I’ll be at the Warwick Economics Summit February 17-19, speaking on the 18th.

I’ll be speaking at the Adam Smith Institute in London on February 20.

On February 23, I’ll be at the off-Broadway Soho Rep Theater, moderating a panel discussion on “The Economy of Beauty” following a performance of the hot German playwright Marius von Mayenburg’s new play The Ugly One. My fellow panelists will include the sociologist Ashley Mears, author of Pricing Beauty: The Making of a Fashion Model and a former fashion model herself.

On March 9, I’ll be speaking at the Laboratory for Laser Energetics in beautiful Rochester, New York.

I expect to be speaking at the University of Maryland on a date still to be negotiated in April or May.

And from July 29 through August 3, I’ll be giving four lectures and hobnobbing with the other participants at Cato University. (Yes, I know the link is to last year’s Cato U.; this year’s page seems not to be up yet.)

If you’re in any of those neighborhoods, do join us.

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I strongly encourage spirited discussion. I understand that spirited discussion can get pretty heated, and that in heated discussion people (including me) sometimes say nasty things. I prefer to keep that to a minimum, but I still allow a fair amount of it as long as the comments advance the discussion. But if your post consists of 100% pure nastiness, with no conceivable way for anybody to learn anything from it, I will usually delete it. One exception: Being very funny can compensate for a lot of nastiness, especially if it’s the kind of funny that draws the reader’s attention to a genuine flaw in someone’s reasoning. The many posts I’ve deleted over the past 48 hours were nasty without even trying to be funny.

I also strongly encourage staying on topic. I usually interpret the latter requirement as broadly as possible, so that I usually allow comments that are (in my opinion) pretty tangential as long as there’s some connection to the topic at hand. But there’s a limit. With that in mind, I deleted some comments that addressed the pros and cons of progressive taxation with no particular relevance to the point at hand. Those same comments would have been welcome in some other thread. In general, if you’re dying to talk about something that’s entirely off-topic, please either wait till I post about it, or speed up the process by sending me an email with a request for a post on that topic. (I promise nothing of course.)

(On the other hand, don’t let the above be too discouraging. As I said, tangential relevance is not ideal, but I usually let it through.)

If you go to Paul Krugman’s blog, you’ll find that a very large percentage of the comments are either nasty, devoid of content, or both. We’ve always drawn a much higher class of comments here at The Big Questions and I aim to continue that tradition.

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I have only one quibble, and that’s that Greg is very sure we should eliminate the mortgage interest deduction in accordance with his first principle: “Broaden the Base and Lower Rates”. I think we should maybe keep it in accordance with his second principle: “Tax Consumption Rather than Income”. (Though I certainly agree that after the second principle has been implemented, it will be time for the mortgage interest deduction to go.)

How sad that so much wisdom is sure to go unheeded.

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Umm…Paul? They pay both. I’d lift Krugman’s own favorite dismissive phrase and say “That’s Economics 101″, but actually it’s probably standard knowledge among middle schoolers.

To review the details:

First, Krugman reposted (from the website of a left-wing advocacy group) a highly misleading chart purporting to illustrate the federal tax burdens borne by various income groups. The chart accounts for payroll and income taxes, but omits corporate taxes, thereby making the burden on high-income tax payers appear substantially smaller than it is, because corporate taxes reduce dividends which are disporportionately paid to high-income taxpayers.

Next, he got called on it by lots and lots of people, including, for example, Greg Mankiw.

Next, Krugman acknowledged his error. But, as always, he did so with the least possible grace, suggesting that his critics, by virtue of pointing out Krugman’s mistake, have somehow undermined their own principles.

In particular, his position is that by acknowledging that corporate profits benefit shareholders, “conservatives” have undermined their own ability to claim that corporations benefit anyone other than shareholders (e.g. workers). He relies, in other words, on the cockamamie notion that if something is good for group A, it can’t possibly also be good for group B.

If Krugman’s point is that all profits are paid to shareholders, well duh. Surely nobody, nowhere, never, nohow, has ever suggested otherwise.

But if his point is that you must claim a share of those profits in order to benefit from capital accumulation, then he really has stopped even pretending to be an economist. As Professor Krugman is surely well aware, the accumulation of capital is the primary driving force behind the growth of wages.

In other words — and this is exactly what Krugman is denying — if you work for General Electric, you might have a good reason to be glad that General Electric is around. Even if you don’t own any stock.

