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The [ECONOMY]

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Posts

  • SerukoSeruko Ferocious Kitten of The Farthest NorthRegistered User regular
    Hamurabi wrote:
    So I have this persistent question: where does the austerity agenda in the Euro Zone come from?

    I mean, it seems that after 236 years of the formalized study of economics that highly-placed technocrats would understand what happens when you impose austerity during an economic slowdown. Yet there it is.

    I asked a Marxist friend of mine, but he predictably replied that it's because they're part of the neoliberal orthodoxy that sees public spending beyond some minimalist threshold as being The Sum of All Evils; additionally, and somewhat more cynically, that their only concern is with giving foreign capital an escape route.

    So what say you, Econ Thread?

    On a very simplistic level essentially it's Germany. it's also Britain France and Austria.
    Germany has a high amounts of Foreign (intra-European) trade.
    German lenders have also lent heavily to other European Countries, especially to the PIGS (Portugal, Ireland, Greece and Spain).

    So on the one hand Germany is a shinning example of having a balanced budget (heavily subsidized in the from of exports).
    People who want to have their framework of austerity rationalized are all "well look at Germany, so ez: they're doing great!"
    And on the other hand Financial institutions in Germany are all like "You shiftless buggers, we financed your party now it's time to pay up and we refuse to take a haircut." Even though they got the money from exports to lend back to the countries now in trouble.

    That's a mile high view of it.
    YMMV

    "How are you going to play Dota if your fingers and bitten off? You can't. That's how" -> Carnarvon
    "You can be yodeling bear without spending a dime if you get lucky." -> reVerse
    "In the grim darkness of the future, we will all be nurses catering to the whims of terrible old people." -> Hacksaw
    "In fact, our whole society will be oriented around caring for one very decrepit, very old man on total life support." -> SKFM
    I mean, the first time I met a non-white person was when this Vietnamese kid tried to break my legs but that was entirely fair because he was a centreback, not because he was a subhuman beast in some zoo ->yotes
  • spacekungfumanspacekungfuman Poor and minority-filled Registered User, __BANNED USERS regular
    eMoander wrote:
    ronya wrote:
    That explains the technocrats, I think. For Europe the perspective is even more severe, because default is a credible problem.

    This was my understanding of the austerity measures, specifically Greece. The massive disparity between pensions/government spending/etc compared to the revenue shortfall (tax evasion), coupled with their lack of currency control by being locked to the Euro means that default is a very real risk. If you accept that a Greek default would be bad for other European countries, then you're left with the current situation where they need to 'save' Greece.

    While it is probably terrible for their local economy, I can absolutely understand the perspective of the other European countries to not want to keep pouring money into a hole where structural problems might prevent the economy from ever recovering. Better to take the pain in the short term and fix the problems, than to throw money at them and hope they can get their act together in the future (again, my interpretation of their perspective).

    Personally, I think this makes some sense in the specific case of Greece. Why this seems like it might be spreading to other countries doesn't make any sense to me though.

    So my layman's opinion, based on things I have heard and read, is that the EU made a massive mistake by allowing Greece and other countries who did not meet the financial standards into the EU in the first place. If this is correct, what is the point where the EU should have stopped expanding if it wanted to remain stable?

    qkjb5npq8xrb.jpg
  • FencingsaxFencingsax Bondage Discipline Spider-Man Registered User regular
    eMoander wrote:
    ronya wrote:
    That explains the technocrats, I think. For Europe the perspective is even more severe, because default is a credible problem.

    This was my understanding of the austerity measures, specifically Greece. The massive disparity between pensions/government spending/etc compared to the revenue shortfall (tax evasion), coupled with their lack of currency control by being locked to the Euro means that default is a very real risk. If you accept that a Greek default would be bad for other European countries, then you're left with the current situation where they need to 'save' Greece.

    While it is probably terrible for their local economy, I can absolutely understand the perspective of the other European countries to not want to keep pouring money into a hole where structural problems might prevent the economy from ever recovering. Better to take the pain in the short term and fix the problems, than to throw money at them and hope they can get their act together in the future (again, my interpretation of their perspective).

    Personally, I think this makes some sense in the specific case of Greece. Why this seems like it might be spreading to other countries doesn't make any sense to me though.

    So my layman's opinion, based on things I have heard and read, is that the EU made a massive mistake by allowing Greece and other countries who did not meet the financial standards into the EU in the first place. If this is correct, what is the point where the EU should have stopped expanding if it wanted to remain stable?

