26 Nov 2014

American People Don’t Know Basic Economics Because Economists Have Misled Them

Health Legislation, Krugman, Steve Landsburg 24 Comments

[UPDATE: As Keshav and David pointed out in the comments, I made a bonehead mistake in the original draft of this post, which ironically strengthens my underlying point rather than hurting it. I’ve corrected the mistake below, and in a follow-up post I’ll deal with this issue more directly.]

Steve Landsburg recently wrote a post entitled, “In Defense of Gruber.” Now Steve likes to write provocative things, so I was curious to see how he could possibly approach this seemingly impossible task. I think Steve failed–badly–but it’s because he is not really being fair with the average non-economist. Precisely because you’ve got ostensible giants in the field misleading Americans about the state of the economics literature, it’s not the average person’s fault for believing the deception that Gruber helped foster.

Below, I’ve excerpted the gist of Steve’s post. For the context, remember that Gruber (among other controversial things) told an audience that taxing insurance companies for high-premium employer-provided health plans (tax on “Cadillac plans”) was the same thing as eliminating the favorable tax treatment of those plans, which they currently enjoy because employer contributions to premiums are not considered taxable compensation to the employee. Gruber thought it was hilarious that the American people were too ignorant to see that these were the same policies, and his audience laughed along with him. Now Steve favors eliminating this special tax treatment that encourages employers to pay in the form of insurance premiums rather than salary, and so Steve agrees with Gruber that it’s a good part of ObamaCare to crack down on these Cadillac plans. So here’s how Steve justifies Gruber’s participation in this scheme to obfuscate what this “Cadillac tax” would actually do to average Americans:

7) So — here we have two different policies with exactly the same effects — tax the consumer or tax the insurance company. Gruber et al. believed that the voters would oppose one and support the other. It does not seem to me, under those circumstances, that it’s especially dishonest to choose the package that you think will sell. If voters have opinions that are completely incoherent to begin with, then neither Gruber nor anyone else can be accused of confusing them. They were, after all, maximally confused in the first place.

8) I do think that those of us who are paid to teach economics have something of a moral obligation to, you know, teach economics. So it would have been better if Gruber, like so many of the rest of us, had made some effort to explain to the public that there is no difference between paying a tax and having a taxed passed on to you. On the other hand, the public is confused about enough different things that we can’t all be explaining all of those things all the time.

9) I want to say this again. If the voters favor a law that says all drivers must be licensed, but oppose a law that says nobody without a license is allowed to drive, then I don’t think it’s immoral to propose the first law instead of the second. That’s basically all Gruber did. I would prefer that he had tried to point out the inconsistency, but Gruber is under no obligation to live by my preferences.

10) Bottom line: The Cadillac tax is a good thing and Gruber found a way to make a good thing politically palatable, without telling any out-and-out lies (as far as I know, he never tried to claim that the tax would not be passed down). I see no sin in that.

No, this is a terrible analogy, even if we agreed with Steve’s moral stance (which I don’t). It’s not “incoherent” for the average American to (a) not want a tax to be levied on him and (b) be OK with a tax levied on the insurance company. You can disagree with the selfish, unprincipled morality of such views, but there’s nothing contradictory about them.

In order to believe these views to be contradictory, you have to subscribe to a particular economic theory of cause-and-effect. Namely, you have to think a tax levied on the insurance company will be fully “passed on” to the consumer market prices adjust in either case such that the consumer is equally affected by a tax levied on him versus the seller.

Rather than focusing on the narrow issue of tax incidence in the health insurance market, consider the following “facts” about the world that a reader of Nobel laureate Paul Krugman would understandably believe. And note carefully, I said “understandably believe,” which is not the same thing as “correctly interpret as the finely nuanced position that Krugman was actually stating.”

==> Imposing energy efficiency mandates that force businesses to buy new equipment and install insulation on their buildings would actually stimulate the economy, as well as help the environment. [Sorry I can’t find link right now to Krugman saying this, but trust me he has–citing liquidity trap and obsolescence leading to forced investment.] Don’t let the right-wing think tanks tell you such mandates will stifle growth or job creation; they are lying.

==> More than doubling the minimum wage to $15 would have hardly any effect on employment in the fast food industry. The right-wingers warning of job losses are ignoring all of the best research.

==> There is “zero evidence” that marginal income tax rates have an effect on economic growth. In fact, if the government raised the top income tax rate to 70 percent or possibly even 91 percent, there’s no reason to expect it to have a big effect on how much rich people work, or the growth of the overall economy. Don’t believe those lying conservatives when they tell you we need low taxes on rich people in order to spur job creation. (In fact, to argue that rich people somehow contribute on net to the economy contradicts free-market economics; that’s how idiotic these right-wingers are.)

==> Strong measures to limit carbon dioxide emissions would be very cheap, possibly even free. Don’t listen to the right-wingers who keep warning about a carbon tax somehow hurting the economy. These people haven’t studied the literature, or they’re lying.

==> Advocates of fiscal austerity keep warning that the invisible bond vigilantes might suddenly attack the currency, and that’s why we need to get government debt under control. What these morons don’t realize is that a speculative attack on the USD or Japanese yen would actually help our countries. Man these right-wingers are cruel and stupid.