(Actually, it’s not just GE’s employees who benefit from GE’s capital accumulation; it’s workers everywhere. Example: GE hires a bunch of workers, which makes it harder for IBM to hire workers, which forces IBM to pay higher wages. But if that’s too subtle for Paul Krugman, we can focus on just the GE workers and still devastate his argument.)

In summary: Everybody who knows any economics knows that corporate capital accumulation can benefit both workers (via wages) and stockholders (via dividends) at the same time. (Well duh again.) Krugman makes some bogus argument about taxes that ignores the existence of the dividends. Mankiw and others point out that the dividends exist. Krugman says: “Okay, you’re right, but I hope now you’ll finally stop claiming that wages exist!”

I’d love to find the perfect closing sentence to capture the flavor of this peremptory illogic, but I’m stumped. What should the final line of this post have been?

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For at least the eighth time on this blog, I want to point out that this widely believed “fact” is not true.

To understand Mitt Romney’s tax burden, you have to compare him to his doppelganger Timm Romney, who lives on a planet with no taxes. In the year (say) 2000, Mitt and Timm both earned (say) a million dollars. Timm invested his million dollars, saw it double over the past decade or so, and cashed out his investment this year, leaving him with two million dollars. Mitt, by contrast, paid 35% tax in 2000, leaving him with $650,000. He invested it, saw it double, and cashed out last year, paying 15% tax on the $650,000 capital gain. That leaves him $1,202,500, which is about 60% of what Timm’s got. In other words, the tax system costs Mitt almost 40% of his income.

By contrast, people on our planet without investment income collect their wages, pay 35% in taxes, and spend what’s left. The tax system costs them 35%, while it costs Mitt almost 40%. In other words, people with investment income bear a higher tax burden, as a percentage of their income, than anyone else — and that’s before you even start accounting for the taxes on dividends, interest, corporate income and inheritance.

It’s true that there are some hedge fund managers out there who manage to game the system by disguising their wages as capital gains and thereby avoiding the wage tax altogether. That in no way undermines the main point.

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A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods.

So according to Krugman, it’s better for you and your spouse to earn $40,000 each than for one of you to earn $80,000 while the other stays home with the kids. I wonder how many two-earner families would agree with him.

Perhaps Krugman hasn’t noticed that the US economy, over the past century or so, has managed to cut its per capita labor input roughly in half without plunging into a 100-year-depression. There are even some people who think we’re better off these days partly because we work 35 hours a week instead of 70.

Apparently business isn’t the only profession where success is not always accompanied by wisdom.

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(Slightly higher quality video here.)

Edited to add: There were apparently some problems with the video stalling somewhere around the one-hour mark (during the post-talk question period.) I believe this is fixed now.

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1. Public debt has redistributive effects and incentive effects. We all agree on this. There remains the question of whether there is a “burden-of-the-debt” effect over and above these well understood effects. The right way to approach that question is to ask “Would there be any burden of the debt in a world with lump-sum taxes—i.e. a world in which the redistributive and incentive effects are assumed away?”.
2. In that world, as in any world, government spending is costly.
3. Deficit financing offers the older generation a mechanism to shift some of that cost to future generations. Individuals will take advantage of this mechanism if and only if they want to.
4. Therefore nobody currently alive (or, in Bob Murphy’s Abraham-and-Isaac model, no member of the older generation) has any reason to object to deficit financing. Deficit financing expands your opportunity set, which you cannot be a bad thing (for you).
5. I called Nick Rowe “wrong” for overlooking point 4; that was, in his words, a rhetorical flourish. Nothing he said was actually wrong except (in my opinion) for his choice of emphasis.
6. Speaking of Bob’s Abraham-and-Isaac model: This introduces a minor twist. Instead of the choice between taxing one cohort today or another cohort tomorrow for the benefit of the former, Bob offers the choice between taxing a single cohort either today or tomorrow, in order to benefit an older cohort. But this changes none of the fundamental issues. Regardless of whether Isaac is taxed today or tomorrow, Abraham has the opportunity to restore the status quo, and has no cause for complaint if he chooses not to.
7. When the government runs a deficit, some people miscalculate the effect on their grandchildren and therefore save the wrong amount. It would be good to educate these people.
8. The people in the preceding point might, a priori, either underestimate or overestimate the costs of current spending to their grandchildren and hence might either oversave or undersave. Therefore it’s possible we’d do these people a service by raising alarms, but it’s also possible we’d do them a service by quelling their fears.
9. As far as future generations are impoverished by the greed of the current generation, their main beef should be not with deficit financing but with the underlying greed. Indeed, a greedy current generation is perfectly capable of impoverishing future generations without deficit spending, by depleting their inheritances.
10. Bob seems to disagree with the preceding point. I still don’t understand why. But this is not fundamentally a disagreement about what happens; it’s a disagreement about how to describe what happens.
11. Bob’s got some cockamamie story to tell about going into the future with a time machine and stealing pizzas; he observes that the time machine enables the theft and therefore it is natural to talk about the “burden of the time machine”. This is true, but the difference between a time machine and deficit finance is that a time machine enables you to transfer resources across generations in a way you might not otherwise have been able to, while deficit financing is just a new way of doing something you could have done anyway.
12. There’s an exception to the above: People who are credit-constrained can consume more (and hence impose greater costs on their grandchildren) when the government borrows. The grandchildren of those people might find Bob’s time machine analogy perfectly apt.
13. On the other hand, even with credit constraints, deficit finance does not allow an entire generation to increase the burden on its descendants beyond what it could have done anyway (and in that sense is nothing like a time machine). It only allows some families to increase the burden on their descendants. The greatest damage one generation can inflict on the next is to consume everything in sight, and this is always possible without deficit finance.
14. None of this has anything whatsoever to do with whether the debt is held by domestic citizens or by foreigners. The analysis runs exactly the same either way. Krugman got this wrong.
15. All of the above holds government spending fixed. Don’s argument (for which he credits Buchanan) is that this is a bad assumption. Here’s why: Deficit finance creates the option of passing costs on to the next generation. Some taxpayers will choose that option. Those taxpayers, having successfully pushed part of the cost of spending onto others, will vote for more spending, and sometimes they will prevail.
16. Don’s argument makes perfect sense and could well be empirically important. (I don’t know whether it is.) But it’s not the same thing that people are usually referring to when they talk about the burden of the debt. What’s usually meant by that is an additional burden over and above the burden created by a given level of government spending.

