Inequality

Indeed for lack of a better alternative i am a registered Dem, and if anything I think the Auto bailout was less defensible than the Bank bailouts, because there was no systemic risk to the world.

Unions can be just as predatory on the rest of society as can be management or investment bankers. No group holds a monopoly on extorting the public... I am sure plenty of educated pragmatic liberals would agree.

But it ought to be possible to look at occasions when taxes on the rich were lowered, and see what the impact was on investment. It might not be possible to show what individuals did, but the aggregate impact should be visible. Conveniently, we have several of those over the past few decades. And the occasion when the capital gains tax rate was set below the rate for other income should, by comparison, give us at least one data-point on how that worked out.

Granted the impact on investment of raising taxes might not be perfectly symmetrical with the impact of lowering them. But it would at least be suggestive, don't you think? (And once we have a handle on that, we can think about validating the impact of investment on job growth.)

I guess it comes of being an engineer by training. I like to have some reasonably hard data on effects, even if it is not perfect. (Physical scientists are just as capable as economists of coming up with beautiful and plausible, but wrong, theories about how thing work.)

@ Fundamentalist,

"Increasing the rate of taxation on the 1% won't necessarily make the 99% better off in the long run. It will in the short run, but as the 1% reduce their investment in job creating businesses, the 99% will suffer from higher unemployment."

This way of thinking negates the shift in the manifestation of the so called "trickle-down effect". You're right to say that an increase in taxes on the top 1% will affect their desire to invest in expansion etc, but you fail to acknowledge that a very large part of the problem here is that a large proportion of the jobs created through such investments occur overseas in countries like China where "the army of the unemployed" continues to ensure that American workers cannot be competitive and still feed themselves.

Now, you may argue that raising taxes on them is hardly going to ensure that the 1% start investing domestically, but that doesn't alter the fact that all this "job creation" rhetoric always conveniently leaves out where most of these jobs are actually created.

I think that would be a good idea. I’ll try to search the internet when I get time to see if anyone has done that. I have tried myself and not succeeded. The problem is separating personal investment from corporate. The data that FRED (Federal Reserve Econ Data) has on private investment is spending on new plants and equipment. Obviously, individuals don’t do that. The investment of individuals first shows up as savings that go to bonds or stocks. Then companies use that to invest.

If you regress personal savings on investment, you get a negative coefficient for savings. Intuitively we wouldn’t think that savings reduces investment, so what the regression is probably measuring is the fact that savings increase during a recession when corporate investment is at its lowest. Then savings decline and investment increases as the expansion progresses. So there is probably a long and variable lag between personal savings and the point at which businesses use those savings for investment.

That exemplifies the chief problems of econometrics – missing data, specification errors and confounded effects.

Also, it highlights a point made by Hayek several times: we know a lot more about human behavior in the market than we have data to illustrate. If we limit ourselves to theory based solely on available data, we limit our knowledge severely. We become guilty of the same fallacy as the drunk who looks for his keys under the street lamp because that’s where the light is.

Good economic theory isn’t like theory in physics. In physics researchers know very little about their subject and make wild guesses. Then other physicists go out and perform experiments to see if the theory is valid.

Economic theory comes from observation. The best economists are good anthropologists. All good economic theory came from watching people act in the marketplace. It’s a different kind of empirical evidence that mere data. We know a lot more about the subject, humans, than we can find measurable data to illustrate.

On the other hand, it might be possible for economists to take one lesson from physicists. Once you have a theory, you have an idea of what data is necessary to prove or disprove it. So you focus on getting that data.

Now economists can't (usually) perform experiments to gather the necessary data. But what they can do is figure out how to gather the data from life. It's not as controlled as one might like. On the other hand, there is lots of it. And from a variety of circumstances -- which gives a start towards the (definitely complex) job of disentangling multiple factors.

I can see a couple of possible steps in that direction. First, it may be possible to persuade government agencies to include the data economists want in the data gathering that they are already doing. Granted there is the challenge of determining which governments are reliable. And there can be issues with the honesty of the reporting that they take their data from. But those are hardly insuperable obstacles.

Second, there might be a way to gather at least some data independently. I'm thinking of recurring surveys tracking individuals over the course of years -- the sort of thing that is done in long-term medical studies. Yes, it's a pain, and requires a long-term committment from the researchers involved (or at least the ability to recruit new researchers onto the team). But it ought to be possible.

Yes, those things are possible economists do as much as they can, but your analogy with medicine is very appropriate. Such studies are very expensive, which is why medicine does so few of them.

You probably haven't read much formal economics, but find some economic journals, or read some of the Weekly Papers that RA posts. They are heavily data and math intensive. Mainstream econ has desperately tried to imitate physics since WWII.

That's why I get a little irritated at some posters who come from the natural sciences and insist that economics could be better if it tried methods from the natural sciences. That is exactly what mainstream econ has attempted for 60 years! Read about the latest Nobel prize winners. They are about nothing but data and econometrics. I realize the average person doesn't see that because they read mostly blogs or articles in the popular press that translate the math into prose. But I can guarantee you that no one wants econ to be like physics more than mainstream economists.

