Nominal Tax Rates Mean Nothing

Peter Diamond and Emmanuel Saez have an op-ed in the Wall Street Journal in which the two economists advocate for a higher top tax rate in the United States. How high? 50 to 70%. In essence their argument is that the higher tax rate won’t reduce economic growth. Here’s the meat of it:

In the postwar U.S., higher top tax rates tend to go with higher economic growth—not lower. Indeed, according to the U.S. Department of Commerce’s Bureau of Economic Analysis, GDP annual growth per capita (to adjust for population growth) averaged 1.68% between 1980 and 2010 when top tax rates were relatively low, while growth averaged 2.23% between 1950 and 1980 when top tax rates were at or above 70%.

Neither does international evidence support a case for lower growth from higher top taxes. There is no clear correlation between economic growth since the 1970s and top tax-rate cuts across Organization for Economic Cooperation and Development countries.

For example, from 1970 to 2010, real GDP annual growth per capita averaged 1.8% and 2.03% in the U.S. and the U.K., both of which dramatically lowered their top tax rates during that period, while it averaged 1.72% and 1.89% in France and Germany, which kept high top tax rates during the period. While in no way does this prove that higher top tax rates actually encourage growth, there is not good evidence from the aggregate data supporting the view that higher rates slow growth.

Frankly, I’m skeptical of their reasoning. After World War II the United States was the only major nation with a functioning industrial economy. The damage from war was still evident in the UK, France, Germany, and Japan for nearly two decades after the war had ended. That the U. S. should grow robustly while these economies rebuilt would be expected. That the growth would slow after these economies had recovered should also be expected.

American industries didn’t have a great deal of competition from British, French, German, and Japanese competitors for decades after the war and no competition whatever from Chinese competitors until after 1980. The circumstances really are different today than they were when the top rate at which we taxed income was 90%.

Additionally, the pattern of U. S. growth is drastically different from that of the UK, France, or Germany. I’ve published this information previously: U. S. growth has been remarkably steady over an amazingly long period while British, French, and German growth have waxed and waned. International comparisons are truly irrelevant.

Nowadays economics seems to be about telling a story. Drs. Diamond and Saez’s story is that high marginal tax rates produce growth. Note that the correlation they point out could also mean that higher marginal tax rates are more tolerable when growth is robust. That’s clearly not the story they’re telling so, consequently, they’re saying that high marginal tax rates produce growth.

Here’s my story. U. S. economic growth has grown incomparably throughout its history. However, on average over the last 50 years U. S. growth has been slowly but steadily slowing. From now on each additional bit of growth will require more investment in capital, time, energy, and so on than the bit that came before. Growth hasn’t stopped but it will be harder. The inference I draw from this is that government, like industry, will need to learn to do a lot more with a lot less and we’ll need increasingly more private investment and incresaingy more productive private investment as time goes on. I do not see how a very high, 70%, top tax rate fits into that picture.

Still, the federal government can’t go on as it has indefinitely without debasing the currency or causing people to lose confidence in it entirely. A higher nominal top tax rate may be necessary but that alone won’t be enough to right our fiscal ship. Healthcare spending, which is ruining not only the federal government but state and local governments, must not only be slowed but reversed. And the effective tax rates, particularly on the highest income earners, must be increased. Nominal tax rates mean nothing. A high nominal rate that nobody pays is just public relations not practical policy.

The two prospective targets for increasing the nominal tax rate are to limit the ways in which income can be shielded from the tax and reducing or eliminating tax expenditures. The Great White Whales of tax expenditures are the home mortgage interest deduction and the exclusion of employee benefits from income for the purposes of taxation.

As contentious as the top marginal rate is tax expenditures are even more so. That’s where the work is and where the solutions are to be found. Not in raising the top marginal tax rate as window dressing.

51 comments… add one
  • Icepick

    I’ll do Diamond and Saez one better. Since higher nominal tax rates CLEARLY create higher gorwth, I advocate a 100% tax rate on all income. The numbers are clear, and you can’t argue with math!

  • Icepick

    The previous comment was, of course, facetious. My actual plan for improving growth in the US economy is to encourage massive wars in Europe and the Far East.

  • You’d think that achieving a doctorate would teach people the difference between correlation and causation….

    Anyway, here’s my narrative: Those who advocate for specific tax polices and tax rates will inevitably fit their interpretation of the data to their policy preferences. If it’s higher taxes you want, then higher tax rates either stimulate growth or at least don’t damage growth. If it’s low taxes you want, then low tax rates are a primary driver of economic performance.

    I haven’t looked at the data in a while, but IIRC, there isn’t even much correlation between top tax rates and growth. This leads me to believe that the effects of taxation are small relative to other factors. I think one also has to consider circumstance – in other words the effect of tax rates isn’t a constant but depends on circumstances. For example, I doubt that a tax rate of 30% will have the same effect in a manufacturing-oriented export economy as it would in post-industrial service economy. That just gut instinct on my part, but in my experience the effect of various factors is rarely constant or linear.

  • michael reynolds

    Economics is theology: you find in it whatever you want to find.

    At risk of being derided as simplistic, I think we get economic growth from imagining things we want and then making them. Ships, railroads, cars, houses, refrigerators, food, cellphones, programs. I think we’ve run out of stuff we want. Not all of us individually, of course, but as a society. The remaining stuff we want amounts to filling in around the margins — a few apps or Facebook friends.

