A Capitalist’s Dilemma, Whoever Wins the Election
nytimes.com
nytimes.com
Free markets fuel capitalism.
The Fed's market manipulation is abhorrent to pure capitalism; it throws the elegant system of free competition and trade horrifically out of balance.
A sound, stable currency is an essential component to a free market. When a currency is manipulated it can drastically upset the natural balance within a marketplace.
When money is cheap (i.e. artificially low interest rates combined with Fed pumping new money into system) it leads to malinvestment.
Consumers buy things they wouldn't normally buy. Companies invest in projects they normally wouldn't invest in.
There is an initial "boom" (i.e. asset prices rise) that comes from people spending the easy money. But it can't last because the spending didn't come from savings or underlying productivity increases. It came from artificial stimulus.
I'm glossing over a lot of points here, but it's called "business cycle theory" if you care to investigate.
This assertion is observably false in the current economy.
Perhaps, but systems should use managerial feedback systems to dampen large deviations. The incompleteness or the ineffectiveness of money-supply controls does not lead us to conclude that no managerial feedback should occur at all.
EDIT: expanding on that, I'd say we often go 'round with that binary question, when we rarely ever ask, "what would be a more effective way to handle disruptions to the economy?" in which case we'd begin to examine the available and potential metrics, the tools of affecting behavior, and whether those tools can be used without violating autonomy. If we have successfully optimized for efficiency and available capital, as the article suggests, then how could we next optimize for risk, experimentation, and innovation?
OTOH, the great depression made a strong case for an intervention by governments at the macroeconomic scale - if only to smooth out bumps that could certainly sort themselves out in the long run, but which could still be uselessly painful for tens of years.
Fiscal policy is IMHO wrong, but monetary policy is not that damaging, especially since it doesn't do much damage to real assets (like say gold)
Then what happens is that the expert will say something, and people will accept it as truth, because after all, he is an expert. And then it goes viral. All of a sudden, everything thinks something is true, even though it is completely false.
Then entire books are written. An entire field called economics is created. Universities teach economics using these books that are based on incorrect assumptions. An entire generation of people build their knowledge on top of these false assumptions. And the cycle repeats, perpetually.
I'm convinced that the entire foundation of economic thought is wrong, and that the entire field of economics contributes negatively towards humanity.
Regarding the great depression, you can make the argument that government intervention in fact created and prolonged the great depression. You'll never really know, because you can't go back in time and run the experiment again.
If you don't understand how something works, it's probably best to leave it alone, rather than try to fix it.
Great book on the subject: http://www.amazon.com/FDRs-Folly-Roosevelt-Depression-ebook/...
"As already noted, major factors bringing on the Great Depression were the severe monetary contraction that the Federal Reserve presided over, unit banking laws that made it almost impossible for small-town banks to diversify their portfolios, high-wage policies that made it more expensive for employers to hire people, the 1930 Smoot-Hawley tariff that throttled trade, and the 1932 tax hikes that took money out of people’s pockets."
To me that's like saying we need to stop playing football with all of it's unnecessary rules and regulations and get to the purest form of sport: kill the man with the ball.
All sports put arbitrary restrictions into the game. You can't touch the ball with your hands. You have to dribble while running. You can't pass to a teammate when he's too far down-field. All of these are to make the sport better for the players as well as the spectators. The players often complain about the rules, try to get around them and/or fight with the refs, but the appropriate response is generally to call them big whiny babies.
That's not to say the refs should be corrupt and influencing the game too much; that needs to be called out when it happens.
The way I see it, the game spun out of control (mostly because the rules were changed to favor risk-taking) and now the Fed is trying to reset it to a point where we can all start playing again. Can we at least agree that a game with the rules removed is not always better?
Who enforces the rules when someone breaks them? The community? Sounds great! Do all of the people have to vote on every infraction every time? …or are we going to designate some people who understand the rules and regulations deeply (let's call them referees and/or regulators) and put them in charge of making decisions on our behalf. That sounds like a great optimization to me! We just need to make them answerable to the people and not the players. You know, the players would love to have these guys on their side. They will probably even try to corrupt the refs by paying them off.
Why can't we have competing currencies in the market? And then we can see what kind systems & rules evolve and come into being. Fiat currency is like a single point of failure.
Firstly, we do have multiple currencies. Each nation has one and there's nothing from stopping you and all of your friends from doing business in a different one. Yes, you still have to pay your taxes in the one the US gov accepts.
