What if the actual conclusion is that it just doesn't matter. Growth is driven by other factors, like when a brilliant but insufferable physicist moves back home to be close to his mother , and is a function of individual, private firms performing functions of the economy more efficiently than existing incumbents. Tax policy follows as a consequence, and can go in either direction: either the newly-rich individuals think "Oh well, I've got plenty of money to spare, I can afford to burn some to ensure the people around me live decent lives", or they think "I want to keep more of this money to myself so I can decide how to allocate it." Regardless, wealth brings power, and so they have the ability to shape local government policy based on their particular worldview.
If this is correct, tax policy is a huge distraction, and if governments really want to jump-start growth they should be funding basic research, ensuring that the results are public (to their citizens, at least), and encouraging bright young people from across the world to immigrate to their jurisdictions.
If your tax rate is not the problem, then neither raising nor reducing it will fix the problem. Perhaps, in South Korea, the tax rate was not the problem.
We had absolutely massive demographic shifts over the initial decades of the 20th century, and you're seriously going to pick income tax as the culprit of crime rising? Compared to 1900, 1920s America had a much different identity.
Wish we had more historians hanging around here
For instance, the divorce rate in Maine in perfectly correlated to per capita consumption of margarine, but one doesn't cause the other (http://tylervigen.com/spurious-correlations) -- or, for instance, the Dick Act was passed just a few years before WWI but it certainly didn't cause that either.
PLACES TO INTERVENE IN A SYSTEM
(in increasing order of effectiveness)
12. Constants, parameters, numbers (such as subsidies, taxes, standards).
11. The sizes of buffers and other stabilizing stocks, relative to their flows.
10. The structure of material stocks and flows (such as transport networks, population age structures).
9. The lengths of delays, relative to the rate of system change.
8. The strength of negative feedback loops, relative to the impacts they are trying to correct against.
7. The gain around driving positive feedback loops.
6. The structure of information flows (who does and does not have access to information).
5. The rules of the system (such as incentives, punishments, constraints).
4. The power to add, change, evolve, or self-organize system structure.
3. The goals of the system.
2. The mindset or paradigm out of which the system — its goals, structure, rules, delays, parameters — arises.
1. The power to transcend paradigms.
It seems to me that subsidies and taxes are obvious ways to shift the mindset of the system or "transcend paradigms" since we know taxes actually influence behavior. Look at sin taxes on smoking in the U.S., which not only directly reduced smoking but in turn have helped fund anti-smoking propaganda, which together have helped the rate of smoking in the U.S. plummet. Is this what is meant by "transcending paradigms" or "shifting mindsets"? If so, doesn't that really mean that taxes or subsidies can be one of the most effective ways to influence an economy?
The purpose of the leverage points is to change the system at a fundamental level. Changing taxes doesn't (until you hit extremes) cause that. The system continues to behave in the same way but with increased or reduced constraints. Consider birth control policies. Eliminating birth control (making it illegal, so not really eliminating it) can cause an initial increase in children born until a new stable point is reached. Once you make birth control legal again, unless there has been a culture change in the interim, the birth rate will drop to the prior level.
Taxes and subsidies are the same. They don't change the system at a fundamental level (or don't do so easily), they only alter its external behavior. But once they're restored to their prior levels the system will probably return to its same behavior.
As a tax example: Perhaps we want to encourage people to save money for retirement, so we give them a tax break on their IRA contributions. This seems to help, people are saving more for retirement (as measured by IRA contributions increasing). We remove the tax break, do they continue to contribute (it's now a part of the culture) or do they stop contributing (they only did it for the tax benefit)?
If they continue, then you managed to create a substantive culture change. But most likely you'll get a drop of contributions.
There are a limited number of ways to have any substantial effect on a bottom-up system like the economy in a free society. You can pass laws forbidding some activity, or offering benefits to try to encourage some activity. You can raise taxes to make an activity prohibitively expensive compared to the desired alternative. You can educate (or propagandize) the population to recognize or believe something. You can conscript people and force them to behave in a certain way (tough in a free society). There aren't too many other options.
When we're discussing how to increase growth, it's not really helpful to say that we should ignore one of the primary levers we have to play with, because that lever isn't nearly as powerful as "changing the paradigm". Okay, great, but what specific actions should we take (i.e. what lever should we play with) to change the paradigm, other than the lever we're talking about?
Really, though, you have to use all the leverage points (or a subset of them). The point of the list was not: Which of these will achieve the desired external behavior the best? The point is: Which of these will actually alter the system itself so that it doesn't regress when removed?
Prohibition didn't eliminate alcohol consumption, it only changed how it was acquired. It made use of a number of the leverage points but fundamentally the US was still a nation of alcohol consumers. Tobacco use has been reduced in the US, but not eliminated, through education and taxes on tobacco products. Education (at least for my generation, now mid-30s) seems to have had a huge impact and actually changed the way it's viewed (so it achieved a paradigm shift).
To change the system (and maybe the paradigm) you'll have to use several of them. Raise taxes on the product (#12). Increase information flow about the consequences of tobacco use (#6). Reduce the positive feedback loop of using it by making it "uncool" (#7). Introduce alternatives that provide the chemical fix (nicotine) without (as much of?) the health consequences via patches and gum (#4).
To directly attack the paradigm itself, you have to use education and propaganda. Which will have varying effectiveness. For points #1 and #2 to be useful, you either have to be an individual with an open mind and the ability to introspect, or a learning organization. That latter part gets harder and harder the larger the organization becomes. A small team can alter its course more easily than a small business, which is more adaptable than IBM or the US population.
Anyways, it still seems to me that taxes are one of the primary tools we have to effect change, and the taxes themselves (individually or together with what we then do with the money generated) can fulfill most, if not all, of the categories on Donella's list.
You're right to call this out. It's the most difficult and elusive thing to achieve. However, it has been happening pretty continuously since the dawn of civilization. Thomas Kuhn sat down to study it in the 50's or 60's and published "The Structure of Scientific Revolutions." That book is one of the best treatments of this subject area to date. It is the book that popularized the term "paradigm shift."
to shape beliefs and discourse in the direction of a particular perspective or worldview.
think socialism versus free-market capitalism versus libertarianism. two-party politics in the United States could be thought of as a paradigm.
these are the types of paradigms under evaluation. altering one of these at this layer has cascading effects on policies etc.
