Even our taxes?

by Linda Beale
(cross posted from ataxingmatter)

Economic Theory–how much is it worth
[hat tip–Yves Smith at Naked Capitalism]

Michael Hudson, an economist at the University of Missouri-Kansas City, asks how the economic discipline became so “trivialized from its classical flowering””taking for granted the social structures and dynamics that should be the substance and focal point of the analysis.” See Michael Hudson Responds to Paul Krugman, Dec. 19, 2009. He answers the question by discussing “the ‘intellectual engineering’ that has turned the economics discipline into a pulibc relations exercise for the rentier classes criticized by the classical economists: landlords, bankers and monopolists. It was largely to counter criticisms of their unearned income and wealth, after all, that the post-classical reaction aimed to limit the conceptual ‘toolbox’ of economists…. It has ended up as an intellectual ploy to distract attention away from the financial and property dynamics that are polarizing our world between debtors and creditors, property owners and renters, while steering politicas from democracy to oligarchy.” Economists, Hudson complains, developed consistent theories that won them Nobel prizes, even while pointout that there was no need to be “committeed unduly as to the relation between reality and these [abstract economic] assumptions” (quoting Nobelist Paul Samuelson)–in fact, “the results are implicit in the assumptions made” (quoting Nobelist William Vickery). Yet these theories were nonetheless used to arrive at policy conclusions that impact individuals in the real world.

Something very similar–and perhaps even more perverse–happened to tax analysis. It was coopted by this consistent economic theory and the importance of equitable considerations were shunted aside. At the Congressional level, economic models showing economic growth from tax cuts were relied on in the face of evidence to the contrary to justify one tax cut after another. The predominance of shoddy economic analysis on behalf of the vested interests and their property and “rent” rights made it possible. In academe, economic theories of efficiency were given precedence over discussion of equity–it is still somewhat hazardous to an academic tax professor’s career to write about tax without at least giving nominal homage to efficiency theories. The Volcker panel, appointed by the Obama White House to think about tax policies, is dominated by economists and, in fact, doesn’t include a single tax professor. See this March 25, 2009 Bloomberg.com story on Volcker’s appointment and the long list of former government officials with economics backgrounds that were appointed to the panel. It is bad enough that the panel was hobbled with instructions not to consider raising taxes on anyone making less than $250,000 but the makeup of the panel suggests that issues that should be on the table will be shunted aside.

In a way, the spread and misuse of theoretical economics to answer questions across a range of policy issues relates to the spread of “law and economics” in law schools. Funded by millions from the Olin Foundation and driven by people like the George Mason Dean who sought to inculcate economic approaches in the entire law school faculty (economics and tenure went together like love and marriage), law school faculties hired more and more law and economics professors (law degrees not always necessary) and those professors brought in even more faculty who wrote in some aspect of law and econ. As a result, schools across the country host a wide variety of scholars who do some aspect of “economics” research, including tax professors, corporate finance, and policy theorists.

So an interesting question to ask is how the utter failure of the economic model to foresee and deal with the financial crisis should impact the credibility of economics as the theoretical starting point for so many different analyses. In my view, it should cause us to step back and examine the premises on which so much of modern economic research is based–the use of math to hide the shallowness of conclusions that arrive exactly where they must given the starting points, even when the starting points have little to do with the real world. But there are many careers invested in arguing from the Milt Friedman perspective of free markets. It won’t be so easy to dethrone that approach.