Quick Note on Consumption vs. Income Tax
[UPDATE: This whole “disagreement” with Rothbard may have been a figment of my bad memory; see this post.]
Some people are asking me about Robert Wenzel’s take on Peter Schiff/Herman Cain on tax theory. I would have to sit and think through Rothbard’s argument about a consumption tax getting shifted back onto the incomes of land, labor, and capital (goods).
In the meantime, though, let me say that there really is a legitimate sense in which taxing income is more distortionary than taxing consumption. The reason I stress this is that I used to think this was a neoclassical myth. But I realized I was wrong when I was working on a tax reform paper for PRI. None of this is an endorsement of Cain’s 9-9-9 plan, of course, but anyway this is what I can quickly add to the discussion for what it’s worth. From a post a while ago:
When it comes to people arguing for a consumption tax instead of an income tax, a typical argument is, “The income tax discourages savings.”
Now for a long time, I agreed with Murray Rothbard’s take on this. I thought it was a dumb argument, because there’s nothing magical about saving more; it would clearly be terrible if the government said, “Save 99% of your income or else you get executed.” And the whole point of saving is to consume in the future, so why wouldn’t a consumption tax discourage saving just as much?
Well, when working on my PRI Flat Tax pamphlet [.pdf], I realized Rothbard and I were wrong. An income tax really does distort the consumption/saving decision, moving it away from the margin that the consumer would have chosen in the absence of taxes. In other words, the consumption tax makes the consumer poorer, to be sure, but at least the consumer gets to decide in which time period to distribute the blow. But an income tax is a double whammy–it takes away from your overall budget, but then puts on extra penalty on your decision to carry income forward. (This is because interest income or dividends is hit afresh with the income tax in the next period.)
To repeat, I am not here saying that Wenzel is wrong and Schiff/Cain are right. I’m just firing off a quick point that might move the ball forward for some of you.
The House That Sumner Built
For those who don’t follow these things, Mugato would say Scott Sumner is so hot right now. Now even Krugman endorses Sumner’s general worldview.
I was reading Brad DeLong’s take on the whole affair, and found this excerpt revealing:
By contrast [with the Fed buying assets with new money], the alternative expansionary policy is for the government to print money and spend it buying useful things. Then:
1. The buying of useful things raises spending.
2. Financing it by printing money rather than issuing bonds means no increase in interest rates to crowd out private spending.
3. Financing it by printing money rather than promising to levy future taxes means no increase in the present value of future tax liability to crowd out private spending.
4. Financing it by printing money means no worries about any increase in fears of some future government default.
….
To try to target nominal GDP using either only monetary policy or only fiscal policy seems hazardous. To coordinate–monetary and fiscal expansion, money printing-financed purchase of useful things–seems to be the winner.
Maybe I’m naive, and these views were always lurking in the background. But before this crisis–and the ascendancy of the “market monetarist” view–I don’t recall economists pointing out the advantages of running the printing press to literally pay the government’s bills. I think that would have been routinely denounced as incredibly irresponsible and a recipe for (yes) hyperinflation.
But 9/15 changed all that, apparently.
Continuing the Murphy NYU Tradition
If I do say so myself, I was good at making jokes while we studied really geeky economics stuff at the doctoral program in NYU. I am glad to see two people following in my illustrious footsteps, though upon closer inspection I see they are PhDs and not students (HT2 MR, and I only watched the first five minutes of this):
P.S. Sargent came to NYU while I was still there, but I was no longer taking regular classes and I regret to say that I don’t think I ever sat in on any of his lectures. I seem to think (in my defense) that he didn’t like people just doing that to see the superstar, but maybe I’m inventing that memory in retrospect. I also didn’t visit the Empire State Building or Statue of Liberty in my 5 years at NYU.
Touching Request from Robert Downey Jr.
This is really neat. I don’t want to say what it is, in case you haven’t heard. (HT2 Tom Woods at LRC)
Friendly Monthly (Price) Inflation Update
Relying on the official BLS reports that came out yesterday and today on the Producer Price Index (PPI) and Consumer Price Index (CPI) respectively, here are the price increases for various categories over the course of the year from September 2010 through September 2011:
Consumer Prices not counting food and energy: +2.0%
Consumer Prices, all items: +3.9%
Finished Goods, +6.9%
Intermediate Goods, +10.5%
Crude Goods, +20.9%
I have two observations:
==> The people telling us not to worry about (price) inflation–I have in mind Paul Krugman and Scott Sumner, but I’m sure others have said as much–tried to dismiss the bump up in “headline inflation” (meaning CPI all items) a while ago, by saying it was a one-shot spike due to the return of commodity prices to normal levels, following the slump when the panic set in. Exactly how long will it take us to get over that “hump”? Does it make sense that headline CPI is up 3.9% over the last twelve months, if this is all just a misleading spike due to oil price rises in 2009?