1. is basically the ability to create effective think-tanks to shape beliefs and discourse.
What is the level of peer-support for this amongst mainstream economists? It sounds like woo.
Christianity -> Science is a notable example of a paradigm shift.
Hunter-gather -> Argiculture is another such shift.
It is woo. My translator says it means, "to invite me to do a TED talk, send a DM".
For an example of #3... I dunno, change the definition of GDP. That affects a ton of stuff.
That doesn't mean the list is bad -- I think it's powerful enough to try and articulate as many semi-distinct inflection points for a system as one can. Just that I'm not sure that the ranking is pure.
You can change the external behavior of an economy by increasing/decreasing taxes. But this may not alter the fundamental system itself.
Consider #9: Length of delays relative to rate of system change.
This is precisely what the Agile and Lean movements wants (OODA and PDCA loops). By reducing the delay (compared to Waterfall and comparable approaches) between doing something and getting feedback, they can adjust their processes and systems to meet customer demands more reliably. This is much more impactful than parameter changes (#12) which is: hire 10 more people, or give the best devs a 25% bonus. Those may help to motivate people, but they don't alter the fundamental system (ok, mass hiring can alter the fundamental system, but often not in the desired way).
On the other hand, introducing delays can stabilize a system. So reducing delays isn't the right choice for every circumstance.
Which could be accomplished by raising taxes.
Raising taxes, particularly in the US to pay for social services like healthcare and education would also have a huge effect on growth and productivity. It's not really the level of taxes that matters it's that you spend money on things that enabled people to pursue innovation/employement/art/etc and not get burnt out on administrative bullshit and constant stress from preventable things.
On the other hand commercial activities can be funded via issuing currency through fractional reserve banking - causing national and global asset bubbles with periodic recessions and terrible effects on growth and productivity.
I think we need to move to different mental models of both to advance past our current economically induced problems.
> commercial activities can be funded via issuing currency through fractional reserve banking
It's because the benefits of social activities cannot be captured and its value extracted. Commercial activity can - and therefore, there's motive for somebody to fund it to get richer.
Money is public credit and varies in quality depending upon what it is secured by. Broad-based sales and payroll taxes are the worst possible quality of tax which undermine their own base. Sales taxes destroy commerce and payroll taxes which shift the tax burden from old savers onto young workers make it harder for families to afford having kids as early.
Land value and property income taxes are the best quality of tax, because the state simply confiscates a portion of the free lunch which would otherwise be privately captured by landlords, without discouraging any productive economic activity.
Louisiana is an example of a state with very poor tax "quality": low property tax, large property tax exemptions for businesses, and high sales taxes. It has negative real GDP growth per capita.
The public is frequently malinformed by experts as to what taxes are the best quality, because many tax 'reform' advocacy organizations actually advocate that the governments use the worst possible quality tax because they hypothesize that it will cause voters to advocate for lower government spending.
That said, I agree that property tax is probably the least bad tax.
I don't think this is true except at very high levels of taxation.
The taxation styles and rates of the U.S. and the E.U have been wildly different for the last 40 years, but the growth rates have been very similar.
... which requires taxes, which makes tax policy not a huge distraction.
The entire DARPA budget is $3.44B this year, half as much as the wall that's currently shutting down our entire government, and less than 1/1000th of the total federal budget. The NSF gets $7.8B, a little more than the wall and about 1/500th of the budget. NASA gets $20B.
Other than that, I agree... NASA isn't getting enough funding. As are climate initiatives in the US. And the same goes for similar agencies and initiatives in the EU where I live.
I'm more skeptical about DARPA, but to their credit they're not just enablers of death; they're also working on some certifiably good stuff, like fighting human trafficking .
There are a lot of different ethical systems, but almost all of them consider killing people to be evil. Sometimes people quibble about whether killing people in self-defense or defense of others is evil, eg. "Would it be evil to go back in time and kill Hitler?" But note the asymmetry: it may be debatable whether killing Hitler is justified, but everyone save some very fringe movements believes that Hitler himself was evil.
We put up with nation-states because of survivorship bias. There are two kinds of people: those who live under the jurisdiction of a modern nation-state, and those who are now dead. From the surviving individual's POV, it's better to be the person for whom's benefit your country kills, than the person killed by them.
You're a female rape victim. The rapist broke into your house and performed said act. 6 months pass, and you decide to buy a gun (a glock, say) and take self-defense classes which include weapons training. You now stash the gun under your pillow at night, and you live alone.
Would effective self-defense (ostensibly, including the likelihood of killing a potential perpetrator) be evil?
I don't see how you get out of this puzzle.
The only thing I can think of is something like St. Augustine's argument that it can be sinful to do something, but still be a morally right act (or morally right thing to do). One of his points is that this is one of the perplexing aspects of the human condition.
But if we follow Augustine down this path, then we don't really end up with a conclusion that you wanted to drive at. You want to say putting resources behind a nation-state defending itself is evil, and is evil tout court. Augustine's argumentative path won't get you there.
Now, you could say individual self-defense is not the same as nation-state self-defense. That's fair. But, let's now walk our way down this path a bit. Is there a relevant and substantive difference between individual self-defense and the self-defense of a village of 50 native american indians soon to be snuffed out by Custer? How about 1,000? At what point do we say too many people in the collective ('nation-state') makes effective self-defense evil, in general.
This is too strong a claim.
At some point you just have to get a grip on reality.
Which is about 3.5 walls and about 1/200th of the budget.
The $5.7B that Trump is asking for isn't enough to build the whole wall, it's just the amount he wants now. Cost estimates for the wall vary but they're all larger than $20B.
The idea that higher taxes would bring growth is weird, religious, and the opposite of what should happen. It's the same as the discredited Reinhoff-Rogoff debt-to-GDP paper searching for an invisible force that punishes irresponsibility; the "Invisible Dad" as it were.
