The Myth of Barstool Economics

Facebook has seen versions of this video floating around recently. It's a cute little story about men drinking beer in a bar, something we can all sympathize with, and it tries to make a larger statement about how "unfair" our tax system is and how we shouldn't stigmatize inequality.

Now, for anyone that's spet even a little time looking at the tax system, something seems a little off here. What's more, the Facebook version of this story, often posted in the form of a letter, is always attributed to American economists who deny having anything to do with it. Clearly, these guys wouldn't spend so much effort distancing themselves from this obviously partisan tale if they actually believed in what it says.

As the incredible Richard Wolff points out, part of the deception in the video is its simplicity. Viewers often drop their critical assessment of its content because it both seems straightforward (look at the easy math!), and it supports a common sentiment (taxes suck!). But if you only take it this far, you miss an incredibly pernicious piece of political economy.

Debunking all of this is going to take some work, and I'll be relying on the basic messages that Wolff presents, filling in details as we go.

i) While the "barstool economics" story assumes that everyone is getting the same service (a beer), the truth is that the rich receive more benefits from the government than the poor, which is why they should pay more. The tax code is just one of many examples.

ii) The original point of the income tax, as it was conceived in the beginning of the 20th century, was to use the money from the top 1-5 percent to develop common well being. The sentiment is very similar to Adam Smith's take on taxes, that those with the most should provide the most to guarantee a strong civil society. This is basically described in the original legislation. 

Over the last 50 years, the rich have been steadily moving the tax away from themselves and onto poorer people, which helped turn people against it. This is part of the reason that anti-government rage seems to only grow stronger the longer Republicans are in office: by shifting the cost of government onto

iii) The story is confusing for people who don't understand that we have a marginal tax system. You do not pay a tax rate on a total amount of money. You pay rates for certain increments that you earn.

For example, the first 10k are tax free. The next 10k are taxed at 5 percent. The next 10k at 10 percent and so on. The rich only pay the top rate on the money that they've earned above 250,000k; the lower increments are taxed at the same rate as the poor and middle class. As it works out, your effective (actual) tax rate is always lower than the tax rate of your top marginal bracket. This is why no one in the US actually pays 35 percent (the top threshold), even before accounting loopholes come into play.

So if Barack Obama is going to keep the Bush tax cuts for everyone except those "earning over 250k," what he's actually doing is adjusting the rate for the very top threshold. Rich people will still get a tax reduction for everything they earn up to 250, only the amount that comes over the top is actually taxed higher. Does that make sense?

To play the game a little, Obama's plan would be similar to this scenario:

Guys 1-6 no longer have to pay due to the cut. Every one else shares a four dollar tax cut, which is the maximum reduction that anyone would receive. Although everyone shares the cut equally, the richest guy now pays a larger portion of the bill, since some other guys have dropped out. This is true of the "discount" given in the story too, and it would happen in most scenarios that try and distribute the discount fairly.

(This demonstrates the great irony of the right's tax cutting zeal. Half of Americans don't pay income taxes because Republicans have been cutting taxes so aggressively for the last thirty years. Having created this situation, they now complain about it to further their real goal, lower rates on the rich and higher rates on the poor).

iv) In the end, the biggest problem with barstool economics is how incredibly far it is from the actual kind of tax cuts proposed by the Republican Party. Under the story's little description of a "tax cut," everyone got roughly the same savings, in percentage terms. In fact, the "percent" cut actually favored the poor.

No Republican is actually proposing anything like that. If you compare Romney and Obama's plans (assuming that Romney could actually deliver, which is a whole 'nother issue), you can calculate the "Romney saving" by combing the two together.

Graph original prepared by Ezra Klein here.

Excluding the poorest twenty percent (who would see their taxes increase), all of the bottom 99 percent would get a tax deduction of less than ten percent (comparing with the rate they'd have under Obama). The top one percent, would get a 13 percent tax deduction, while the top .1 percent would get a 15 percent tax deduction.

So, people aren't just confusing dollars and rates when they look at Republicans' tax cuts. The rate of the cut for the rich is way larger than the rate of the cut for everyone else. Combined with reduced services, you see a massive shift in the burden of government from the rich to the poor.

...And they blame the left for class warfare.

What's so Scary about a Little Inflation?

Forbes contributor Charles Kadlec sees only one thing in QE3: a good ol' fashioned dollar devaluation. As he writes:

The Fed’s zero interest rate policy accentuates the negative consequences of this steady erosion in the dollar’s buying power by imposing a negative return on short-term bonds and bank deposits. In effect, the Fed has announced a course of action that will steal — there is no better word for it — nearly 10 percent of the value of American’s hard earned savings over the next 4 years.

Now, obviously, I'm not one to agree with Kadlec's conclusions. Even though the critique of the Fed's tracking methods is a little interesting, there is not a single explanation of why a slowly devaluing dollar is a bad thing. He just assumes it outright and instead throws around a silly little thought experiment about changes in prices over 20 years. Even stranger, he doesn't seem to mind proving that a little inflation is good. He quotes the FOMC's statement on why a little inflation is much more benign than deflation, and does nothing to try and prove it false.