    The bigger problems were more the fact that the ECB doesn't work like a central bank, and essentially works to Germany's benefit, and that they don't really have the centralized power they need to prevent crises like this from happening. When every member state needs to approve measures separately, things are not going to go well.

    Greece lying about it's balance sheet forever doesn't help, but when France and Germany are trying to keep Greece buying their weapons while still demanding austerity (for example) it's hard to blame the Greeks when they are taking it from all sides.

    It is difficult to get a man to understand something, when his salary depends upon his not understanding it
  • SerukoSeruko Ferocious Kitten of The Farthest NorthRegistered User regular
    edited February 2012
    eMoander wrote:
    ronya wrote:
    That explains the technocrats, I think. For Europe the perspective is even more severe, because default is a credible problem.

    This was my understanding of the austerity measures, specifically Greece. The massive disparity between pensions/government spending/etc compared to the revenue shortfall (tax evasion), coupled with their lack of currency control by being locked to the Euro means that default is a very real risk. If you accept that a Greek default would be bad for other European countries, then you're left with the current situation where they need to 'save' Greece.

    While it is probably terrible for their local economy, I can absolutely understand the perspective of the other European countries to not want to keep pouring money into a hole where structural problems might prevent the economy from ever recovering. Better to take the pain in the short term and fix the problems, than to throw money at them and hope they can get their act together in the future (again, my interpretation of their perspective).

    Personally, I think this makes some sense in the specific case of Greece. Why this seems like it might be spreading to other countries doesn't make any sense to me though.

    So my layman's opinion, based on things I have heard and read, is that the EU made a massive mistake by allowing Greece and other countries who did not meet the financial standards into the EU in the first place. If this is correct, what is the point where the EU should have stopped expanding if it wanted to remain stable?

    Really this is only Greece.
    Ireland was fine financially until they decided to socialize all the debt from the financial sector without first asking how much debt the financial sector had.
    Spain is getting beat up because of the global economic situation, but isn't spending crazy money.
    Portugal is weird, but it seems like more or less they haven't been doing very well in the competitive global or even regional European market.

    http://krugman.blogs.nytimes.com/2011/11/27/hedge-fund-ireland/
    http://krugman.blogs.nytimes.com/2010/02/05/the-spanish-tragedy/
    http://www.economist.com/node/21546056
    http://business.blogs.cnn.com/2011/11/09/italys-economic-crisis-kicks-up-as-berlusconi-bows-out/
    Fencingsax wrote:

    The bigger problems were more the fact that the ECB doesn't work like a central bank, and essentially works to Germany's benefit, and that they don't really have the centralized power they need to prevent crises like this from happening. When every member state needs to approve measures separately, things are not going to go well.

    Greece lying about it's balance sheet forever doesn't help, but when France and Germany are trying to keep Greece buying their weapons while still demanding austerity (for example) it's hard to blame the Greeks when they are taking it from all sides.

    Essentially this.

    Seruko on
    "How are you going to play Dota if your fingers and bitten off? You can't. That's how" -> Carnarvon
    "You can be yodeling bear without spending a dime if you get lucky." -> reVerse
    "In the grim darkness of the future, we will all be nurses catering to the whims of terrible old people." -> Hacksaw
    "In fact, our whole society will be oriented around caring for one very decrepit, very old man on total life support." -> SKFM
    I mean, the first time I met a non-white person was when this Vietnamese kid tried to break my legs but that was entirely fair because he was a centreback, not because he was a subhuman beast in some zoo ->yotes
  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
    Greece lied to get into the EU. One lesson here is probably "don't trust Greek statistics. Don't trust Southeastern Europe statistics, actually, the region still engages in the arrest-the-too-honest-statisticians thing.

  • shrykeshryke Member of the Beast Registered User regular
    Hamurabi wrote:
    So I have this persistent question: where does the austerity agenda in the Euro Zone come from?

    I mean, it seems that after 236 years of the formalized study of economics that highly-placed technocrats would understand what happens when you impose austerity during an economic slowdown. Yet there it is.

    I asked a Marxist friend of mine, but he predictably replied that it's because they're part of the neoliberal orthodoxy that sees public spending beyond some minimalist threshold as being The Sum of All Evils; additionally, and somewhat more cynically, that their only concern is with giving foreign capital an escape route.

    So what say you, Econ Thread?

    My uninformed view on it is that Europe, along with the US and Canada responded to the financial collapse of the last decade by turning to Conservative governments who by fiat hate public spending. I have a friend who's deeply involved with the GOP and refuses to admit that austerity doesn't work even when presented with evidence.

