How Markets Foil Collectivist Schemes

[Linette]

How Markets Foil Collectivist Schemes

Very important.

[Democrats_win]

1. This is very good especially why tax cuts for the rich are worthless.

The term "collectivist scheme" for "tax cut for the rich" seems odd, but once you think about it, it's appropriate.

[AX10]

2. Interesting. Please READ THIS.

There is a good amount to consider here.

[On the Road]

3. For All the Problems with "Collectivist Schemes"

this isn't really a very insightful analysis.

Whole collectivist societies or economies like the Soviet Union are not considered a viable option by any industrialized nation. (Although the experience of poor third-world countries like Vietnam or Cuba suggests that collectivist states provide better benefits for ordinary citizens than similar laissez-fare states.) So the relevant issues are individual programs like Social Security and universal health care.

The author cites the fallacy of composition ("all the members of a group will benefit from a certain behavior if a single individual clearly appears to benefit"). First, I don't know any serious argument for those programs based on that fallacy. Before Social Security, 50% of elderly people lived in poverty. It is now 10%. That is the strongest argument for keeping the collectivist policy of SocSec, and it is based on a large mass of people. Even those above the poverty line benefit.

The author seems to think that if an action would have a negative effect if every individual did it, it is bad policy to intervene in that area. This kind of thought experiment is not a very way to judge policy, which usually has only a moderate effect on people's behavior. It is true that if everyone saved all their disposable income, the economy would go into a recession. That does not mean that encouraging savings is bad policy.

In fact, the sometimes negative results from every individual pursuing his or her own good are exactly the reason that "collectivist" schemes are sometimes the best policy. Markets of all kinds can benefit from government intervention by smoothing economic booms and busts, providing a more efficient infrastructure (highways and the creation of the internet), setting standards, enforcing labor laws, and preventing monopolies.

He sometimes seems to argue against his own premise, eg, "if all firms are forced to give all of their employees an extra week of paid vacation, then none of them is actually hurt by the requirement." I agree with this under a "collectivist" law, but if businesses have an option, the most generous ones are penalized. And the employees benefit.

The author claims that business set prices most efficiently by setting the highest price that will allow them to sell out their supply of goods. This makes a certain amount of sense for commodities like oil or metals, but it has less and less to do with the modern economy. If demand for SUVs go up, GM quickly adds a second or third shift to make more. Is there a limit to the number of meals a restaurant can serve? And for products like music, movies, or software, there is not only no meaningful limit to the supply, but additional copies cost virtually nothing.

The author claims: "The purchasing power of your income is determined solely by its relative position amongst all accumulations of disposable income/wealth. Has the author even thought about different countries? A median income in the US is better than a median income in Nigeria. And it's better than the median income in the US eighty years ago.

His example of "everybody needs a tax cut" is also wrong. Giving everyone a tax cut does increase everyone's income -- the problem is elsewhere, in that it also increases the common debt.

I could go on. But the more I read over the article, the less sense it makes to me at all. I can hardly find anything at all worthwhile here.

Sorry for the rant, and for dumping on the article you posted, Linette. I hope you were really looking for honest discussion and reaction. :)

[Linette]

7. Sorry, ribofunk

Almost none of your criticism made any sense to me.

Looks like there's a big chasm between where Kroeger is and where you are. Somehow I think it will always be that way.

[nick303]

4. This article was shockingly un-profound

Basic principles James Kroeger needs to comprehend before he will be able to say anything "important":

* J M Keynes's explanation of MPC, MPS, Real/Nominal GDP

* The Laffer curve.

* ...that politicians operate under a vote maximization scheme, and thus will sometimes just say things that sound good to people.

[Linette]

8. nick303

After you get over your shock and awe, do you think you could bother to explain why you believe Kroeger doesn't understand MPC, MPS, etc.? Or is your understanding of economics so profound that I should simply accept what you say at face value?

