Battlepanda: Should I be a supply-sider?


Always trying to figure things out with the minimum of bullshit and the maximum of belligerence.

Monday, April 02, 2007

Should I be a supply-sider?

Tyler Cowen must feel the need to win back the libertarian fundamentalist crowd he lost with his podcast on positive liberty. I'm not sure how else to explain this disingenuous bit of economic sleight-of-hand, arguing that the left should embrace supply-side economics.

OK, to oversimplifiy the numbers just a bit, rich people earn -- at least -- six to seven times more on their money than do poor people. Many of the poor earn negative rates of return.

The contemporary left often seeks to remedy this unfairness, but in the meantime it is true true true. Right?

So for each extra dollar we leave with rich people, the economy earns six or seven times more in net terms -- at least -- than if that dollar had been given to the poor.

"The rich people's economy" doubles in size about every ten years or so. "The poor people's economy" doubles in size about every sixty years or so, at best. After sixty years have passed, "the rich people's economy" has done at least six times better, relative to its original starting point.

Now trickle-down effects from rich people are possibly quite slight. If a rich person creates a dollar's worth of investment, the consumer surplus and wage-boosting effects from those investments won't be more than 25 cents on the dollar, right? That means poor people get...

Well, it depends upon your assumptions. But how do you feel about this claim?

"I favor redistribution from the rich to the poor. It will make the poor better off for a few decades, but no more. After that point, the poor are worse off, forever, and by more each year."


The more you emphasize the unfair differences between the capabilities of the rich and the poor, the more easily you fall into this trap. Redistribution is good for the poor only in the short run, and we haven't even considered the traditional negative incentive effects on the rich.

Supply-side economics doesn't have to be about assuming unrealistically large elasticities of substitution on the part of the wealthy. The real supply side story is about how different social classes use resources in different ways and to achieve different rates of return.


I'm pretty sure that Prof. Cowen is being disingenuous here, because the logic of the argument leads to the conclusion that ideal tax policy is regressive, and Prof. Cowen is on the record as saying that tax policy should be "mildly progressive".

Where does the argument, sincere or not, go wrong? The problem is the leap it makes from "The rich get six times the return the poor get on their average investment dollar" to "The rich get six times the return the poor get on their marginal investment dollar".

If the government takes $1000 from a rich person and gives it to a poor person, what will the rich person cut back on, and what will the poor person spend it on? If, as the rhetoric of the right would have it, the rich person will cut back on his job-creating investments, and the poor person will blow it on a crack binge, then obviously the transfer was not a utility-increasing one. If, on the other hand, the rich person forgoes the purchase of a diamond-studded monocle, and the poor person takes a couple of classes at a community college, increasing his lifetime earning power by more than $1000, then the transfer was a good one from a utilitarian standpoint.

The argument overlooks the fact that for people toward the bottom of the income distribution, the return on investment in human capital, whether their own or that of their children, greatly outstrips the return on any other investment, even by the rich.

Would the poor beneficiaries of income redistribution invest their gains better than the rich would? It's an empirical problem, beyond the scope of armchair economics. If Prof. Cowen has any evidence other than ass-numbers, he certainly didn't present it in this post.