The Problem With Economists

Dave Johnson

… is separation from reality caused by internalizing decades of endlessly repeated right-wing propaganda. This time it shows up in a discussion of the effect of top tax rates by Christina Romer. I hate to pick on Romer again, but…

In the New York Times’ Economic Vew, Romer has written Marginal Tax Rates and Wishful Thinking. Romer begins her argument with the following premise:

“A family’s marginal tax rate is what its members pay to the government if they earn another dollar. If the government takes a smaller chunk of that dollar, a family has more incentive to earn it.”

OK, here is my problem with this, and with most economists. This assertion that taxes reduce the incentive to earn money — when the government takes less a person will work harder, and if the government takes more a person won’t bother to work as much — isn’t just right-wing stuff, it is Ayn Rand “going Galt” nonsense. This is the Randian claim that if the government taxes too much the rich “producers” will go on strike, stop working, and deny the rest of us their vital essence or something. My local newspaper regularly publishes letters that warn if the state raises taxes (or fights pollution, raises the minimum wage, enforces labor laws, whatever…), millionaires will flock to lower-taxing states, and take their “job creation” magic away with them.

This assumption is also the basis of conservative arguments that cutting taxes actually increases revenues, taxes “take money out of” the economy, etc. It is the underlying assumption of the “Laffer Curve” — that as taxes increase the government will receive less revenue until at 100% people won’t work at all.

Who Says?

Why is this assumption any valid than the idea that a person will just keep doing what they do or even work harder and longer to make up the difference? Why fall back on an Ayn-Randian assumption that a person will work less if the government collects a tax? Of course welders, police officers, teachers, bus drivers, or other working people won’t work less. For that matter, what economist is going to work less because taxes are increased? Is the Dean of the Econ department, or the head of any firm that employs the economist going to allow that?

And at “the top,” what baseball or football player, rock or movie star, Nobel-winning physicist, lottery winner, heart surgeon, company CEO, or even hedge fund manager is going to take part of the year off — or stop working entirely — just because of higher taxes? Seriously, are they at the top because they are people who just decide to stop working? On what planet do people who have less take-home pay work less in response? On Planet Economus, perhaps, but not on Earth.

The problem is the economist assumption that people only do things for money — that money is the only thing that matters.

The rest of Romer’s discussion concerns how much of an effect higher taxes has on reducing output… She concludes that the effect is small. Romer writes that we need a “mix of rate increases and cuts in tax expenditures.” Yes, we do. I suggest restoring rates at least to where they were before Reagan — when we didn’t have deficits, could afford to successfully hold off the Soviet Empire, educated the GIs and spent enough to maintain the best infrastructure in the world. In other words, to the rates we had before the Reagan tax cuts screwed everything up.

Shifting Costs

While I’m going on about Romer’s article… here is another assumption Romer makes, typical of economists, failing to look at the bigger picture over the longer term. Romer writes, “…unless we choose to gut Medicare and Medicaid, additional tax revenue will be needed.” Actually, cutting Medicare doesn’t cut the need for the health care at all, it just shifts the costs to the larger economy, and most likely increases them in aggregate, which lowers other economic activity and certainly cuts the revenue collected by the government. In other words, cutting Medicare causes bigger problems later so the idea is self-defeating. What really needs to be done is to lower health care costs in the economy, not gut the most efficient health care program we have. The way to lower health care costs in the economy is to do what almost every other country has learned lowers health care costs in the economy. I’ll leave you to guess what that is. (Hint, it is the opposite of gutting Medicare, it is extending Medicare to everyone.)

Full disclosure: I’m not an economist, I just mock them online, But, really… On what planet do people work less in response to getting less take-home pay?

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