Better” is subjectively assessed by the individual, so by definition government cannot spend it better.

      • Lord Keynes says:

        “I am still looking for a single Austrian that predicted hyperinflation.”

        LOL:

        (1) Bob Murphy, April 23, 2009:
        http://www.lewrockwell.com/2009/04/bob-murphy/hyperinflation-is-coming/

        (2) Marc Faber said explicitly in 2009 that hyperinflation in the US was 100% certain:

        http://www.youtube.com/watch?v=YDD03avqv2A

        That good enough for you?

        (3) Nor was Schiff’s position in that same video above (from 3.03) really that far from Faber’s: for Schiff, if the US did not change policy (i.e., large deficits and QE) it was headed for hyperinflation. Yet large deficits and round after round of QE since 2009 have happened, and still no sign of the Austrian inflationary armageddon.

        • Bob Roddis says:

          I never predicted hyperinflation. I thought that the new funny money would go to propping up collapsed asset prices and wouldn’t be called “inflation” by the Keynesians.

        • Bob Murphy says:

          Look LK, I obviously was wrong in my views on price inflation in the last 5 years, but I didn’t pick the title of that article. I was not “predicting hyperinflation” by this point.

        • Bob Roddis says:

          Austrian predictions are not and were not based upon society being on auto-pilot. Any prediction of inflation back in 2009 was essentially a prediction of what “policymakers” (as DK likes to call them) would do and what they might be able to get away with.

          It was basically a prediction of what the criminal statist money managers were going to do in the next few years depending upon the obliviousness of the public. The statists were more criminal and the public more oblivious than most of us predicted. There was a lot less lending to the public than I would have predicted because I didn’t think the public would put up with the bad times for as long as they have.

        • Cosmo Kramer says:

          Is this the best you’ve got Captain Eugenics?

          To help you out in the future, let me tell you what a prediction is. ex: I predict the sun will come up tomorrow. versus a Schiff “prediction”: If the sun goes supernova, it will not rise tomorrow; supernova is a worst case scenario.

          (1): okay, so where did he predict hyperinflation in the article you blindly linked? Bob actually predicted high levels of inflation, per his bet. Those predicted rates of inflation don’t go anywhere near hyperinflation.

          (2) Forgive me if I don’t take Faber serious. I consider him as much an Austrian as John Mauldin. He’s a doomsdayer. If he is considered “one of us” then my statement is wrong, but I would contend that he is not.

          (3) Schiff is more an Austrian than Faber, but let’s be clear about his stance on hyperinflation. He literally called it a worst case scenario.

          “the US did not change policy (i.e., large deficits and QE) it was headed for hyperinflation. Yet large deficits and round after round of QE since 2009 have happened, and still no sign of the Austrian inflationary armageddon.”

          And what exactly was the time frame he gave, if any? And gee golly, policies are shifting and deficits are coming down. You have disproven yourself again. I end up disagreeing with what Schiff believes would cause Hyperinflation, but he didn’t predict the policies that would cause it to happen.

          Pathetic attempt Captain Eugenics.

          For future reference, I am talking about actual Austrian economists. Why all the straw men against Austrians regarding hyperinflation? Where are they hyperdeflation straw men?

          When we laugh at Keynesians, we use actual quotes, not straw men.

          http://mises.org/daily/6372/

          • Lord Keynes says:

            (1) Murphy implies in very first few sentences that he is thinking of hyperinflation:

            People often accuse me of making “irresponsible” forecasts of massive price inflation. Even though they know that history is replete with examples of central banks ruining their currencies, these critics are sure that “it can’t happen here.” So in the present article I’d like to make the brief case for why we should all be very alarmed about the prospects for the U.S. dollar.

            Murphy claims that he didn’t give his article its title. In that case, whoever did so at lewrockwell.com interpreted Murphy to be warning of hyperinflation, just as any honest reader of the article would conclude .

            (2) nice no true Scotsman fallacy.

            For every example of an Austrian predicting hyperinflation, you’ll no doubt just scream that he is not *really* an Austrian, or some such rubbish.

            (3) “And what exactly was the time frame he gave, if any?”

            lol.. So we’re expected to believe that he was thinking of hyperinflation 200, 300, 500 or 1000 years from now?

            • Bob Murphy says:

              Lord Keynes, the man for whom Mises quotes on analytic judgments mean nothing, and for whom quotes about “massive price inflation” mean hyperinflation.

              • Lord Keynes says:

                (1) So actual “ruining a currency” and “massive inflation” are not really hyperinflation?. lol.

