Conservatives have a lot of Galt

John Galt, that is.

As Stephen Colbert explains, wealthy Americans are turning to Ayn Rand's "Atlas Shrugged" in response to the Obama administration's recent taxation and spending plans:

The Colbert ReportMon - Thurs 11:30pm / 10:30c

The Word - Rand Illusion

Colbert Report Full Episodes
Political Humor

Rap Battle
NASA Name Contest

Galt's character, disgusted by a government that heavily taxes the wealth producers in society only to waste their money on "moochers", calls for a general strike on behalf of the rich and talented.

Of course, it's tempting to draw comparisons to today. Barack "spread the wealth around" Obama is planning on increasing marginal tax rates on the wealthiest 2% in order to fund more generous social welfare programs and public goods.

But will this plan lead us to a Galtian world where the rich go on strike? In a word: no. Labor economists look at a measure known as the "labor supply elasticity of income", which is simply how much more people are willing to work if their income goes up (and conversely, how much less people are willing to work if their income goes down). The argument espoused by Michelle Malkin, Sean Hannity and other conservative pundits shown in the Colbert clip, is that this elasticity is high - if you increase taxes on the rich, they will decrease their labor by a lot, which will hurt us all. If high wage workers deprive the economy of their labor, then who will create wealth?

Empirically, this case is tenuous. For example, economist Robert Frank cites work by Fran Blau and Larry Kahn, who find that:

"the labor supply curve for men has been essentially vertical [which means a low elasticity] for many decades. The clear implication is that higher taxes on top earners, most of whom are men, will not significantly reduce work effort."

Similarly, Bruce Kaufman and Julie Hotchkiss, in their widely read text book The Economics of Labor Markets, survey the research and conclude that changes in tax rates during the 1980s did not cause large changes in labor supply, despite the theoretical evidence that it might.

Rand's novel is something of a libertarian version of The Communist Manifesto. The idea that high-wage workers will withdraw from society and form their own utopia is no less fanciful than the idea that low-wage workers will unite and create a socialist paradise.

Further, Atlas Shrugged may not be the best metaphor for our current situation. The popping of a $6-trillion housing bubble showed us that a great deal of wealth "created" by the John Galts on Wall Street was nothing more than an illusion. When financial assets were over-valued, so were the value of people who produce those products.

Ultimately, the lesson here should be one of humility. Consider what Will Wilkinson takes from the book:

"In the individual case, “going Galt” smacks of a kind self-aggrandizement in the same way that climate smuggery does. Because, really, your marginal contribution doesn’t matter that much...

By the way, Atlas buffs, the point of Atlas Shrugged is not that you are John Galt. The point is that you are not John Galt. The point is that you are, at your best, Eddie Willers. You’re smart, hardworking, productive, and true. But you’re no creative genius and you take innovation — John Galt — for granted. You don’t even know who he is! And this eventually leaves you weeping on abandoned train tracks."

Then again, if Michelle Malkin and Sean Hannity go on strike, you won't hear me complaining.

Stuck in the middle

Harold Mayerson is a Washington Post columnist and an actual, real-live socialist. Russ Roberts is a George Mason University economist and an actual, real-live libertarian. These two recently took part in a discussion on the use and abuse of the term "socialist" in politics today (here's the Windows Media Player file and here's the Real Player file).

Many interesting points come out of this talk, but here's the takeaway:

• Despite all the talk about socialism, the Obama administration is committed to private ownership of industry (see their resistance to nationalizing/re-privatizing the banks)
• Despite all the talk about free markets, George W. Bush was not a libertarian (see his steel tariffs, budget expansion, Medicare Part D, No Child Left Behind, etc)

Other democracies around the world support multitudes of parties (Israel, a country of 5 million people has 12 different parties currently represented in the Knesset. Another 21 ran but didn't meet the electoral threshold). This often means that a wide range of opinions are represented in government. Most European countries have socialist (and even communist) parties in governing coalitions. By contrast, American politics is mostly about the center right vs. the center left. Real socialist ideas, like government ownership of major industries, are not really on the table; neither, for that matter are real libertarian ideas, like privatizing schools.

For better or for worse, our politics is stuck in the middle. If you want real socialists (or real libertarians) in the mainstream, go somewhere else.

Who are you calling Socialist?

If I didn't watch Fox News, I'd have no idea that we were in the midst of an American-version of the Russian Revolution. Didn't you hear? The new administration is looking to turn our country into a worker's paradise! As Mike Huckabee lamented to the Conservative Political Action Conference, “Lenin and Stalin would love this stuff.”

