Where is the US economy headed?

Cycloptichorn wrote:

IT IS NOT OBVIOUS that such a curve exists. Stop repeating that it is!

Cycloptichorn

Well, we will just have to disagree. To say it does not exist is to assert the economy is static, no matter the tax rate, which I think is ridiculous. That is akin to saying the economy is static, no matter the interest rate, or no matter the price of oil, or no matter the inflation rate, or no matter lots of things.

Government has this arrogant and condescending attitude that they are above, or somehow apart from the rest of us that makes the economy what it is, and they can simply tax us at whatever rate they wish, and it has no effect on what we do and how hard we do it. And somehow they are exempt from the same principles that govern the economy. The fact is the government is a very big part of the economy, especially in terms of bleeding it, and to a smaller extent in providing things for us, such as police protection, defense, roads, and other things.

And like government, liberals have adopted a similar attitude, that tax rates, and whatever the government does is a world unto itself, apart from the realities of the free market, and it has no relationship whatever. If you ever took calculus, you would understand that virtually every relationship can be defined by some kind of curve.

Well, we will just have to disagree. To say it does not exist is to assert the economy is static, no matter the tax rate, which I think is ridiculous. That is akin to saying the economy is static, no matter the interest rate, or no matter the price of oil, or no matter the inflation rate, or no matter lots of things.

The whole point of keeping the Laffer curve out of economic discussions isn't to keep anyone down, it's because the curve isn't an economic model for predicting anything. It's an economic model for rationalizing giving more money to the rich, and that's it. It is a theory with no actual use in the real world.

Cycloptichorn wrote:

The whole point of keeping the Laffer curve out of economic discussions isn't to keep anyone down, it's because the curve isn't an economic model for predicting anything. It's an economic model for rationalizing giving more money to the rich, and that's it. It is a theory with no actual use in the real world.

Judging by your confident statements about what is and what isn't a usable economic model, you must have worked through an economics textbook by now. May I ask which one it is?

Wednesday, May 10, 2006
Summer Reading List

A student emails me asking for a summer reading list. Here are ten very different books I like that are fun enough that you would not be embarrassed (well, not too embarrassed) reading them at the beach:

* Milton Friedman, Capitalism and Freedom
* Robert Heilbroner, The Worldly Philosophers
* Paul Krugman, Peddling Prosperity
* Steven Landsburg, The Armchair Economist
* P.J. O'Rourke, Eat the Rich
* Burton Malkiel, A Random Walk Down Wall Street
* Avinash Dixit and Barry Nalebuff, Thinking Strategically
* Steven Levitt and Stephen Dubner, Freakonomics
* John McMillan, Reinventing the Bazaar
* William Breit and Barry T. Hirsch, Lives of the Laureates

cyclops, if there is a relationship between the sun's relative energy levels and earth's temperatures, scientists will attempt to quantify the relationship and draw curves and graphs to demonstrate the relationship. This does not preclude the fact that the temperature is also affected by many other relationships and factors. Just because there are many factors does not keep us from trying to determine the extent of the effect of a single factor, each one as we study it. Nobody is stupid enough to believe the science is perfect or the answer is static, but I believe it is stupid to ignore a relationship or not attempt to quantify it simply because there may also be other factors.

Another great example is medical studies, wherein new medications or treatments are evaluated. No two patients are the same, and each patient has other factors influencing the outcomes, but scientists still attempt to isolate and quantify single relationships between two factors, a disease and a treatment. Wake up. This is what science is about. The economy is not exactly science, but it does lend itself to numbers, and is defined by numbers that define relationships and effects, which is a science.

Now, answer the question: what predictive value do individual statistics add to models of complicated systems? How about on their own - can an individual statistic give you accurate predictions about a highly complicated system, regardless of knowing any other factors?

Cycloptichorn

After our previous discussions on the matter, I found myself doing exactly that, and found this -

Any suggestions to add on to the reading list? I'm interspersing them with scifi novels, so it'll take a while to get to the end.