                Let just redefine words at will, why don’t we!

                (2) As for Mises’s quotes on analyticity, you continue to read too much into them.

                Mises tells us point blank that he doesn’t really care about whether praxeology is analytic or synthetic:

                “Praxeology is a priori. All its theorems are products of deductive reasoning that starts from the category of action. The questions whether the judgments of praxeology are to be called analytic or synthetic and whether or not its procedure is to be qualified as ‘merely’ tautological are of verbal interest only.

                Mises, Ludwig von. 1962. The Ultimate Foundation of Economic Science: An Essay on Method. Van Nostrand, Princeton, N.J. p. 44.

              • Cosmo Kramer says:

                “So actual “ruining a currency” and “massive inflation” are not really hyperinflation?. lol.”

                No. Hyperinflation is hyperinflation.

                One can say that you “ruined” a car if you hit a parking pole, yet the car still functions perfectly. or “ruin” a cake by sneezing on it. Surely you would agree that sneezing on a cake and exploding it are entirely on a different level of damage to edibility?

                Besides, see the actual definitions of mass vs hyperinflation provided.

                You are the only one here changing definitions to suit your pathetic attacks. These terms are WELL DEFINED all about the internet.

                http://mises.org/daily/6159/

                oops, just exploded another hopeless attack by Captain Eugenics.

              • Lord Keynes says:

                “One can say that you “ruined” a car if you hit a parking pole, yet the car still functions perfectly. or “ruin” a cake by sneezing on it”

                (1) lol.. So all Murphy meant was that, well, the economy was going to be “ruined” but of course not “ruined” in any substantive sense of that term.

                (2) And yet whoever gave the title of his post at lewrockwell.com interpreted Murphy to be warning of hyperinflation?

                (3) and despite the fact that Murphy was trying to refute those who were
                saying hyperinflation wouldn’t happen:

                economists Woodward and Hall think the Fed just needs the ability to charge banks for holding reserves. The Fed already (recently) obtained the right to pay interest on reserves, and so Woodward and Hall think the Fed should also have the ability to do the opposite, i.e. to be able to pay a negative interest rate on reserves that banks hold on deposit with the Fed.

                How does this avert the threat of hyperinflation? Simple, according to Woodward and Hall. If banks ever start loaning out too much of their (now massive) excess reserves, and thereby start causing large price inflation, then the Fed can simply raise the interest rate it pays on reserves. Banks would then find it more profitable to lend to the Fed, as it were, rather than lending reserves out to homebuyers and other borrowers in the private sector. Voil! Problem solved.

                Obviously these tricks can’t avoid the consequences of Bernanke’s mad money printing spree. At best, they would merely push back the day of reckoning, while ensuring that it grows exponentially (quite literally).

              • Cosmo Kramer says:

                “lol.. So all Murphy meant was that, well, the economy was going to be “ruined” but of course not “ruined” in any substantive sense of that term.”

                No. Are you just going to continue to lie when we have their actual words? He says what he means, it is clear if you bothered trying.

                You have RPM’s actual inflation prediction of 10% / year cpi, and fail to see things as he does. You are such a failure because you refuse to look at things in context. Again, all of these terms are well defined and understood by everyone……. except you.

                “(2) And yet whoever gave the title of his post at lewrockwell.com interpreted Murphy to be warning of hyperinflation?”

                Whoever gave that title to the article either didn’t read it or was looking to stir up interest. But that isn’t even the title. This is the title

                “Will New Fed ‘Tools’ Avert Hyperinflation?”

                “(3) and despite the fact that Murphy was trying to refute those who were
                saying hyperinflation wouldn’t happen:”

                ok…… again, go to RPM’s actual predictions, they are well documented….. duh, there was a bet. Why have you refused to acknowledge the bet he made?

                and then there’s this. you are late to the straw man party dude.

                http://consultingbyrpm.com/blog/2011/09/did-i-ever-predict-hyperinflation.html

                In context, all of his inflation predictions clearly indicated large price level increases.

              • Major_Freedom says:

                LK,

                You’re redefining terms.

                Hyperinflation is NOT “massive inflation.”

                Massive inflation is massive inflation and hyperinflation is hyperinflation.

                Definitionally, hyperinflation is like Weimar, or Zimbabwe, or, by most accounts, above 50% price inflation per year.

                Murphy predicted 10% price inflation, and so it is pretty clear that by “massive inflation” he meant price inflation od around 10% per year.

                10% price inflation is not hyperinflation.