Secondly, why is innovation in currencies important? I'd rather have companies building new types of ship rather than trying to reinvent water. I think something like bitcoin or a gold-backed dollar is interesting to think about, but I haven't seen anything compelling to say it's worth the switch. Maybe some smaller nation/economy somewhere should try it out. I think they will find that it's not all roses as they think it is.
In europe they said: cell phone infrastructure is extremely expensive to build so let's pick one standard, and force all companies to compete and build it out on the same standard. Kind of like how the US originally approached the incompatible railway gauge problem.
With cell phones, the US didn't do that so now we have multiple incompatible standards that all have kind of half-assed coverage. More competition and innovation! Except it's worse for the consumer. If you want to buy a cell phone, it might only work at your home but not well at your office. It might have to have 2 different kinds of radios. I wish the US had picked a different set of priorities to compete around.
A privately-run court system which is prone to corruption wouldn't last very long, when a competitor could easily pop up who offers transparency and a lack of vested interests.
http://en.wikipedia.org/wiki/Anarcho-capitalism#Law_and_orde...
Those with means would prefer, rationally, to have a system where the measure of justice they receive is proportional to the means they possess. As long as we're buying and selling justice, who would want to pay more, and receive less justice? I'll take my business elsewhere, thank you.
I somehow doubt, then, that such a system would tend toward what most people consider fair and justice -- those notions today, at least ideally, embody the concept that all participants are equal, regardless of any other consideration.
Equality as defined by the government/state... which as we have seen, is susceptible to corruption and enforcement of laws that were created with influence from special interests.
I reject your implication that the state/government are somehow separate from those governed, however. Without that, all you are saying is that equality is a flawed concept, owing to the fact that government has so many stakeholders, with disparate, wide-ranging and sometimes conflicting interests -- and therefore any notion of equality formed by consensus will fail to completely satisfy someone.
The ideal of equality before the law, however, remains -- something which cannot be said for a pay-for-play justice system. You are changing the subject by drawing attention to the flaws of the current justice system. The original statement you made was a positive assertion about the qualities of a theoretical private arbitration system.
I see that you added "when a competitor could easily pop up who offers transparency and a lack of vested interests" since I wrote my comment. To this, I can only groan and roll my eyes. Who will pay for such a system? Why would someone who can pay prefer a fair system to an unfair system? All other things being equal, if you have to pay $X for justice, would you rather have a fair hearing or one where a favorable outcome is determined?
> (Minarchism) maintains that the state is necessary and that its only legitimate function is the protection of individuals from aggression, theft, breach of contract, and fraud, and the only legitimate governmental institutions are the military, police, and courts.
But I still believe theoretically a private court system could exist and function properly.
This is based on the concept that private court firms would have to have a good reputation in order to stay in business.
1) What individual/business acting in their own self-interest would enter into a contract enforced by a court system that favours the other party?
2) No judge would ever get hired again if he was found out to have been bribed, so why would they risk their career?
3) The courts would have their own policies to maintain a good reputation, for example, they could have a very strict contract with the judges they employ and enact policies to maintain fairness (such as transparency measures).
4) The courts would also be exposed to lawsuits from citizens just like any other business. Any type of malpractice would expose the court to a large amount of legal/financial risk.
2) First, this is an unsubstantiated statement of faith. Second, we're not talking about bribes but systemic bias i.e. the entire private court is lopsided. You're thinking that the problem would be of the form of "I'll just pay judge X to render my preferred verdict." I'm talking about a problem of "all courts have a fundamentally pro-business bias and impose a severe burden of proof on plaintiffs pursuing business defendants."
3) Again, bribery is not the issue. Selection of the judges is the issue.
4) And in which court will these suits be heard!?
Perhaps you think that there will simply be other private court systems set up with select mostly "liberal" judges. Who will pay for these? Wealthy individuals?
And which business would insist on being heard in these courts? As it stands, almost every large business with whom you contract has an arbitration clause which you accept when you engage them. Those clauses always reserve for themselves the right to select the arbitration venue. Why would that change? Which business would ever decide to concede that right, or to choose a consumer-friendly venue?
4, a higher legal association, that deals with lawsuits against courts. The association would be in as much market pressure to be honest and reputable.
You would choose courts based on their contracts with these associations.
But as I mentioned above, I personally don't believe in having a private court system. I support a state run law court (ala minarchy).