I am guessing we can get near-unanimity on all of these, with one exception: Bob Murphy keeps insisting there’s something the rest of us aren’t seeing, and I can’t figure out what it is. (Perhaps it’s just point 12 above, in which case I have to tell him that everybody else already knew this; it’s a commonplace observation in the literature on Ricardian Equivalence. Please don’t read that as snarky; we all have our blind spots and every one of has somehow overlooked a thing or two that everybody else has been onto forever.) I like Nick Rowe’s model a lot, but I don’t see where it teaches us anything we didn’t already know. (That’s not a criticism! It’s extremely important to find new ways of verifying the things you “already know”!). Bob, however, somehow sees it as revelatory. Exactly what it revealed to him is still a mystery to me.

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Murphy objects to formulations along the lines of “government debt is not a burden because we owe it to ourselves” and offers a parable that he thinks illustrates all the key issues. I agree that his parable illustrates all the key issues, so let’s review it — and see what it really illustrates.

In Year One, Abraham (who is old) owns an old apple tree and Isaac (who is young) owns a young apple tree. Each tree delivers 100 apples to its owner. Shortly thereafter, Abraham’s tree dies and Abraham follows suit. In Year Two, Isaac’s tree delivers him another 100 apples, and then both the tree and Isaac die.

Now in Year One, Abraham’s government decides to give him a present of 10 extra apples, which it borrows from Isaac. As a result, Abraham gets to eat 110 apples and Isaac eats only 90. In Year Two, the government owes Isaac 11 apples (including interest). It gets these apples the only way it can, by taxing Isaac. Therefore Isaac pays 11 apples tax, receives an 11 apple bond payment, and eats 100 apples. Bottom line: The government policy has increased Abraham’s lifetime apple consumption at the expense of Isaac’s. Therefore, says Bob, it’s clear that the government’s debt constitutes a burden to Isaac.

Fine. Here’s my counter-parable. In Year One, Abraham’s government decides to give him a present of 10 apples, which it gets by taxing Isaac. In Year Two, the government does nothing. The government policy has increased Abraham’s lifetime apple consumption at the expense of Isaac’s exactly as in Bob’s story. The Landsburg-Isaac feels exactly the same burden as the Murphy-Isaac, even though there is no debt in the Landsburg world. Therefore debt cannot be the source of Isaac’s burden.

Indeed, the source of Isaac’s burden, plain and simple, is that his government decided to transfer resources from him to Abraham. Whether they do this via debt or via taxation is as irrelevant as whether they deliver the apples to Abraham by truck or by train.

If the apples are delivered to Abraham in a wheelbarrow, one could, I suppose, blame everything on the wheelbarrow and talk about the “burden of the wheelbarrow”. And in some very contorted sense, one could defend that position. But why would you want to?

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