                Stop redefining words to make people look bad, instead of engaging their arguments head on, coward.

            • Cosmo Kramer says:

              “For every example of an Austrian predicting hyperinflation, you’ll no doubt just scream that he is not *really* an Austrian, or some such rubbish. ”

              No. I can’t do that. and remember I specifically noted that I may be wrong if he is generally considered “one of us”. and if this is so, how would a single Austrian predicting hyperinflation make us the hyperinflation school? And it is entirely possible that an Austrian actually predicted hyperinflation. I am simply unaware of an instance to this date, despite COUNTLESS attacks on Austrian economics……. basically saying that this is our prediction. It is one thing to be believe in Austrian economics and one that actually is part of it.

              So where exactly are your attacks on the general Austrian consensus? Look at Dr. North, or Thornton etc. Your hopeless attacks rely on going to the fringe.

              “lol.. So we’re expected to believe that he was thinking of hyperinflation 200, 300, 500 or 1000 years from now?”

              I don’t know Dr. Strawman, but there should at least be a prediction followed by some general timeline, no? Otherwise it would be an open-ended prediction and you’d be able to say xyz is predictING hyperinflation.

              Not like that matters anyways in this instance, as policy is changing and deficits are coming down. And he did not specifically predict the policy that (in his mind) would bring about hyperinflation.

              “Murphy implies in very first few sentences that he is thinking of hyperinflation: ”

              Captain Eugenics, you provided a quote that in no way implies hyperinflation. Hyperinflation is at least 10 times the inflation that RPM actually predicted. Isn’t this distinction worth noting?

              Massive price inflation does not equal hyperinflation.

              Mass inflation is typically defined as 10-20 percent / year

              Hyperinflation at minimum has been defined as 10 percent / month. Although I see it typically defined as 20-50 %/mo.

          • Lord Keynes says:

            (1) And right here on Mises.org Faber is taken seriously, in contrast in your no true Scotsman fallacy:

            http://archive.mises.org/12795/where-is-the-hyperinflation/

            And the fact that the whole point of that article is to explain why predictions of hyperinflation did not come true already shows that some Austrians were predicting it.

            (2) As for Schiff, we can presume he approved what was published in his newsletter:

            Peter Schiff’s Euro Pacific Capital newsletter from April of 2009 stands out as especially revealing. That newsletter clearly demonstrates just how far off the proponents of the Austrian school are on understanding inflation and hyperinflation. The newsletter featured a guest article written a month earlier by James Turk entitled “On the Cusp of Hyperinflation”. [James Turk is the author of The Collapse of the Dollar and the founder of goldmoney.com.] In this March 2009 article, James Turk enumerated 6 reasons for his predicting that “hyperinflation of the US dollar is imminent” and also said “[the US dollar] is on the cusp of hyperinflation. I expect this to become increasingly clear within twelve months.” Of course this hyperinflation prediction has proven to be wildly off the mark.
            http://www.hyperinflation-us.com/

            And even if Schiff disagreed, James Turk is an Austrian.

            (3) in 2009 Doug French is warning of hyperinflation as a real possibility on Mises.org:

            http://mises.org/daily/3653

            • Cosmo Kramer says:

              (1) is an Austrian describing why Faber’s prediction has not occurred. Tucker then says the recovery will mark the beginning of the “inflationary disaster”.

              I don’t see this as taking him seriously, and I don’t know how to define what rates tucker expects once recovery ensues. But again, if he is considered “one of us” then I was wrong.

              (2), again, is Turk really “one of us”. Is John Williams “one of us”.

              I don’t, and I think at best they can be described as being on the fringe.

              (3) completely wrong again Captain Eugenics.

              Did you forget to read the article?

              “So instead of allowing the market to provide a healthy cleansing deflation, the Fed, the Treasury, and bank regulators are fighting valiantly to keep the fractional-reserve-bubble machine operating, with the ultimate result likely to be inflation and possibly hyperinflation.”

              In context it says something different than you imply. But let me push you further. Isn’t it a possibility? I don’t think it is very likely, but I am not a policy maker. They make the decisions that choose the outcome, not you or I. To you, noting it as a possibility is a prediction.

              So these are 2 real questions:

              -What to you isn’t hyperinflation?
              -What doesn’t constitute a hyperinflation prediction?

            • guest says:

              And the fact that the whole point of that article is to explain why predictions of hyperinflation did not come …

              … “Yet”, the article is saying:

              That is to say, it doesn’t matter how much the Fed fills the bank coffers if the banks aren’t lending money. The bitter irony is that economic “recovery” will mark the beginning of the inflationary disaster.