    What is the Big Thing we’re dying to build? We’ve given up on manned space exploration, we have too many houses, cars are great, we all have TVs and refrigerators. We have played out the search for more stuff. There is not a single damned “thing” I want. My son just had his 15th birthday. He also couldn’t think of any “thing” he wanted.

    Before I’m denounced as privileged, (duh) people in my bracket are the ones with the disposable income to buy “stuff.” If I’ve reached the end of the stuff search then we have a problem much bigger than marginal tax rates. Can’t build what nobody wants. The “more, more, more!” that’s been driving us since the end of WW2 is done, we have reached the end of that road, and now we need to figure out something entirely new.

  • Jimbino

    I agree that the deductibility of employee benefits represents a major market distortion. I don’t agree when it comes to the homeowner mortgage interest deduction, however.

    Here’s why: without the deduction, I (in a 40% marginal tax bracket) could grant my nephew (in a 0% or 15% bracket) a real cheap (or free) rent to live in my mortgaged extra home. His mother, my sister, could make the same offer to my son. We all then make out like bandits, since, although the huge rent break is to be taxed as income to each kid, the kid pays almost no taxes, while we elders deduct all expenses including property tax, depreciation, repair & maintenance, mortgage interest and so on at our 40% effective marginal rate.

    This leads to a huge tax savings compared to the alternative where the kid owned an identical mortgaged home even with the homeowner mortgage deduction in place, and an even huger tax savings if the mortgage deduction were eliminated.

    If the mortgage deduction were eliminated, the economic thrashing resulting from every family’s creating such an artificial situation would be entirely wasteful. And it wouldn’t have to be limited to families: you could arrange the same with Facebook friends!

  • steve

    I am with Andy. When you look at rates and GDP growth, the relationship is not very strong. Other factors are much more important. We should set tax rates to collect the amount of tax we want to collect. Decide what you want government to do, then pay for it. Taxes should be adequate to pay for what we want.

    @Michael- You will want to be healthy and pain free. There is a body of work that suggests that in a mature economy, health care, in some form, becomes the growth area into which people spend that excess cash.

    Steve

  • Drew

    My God. Boneheaded.

    First, the actual marginal rate is never mentioned in the so-called Professors editorial. The stated marginal rate can be 90% if deductions create a practical 40% rate. This of course was the case in 50s and 60s. Eliminate the deductions, and create a real 90% rate and you get the Beatles writing and singing Tax Man. And the Stones move out of England. Dopes. I guess they didn’t consult Diamand and Saez. See also: brain drains all over the world.

    Second, their citations of lack of lending for “start ups” shows why they are college professors, and not investors. No practical experience whatsoever. Start ups are all equity. (or maybe equity plus a small, collateralized, including personal guarantees, WC loan) It’s called venture capital. Get a clue. See also: The way Solyndra should have been financed.

    Look people. You own a business. Revenue is $100. Gross profit, at 30%, is thirty bucks. After SGA of $18 you have an operating profit of $12 dollars. (very typical numbers for those not familiar with a bread and butter manufacturing concern). Case A. taxes of 50%. Case B. Taxes of 25%. You make, net, $6 bucks, or $9 buckets. A fifty percent increase. Now factor in risk and perhaps financing costs. Would that change your behavior? It does for any sane businessman.

    Now personalize it. I can work this weekend- overtime – to make an additional $10 bucks, or I can go fishing or golfing or spend time with the wife and kids. Work or leisure. If the marginal tax rate is 50%, meaning you really are working for 5 bucks, not 10 bucks, what do you do? If the marginal rate is 25%’ and you are working for that extra $2.5 bucks what do you do? Scale the numbers, and look at percentages. Thats how people think, and react.

    Well, ask the unions, those bastions of conservative thought (snicker). They demand time and a half or double time to work overtime, instead of leisure. They talk a good game, but when it’s nut crunching time, and they have a pocketbook and work decision to make personally, they are conservative to the core. Duh.

    Which brings me to the hoary propaganda of these two totally dishonest profs. They cite the top 1%. They never stop to think that the rates they propose on the top 1% are a dishonest diversion. Would Sean Penn make his next movie for $10 million, if he made only $5 million net, vs $7 million? He might. But I bet his agent would be arguing to the matt to get paid more to cover the taxes. Heh. Heh. But some people won’t. That’s not good. Further, they know, but refuse to address in their editorial the elephant in the room. To really make dent in the deficit these rates they cite have to dig deep, deep into the upper middle class and middle class. This is a despicable Trojan Horse for a general tax increase. Shame on them.

    As for Michael. You know, I’m sure the same was said years ago. Why, everyone now has a great horse, air conditioning and central heat. Ice boxes for milk. The best buggy whips anyone could want? A 1000 sq foot box, er, house? My god, The wife doesnt have to iron, they have dry cleaners now. And have you seen this invention called color TV. Thats it……..Nirvahna. I’ve long understood Michael has no economic sense, but the arrogance that this is THE time in history when all needs have been met is stunning.

    Gimbino.

    I’d be careful of the scenario you paint. Mr Aye, Mr Are and Mr Ess may be knocking on your door.

  • michael reynolds

    @Michael- You will want to be healthy and pain free. There is a body of work that suggests that in a mature economy, health care, in some form, becomes the growth area into which people spend that excess cash.