There are thousands of things more important and much more obviously broken than the court system (military expansionism, war on drugs, domestic surveillance, federal reserve etc, etc).
That being said, I fully support the non-aggression principle in all other contexts and (obviously) in the efficiency of the market model.
So pretty much the current system of mandatory binding arbitration that we're all being forced into. It's a libertarian's dream!
An unfair court would be less likely to be trusted by both parties and would not be as able to compete as a fair one.
Consider what options there are when there is only one court and it is terribly unfair. And that has happened many times.
People who are chronically treated unfairly would be much better off having a choice. And they and people that deal with such groups would have an incentive to choose a fair court.
And this is already there to a slight degree. Many companies incorporate in Delaware because they think its more favorable.
Of course, most things are governed by courts where you do business, so for most things it doesn't matter that much. In a more competitive situation, it could matter much more.
The private arbitration system approximates to a high degree exactly what you idiots are proposing, and yet it conforms to almost nobody's definition of justice. (except corporate lawyers'?)
But no. Let's dismantle hundreds of years of common law and the notion of equality before the law, the fundamental basis of our society, because some naive, uninformed kids were convinced by a couple of half-assed comments on Reddit.
Your entire argument hinges on the implicit assumption that all parties have the full and unlimited right to choose the venue in which their case will be heard. That is a complete fiction, given everything we know about human behavior and history.
I made no assertions about today's situation.
I was proposing an alternative where people could choose who they do business with based on the proposed final arbiter of the contract.
People can already do this by choosing to business in a different country where a different final arbiter is in charge. I'm just proposing that sort of competition within a country.
I guess today's contract arbitration could be interpreted as exactly that. But people certainly have a choice to sign or not.
Oh, really? If that were the case, then why does it take so long for people to overthrow the regimes in decidedly corrupt third-world dictatorships, like Libya, or Egypt? Those states were well known to be corrupt and unsustainable, yet it still took decades before Qaddaffi and Mubarak were overthrown.
The fact is, a court system needs a way to enforce it's judgement. Such enforcement necessarily requires force. And once a court system has a monopoly (or near monopoly) on force, then it becomes very difficult and painful to get rid of that court system and replace it with a competitor. In fact, we have a name for that process: revolution, and it's not exactly as easy as you make it out to be.
As I mention in other comments, I personally favour minarchy which supports a system of law courts and enforcement, as well as state run military and police.
There are thousands of things more important and much more obviously broken than the court system (military expansionism, war on drugs, domestic surveillance, federal reserve etc, etc).
To the end that prosperity requires economic forces in order to create opportunities for people to rise disproportionately to their effort, we have a market. But the market serves our society, not vice versa -- the purpose is to control and tame the beast to make it serve us, not to expose ourselves to the wild fluctuations of uncontrolled (or poorly restrained) profit motives. The extent to which market control is reduced raises the bar of informed-ness for all market participants.
In theory we can all be served by an efficient market, if all participants are perfectly informed. In practice, perfect information is unavailable, and lacking that, we will all spend every available minute either seeking information or being duped.
Or: we can sacrifice the goal of theoretical market purity and accept that the rest of us have better things to do with our lives.
The "truly free market" can never achieve the "pure" capitalism you propose in practice, then, because deregulation involves a great deal of involuntary choices forced on the consumer (as opposed to being forced onto the business.)
The monetary system is an engineering problem. The goal is to keep enough new money flowing into the system, but not too much, and make it robust in terms of political pressures, etc. Unfortunately, the debate over the issue is always reduced to ideological handwaving. That's not how engineering problems are solved.
The things you bring up are not even the hard part… The difficulty is that the system is dominated by feedback loops. I still think it's within the realm of 'engineering can improve this'.
Of couse, the real problem is which model(s) to use, since that affects the system. The answer to that is probably "all of them", picking whichever one seems more appropriate. I'm thinking like a physicist here: sometimes you ignore gravity, and sometimes you ignore wave-partical duality.
British currency was initially tri metallic: copper (pennies), silver (pounds), and gold (guineas).
If you are seriously proposing bimetallism as a workable system in the year 2012, you are a total and complete kook and have no business discussing the matter because you clearly have no fucking idea what you are talking about.
I showed two counterexamples.
I'm not sufficiently versed in contemporary currency matters to discuss the feasibility or actuality of significant currency bases presently. But that wasn't the question.
