I don’t think he is. I enjoyed his book, “The Big Questions”, and I even made a set of desktop images for him, which (if you’d like) I can send you the full sized images and you can use them for free if you enjoy them (p.s. I also do design work)!
In any case, his recent post has gotten play from Alex Tabarrok, Brad DeLong, and tonight, Noah Smith.
The only thing I find wrong is the fact that you can’t do economics from accounting identities. If you could, then Steven’s basic model would be correct, as a matter of arithmetic, and a matter of reality. To my mind, that is where you stop.
Start with GDP: Y = C + G + I + Nx. I think we can probably disregard Nx to make the model easier. In this case, consumption is constant, as the assumption is that our idle millionaire consumes zero at $84 million, and you can’t consume less than zero (even when dead!). In this case, we’ll hold C constant at $100. Now say G is currently 0, but the government sees a nice pile of money, maybe $84 million, sitting around in a bank account. Well, that money isn’t just sitting there, S (savings) is related to I in our GDP model! So assuming a quick 1:1 relationship between S and I, what the government is doing, in order consume $84 is reducing investment by $84. Assuming there is some sort of relationship between I and C, than in future periods, C will have to be reduced by a cumulative total of $84.
Of course, none of that is literally true. As I (and Noah) said before, doing economics from accounting identities leads to patently absurd conclusions. There are no concrete relationships between savings and investment. They are both dependent variables. Neither is there a concrete relationship between I and C. Both depend on other economic variables, as well. But, zero-sum accounting would get you this result.
But I think there is a deeper fallacy that Landsburg’s experiment falls into, and that is the myth of government as consumer. It is very common to hear in right-wing (usually non-economist) circles that the private sector produces wealth, and that the government produces nothing, it only consumes wealth that is generated in the private sector. The fact is that the state produces the exact same amount of wealth as the market. That is none at all.
The fact is people produce wealth, and people consume wealth. The state and the market are simply institutions which people have arranged to coordinate production and consumption. The socialist calculation debate was not regarding how the state stole wealth from the market, it was regarding the limitations of the state as an institution for coordinating economic activity. Corporations in-and-of themselves do not produce any wealth, either. The organization of a corporation is wealth enhancing, but that is only to the point that it is more efficient than other such arrangements that bring people together to produce and consume.
Per James Buchanan’s excellent analysis [JSTOR] of the political economy, the (tax and spend*) state is largely concerned with providing club goods, that is: goods that are largely non-rival, and at least partially non-excludable. So to assume away transaction costs, deadweight loss, and the like…in this simple model, a society is choosing to purchase some goods as the “club of everyone”, instead of as individuals. Consumption increases when the government steals “idle millionaire’s” money, and doesn’t decrease at all (assuming no effect on I, or rather, that he government’s investment produced a form of capital to substitute for direct savings) because the types of goods provided by the “club of everyone” wouldn’t necessarily be purchased by the individual, but individuals are (presumably) wealthier for having them.
Brad DeLong is actually correct (and this fallacy is what he is pointing out in his post, although he doesn’t explicitly state it). “We” are the state. Arnold Kling is also correct, “lose the we”…the catch is that he just wants a different arrangement of the provision of club goods. Kling is re-stating Milton Friedman’s sentiment when he said (paraphrasing), “I’ve never seen a tax cut I didn’t like”. Friedman was stating a preference for institutional arrangements, not a statement about consumption.
Note: This isn’t an argument that allows the government to run roughshod over “idle millions” sitting around. Our capital stock does determine investment in the long run. Savings do have a role in the economy. In a hypothetical situation, if the government can get a higher ROI from stealing a millionaire’s money from under his mattress, then society is richer. But if not; if the government simply determines that government mattresses are where money goes, society is no worse off, and if the government consumes goods or invests the money in a ridiculous fashion, then society is worse off.
*I specifically point to the tax and spend state because the “tax to finance regulations” state is a completely different animal. And so you can see how you can get mislead by simple accounting identities!
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Thursday ~ April 21st, 2011 at 9:34 am
Ryan P
How is Landsburg’s point any different than pointing out that the statutory incidence of a tax is not the true incidence? I think I can agree that sometimes the gov’t produces non-excludable goods** or ones with high ROI without agreeing that tax incidence questions make no sense in general.
**though obviously not all — SS & Medicare seem like strong counterexamples
Thursday ~ April 21st, 2011 at 10:05 am
JazzBumpa
Niklas -
Excellent post!
Cheers!
JzB
Thursday ~ April 21st, 2011 at 11:34 am
Wonks Anonymous
I thought Landsburg’s argument was stupid because consumption is not actually zero, the guy has real resources that can be taken.
“Per James Buchanan’s excellent analysis [JSTOR] of the political economy, the (tax and spend*) state is largely concerned with providing club goods, that is: goods that are largely non-rival, and at least partially non-excludable.”
What percent of spending is on such goods?
I also thought your point that “people” produce wealth was lame. Duh, institutions are made of people. Might as well point out that people are made of cells, made of molecules, made of atoms etc. The best argument against the purely consuming public sector is that communist states have no private sector, so the state produces (yes it rips off the peasantry, just as Marxists claim of feudalist/capitalist systems), just not very well.
Thursday ~ April 21st, 2011 at 12:18 pm
IVV
There’s no such thing as public and private, merely different ways we divvy up and agree who gets to control which resources. Whether we call that a “state” or a “corporation” is more semantics than anything.