Shifting taxes to people who consume with a lower proportion of their income (the rich) to people who spend a higher portion of their income (the poorer) is good; but raising taxes on the rich without transferring it to the poor (either in direct payments, employment, or structural improvements) has to mean that you're transferring it out of the country. It's an identity; using personal debt to pay down public debt.
As for California in particular, I can tell you that their tax policy (along with all of their other policies, including firearms policy which is somehow more asinine than here in Canada, and their policy on corporate boards which is profoundly unjust) is a major turn-off for myself, and if you look at migration between states in the U.S, you'll find that a lot of other people feel the same way.
People aren't leaving California because of the weather, you know.
2010: -130,416 (net migration out of California)
Tax changes in 2014/2015: I didn't see any major tax changes .
Firearms policy changes in 2014: Long gun serial numbers required to be recorded on new sales. Police can confiscate guns from high-risk individuals for three weeks (signed in 2014, took effect in 2016). 
Firearms policy changes in 2015: Firearm Safety Certificate required for all guns (previously only required for handguns). 
Board policy change: Passed in 2018. 
My take: Migration out of California has increased, but it's not clear why. My personal guess would be cost of living.
2012 was the nadir of housing prices, and they've been rising rapidly since 2014.
Cost of living is a huge one, but a large part of urban California's cost of living has to do with consumer and [metropolitan] housing policy. It is exceedingly difficult to get anything built in major Californian cities, and once you do have it, the conditions for keeping it are onerous. The various committees and authorities in the state seem to regularly produce unjust outcomes (even from reasonable policies) and don't seem to care when they do.
I think people are broadly willing to pay higher state and local taxes *as long as the services they receive function well, and the outcomes are reasonable.
I understand your point, I just don't think you've provided the evidence to back it up. From where I'm sitting, it looks like you started with the conclusion ("I don't like CA policy") and then rationalized it from some personal experiences ("people like me are moving out of state"). 
California's population is increasing at the same rate as the US as a whole—about 1% per year—even after people leaving is taken into account. To put it another way, CA's population increases about 1.35% per year total, and about 0.35% move to other states. There's nothing particularly interesting going on with the migration numbers that I can see.
 Not implying that's what you said or actually think, just that it's what your thought process looks like to me.
I certainly did not provide much evidence to back anything up, you are right. I'm mainly just sharing my anecdotes: namely that I have made major life decisions based on the relation between tax policy in particular and policy more broadly, and the effect that that has on quality of life.
I do take a bit of issue with the implication that because no particular correlation exists between policies of the last eight years and emigration, that there is no measurable relationship between emigration and policy. I know in the most concrete sense that there are at least a handful of people who primarily justify their choice to avoid or leave California in terms of the direct or proximate impact of policy (and the cost of that undesirable policy in terms of taxes).
Understanding "why" also requires looking at where people are migrating to and why. Quite possible that the destination affects the numbers, especially if it's consistently a common destination, more than the source.
As a simple counter-example, let's say 100% of income were taxed and spent on the best educational and transportation systems money can buy. You'd have excellent schools and the best roads, but zero incentive for anyone to work, much less start a business. The capital needed to produce the goods people want would be consumed without replacement. That's a recipe for economic collapse, not growth.
The lowest tax places are usually places dominated the lowest value-add businesses -- like resource extraction. They don't really care about people because they don't need them.
Turns out, people from the shitty city were more successful on average; and they decided to stay where their families are. People from the nearby cities didn't decide to move to the shitty one but did so because that's where jobs are.
If there is anything that I learned by traveling cities:
1. Jobs matter. More than you think. They are what attract people to a city.
2. Family relations matter. More than you think. It seems it is what attract people back and make them invest their life savings in a house, small business, etc...
The mistake is in focusing obsessively on any one variable rather than addressing the entire system. California is definitely economically worse off in some ways than alternate-universe-low-tax California, but in exchange they have more tax revenue and hence potentially better schools and highways. It’s all tradeoffs and matters of degree. Confiscatory 90%+ income tax rates were not sustainable after the immediate postwar era, and might have even been a bad idea at the time, but it doesn’t make sense to overreact to that mistake when it’s long been fixed and there are more obvious bottlenecks.
This is true in the short term as the individuals already exist and their prior experience is already locked in. The long term problem is that of failure to create a new generation of high performing individuals, either through a collapse in birthrates (already underway for at least 1 full generation) or a failure to entice high potential individuals to participate in meaningful endeavors (arguably happening right now). Humans have a defined lifespan and their life trajectory is largely determined by outside factors even if their potential isn't.
Should this be surprising? I thought that was pretty much what the laffer curve was about:
i'd also guess that south korea, while more developed than many countries, is not quite developed enough to extract surplus value from the various value chains its economy participates in. that would matter because their businesses would have less profit leeway to absorb costs like a higher minimum wage in the short term.
To your point - other things matter too: access to great engineering schools that are open to professors moonlighting, flexibility of labor and capital, etc.
It shouldn’t be surprising that a change in tax rate can be overpowered by other factors.
You're probably right with respect to growth.
Other commenters are going to glibly point out that you need taxes to pay for basic research or whatever. Yeah, I think they miss the point too.
If the country wanted to, it could not raise a single tax dollar and 10x its research spending. A country isn't a household, its balance sheet can have debt permanently, etc. etc.
No, I think taxes matter for justice and equality. And the whole reason cost effectiveness entered our debate is that rich people, like you're correctly pointing out, have opinions, and tax policy is a consequence of that.
But if overall rich people are aligned against higher taxes, which is the case in history most of the time, they're effectively aligned against equality and justice.
And save me the downvotes if you don't understand how property taxes, for example, that differ between neighborhoods, can be about justice as much as they are about funding school districts.
Or that the healthcare mandate was absolutely about justice, and that calling it a tax was a workaround precisely for the reasons I described: that we've become obsessed with positivist or legalistic (instead of normative) dialogue, so it was the only way to get ACA passed.
I love tax policy on HN, because it really brings out of the woodwork people who do care about what's good for the country, and people who don't.