==> People keep lambasting government waste, saying we should only invest in smart, cost-effective public projects. No, that’s wrong. Compared to the status quo, it would be preferable if we erroneously believed aliens were about to invade, so we could all build up our militaries with–what turned out to be–useless equipment. That would stimulate the world economy and end this depression now. I don’t need to tell you–but I will–that the people arguing that wasteful government spending is wasteful, don’t understand that economics has advanced since 1936.

* * *

Now suppose you are a regular reader of Paul Krugman. He won the Nobel Prize in economics, taught at Princeton for a long time, and has sold a bunch of books, both popular books and texts that other professors adopt. So Joe Sixpack would understandably think that this guy Krugman is no slouch. If Krugman has led Joe Sixpack to believe all of the above, over the years, and then Jon Gruber comes along with his fancy computer models telling everybody how much premiums will go down with ObamaCare…then Steve Landsburg is going to come along and scold Joe Sixpack for holding “incoherent” values if he simultaneously doesn’t want the government to levy a new tax on him, but instead to put it on the rich insurance companies?

Couldn’t Krugman come up with some kind of liquidity trap argument, or cite the famous Kenneth Arrow paper that “proved” the free market doesn’t work when it comes to health care, or talk about cartels and market power among the health insurers…to argue that these two taxes aren’t equivalent as a matter of logic?

Sorry Steve, but if you want to write “In Defense of Gruber,” I think your only chance is to go like this:

(1) Gruber is the economist equivalent of Count Dooku–trained as a Jedi to protect the weak, yet instead serves the Sith lord.

(2) The one good thing about Gruber is that he was shockingly frank about how he and his clique had deceived everybody, and the contempt with which they hold average Americans.

(3) Therefore, Americans will now take people like me more seriously when I warn them about these nasty characters.

(4) I’ve even got a catchy title, Steve! “More Lying Is Safer Lying”

24 Responses to “American People Don’t Know Basic Economics Because Economists Have Misled Them”

  1. guest says:

    Will somebody please put FOX’s the Glenn Beck Program on DVD so that everyone can see just how readily available this information was after he and Andrew Breitbart exposed a lot of this stuff?

    Nobody had to fall for this. I am so frustrated.

  2. Rick Hull says:

    Couldn’t I, Joe Voter, simultaneously believe that (viable, sustainable, profitable) businesses must maintain a profit margin, thereby tending to pass on all costs, yet also be misled by hidden taxes? Where are the individual tax rate analyses — the ones showing rates between 28% and 55% — that are able to account for my Obamacare tax load? When would Paul Krugman include such taxes in an individual tax rate policy discussion?

    Landsburg is being quite obtuse here.

  3. Keshav Srinivasan says:

    Bob, isn’t it a theorem of economics that economic incidence is independent of legal incidence? So doesn’t it not matter if you impose the Cadillac tax on the policy holder or the insurance company, regardless of what the elasticities happen to be?

    • Rick Hull says:

      The argument is rather that, for consumers as a class, there is no economic advantage to taxing producers instead. Clearly there is a political advantage, for any given policy change, to fund with producer rather than consumer tax. The point is that the political advantage is based ultimately upon deception, and any learned economist or decent human being should explain the truth rather than deceive.

      • Keshav Srinivasan says:

        I was addressing Bob’s contention that “In order to believe these views to be contradictory, you have to subscribe to a particular economic theory of cause-and-effect. Namely, you have to think that a tax levied on the insurance company will be fully “passed on” to the consumer.” I think the conclusion follows regardless of whether it’s passed on.

    • Major.Freedom says:

      Bob’s point is that THAT theorem is contingent on supply and demand curve theory. Supply and demand curves are not observable. We have to make specific assumptions grounded on a specific theory of economics.

      With certain assumptions holding regarding counter-factuals of supply and demand,, yes a deduction can be made that for taxes, the economic incidence is independent of legal incidence.

      But those assumptions, because they are not observed, means that taxing employers is NOT logically equivalent to taxing consumers.

      Think about it. Suppose employers were taxed 1% more. Are you saying it is logically impossible for them to subsequently withdraw fewer funds from their firms in the form of dividends and interest payments, so as to increase the reserve for higher taxes, but pay the same funds towards labor and capital, and not raise selling prices at all? Logically impossible? That is a strong claim.

      Murphy’s right. We need economic theory to claim that prices will concomitantly rise for the consumer as well. They are not logically equivalent.

    • Bob Murphy says:

      Keshav, I’m not going to lie to you, I wasn’t thinking about it properly when I fired off the post. As you can surmise, I was focusing more on the various ways that Krugman (in my opinion) has beaten out “basic economics” from his readers over the years, and made them doubt anybody warning of the negative consequences from policies levied against rich powerful interests.

      However, I don’t think it changes the case once I correct that mistake, and in fact strengthens my point about Landsburg. I’ll write a follow-up post after the holiday.

      • Tel says:

        Fair enough, that’s the basic economics where all parties have full information and the time, ability and interest to do full analysis of that information. In which case, there would be no Gruber, and probably no Keynes either.