    The same sort of mindset that lets someone looks at a disappearing ice sheet and think global warming's a myth or lets the Obama administration think that the newly elected Tea Party Congress surely won't want the US to default.

    I'm not sure what causes it.

    The Conservative victories in Canada have pretty much nothing to do with the economy.

  • Fallout2manFallout2man Registered User regular
    So my layman's opinion, based on things I have heard and read, is that the EU made a massive mistake by allowing Greece and other countries who did not meet the financial standards into the EU in the first place. If this is correct, what is the point where the EU should have stopped expanding if it wanted to remain stable?

    Worth pointing out is that Goldman Sachs was the primary culprit in getting those same countries into the Eurozone and what do you know? When Greece called for a referendum and Italy started criticizing the Euro both countries had their leaders replaced with what? *Gasp*! Former Goldman Sachs executives. The Eurozone is ten kinds of messed up, but none of it would've happened if our lovely financial sector hadn't thought there was money to be made defrauding governments through clever financial instruments to conceal real debts.

    On Ignorance:
    Kana wrote:
    If the best you can come up with against someone who's patently ignorant is to yell back at him, "Yeah? Well there's BOOKS, and they say you're WRONG!"

    Then honestly you're not coming out of this looking great either.
  • SerukoSeruko Ferocious Kitten of The Farthest NorthRegistered User regular
    So my layman's opinion, based on things I have heard and read, is that the EU made a massive mistake by allowing Greece and other countries who did not meet the financial standards into the EU in the first place. If this is correct, what is the point where the EU should have stopped expanding if it wanted to remain stable?

    Worth pointing out is that Goldman Sachs was the primary culprit in getting those same countries into the Eurozone and what do you know? When Greece called for a referendum and Italy started criticizing the Euro both countries had their leaders replaced with what? *Gasp*! Former Goldman Sachs executives. The Eurozone is ten kinds of messed up, but none of it would've happened if our lovely financial sector hadn't thought there was money to be made defrauding governments through clever financial instruments to conceal real debts.

    IDK the link between Lucas Papademos and goldman sachs is pretty tenuous; the link between Mario Monty and Goldman Sachs does not seem like a huge deal.

    "How are you going to play Dota if your fingers and bitten off? You can't. That's how" -> Carnarvon
    "You can be yodeling bear without spending a dime if you get lucky." -> reVerse
    "In the grim darkness of the future, we will all be nurses catering to the whims of terrible old people." -> Hacksaw
    "In fact, our whole society will be oriented around caring for one very decrepit, very old man on total life support." -> SKFM
    I mean, the first time I met a non-white person was when this Vietnamese kid tried to break my legs but that was entirely fair because he was a centreback, not because he was a subhuman beast in some zoo ->yotes
  • HamurabiHamurabi Cambridge, MARegistered User regular
    edited February 2012
    ronya wrote:

    I assume that "G" is Government Spending, but what the hell is "T?"

    Hamurabi on
  • silence1186silence1186 Character shields down! As a wingmanRegistered User regular
    Hamurabi wrote:
    ronya wrote:

    I assume that "G" is Government Spending, but what the hell is "T?"

    Taxes? Which I guess can affect Aggregate Demand.

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  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
  • Fallout2manFallout2man Registered User regular
    edited February 2012
    Seruko wrote:
    IDK the link between Lucas Papademos and goldman sachs is pretty tenuous; the link between Mario Monty and Goldman Sachs does not seem like a huge deal.

    Apologies on that; Papademos himself isn't connected to Goldman Sachs. He just was the head of the ECB when Greece entered the Eurozone. I got that one mixed up. ^_^;;

    Fallout2man on
    On Ignorance:
    Kana wrote:
    If the best you can come up with against someone who's patently ignorant is to yell back at him, "Yeah? Well there's BOOKS, and they say you're WRONG!"

    Then honestly you're not coming out of this looking great either.
  • HamurabiHamurabi Cambridge, MARegistered User regular
    edited February 2012
    Taxes occurred to me, but then I thought "Wait, how much of an effect will income, sales, and capital gains taxes have on something as enormous as AD"... and then I remembered that that was in the context of budget speeches, and it clicked.

    EDIT: Also, shut the hell up Vicks.

    Hamurabi on
  • silence1186silence1186 Character shields down! As a wingmanRegistered User regular
    Hamurabi wrote:
    Taxes occurred to me, but then I thought "Wait, how much of an effect will income, sales, and capital gains taxes have on something as enormous as AD"... and then I remembered that that was in the context of budget speeches, and it clicked.