Under this viewpoint, parents who manage to afford to live in a wealthy neighborhood and send their kids to good schools have sacrificed a lot - in continued education, in long work hours, and in taking careers that are in-demand rather than ones that might be prestigious or enjoyable - for that privilege. It's unjust to take their sacrifice away from them and give it to folks who dropped out of college and spent their 20s playing video games, just because the latter group is now reaping the consequences of their decisions. Moreover, it means that now there is no reason to study & work hard and go into professions that people will pay a lot for, because your money is just going to go to people who don't.
Whether you hold this viewpoint or your "taxes = justice" viewpoint hinges a lot on the factual question of whether you believe that one's station in life is primarily due to outside factors or whether it's due to your own actions. I suspect you'd find very strong correlations between the former worldview & Democratic political preferences and the latter with Republican political preferences, though obviously it won't be 100%. Personally I think it's a little of both, so I tend to identify as a moderate. But I'll point out that this worldview, on a societal level, is itself self-fulfilling: if most of the society believes it, they create a redistributive welfare state, which means that your success is dependent upon outside factors, which then justifies the original belief in the first place. While if most of the society disbelieves it, they create a cutthroat individualist economy, which highly incentivizes individuals to make decisions that will put them on top, which means your success is dependent upon your own actions, which then justifies the original belief in the first place.
To muddy the waters further, when a society with a cutthroat individualist economy encounters a redistributive welfare state, the former has a tendency to conquer the latter. After all, it's their own damn fault that they've coddled their weak and have no strong leaders that can lead the fight. So the latter type of society tends to fall into irrelevance or disappear even if the majority of people involved would actually prefer it.
Countries with higher taxes have made a different tradeoff about the cost of taxation( borne mostly by the middle class) compared to the benefits of large fiscal outlays by the government.
>> I love tax policy on HN, because it really brings out of the woodwork people who do care about what's good for the country, and people who don't.
Maybe instead of arguing about tax policy using canards you could come up with a coherent argument based on actual policy outcomes?
> I think taxes matter for justice and equality
Thank you for saying this. I wish the president of my country (which is not the US!) understood this. And that running a country is also not like running a business.
> I love tax policy on HN, because it really brings out of the woodwork people who do care about what's good for the country, and people who don't.
What's the point of discussing this with you? Here, I'll try:
But if overall poor people are aligned for higher taxes, which is the case in history most of the time, they're effectively aligned against doing work and freedom.
Is that really different than a household?
The problem with a debt isn't that you have to pay it off. Actually, your creditors were prefer that you didn't and instead pay them interest until the day you die after which they'll collect the debt from your estate.
The problem with debt is that you have to pay interest all of the time. Countries with debt are necessarily purchasing less goods and services for their citizens then if they didn't have to spend some portion of their income paying the interest.
So, the fundamental reason why it's better (all else being equal) to avoid being in debt is the same in either case. Its not about the future day when you'll have to pay the debt, it is interest you are paying now.
There was some concern about China being a large holder of U.S. treasuries a decade or so ago, but that concern has abated as China has unpegged their currency and unwound some of their treasury holdings, and because the debt is denominated in U.S. dollars and so the U.S. government could always inflate it away to nothing if China tried anything funky. The "bad consequences" of the U.S. <=> China current-account deficit have largely already come home to roost - that's what's fueling the rise in real estate prices bought by Chinese investors which is making homes unaffordable for Americans in west coast states.
The household analogy would be an adult child who pays rent to live in their parents' basement, which the parent may either spend on the child or plans to return to them via inheritance when the parent dies. Sure, you're spending money, and sure, it means that you have less money for spending on other things. However, it just means that other people closely associated with you spend that money instead, and if they don't, it comes back to you anyway.
I presume that the parent is the government and the adult child is the citizen. That would suggest that the rent is taxes. But that would leave there being no debt in the analogy which would rather defeat the point of it. So I have no clue how this is supposed to work.
There is nothing inherently just or equal about coming with guns to people and taking a percentage of their earned resources.
And I love it because it brings out holier-than-thou virtue signalers, who think that they know better than everyone how to spend other people's resources, while denigrating their contributions.
The road to hell is paved with good intentions. "Caring about what's good for the country" is not nearly enough to be able to bring positive change even to a subset of people in the country. But it does bring some virtual internet points, I concede that.
There's nothing just about people believing they "earned" those resources by their hard work alone, and not understanding that there were huge infrastructure costs that enabled them not just to do the work and earn money, but even to stay alive -- and that they have to pay to sustain it.
From the roads their cars (and they suppliers and customers cars) drive on, to the airports, to the government funded internet (from the research of ARPANET, to CERN (www), to the trillions spent subsidizing telcos), to the primary schools and high schools they went to, to the fire department that helps them to avoid burning when their houses catch fire, from the FDA and relevant law enforcement that helps them avoid dying from the first crook wanting to sell crap as food or medicine, to the contract laws and their enforcement that help them stay in business, to the criminal laws and their enforcement that protect them from being at the mercy of anyone who'd fancy killing them, from the military that prevents them from being the subjects or prisoners or sex slaves of some foreign power that wanted to expand, and on and on...
It would only be _just_ their "earned resources" if they made them in the jungle, hunting or growing their food alone.
If we knew then what we know now, maybe people wouldn't have wanted the government to subsidize the automobile by creating our road system's infrastructure. Hey, maybe people won't even want the internet in another twenty years. And I know for a fact that plenty of people in the US don't appreciate the way law enforcement keeps them "safe". Same for the military.
I find this whole, "let me laundry-list things the government does, many of which it didn't really ask for permission to serve, as a justification for its existence," to be a fairly empty excuse for taxation. I appreciate what I get on some level, but I recognize that the government isn't 100% perfect and that my successes aren't that dependent on, say, my high school guidance counselor.
We don't have a choice with any LAW. It's what the society has decided, with the means the society has to decide things (elections, and so on).
>I find this whole, "let me laundry-list things the government does, many of which it didn't really ask for permission to serve, as a justification for its existence"
That's what elections are for -- and even more so, active participation in politics every day (including with violent protests when it calls for it).
