Caeca invidia est
By Tino
Cornell economist Robert Frank gets the labor data wrong, confuses Keynesianism with supply side economics and proudly demonstrates his lack of understanding of about small-business economics. On the other hand he fills the usual NYT quotas, attacking the rich, erroneously calling Bush ignorant and substituting analyses with namedropping.
First the Kerry prediction that Bush would be the first president since Hoover to see net job loss during his term, often repeated by the media. In fact the prediction turned out to be wrong, after which the media killed the story. Frank however doesn’t seem to have updated his figures (perhaps preferring to still live in November 7th 2004?):
“experience has proved [Tax cut critics] right. Total private employment was actually lower in January 2005 than in January 2001, the first time since the Great Depression that employment has fallen during a president's term of office.”
In fact, the Bureau of Labor statistics reports that Nonfarm employment was 344.000 higher in January 2005 than January 2001, which would have taken some 50 seconds to check.
He also creates a straw man by misrepresenting Bushes case for the tax cuts as Keynesian rather than supply side. This is why Frank thinks the US cut taxes:
“The president's defenders might respond that business owners often need money up front to cover the hiring and training costs incurred before new workers can effectively contribute to extra production. The tax cuts put that money in their pockets.”
Pathetic. In the liberal world without elasticity’s the only effect of tax cuts is redistribution, and the only stimulating effect could thus be to give money to those who spend more. But in real life taxes make it less profitable to work, hire or invest, so cutting them stimulate the economy by expanding work, hirings and investments. How hard is that to understand?
“the president's claim that tax cuts to the owners of small businesses will stimulate them to hire more workers flies in the face of bedrock principles outlined in every introductory economics textbook.”
A completely false, as there is plenty of established theory that shows what common sense would suggest: small business taxes can influence hiring decisions. Some would ascribe Robert Franks gibberish above to the overemphasis on neoclassical economics, a field where the entrepreneurs is conspicuously absent. Perhaps. But I think even a pure (but competent) neoclassical could easily understand why lower taxes for entrepreneurs would lead to stimulating more hires.
The entrepreneur and her workers are complements. As lower taxes stimulate me take the risk/effort and start a new firm or to make it more profitable to expand my existing firm I am likely to also need new workers.
Furthermore, economic decisions are made infra-marginally as well as marginally. The personal income tax takes a huge bite out of any profit I make by hiring additional workers. If there is any costs associated to me from with hiring them (risk, effort) the taxes will distort my choice. Essentially what Luskin is suggesting with his example.
Why not look at some empirics? Princeton professor and Bush advisor Harvey Rosen has worked extensively with estimating the effects of small firm taxation after the Tax Reform Act of 1986. With Carroll, Holtz-Eakin and Rider he has written a host of influential papers on this, showing that entrepreneurs' personal income taxes significantly effect investment, labor supply and hiring decisions.
For example, they find that lowering the personal marginal tax rate of the entrepreneur by 10 percent “raises the mean probability of hiring workers by about 12 percent”. This was published in the Journal of Labor Economics already in 1999!
There is more modern research that shows that high income earners and the self-employed have large supply elasticity of labor. MIT and Berkley economist Grueber and Saez estimate that the supply elasticity of high earners is 0.57, three times that of low income earners.
Instead of discussing these and other results Frank tries to bully his readers into believing him “[the taxcuts] prompted a large group of Nobel laureates in economics to issue a statement last year condemning the administration” The Paper of Record neglects to mention that another large group of Noble laureates came out in support of the Tax cuts.
Bush is often seenas an unintelligent buffoon by those who consider themselves intellectuals. Certainly he doesn’t go around quoting Virgil or Livius, if that's your criteria. But his intuitive understanding of the role on economic incentives on the behavior of entrepreneurs and workers is quite impressive, extremely rare among politicians and sadly also among some economists (as illustrated above).
The President at least seems to understand two central economic aspects much of the educated left lacks in their mental world models: elasticities and incidence. Maybe they should read a couple of those introductory textbooks.
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