    EDIT: Also, shut the hell up Vicks.

    Now, now Ozark, civility is called for in economics discussions, no? And my taxes are going up this year do to a wrinkle in where I live vs. where I get my mail delivered, so that will certainly affect my spending habits. More ramen, less diner visits. Sad times.

    3DS Friend Code: 1891-2359-4305
    3DS Friend Name: BiggsWedge
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  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
    edited February 2012
    Hamurabi wrote:
    Taxes occurred to me, but then I thought "Wait, how much of an effect will income, sales, and capital gains taxes have on something as enormous as AD"... and then I remembered that that was in the context of budget speeches, and it clicked.

    EDIT: Also, shut the hell up Vicks.

    total taxes generally operate in the same ballpark as total government purchases, for unsurprising reasons

    "the real estate market is overheating" - "ok, let's tax houses" is a response that governments still occasionally practice, to some success.

    ronya on
  • HamurabiHamurabi Cambridge, MARegistered User regular
    ronya wrote:
    Hamurabi wrote:
    Taxes occurred to me, but then I thought "Wait, how much of an effect will income, sales, and capital gains taxes have on something as enormous as AD"... and then I remembered that that was in the context of budget speeches, and it clicked.

    EDIT: Also, shut the hell up Vicks.

    total taxes generally operate in the same ballpark as total government purchases, for unsurprising reasons

    "the real estate market is overheating" - "ok, let's tax houses" is a response that governments still occasionally practice, to some success.

    As in, total tax revenue is roughly equivalent, in relative and/or absolute terms, to government expenditures (the G in C + I + G + NX) ?

    In a related matter: it is my impression that 'lower taxes = more growth' is, apart from being a tired meme of the right, a wholly unsubstantiated claim empirically. ronya, please affirm my preconceived liberal assumptions about economics! :P

  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
    It is taken as given, in the context of Western liberal democracies, that the vast majority of taxes goes toward (1) redistributive welfare and insurance (2) military spending, of which R&D may be a rounding error. It is also taken as given that growth is driven by either population growth, technological advancement or capital accumulation, and that (1) and (2) have at best an indirect relationship to population growth, technological advancement, and capital accumulation. And, we have deadweight losses, because we do not raise lump-sum taxes for practicality reasons. Therefore: taxes reduce growth.

    In the context of business cycles the Keynesian analysis is that deficit spending is expansionary and so lower taxes holding government purchases constant does indeed boost growth. Indeed this was a common Republican, Tory, etc. way of considering things back in the "we are all Keynesians now" era.

    All this said. We are not generally interested, overwrought discourse aside, in hypothetical universes where taxes and spending are dramatically lower or higher than they are now; more plausibly things would be several points higher or lower and there would be a handful of spending programs enabled or disabled by these changes. So we really want to know the marginal effect of some proposal relative to the status quo and it is there the point of ambiguity has its success. Infrastructure programs, for instance, may individually pass a cost-benefit analysis. And of course it does! Surely one needs to know how taxes are being used to say anything about their effect on growth? Taxation to fund statues of the Glorious Leader would diminish growth, and by the same token lowering those taxes would increase it.

  • HamurabiHamurabi Cambridge, MARegistered User regular
    Right. I guess what I was trying to ask was whether there was some actual evidence that there was more than a 1:1 ratio between tax breaks for firms and growth in GDP (because every dollar the firm doesn't pay in taxes by definition becomes revenue for that firm).

  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
    edited February 2012
    Holding G constant - meaning that the government runs a deficit to cut those taxes, which it can't do forever* - the short-run Keynesian multiplier of the corporate income tax does seem to be greater than one (i.e., cutting taxes by a dollar without cutting spending increases GDP by more than one dollar, presuming an accommodative central bank etc.). How much greater than one seems a topic of dispute, though.

    * not, strictly speaking, true, but in the long run we're all dead the short-run Keynesian multiplier is irrelevant anyway.

    ronya on
  • HamurabiHamurabi Cambridge, MARegistered User regular
    You're supposed to say that corporations are evil and any tax breaks you give them into golden parachutes!

  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
    Golden parachutes are part of GDP, so.

  • HamurabiHamurabi Cambridge, MARegistered User regular
  • Major TomMajor Tom Registered User
    Really hate being short ahead of LTRO

    All I can hope is that they come out with a really disappointing number

    Come on $250bn EUR!