The FOMC's argument falls in line with the monetarist discussion of inflation, which comes from the work of Milton Friedman and from A Monetary History of the United States in particular.

For the economy to grow, the amount of money available has to increase. We have inflation because we play it safe; we allow money to grow faster than the economy, because the alternative is disastrous. Deflation, when the supply of money not keeping pace with the economy (or more usually declining faster than the economy), is very punishing to anyone with debt; your ability to pay your debt decreases while the required payments stay the same. Since the relationship is basically fixed, its not surprising that deflation almost always leads to a collapse in economic activity. This is the heart of the room to grow argument that most contemporary economists support.

Moreover, inflation allows for wage flexibility. It encourages hiring. It provides the central bank the opportunity to cut rates when needed. It encourages more people to be involved in financial markets, instead of hoarding hard currency. And most importantly, it encourages businesses to spend saved cash on machinery and other fixed assets. It's hard to argue that inflation is too high when American companies are holding more than a trillion dollars in cash.

Of course, as is often the case in economic policy, higher inflation rates do have a real cost. Most economic explanations of inflation, especially those that remain hawkish, talk about how inflation is a secret "tax" on savers. This is only partially true. Inflation moves money from savers to debtors. It benefits government when it is a debtor, but it benefits most people as well, since most working people are debtors too. If the government is a saver (like Spain and Ireland before the crisis), then inflation hurts them too.

Going back to the much more important issue, there is no reason to assume that wages wouldn't increase at the same rate as inflation. Wages are entirely independent from any understanding of inflation. They can increase faster than inflation or they can increase slower than inflation. Inflation has everything to do with the relationship between money and national growth (GDP).

Which is why it is possible to have real wage growth (wages growing after inflation) and it is possible to have negative wage growth. Nonetheless, growth was almost always higher during periods of higher (moderate) inflation.

Now, during these situations, rich people suffered. And Republican governments tended to address this suffering by reducing this inflation. But reductions in inflation tended to be recessionary too, reducing job growth and wages. Which is why, since WWII, Democratic presidents have been in charge of higher employment and higher wage growth. Maybe not everything is connected, but these things are.

This is another stimulus just waiting to happen. Unfortunately, at 2 percent inflation, there just isn't any incentive to get started on this. The real return on fixed assets just isn't high enough, but it would be if inflation was higher.  Yes, higher inflation would be bad for bankers, and that's obvious since you site another person from the financial community as your hard currency expert (aren't you at least a little surprised that they all share the same background?). But I would rather have an economic recovery than a bunch of rich bankers.

Scott Sumner, the guy chiefly responsible for moving inflation back to the center of the discussion on monetary policy, is a libertarian. In fact, nearly every economist advocating NGDP targeting (raising inflation to compensate for a slowdown in spending) are libertarians. They are intellectual descendants of Milton Friedman, also a libertarian.

I'm not advocating some radical leftist theory, and you haven't heard me mention anything about forced full employment, or increased government transfers (at least not right now). I'm advocating ideas started by a libertarian (uncle Milty) supported by other libertarians (uncle Freddy) and to this day still advocated by libertarians (the Market Monetarists). Hell, I'm starting to get worried about the accusations that I'm a traitor to my own side.

If you base NGDP targeting on the rates of return from GDP futures, which would be a market-driven target, you would get an entirely market-driven monetary policy. The supply of currency would expand during downturns (not being a hard currency), but this is exactly what Friedman said was necessary.

To get there, you have to learn to love (a little) inflation (sometimes). These spurious arguments about war and peace are stopping you from realizing that this could easily be a strong, stable and entirely pro-market monetary policy. People like Kadlec just need to come out of the Austrian woods to see that there are other market-based monetary regimes. I promise, it won't hurt a bit.

Institutionalist or Insurrectionist?

Chris Hayes' Twilight of the Elites is the current book on the reading list. I'm enjoying it quite a bit, and I'll probably have a lot more to say about it once I make it through. In the meantime, I'll be talking about it as a nice piece of swath of institutional and institutional decay literature that I've been digging through. This includes Winner-Take-All Politics and Unequal Democracy (both of which I've talked about in earlier posts), along with more economic takes on institutions, like Why Nations Fail (my review).

Essentially, the book can be divided into two halves, two perspectives on an interrelated problem: institutional decay. Ostensibly, Hayes is writing about the failure of America meritocracy and how this seemingly egalitarian system has been transformed into something supporting oligarchy and plutocracy. Hayes has a wonderful piece in The Nation detailing this very phenomenon and showing how an obsession with "smartness" has betrayed fundamental American values and led to the institutional crisis that has persisted past the financial crisis and great recession. Although problem is multifaceted, Hayes prefers to simplifying things by calling the general decay a Crisis of Authority. I'll follow his lead; it makes things easier.