That’s the “people produce wealth” argument. We have stuff. We make stuff. We eat stuff. All our organizations are ways we define how we go about making and eating stuff, and how much stuff we can sit on afterward.
So, when the state takes the idle millionaire’s millions and spends it, whether it is good or bad depends on whether it goes from “stuff I can’t touch” to “stuff I can touch.” If it does, it’s DeLong, and it’s a good idea–I get more stuff! However, if you see it as going from “stuff I can’t touch” to “stuff I still can’t touch” then it’s Kling, and the only good reason to take it is if it ends up invested better, giving greater availability of stuff to everyone (read: me) in some way.
Thursday ~ April 21st, 2011 at 3:02 pm
Wonks Anonymous
There is public and private, just as there is Coca-Cola and Pepsi, investment and commercial banking, real estate and manufacturing, for-profit and non-profit. How much weight you want to put on categories is another thing.
Your emphasis on “stuff” is very Landsburgian. Landsburg argues that a rich man who consumes no stuff is not actually preventing anyone from getting their hands on anything. My argument against him is that his premise that Kendrick (though not an actual dead, make that cremated, man) does not consume stuff (although he does have lots of meaningless dollars in his bank account). His four cars could be used by someone else, and I assume he has a nice house too.
A point Landsburg recently made is that the value of government spending a dollar (a completely separate issue from his point about taxation) can be 50 cents, a dollar, five dollars or even negative one dollars. So beyond Kling’s point that the government may just transfer a good from Kendrick’s hands to someone else who isn’t me, I have the concern that it may spend it on the war on terror/war on drugs etc.
Thursday ~ April 21st, 2011 at 3:07 pm
Wonks Anonymous
“Whether we call that a “state” or a “corporation” is more semantics than anything.”
Reminds me of Murray Rothbard’s extension of the calculation argument (which as a non-Austrian I don’t find persuasive) to “one big corporation”, a point beloved by left-libertarian followers of Samuel Edward Konklin III. And it may also be pointed out that the state is itself a corporation. Most of corporate law has roots in governments and quasi-governmental organization (Catholic Church of the middle ages), when any yahoo with a business plan could not easily become incorporated. Nowadays the word “corporation” has connotations of profit-seeking or selling shares on a public exchange, but the only necessary thing is that it has a legal personality beyond that of any particular individuals.
Thursday ~ April 21st, 2011 at 4:29 pm
IVV
Sounds like we’re actually in agreement, then, we just use different frames of mind to get there.
Thursday ~ April 21st, 2011 at 1:49 pm
Noah Smith
Good point NB! In addition to being obviously false, Landsburg’s point about “government consumption” is irrelevant to most real issues of public policy!
Friday ~ April 22nd, 2011 at 3:35 am
Idle Millionaires and Monetary Policy « Modeled Behavior
[...] One more post on Steven Landsburg’s taxation problem. My previous post is here. [...]
Thursday ~ April 28th, 2011 at 2:34 pm
何のための税金？ by Paul Krugman – 道草
[...] 4月21日に西田さんが翻訳して道草に投稿した「課税されることのない男」BY STEVEN LANDSBURGの元ネタに対して、デロング、クルーグマン、ブランシャール等から反論が上がっており、それを、himaginary氏が「政府は消費しない。人々が消費するのだ（himaginaryの日記の4月21日のエントリ）」で、要約して取り上げていらっしゃいます。経済学に関する専門知識を持った著名な方々の、税や政府の役割に関する認識の差を読み取るのにおもしろい題材だと思いましたので、今後、残りお二方（デロングとブランシャール）の関連エントリも全文訳する予定です。その後ランズバーグもこれに対する反論を書いているので、道草若手のホープ、西田さんの訳がでることも期待しつつ。 [...]
Saturday ~ April 30th, 2011 at 10:57 pm
Stone Glasgow
He confuses the meaning of the word “burden.” He thinks that because we know that government spending always burdens someone, that because Kendrick does not care about losing millions, he is not burdened, and that therefore, someone else must be hurt. Taxes are not a burden, per se. They take assets from people, which is only presumed to be a burden.
He is correct in stating that others will feel pain, but Kendrick still loses his wealth, even if he doesn’t feel pain. If Kendrick had accumulated his wealth in gold, and loaned it out to a business, the government would be confiscating the loan contracts and canceling them. The tax hurts both Kendrick (who doesn’t care) and the business that received his loan.
Monday ~ May 2nd, 2011 at 11:43 am
Ryan P
So in the case where a tax doesn’t harm you, and the incidence is entirely on other people, and you feel zero pain in any sense from the tax, and you literally don’t care, you would still call the tax a “burden”? I’m not sure that’s either a very useful definition of the word or a common usage
Tuesday ~ November 29th, 2011 at 7:41 am
Xerographica
We’ve already established that the state is not effective at coordinating the production and consumption of private goods…so why do so many people just assume that the state can effectively coordinate the production and consumption of public goods?
Sure, it’s reasonable to say that the private sector fails at providing adequate levels of goods that people can benefit from without contributing to…but why not just apply market principles to the public sector?
Applying market principles to the public sector would simply involve allowing taxpayers to directly allocate their taxes. The invisible hand would efficiently allocate the goods in both the private and public sectors. This approach is known as pragmatarianism.
Pragmatarianism offers the best of both worlds…we would have adequate levels of efficiently allocated public goods. What’s not to like?
Because it all boils down to respecting…or at least tolerating…other people’s values… http://pragmatarianism.blogspot.com/2011/11/other-peoples-values.html