“What Happens if the Tax Bill Is a Revenue Disaster?” (nytimes) is a piece by Nobel laurate Paul Krugman. He uses his macro-sized brain to predict how Americans and American enterprises will react to this bill and thus what the likely impact on revenue is.
My comment:
Thanks, Professor Krugman, Your last prediction about the markets and the economy that I can recall was in November 2016: “It really does now look like President Donald J. Trump, and markets are plunging. … If the question is when markets will recover, a first-pass answer is never.”
I don’t follow the stock market closely. Was there, in fact, ever any kind of recovery for the S&P 500?
On a more serious note, why do we think it would be possible to come up with an accurate prediction? For individuals there has been a lot of research on the tendency of people to work more as rates are lowered or work fewer hours as tax rates are increased. But do we have any data or experience with corporations? Given the complexity of the tax code for business it doesn’t seem as though a simple “look at the rates” approach would work.
Was there any economist who predicted that U2 would move its songs to an offshore Netherlands trust or use corporate shells in Malta and Guernsey for property investments? (The Sun) Since it has never previously been tried, how can anyone know what would happen if it were possible to pay the IRS a straight 20 percent instead of paying armies of lawyers and accountants and offshore functionaries?
Financial disclosures often included warnings such as “past performance is not indicative of future outcomes”. So Professor Krugman’s prediction in 2016 should have no bearing on the present one.
The only thing that is important (at least to his audience) is how well it highlights the vast detrimental effects of this presidency. Here Professor Krugman’s has correctly identified the proposed policies as a disaster.
My recollection is that Professor Krugman retracted that prediction the next day and admitted he had allowed emotion to get in the way of analysis.
Economics is of course not really a science. It has not shown the ability to make consistently accurate predictions about the future like the hard sciences. It seems to have some insights into human behavior but then again so do history and literature. People like Krugman have political points of view like the rest of us but try to dress up their opinions and prejudices with the disinterested language of science. They are given some sort of credibility by prizes like the Nobel Prize and use that recognition to bootstrap into giving opinions on things that are far removed from their supposed expertise — Krugman’s as I recall had something to do with international trade or exchange rates. But at bottom economics isn’t science and Krugman’s predictions about the future are probably no better or worse than the rest of ours.
Here is Nobel winning economist Krugman confidently explaining his view that debt doesn’t much because it’s just money borrowed from one person’s deposits then repaid later by another.
Here is the Bank of England refuting Krugman saying: “No Paul, that is completely wrong – debt is conjured to create new deposits, not deposits are borrowed to create new debt”.
Being completely wrong, however, hasn’t stopped Krugman from telling us how he thinks things should work.
Imagine the following headline in one year review of the administration in nytimes in Jan 2018:
“Paul Krugman: President Trump’s economic policies not that bad after all, and some are in fact quite good …”
How will (most of) his readers like like that, and how will it affect his popularity?
It is quite likely that Nobel laureates are more knowledgeable than most people, especially those not working in that area, but these experts are probably more constrained by personal financial interests than any limitations of their expertise/ability. So they may actually be capable of making better predictions than most people, but also equally capable of justifying more “suitable” predictions with better supporting arguments.
nobody who can predict the future needs to work at the Times or anywhere else.
I have lately discovered “Modern Monetary Theory” .
https://en.wikipedia.org/wiki/Modern_Monetary_Theory
MMT seems to explain how Congress and the Fed act rather than what they say. Short version: The government will never run out of money and it doesn’t matter because it’s just entries in a ledger that will last as long as the government. A “deficit” is excess money in the real economy, and congress gets to steer it to favored sectors. A “surplus” is a shortage of money in the economy and congress decides who does without. Obviously the incentive is to avoid anybody doing without, so the bias is toward deficit. Both parties pay back donors first, then they fight over who gets the rest. (They have to fight or we wouldn’t need parties.)
Economists, the Congressional Budget Office and all the other Swamp Institutions cannot be trusted. We should COMPLETELY IGNORE their biased projections with a record of being utter rubbish. The simple question is this… Do we want the government to collect less taxes — from the middle class, the poor, the rich or anyone else? My answer is yes. If this results in economic growth which more than offsets the tax cuts — like the Reagan tax cuts did –that’s great! If not, then we’ll just have to make all the necessary cuts and eliminations to make GOVERNMENT TAKE LESS AND DO LESS, which is even better!
Rule #1 when dealing with government, take away the money first then cut the beast down to size.
Rule #2 Two ALL SPENDING is discretionary. Constitutionally, congress can repeal or modify all social programs or program commitments. It’s about time they do.
The people who can make reliable predictions about this stuff are writing $40K per issue newsletters sold to institutional investors, and being quiet about it. They aren’t churning out columns for mass consumption in propaganda rags.
Look into Juliette Declercq’s analysis of the tax bill if you’re interested.
Historically, humans start to die off at 100% taxation. At 75%, they’re all homeless. At 50%, they experience long term extinction.
Point made about the limitations of economists’ predictions. But let me ask you this. If we shouldn’t listen to economists, who should we listen to? You? Note that the answer can’t be “nobody”. Decisions need to be made, and they’re going to need to be based on something.
“For individuals there has been a lot of research on the tendency of people to work more as rates are lowered or work fewer hours as tax rates are increased. But do we have any data or experience with corporations? Given the complexity of the tax code for business it doesn’t seem as though a simple ‘look at the rates’ approach would work.”
Yes, there’s quite a lot of research on corporate taxation. The focus is indeed on rates (both headline rates and effective rates). Stephen Gordon has assembled a reading list. He summarizes:
For an explanation, see Economic policy advice for the NDP, Part III: The GST. Corporate taxes lower the rate of return on investments, while consumption taxes like Canada’s GST (a value-added tax) do not. So a higher corporate tax results in lower investment and long-run economic growth: Who pays corporate taxes?
However: Stephen Gordon observes that the optimal tax policy in a small open economy like Canada’s is very different from the optimal policy in the US, which has no trouble attracting capital. Corporate tax cuts won’t work in the U.S. the same way they did here.
To defend Krugman a bit, he’s actually got a pretty good track record for predictions. He generally bases them on an economic model; for example, here’s Krugman’s model for the effect of corporate tax cuts. Here’s his comments on his incorrect prediction about the effect of Trump’s election on the stock market, from February.
the Other Donald: Krugman explains why MMT is wrong about deficits.
Dwight: Here’s a libertarian view of the Republican tax bill, from Will Wilkinson of the Niskanen Center.