If the population hardly deserves the title of "citizen" (active participant in the politics of the polis), and just casts a vote every 4 years (if that), then they don't get to complain that they pay more taxes than they want, or the government does X which they don't want.
The exception being if there's a tyrannical government, or opaque procedures out of their reach, or the control has been shifted away from their reach and they're e.g. a protectorate (which also can happen).
Which half exactly?
>And most certainly this is not what’s being advocated by the proponents of the “justice and equity”.
Well, I'm one of the proponents of “justice and equity”, and this is what I'm advocating (among other things). If you make more money, you also take more advantage of these infrastructures (someone who makes $10/hour flipping burgers doesn't depend on those infrastructure as much as someone making millions running a company whose operations crucially depend upon all those things being present).
Basically I feel that a person who puts in a reasonable effort (spends 45 to 55 hours a week working, commuting, learning skills, and/or looking for work) should be able to generally live the American Dream which I would define as something along the lines of owning a house, providing for your needs, raising a family, improving yourself, participating in culture, and generally having the freedom to choose your lifestyle.
When I say choose your lifestyle, I don't mean that everyone can become a rockstar or drive a Ferrari. Rather I mean things like:
Do I want to live in the city or the country? Is it important to me to live near people that share my religion or culture? Is living near my parents important? Am I a Southerner, a Yankee, or a Texan? Do I want to live the mainstream American lifestyle or be more of a hippy?
Of course, this article scratches its head because it is assuming SKorea = USA and South Koreans = 'Muricans. Maybe we should look at the biggest driver of the economy in the US: consumer spending. Giving workers higher wages causes a boom in spending and a boom in economic growth (see: the wage increases in the 1990's and the largest boom in latter 20th century history). Maybe SKoreans just don't need to own piles of crap like americans? Maybe we should look at what historically the biggest driver of the SKorean economy is, and see if raising wages would actually increase that.
Too bad the article is so thin on actual economic history and, um, knowledge.
But even this, is a simplistic view. Inflation typically causes previously issued corporate debt to drop in price and newly issued fixed rate instruments to increase in yield. The problem with that is that increased yield cost corporations more money to borrow when they refinance their existing debt. Now companies are in trouble from two angles: One, a higher cost of labor due to inflation, and two, from higher costs of borrowing money. As a result, companies increase prices even further, which starts an upward spiral where wages can't keep up. By the way, this is the cause of the recent meltdown in US Stocks over the last 4-6 months.
If this process is allowed to run without any controls, you'll wind up with a hyperinflationary environment, similar to Argentina, where the dollars in your bank account are worth 40% less than they were the previous year. People wind up unable to afford anything beyond day-to-day goods like food and housing, consumerism, the main driver of most Western economies, slows to a crawl (You can't save for an iPhone when it costs double what it did last year), industries that rely on discretionary income go out of business, and the economy contracts and collapses on itself.
I know this is a bit dramatic, but it can and does happen. It can happen even without a trigger, but if you suddenly increased the minimum wage in a tight labor market you're basically throwing gasoline on the fire that is inflation.
And from a theory standpoint minimum wage increases should have very little effect on inflation. Standard inflation theory is too much money in the economy. And too much demand for goods, causes too much demand for workers. This causes a tight labor market which drives wage rates which get passed onto consumers through increased prices. But minimum wage workers have the least amount of negotiating power, and since the minimum wage is higher than their market wage they by definition can't negotiate. Which makes it impossible for them to drive inflation.
> One, a higher cost of labor due to inflation, and two, from higher costs of borrowing money. As a result, companies increase prices even further, which starts an upward spiral where wages can't keep up.
Inflation does have some serious problems, but the idea that wages can't keep up with inflation doesn't make any sense. How can wage driven inflation drive inflation higher than wages?
I'm also not sure borrowing money is any more expensive. The nominal interest rate increases, but the real interest rate decreases. There is a large boon to current borrowers when inflation unexpectedly increases, and a boon to loaners when inflation unexpected decreases.
Firstly, inflation stats don't track every price. In particular they don't track house prices (directly) or the prices of financial instruments like debt, stocks, etc. So money printing that pours into the stock market will cause a market bubble whilst inflation stats stay stubbornly low.
Secondly it's possible businesses have adapted to increased minimum wage laws by simply automating those jobs away. I see a lot of robotic airline checkin desks and McDonalds order takers these days.
So if the interest rate goes from 10% -> 0 we would have 1700% inflation. Which is crazy especially if all other goods and services in the economy remain unchanged.
In reply to your second post, which I think is essentially the same as this one, it makes no sense to say it'd give "a false impression inflation is happening". Inflation is whatever set of prices we want to include. If we arbitrarily exclude some because we think inflation stats should look a certain way, that's the tail wagging the dog - this data exists to inform decision making, not tell us what we want to see.
To get inflation, you need enough of an increase in demand to create bottlenecks (not enough sellers to meet demand). But an increase in demand (hopefully somewhat less than that) is also what you need for economic growth.
In fact, that's what economic growth is for. People benefit from being able to buy more of what they need. This is a good thing!
Getting the balance right can be tricky, but they're not opposites.
The problem with this cycle: wage increase -> cost of labor increase -> goods increase -> wage increase -> inflation is, and here's where I get all Che, a fundamental problem with capital. Unless only some people see their wages increase, it keeps a lid on inflation, because there will always be exploitable labor.
So I go back to the late 1990's: why did the economy boom and wages rise without inflation? Simple: the notion of labor increases driving inflation ignores the fact that very very rich people are taking the bulk of the profits and if they weren't so intent on taking every last penny, then labor costs would NOT be passed on to the consumer.
As long as CEOs feel entitled to unlimited pay, there will always be inflation.
It's not odd at all, just biased.
South Korea has some serious problems.
- Living as South Korean is hard and stressful. Really hard and stressful. It has one of the highest suicide rate, highest elderly poverty rate among OECD, and again one of the longest working hours. Not to mention extreme competition at school.
- As a result, less and less Koreans are getting married, and less babies are born, because people cannot afford to marry and have babies. These days a lot of young people say they cannot afford to be in a relationship! We are turning into a country of "involuntary celibates."
