Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.
Welcome to my world, Paul.
Do economists, generally, have any clue as to how "the pieces fit together"? If they do, they disguise it pretty effectively behind that jargon. More on that in future posts, no doubt. To the matter at hand . . .
Paul is referring to one particular instance of a conservative-libertarian economist attempting to refute one particular, and somewhat ad hominem argument for taxing inheritances, by a newspaper columnist, Elizabeth Lesly Stevens. The conservative, Steve Landsberg, asserts: [emphasis in the original]
. . . it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick [Kendrick, heir to a fortune, stands in as a representative of the idle rich]. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.
Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer. But Mr. Kendrick, by Ms. Stevens’s account, consumes almost no goods or services whatsoever. He just pushes cars around all day. His consumption can’t go much lower.
Ah, says Ms. Stevens — but there’s still that $84 million in the bank. Surely we can tax that, no? That, right there, is the heart of Ms. Steven’s confusion. She thinks that green pieces of paper, or a series of zeroes and ones in a bank computer, can somehow help supply the government’s demand for actual goods and services. It can’t.
So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.
Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else? The answer depends on the details of the transactions, but the most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacation, or postpones a car purchase, or abandons a half-built factory. Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.
You can try to tax him, but any attempt to tax him turns into a tax-in-disguise on somebody else. And the reason for this is not ultimately to be found in the laws of economics; it’s to be found in the laws of arithmetic. You can’t drive a man’s consumption below zero.
Alex Tabarrok, another conservative-libertarian economist, endorses this line of reasoning, adding, ". . . is being 'idle' rich, in the sense above, such a bad thing?" Greg Mankiw, Robert M. Beren Professor of Economics, Harvard University, and a well-practiced hack, thought Landsberg's an anodyne, almost banal point: ". . . all Steve is saying is that the true incidence of a tax is not necessarily on the person who writes the check to pay the tax bill. He just made the point in a particularly dramatic way. At its heart, however, his point is pretty standard and hard to argue with." (Greg helpfully includes a link to another Landsberg post cleverly charging Obama, a rich person, with a form of hypocrisy for advocating higher taxes on rich people.)
Contra Mankiw, a whole bunch of people did not find it difficult to argue against Landsburg's analysis. They saw error. Logical error. Noah Smith counted up four. Brad DeLong noted three. Paul Krugman, as we have already seen, held his head and mumbled under his breath about Landsburg not understanding that taxes "don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency." Nicklas Blanchard offered a thoughtful post, about the problems associated with "doing economics from accounting identities" and treating the government as a consumer instead of a social institution mediating choice.
None of these critics, apparently, persuaded Landsburg (or Tabarrok or Mankiw) to make a correction. Landsberg, indeed, created two additional posts, in order to lecture his critics, including Paul Krugman, as if they were particularly dense schoolchildren.
What can we make of this?
Remember that Landsberg's original thesis was a reaction to a column by the non-economist, Elizabeth Lesly Stevens, who advocates taxing the idle rich, and advocated in particular and specifically, confiscatory inheritance taxes on estates over $2 million. With considerable arrogance and contempt, Lansberg pontificated:
Assuming the facts are as she (Stevens) states them, it is quite literally impossible to raise revenue by taxing the likes of Mr. Kendrick. We could argue about whether it’s desirable, but because it’s impossible, the discussion is moot.
I would think that Landsburg's agenda would be fairly obvious from his thesis. He's opposed to taxes on rich people, and he's a smart and clever guy, who will manufacture any sophistry to make that preference plausible to people, not as a preference, but as a "technical" insight, which renders their preference “impossible”.
This doesn’t even rise to the level of a logical fallacy. It’s an argument of sorts, but one designed, not around the stringency of logical validity, or even a purpose to persuade, but around the desire to hypnotize. It is not "literally impossible" to "raise revenue" by collecting money taxes. On its face, Landsburg's thesis is more silly, than “logically invalid”. Anyone, who thought about it would realize that in a second, but the point is to stop the audience from thinking, to suspend that critical faculty and to become receptive to the narrative, which follows, a narrative filled with emotionally evocative associations. Landsburg has prestige and an arrogant self-confidence in his ability to overawe. Declaring emphatically "Money is not wealth." (emphasis was Landsburg's) has a certain Alice-passes-through-the-looking-glass effect, I guess. Money is wealth, in any common-sense meaning of the terms, of course, but, if you bold the assertion, many people will give you the benefit of the doubt: you are a smart economist; you couldn't possibly be a Glenn Beck wannabe with a Ph.D. You trust the Professor to explain himself, and explain he does, that taxing the pitiable millionaire drone, Kendrick, will result in cancelled vacations, a cancelled car purchase, and the shuttering of a half-built factory. Oh, so sad. It will “hurt” people (people like you, dear reader), but not Kendrick.
The “naïve” Stevens thought that taxing Kendrick would raise revenues and help save Head Start programs, but Landsburg has set us straight. As if.
In another context, Landsburg could probably write skits for a Monty Python troup:
- Person of ordinary understanding (OU): "Let's tax the rich, dead guy; he won't miss it."
- Person of Landsburgian understanding (LU): "Sorry, that's impossible. Cannot raise revenue that way. Doesn't work!"
- OU: "But, the dead guy's got $84 million. Why can't the government take $80 million to pay bills? It won't be a burden on him; he's dead."
- LU: "Exactly."
- OU: "Huh?"
- LU: "Taxes have to burden someone. It's in the nature of the government thing. Technical insight."
- OU: "Oh. Didn't know that. I guess we'll have to tax someone, who doesn't have the money; that'll really increase the burden."
- LU: "Common error, really. Lots of liberals get it 100% wrong. But, I'm glad to correct them. Glad to share my insight and expertise. "
But, economics is not a Monty Python skit. It is an academic discipline with great influence on politics and policy. Exposing sophistry for its logical fallacies is a tradition that goes back to Aristotle, but why didn't it have more impact, here?
The conservative-libertarians – Landsburg himself, Mankiw and Tabarrok – did not engage with the logical constructions of their liberal critics. They retreated, to simpler, more abstract formulations of the rationales for their conservative world-views and moral imperatives. Unintended consequences. Money illusion. Counter-intuitive tax incidence. Conservation principles, which assert a zero-sum game.
And, the liberals did not engage with the intentions of the conservative-libertarians. Instead, they accepted the challenge to pass through the Looking Glass into a dream-world whose architecture was dictated by Landsburg’s assumptions, there to criticize the architecture. Landsburg was committing logical errors – that was his sin, said the liberals (young Noah allowed that he seemed crazy). Doesn't seem to understand how taxes relate to solvency; doesn't understand how local nonsatiation is a necessary assumption for the analysis of tax incidence, etc. Using the prestige of his profession to suppress democracy . . . that really didn’t come up.
Krugman, at the top of this post, is disturbed that his colleagues do not understand the economy. He appears unaware that his conservative-libertarian interlocutors are smart enough -- Landsburg has been writing a book about the physics of Relativity, for fun! -- but have preferences, which they are pursuing by means of an economics, which actively and deliberately destroys shared public understanding. Landsberg was trying to de-legitimize a simple, common-sense argument with mumbo-jumbo. He wasn't trying to advance public understanding of economics or the economy; he was trying to protect rich people from taxation. Tabarrok and Mankiw knew what they were about, and worked additional plugs for an anti-tax-the-rich sentiment into their posts, not earnest explanations of analytical logic.