    There are not a whole lot of new health services or health products for me to buy. The downsides of such things are too evident. In any case I doubt we’ll grow the economy off old farts getting tummy tucks.

    I know this isn’t something I can demonstrate, just an instinct, but in one thing after another — cars, appliances, homes, travel — there’s not a lot new going on. There’s a lot of minor adjustments at the margins. The country is aging, and to make it worse the coming generation is simply not buying into my generation’s “must have more and bigger” philosophy. If people don’t want “more and bigger” then we don’t have a line heading north we have a line staying level.

    If I have cash and there’s nothing I want to spend it on, how does the economy grow? If all my kids want is another .99 cent app, how does the economy grow?

  • I think we’ve run out of stuff we want.

    I gather you haven’t been to a Costco recently.

    We never want anything “as a society”. All wants are individual. With a strictly majoritarian government enough individuals can push the whole society any way they want to. In a liberal democracy with limited government of enumerated powers it takes more.

    Start ups are all equity. (or maybe equity plus a small, collateralized, including personal guarantees, WC loan) It’s called venture capital.

    I’ve known any number of startups that began with the credit cards (which are, as it works out, unsecured debt) of the principles.

    Drew actually brings up a very good point in his comment. There is no question in my mind that increasing the top marginal tax rate will slow the rate of new business formation. Slower new business formation over the last 20 years is one of the reasons the recovery in jobs has been so painfully slow.

    You will want to be healthy and pain free.

    Too bad there isn’t some industry that can do that. The healthcare sector certainly ain’t it. I agree that people want health and freedom from pain. The healthcare sector sells care not health and the relationship between care and health is, at the very least, not a straight line one.

  • michael reynolds

    but the arrogance that this is THE time in history when all needs have been met is stunning.

    Actually, Drew, history is marked by long, long periods of stasis. The assumption that growth is the norm is without foundation. It’s a relatively recent phenomenon. The historical norm is “same old, same old,” for centuries. Many, many centuries. You were born into a country that as Dave points out is unique in its growth. Unique, as in not the norm.

    Let me ask you something: what does my next car do that my current car doesn’t? Not a damned thing. Which is why when I thought maybe I should trade in my 2008 I decided, “Nah, why bother?”

    So, I can buy a new car and give a bunch a bunch of people jobs. But I have no reason to. So I don’t. And that’s a problem.

  • michael reynolds

    Dave:

    I love Costco. (I have the black card.) But I don’t go there because I want more, I go there because I want to spend less for the same, and because I want to minimize my shopping time. I’m actually choosing to reduce my choice, making do with less so long as its cheaper and convenient.

  • michael reynolds

    “It’s.”

    Look, just because “paradigm shift” is an overused phrase doesn’t mean it doesn’t sometimes occur.

  • Ben Wolf

    “Second, their citations of lack of lending for “start ups” shows why they are college professors, and not investors. No practical experience whatsoever. Start ups are all equity. (or maybe equity plus a small, collateralized, including personal guarantees, WC loan) It’s called venture capital.”

    If there’s one thing you can be sure of, and it’s exactly what I’ve been bitching about all this time, mainstream economists will invariably ignore finance. It doesn’t matter if they’re left, right or center. Somehow money, banking and investment just aren’t important enough to model.

  • Drew

    I’ve known any number of startups that began with the credit cards (which are, as it works out, unsecured debt) of the principles.

    C’mon, Dave. Tiny, and, at least before hitting the road right in front of the bill collector and with no shame became the American way, a permanent smirch on the credit record, and defect equity investment.

    Seriously, Michael. You make constant references to ancient history in making many of your points. Do you own a time machine in which you travel back to the wonders or horrors of days long gone? For example, you talk about racism or slavery as if it was a recent and uniquely American trait. It’s been around forever. And so it goes.

    On economic matters, do you think we could somehow discuss issues of the last, oh, I don’t know, 200, 100, perhaps even 50 years, as opposed to citing the world when most people tended their farms and hunted varmints for their meat? You do know there was this thing called the Industrial Revolution, right. Water, toilets, electricity, steam power, broad based education, transportation sytsems, information technology an sech? Why don’t you sit down for a second. I have news. We even landed some dudes on the moon. Cool, eh?

    I have a question for you, Michael. Go back in your time machine. After all, what more could you want than your radio and Victrola? I mean really. Push the time lever forward. What more could you want than your 12 inch TV, and then your 20 inch color TV…….and then your 65 inch flat screen hi def TV. And then this Internet thingy…..

    People with vision will never change; they keep moving forward. I’m afraid your vision of “stasis” pollutes most of liberal thinking. Let’s just stop everything just because I say so and im fine, and lets just whack up the spoils as the rest of humanity passes us by.

  • Drew

    De facto

  • Ben Wolf

    @Dave Schuler

    “From now on each additional bit of growth will require more investment in capital, time, energy, and so on than the bit that came before.”

    This is why I want to see truly massive public investment in basic research. It gives entrepeneurs many more opportunities to think up new products using the results. But instead we’ve been cutting basic research for the last decade and what’s left we’ve devoted toward weapons/universal domination.

  • michael reynolds

    I’m afraid your vision of “stasis” pollutes most of liberal thinking. Let’s just stop everything just because I say so and im fine, and lets just whack up the spoils as the rest of humanity passes us by.

    No, it’s just a vision of the future that is less about extracting some resource and turning it into an object of desire.