With regards to governments deciding on currencies: it's not that alternate payment methods cannot be considered. It's that a payment in the legal tender for a debt cannot be refused (without prior arrangement) without voiding the debt. If you make a credible offer to pay in legal tender and the payee refuses, the debt is void. Doesn't mean you can't make payment in gold or cowrie shells, so long as you both agree to that. Including to the IRS (e.g.: property seizures to pay back taxes).
No, I said that there's no such thing as competing currencies. Having a single currency with more than one base has obviously been tried, but it didn't work.
> it's not that alternate payment methods cannot be considered. It's that a payment in the legal tender for a debt cannot be refused (without prior arrangement) without voiding the debt
Right. It just so happens that this provides enough of a nudge for the entire currency base to switch over to the legal tender currency.
> e.g.: property seizures to pay back taxes
I never thought of that as an alternative form of payment. Heh. It's clearly a bit of a corner case, and at any rate, if I own a house, that's not really a commodity I can use as a medium of exchange, even if the IRS can seize it or my bank can foreclose on it.
> No, I said that there's no such thing as competing currencies. Having a single currency with more than one base has obviously been tried, but it didn't work.
I still say flat out that you're mistaken. We have (and have had) multiple currencies in the world, used within a single area (quite often, especially during wartime), regionally, and worldwide. How do you deal with multiple currencies? Via exchange rates. These may be floated or decreed, but they exist. Dollars, Euros, Yen, and gold are all commonly used for current-day international transactions (with a strong preference generally for US dollars, though this may change). The dollar also has special standing as the preferred reserve currency, but again, this is largely a matter of convention, liquidity, and stability.
Over historical time, there have been (usually local and smaller-scale, though not always) systems in which multiple currencies managed by multiple sovereigns circulated and were commonly used. Sometimes usage is specific to transaction types (e.g.: use currency A for large and multi-region transactions, use B generally for local/smaller transactions).
On England's tri-metalism, Adam Smith discusses this at length in On the Wealth of Nations. The standards date to Roman times (copper basis), with silver emerging from the Saxon tribes, and gold from mainland Europe.
Ah, but you're making the false assumption that somebody needs to make this decision, from the top down. But the real alternative is a free market in money itself.
All it really requires is the repeal of legal tender laws and the ability to enforce the settlement of contracts in whatever currency the parties agree to. No need to abolish the Fed or end government-backed currency. Just force them to compete on even footing with anyone else who thinks they can do better.
Monopoly is bad for consumers, and it always leads to abuse. And you don't need monopoly to have interoperability -- especially given our digital technology.
While government currencies would likely continue to enjoy certain benefits (like being acceptable for taxes, and being used to settle civil damages), there's no reason that large swaths of the economy couldn't operate under entirely different currency terms, and trade back and forth across currency regimes through freely moving exchange markets.
People tend to denominate their contracts in the base currency. In the old system before the Fed, the value of this currency in the US would fluctuate as much as 50% in one year.
It is hard to imagine with what bizarro world economic actors is this an elegant and sound basis on which to conduct trade, that a bank could find that all of its customers suddenly find it 50% harder to pay off their loans, or conversely, that its capital stock is worth 67% (1/150%) of what it was before. Now imagine how that feels for the customers, or shareholders. Imagine a society when the money can come or go in floods and what this means for every contract, every wage, every price.
Why would you want this? So you can satisfy some Rothbardian itch about an "elegance" constraint that means very little in practice?
The Fed tends to target price levels. In addition to being a very elegant basis with which to conduct trade and form contracts (as Milton Friedman pointed out), stable price level targeting has the advantage of actually working out pretty well, unlike 'free market' currencies or fixed standards. NGDP targeting is probably better but that's outside the scope of this discussion...
What year were you thinking of?
Perhaps this is the cause of the problem and not just a poor solution to the problem.
> The Fed has been injecting more and more capital into the economy because — at least in theory — capital fuels capitalism.
But lowering interest rates is still a form monetary stimulus (which is currently being employed by the fed) and is a means to inject capital into the economy.
Think of the analogy of your Kid: Would you set the bar low and expect the kid to excel and get into Stanford? No. Thats now how it works. Without coaching, encouragement, benchmarking, and measurement, success is the exception not the rule.
Why is this so hard for DC to grasp? The empirical datapoint on this is clearly Japan in the 1990's. Ultra-low interest rates, and ultra-cheap capital might spur investment, but not <profitable> investment. Twice as much investment at 1/2 of the return on capital is not moving you anywhere.