  • GoumindongGoumindong Registered User regular
    ronya wrote: »
    And, we have deadweight losses, because we do not raise lump-sum taxes for practicality reasons. Therefore: taxes reduce growth.
    Deadweight loss does not imply lower growth, it implies less utility. The only thing that can get us lower growth is less capital accumulation/technological progress, and its a lot harder to make the claim that taxes reduce capital accumulation than it is to make the claim that they impose deadweight losses.

    Economists can't find links between tax rates and long term growth, let us all collectively stop implying that the inefficiency result implies it in any way. Because it does not.

    Note also that the result relied upon to imply that non-lump sum taxation incurs deadweight losses requires that G is wasted and provides no utility or endowment in a predictable fashion. Once you infer that people get benefits from govt spending in any way, or receive endowments(with a total NPV of their taxation) then the deadweight loss result disappears.

    wbBv3fj.png
  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
    edited February 2012
    Yes. Hence:
    ronya wrote: »
    It is taken as given, in the context of Western liberal democracies, that the vast majority of taxes goes toward (1) redistributive welfare and insurance (2) military spending, of which R&D may be a rounding error. It is also taken as given that growth is driven by either population growth, technological advancement or capital accumulation, and that (1) and (2) have at best an indirect relationship to population growth, technological advancement, and capital accumulation.

    It is true that deadweight losses do not factor directly into growth rates; they can be a one-off loss if the DWL is entirely in consumption. For a given rigidly old Keynesian sort of intuition, this is the case, although not for the augmented Solow intuition I was describing: contra your claim it is not difficult to intuit how DWL lead to less growth in national K - if the DWL is not entirely in consumption, then some of it is in investment, and if the return to investment is decreased, then the long-term K is diminished. Done.

    I was describing what I thought was the mainstream view and I think I captured the idea that the present moderate-leftish sort of US economist, aka the academic sort, tend to regard that, cet. par., increased taxes reduce long-term-growth but may be desirable nonetheless for other, net-present-value sort of reasons. For the extreme of this logic, recall the Samuelsonian account of the USSR that one could, in principle, simply strangle domestic current consumption to fund long term growth but of course we do not work solely that some hypothetical future generation may live in paradise.

    If I were to give my own view, it is that we have rather poor understanding of how A in A Kⁿ L¹⁻ⁿ evolves over time.

    ronya on
  • HamurabiHamurabi Cambridge, MARegistered User regular
  • CantidoCantido Registered User regular
    Hamurabi wrote: »
    Engrish prz

    Economics is super excellent.

    steam_sig.png
  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
    At any given moment you have some finite amount of stuff. You can eat the stuff (consumption, both private and government), use it to create more stuff in the future (investment, again both private and government), or waste it (here, deadweight losses). We are interested in discussing the link between the alleged size of the waste and the growth rate of the amount of stuff you have over time.

  • enc0reenc0re Registered User regular
    I too thought that it was completely mainstream to think of taxes as reducing capital accumulation. That's the argument for cutting capital gains (etc) taxes to zero. Even the most left-wing economists I know will say so, while of course still not claiming that doing so would be a good idea.

  • SerukoSeruko Ferocious Kitten of The Farthest NorthRegistered User regular
    enc0re wrote: »
    I too thought that it was completely mainstream to think of taxes as reducing capital accumulation. That's the argument for cutting capital gains (etc) taxes to zero. Even the most left-wing economists I know will say so, while of course still not claiming that doing so would be a good idea.

    It depends on incentives.

    If you're incentivized to either pay taxes or invest in local infrastructure you invest locally.
    If you're incentivized to either pay out big dividends or sit on cash, you pay out dividends and sit on cash.
    This is the difference between 1950 and 2010.

    "How are you going to play Dota if your fingers and bitten off? You can't. That's how" -> Carnarvon
    "You can be yodeling bear without spending a dime if you get lucky." -> reVerse
    "In the grim darkness of the future, we will all be nurses catering to the whims of terrible old people." -> Hacksaw
    "In fact, our whole society will be oriented around caring for one very decrepit, very old man on total life support." -> SKFM
    I mean, the first time I met a non-white person was when this Vietnamese kid tried to break my legs but that was entirely fair because he was a centreback, not because he was a subhuman beast in some zoo ->yotes
  • GoumindongGoumindong Registered User regular
    edited March 2012
    ronya wrote: »
    if the DWL is not entirely in consumption, then some of it is in investment, and if the return to investment is decreased, then the long-term K is diminished.

