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John Tamny comes to Liberty Law Talk to discuss his excellent new book Popular Economics. Many will recall the first time they read Hazlitt’s Economics in One Lesson. That book’s clear prose and striking examples provided a foundational introduction to free markets. But, as is often true, our practices are better than our theories. We instinctively grasp economics in our daily habits and choices but misunderstand the conditions and principles that support economic growth. Americans are confused about inequality, trade deficits, antitrust policy, fiscal policy, minimum wage, job creation, etc, despite pursuing their own economic self-interest without much thought.
Dispelling such confusion is John Tamny whose work will become the Hazlitt of our day. Using examples from the Rolling Stones to illustrate the folly of taxing capital gains, why common antitrust theories were exposed by the FTC’s blocking of the merger of Blockbuster and Movie Gallery just as Netflix was making both companies obsolete, and demonstrating why the explanations of the 2008 Financial Crisis strain to avoid the obvious factor of currency devaluation, Tamny gives us free market lessons that we can’t not know. Enjoy the interview and buy the book!
I can’t wait to read this.
Why don’t we have more consumption taxes as opposed to income or inheritance taxes?
It seems to me that people’s objections to inequality stem from this idea of the dislikeable “rich prick” who parades his wealth and spends lavishly, i.e., consumes extravagant amounts rather than investing those funds in the miraculous innovations that make everyone’s lives better. When someone’s income increases slightly, that extra income tends to go towards increased consumption, rather than investing or savings. On the other hand, behavioral economics will tell you that lump sums tend to be saved or invested, not immediately consumed. Is this a question of whether it’s better to consume or save?
YES, let’s please allow Hall and Rabushka to implement their Flat Tax proposal, which is FAR superior in every way to our current tax system as far as I can see!
I think the answer to your first question is that a consumption tax isn’t very politically viable, and here’s why. Income/Inheritance taxes are popular because they can be designed progressively (i.e, they impact the rich more). The intuitive way to do this with a consumption tax would be something like a tax on luxury goods like yachts, fur coats, nice cars, etc. However, these taxes aren’t usually implemented because they do a poor job of generating revenue for the government, because demand for such goods is highly elastic (It was tried in the US in the early 90’s, but it was cancelled after just two years). Ironically, this lack of revenue could be a sign that the luxury tax does do a good job of encouraging the rich to substitute investment for consumption, but policymakers were too concerned with revenue generation to care about the “rich prick” issue 🙂
Joe, the Hall-Rabushka Flat Tax is a consumption tax (though they originally avoided this designation since the term had unpopular connotations in their day) which is progressive, and is also incredibly well thought out. I’ll be happy to lend you my personal copy if you’d like to read about it.
Could you post a link? It sounds interesting.
Here’s a link to buy the book: http://www.amazon.com/The-Flat-Tax-HOOVER-CLASSICS/dp/0817993118
There may be a summary that does it justice online somewhere, but the book itself is only about 200 pages which are diminutively proportioned.
Couldn’t you design a “progressive”-type consumption tax? For example, VAT on all goods (toilet paper, toothpaste, cereal), but a higher one on luxury-type goods (yachts, etc.). Perhaps a higher tax on inelastic goods could make up for the lost revenue on more elastic ones. This sort of tax would definitely be a nudge towards lifestyle equality, taking the attention off of income (in)equality.
Yes, it seems that Hall and Rabushka advocate just such a plan, and it does indeed seem less distortionary, and would do a better job of encouraging savings. I’m pessimistic about its chances of passing, though…
My professor in my Law and Econ class told me that Steve Forbes advocated for a flat tax in his presidential bids, but sounded like he didn’t know how it really worked. Wikipedia makes it sound like he did a poor job expressing himself on the campaign trail:
“His awkward campaigning style was considered to be a major factor in his defeat. Time Magazine called his stumping a ‘comedy-club impression of what would happen if some mad scientist decided to construct a dork robot’ and also described his campaign as ‘wacky, saturated with money and ultimately embarrassing to all concerned.'”
http://en.wikipedia.org/wiki/Steve_Forbes#Campaigns_for_president_and_major_issues
I find John Tamny’s brief assessment of the underpinnings of the 2008 housing and financial crisis to be refreshingly concise and lucid, along with the other topics he briefly touched on in this podcast. The notion that balancing the budget is not terribly important was hard for me to swallow, until he went on to say that we should be focused on cutting government spending (and taxes) instead in order to stimulate exponential economic growth. Economic growth really does seem simple when the market is allowed to do its own work with little government interference!
I found Tamny’s stance on the value of the economic intuition of the American people very poignant, and I think it’s true that the people who are more involved in politics or economics are the ones who have the worst ideas about how to promote growth, because they believe that their expertise should trump this intuition. I think that’s due in part to pride-people want to give off the impression that economics is hard, when in fact it should be very intuitive.
I enjoyed this podcast thoroughly. The beginning points Tamny makes is spot on. He begins to say that Americans do understand economics well from a metaphysical standpoint. He then goes on to say the political class and some economic academics are the ones out of touch with reality and economic laws. Tamny then goes on to say how income inequality is not as nefarious and atrocious as many economist’s narratives pushed onto the public. Americans understand that Peyton Manning is the best QB in the NFL and deserving of his contract causing him to make much more money than Matt Schaub and others. However, people seem to complain about the wealth of Steve Jobs and others even though these individuals provide great value to society with their products. Tamny then states that if countries would just follow the four basic economic concepts to growth, we would all be wealthier and better off. Tamny is correct when he points out the nature of government spending and how the state accumulates its resources from the private sector causing crowding out and less investment. I am glad Tamny defused the myth on “debt.” It is true that debt is just a way to finance expenditures, so debt is not necessarily the worst thing the government does as this happens with companies in the private sector as well. The real problem is the amount of money flowing into the government causing crowding out in the private sector. The money in the private sector sent to the government could have been put towards more productive uses, which would allow all of us to live much wealthier and technologically advanced lives. Tamny then goes on to state that not working as much as those in the past is a great thing! Free trade and creative destruction has caused this, which is wonderful.