I learned the math/physics approach to econ when I earned a masters in econ from a good state school. Later I abandoned it for Austrian econ. Here is a good interview with Boettke on Austrian econ: http://thebrowser.com/interviews/peter-boettke-on-austrian-economics?page=1

The main reason I divorced the math/physics approach to econ was that I found it worthless as tits on a boar. Hell, they couldn't even see the worst depression since the Great D coming after 60 years of math and physics! The good stuff that the math/physics approach has produced over the past 60 years is nothing but confirmation of what the Austrian economists of the 1930's were teaching.

I provided an example in an earlier post. Here are my comments on "Common sequencing patterns in financial crises" (Carmen Reinhart) in the Weekly Papers for Jan 11. "Common sequencing patterns in financial crises" (Carmen Reinhart) is pretty good. Read it and then Hayek's "Monetary Theory and the Trade Cycle" available at mises.org under literature (pdf free). Hayek anticipated Reinhart by about 75 years."

Economics is more complex than medicine. But here is an interesting article on why the complexity of medicine is causing science to fail us:

Trials and Errors: Why Science Is Failing Us" http://www.wired.com/magazine/2011/12/ff_causation/all/1

PS, I didn't abandon mainstream math/physics econ because I couldn't do the math. I could. For many decades econ majors have had to take several levels of calculus and and differential equations. But after all that math, no economist can predict gdp with any reasonable accuracy beyond the next quarter.

I have mentioned before that I had a prof in college with two PhD's, his first in physics and the second in econ. He said he switched to econ because he found physics boring and econ used the same math tools. Econ is a lot of things, but it ain't boring!

One of the many problems with using math in econ is that the coefficients of any equation never stay the same in different time periods. Estimate any equation for anything and the coefficients are not invariant across time. Take any set of data and estimate the coefficients for the whole set. Then take subsets of the data and re-estimate. The coefficients change dramatically and can even flip the sign!

Why does that happen? Unlike any other subject in science, people can learn, and because they can learn they will rarely do exactly the same thing under exactly the same set of circumstances.

It occurred to me after I posted that a better parallel might be astronomy. Unlike most physical scientists, astronomers can't do experiment; they're limited to looking at whatever data nature makes available. It seems like an analogy which might make physical scientists better understand the handicaps economists work under.

Perhaps you should consider one word for the math-intensive approaches you decry: epicycles. If you start from a bad premise (e.g. a geocentric universe), you can do lots of great math to explain what you see. And it can even produce approximately correct results . . . although the more exact your data, the more complex the correction factors required. Eventually, someone figures out that a different premise (in this example a heleocentric solar system) makes a better fit for the data with much less complexity required. Perhaps economics will reach that sort of epiphany eventually.

Yes, I think that has been happening very slowly in economics. Keynesian econ died because of the economic disaster of the 1970's, the "stagflation." Economists reconsidered their premises. Neo-Classical was a great improvement over Keynesian econ. This latest crisis has caused another reconsideration and quite a few are coming around to the premises that Austrian econ promoted back in the 1930's. The latest crisis was a huge boost for Austrian theory.

Austrians don't think that math is a bad thing. If economists used the premises of Austrian econ to create their models they would be much more accurate. However, some things we just can't model yet.

There would seem to be an opportunity here for someone who is good at modeling to build some off of Austrian premises. Do you know if anyone has done that already? Sure, we don't know enough for perfect models. But if the premises are better, it ought to be possible to make models that work better than existing ones. And if the premises are not better, that ought to show up as well.

And whoever does it should be on the short list for a Nobel.

"That's a good point. I have asked student why no one complains about the extreme wealth of musicians, actors and athletes. Usually they say that those people earned their wealth whereas CEO's don't."

What world do you live in? Anyone who follows sports knows that one huge complaint among fans is that the athletes are overpaid. Read any online article about ANY celebrity and you'll find comment after comment trashing that person as talentless and not worth the money they make.

The reason OWS wasn't Occupy Hollywood is that, for all their faults, the millionaires and billionaires in the entertainment industry aren't the ones who wiped out all our 401Ks while making out like bandits themselves. Kanye may be a self-important jerk, but he didn't hand out billions of dollars worth of bonuses after a tax-payer-funded bailout of his industry.

I don't follow sports blogs, so I wouldn't know. But in the mainstream press, and for OWS, the only evil wage is one paid to a CEO. Athletes and Hollywood get a free pass.

On second thought, I listen to ESPN and Fox sports when I'm in the car and have never heard anyone complain about athlete salaries.

That is just completely untrue. Were you asleep during the NFL lockout? The overwhelming consensus among fans was that the players were a bunch of overpaid babies who should stop whining and get back to work.

Google the phrase "overpaid athlete" and you'll get over 600,000 results. Google the phrase "overpaid actor" and you'll get half a million. Google "overpaid CEO" and you'll get over 800,000. Yes, that would seem to indicate that people are more concerned with overpaid CEOs at the moment, but not by that much, really -- especially when you consider that it wasn't athletes and entertainers who wrecked the economy and then fought any new restraints on their ability to wreck it again after graciously accepting a publicly-funded bailout.