    Part of the problem is that we don’t have a TV to exchange for a Victrola. We don’t have a car instead of a horse. We have slightly better TVs and slightly better cars. In reality, the same TVs and the same cars.

    We do have terrific computers — in fact so good we need fewer planes and cars and TVs and books and schools. I just did a walk-about in Washington without getting out of my rocking chair. My 1000 dollar computer just saved me a plane trip, a car rental, a hotel room, room service and a camera. The same computer also saved me buying CDs or vinyl records, buying paper and pens, making doctor visits, going to the library and so on. My wife just “visited” a school in Ohio at zero cost, creating zero jobs.

    Now, you could argue that all those jobs lost in all those industries – hospitality, airlines, film manufacturing and developing, paper milling, etc… will be made up, somehow, but where’s your evidence? Are they being made up? Because it looks to me like they’re not. It looks to me like jobs are being lost all across the developing world in countries with bigger governments and smaller governments, higher taxes and lower taxes, some practicing austerity and others running up still more debt.

    Now, what about the countries that took on those manufacturing jobs — China and the others. Are they creating revolutionary new stuff we need and want? Or are they basically just taking advantage of a gap in development to pick up the buggy whip jobs we can’t afford to do anymore?

    I don’t do faith. And despite all the lovely numbers with their sense of solidity and realness, I don’t see anything but faith that somehow things will go back to normal, and somehow the future will be like the past 50 years. Just saying that something will come along, because something always does, and then insisting we confine our “always” to the post WW2 period, is faith not fact. Take out the housing bubble and the internet bubble and now the education and health care bubbles, what’s left that gives you such certainty that the recent past is somehow a prologue to a wondrous future of ever more stuff?

  • michael reynolds

    developing should be developed.

  • I agree that the deductibility of employee benefits represents a major market distortion. I don’t agree when it comes to the homeowner mortgage interest deduction, however.

    The purpose of the mortgage interest deduction is what? To encourage home ownership? Does it?

    Here’s the home ownership rate in Canada: 68%. In the U.S. it’s 67%. The U.S. rate peaked at the top of the housing bubble at 69%. In other words, two very different housing finance systems, one much riskier than the other, produced virtually the same home ownership rate.

    If we buy into the assumption that the Canadian attitude towards home ownership is the same as the American attitude, then absent the mortgage interest deduction, we should expect, after the market adjusts to a new reality, that nothing will change.

    The mortgage interest deduction doesn’t appear to distort the market for home ownership, it distorts the market for the types of homes we buy and it distorts the investment allocation decisions we make – money invested in home ownership is being taxed in the same fashion as money that is borrowed to invest in a productive enterprise.

    Time to get rid of the mortgage interest deduction.

  • michael reynolds

    One more thing. We are conditioned to believe in progress. But historically, and even in our own physical evolution, progress has tended to be spasmodic — periods of sudden change followed by periods of stability. Revolutions don’t go on 24/7/365 ad infinitum, they have forward rushes followed by stasis or even retreats. To pretend otherwise is either to ignore history or to imagine — speaking of arrogance — that the mere application of capital is sufficient to eliminate the rhythms of history.

  • Frankly, I’m skeptical of their reasoning.

    You should be.

    When WWII ended you had a populace that had, if anything, a worse standard of living than during all but the worst years of the Great Depression era. Resources were being diverted to be destroyed. Oh it wasn’t quite that simple, that was basically the process. Take resources that could make consumer goods or provide services, turn them into munitions, send them off to war and there those things, by and large, were destroyed.

    So the war ends and with it the idea of giving up various items for the greater good also ends. Now people want that stuff they’ve been not buying for years. So the economic potential of the U.S. economy shifts from war to consumer goods and services.

    Is it any surprise that economic growth is high? Granted there was a period of realignment where you had a recession, but once that period was past things grew rapidly.

    I know the above narrative might not be that impressive, but think about. Since the about 1930/1931 people have been in an economic situation where they had to make do with less. First it was due to the Depression then WWII. That is a good 15 years of lowered consumption. And what is one of the largest components of our economy? Personal consumption expenditures (PCE). Is most PCE done by the wealthiest 1%? No. Most of it is done by, well…most of us.

    I think Dave’s points about the competition from places like Germany, Japan, China, etc. is valid, but of secondary concern since it is consumption spending that is one of the main drivers of our economy. And too the extent that we could also meet demands over seas that would help our economic growth here as well.

    And the above explanation fits well with this from Dave,

    Here’s my story. U. S. economic growth has grown incomparably throughout its history. However, on average over the last 50 years U. S. growth has been slowly but steadily slowing.

    You have high growth initially due to lack of consumption for nearly a decade and a half. You also have high growth due to the lack of competition from foreign economies. As that initial burst of consumption fades and foreign economies rebuild you’ll see economic growth slow.

    And we could probably look at tertiary factors as well. We have more environmental regulations that ever before as well. This isn’t necessarily a bad thing, so don’t get me wrong here thinking, “Oh here we go again on the enviro stuff….” My point is that while more environmental regulations might improve the environment (a good thing) nothing is free and one of the costs might be lower rates of economic growth (a bad thing).

    So, if we reset the top marginal tax rates to 70% will Ward and June Cleaver reappear and give us Wally and the Beaver again? I doubt it very much. Will it mean economic catastrophe? Probably not, but I’m skeptical that it will lead to more growth and a better situation than we are currently in.

