Saturday, March 19, 2011

Leonhardt whiffs

Following up on Tyler Cowen's recent discussion of mistakes made by left and right-wing economists, The New York Times lead economics writer David Leonhardt produced his own list of blind spots both sides allegedly suffer from. While his critique of the left strikes me as pretty accurate, and he makes a number of valid points in his assessment of the right, several of the items he mentions are off target by a considerable margin. Let's examine them one by one:
  • The rich will always figure out a way to get around tax increases.
The link Leonhardt provides that supposedly undermines this idea is a column he wrote about two years which notes that tax rates on the rich have varied considerably since at least the FDR administration, with the economic impact of increased rates on the rich rated as "fairly modest" by at least one academic study. But this is completely different from arguing that the rich don't figure out ways to get around tax increases through various tax mitigation strategies.

Indeed, given that tax revenues as a percentage of GDP have held remarkably constant since the end of World War II, varying between 15-20 percent, despite considerable tax rate changes this would seem to support the idea that the rich invariably figure out ways to avoid paying more money to the US Treasury.
The link provided highlights the fact that 26 percent of health insurance claims in California are denied (although it is worth noting a recent GAO finding that half of health insurance claim rejections are reversed on appeal). But so what? The central position that insurance occupies in our health care system isn't a product of the free market, it's a product of government.

Since government began subsidizing the purchase of health insurance through the tax code its usage has soared, to the point that consumers now only directly pay for 12 percent of health insurance costs. Further, competition in the health insurance market is restricted by government that prevents companies from selling their product across states lines, restricting consumer choice and handing more power to the incumbent players. How is this an indictment of the free market?
Well, no, it isn't. As I have written before, if I receive a $5,000 raise and my boss receives a $20,000 raise our income inequality has expanded yet we are both better off. I have yet to find anyone who can explain why this is a problem. The link Leonhardt provides is a blog post he wrote discussing the fact that household income slightly decreased over the previous ten year period from when it was written.

While that is indeed a problem -- assuming that household sizes haven't decreased -- it's a problem of income stagnation, not income inequality. The problem facing these households is that their income isn't increasing, not that certain elements of the population have become fantastically wealthy. Indeed, had the rich seen their income fall during that period it would have helped these households not one bit, even though income inequality actually would have declined. This example only works if one believes we live in a zero-sum world where the amount of wealth is fixed and one person's gain is another's loss -- a proposition that is quite obviously not true.

If inequality was even half the problem the left purports it to be they wouldn't need to struggle so mightily to explain exactly why it's so worthy of our concern.

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