Garrett Jones
About
Economist
Claims by Garrett Jones (15)
If businesses say a tax cut doesn't help them, that is an argument for the tax cut, because businesses get most excited about cuts on activities they are already doing (infra-marginal), which create no new behavior; whereas a cut that businesses are indifferent about may produce large consumer benefits by shifting behavior at low cost.
Cutting the pay of doctors would reduce the number of people who become doctors, because while many would remain for non-monetary reasons, millions more are marginal entrants who would choose other professions like law; this shows money matters at the margin even when people aren't primarily money-motivated.
When a supply curve is relatively flat (elastic), there is little producer surplus, so producers won't lobby hard for or get excited about a price/tax change; yet because the demand curve's shape is independent, consumers can capture huge gains from the same change—explaining why innovations are often small producer-side tweaks that yield large consumer value.
Party brands have a longer time horizon than individual politicians, who plan to serve only a few years before cashing in as lobbyists, so leaders managing the brand internalize long-run consequences much as a corporate CEO protects company reputation against the indifference of anonymous individual workers.
Earmarks are a far cheaper way to buy a member of Congress's vote than the alternative of permanent entitlement spending—e.g., a two-million-dollar post office versus a permanent two-billion-dollar Medicare increase—so retaining earmarks will help parties cut hard deals on entitlement reform.
Earmarks function culturally like steroids in baseball: they are tolerated but practiced quietly, with politicians using disguised mechanisms (like a 'rifle shot' tax provision targeting a single product) rather than openly subsidizing a named beneficiary, because doing it openly is considered gauche.
Most modern work is not producing physical capital or final consumer goods but building organizational capital—the cultures, patterns, processes, databases, R&D, and trained workers that make a firm function—so very few people are needed for actual final production (e.g., a handful of workers at a car assembly line or two workers at a fortune-cookie factory).
Measured labor productivity has risen during the last three recessions (1991, 2001, and the 2007 downturn), reversing the historical procyclical pattern, because firms lay off organizational-capital workers (innovation, R&D, cubicle process workers) while retaining the small number of final-production workers—so output per worker rises even though no one is necessarily working harder.
Real business cycle theory (Kydland and Prescott, ~1980) explains business cycles as driven by exogenous productivity changes—from regulation, tax rates, oil prices, or innovation—where people work more hours when productivity is high ('make hay while the sun shines') and fewer when it is low, generating procyclical productivity, wages, and investment.
If supply-siders were right that small tax-rate changes have large effects on the rich's labor supply, then 2010 should be a massive boom year for work by America's rich (anticipating 2011 tax hikes), making labor supply shift hay-making forward; Jones predicts this will not happen, because labor supply responds to tax rates far less than supply-siders claim.
Empirical analyses by Christina and David Romer and by William Niskanen find that tax cuts do not starve the beast as Milton Friedman theorized; instead the one thing a tax cut reliably predicts is a future tax increase and possibly higher future spending, consistent with a 'Puritan vs. partier' model where parties restrain each other's tax cuts and spending hikes together or indulge both together.
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