              (As measured by the rigged CPI, anyway.)

              And, as noted in the following interview, higher inflation IS actually happening in stock and housing prices, among other areas:

              So Where’s the Inflation? Tom Woods Talks to Mark Thornton
              [WWW]http://www.youtube.com/watch?v=n0RusrwYsRE#t=5m16s

              • Cosmo Kramer says:

                That is what is so hilarious about the “need” for housing prices to “recover”.

                If I am moving from LA to Sacramento, I will sell my house and buy a different house. In loose terms, it is a wash, as the rising home prices allow me to sell for more, but I have to pay more.

                The “need” for higher home prices HURTS those that are only buyers. It is all about the idea of equity (key word Idea).

                “(As measured by the rigged CPI, anyway.)”

                right…. rising home prices are wonderful, but rising price of lettuce isn’t?

                The proper question is always “from which person’s point of view”.

        • guest says:

          So Where’s the Inflation? Tom Woods Talks to Mark Thornton
          [WWW]http://www.youtube.com/watch?v=n0RusrwYsRE#t=5m16s

  3. guest says:

    For example, Gene Callahan has pointed out that libertarian economists often warn that a tax on corporations will be “shifted” to other parties (such as the consumers or workers), but when it comes to figuring out the effective tax rate paid by “the rich,” the same libertarian economists will often use the statutory incidence of a corporate tax as if it’s coming right off the bottom line.

    Ahh-so.

    Aside:

    Papa John and “Passing On”
    [WWW]http://bastiat.mises.org/2012/11/papa-john-and-passing-on/

    “The idea that the increased cost will be passed on to the consumer by the employer is an illustration of perhaps the single most widespread fallacy on taxation: that businessmen can simply shift their higher costs forward onto the consumers in the form of higher prices. All the economic theory expounded in this book shows the error of this doctrine. For the price of a given product is set by the demand schedules of the consumers. There is nothing in higher costs or higher taxes which, per se, increases these sched­ules; hence, any change in selling prices, whether higher or lower, will decrease the revenues of the business involved.

    We thus arrive at this significant conclusion: no tax (not just an income tax) can ever be shifted forward.

  4. Jason Quintana says:

    “For example, Gene Callahan has pointed out that libertarian economists often warn that a tax on corporations will be “shifted” to other parties (such as the consumers or workers), but when it comes to figuring out the effective tax rate paid by “the rich,” the same libertarian economists will often use the statutory incidence of a corporate tax as if it’s coming right off the bottom line. So, I was glad when Gene pointed that out, because at the very least I want to be consistent in how I handle those two issues.”

    Correct me if I am wrong, but I do not think it is a problem to assume both of these extremes. At time 0 the effect of the corporate taxes are felt directly by the stock holders because they own the businesses in question. If corporate income taxes were eliminated they would have full control of the additional profits and they would have the choice to consume or reinvest. They feel the full brunt of the double taxation in any single period because they are the parties who are being taxed. It is their property that is directly expropriated. Over the longer term, the effects of taxes on businessmen are ALSO indirectly felt by workers and consumers.

    Owners of corporations don’t get wealthy by consuming all of their profits in each period. They reinvest a large portion of profits back in to the business, or in investments in other businesses. This has the dual effect of increasing the demand for labor in the private sector, and increasing the productivity of the private sector via capital expenditures. Taxes reduce the ability of business owners to reinvest profits, which reduces their ability to accumulate capital. This reduces their wealth in real terms immediately, and over the longer term (think about the logic of compounding) even more significantly.

    The economic system is less productive due to successive periods of business taxation. The government mostly squanders what would otherwise have been a long series of productive expenditures by businesses. Real wages are lower and consumers suffer because of lower purchasing power. The tax burden is suffered by the businessmen (who have accumulated less capital and are less wealthy) AND by consumers, who must consume less in successive periods due to the less productive economy.

    • guest says:

      Over the longer term, the effects of taxes on businessmen are ALSO indirectly felt by workers and consumers.

      The tax burden is suffered by the businessmen (who have accumulated less capital and are less wealthy) AND by consumers, who must consume less in successive periods due to the less productive economy.

