Man Without Qualities

Thursday, December 19, 2002

More DeLong Nonsense

Poor and Stupid does a take-down of some typically simplistic, intellectually dishonest DeLongian economics. Yep, according to Professor DeLong, one just connects supply and demand curves and federal budget deficit consequences are fully explained! What's the big fuss, says he?

Professor DeLong calls that "normal" economics - without apparent irony. Of course, the Good Professor doesn't say that he would do what "normal" economists would do. Isn't he droll? Are his fellow economists taking note of his manifest contempt for the field and their minds?

The way Professor DeLong is trending, the Krugman Truth Squad will soon have to acquire the lot next door to accomodate the growing mass of rich intellectual DeLongian composte.

FURTHER THOUGHT: Among the many things Brad DeLong's simplistic pseudo analysis ignores is that, generally speaking, what one finances is more important than how one finances it. In the area of corporate finance this principle manifests itself as the famous Miller-Modigliani Theorem, which holds that the enterprise value of a company is independent of its financial structure once the substantive business plan is fixed, except of bankruptcy and tax effects (taxes perversely favor interest payments over dividends).

In the sphere of national economics, the concerns are different, but attempts have been made to address them coherently by, for example, James M. Buchanan in his book "Debt and Taxes", for example. A quick scan through the Buchanan effort reveals all the more clearly what a pathetic joke Professor DeLong's is attempting with this post.

For a cogent analysis of what happens when a first-class economy diverts too much through the political mechanisms, Gerhard Laffer presents a sophisticated take on Germany's current, inadequate efforts to claw itself back from permanent stagnation and decline brought about by economic policies very much like those Professor DeLong cherishes. Herr Laffer's article should be read in its entirety, but it is available only to Wall Street Journal subscribers and is copyrighted. I will resist Professor DeLong's own frequent penchant towards intellectual property kleptomania and not reproduce the entire copyrighted article. However, the following fragments are interesting enough:

"Very clearly, our system is not attractive."

It has to be one of the great understatements in German politics, but all things considered, it's still progress. Chancellor Gerhard Schroeder was speaking of tax rates that can approach 50% of investment income and the billions Germans park in friendlier places abroad avoid those rates.

For years, Europe's biggest taxers have done little to make their systems more attractive and encourage the repatriation of that money, choosing instead to threaten and bully. ....

Germany has finally announced a step in the right direction. Mr. Schroeder proposes a tax amnesty for those holding capital "offshore" (an amusing term when applied to landlocked Switzerland), combined with a lowering of the tax rate on interest income to 25% (that rate will later rise to a more confiscatory 35%). Currently, income from savings is taxed at an individual's marginal income-tax rate, which can be as high as 48%.

A cut that hefty might seem generous, but it's actually just a concession to reality.
Sound familiar? It should; it's a version of the famous bell curve credited to California economist Arthur B. Laffer, which he used two decades ago to argue that lower tax rates could bring in more revenue when the rates had gotten so high that people started taking steps to avoid taxes altogether. The Laffer Curve was not primarily concerned with tax evasion per se, but capital flight is one way high tax rates can depress tax revenue.


The tax amnesty and rate reduction won't stop tax evasion, nor will it solve all of Germany's economic problems. But beginning from an understanding that the problem is Germany and not Switzerland, Austria or Luxembourg is a good start. We hope this means that the centrist, tax-cutting chancellor of Mr. Schroeder's first term is making a comeback.

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