    This is a fundamental misunderstanding of the model. The DWL does not imply less consumption it implies different consumption from a Pareto* amount denoted in utility. This could mean more or less consumption in the immediate term. Similarly DWL in K does not imply less investment it implies that we invest more or less than a pareto utility amount.

    Hell, since we either consume or invest with G merely re-arranging who has what to consume implying that DWL in consumption reduces consumption requires that it increase investment which would increase long term growth**

    The layman answer:
    Think of it this way, we get utility from consuming now or consuming later. When we say investment we mean "consuming later". There is an optimal amount of consuming now and consuming later to be done which balances the fact that we have wants now and wants later. Non-lump sum taxes necessarily change that balance of consuming now and consuming later because they change the return we get from consuming now and consuming later). But the change does not require that there is more consumption now and less consumption later. There could also be less consumption now and more consumption later.[Edit: In addition there must be an allocation of non-lump sum taxes which yields a Pareto outcome so long as government expenditures are merely transferring money around between people****]

    Non-lump sum taxes do not imply, in any formulation, lower growth.

    In order for taxes to necessarily reduce growth the model would have to assume that government literally takes your investment and destroys it, gives it to no one, invests it in no way and does nothing with it, except of course, make it not exist anymore.

    Note that they can reduce growth if they cause us to work less (thus having less stuff to consume/invest because we are lounging around more) or if they cause us to consume more(thus having less stuff to invest), but neither of these things are necessary from the model.

    The mainstream view is that there are taxes we can prefer because they're generally less distortionary (like lump sum taxes, consumption/income taxes) and so are better from a Pareto utility efficiency point of view***, but not that they necessarily reduce growth.


    *Pareto Efficiency: A position in which we cannot make any one person better off in terms of utility without making someone else worse off (also in terms of utility).

    **Note that we have very strong empirical results to justify this as there are many examples of governments promoting investment with higher taxes which while we can suggest it makes people worse off we can also note that growth was significantly higher during these times. And we don't only have to point at the Soviet Union for this, as the original impetus for Keynes to examine the macroeconomic situation was a massive increase in growth during the high tax duration of WWI.

    ***Which has its own problems and is why economists can say we should not get rid of capital taxes

    ****We can see this by getting a final allocation of goods given transfers and then setting taxes to have equal and opposite effects on the various aspects and in the level that guarantees the transfers occur

    Goumindong on
    wbBv3fj.png
  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
    edited March 2012
    No, no. Not a pure exchange general-equilibrium economy with heterogeneous goods - in that, it is true that DWL has an indeterminate effect on recorded trade (=GDP). Second-best solution might easily entail a lot more movement of goods than the first-best, increasing trade whilst decreasing social welfare. And in a pure exchange economy, DWL does, yes, have agents simply stuffing their endowments into second-best uses.

    Rather a Solow model with homogenous K, L, Y, with K, L varying in extent depending on incentives. In short, the orthodox workhorse model for analyzing long-term growth. Here DWL undeniably reduces Y - less K or less L entails less Y. No Y-increasing substitution since first-best K, L are already chosen to maximize representative units of GDP. No trade-increasing second-best uses by assumption: there is simply less input. Agent's endowments (time) flow into non-GDP activity, like leisure (i.e., they consume their own endowment).

    Your argument exists insofar as homogeneities fail to hold, but that is true of virtually every macroeconomic statement, since Anything Goes in general eq.

    ronya on
  • GoumindongGoumindong Registered User regular
    edited March 2012
    No, the model i am working under is the homogeneous NGM (I.E. the Solow model). The problem is that you assume that DWL entails less K or L, wherein it necessitates neither. Because the standard Solow model with a representative agent has has consumption as a variable. The representative agent isn't maximizing GDP or his production he is maximizing his lifetime utility, which is well behaved in C and 1-L. This leaves the effect of taxation indeterminate on output because the agent enjoys leisure, consumption today, and consumption tomorrow. Wherein giving one one gets you the other two. Thus the result of a tax that shifts from consumption today may increase leisure or consumption tomorrow.

    To get the non-lump sum tax result (in Pareto efficiency) you have to assume that G is wasted, that G confers no benefit or transfer upon the representative agent. If it does confer a benefit or transfer upon the representative agent then the result which guarantees non Pareto efficiency fails.

    Lets get a bit more simple here.

    Is there a tax policy that the government can implement under the Solow Model that will increase or keep steady the savings rate? If yes, then the effect of growth is indeterminate. If no, then it is determinate.

