Sunday, October 30, 2011

Allan Meltzer, Steven Landsburg Commit Economics Malpractice on Editorial Pages of the Wall Street Journal

Economics Profession Needs a System to Label Quacks – It is Only Right that the Public Be Warned

For some reason reasonable people believe that the scholars of Economics deserve a Nobel Prize category. Apparently those people are not aware of the sheer idiocy that Professors of Economics put forth on the Opinion pages of the Wall Street Journal.  This past weekend was Exhibit A why the Economics Profession needs to get serious about enforcing some minimum standards or at least labeling gibberish for what it is.

With columns by Allan Meltzer and Steven Landsburg we have opinion and analysis so unsupported by logic, facts, data and the generally accepted principles of basic macro economics that one wonders how these two individuals obtained faculty positions at Carnegie Mellon University and the University of Rochester.  They belong on the faculty of Whatsamatta U.

First up we have Mr. Meltzer, writing about how the failure of the stimulus, which was ill designed and inadequate, must mean the Keynesian economics is not valid.  It is as though a medical researcher studying a situation in which the wrong anti-biotic given in a dosage about 1/3 what was needed failed to cure an infection and concluding that anti-biotics don’t work.

Those who heaped high praise on Keynesian policies have grown silent as government spending has failed to bring an economic recovery. Except for a few diehards who want still more government spending, and those who make the unverifiable claim that the economy would have collapsed without it, most now recognize that more than a trillion dollars of spending by the Bush and Obama administrations has left the economy in a slump and unemployment hovering above 9%.

Of course no major Keynesian economists have abandoned the theory.  As for the “unverifiable claim that the economy would have collapsed” without the stimulus, Mr. Meltzer is apparently ignorant of the many studies that have shown just that, including the non partisan Congressional Budget Office.


Here is what GDP has looked like since 2007.  Does anyone other than Mr. Meltzer fail to see where the stimulus impacted the economy, (hint, try mid 2009).  Take a trillion of government stimulus out of the picture and what do you think that picture would look like.?

What are  Mr. Meltzer’s arguments.  Well here are some

Concern over future tax rates is one of the main reasons for heightened uncertainty and reduced confidence. Potential investors hold cash and wait.

Surveys have shown that tax rates play very little role in the investment decision.  The major factor is demand for goods and service.  Who else but an ideological academic would think that business will expand just because taxes are lower, when there is no demand for the additional capacity.

Permanent tax reduction generates more expansion than increased government spending of the same dollars.

Mr. Meltzer fails basic macro economics 101 with that comment.

Keynesian models totally ignore the negative effects of the stream of costly new regulations that pour out of the Obama bureaucracy.

The old “regulations” are the problem argument.  How did lack of regulation of the financial sector turn out in 2007-2009?  Exactly which regulations are the subject of Mr. Meltzer's objections?  Like cuts in Federal spending, the regulations that Conservatives oppose are never named.

By now even the Fed should understand that we do not have a liquidity shortage. It has done more than enough by adding excess reserves beyond any reasonable amount. Instead of more short-term tinkering, it's time for a coherent program to start gradually reducing excess reserves.

This is economic speak for raising interest rates.  Anyone think that is the answer?  Anyone?

Mr. Meltzer has his own prescription for the economy.  It is cutting government spending, lowering corporate income taxes, no new regulations and targeting inflation at 0-2%.  Note to Mr. Meltzer:  Higher inflation resulting from increased demand would be good for the economy right now.  Really, it’s in all the basic textbooks.


Steven Landsburg opines that the Estate Tax, which he like every other Conservative re-labels as the “Death Tax” (because an intellectually fraudulent label like that helps support a cause that is intellectually fraudulent) is actually harming poor people. 

Absent the death tax, we'd have had even more frugality and more resources available for the kind of investments that benefit all of us.

So you don't need rich parents to be a victim of the death tax. You don't need to own a family business or family farm. You only need to be someone who works in a factory or shops in a grocery store or gets sick and goes to the hospital.

The logic, if it can be called that (The Dismal Political Economist is in a charitable mood and will allow labeling Mr. Landsburg arguments as “logic”) is this.  The savings of rich people provide the funding for investments, and if there is an Estate Tax, this encourages rich people to consume rather than save, and so the supply of investment funding is less, which means less investment and lower economic growth.