And, besides, you're not arguing that people are MORE upset about overpaid CEOs, your claim is that NO ONE ever complains about overpaid athletes and entertainers. That claim is completely false.

Now, follow some of those links and, doubtless, you will find many people defending athletes and entertainers against the charges of being overpaid. But, there would be no need for defense if the allegations were not commonplace. Likewise, if we follow the links for overpaid CEOs, we'll likely find many people (like you) who will take the side of the CEOs.

Whatever the merits or demerits of the anti-CEO criticisms, anyone who claims that the phenomenon of grousing about wealth is restricted to CEOs is not arguing in good faith. Anyone who claims that athletes and entertainers get a "free pass" while capitalists are derided is not interested in facts. Not to mention the fact that any rise in taxes for the top 1% would affect those millionaires and billionaires in Hollywood and professional sports just as much as it would the CEOs on Wall Street.

No one is asking for limits to athlete pay, though. The level of griping about athlete pay is very mild compared to the outcry against CEO pay. Apparently you don't read much or you would have seen the many editorials about the immoral level of CEO pay and the nearly non-existent editorials about athlete or actor pay.

Which is EXACTLY what I said in my post, that we need to cut spending and raise revenue both. The only argument against raising rates back to the BOOMTIME levels of the late 90s is that we need to cut spending...which is of course not the same topic AT ALL. Argh!

Math hasn't changed, but neither has the right's slavery to plutocrats.

I haven't heard serious discussion about cutting spending from any politician save Ron Paul, hence my skepticism about left's tax hike wishes.

I can't account for what you've heard (Simpson Bowles was a bipartisan roadmap for cutting a lot of stuff), and I don't care.

Any thoughtful non ideologue can only conclude that we need more revenue (current Federal receipts are 15% of GDP, lowest ever) AND need to cut spending. ANd it's maddening to hear calling for a slight increase in taxes to BOOMTIME rates (yes all caps every time) being called 'class warfare' or 'persecution' or whatnot. That kind of rhetoric is childish at best.

First off, Simpson Bowles seems to be dead at the moment. Second, while it was a good effort, even that only reduces deficit to something more manageable, not eliminates it.

And as far as revenue goes, it'll rise if the economy gets going, but it's highly unlikely it'll go up to the levels left wants, no matter how much you hike taxes on the rich. It's simply an ideological feel good point, devoid of real substance.

No. Laffer didn't believe that "cutting rates ALWAYS results in higher receipts." It is, after all, a curve that starts and ends at zero receipts. http://en.wikipedia.org/wiki/Laffer_curve

It is modern day Republicans that think that there is no tax rate at which receipts won't continue to rise. This effectively converts Laffers "reverse C" shaped curve into a "reverse S".

Fair enough, but Laffer is every inch a 'modern day Republican' calling for even lower tax rates. IMO we've reached diminishing returns on his theory. It made a lot of sense when cutting rates from 70% or higher marginal levels. It makes none today.

You're really not coming across well. You said you'd never seen the left call for lower spending, I bring up Simpson Bowles, you say it's 'dead'. But you surely understood what I meant, that S-B was an example of the 'left' agreeing to make drastic cuts.

I'll give you one more chance to actually engage my argument, if you misdirect again I can only conclude you are useless to argue with.

That 'good effort' is plenty. We don't need to get the deficit to zero, just below the growth rate of the economy (around 3-4% of GDP). I imagine 'dead' Simpson-Bowles will be a framework for some kind of grand deal. I hope it's this year but let's face it, it's going to be 2013. We'll have a Dem president and a Rep Congress in both houses, just like the late 90s, when tax rates were a little higher and the budget was in balance.

And your refusal to consider very benign tax increases (which by the way I make enough to have to pay) is the actual substance free ideology. It is plain and simple common sense that we need more revenue AND less spending. Doesn't have to be equal proportions either. The Dems were offering 5 to 1 ratio deals to the Reps, who characteristically rejected them.

You're not one of those knuckleheads, are you?

What misdirection? Obama administration chose not to back commission recommendations, and at the moment it appears to be going nowhere. This is a perfect example of politicians making agreements when they don't have to deliver actual results. And this goes against both parties - Republican grandstanding is just as hollow as Democrat promises. You can imagine all the grand deals you like, but until i see an actual one passing, please call me skeptical.

I'm trying to be as realistic and bipartisan here as possible, while trying to keep an eye on the arithmetic. Here's what i got so far. Current deficit - $1,000 billion per year. Revenue gained from taxing the rich - $70 billion per year. Difference - $930 billion per year. Ok, say we raise taxes on the rich. Now, can we focus on real issues please and address the difference?

The left makes it seem like taxing the rich will solve all our problems. In my original post, i said that it won't, at any tax rate. When your imaginary grand deal comes to pass, and if it'll be like S-B or better, you'll have a good argument. Until then, 'taxing the rich' is just a tiresome rhetoric.