Monday, December 13, 2010


Much economic discussion these days revolves around how contradictory and impossible the major premise of the opponent's program is. The left complains that it is simply insane to think you can cut taxes and get more revenue. It just seems backwards. If you want more money, charge more. The right complains that the Keynesian approach seems equally insane on the face of it. Why should the government spend more money in a downturn, when the people have less?

Both sides have their reply, based on their assumptions. Reduced taxes means more money out doing productive things in the economy, like creating jobs, which eventually creates more people working, making money, and paying into the system. Or from Keynes, the system needs a certain amount of fluid in it to operate properly. If the fluid isn't coming in naturally, the government has to top off the fluid by injecting money into it.

I leave off for the present the argument about which works better. I note that there is a similarity in that both teach that money flowing around rather than sitting idle is a good thing, but they differ as to where the money comes from. What strikes me at the moment, however, is the inability of either side to acknowledge that yes, it does seem counterintuitive, doesn't it? Perhaps in these times of bitterness, such an admission would seem too great a risk. Much better to simply pound home the idea of how ridiculous the other guy's idea sounds. Yet I can't help but think we might move forward if we could start from the realisation that both positions can be oversimplified and made to sound insane.


(another) Jonathan said...

Doesn't it only seem counterintuitive if you aren't familiar with feedback mechanisms?

Assistant Village Idiot said...

Well, that would seem to be most people, wouldn't it?

Dr X said...

It would seem to be most people.

And once the Laffer Curve is understood there is the question of where the curve bends. Getting past ideological resistance to understanding is the first hurdle. People can be opaque when ideology is at stake. But, it's certainly possible for some to grasp.

You'll notice that there is great variation in the answers given to the question of bending point and, surely, as Mankiw suggests, the answer is different in the long-run versus the short-run. And what isn't mentioned in those brief synopses is that the bending point surely changes depending on the types and combinations of taxation and the economic conditions at any particular point in time.

Of those who do grasp the basics, I suspect that ideology will significantly bias judgment on these questions.

Dr X said...

Apologies for skating away from the subject of how the stimulative effects of spending versus tax reduction are understood (or misunderstood). I do think the difficulty lies in grasping the same sort of dynamic issues. And once we move beyond the simple notion of deficit spending versus tax reduction, we get into questions about levels of tax reduction, kinds of tax reduction and, on the spending side, how much spending and spending on what exactly? The answers move depending on the economic context. These are legitimate questions and ideological biases play no small part in closing minds on the answers.

karrde said...

The human intuition, while useful, doesn't deal well with systems which have complex feedback loops, multitudes of signals, and involve the individual decisions of millions of consumers, producers, regulators, prosecutors, and bankers.

In short, the economy is counter-intuitive to the average person, and often also to the economist (whether average or not).

As to why neither kind of political advocate seems able to admit is either lack of humility, or perceived lack of attention span among the audience.

I just can't tell whether the audience is supposed to be voters or the opinion-makers of the Press.

Carl said...

I agree with all commenters here, including AVI, that the problem with the left's argument is the presumption of a static model. (This is a common failing among lefties arguing about economics.) But to take up the issue AVI avoided -- and recognizing the difficulty of distinguishing between cause and effect -- the proof is in the pudding. Historically, tax cuts have been followed by a growing economy and increased tax receipts. This was true in the Bush Administration--until the credit crunch wiped out both growth and receipts.

So, my point is this: we don't have to convince people of the "counterintuitive"--just that the past is prologue.