      Here’s some more of what Rothbard had to say on this matter; Yes, consumers suffer, but not for the reason you think (I’ll share why the nuance matters, below):

      Chapter 12—The Economics of Violent Intervention in the Market (continued)
      [WWW]http://mises.org/rothbard/mes/chap12c.asp#8C._SI_Tax_on_Industry

      Suppose that a particularly heavy tax—of whatever type—has been laid on a specific industry: say the liquor industry. What will be the effects? As we have noted, the tax will not simply be “passed on” to the consumers.[43] Instead, the price of liquor will remain the same; the net income of the firms will decline. This will mean that returns will be lower to capital and enterprise in liquor than in other industries of the economy; marginal liquor firms will suffer losses and go out of business; and, in general, productive resources of all types will flow out of liquor and into other indus­tries. The long-run effect, therefore, is to decrease the supply of liquor produced, and therefore, by the law of supply and demand, to raise the price of liquor on the market. However, as we have said above, this process—this diffusion of suffering over the econ­omy—is hardly “shifting.” For the tax is not simply “passed on”; it only permeates to the consumers through hurting the industry taxed. The final result will be a distortion of the factors of pro­duction; fewer goods are now being produced than the consumers would prefer in the liquor industry; and too many goods, relatively to liquor, are being produced in the other industry.

      Taxes, in short, can more readily be “shifted backward” than forward. Strictly, the result is not shifting because it is not a painless process. But it is clear that the backward process (back­ward to the factors of production) happens more quickly and directly than the effects on consumers. For losses or lowered profits to liquor firms will immediately lower their demand for land, labor, and capital factors of production; this falling of demand schedules will lower wages and rents earned in the liquor indus­try; and these lower earnings will induce a shift of labor, land and capital out of liquor and into other industries. The rapid “backward-shifting” is in harmony with the “Austrian” theory of consumption and production developed in this volume; for prices of factors are determined by the selling prices of the goods which they produce, and not vice versa (which would have to be the conclusion of the naive “shifting-forward” doctrine).

      It should be noted that, in some cases, the industry itself can welcome a tax upon it, for the sake of conferring an indirect, but effective, monopolistic privilege on the supramarginal firms. Thus, a flat “license” tax will confer a particular privilege on the more heavily capitalized firms, which can more easily afford to pay the fee.

      The emphasized part is an extremely important concept (It explains why the Labor Theory of Value is wrong). The reasoning behind it goes:

      Since prices are based on the subjective valuations of individuals, factors of production are only economically beneficial insofar as they meet the demand (from individuals) for the finished good.

      Basically, this means that people either find it beneficial to buy a product at a given price or they don’t (all other things being equal), so you CAN’T pass on a tax burden to your customers. If they accept a higher price, that only means that they already had a higher preference ranking for the product.

      Beyond a certain price, people will stop buying.

      I recommend the following video to aid in an understanding of the emphasized part of the Rothbard quote, above:

      The Birth of the Austrian School | Josep T. Salerno
      [WWW]http://www.youtube.com/watch?v=dZRZKX5zAD4

      Great, foundational stuff.

  5. Jason Quintana says:

    Guest,

    Hopefully I can make myself more clear then I did last time. I am not referring to the effects of taxation on individual industries, I am referring to the effects of corporate taxes on the **entire economic system**. Rothbard in this quote is referring to micro level adjustments of the market to higher levels of taxes on specific industries.

    I was referring to the level of aggregate capital accumulation that would have taken place if businessmen (as a class) had been allowed to keep and reinvest a part of the profits that were taxed away. Because of corporate income taxes less capital accumulation takes place in the private sector, which results in a lower productivity of labor. This results in a less productive economy, which in turn results in a tax on the purchasing power of the public. Businessmen (and owners of common stock) as individuals suffer the direct consequences of corporate taxes. Because businessmen as a class accumulate less capital in successive periods, an indirect “tax” is passed along to consumers.

    As a side issue, I am aware of the Rothbardian/Misesian view about purely subjective consumer demand dictating the valuation of the entire supply chain. George Reisman (following Eugene Boehm-Bawerk) has promoted a much more nuanced view of how prices are determined at the micro level (often by the cost of production) vs. how consumer choices steer the relative sizes of industries at a macro level over time. I recommend taking at look at this alternative viewpoint. In a quick search of Mises.org I see a 2007 blog discussion about it (http://archive.mises.org/7220/the-cost-price-doctrine-on-bohm-bawerk-and-reisman/) and also this article (http://mises.org/journals/qjae/pdf/qjae5_3_4.pdf). Reisman’s book provides a much more elaborate explanation of this point of view.

    • guest says:

      Hopefully I can make myself more clear then I did last time. I am not referring to the effects of taxation on individual industries, I am referring to the effects of corporate taxes on the **entire economic system**.