That's a major part of the problem. USA have been facing this since the Greenspan stimulus following the Dot-Com crash in the early 00's.
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[1] This might work OK in a short run, of 6 months or a Year, but not over 3-5-10 years -- then you are talking entire capital investment life-cycles.
But the OP is right. Free money encourages waste. It encourages companies and governments to build things they can't really justify and can't afford to maintain. The real monument to Japan's lost decades is the amusement parks, golf courses, and rail lines that are crumbling because there was never enough demand to support them.
But are we seeing that here in the US? Empiricism is the path to salvation my friend.
It's a complicated topic - there was a great discussion about the inflation tax in a bitcoin article recently - http://news.ycombinator.org/item?id=4621674 where I was exposed to interesting new ideas by enki and snikto:
using up resources is not valuable by itself. forcing someone to spend on anything, anything at all, does not lead to a good allocation of resources. it might increase GDP, but it does not create value.
under inflationary interpretations of value creation, building a road circling back onto itself - not connected to anything - in the middle of a desert that no one ever visits - increases GDP and thus helps the economy. the better if you afterwards tear it up and rebuild it a second time.
on the other hand, in a stable currency system, if someone holds on to their capital, they actually free up resources for those who do spend. this means the purchasing power of those who do spend goes up.
in such a system money flows away from those who spend on things that have no return (consumption), and towards those who create (value creation by seizing and creating opportunities).
Maybe when comes the day where technology has not progressed enough to sustain economic growth and the extraction of resource should be rationalized (like say if we aren't mining asteroids in 100 years), there could be a case for a negative inflation rate.
IIRC 0 inflation was also an idea of Milton Friedman - http://en.wikipedia.org/wiki/Friedman_rule
Inflation by itself does a great thing: it reduces the real value of old debt. Q.E. just distributes the cost of forgiving debt away from dead people to everyone in an economy. In other words, monetary policy lets us avoid the moral hazard of stealing from the past.
Inflation rewards debtors and punishes savers. That's not an unmitigated good thing. In fact, I would say it's mostly bad.
Alluding to it being a moral hazard.
A high interest rate means firms reduce their investment spending to avoid high interest payments ; or said otherwise rising interest rates lead to crowding out of private fixed investment.
Look at the IS curve on http://macrotutor.weebly.com/2-is-curve.html
(but I might be wrong - I'm quite new to macroeconomics)
IS/LM and is not something that I would hang my hat on, here.[1] The reason is that the performance evelope of the firm must be considered micro-analytically. Ie, you need to take the perspective of the firm as a composite of capital investment projects. The aggregate value of the projects will be the value of the firm.
What impacts the decisionmaking of the firm? The spread between the cost of capital and the return on capital. For a fixed opportunity set of projects, a lower cost of capital will result in incremental investment provided that capital is available and capital projects are available that exceed the cost of capital.
How does one get these projects? In the real world, these are "hunted" like big game. These projects are either invented by engineering (new widget X) or they are extensions of current product (widget Y) that are sold to new clients (Z) by sales or bus dev.
Internally, the "green light" for these hunting parties is a hurdle rate (set to an average expected return-average cost of capital=some threshold level). Because there is uncertainty[2] in these big-game hunting expeditions, over time they will converge to the least amount of work necessary to clear the threshold. So, by this logic, the quality of projects will decrease over time as the threshold of project quality declines.
On the other hand, the external environment will also drive down this potential. Other companies will be increasing their hunting parties, increasing competition and reducing the probability of success.
The combination of these two factors, will over time decrease the performance envelope of the hunter/gatherer parties (be they engineers or sales/bus-dev). The issue is that this decline may have persistent effects (ie, learning by doing cuts both ways.)
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[1] See my footnote earlier. The IS/LM model assumptions and general methodology will not capture the recursive and inter-temporal effects on the opportunity set of projects that will follow from interest rates approaching zero artificially (ie, by fiat stimulus).
[2] And not insignificant cost.
This could explain the current divergence in the GDP per capita curve (usually log linear) if we follow the idea that a continuous pace of innovation is necessary.
A quick wolframalpha graphing of the GDP per capita curve and federal funds rate shows in fact that the GDP per capita curve has inflections when interest rate quickly fall or go below 2.5%.
