Saturday, September 24, 2011
Monday, September 05, 2011
"Central economic planning can't work, explained Hayek, because no small number of people at the top, however brilliant or informed, can aggregate all the trillions of pieces of data needed to plan an economy well. The main information that matters in real time is what Hayek called "knowledge of particular circumstances of time and place" and this information is necessarily decentralized: it exists only fleetingly in the minds of millions of people.....Hayek's argument applies whether the good being produced is food, steel, or internal security. In fact, in her testimony before the 9/11Commission, Dr. Rice explained the problems with centralization eloquently;
You have thousands of pieces of information . . . and you have to depend to a certain degree on the intelligence agencies to tell you what is actually relevant,
what is actually based on sound sources, what is speculative.
The lesson of September 11 is not that government should plan better and not that a Republican president plans better or worse than a Democrat president. The lesson of 9/11 is that central planning doesn't work and that government should not get in the way of our planning. " LINK
In addition to the 'knowledge problem' discussed above, Sobel and Leeson have identified several other issues with the top down approaches in homeland security regarding incentives, the tragedy of the anticommons, and type II error policy bias. Absent market prices, how do we deal with these issues? Attempts to address these problems, to some extent, can be found in scholarship related to homeland security and federalism:
"an agency that forms partnerships with state and local governments instead of coercive top-down regulation-heavy regimes is an appropriate response on the part of the national government to deal with the particular needs of all the other governments in this country. Further, this agency should work at giving state and local governments as much flexibility as possible in dealing with own-source challenges. By facilitating cooperative networks of communities/jurisdictions a far more realistic and pragmatic approach to all hazards preparedness is a logical outcome. The national government should provide the organization around which such networking might take place." –Homeland Security Affairs VI, no. 2 (May 2010) – Sam Clovis
"The financial crisis invalidated a naïve notion of "efficient markets," but the most sophisticated version is still viable. Whereas the invalidated version holds that markets never err and always adjust instantaneously, the sophisticated version, associated with the ideas of Adam Smith and F. A. Hayek, holds that markets mobilize individuals to realize gains from trade and to innovate and thereby produce generalized prosperity."
"I prefer true but imperfect knowledge, even if it leaves much indetermined and unpredictable, to a pretence of exact knowledge" - F.A. Hayek
"In the 1940s, Hayek warned his fellow economists of the misleading standards of perfect competition and static efficiency in assessing the market economy. As he wrote in Individualism and Economic Order, "[T]hese adjustments are probably never 'perfect' in the sense which the economist conceives them in his equilibrium analysis. But I fear that our theoretical habits of approaching the problem with the assumption of more or less perfect knowledge on the part of almost everyone has made us somewhat blind to the true function of the price mechanism and led us to apply rather misleading standards in judging its efficiency" (1948, 87)"
"The great free market economic thinkers from Adam Smith to F. A. Hayek never argued that individuals were hyper-rational actors possessed with full and complete information, operating in perfectly competitive markets.... Efficient markets are an outcome of a process of discovery, learning, and adjustment, not an assumption going into the analysis."
Friday, September 02, 2011
tax increases to be highly contractionary with a negative effect on investment
Alesina, Alberto and Silvia Ardagna (2010) "Large Changes in Fiscal Policy: Taxes versus Spending" In Jeffrey Brown, 2010. "Tax Policy and the Economy, Volume 24," NBER Books, National Bureau of Economic Research.
Fiscal stimulis based on tax cuts increases the probability of future economic growth greater than spending
Carroll, Robert, Douglas Holtz-Eakin, Mark Rider, and Harvey Rosen (2000) "Income Taxes and Entrepreneurs Use of Labor," Journal of Labor Economics, 18 (2), April pp. 324-55
Increases in marginal tax rates reduce the probability of future increased hiring and are associaed with reduced growth in wages.
Gruber, Jon and Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, vol. 84(1), pages 1-32.
Finds a very elastic response for incomes over $100k, (.57) with an elasticity of about .17 for incomes < $100k.
Gentry, William and Glenn Hubbard (2000) "Tax Policy and Entrepreneurial Entry" American Economic Review, vol. 90, pp. 283-287.
Finds a significant increase in entrepreneurial activity when tax rates are less progressive.
Djankov, Simeon, Tim Ganser, Caralee McLiesh, Rita Ramalho, and Andrei Shleifer, (2010). "The Effect of Corporate Taxes on Investment and Entrepreneurship," American Economic Journal: Macroeconomics, vol. 2(3), pages 31-64, July.American Economic Association.
"our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity"
The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act Martin Feldstein Journal of Political Economy
Vol. 103, No. 3 (Jun., 1995), pp. 551-572
Estimates the elasticity of taxable income to range from about 1.0 -3.
Lindsey, Lawrence B. 1987. "Individual Taxpayer Response to Taxcuts, 1982-1984." J. of Public Economics 33 (July) 173-206
Found elasticity of taxable income by income category to be .728 for income > $50k, 1.023 for >$100k, 1.413 for >$250k, and 2.0 for > $1 million. Also derived the tax revenue responses to reductions in marginal taxes for those earning more than $200k / yr. Revenues increased by 19% in 1982, 35% in 1983, 56% in 1984.
WHY DO EUROPEANS WORK (MUCH) LESS? IT IS TAXES AND GOVERNMENT SPENDING
Economic Inquiry, 2008, vol. 46, issue 2, pages 197-207
Why Do Americans Work So Much More Than Europeans?
Federal Reserve Bank of Minneapolis Quarterly Review
Vol. 28, No. 1, July 2004, pp. 2–13
Finds that taxes, and particularly higher marginal tax rates have a negative effect on labor hours.