      I hadn’t picked up on that; It did read as if you were referring to individual businessmen.

      Briefly – since I realize you’ve provided me a counter argument to research – in the Austrian paradigm there is no such thing as “aggregate capital accumulation” or taxes affecting the entire economic system or businessmen as a class (everyone has at least their own bodies as capital).

      As a side issue … George Reisman (following Eugene Boehm-Bawerk) has promoted a much more nuanced view of how prices are determined at the micro level (often by the cost of production) …

      Thank you for mentioning that; I was going to mention it.

      I will definitely take a look at the nuanced view. Currently, I am persuaded that, because the cost of production can only be justified by the value placed, by the consumers, on the finished goods, it will be logically impossible for him to prove otherwise.

      • guest says:

        Alright, I have my basic response, which will be imprecise, but should be sufficient. But I want to see if I can do better, so stay tuned.

        The three-buscuit, two-grain-sack analogy I’ll respond to now: The first three sacks of grain and the disutility of labor involved in converting the grain to buscuits are still valued higher than the utility gained from the fourth and fifth sack of grain.

        So it is still the case that value has determined costs.

        More to come.

      • guest says:

        I’m back for this.

        What I think is happening is that Reisman is conflating price and value.

        If your highest ranked preference is making a profit of 1 silver coin off of each unit of a good sold, the price can fluctuate with a change in costs without one’s preference changing; You’re still making your profit of 1 silver coin off of each unit.

        Costs determine what CAN be produced, while value will determine what WILL be produced, if at all. Costs can determine which preference I will pursue but not my valuation of that preference.

        What if someone wants to drive his company under by producing in a manner that’s unsustainable? Here, costs in terms of what will permit production are being ignored, so they can’t be a cause of value.

        Regarding the supramarginal goods argument, not everything that CAN be produced by a machine which can make many types of goods at the same cost will sell for the same price; You still have to produce what others value in order to make a profit (assuming that’s the goal).

        Lastly, here’s a helpful description of the nature of costs, by Rothbard:

        The Myth of Efficiency
        [WWW]http://mises.org/rothbard/efficiency.asp

        The cost of any individual’s choice is his subjective estimate of the value ranking of the highest value foregone from making his choice. For each individual tries, in every choice, to pursue his highest-ranking end; he foregoes or sacrifices the other, lower-ranking, ends that he could have satisfied with the resources available. His cost is his second-highest ranking end, that is, the value of the highest ranking end that he has foregone to achieve a still more highly valued goal.

  6. Jason Quintana says:

    Here is Ludwig von Mises (someone who is part of the Austrian paradigm the last time I checked) discussing businessmen as a class (the entrepreneurs) and the effects of “aggregate capital accumulation” on the the economy :

    “Saving—capital accumulation—is the agency that has transformed step by step the awkward search for food on the part of savage cave dwellers into the modern ways of industry. The pacemakers of this evolution were the ideas that created the institutional framework within which capital accumulation was rendered safe by the principle of private ownership of the means of production. Every step forward on the way toward prosperity is the effect of saving. The most ingenious technological inventions would be practically useless if the capital goods required for their utilization had not been accumulated by saving.

    The entrepreneurs employ the capital goods made available by the savers for the most economical satisfaction of the most urgent among the not-yet-satisfied wants of the consumers. Together with the technologists, intent upon perfecting the methods of processing, they play, next to the savers themselves, an active part in the course of events that is called economic progress. The rest of mankind profit from the activities of these three classes of pioneers. But whatever their own doings may be, they are only beneficiaries of changes to the emergence of which they did not contribute anything.

    The characteristic feature of the market economy is the fact that it allots the greater part of the improvements brought about by the endeavors of the three progressive classes—those saving, those investing the capital goods, and those elaborating new methods for the employment of capital goods—to the nonprogressive majority of people. Capital accumulation exceeding the increase in population raises, on the one hand, the marginal productivity of labor and, on the other hand, cheapens the products. The market process provides the common man with the opportunity to enjoy the fruits of other peoples’ achievements. It forces the three progressive classes to serve the nonprogressive majority in the best possible way.” (from “The Anti-Capitalistic Mentality”)

    http://mises.org/etexts/mises/anticap/section2.asp

    The most important savers in the economic system are the entrepreneurs, who plow their profits back in to their own business ventures, or into other investments. When you tax them to fund government programs, you choke economic progress and tax consumers in future periods because of it.

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