In the interest of fairness, moderate conservative David Brooks gave the Obama administration space to respond to these accusations. Here's Brooks' recap of what they said:

"In the first place, they do not see themselves as a group of liberal crusaders. They see themselves as pragmatists who inherited a government and an economy that have been thrown out of whack. They’re not engaged in an ideological project to overturn the Reagan Revolution, a fight that was over long ago. They’re trying to restore balance: nurture an economy so that productivity gains are shared by the middle class and correct the irresponsible habits that developed during the Bush era.

The budget, they continue, isn’t some grand transformation of America. It raises taxes on energy and offsets them with tax cuts for the middle class. It raises taxes on the rich to a level slightly above where they were in the Clinton years and then uses the money as a down payment on health care reform. That’s what the budget does. It’s not the Russian Revolution.

Second, they argue, the Obama administration will not usher in an era of big government. Federal spending over the last generation has been about 20 percent of G.D.P. This year, it has surged to about 27 percent. But they aim to bring spending down to 22 percent of G.D.P. in a few years. And most of the increase, they insist, is caused by the aging of the population and the rise of mandatory entitlement spending. It’s not caused by big increases in the welfare state."

I think it's time for conservatives to take a deep breath. Whether or not you like the Obama economic agenda, this is hardly a revolution. If the budget projections are correct, we'll soon be back to levels of government spending, budget deficits and marginal tax rates in line with the past 30 years.

Of course, there has been a lot of hand-wringing over the plan to raise the top marginal tax rate. But people forget that as recently as the Reagan presidency, the top marginal rate was 50%, 10 percentage points higher than what Obama is proposing. We've come a long way on taxes, baby.

Once more, with feeling...

Yes, I know I've already covered this. But for some reason, it just won't go away:



About half way through the interview, Barbara West quotes Karl Marx and asks "how is Obama not being a Marxist?" when he calls for changes in US tax policy. Later on she worries that Obama envisions turning America into a socialist country like Sweden.

Maybe some people are content with Barbara West's understanding of the history of economic thought. But for the rest of us, it's worth checking out the Concise Encyclopedia of Economics, a wonderful resource maintained by the Library of Economics and Liberty. According to them (and, well everyone else who actually knows what these terms mean), Socialism is "defined as a centrally planned economy in which the government controls all means of production". Examples of socialist countries throughout history include the Soviet Union, Cuba under Castro and China up to the mid to late 1970s. On the other hand, Social Welfare States like Sweden are not socialist, since they have private ownership of production.

This is not a minor technical issue. "Socialism" and "Marxism" are politically charged terms that evoke powerful images. Socialism failed as an economic model. Robert Heilbroner, himself a socialist for much of his life, was ultimately scathing in his appraisal of the idea:

"Socialism...was the tragic failure of the twentieth century. Born of a commitment to remedy the economic and moral defects of capitalism, it has far surpassed capitalism in both economic malfunction and moral cruelty."

Clearly, linking Obama to the failures of Socialism is a powerful political strategy. But we can get lost in the rhetoric. The following chart from the Wall Street Journal shows proposed tax rates by both McCain and Obama, as well as under current law:

There are clear differences between the two candidates on tax policy. But to put this into context, Obama favors increasing the top marginal tax rate to 41%, roughly the same as during the Clinton years and lower than under Ronald Regan.

Serious people can debate the merits of Obama's tax policy. Gregory Mankiw, for example, has raised some interesting concerns about the effect on work incentives. But unfortunately much of our national debate isn't conducted by serious people; it's conducted by people like Barbara West.

...and I guess I'm a socialist, too

I know, I know. I need to spend less time writing about stuff Sarah Palin says. But I swear, I can quit any time I want.

Sarah Palin recently criticized Obama's tax plan, saying, "this is no time to experiment with socialism". But is a little more income redistribution really "socialism"? Economists for Obama weigh in:

1. The definition of socialism to which most economists, poli sci types, etc, adhere is that socialism is that form of economic organization in which the state controls the means of production.
   
2. While there are some examples of this sort of thing in just about any market-based economy (geez, the government controls the military!), the idea that redistribution per se implies socialism is ridiculous. Hell, the second welfare theorem states that in a perfectly competitive economy (I bet that got the attention of all those neoclassical macro fans!), you can get to any desired (Pareto) efficient allocation with laissez-faire marginal tax policy and the right set of lump-sum...wait for it...redistributions! I guess in current parlance you might call that socialism the Arrow-DeBreu complete-markets way.

Trade theory works the same way. The idea is that there are winners and losers, but the winners win more than the losers lose, so they can compensate them.

For those of you who don't know, the Arrow-DeBreu model is the foundation of neo-classical microeconomics. While people typically think of economists as advocates of completely unfettered markets, a stroll through standard economic theory paints a more complicated picture.

And while we're on the topic of redistribution, would Sarah Palin like to explain why Alaska receives more federal revenue than any other state?