  4. Major.Freedom says:


    An implication of your blog post here is that Gruber’s faux pas is not exactly what you might have thought it was. You’re implying here that Gruber’s economics is wrong. That his belief the American voters are stupid about how taxation works, is really a false belief. That he is wrong about the economics.

    The implication is that he not only purposefully mislead people by trying to deceive, he also deceived based on false beliefs.

    What’s worse? Deceiving people purposefully, or unintentionally feeding them falsehoods? And why?

  5. David R. Henderson says:

    Bob, You write:
    Namely, you have to think that a tax levied on the insurance company will be fully “passed on” to the consumer.

    No you don’t, as Keshav has pointed out. You simply have to believe, as I do, Steve does, and, I believe, you do, that the incidence of the tax depends solely on the elasticities of supply and demand, not on whom it’s levied on.
    Or don’t you believe that?

    • Transformer says:

      If the Guber thing was only about the Cadillac tax, and Guber sincerely believed that the two approaches were identical then I think Steve’s defense would be good.

      But wasn’t Guber boasting about much more significant ways that the ACA was being mis-sold beyond the Cadillac tax ?

    • Bob Murphy says:

      Right David, thanks.

      • Major.Freedom says:

        I read “fully passed onto the consumer” as another way of saying “market prices adjust in either case such that the consumer is equally affected by a tax levied on him versus the seller”.

        I read your post differently from everyone else, including you it seems. Huh.

    • Mike M says:

      Correct David. But let’s not lose sight of the fact that taxes on business are ultimately paid by someone other than the business entity itself. Either consumers via cost of the good or service, shareholder via reduced return, or employees by lower compensation.

      • guest says:

        “But let’s not lose sight of the fact that taxes on business are ultimately paid by someone other than the business entity itself.”

        Not true:

        Papa John and “Passing On”

        “Rothbard demonstrated in Power and Market that the notion of such “forward tax/cost shifting” is fallacious: “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. …

        “… 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. 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.”

        • Mike M says:

          Guest. You either didn’t read or comprehend my comment. I’m identified THREE categories of real people that bear the cost either in singular or shared fashion.

        • Tel says:

          How does a business consume goods? How can this consumption of goods be curtailed by force and transfered to someone else (which is basically the definition of a tax)?

        • AcePL says:

          Hmm… where I come from Rothbard would have serious problem defending his case… Because every time the given tax has been increased there was corresponding increase in the price. Like fuel price – in Poland there are three taxes in the fuel price: road tax, luxury tax and VAT. All comprise roughly 85% of the price, with VAT being applied to net price increased by luxury tax…
          So shifting tax on consumer is more like market law than fallacy…

          • Harold says:

            Whenever duty is increased on cigarettes in the UK, the retail price is raised by exactly the same amount.

            According to Rothbard, this would instantaneously cause the revenues of the cigarette industry to fall. You would have thought that the industry might have noticed this after all these years, and stopped jacking up prices after the budget, but they do not. So why does this continue to happen? Presumably the price hike does not result in as big drop in revenues as leaving the price where it is.

            Sanchez says “There is nothing in higher costs or higher taxes which, per se, increases these sched­ules” One way for the observed price behaviour to occur is that this is wrong, or the wrong way to look at it. The consumer knows a tax has been imposed. He expects to pay more. This affects his demand schedules. The consumer suddenly values the cigarette more, simply because the tax has gone up. This would presumably not have occurred if the manufacturer had simply raised the price in the absence of a tax. So there may be nothing in the price per se, but there may be something in the way the price is perceived by the consumer.

            The effect described by Rothbard is not absent, of course. Some people will not pay the new price – which is part of the reason for such high duties on cigarettes, so consumption will fall a bit. But the instant price hikes suggest that there is something wrong with the simplistic model.

  6. Yosef says:

    Trained as a Jedi to protect the weak?

    The only thing Jedi protect is their own power. Talk about coercive government, they do everything by Force.

  7. Yancey Ward says:

    The world has always been filled with the alibis of liars. Landsberg and Gruber are nothing new.

  8. Tel says:

    Namely, you have to think market prices adjust in either case such that the consumer is equally affected by a tax levied on him versus the seller.

    Seems to me the question is whether consumer purchasing behavior is the same regardless of whether a tax is visible or invisible. Gruber clearly believes that making a tax less visible will change voter’s political behavior without influencing their economic behavior. Other governments around the world seem to believe that visibility does make a difference… note how the UK government insists that consumer prices be quoted inclusive of VAT to help hide that tax amongst the line items, rather that have a big lump tax at the bottom.

    The Japanese government has a similar approach, strongly encouraging stores to quote tax inclusive prices. You can see many other cases, including taking income tax from the employer rather that from employees. Even having company tax at all is just a way of taxing individuals, since companies don’t consume (or consume very little depending on how you want to look at it).

    I think governments would not go to so much trouble to hide tax unless it did make a difference.

  9. Steven Landsburg says:

    Before responding, I’d like to be sure I understand your position. To that end, I’ve posted two clarifying questions here.

  10. S.C. says:

    I’ll trust economists to an extent. Otherwise, I trust my common sense.

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