But considering that interest rates are used by the fed to try and fix the economy and thus highly correlated with high and lows, I don't know if there is a good way to check for this hypothesis.
It could also have bad consequences, since it predicts that countries with low interest rate (currently EU, US, JP) will experience a lesser form of innovation with lasting effects - and unfortunately I don't see interest rates going up, not with the current focus on low inflation.
It still is a very interesting concept. I would like to know more. Is there a name for the model you are describing? (or some links)
One thing is common among all of the discussions which is the fixation on the tax proposal, but I think it was just a swag at what a policy might look like. I thought the real interesting part of his observation is that we are rewarding efficiency innovation too much and transformative innovation almost nothing. Try and develop a new power system not based on fossil fuels and see how much money people want to give you when your time horizon is 10-20 years out. It is the transformative innovation that recreates jobs for the jobs lost through efficiency innovation. I think that is the more important discussion over a regressive capital gain tax. Remember, most entrepreneurship would qualify for preferential capital gains taxation (except for ISO options oddly) because even the efficiency innovation takes more than 1 year to payback.
His tax would mostly affect wall street and the trader mentality: HFT, ETFs, day traders, etc. Remember people buying or selling securities don't actually give companies money directly. Companies only get more money when the issue more shares (or hold their own shares). If I buy a share for 1 day or 10 years the company doesn't benefit at all from my action.
If you look at the green energy movement a few years back was going to be very transformative, but VCs backed off when it was hard to turn a profit as quickly as information technology. It's that kinda of calculus that needs changing if we really want to do what Christensen is outlining.
2. I hate to be the consumerism party pooper but I think pointing out that it has been 60 months and we still are not at prerecession levels to be a good thing (ducking for cover). The reason we were at those levels is partly because we were operating unsustainably - spending more than we had (or at least more than we should if we want retirement savings) and giving out mortgages and loans to people that couldn't afford them (obviously there are many more reasons...).
As Friedman might say, monetary unsustainability is purely a monetary phenomenon. Even Keynesians know this and in fact that is why they tend to call for higher inflation.
We don't have to pay because people foreclosed and filed for bankruptcy protection.
A nation cannot spend anything it doesn't "have" except by trading with other nations, and trade does not remotely explain the deficit.
When did we start talking about the deficit and why are you suggesting the deficit is related to the economy collapsing/recovering (not saying it isn't)? To be fair, when I mentioned retirement savings I wasn't really thinking public programs, probably should have been more specific.
I think many would agree that irresponsible loans were given to people that didn't have the means to pay them off, especially if (when) the adjustable rates adjusted. If housing prices don't get back to prerecession levels for instance - well I think thats a good thing. People where inflating the markets that they really had no business being in and banks gave them mortgages for these markets wearing a grin...
The Federal Reserve has been shoveling money into large banks, literally lending trillions of dollars to them at times. Interest-free, of course. Then they lend it the US Treasury. Or leave it in their Federal Reserve accounts and collect interest there.
With such a sweetheart deal, anybody could make a profit. How is it these guys deserve bonuses?
One can only conclude that our government has been completely captured by these guys.
It would encourage self-sustaining growth instead of fly-by-night profits, made in the present at the expense of the future - ie let the market sort out which sectors are more likely to bring better long term outcomes, considering the current focus on short-term is a negative externality that should be fixed by government intervention.
The author also properly acknowledges that increasing tax on the top 1% will only be redistributive, and increase consumption - which might certainly have better effects on consumption than leaving that money to the top 1% who might keep saving it while there is no current shortage of capital.
But that is only a mechanical property of the progressive tax scheme (lower tax for lower incomes), which makes the redistributed money more likely to be spent instead of saved (or paid in tax) - yet as the author points out trading consumption for consumption is pointless given the current state of the economy.
It's quite a interesting time.
It seems like the current situation is not just a demand shock which can be treated with Keynesians stimulus, but a new kind of shock based on a slowdown of the progress of technology - especially of the "empowering kind".
I wonder how this will make us reassume the traditional models such as Solow (technology drives long term growth) or Romer (technology and education), since it now seems there are different kind of technology and education that we should invest in - and some that we should consider as negative externality (like humanities - I have nothing against such studies, but they should not be on the taxpayer dime)
Introduction to Solow model : http://en.wikipedia.org/wiki/Neoclassical_growth_model
Introduction to Romer model : http://en.wikipedia.org/wiki/Endogenous_growth_theory
Taxes aimed at changing behaviour are generally considered to be bad taxes.
