I probably shouldn’t respond on the fly to anything by a guy as Tyler Cowen, and I’m heading out the door in literally minutes, but here he writes:
Left-wingers should be the real supply-siders
This post is pure provocation, take it as you will.
The left often stresses how wealthy people have superior opportunities in life. They can save more, avoid debt, buy better educations, they have a better chance to start a company, and so on. Furthermore this is seen as unfair. Right?
To put the point in simple quantitative terms, equity yields an average of about seven percent, while holding debt claims yields a bit over one percent. Most poor people don’t hold much equity, or for that matter they tend to take out debt rather than hold it. Smart rich people stock their portfolios with equity quite heavily. So on average rich people get richer. That is even more unfair. Right?
OK, to oversimplifiy the numbers just a bit, rich people earn — at least — six to seven times more on their money than do poor people. Many of the poor earn negative rates of return.
The contemporary left often seeks to remedy this unfairness, but in the meantime it is true true true. Right?
So for each extra dollar we leave with rich people, the economy earns six or seven times more in net terms — at least — than if that dollar had been given to the poor.
“The rich people’s economy” doubles in size about every ten years or so. “The poor people’s economy” doubles in size about every sixty years or so, at best. After sixty years have passed, “the rich people’s economy” has done at least six times better, relative to its original starting point.
Now trickle-down effects from rich people are possibly quite slight. If a rich person creates a dollar’s worth of investment, the consumer surplus and wage-boosting effects from those investments won’t be more than 25 cents on the dollar, right? That means poor people get…
I do have a few questions….
1. If there is a single best investor in the US (perhaps its Warren Buffett?), would we all be better off if he/she gets everyone’s income to invest? In other words, what if the government simply took everyone else’s income and gave it to that person – no doubt a great investor would be able to double the money in far less than ten years. Or does this sort of Pareto efficiency argument only apply when we’re talking about large numbers of people?
2. Maybe the poor are being rational only earning their piddly one sixth returns of the wealthy. Consider… if at the end of the year you have some spare change lying around to put away, and that spare change is $100,000 (so we’re not talking Warren Buffet, we’re talking something that is easy for the top percent of income earners), you have many options to invest. And odds are very high, whatever choice that person takes, the brokerage fees and other costs associated with the investment are probably minimal relative to the return. Now, consider someone in the bottom 20% of income – a much larger share of the population. At the end of the year, what do they have to invest? And how many investment vehicles are available to them with that sum? And what share of any potential returns will be eaten up by fees? And after all this, is this really a better investment than trying to maintain that minimum balance in the bank that keeps one from having to pay penalties for bouncing checks. Or, for those in a bit better financial shape than that, keeping enough in the bank to achieve that minimum balance that keeps the bank from charging a check fee?
3. If lower taxes lead to faster growth…. why did the economy grow faster in the 1960s than since that time? why did it grow faster under Clinton than under GW? Why did it grow faster once you account for debt under Clinton than Reagan? Considering the historical tax decisions made by the various states, would we all be better off if the entire country behaved like Taxachussetts, New York, and California, or if the entire country behaved like Alabama, Mississippi, and Tennessee? Which states have driven the economic prosperity of the country for the last hundred years or so?
I’ve said it before, and others have as well… the problem with economics is that most economists simply are unable to grasp the issues that affect a very, very large segment of the US economy.