This is correct, if the year were 1900.  In a developing nation the capital accumulated by wealthy people is necessary to fund investment.  But since the early part of the 20th century we have this new thing, that apparently Mr. Landsburg is unaware of.  It’s called capital markets.  Capital markets provide for the funding of investment by institutions like pension plans, banks, insurance companies, sovereign wealth funds and the like.  Individual funding to the tune of billions or hundreds of millions is simply not a large part of a modern economy, and to the extent that it is, there is ample supply of funds thanks to policies which have allowed the top 1% in the U.S. to accumulate unprecedented income and wealth.

As for the argument that the Estate Tax encourages consumption by rich people, that is an argument for the Estate Tax, not one against it.  Mr. Landsburg, as an academic, is apparently unaware that investment is driven buy consumption.  Investment is made to produce additional goods and service to meet higher aggregate demand (Gee, where have we heard that before). 

To illustrate his point Mr. Landsburg invokes Scrooge McDuck.  Really he does.  Here are his exact words.

If Scrooge McDuck forgoes a private jet so his nephew Huey can have a private jet 20 years from now, we get 20 years of additional production from the factories that can be built in the interim.

Second, don't be so sure Huey ever gets that private jet. He will, after all, be splitting Scrooge's estate with his brothers Louie and Dewey. A hundred million dollar inheritance, split among three children, and then nine grandchildren, and then 27 great-grandchildren, gets whittled down in just five generations to less than half a million per heir—and that assumes that nobody spends anything along the way! So when Scrooge forgoes his private plane, it's likely to be for the benefit of descendants who fly coach.

I'm not just making this up.

No Mr. Landsburg, you are just making that up.  Scrooge McDuck and Huey, Louie and Dewey are Disney characters.  They are not real!  And here is how Mr. Landsburg ends his polemic

But the death tax is a double whammy, compounding the damage by encouraging overconsumption. (The same is true, incidentally, of taxes on interest and dividends.) So my message is this: If you must tax the rich, please do it in a way that minimizes the collateral damage to the poor.

So it is the poor that are being hurt by the Estate Tax.  Ever wonder why these same poor people are not rioting in the streets calling for an end to the Estate Tax which is harming them so much?  Maybe it’s because they are too stupid and lazy to understand the issue, and need academic elites like Mr. Landsburg to explain it to them, to tell them that against all appearances to the contrary, cutting taxes on the super rich is helpful to poor people.

Or maybe they are smarter than Mr. Landsburg, and know that letting someone like, say Mitt Romney pass on hundreds of millions of dollars of wealth to his descendants without a transfer tax (which is what the Estate Tax is) will not benefit them at all.  After all the Estate Tax was cut substantially in the first decade of the 21st Century.  How did that turn out for poor people?  Well great if the objective was to create more of them.

Economic illiteracy and ignorance is a major problem in America.  With people like Mr. Meltzer and Mr. Landsburg holding faculty positions at major U. S. universities one can see why.  But one cannot see how these individuals, and people like them ever got to hold a faculty position at a university in the first place.  Maybe economics does need professional licensing, or at least minimum standards. 

It would be very refreshing if people like Mr. Meltzer and Mr. Landsburg were more honest with everyone.  They should just say that they support policies that favor the wealthy, that they don’t really care about the middle and lower income groups, and that the wealthy pursue these policies because they have unlimited greed and desire for more money and more political power, and that is whey they want tax cuts for the wealthy and the elimination of the Estate Tax. They would still be wrong, but at least they would be honestly wrong, not intellectually wrong.

But as much as one is tempted to believe otherwise, it appears that people like Mr. Meltzer and Mr. Landsburg actually believe what they write.  This puts them into a recognized category, and so despite their advanced degrees and academic credentials we can label them for what they are, "useful idiots" to the Conservative cause.

1 comment:

  1. "After all the Estate Tax was cut substantially in the first decade of the 21st Century. How did that turn out for poor people? Well great if the objective was to create more of them." Just an example of why I like you like a religion. Gracias!