Matthew Yglesias: Taxophobia: I read the referenced posts by Greg Mankiw and Brad DeLong, and don't think they're really saying what Yglesias thinks they're saying, but Yglesias does sum up one political view that seems to be well entrenched if not necessarily spreading wide:

What I take Mankiw et al to be saying is that taxes are really, really, really bad. And taxes on high-income people are really, really, really, really, really, really, really bad. They think that the electorate is joined by leftwing economists in massively underestimating the scale of the badness. And they look at population aging and growing health care costs and see that it's likely that taxes will go up in the future. And they think this is an incredibly bad outcome, with massive negative long-term consequences. Consequences that are far more dire than any transient, years-long period of unemployment. Ergo, it's really important to do the best one can to weather the 111th Congress -- the most leftwing congress in decades, and the most leftwing congress we're likely to see in quite some time -- while minimizing increases in the spending level. Really, really, really important.

Mankiw's nonsense can be highlighted in three lines:

1. "Higher future taxes reduce demand today for at least a couple of reasons. First, there are Ricardian effects to the extent that consumers take future taxes into account when calculating their permanent income."
2. "That is, businesses may be reluctant to invest in an economy that they expect to be distorted by historically unprecedented levels of taxation in the future."
3. "But many other economists (and I suspect many stimulus-skeptics like the tea-partiers) believe that taxes have significant incentive effects and can prevent the economy from reaching its full potential."

Let's start in the middle: nobody is arguing for "historically unprecedented levels of taxation" -- I'd be inclined to kick up the estate tax a notch, but I don't see a need for 90% marginal tax rates. (I'd cap top bracket income taxes around 50%, where they might be aggravating but wouldn't be a real disincentive -- which is not to say that higher, truly disincentivizing tax rates wouldn't have social value in capping greed.) Nor do any currently projectable federal debt levels require unprecedented levels of taxation. So a key part of Mankiw's argument -- my second quote above is an elaboration of the second point alluded to in the first quote -- is sheer demagoguery. Moreover, refuting it lets us invoke historical cases. In particular, the period when the US had its highest tax rates was exactly the period when the nation's economy grew the fastest, which at the very least lends no credence to the claim that raising tax levels depresses the economy.

The first point about Ricardian effects strains credulity. Is anyone ever so smart that they can correctly anticipate how future events will eventually prefer investment decisions today? It's easy to pile on counterexamples: when did the inevitability of a bubble of real estate or high-tech stocks or Dutch tulips bursting ever inhibit that bubble from developing? If there is any one thing you can count on it's that business only thinks in the short term. There may be good reasons to worry about the long term, but the current behaviour of business isn't one of them.

The third quote raises two problems. While it is true that current tax policy allowances and deductions affects business behaviour inasmuch as it adjusts (or distorts) prices, it isn't at all clear that overall tax levels have much effect except on distribution -- low tax rates let profits accumulate much faster (making the rich much richer and increasing inequality) while high tax rates slow down that accumulation, but there is little evidence of whole industries boarding up due to higher tax rates. More generally, investors -- i.e., people with more money than they can consume -- will seek out higher returns but will settle for the best returns they can get, folding only when there are no profits to be had at all. As long as tax levels allow for some profits, and the taxes are then recirculated as spending, it's hard to see how higher tax levels depress the economy -- at most they depress the upper classes, which isn't necessarily a bad thing.

The other canard is the bit about the economy "reaching its full potential." I have no idea what Mankiw thinks this means, especially since he implies that it relates to low taxes. A more plausible definition would tie "full potential" to full employment. We tend to think ass backwards on this issue: that a booming economy causes fuller employment, rather than that fuller employment is what makes the economy bloom; much as we are led to believe that business investment creates jobs, as opposed to realizing that labor is what creates all that we value in the economy. For various reasons, capitalists left to their own devices never produce full employment. The only way to get there is for government to fill the gap, both by spending to prop up the private sector and by creating jobs directly. And to pay for those jobs you have to raise taxes, and the most productive way to do that -- with inequality approaching historically unprecedented levels, and especially with the the rich sitting on cash they can't find productive investments for -- is to target the rich.

And that's the deeper context for Mankiw's argument. It's not just that he dislikes taxes. Just as important is that he isn't bothered by unemployment. In fact, I think you'll find that he rather likes unemployment: more unemployment means cheaper labor, less pressure to share profits, tilting the balance of power toward capital. Friendly economists may pollute the air with Ricardian mumbo jumbo, but the prime reason capitalists don't like taxes, labor rights, and any sort of government action to create jobs or lessen the pain of unemployment is that they don't want to share. In fact, their power viz. labor matters so much that they'd rather suffer through a sluggish economy than lose any of their relative advantages.

One problem here is that in polite political discourse, Mankiw et al. can't just come out and say, "hey! we like this 10% unemployment, we like that the safety net is unraveling, we're looking forward to squeezing labor even harder." Rather, they talk about how we can't afford the deficit (sooner or later, at least in some crackpot theories), about how taxes only hurt the economy (and therefore how we can't fix the deficit problem). They have to pretend that only the richer rich create jobs (even though most of their gains have come from bidding up each other's assets), and that the economy they build somehow benefits us all.

One thing Yglesias is right about is that Krugman, DeLong, et al. are "a bit too literal in their disagreements with the center-of-center economists [whoever that is] of the world." I have three or four recent books on why Ricardo was full of shit, but that's not what this is really about. It's really about power: who pays and who benefits. And that reflects a fundamental difference in worldviews: do we share the world, or do we compete for its spoils? The Great Depression and WWII shocked people into a sense that we're all in this together, and out of that we forged a more equitable society, based on labor rights, a safety net, and steep progressive taxation to pay for it. It wasn't perfect, and flaws going back to the beginning would eventually undermine it. But in the 1970s the rich revolted, exploiting their substantial advantages for political and economic gain, and they have gradually tore the social compact apart while compounding problems. The eight disastrous years of George Bush led to a change of leadership, but sadly, pathetically not to a change in thinking. We are in the midst of a one-sided class war, where the putative defenders of the non-rich don't even recognize they're being fired on, and don't make more than the most paltry efforts to defend the people who voted them in.

On the other hand, I don't blame Krugman and DeLong for focusing on the economic nonsense. They've worked hard to keep the economists from pulling the wool over our eyes. I blame the Democratic Party politicos, starting with the guy in the White House, for not finding principled political issues to run on and drive home, such as the need for full employment to lift working wages, and more progressive taxes to level the playing field; the need to get out of the global war business -- one which only serves to fund the right and keep the left on the defensive -- and the need to reverse the great risk shift -- the real security threat that most Americans face these days.