    But there is trivially such a policy. If we tax anything and then give the representative consumer, in any period, an endowment equal to that taxation(and they know this, which by the assumptions of the model they should) the NGM solves as if there were no tax(indeed it solves as if there were no government). The result that provides this is the exact same result which we rely on to say that non-lump sum taxes are inefficient. *

    You might say that such a policy is unrealistic and that is fine, but to model a more realistic policy we can't use a representative agent model, we need to move to, at the very least, a two consumer model and in that case we are going to run into the GE world because the consumers will be able to trade K back and forth between themselves and once again, accumulation is indeterminate.

    *Basically what you do when you show this is show that the First Order Condition's [FOC's] are the same between the model with lump sum taxes and wasted G and the model without lump sum taxes and wasted G. Which basically means that if we took the budget constraint from the "no government" model, removed G as a fixed cost then maximized we get the same thing as if we apply lump sum taxes. So then you say, what about if that taxes were not lump sum? Then the FOC's are not the same and so we have distortions off the Pareto solution. But if sum(G) =0 then the result goes away again since sum(taxes) must also be zero (or however you want to formulate it it works out to the same thing, the representative agent will receive an amount equal to his tax as an endowment in some time period. and per the result above that proves that lump sum taxes are non-distortionary the time period of an endowment doesn't matter, so we can conveniently line them all up to say that so long as G is given back to the representative agent he maximizes as if there is no government). As well, if G contributes to either production or utility the result goes away again, since now we have more FOC's and the non-government Pareto solution no longer holds (if utility or production are well behaved in G then the non-government solution has negative infinity utility)

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  • enc0reenc0re Registered User regular
    Goumindong wrote: »
    Note that they can reduce growth if they cause us to work less (thus having less stuff to consume/invest because we are lounging around more) or if they cause us to consume more(thus having less stuff to invest), but neither of these things are necessary from the model.

    And taxes on labor income and investment gains do each of those things respectively. Yeah, there are some fantasy tax systems that reduce consumption in favor of more investment or some whacky labor supply curves where taxes motivate you to work more; but those are not relevant in a policy discussion, are they?

  • GoumindongGoumindong Registered User regular
    edited March 2012
    enc0re wrote: »
    And taxes on labor income and investment gains do each of those things respectively. Yeah, there are some fantasy tax systems that reduce consumption in favor of more investment or some whacky labor supply curves where taxes motivate you to work more; but those are not relevant in a policy discussion, are they?

    Yes. The labor supply curve that slopes backwards is the standard model. The reason that those curves look like they do is precisely a result of doing the same type of maximization procedure we are doing with the Solow model. (albeit with some important changes to the assumptions)

    That is, we assume someone maximizes utility. They get utility from consumption and leisure and that the utility function is well behaved in both consumption and leisure. That is the utility function is increasing and concave in both consumption and leisure. In macro we also tend to say that the marginal value goes to infinity as consumption or leisure go to zero and to zero as they go to infinity. But these largely rule out corner solutions, which we don't like for practical purposes.

    Take that utility function and then imply a tradeoff between leisure and consumption(I.E. i can lounge around or can work and thus consume) and BAM out pops your backward bending labor supply curve. The question wrt that is "where are we on that curve, and what does it look like when we aren't looking at one person"

    Here that is basically the same thing. We take the utility function assumptions that we got the backward bending labor supply curve out of and say "we do this again next time period, discount the consumption for the next period, and say that the consumption in the next period is a function of what we don't eat the previous periods"

    Now, because we are talking macro economics instead of micro, we can't assume that we have no impact on the market, so talking about a labor supply function doesn't make much sense, especially in the Solow model where we have one person maximizing and he owns all the capital. We can say he owns the firm and pays himself a wage... but we can also just internalize all of that. Either way, "price" of consumption is always going to be in terms of "consumption later" or "leisure today".

    And since our rational agent is maximizing we know that we will take into account all restrictions and then maximize so that dU/dc= d/dt(dU/dc_dot), and dU/dLe = 0 |U is the entire constrained utility function/Hamiltonian/Lagrangian, c_dot is the change in consumption over time. Note that its very similar for a discrete time solution but its easier for to denote in continuous time on a forum.

    OK, well if these are true we have a problem. There is a unique solution to this system of equations but it depends on the precise form of U and the budget constraint(in this case, time). And since we have relationships between leisure and consumption if we modify the tradeoffs we don't know what happens to the other two unless we know the precise form of U and the budget constraint. Just like we don't know where we are on the individuals labor supply function as a result of simply generating what it looks like in general.

