As always, Tyler Cowen offers really valuable, provocative, appealingly scattershot observations in a post titled “How rich are we?,” riffing on a similarly insightful post from Arnold Kling. Kling makes the following observation:
Within economics, it is not so easy to come up with reasons why we are not as rich as we used to think we were–that is, reasons that what we produced and consumed in 2006 overstates what we can produce and consume going forward.
and he quickly moves to one of my fixations, the mismeasurement of public spending:
Mismeasurement. For example, as Cowen points out, government’s contribution to GDP is measured as the cost of the inputs employed rather than the value of the services produced. If costs are high relative to value, this means that national income is overstated and government consumption is in some sense unsustainable.
To make a forehead-slappingly obvious point, it could be that we no longer want to consume in 2010 what we produced and consumed in 2006. This is why I worry about propping up the housing and automobile sectors. It could be that we want smaller homes that are closer to our jobs, and more fuel-efficient vehicles. And so crudely recreating the economy of 2006 through the use of subsidies will most likely make it harder to transition — it delays the painful liquidation of boom-era malinvestment, the “cleansing” process Raghuram Rajan references in Fault Lines.
Many wonks like the idea of raising the gas tax, and I do too. But the problem is that many households with children earning about $50,000 a year don’t have the resources to adapt their auto-dependent way of life quickly and painlessly. And so a steep rise in the gas tax without any means of helping them adjust is a recipe for economic pain and, more to the point for politicians, electoral disaster. This is a microcosm of some of the broader shifts we need to make as a society to accommodate broad shifts in tastes, preferences, and skill distributions in an increasingly globalized labor pool.
On to Tyler:
The problem is not in reattaining the 2006 level per se, but rather that people in 2006 expected an entire future path of growth which now appears further away. They made plans based on these expectations and we are not yet in a position to make comparably luxurious plans. Ireland is an extreme example of this point and do note that their capital stock has not been destroyed.
I agree completely. Parochially, think about a young person who just finished a JD from an expensive law school and now finds herself in a bind: the lucrative jobs she envisioned are no longer there, yet she faces a punishing debt burden. Again, not the most compelling sob story, but this is happening to sober, responsible gratification-delayers — it’s worse for others.
As I’ve written elsewhere, I remain an optimist about the future path of utility, though perhaps not gdp. Many of today’s innovations improve people’s lives directly, without necessarily generating much revenue or employment.
This is also very true, and one wonders about the implications for how we tax and spend. In Saving Capitalism from the Capitalists, Rajan and Zingales suggest that property taxes are superior to income taxes because they encourage the highest value use of property.
Some readers may wonder why a free market in land will not lead to the efficient allocation of resources. In other words, why doesn’t the efficient son of the soil not buy out the incompetent writer? The problem is that the writer gets psychic nonmonetary value from the land that makes up for her incompetence at farming. This psychic income is not taxed. As a result, even if her psychic income does not make up for the lost monetary income, the son of the soil will find it hard to buy her out. Under the current tax regime, psychic income does not make up for the lost monetary income, the son of the soil will find it hard to buy her out. Under the current tax regime, psychic income is tax exempt while anyone who produces monetary income faces the full burden of taxes. So everything else being equal, the producer of monetary income is willing to pay less for a piece of proerty than one who enjoys psychic income from it. Similarly, the current tax regime subsidizes the survival of incompetent businessmen who get personal value from running their firms. A change from taxes on the income generated by property to a tax on the value of property itself will avoid these inefficiencies.
What happens in a world defined by rising psychic income inequality? I’m desperate to think more about this question. It has interesting and weird implications.
Tyler ends on an optimistic note:
I’m still an optimist about the much longer run, whether for utility or gdp. In fact the greater the current labor market troubles, the greater the long-run “human capital dividend” from reallocating resources. Sooner or later, we’ll have another burst of important innovation, comparable to that of 1870-1940. We just don’t have it now.
This sounds right to me as well. But yes, it’ll take a while.