- This of course means there will be less and less young people to sustain the economy, which will start a positive feedback loop. Immigration might help but it can only help so much.
The government is thus forced to do something. Increased minimum wage, more public sector jobs, better enforcement of workplace safety laws (which have been basically toothless): these are desperate attempts to make people stop feeling like walking next to a cliff (and hopefully to make more babies). If these policies also bring immediate economic growth, that's great, but that's not the primary objective, as far as I'm concerned.
As to growth, you're absolutely right that it's not as simple as wishing it. But the same is true for raising wages: sure, it's trivial to raise the statutory minimum, but for that to have the intended effect is a different story, unless the intended effect was more unemployment.
And guess how we fund welfare?
> Under President Moon Jae-in, South Korea has raised taxes and the minimum wage in the name of economic growth. So far, it hasn’t worked out as planned.
That's not how that works at all. Whoever made this "plan" apparently skipped Macroeconomics 101.
> Growth has slowed, unemployment has risen and small-business owners like Moon Seung are complaining.
Any Economics undergrad would tell you that's exactly the expected outcome.
Raising taxes hurts growth and increases unemployment because you are reducing the profitability of all businesses.
Raising minimum wage increases unemployment because you are raising the cost of labor.
And small businesses often pay the highest price for these policies.
The economy is powered by creation and exchange of value. Money changing hands is mistaking the incentive for the act itself.
Most economic schools of thought advocate stimulus during recessions to stop a slowdown of money changing hands, but this is a short-term measure. Money isn't the economy and there's no reason to believe making money fly around willy-nilly will help the economy in a permanent way.
To easily demonstrate: imagine everyone stopped producing goods and services tomorrow in the US.
Everyone would still have the exact same amount of money, but you will not be able to use it to buy a fresh loaf of bread (since none are being baked) or have your car serviced.
The value of money will drop to zero. It won't matter at all if it changes hands; indeed, it won't, since there won't be anything to buy.
Thinking "money changing hands" powers the economy is thus mistaking effect for a cause.
I think there's more to it than that. There is no particular reason to think that money changing hands benefits the economy, or society, but there is at least one party that does benefit: the government. Every time money changes hands the government takes a share in the form of income and/or sales taxes. Ergo, there is reason for the idea that higher monetary velocity is better to be popular among both politicians and the economists who advise them.
It it good or bad to remove someone from their money? That depends a lot and is subject to lots of complex debate.
Raising the minimum wage also redistributes money to low wage earners, who tend to spend their all money, as opposed to richer people who save. Increases to the velocity of money results in economic growth. That's one of the counterarguments to the minimum wage argument. Society is complex and when you change the minimum wage it has rippling effects on employment, housing, consumer spending, investment and so forth. On top of that you have psychological effects and signalling issues. Predicting the consequences of a minimum wage hike is hard.
The real world is not Macro 101, and pretending policy questions like these are trivial is very very silly.
Please cite such evidence.
> Raising the minimum wage also redistributes money to low wage earners, who tend to spend their all money, as opposed to richer people who save.
Raising minimum wage increases the cost of labor, which will reduce hiring and trigger layoffs. Minimum-wage earners are the most vulnerable class of employees, the most easily dismissed and replaceable. As such, they will be the first to be laid off as profits decline, especially when these profits are declining as a direct result of the cost of employing them
Rising cost of labor also hurts growth directly, especially when its due to government intervention and not voluntary free-market forces.
> The real world is not Macro 101, and pretending policy questions like these are trivial is very very silly.
Except in this case all these "policy experts" and "professional economists" were apparently wrong, and instead of increasing growth, these changes hurt it substantially, just as Macro 101 would predict.
So score one for basic economic good sense versus the "policy experts".
Fine by me. A nation that does not have either strong (and not hindered by law) unions or a minimum wage to support the most vulnerable (your mention of which in the context of your comment comes across as libertarian concern trolling) does not deserve to "grow".
>Raising minimum wage increases the cost of labor, which will reduce hiring and trigger layoffs.
My solution to this is simple - abolish the wage. But I'm interested to hear to what extent this is true where minimum wages have increased so far, and whether it must necessarily happen. Taking the argument to its extreme, we ought not to pay anyone at all, since any amount >0 is a rising cost of labour and since growth is important, we out to minimize the cost of labour to zero or even lower.
I'm thankful for the fact that the eight hour work day and humane conditions, thanks to the socialists and social democrats of the 19th and 20th c. have prevailed over your "voluntary free market forces".
Increasing minimum wage is liable to cause a host of well-known unintended and paradoxical adverse consequences:
To you it seems like a simple way to benefit the poor, but in reality it raises unemployment - a far graver problem - among these very poor you are ostensibly trying to protect.
You can flame that as "concern trolling", but these are not just very real concerns - they are real consequences that have been observed numerous times across history, including in this very case in Korea, where unemployment has risen substantially as a result of the recent minimum wage raises.
> My solution to this is simple - abolish the wage.
Truly an excellent practical suggestion for the modern growth economy.
Your comment offers zero practical solutions, or anything but empty moral posturing and inciting inflammatory language.
On paper, if you increase wages and taxes to subsidize demand, you encourage consumption. And it actually works ... provided consumers a) aren't over their ears in debt (which they are) and b) are buying from locals (which they aren't, at least for industrial goods).
The French learned this the hard way during a short period in the early 1980s. They did exactly that, and it drove consumption up as expected, but this actually ended up helping more competitive manufacturers from their trading partners.
These very same people would be contributing to growth if they worked in the private sector and produced goods and service. Instead, they create either zero or negative growth.
Clearly you're going to end up with lower economic growth.
The fact he would spend his salary on purchases is small comfort, especially when he'd likely earn a larger salary to spend in the private sector.
It's not clear that you're going to end up with lower economic growth. For example, taxing some level of income that would otherwise not be spent on economic activity (e.g. savings or equity investments) and spending it on things that do result in economic active results in higher economic growth.
