22 April 2011

Speaking of Idiots

There are multiple things wrong with this claim, but the most fundamental, I think, is that it represents a remarkable misunderstanding of the reasons why we have taxes in the first place. They don’t primarily exist as a way to induce lower private consumption, although they may sometimes have that effect; they are there to ensure government solvency.
So right off the bat, Krugman decides to define taxes by the stated intent, not the actual result, although he isn’t stupid enough to ignore it completely.  Economists Thomas Sowell and Walter Williams, among many others, have argued that any and all entities should be defined by what they actually do, not what they’re intended to do.  Thus, taxes may be intended for government solvency (a claim that is simply ludicrous in light of the massive federal deficits of the last twenty years and in light of how rapidly the federal government is approaching the debt ceiling), although the reality of the situation is that taxes do, in fact, induce lower private consumption.
Consider first the taxes raised by, say, the state of New Jersey. Chris Christie doesn’t tax me because he wants to reduce my consumption; he taxes me because NJ needs money to pay its bills. It’s true that in the short run, if we ignore the legal restrictions on state borrowing, he can spend more than the state takes in in taxes; but over the longer run the state must, one way or another, collect enough revenue to pay for its spending.
Again, Krugman presents and recognizes the Intentions/Reality dichotomy, but somehow doesn’t realize that this dichotomy is the entire point of Landsburg’s post.  Yes, the government may want to tax the rich by stripping them of all their money.  But since the money is in the bank, being loaned out to middle class workers or other borrowers, the taxes effectively deprive those who would borrow the money of the assets they would otherwise purchase.  That’s the whole point right there.  It doesn’t matter if the federal government, or Chris Christie, for that matter, intends to reduce citizens’ consumption; that’s what happens.
Does the same thing hold true for the federal government? Well, the feds have the Fed, which can print money. But there are constraints on that, too — they’re not as sharp as the constraints on governments that can’t print money, but too much reliance on the printing press leads to unacceptable inflation. (Cue the MMT people — but after repeated discussions, I still don’t get how they sidestep the issue of limits on seignorage.)
Krugman, not satisfied with having taken merely a twelve-gauge to his toes, now prepares to fire an RPG at them.  The reason why inflation is also a form of taxation is that it increases the money supply without actually increasing production.  Among other things, inflation creates a sense of uncertainty, which generally has a negative impact on production, meaning that there is less for everyone.  (On a side note, if I were to accept the argument for money neutrality, inflation can still function as a redistributive tax in the short-term.)
So taxes are, first and foremost, about paying for what the government buys (duh). It’s true that they can also affect aggregate demand, and that may be something you want to do. But that really is a secondary issue.
Ultimately, the flaw in Krugman’s “rebuttal” is that he forgets that money, particularly fiat money, exists primarily as a medium of exchange.  The pieces of paper that people use for trade are worthless if there are no assets to back them.  The only thing money is good for if not exchange is to be used as wallpaper.  Money’s main value is that it can purchase things.

If the government confiscates money through taxation, it is really confiscating one’s purchasing ability.  Every dollar the government takes from is a dollar that I cannot use to purchase something for myself.  That was Steve Landsburg’s whole point, which Krugman brilliantly proves for him.  The reason why the wealthy Mr. Kendrick can’t be taxed is because his consumption won’t be altered; someone else’s will.

There are a limited amount of resources, and money is used as way to allocate these resources among people.  This is basic economics.  The reason why the government taxes people is because it wants to purchase things.  It wants to command resources.  It is easier to do this by confiscating money instead of assets because money is more liquid, and more widely dispersed, ensuring that there is a relatively large tax base.  The government wants money because the government wants things.  Any dollar the government confiscates cannot be spent by the person from whom it was confiscated.  Any resources the government consumes as a result cannot be consumed by the person who was taxed.

Basically, Krugman is in agreement with Landsburg.  Unfortunately, Krugman is too stupid to realize this.  In closing, I would simply like to quote a well-known Nobel laureate who weighed in on the stupidity of this situation:
Discussions like this really disturb me; they indicate that there are a lot of people with Ph.D.s in economics who can throw around a lot of jargon, but when push comes to shove, have no coherent picture whatsoever of how the pieces fit together.

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