  • PD Shaw

    Drew, History is bunk, is it?

  • Drew

    “If there’s one thing you can be sure of, and it’s exactly what I’ve been bitching about all this time, mainstream economists will invariably ignore finance. It doesn’t matter if they’re left, right or center. Somehow money, banking and investment just aren’t important enough to model.”

    I’m just a simple farm boy from Indiana who stumbled into the buyout business. But if there is one thing I know like the back of my hand it’s the lower middle market buyout/management/finance/job creation business. I know it like the back of my hand. And the things I sometimes read here, or other blog sites, or from Fearless Leader……variously make me want to laugh, throw rigid, high density objects or cry.

  • Drew

    “No, it’s just a vision of the future that is less about extracting some resource and turning it into an object of desire.”

    Playing angel, are we?

    “we have slightly better….”.

    Heh. Well, you are in the creative arts. I have an ultra, ultra, ultra, embarrassingly ultra high end stereo system. Have you ever heard Caruso sing? The recordings are crap. Now imagine my system reproducing Caruso, if recorded in modern day. Imagine current well done recordings reproduced on my system. To die for. As I’ve noted before, if great opera doesn’t make you cry, you have no soul. On my system, you are there in the hall. You would have us think it’s all the same. Balls.

    Balls II. Revolutions don’t go on 24/7/365…… You truncated your very limited business thinking at capital, Michael. You forget, Michael, I started my career as a process engineer. Most people don’t know what that means. It means you are on the manufacturing plant floor thinking quality, cost, productivity every day. It might not be revolutionary in the sense of Facebook. But every day it’s how do I deliver to the consumer cheaper, more reliable, more features etc. if you don’t think this way the competition flys past, and you die. When we buy companies we ALWAYS look at the marketing and development engineering function. On the other hand, you could be Michael Reynolds and just advocate voting for Obama and they bail your sorry, tired GM ass out at taxpayer expense. Michael, you are floundering.

    Pd

    C’mon. Of course history matters. But let’s keep things real in the here and now, not before child labor laws.

  • PD Shaw

    @Steve V,

    I think the environmental regulatory problems are often misdescribed. Our system is too slow (and thus inflexible to deal with change), it is too arbitrary (and thus difficult for planning and subject to regulatory abuse) and it is too certain about difficult to measure or unmeasurable risks (and thus open to being caricatured as insane for studying issues like the regulatory framework for handling clean soil or the racism in locating a plant near people who need jobs).

  • steve

    @Drew- Yes, your numbers make sense. But, when you look at GDO through our history, it goes up at a fairly constant rate, though slowing lately, whether government was big or small. Whether taxes were low or high. No one (I hope) is saying that tax rates do not matter. We are saying they do not appear to be the most important factor in growth. As a case in point, our current tax rates are pretty low by post-War standards. Our economy is sucking.

    Here is something I do not understand. You can tell us why higher tax rates will make people not invest. You will all just play golf instead if your returns are not high enough. Yet, for most other people we see increased productivity, longer hours more educational requirements and income stagnation. Returns to productivity are going to management and investors. Why will workers continue to acquire new skills and become more productive when there is no return at all for them.

    Unintended consequences. Shouldnt we at least acknowledge that the combination of low interest rates, liquidity and low tax rates can lead to excessive risk taking? Risk taking that results in the public making up for losses.

    BTW, interesting Venture capital piece.

    http://noahpinionblog.blogspot.com/2012/04/venture-capital-is-sucking-your-money.html

  • michael reynolds

    Drew:

    Your stereo example is very weak, dude. It’s a marginal improvement on existing technology. The equivalent of saying that you now have a car that will go five miles an hour faster than your old car. You think we’re going to find millions of jobs out of marginally improved sound systems? Not exactly the Wright Brothers or the interstate highway system is it?

    You have offered nothing to describe the future that does not boil down to simple faith. You have faith, and that’s fine, you’re entitled. But it’s still just faith.

    What I see is that we haven’t really added many jobs in recent history. We haven’t improved standard of living much, either. Look at the improvement in living standards in the 50 years from 1910 to 1960 and compare them from 1960 to 2010. Look at technological advances in that same period. You really think we’re as far from 1960 as they were from 1910? And those people had the Depression in the middle of their 50 year slice of time, what’s our excuse?

  • Michael,

    It kind of surprises me you can’t think of anything. That said, I get what you’re saying and to a certain extent I agree. The laws of physics would seem to indicate there is an upper boundary on what can be accomplished technologically and I agree that the boom experienced over the last couple of centuries might be plateauing. On the other hand, I also acknowledge my own lack of vision and the demonstrated inability of humans in general to predict advancements and where they will lead.

    You’re also right about history and stagnation, but Drew has a point (made a bit obscurely) that conditions are different now. If new ideas can’t blossom in this era of wealth and openness, then maybe we have reached an end point.

  • michael reynolds

    Andy:

    I don’t think of it as an end point, just a different version of life. I’ve been trying to think of a good historical comparison and there are a number of admittedly imperfect ones where we reached fundamentally new versions of how we live and create and do business. At times in history wealth was acquired through plunder. That system went away. For much of history wealth was calculated in slaves or serfs. That system went away. Often wealth has been counted in rare minerals — gold, silver, diamonds.

    We see similar revolutionary changes in how we define work, how we define education, how we view the social contract and so on.

