Life is too short to defend myself against all the silly, groundless attacks I run across in the blogosphere. So I am delighted when smart commentators like econ prof Scott Sumner help with the job. For Scott’s latest effort, click here. Thank you, Scott. Unfortunately, Scott has announced that he is taking a break from blogging.
A couple bloggers I follow have posted comments on my new paper with Matthew Weinzierl on optimal stabilization policy. Scott Sumner likes it. Paul Krugman is predictably snarky.
Update: Greg Ip of The Economist weighs in.
Some pundits, reflecting on the looming U.S. budget deficits, claim that Americans are vastly undertaxed compared with other major nations. I was wondering, to what extent is that true?
The most common metric for answering this question is taxes as a percentage of GDP. However, high tax rates tend to depress GDP. Looking at taxes as a percentage of GDP may mislead us into thinking we can increase tax revenue more than we actually can. For some purposes, a better statistic may be taxes per person, which we can compute using this piece of advanced mathematics:
Taxes/GDP x GDP/Person = Taxes/Person
Here are the results for some of the largest developed nations:
France
.461 x 33,744 = 15,556
Germany
.406 x 34,219 = 13,893
UK
.390 x 35,165 = 13,714
US
.282 x 46,443 = 13,097
Canada
.334 x 38,290 = 12,789
Italy
.426 x 29,290 = 12,478
Spain
.373 x 29,527 = 11,014
Japan
.274 x 32,817 = 8,992
The bottom line: The United States is indeed a low-tax country as judged by taxes as a percentage of GDP, but as judged by taxes per person, the United States is in the middle of the pack.
Update: This post has been more controversial than I expected. I am surprised because I did not say much here. I merely presented an identity and some data, which illustrated international differences in a novel (and, I thought, interesting) way. In any event, I thank Scott Sumner for coming to my defense.
According to a view common among macroeconomists, the Smoot-Hawley tariffs of the 1930s were a poor policy choice, but they were not a main reason for the severity of the Great Depression. In an interesting blog post, economic historian Scott Sumner calls the second half of this conclusion into question:
In the period around March and April 1930, there were a few “green shoots” in the economy. The stock market recovered a significant chunk of the huge losses in 1929. (I recall the Dow fell well below 200 during the famous crash, and got back up over 260 in April. The 1929 peak had been 381.) Then in May and June everything seemed to fall apart, and stocks crashed again. So what happened in May and June?
The headline news stories during those months were the progress of Smoot-Hawley through Congress. Each time it cleared a major legislative hurdle, the Dow fell sharply. This pattern was obvious to those following the markets, and was frequently commented upon. After it cleared Congress it went to Hoover. The President received a petition from over 1000 economists pleading with him to veto the bill. (A veto would not have been overridden.) Over the weekend Hoover decided to sign the bill, and on Monday the Dow suffered its biggest single day drop of the entire year.
Scott then goes on to propose an explanation of these events that can be viewed as consistent with the textbook Keynesian model. In particular, I interpret Scott as saying that the retreat from free trade reduced business confidence, shifted the investment function I(r) to the left, and thereby reduced aggregate demand.
One general lesson from his discussion is that it is often hard to distinguish shocks to aggregate supply and shocks to aggregate demand. Policies and events that adversely affect aggregate supply (e.g., trade restrictions) will often reduce the marginal productivity of capital, decrease investment spending for given interest rates, and depress aggregate demand as well. In the short run, the indirect demand-side effects of ”supply shocks” could potentially be larger than the direct supply-side effects.
This is something to keep in mind as our economy enjoys the beginnings of a recovery.