    What this means is that taxes, so long as they do not change the budget constraint in explicit ways. I.E. so long as the economy gets back the full amount either in endowments (given stuff they get to choose what to do with) or receives utility* from them means that we are still maximizing over the same total resources and so we still face those same tradeoffs to either be lazy, consume now or consume tomorrow.

    Again the simplest way to show it is to just give an example where i tax you 10% of your consumption and then give you that back that same period. You get the value back and then can decide to invest or consume. If you consume you get 10% of that back which you can then decide to invest or consume and if you consume... If that were the case and so you could consume, lounge, and invest the same amount as you would have before the tax after the tax, why would you not do so?

    My point wasn't that taxes can't, but that taxes do not necessarily do that. And either way we formulate it the empirics are pretty clear, no one has found a link between higher taxes and lower growth.(at least as far as i know)

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  • ronyaronya Arrrrrrf. the ivory tower's basementRegistered User regular
    Goumindong wrote: »
    What this means is that taxes, so long as they do not change the budget constraint in explicit ways. I.E. so long as the economy gets back the full amount either in endowments (given stuff they get to choose what to do with) or receives utility* from them means that we are still maximizing over the same total resources and so we still face those same tradeoffs to either be lazy, consume now or consume tomorrow.

    Short reply: aaaaaand we're back to "deadweight losses". In principle a government that either taxes perfectly inelastic things or only levies lump-sum taxes could have an arbitrarily high tax revenue without incurring efficiency losses, yes. And then one invokes a Solow logic to argue that said government can then set the societal balance between current consumption/leisure and future consumption/leisure. But we don't do that - we tax labour and investment and consumption; mostly income.

  • GoumindongGoumindong Registered User regular
    edited March 2012
    Sooooooo: We are back to "deadweight losses" do not imply that investment is lower! If we can balance between current consumption/leisure and future consumption/leisure with taxes there must be taxes which have net positive effect on future consumption! (and furthermore we have failed to find effects of taxes on growth!

    Look think of a deadweight loss from micro, it reduced quantity right? But it also increased "money not spent". Well as soon as you say that you can get utility from that money not spent and can do other things with it, you will see why deadweight loss does not imply that less things happen. Because "too much money in my pocket" is deadweight loss.

    Lets think of it another way, lets say investment is 100% of production and let us also say that we produce a positive amount? We can make ourselves better off by saving less and consuming more no?

    Well, if we can make ourselves better off by saving less and consuming more we can also make ourselves worse by saving more and consuming less. Deadweight loss implies we are worse off, not that the particular direction of the worse off implies less investment.

    Edit: Note also that the Solow model does not maximize production, so you cannot say that a shift off the optimal reduces production. Production would be maximized at C=0, I=Everything. Any time I increases net production increases for all subsequent periods. Since our solution has positive C it cannot maximize F.

    DWL is always about utility. Utility is always about optimal allocation of goods, wherein there are tradeoffs between them.

    Its precisely the same as the comparative statics when you want to find the effect of a tax on apples on the price/quantity of oranges in a Marshellian demand with three goods. The solution is indeterminate.

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  • enc0reenc0re Registered User regular
    @Goumindong Excellent, we're on the same page then. I'll just sit on my argument that taxes as we use them in reality cause a shift towards more leisure and more consumption now and be happy.

    This was like first semester Ph.D. program all over again. IIRC the very first homework assignment I got was to prove the existence of the Solow steady state and then show how it responds to tweaking incentives. What a nice blast from the past. Thank you for that.

  • GoumindongGoumindong Registered User regular
    enc0re wrote: »
    @Goumindong Excellent, we're on the same page then. I'll just sit on my argument that taxes as we use them in reality cause a shift towards more leisure and more consumption now and be happy.

    The response to that is "then why can't we see it?"
    This was like first semester Ph.D. program all over again. IIRC the very first homework assignment I got was to prove the existence of the Solow steady state and then show how it responds to tweaking incentives. What a nice blast from the past. Thank you for that.

    I know, we just covered the tax equivalencies in the model (though we are holding g constant and wasted for our results and I am allowing G to be transfers on my own)

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  • enc0reenc0re Registered User regular
    Lol. No wonder you're up on that stuff.

    My impression of the empirical literature is that it points towards higher taxes putting a (slight) damper on growth rates. Maybe I'm out of date. If you think that's the case, feel free to throw me some citations to whatever the cutting edge articles are. I'm always happy to learn something new.

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