==> Since 2009, we have been lectured by the monetary experts that of the items above, the only thing we should pay attention to is the top number. All others are misleading for our simple hard-money minds, and will confuse us into worrying about the purchasing power of the dollar.
OK fine. The Fed’s stated policy goal, in terms of their “dual mandate,” is to keep “core CPI” (meaning CPI without food and energy) in the range of 1% – 2%. So now we are officially at the top of that range (we were there last month too), not to mention every other price category being in disconcerting territory. Are the people who, for the last three years, have ignored every other price index except core CPI, now going to agree that the Fed should tighten?
Sumner Ups the Ante on the Hoax of the Decade
For a while now I have shared my theory that Scott Sumner, chief architect of the “target NGDP” proposal on the blogosphere, is actually playing a game with all of us. He has somehow managed to hoodwink not only Brad DeLong and Tyler Cowen but even David R. Henderson. Perhaps because of the metal plate they put into my head after a freak childhood accident, for some reason I have been immune to Sumner’s powers. (He even hypnotized Goldman Sachs! The man is unstoppable.)
The true irony in all of this is that Scott, like a serial killer, is begging to be caught. I have previously documented Scott saying that even if his policies do nothing but lead to rising price inflation, he will have no regrets. Since he got away with that one, Scott has upped the ante once again. In the comments of a recent post he declared:
In any case, I am still waiting for someone to give me an intelligent reason why inflation matters at all. Every reason I’ve heard thus far is simply a mistake in reasoning. They all apply to NGDP or RGDP, not inflation. Inflation doesn’t matter. Maybe I’ll have to offer a $100 reward: “Why should I care about inflation?”
C’mon guys, wake up! If you found out your doctor said, “In any case, I am still waiting for someone to give me an intelligent reason why cancer matters at all,” would you be so keen on his unorthodox new chemo treatment?
Quick Question for the MMTers
For those of you intrepid (foolish?) enough to wade through the comments on this blog, you will note that–contrary to perhaps your initial perception–the Modern Monetary Theory (MMT) proponents do not actually say that the issuer of a fiat currency can’t become insolvent. Rather, they qualify it in the following way: To qualify for the vaunted invulnerability status, we need a central bank having “all liabilities denominated in a free floating, non convertible currency which they are a monopoly issuer of.” So that’s why Iceland, Greece, and Spain are all in trouble, even though the gold standard ended in 1971.
I have an observation and then a question.
OBSERVATION: If this is the MMT position, fair enough, but then to be consistent they should stop saying, “You Austrians have to drop your gold standard thinking. That ended in 1971.” No, it is still very much relevant, as the collapse in Iceland and the current trouble in Europe demonstrate. I could understand you making such a claim during the US debt ceiling debate, because there you were arguing that the politicians were foolishly imposing artificial constraints on the US gov’t/Fed apparatus. But there is nothing artificial about the crisis that hit Iceland, or that is currently hitting Greece. So if the MMTers agree with Krugman (he’s not an MMTer, by the way) when he says that we are seeing the problems of a “nouveau gold standard regime” in Europe right now, then they at least should have the decency to stop ridiculing Austrians (and others) for clinging to “gold standard analysis.” They themselves are admitting it is still necessary to understand–dare I say it?–modern monetary institutions.
QUESTION: The European Central Bank itself currently has dollar-denominated liabilities, on account of its swap lines (and probably a bunch of other stuff too). I can’t get an exact number, but I am sure the Fed in its humongous balance sheet somewhere owes somebody on planet Earth a debt denominated in a currency other than dollars. So, what is the cutoff for MMT to become applicable? (In other words, the Fed presumably counts right now under the umbrella of MMT, so you must think that it’s OK to have a piddling amount of liabilities denominated in foreign currencies.) Does MMT currently apply to just the Fed, or to the ECB too? If the former, should you maybe stop calling it “Modern Monetary Theory” and instead call it “Future Monetary Theory,” for a time when its results are applicable to more than one central bank on earth?
Krugman on Europe: “I Do Believe in Fairies!”
(In deference to some who were concerned about my rough treatment of a youngster, I should note that I am not actually quoting Krugman in the post title.)
Anyway, Krugman today seems to be explaining movements in interest rates based on “confidence”:
There has been a rhythm to the euro crisis: again and again, investors start to realize how bad things look, and spreads rise; then policy makers put together some sort of response, which produces a partial (but only partial) return of confidence, until it becomes clear just how inadequate that response was; then return to step one.
I can only conclude that Krugman is trying to resurrect Tinkerbell.
A few days ago I took a stab at this, and I think I was misunderstood. So let me try it this way: Suppose bond vigilantes weren’t attacking Greece and other Eurozone governments right now. Which would Krugman pick?
Door #1: “Oh man, I guess IS-LM is wrong.”
Door #2: “Man these austerians are idiots. They say that big budget deficits lead investors to worry about default, which then causes interest rates to spike. But if that were true, wouldn’t we see huge spreads on Greek, Italian, and Spanish debt? Try looking at the data, guys.”
My money is on Door #2.
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