Let's say you want to build a road that connects 12 houses. You can do that without the government. You just need everyone to agree on who contributes what, who you hire to do the work, what happens if something goes wrong, who else is allowed to drive on the road, how maintenance happens, who polices the rules, and so on, and so forth.
This does occasionally work out in real life, but mostly people bitterly argue over the whole thing and it never happens. Having a government set some sort of policy and doing the planning is usually far more effective, even if it pays more than is necessary for the actual work that gets done. The government may pay more per mile of road, but the road has a higher odds of getting built.
"The government" is not a singular entity, it's a collection of tens of thousands of smaller entities, all of which operate mostly independent of one another and whose relative "efficiency" is based almost entirely on the people working there. One town may have a school or fire department which operates extremely well under a very tight budget, while the town over might poor money into a corrupt and expensive institution which fails to provide more than basic services.
In this respect, it's no different than any other business. Some Walmarts are clean, tidy, and well run, others are a mess. But you wouldn't go around claiming that "The retail" is inefficient because of this fact.
Also, not every government department should be efficient. The military is often held up as the hallmark of an inefficient bureaucracy, but the fact is, we don't want a military that's cost-effective, we want a military that's combat-effective, no matter the cost. But we also have a post office that can mail a letter to the middle of Alaska for less than a dollar.
Your comment about the market working better at "this" (whatever this is, anyway) is equally as lazy.
Governments are monopolies. The only incentive they have to be efficient is the leadership changes that possibly occur with each election cycle. Given the wide range of services and issues that governments must tackle, it's likely that voters have only a few key issues in mind when they go to the ballot box. With each change in leadership, a different set of priorities takes precedence. Sometimes long standing, mediocre services, continue unabated and unimproved for decades at a time with little to no innovation.
The evidence that this stereotype is true is overwhelmingly strong, so, it's perfectly legitimate to set policy around it.
That's not how taxes work. It actually does evaporate. Money is an IOU from the government that it guarantees it will accept as payment. The government doesn't actually need to give itself an IOU (it doesn't make sense except as a way to keep track of internal accounting obligations); it burns the IOUs it gets back in order to preserve the value of its still circulating IOUs.
It's always important to remember that governments print money, they don't discover it. The government doesn't need it from you, it needs you not to have it in order to keep it somewhat scarce.
You have no evidence of this.
And, even if true, it would only be true if the cost of labor was a significant input to cost of production.
In fact, most of the minimum wage increases in the US are currently resulting in "effect, if any, is so small as to be unmeasurable."
Obviously, you can raise the minimum wage to the point where it is 99% of the cost of production and that would be severely detrimental. However, given the stagnation of the minimum wage over the last decades in the US, apparently the minimum wage has quite a bit of room to increase before its contribution to the cost of production becomes an issue.
Not paying a livable wage just socializes the burden to the taxpayers.
A 4.2 percent unemployment rate is remarkably low, and 2% growth in a quarter, isn't bad either.
Increasing taxes and raising the minimum wage is certainly not going to lead to increased economic growth or lower unemployment. The primary benefit of such moves, is to improve the quality of life for the middle-class and lower-middle-class. Neither of which was mentioned in the article, which is surprising considering that's the primary motivation and metric against which it should be measured.
Also I thought economists believed 5% unemployment was something of a lower bound, that there's always a bit of natural unemployment as people move around between jobs - you can't actually ever hit zero.
So I'm not sure from these stats why South Korea thinks they have a growth or employment problem. It doesn't look like it. The primary driver of economic growth in advanced economies with stable populations is productivity increases and those come from technological advancement, which isn't going to be much affected by minimum wages.
Look at the top 100 counties in terms of real GDP growth, not a lot of Western style counties there.
South Korea has a reputation for a very educated work force, if I were a citizen I'd probably be advocating for policies that can fully take advantage of that over generic solutions such as raising or cutting taxes.
what are some of the examples of these policies.
However in general I think the pattern of increasing R&D budgets, and smart deregulation is key. You need to provide an environment where there is adequate resources to validate new ideas and an infrastructure to quickly get those ideas to market.
Innovative companies don't rise and fall by 10% tax increase or decrease. They often make no money at all until the make a lot. The only people who are concerned about taxes are those who already have money. If you want to lower barriers you need to fix education, costs of living and security. You can't have every incentive saying to stay the course at a traditional job and expect new things to happen. These days everyone expects a large sum of money for themselves to fund their own company. That isn't something you get or can allocate for new things, especially not at scale. Because they are by nature new. So almost every industry started scrappy. Provide an advanced scrappy society and innovation will happen.
People often say "But if this is such a good idea why aren't people in those kinds of countries innovating?". They are. It is just that it is marginal in the beginning and then it gets too large to notice. People think it came out of nowhere, which it sort of did. Even in the US a lot of the innovation, if not most, is related to the relative safety of the university system and subsequent industries. A lot of the famous entrepreneurs from the earlier days of the tech industry are people who were relatively well off if not rich, at least in terms of education or family, who I guess weren't that excited about their prospects and therefor also didn't have much to lose. In a good way. They could go work in a garage startup for a few year and still get the normal job later. They didn't have to, or didn't know to, worry about a mortgage. At least not yet.
You always want to start something new from a position of, if not strength, at least abundance. The zero to hero idea is flawed. If you don't have unrealized potential either in yourself, your idea or the market there isn't something that can succeed. So you want to have more opportunities than you can realize. You want to have more motivation, time or skill than you need. Otherwise you are just going to do what needs to be done, which usually isn't innovation.
Then on top of that you can do all kinds of things. But without the underlying foundation innovation at scale isn't going to happen. Even doing targeted research, you always need more people and better education than you think. For every success there is a hundred average efforts. Which is okay. That is how everything, from science to music scenes, is built. Cities often wonder why their initiatives isn't working, but if you aren't prepared to take on ten thousand new people in a year your industry isn't going to happen. It is going to plateau before you even notices it exists.
At the end of the day, innovation is made by people. You optimize for people and you get new industries. That is every successful city for decades if not centuries. I guess most people wouldn't say that about the Bay Area today, but at one point it was far better than the alternative for a lot of people. Which is why they ended up there.
