Saturday, January 14, 2012

Those quiet rooms where we can discuss tax policy

"QUESTIONER: Are there no fair questions about the distribution of wealth without it being seen as envy, though?

"ROMNEY: I think it’s fine to talk about those things in quiet rooms and discussions about tax policy and the like."

I guess I should thank Mitt for this, what with the 2012 Tax Policy Colloquium starting in 3 days and all. We certainly plan on discussing distribution and tax policy in our quiet room in Vanderbilt Hall. This may be our first ever explicit endorsement by a leading presidential candidate.

Outside our quiet room, however, the comment has rightly attracted the mockery that it deserves.

Though it's shooting fish in a barrel, let me briefly explain why. Government economic policies matter because they can affect how well off people are. Each person might end up with more or with less, depending on what policy is adopted and on how it works out. It is analytically convenient to divide all this into issues of efficiency and distribution. Efficiency is the size of the pie. Distribution is how the slices are divided between different people. You're always facing distribution issues unless it is a pure Pareto (and hence efficiency) case in which someone could gain without anyone else losing. Those issues are pretty easy to resolve - it's not hard to like policies that would make someone better off and no one worse off. The rest of the time, distribution is a key part of the story, and often this is about richer individuals as opposed to poorer ones.

So there are two basic dimensions in economic policy, and one of them, which is involved almost single time, Romney says can't be discussed in public. Would he hire an architect to design his 11,000 square foot house, and say "We can only talk about the size of the house, and not about how we are going to divide up the space between the rooms"?

Another point, of course, is that the government cannot help but affect distribution. It's not a matter of deciding whether or not to simply retain the (wholly fictional) preexisting, non-government distribution. We aren't living in a state of nature, we're in an actual political and economic world with centuries of government policy and ongoing effects on everyone. The question isn't whether to address distribution or not, but what it's going to be, and how different distributional outcomes will be traded off given efficiency (size of the pie) differences between them.

Then of course we have Romney proposing huge tax law changes, not just for the quiet rooms but for the actual halls of Congress, that would include vast, unfinanced tax cuts for people like himself, and apparently tax increases for the bottom 50 percent. But he evidently thinks, from his political handlers, that the "envy" talking point will permit him to dodge discussion of what he wants to do distributionally.

And of course it's not just tax policy. The legal environment in which Bain Capital operated led to a set of transactions around the country that had various efficiency and distributional consequences, which are certainly fair game for discussion. Now, as it happens, I might agree with Mitt that allowing takeovers, refinancings, and plant closings is better than trying to ban them - although we should (a) seek to ensure well-functioning capital markets, without which all bets are off about the ability of a free market economy to yield value-increasing outcomes, (b) keep in mind the effects of tax biases that may have helped drive the transactions, such as that for debt over equity, and (c) consider what policies could help the people who are the casualties of the process. Is that envy too?

If you cannot defend your own policies in terms that have some connection to how you might actually rationalize them to yourself, and instead show the world that you can only defend them publicly in terms that are laughable and (since you must know better) insulting, then perhaps you are in the wrong business.

1 comment:

blissex said...

«You're always facing distribution issues unless it is a pure Pareto (and hence efficiency) case in which someone could gain without anyone else losing. Those issues are pretty easy to resolve - it's not hard to like policies that would make someone better off and no one worse off.»

That is wholly ridiculous in practical terms, you don't seem to think like a businessman who wants to maximize *her* profit and not your competitor's. If a businessman sees a policy that benefits a competitor, either she will seek a share of that pie, or she will try to kill it, because it does damages her business indirectly, but making her competitor stronger.

Unless «no one worse off» includes all possible future indirect effects and outside the economic sphere too, and there are no positional goods either, and ...

But then "better off" and "worse off" lose their meaning.

And by accepting the mirages of "pareto optimality" which have some meaning only within theoclassical models like Arrow-Debreu-Lucas (which contain well known gross mistakes and absurd assumptions to make-believe "worse off" and "better off" have definite meanings across all time) you have already made a pretty big political choice.