    Right now we are coming off a bit more than a century of incredible technological advancement. But there’s no guarantee that continues. No guarantee it ends, either, I’m not making that prediction. In that time we’ve managed to keep most people employed despite huge changes — the virtual elimination of farming and service as major employments, for example. But again: no guarantee that continues.

    Imagining that we can cause that trend to continue merely by application of sufficient capital and providing the right investment environment is, I believe, almost superstitious. A guy in the 15th century conceives of movable type, a guy in the 19th century works out germ theory, a guy in the 20th century figures out a way to fly — you can’t force or predict those kinds of things. Progress isn’t steady, it’s jerky. It relies on the slow accumulation of knowledge, luck, and on the flash of genius.

    And it strikes me as silly to assume that we will somehow always be able to employ everyone, especially given that we are not working toward that end but toward its opposite. We’re working feverishly to find more work for robots, not more work for humans. A Martian might look at this and conclude that our definition of success would be 100% unemployment. Would he be wrong?

  • Drew

    Your stereo example is very weak, dude. It’s a marginal improvement on existing technology

    No it ain’t. Maybe some day you can hear it. At the risk of sounding arrogant, it quite frankly is extraordinary. And there is an entire industry built around “The Absolute Sound.”.

    Steve

    Late. I’ll be back to you.

  • Andy

    Michael,

    Instead of a historical comparison, try science fiction.

  • Icepick

    Drew is closer to the truth on this matter than Reynolds. While it is harder to come up with new things these days (mostly because the low hanging fruit have been picked) it isn’t impossible. Plus, small improvements often precede big improvements. While the US space program has stagnated, commercial exploitation of space is just starting to really pick up. Companies like Scaled Composites and Planetary Resources represent huge potential new markets. One COULD look at them as simply an improved airplane company and an improved mining company (assuming PR is successful), but that kind of misses the point. It would be like thinking that a Toyota Camry is the same thing as an old Connestoga, only a little better. They are entirely different things despite performing the same basic function.

    Additionally, one of the big opportunities NOW that they didn’t have THEN is for integration of products. A smart-phone is the most obvious example of this trend. It isn’t just a phone that works kind of like a walkie-talkie, it is also a camera, a video camera, a video phone, a map, a music player, a storage device with huge effective capacity, a video game machine (such things DID NOT EXIST when I was born), a drawing device, a messaging device for text and other visuals, a word processor, a calculator (graphing, I’m sure, if you hve the correct app), and on and on and on. THIS IS NO MEAN FEAT.*

    Stating that a smart phone is just a minor improvement over what came before is incredibly blinkered. A smart phone is just one very visible part of what’s going on. (I imagine Drew or Schuler could go on at length about various innovations in manufacturing.)

    The internet and the WWW are stunning innovations.

    iPods don’t just offer a new way to listen to recorded music – they offer a huge quantitative leap forward in the experience of personal soundscapes. I remember listening to music on my office computer using the CD player. I always ended up listening to the same 6 to 8 CDs. I didn’t want all of them at the office and I couldn’t be certain which music I would be in the mode for, so I only had my absolute favorites at the office. Once I started using the shuffle feature on my iPod (something one couldn’t really do with earlier devices – software innovations can have huge impacts) I started remembering all the stuff I used to listen to. If soemthing came up I didn’t like, I just skipped to the next thing, no problem. Now my entire music collection travelled with me.

    The iPod isn’t as important an innovation as the transistor, but it took almost sixty years to get from the one to the other. Understanding and utilizing the prior innovations can take a long time, and it isn’t all that easy.

    The next big innovations will likely come from materials science. In fact, companies like Scaled Composites are still working out the applications from previous rounds of material science innovation.

    Just because you can’t imagine what new things will come along doesn’t mean anything. Did you know all these other products and services were coming? Did you know about smart sand? Prior to about a week ago did you know that someone was working on mining asteroids, not simply doing thought experiments about it but designing and building the tools and systems needed to actually mine them? What else is going on that you don’t know about?

    * Personally I miss the days of big heavy black phones from the AT&T monopoly and the disconnectedness this allowed.

  • Icepick

    Instead of a historical comparison, try science fiction.

    Jules Verne would have been a better predictor in the 19th Century than a patent office official who thought that everything useful had already been invented.

  • michael reynolds

    Ice:

    Actually I sing the praises of computers and by extension my indispensable iPhone. My point is not that nothing new will happen, but we can’t be sure it will.

    My second point is that nothing in the current thrust of innovation seems to be creating jobs, rather the reverse.

    Finally, I’m a skeptic when it comes to businessmen like Drew who seem to believe that our 15 trillion dollar economy, closely linked as its fate is with many more trillions in a dozen countries, is a sort of vast machine, an engineering project that comes with toggles and switches and all we need to do is get the right sequence of on and off and we can thereby ensure a future of job-creation.

  • I guess a lot of it comes down to what constitutes a revolutionary innovation and what is merely iterative.

    Personally, I think revolutionary innovation upsets the existing order. If we look at music, the invention of recorded music was a revolution. That revolution created a new industry. Recorded music got iteratively better and the industry that supported it did too. Then we got digital music, which is going to destroy the recorded music industry as we know it. To me, that means digital music is revolutionary. We’re still in the midst of that revolution as well as several others (I would say publishing in general and books specifically- would you agree Michael?). We don’t quite know how or when these revolutions will give way to iterative improvement.