I'm interspersing them with scifi novels, so it'll take a while to get to the end.

Cycloptichorn wrote:

Now, answer the question: what predictive value do individual statistics add to models of complicated systems? How about on their own - can an individual statistic give you accurate predictions about a highly complicated system, regardless of knowing any other factors?

Cycloptichorn

I would think they have tremendous and crucial value. In other words, what effect does the cost of rafters, or shingles, or siding, have individually on the overall effect of the total cost of a house. You must first attempt to quantify the effect of the rise in cost of shingles, or the rise in cost of siding, is first, then you can factor it in along with all the other factors in an attempt to see the overall picture.

I thought of another example to try to illustrate this debate. If you had 10 people thrown into a project, each one having his own skills, priorities, ambitions, and considerations in accomplishing a project. One of those people represents government. As those ten people meet, discuss, allocate, negotiate, and compromise in terms of what each one spends and does to accomplish the project, a workable and balanced solution comes together for the good of all. If in this case, you have one person that insists their skills, ambitions, job, and budget has no relationship to the others, so they stand outside the circle of the other 9 people, then after the other 9 come up with a balanced plan, the tenth guy comes in, grabs the plan and budget and says, okay guys, I am taking 30% of the budget to do whatever I need to do, now get lost and get started with the project, as if the 30% has no impact on the 9 other guys. The 9 other people will get started alright, but to the surprise of the 10th person, 6 months later the 9 people come back with only half of their job finished.

The problem arose because the 10th guy, which is government claims that it can take whatever money it wants and the rest of the money is not affected whatsoever. That is a huge problem, and I think it is one of the principle problems we have right now in government.

Cycloptichorn wrote:

After our previous discussions on the matter, I found myself doing exactly that, and found this -

Congratulations! It's an ambitious, politically diverse, and (I think) enjoyable reading list.

Cycloptichorn wrote:

Any suggestions to add on to the reading list? I'm interspersing them with scifi novels, so it'll take a while to get to the end.

Since Mankiw was too modest to put his own books on the list, I'd suggest his "Principles of Economics", particularly the first edition. I recommend the first edition for two reasons: 1) the current edition is the third, so the first one is pretty inexpensive (and not that different from the third). 2) The major difference to more recent editions is that in the first editions, he didn't need to worry about offending Republican politicians, so he was free to call supply-siders "charlatans and cranks" selling you "snake oil". Mankiv also debunks it with the right argument: he doesn't say there is no Laffer curve, but that it's foolish to believe that current tax rates put America on the wrong side of the curve. (Krugman makes the same point in Peddling Prosperity.)

I think you'd also enjoy Krugman and Wells's Economics. Comparing it with Mankiw gives you an idea where conservative and liberal economists disagree. And that's surprisingly little.

Cycloptichorn wrote:

I'm interspersing them with scifi novels, so it'll take a while to get to the end.

This reminds me: A couple of weeks ago, you told me it was Asimov who said that the people who most want to govern are, by definition, the ones least suited to do it. You also identified the story in which he wrote that. Back then, I searched for the story on Amazon and didn't find it in a Book that contained it. Could you tell me the title of the story again, and the book you read it in?

No offense, but that's a terrible example for what we're talking about. I understand that you have gripes about government, but we aren't talking about government at all; we're talking about the predictive ability of individual statistics on complicated systems.

Look at it this way - Let's say you saw a guy who was fat, and stated 'if he eats less food, he'll get thinner.' On the surface, it looks like a very pat answer.

But, what if he has thyroid problems which lead to his obesity?
What if he has digestive problems?
What if he eats only a little food, but it is high-fat and high-calorie food?

Any one of these factors will affect his weight. When charting the predictive effects of 'eating less food,' you can come up with a curve, sure; but without accounting for dozens of other factors, you cannot make an accurate prediction about the effects of any course of action you advocate!

It's a logical trap, Okie - attempting to explain highly complicated situations with very simple formulas, and what's worse, attempting to make any prediction based upon it.