[nick303]

9. Well, I've recovered from my shock and awe,

so let's get to it. I thought what I said was self-explanatory, but I can see how it might not be. I also have to say that my issue is not really with this guy's politics at all, it's with the fact that his article is the Internet-post equivalent of diarrhea. It's hard for me to figure out where to begin. I guess it started with the fallacy of composition that he starts riffing on at the beginning, which foreshadowed the pretension to come. To address that specifically, most economic models at some point experience a diminishing marginal return, making his first set of examples not wrong, but just incredibly uninteresting.

To address the bullets from my first post:

1) "What happens if all taxpayers receive an income tax cut ? Answer: none of them experiences any real gain in purchasing power."

If you lived in a closed economy with no government playing an economic role, and if the ranking were preserved, AND everyone had the same percentage change in income, this might be true. However, I can't think of anywhere in the real world where anything like that has ever happened.

The standard Keynesian equation is stated here:
Y = C + I + G,

where
Y = Real GDP
C = Consumption
I = Investment
G = Government spending

For simplicity we will assume our trade is in balance, and ignore the '+ X - M' that usually appears.
Also we will assume that the budget is in balance, that is that the government spends all of its tax income and nothing more.

So as an example let's assign some values to each, and state the marginal propensity to consume. You can multiply by a million or billion to make the numbers more life-like:

Y = 1000
C = 800
I = 100
G = 100
MPC = 0.8

So now if this government decides to cut taxes by 10, we see the following GDP and consumption changes as the effect ripples through:

Round__dY_____dC
1______0______8
2______8______6.4
3______6.4____5.12
4______5.12___4.096
and so on..

As the round approaches infinity, we hit a limit of 40. However you will notice that since a tax cut initially only affects the consumers' disposable income, there is no change in Y in round 0. We subtract the initial dC to yield a total gain of 32 to Y.

There is clearly a change that will affect consumers' spending power, whether it changes their rank or not. Kroeger fails to see the government as an economic actor within the system. He commits the same error in discussing tax cuts to businesses.

2) The Laffer curve is another analytical tool that Kroeger was either ignorant of, or conveniently chose to ignore. It consists of a simple, downward-facing parabolic curve, with Tax Revenue on the vertical axis, and the Tax Rate on the horizontal axis. You can see it here:

http://www.investopedia.com/terms/l/laffercurve.asp

Those in favor of tax cuts usually try to argue that we are too far to the right on the curve, and by cutting tax rates we would increase tax revenue. Things don't always go as they expected.

3) I don't think this needs any further explanation.

[dcfirefighter]

5. Failure to differentiate factors of production

Unlike the rest of the posters, I tend to agree with what has been said, with the caveat that you must view his statements with a global perspective.

If all employers worldwide were required to give 6 weeks of paid leave to their employees, the net effect wouldn't be that bad: however, those employers more dependent on paid labor (vs. land or capital) would be affected more than those less dependent on paid labor.

IMO, most collectivist schemes are a reaction to the privatization of the incorrect factors of production. I support a social safety net, however, i feel that collectivized retirement / wage sharing is less than optimal.

I feel that those things that can be reproduced are best NOT collectivized: services and manufactured goods.

Those things that cannot be reproduced: natural wealth, land, broadcast spectrum, etc. SHOULD be collectivized. Under such a scheme, other collective schemes would be redundant and harmful.

Note that the returns to 'ownership' of natural wealth are roughly 40% of our GDP, and removal of harmful collectivization (most taxes) would increase the GDP by 30% or more. - this would lead to 'sharing' more than $20,000 per person, in the form of government goods and services, or preferably, a cash dividend.

Furthermore, the price of goods and services, especially those that depend heavily on purchasing / occupying land, such as housing and real estate, would decrease, as would the fraction of earnings spent on other forms of land, such as oil.

It comes down to choosing the correct things to 'share' through taxation, and I'd like to point out that, following in the steps of the French Physiocrats such as Quesnay, the framers of the Articles of Confederation dictated that the revenue of the U.S. would be derived from the assessed land value of the several states.

[sendero]

6. In a global economy..

... this man's ideas are moot. Even if you could get everyone in the USA to do a particular thing, you couldn't get China to play.