  • Michael,

    I do think our society is not nearly as resilient as we’d like to believe. We are dependent on a variety of systems to survive, much less thrive, and I think it’s probably only a question of when a major disruption will occur and given a big enough and long-enough disruption we could experience a significant culling of the human race.

  • michael reynolds

    We’re still in the midst of that revolution as well as several others (I would say publishing in general and books specifically- would you agree Michael?).

    Very much so. And the publishing revolution, like the one in music, is largely a job-killer.

  • Very much so. And the publishing revolution, like the one in music, is largely a job-killer.

    Yeah, that worries me too. Maybe someday we’ll all end up like the people on the spaceship in WALL-E.

  • Personally, I think revolutionary innovation upsets the existing order. If we look at music, the invention of recorded music was a revolution. That revolution created a new industry. Recorded music got iteratively better and the industry that supported it did too. Then we got digital music, which is going to destroy the recorded music industry as we know it. To me, that means digital music is revolutionary. We’re still in the midst of that revolution as well as several others (I would say publishing in general and books specifically- would you agree Michael?). We don’t quite know how or when these revolutions will give way to iterative improvement.

    There is a term for this “creative destruction”.

    The problem is that with our political system those industries that face destruction can plead special cause and request subsidies and bailouts to keep them going long past the point they should have gone the way of the dodo. That is, ultimately, a waste and if anything prolongs the transition period (one that is often difficult as people move from one sector to another).

  • Drew

    Steve

    So I wanted to make sure I got back to you.

    But, when you look at GDO through our history, it goes up at a fairly constant rate, though slowing lately, whether government was big or small.

    I think we need to factor in productivity as a component in GDO, and then ask ourselves about employment. I think Dave has done an excellent job of highlighting the fact that average job creation, and perhaps GDO has been slowing for 50 years. This isn’t a flat out assertion, but I bet I’m correct (although parsing the data probably makes it impossible to prove…..and yes there have been ebbs and flows) that this coincides with the great growth in government. And government, as a general proposition being a less efficient machine than the private sector is a problem. Things don’t happen overnight in an economy

    No one (I hope) is saying that tax rates do not matter. We are saying they do not appear to be the most important factor in growth.

    No, there are many factors. Take my numbers for example. Tax policy won’t matter if people don’t want a product, or the cost to produce is so close to the customers willingness to pay that the business just doesn’t have any margin. We call those businesses or products solar energy, or, say, the Volt. (sorry, couldn’t resist). But look. You run a business. You know how hard it is to eak out two, three, five, seven profit margin points. And then by a flip of a switch the government tax man can strip you of all the gains, the expertise and the costs of that improvement…..plus. Only a fool plays that game.

    “As a case in point, our current tax rates are pretty low by post-War standards. Our economy is sucking.”

    No they are not, at least not the overall tax burden. Do we have to go through this again? Dishonest (not you) “analysts” cite the tax to GDP ratio. They fail to mention that GDP is substantially debt financed. It’s inflated. So the ratio falls. The real measure, taxes to income, is just about at an all time high. If you went out and bought a $5MM house and financed it with $3MM in debt would you be happy if the government came to you and said your tax to expenditure ratio is at an all time low, pay more taxes, even though your income was static? I don’t think so.

    “Here is something I do not understand. You can tell us why higher tax rates will make people not invest. You will all just play golf instead if your returns are not high enough. Yet, for most other people we see increased productivity, longer hours more educational requirements and income stagnation.”

    You are correct, this is the decision that investors will make. Capital has become so transferable. It will fly like the wind to seak returns….all over the world. Read the capital markets sections of the Journal or Times. I’m sorry thats the way the world works. But it’s the way the world works. Taxing capital is contraindicated, not a solution.

    “Returns to productivity are going to management and investors. Why will workers continue to acquire new skills and become more productive when there is no return at all for them.”

    This will get me in trouble, but….. Survival. First, see the comment on capital flight above. Then consider other immutable laws, like gravity. I wish I could fly, but it ain’t gonna happen. Why did hunters invent spears and learn to grow crops. Why did buggy whip manufacturers learn t o become auto mechanics. Why did Drew learn to be an investor, not a guy who made steel. No one is promised a rose garden, and boneheaded attempts to penalize job creators or capital only make the plight of those dependent on others worse. I know there is a school of thought that education doesn’t matter so much. (see the most recent food fight at OTB). But as someone who employs in multiple businesses, industries and geographies, I’m here to tell you the candidate pool generally sucks. I know that sounds harsh, but the pool sucks. Employees are desperate for great employees. They find them, they pay them. Aggregate statistics, in my opinion, only yreflect the overall pool, and of course in certain industries, wage advantages offshore. But I will tell you right now, “reshoring” is a real phenomenon that is occurring right now.

    “Unintended consequences. Shouldnt we at least acknowledge that the combination of low interest rates, liquidity and low tax rates can lead to excessive risk taking? Risk taking that results in the public making up for losses.”

    Separate issues. Risk taking is good. Rates should be market determined, not Fed manipulated, and tax penalty is no way to encourage sound investment. That’s just bizarre. Don’t tell the capital providers that taxes are the way to cure government bailouts.

    Follow my lead, and minimize the size and power of government, and tell the rent seekers and politicians to go to hell.

