What You Add Is What You Get- Paul Krugman

[Swede]

The Romney fundraiser in the Hamptons continues to inspire much justified hilarity. Matt Yglesias has fun with whining rich people complaining that they are the engine of the economy, pointing out that quite a few of the whiners make their money in ways that arguably does very little for growth — say, by running funds that collect so much in fees that they leave investors worse off.

There is, however, an even broader critique of the whole keep taxes low on jobcreatorsenginesoftheeconomy thing — it doesn’t make sense even when the rich really earn their money. I’ve tried to make this point before, with regard to optimal top tax rates, but without as much success as I’d like; so let’s try it again.

So, imagine a Romney supporter named John Q. Wheelerdealer, who works 3000 hours a year and makes $30 million. And let’s suppose that he really does contribute that much to the economy, that his marginal product per hour — the amount he adds to national income by working an extra hour — really is $10,000. This is, by the way, standard textbook microeconomics: in a perfectly competitive economy, factors of production are supposedly paid precisely their marginal product.

Now suppose that President Obama has reduced Mr. Wheelerdealer to despair; not only does the president waste money by doing things like feeding children, he says mean things about some rich people, which is just like the Nazis invading Poland, or something. So Wheelerdealer decides to go Galt. Well, actually just one-third Galt, reducing his working time to just 2000 hours a year so he can spend more time with his wife and mistress.

http://krugman.blogs.nytimes.com/2012/07/09/what-you-add-is-what-you-get/?smid=tw-NytimesKrugman&seid=auto

[AynRandCollectedSS]

1. Go Galt...

Please...go...I'll help you pack your hideous Louis Vuitton luggage...just GO!!!!!

[Igel]

2. But no.

Optimal taxation theory doesn't have to do with what's best, overall, for the economy. Just what level of taxation doesn't lead to distortions in the economy: It's a heuristic for picking the maximum taxation level that doesn't cause distortions.

It's a separate assumption that the maximum taxation level is the best level, and that's Kaynes, based on the idea that the multiplier for government spending is higher than the multiplier for personal spending or investment. Your sort-of-evidence-based estimate for the multiplier's values seems mostly to depend on what you already believe. If you don't like Kaynes', government spending is far below unity; if you do, then it's not too much below 2.0.

Then again, Krugman's argument can be iterated: If removing $10 million in production that would be paid as income just reduces $10 million from the GDP so it's a wash, that goes for the entirety of GDP. Remove all GDP, and it's a wash to the economy. At no point does any amount of GDP reduction affect anything other than that portion of GDP production.

So, let's remove the actual purchase of electricity from the economy. That won't affect any other GDP but electricity production, and possibly the contribution from the production and maintenance of electrical production. Don't like that? Well, it's entailed. Or we can say that not everybody gets paid precisely what their total contribution to GDP is, and that the nice classical theory is nothing more than a simplifying assumption--wrong, but as long as the error isn't large it's better than leaving an insoluble mess. In other words, many get paid less; some get paid more.

Then again, the very idea of a multiplier seems to indicate that there's more GDP growth for some spending than for others, and that a person can contribute more to GDP than his mere salary. So Krugman obviously isn't Kaynesian. That's also not true.

Krugman often does this. He knows more than he's saying, but says enough to make you think that both he's saying everything that's relevant and that he's correct. In fact, it's hard to know if he's correct because he leaves so much out, and assumptions are necessary to make the logic work--but you can't know if his assumptions are not just reasonable, but the best available.

So evaluating Krugman is like evaluating the multiplier: You start with your beliefs and then, by and large, end with your beliefs.