Firstly, you may not like the outcome. Changing the entire time-and-capital structure of an economy is Serious Business and is going to be utterly unpredictable (if it were predictable things would be more stable. They're not).
Now, suppose it turns out to be a dumb decision. For example, say that some unforeseen feedback loop pops up between overdraft facilities and capital now sitting long-term because of tax changes. Suddenly overdrafts become even more difficult for small businesses to obtain and voila, new cash crunch.
Even if it does more harm than good, you've created a powerful constituency for it. Bond market funds, index funds etc are now all in favour of the new tax rules and will lobby with great vigour to keep it.
Now, this is true of every tax ever. But the reason economists counsel against taxing for non-revenue policy purposes is because every tax has externalities that are unrelated to the direct incidence of the tax. You want to minimise those as much as possible.
Incidentally, the tax system already has consequences. For tax reasons that I simply don't understand, Australian corporations tend to be keen on paying healthy dividends and American corporations focus more on driving up the stock price.
> But that is only a mechanical property of the progressive tax scheme (lower tax for lower incomes), which makes the redistributed money more likely to be spent
The Australian experience has been that instead of spending the money, Australians are using it to pay down debt. Fine as far is it goes, but hardly the pump-priming that everyone was hoping for. There has been a seismic shift in debt/spending preferences across the population.
> but a new kind of shock based on a slowdown of the progress of technology
The long term trend of American GDP is stunningly linear[1] (edit: log linear -- actually exponential, I fail graph-reading forever); the only real deviation in the past century has been the Great Depression and WW2, a pair of connected economic earthquakes. We're talking about the 120 year period which included the widespread use of radio, television, highway systems, air travel, computers, the internet, modern medicine including antibiotics ... the list of literally revolutionary changes that quickly become blasé is very long indeed.
Yet what we see today as monstrous fluctuations are within trend. Perspective matters (cue someone talking about the past 5000 years ...).
[1] http://skepticlawyer.com.au/2012/10/27/the-ever-sharpening-c...
I already don't like the outcome of the last change to the "entire time-and-capital structure of [the] economy," which wasn't that long ago, and is due to expire anyway.
The thing is, however, that tinkering with capital is more important than income. Why? Because capital dwarfs income.
In fact, the more advanced an economy is, the deeper its structure of production is. That is, the more of it is involved in capital instead of income.
Income is the golden river for taxation purposes because it is what is left once capital has done its thing. It is easily identifiable, easily to calculate and easy to extract . It also exercises people's political instinct because most folk, being wage-earners, are far more personally familiar with income and expense than asset and liability.
But that doesn't change the fact that fiddling with the capital structure of an economy is, in the long run, probably the bigger deal.
It's more like an EXPONENTIAL increase!!
Also, if you look at the trend, the recent decline is totally unprecedented - except maybe just before the great depression (the small cut over 1914) and during the great depression.
Considering the decline happened even with a very strong stimulus - and was NOT fixed by the stimulus, I guess we have many reasons to be worried about this slowdown in the pace of growth (and technology).
A tax change may not usually be a good idea - just like a keyneysian stimulus looked weird and was even initially though to be damaging during the great depression.
Desperate times call for desperate measures. We are not there yet, but at least having a refreshing new proposal (regressive tax based on the duration investment spending is kept) is IMHO valuable, if only to have another tool we can use besides the traditional "progressive tax+redistribution to increase consumption".
BTW the Australian example you give is quite interesting. May I ask you for some links ?
By whom?
Taxes are sometimes used for policy purposes. The classic example is "sin taxes" to deter smoking, drinking etc. But in general, if you want to modify behaviour, the tax system is a problematic way to do it.
The problem I see is that none of this needs to employ many people anymore. How many people does Microsoft or IBM or Oracle employ? Compare that to Google or eBay or Yahoo! - and that to Facebook or Dropbox. Even for physical products, what does it take to "make stuff" anymore? Does anyone think that if Telsa gets to selling as many cars as Ford, they'll employ anywhere near the same number of people? Or have a supply chain that extends to hundreds of thousands/millions of workers?
Technology is constantly replacing human work, but for a long time it was slow enough for people to adapt and find other work. These days I'm less and less sure that's the case.
We know there is a problem related to new job growth, he mentions that its taking longer for our economy to recover from the last recessions. And, he points out exactly what is missing from that economy too.