Cycloptichorn

Cycloptichorn wrote:

No offense, but that's a terrible example for what we're talking about. I understand that you have gripes about government, but we aren't talking about government at all; we're talking about the predictive ability of individual statistics on complicated systems.

Look at it this way - Let's say you saw a guy who was fat, and stated 'if he eats less food, he'll get thinner.' On the surface, it looks like a very pat answer.

But, what if he has thyroid problems which lead to his obesity?
What if he has digestive problems?
What if he eats only a little food, but it is high-fat and high-calorie food?

Any one of these factors will affect his weight. When charting the predictive effects of 'eating less food,' you can come up with a curve, sure; but without accounting for dozens of other factors, you cannot make an accurate prediction about the effects of any course of action you advocate!

It's a logical trap, Okie - attempting to explain highly complicated situations with very simple formulas, and what's worse, attempting to make any prediction based upon it.

Cycloptichorn

Thanks for a slow fastball right down the middle, cyclops.

Government is part of the economic system, whether they wish to acknowledge it or not, and the lack of acknowledgement is what this discussion is all about.

Sorry, but if someone is fat, I think it is a safe bet that eating less food will in fact make him thinner, as compared to recommending that he eat more food. I would put my money on that one. I would also find out from the doctor if he had a thyroid problem to factor into the graph of expected results, and if any other factors, I would do the same. After doing my homework, I could feel good about going to the person and making a fairly intelligent recommendation, probably it would include eating less food, probably especially high calorie food, which probably fits government.

Thomas,

The name of the story is Evidence, about a robot posing as a man who attempts to run for mayor, and the attempts to uncover him.

It is contained in the venerable I, Robot and also The Complete Robot, both still in print I believe.

Right, you're getting it now!

Here's the money line -

I would also find out from the doctor if he had a thyroid problem to factor into the graph of expected results, and if any other factors, I would do the same.

In order to make an intelligent recommendation about the economy, do you feel it is necessary to add in additional factors to the equation?

This is 100% my contention - that without studying the additional factors, an examination of the rate of taxation is useless as a predictive tool.

Before you recommend to change the level of taxation one way or another, you must take other factors into account. These other factors can change the situation drastically; if taxation is at 30%, and other factors differ, then raising taxes will or will not necessarily lead to more revenues, and this can change quickly depending on the rate of change of other factors besides level of taxation.

Remember that my whole gripe is about the utility of single factors in predictions!!

Cycloptichorn

I do not disagree, and I have never disagreed with this to my knowledge. All I have ever done is argue that tax rates are not a zero sum game, that the effect of tax rates on the economy needs to be recognized as a real world factor, and it should be argued and considered in an intelligent manner instead of ignored as no factor at all, which is what I see some politicians apparently do. I have never claimed the Laffer curve was drawn perfectly or shaped perfectly. I have only claimed that a relationship does exist. I won't say it is a curve, the dreaded word, because apparently some people cannot bring themselves to admit the word into evidence, so I will simply call it a "relationship."

Well, if you tax the rich too much, such that if you go back to 70% or more marginal tax rates above a high threshold, you very well would hurt the poor in the long run, in my opinion. The only thing left to argue is where the optimum tax rate is for all factors involved, actually is. I hope you are not going to go back to square one and start arguing again that there is no limit to which we can soak the rich without any negative consequences at any point of taxation. I can accept the fact that we all must argue where that point is, but I am simply trying to establish the agreeement that there is a point.

Well, to be honest, I don't know how much effect it will cause. I just think we need to admit to the possibility and consider it. I differ from some Republicans, apparently including George Bush, that we can continue to institute new government programs, without paying for them. I am for lower tax rates, but I am also in favor of the federal government doing less, so that lower tax rates can be utilized. I am also unsure at what point, higher tax rates will actually lower revenues, and I suggest we are closer to that point than you believe. I think, however, that you have finally admitted that such a point may exist, but is probably much, much higher than where we are now.