  • steve

    “But I will tell you right now, “reshoring” is a real phenomenon that is occurring right now.”

    Thanks for the response. No time for long response, but this struck a chord. My son does not know what he really wants to do, so right now he is basically a math/physics major. I have met a number of his classmates. The kids are awfully darn smart. They are working almost non-stop at school. Not a one has a tan, even with the warm weather. They all joke about not seeing people for days when they are working on a project. I dont know if that will necessarily translate into capable workers, but being bright and willing to work is a good start.

    Steve

  • Drew

    “Finally, I’m a skeptic when it comes to businessmen like Drew who seem to believe that our 15 trillion dollar economy, closely linked as its fate is with many more trillions in a dozen countries, is a sort of vast machine, an engineering project that comes with toggles and switches and all we need to do is get the right sequence of on and off and we can thereby ensure a future of job-creation.”

    Let’s set aside for now that this is a simplistic view and implicitly government-centric and redistributionist.

    The issue isn’t whether the global economy has become more complex or integrated. That’s a given. The issue is how we respond, and who best to respond. How to get more competitive.

    Let’s use an obvious sports analogy. So the New York Knicks have introduced a new player, coach and offensive philosophy. They have become a more viable competitor to the Chicago Bulls. I wonder if the Bulls can win another championship. Hey!!!! I know what we will do! Michael Jordan is rich as hell and doesn’t need another dime. Let’s cut his arm off. He will be less effective, he will get fewer endorsement contracts. Further, we will take 25% more of his remaining endorsements and give it to the Minnesota Timberwolves. After all, they need the money. We’ll just fix Jordans greedy ass. After all, it’s just spreading the wealth.

    Do you think the Bulls beat the Knicks?

    Back to business. Do you think the US beats China and India and Brazil……..?

    WTFU

  • Very much so. And the publishing revolution, like the one in music, is largely a job-killer.

    Creative destruction kills some jobs, but also creates new ones.

    Capitalism […] is by nature a form or method of economic change and not only never is but never can be stationary. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. […] The opening up of new markets, foreign or domestic, and the organizational delevelopment from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation […] that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.

    But the problem is this is not something people like. People like stability and even stasis. The idea of father following in his father’s steps and having his son follow in his steps. But stasis is, when you get right down to it, death. You can’t have a vibrant and resilient economy that is stagnant. The two concepts just don’t go together. The two words vibrant and stagnation are pretty much antonyms.

    But stagnation is what politicians like as well. Because it makes people feel good and comfortable and safe. The idea of getting up in front of thousands of people and saying, “I don’t know what the future holds exactly in regards to the economy. We have a dynamic economy where things changes. Sometimes slowly, sometimes quickly. And people often have to find their own way.” Instead we a political system that is instead becoming more and more parentalist. Preventing these unpleasant changes as much as possible.

  • steve

    Poor analogy. Try this one. The Bulls won last year. Let’s give Michael 50 mill a year instead of 25 mil. Let’s keep everyone else’s salary the same, or lower. What happens? How many championships does he win w/o Pippen? (Never talk basketball with a Hoosier.)

    Steve

  • Icepick

    We’ll just fix Jordans greedy ass. After all, it’s just spreading the wealth.

    They DID fix Jordan’s greedy ass – they let him buy the Bobcats.

  • Drew

    They DID fix Jordan’s greedy ass – they let him buy the Bobcats.

    Now THAT’s good.

    It’s really not a poor analogy, Steve. In any competitive endeavor you don’t penalize the best in an attempt to help the also rans. You can’t expect to compete with China by harming the best in the US, just so the groupies and hangers on in the US can get a piece. You just can’t. It’s a death spiral. It’s going to get painted unfavorably in the upcoming election as “social Darwinism” and will probably go unchallenged in the MSM. But it’s just foolish. Fork those of us who really care about the Average Joe, not just flimsy words about caring, we will look to make t he US economy as vibrant and full of opportunity as possible.

    I may be getting old, but I simply do not recall, not once, Michael Jordan saying “you know, I’ve got enough championships, I’m going to miss this shot and give others a chance. Spread it out, you know.”. Not once. The Chinese won’t either.

  • In the past 50 years two new unsophisticated players came into the general economy — blacks and women. That accounts for the growth in government services.

  • Drew came from a typical Indiana white middle class family. Sure, you’d go far. The odds were stacked for you, even in the 70’s. That’s not to detract from your achievements. it is what it is.

  • michael reynolds

    Creative destruction kills some jobs, but also creates new ones.

    This again is an article of faith. You believe it, but you can’t prove it. Nor can you demonstrate that it must necessarily work in the future. reiterating it doesn’t make it any more a fact or less an article of faith.

    Let’s say for example that we set out deliberately to transfer more work from human to machine. We put huge resources behind it. According to your faith we would both succeed and fail. We’d succeed of course because capitalism works. But we’d fail because of creative destruction. That’s a little too quantum for the real world.

  • steve

    ” You can’t expect to compete with China by harming the best in the US, just so the groupies and hangers on in the US can get a piece.”

    Harming? The “best” in the US have sen their income triple while everyone else has seen their take home pay stagnate. What does the country as a whole have to show for that? So, do we double down? Do we follow the same policies that have lead to growth limited to a small group of people? Why will it be different this time?

    Steve

  • michael reynolds

    Steve:

    Don’t you understand that the 1% are the true victims?

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