Public labs are nice for society because they're extraordinary cheap relative to their corporate counter-parts (grad student = 30k/yr with no benefits, research scientist = 200+k/yr with full benefits)
No the real change would be to cut the bullshit for korean laborers. Korean workers spend insane amount of time at work DOING ABSOLUTELY nothing because their supervisor has some work to finish and is unable to delegate / manage better.
Koreans have serious issues with productivity and the country should aim to ease the burden on both workers and companies.
"The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.
The first of these changes is the gaining of vast new experience in the management of central banks.
The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.
Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity."
Taxes for Revenue is Obsolete - Beardsley Ruml (Chair of New York Fed 1946)
South Korea is overtaxed for the size of government it has. As is any nation with any long term unemployment.
What debt? The grandparent is telling you that debt is not necessary to finance a state that control its own floating currency.
It is if you wish to avoid runaway inflation. Even countries which have cast off the fetters of the gold standard (or equivalent) have found that there are still limits to the rate at which they can issue currency. Moreover, once the implications sink in people just index prices (including wages and interest rates) to the expected rate of inflation and you're right back where you started.
That's kind of the point. Enforce taxes so that people have less money or print money and raise inflation so that the money people have is worth less, either way the real consideration is how much of the nation's productivity you are using, not how you are getting the money.
Any business which needs to pay minimum wage in order to maintain a profit is in a precarious situation. A rising minimum wage is far from the only risk to the business; even simple economic growth is going to capsize them eventually as more local jobs pay higher wages.
While we will blame the loss of these jobs on the minimum wage hike, I think it's safe to say these jobs were going away in the near term anyway.
For instance in Switzerland you pay tax on the imputed rent of a home you own. In Denmark you can can come as a foreigner and pay 27% for several years. In the UK you can claim non dom and avoid tax on all overseas income. In Malta corporations pay 35% but get back 30 quite soon.
The brackets and deductibles are also all wildly different.
And most importantly the taxes are paying for very different levels of service.
So there's no sensible way to compress that into a headline without asterisks.
That's not to say I don't think it's a worthwhile debate, just that a number of commentators seem to be going directly to economic theory, which generally does not address these wrinkles.
It's unclear at which threshold this actually occurs, as it implies that rich people are either sitting with their money in the bank or playing speculative games with it rather than investing it in productive enterprises that will spend it on innovation. South Korea's experience indicates that may not be the case, at least in South Korea, or it could indicate that government expenditures aren't actually reaching poor people, or it could indicate poor people blew it all on Bitcoin rather than spending it on useful things. Anyway, that's the theory, whether it applies to reality is still an open question.
Instead, they typically move it into Bonds (Debt), or Stocks, which both fuel the economy because they create liquidity and spur economic growth. Also, most wealthy people are into philanthropy and pay a massive amount of taxes. In fact the top 1% of taxpayers pay roughly 37% of all income taxes.
In reality, it is the opposite. Consumption, is by definition the destruction of resources.
I am not sure why people believe that the destruction of resources is something that we should be promoting.
Instead, we should be promoting savings, and the preservation of resources, as well as the creation of capital.
Production and consumption are both necessary. If you don't save and invest then production capacity will decline and there will be less available to consume in the future; but on the other hand if you don't consume then all that production capacity goes to waste and you derive no benefit from saving and investing. The balance is the critical aspect. Both policies which promote over-consumption at the expense of saving and policies which encourage over-investment at the expense of consumption miss the mark and destroy value by moving the economy away from the optimum balance.
As is usual with O Henry the sting is in the tail :)
It's not that consumption is bad -- consumption is merely the flip side of production. It's what is being consumed that matters. But even frivolous-looking consumption isn't entirely bad, else we'd never consumed arts, would we? But you'll find that humans want some entertainment, down time, etc.
Of course, there is such a thing as bad consumption, demand for wasteful goods and services, and malinvestment. But consumption is no more inherently bad than is production.
Of course there is. This is the definition of savings and capital creation.
The more a society saves, the more we are able to invest in capital, and therefore produce way more in the future.
Capital creation is how societies as a whole become better over time. It is the definition of investing in our future.
Capital creation isn't like having a grain reserve in case of drought. In a steady state you don't want to be producing much more than is consumed, not for long -- you should be producing just enough more than consumption, on average, to allow for some waste.
Of course, the context is global. You can produce much more than you consume locally, if you export, but globally, producing more than is consumed for long is just another way of wasting resources. You can always try to stoke demand if you built too much production capacity, or if you want to build more production capacity, naturally, and you can produce more than is consumed while you're doing this. But in the long run you shouldn't produce much more than is demanded.
> Past tax cuts did little for growth or the wealth gap, Mr. Yoon said. Instead, Mr. Moon aims to improve the incomes of average Korean families so they will consume more, thus reducing the economy’s reliance on exports and, with them, the ups and downs of the global economy. (Exports accounted for 43 percent of South Korea’s gross domestic product in 2017, compared with 20 percent for China.)
Changes happen over the scale of decades.
You don't want to make bad policies today that turn your country into the USSR tomorrow.
Interest rates (when controlled by a market) are a signal of how receptive a market is to investment in new capital or business, lower rates encouraging expansion and higher rates put on the brakes.
So for instance if the market is already growing at a healthy clip and a bank could invest money in existing business and get a higher return, they will not lend to you at a lower rate, unless your expected innovation or business can exceed the existing marketplace yield... which would cause you to accept a higher interest rate.
Taxes merely move buying power by edict to other enterprises. There is no tacit communication of any information, there is no price, and the only information used is the whims of the few individuals redirecting the spending.
i'm a big believer that small income disparity is better. mr. moon, the auto parts maker, probably still earns a multitude of what most of his employees make. if you earn 5 times of what a minimum wage employee makes and the really rich guys earn 7 times of the min wage, you're still considered rich. a ten times wage gap between what the poor and the middle class makes is, imo, just not good for a healthy population.
I mean, it may not be true -- I don't tend to think that it's true -- but this should not be the first time that you've heard it.
Obviously raising taxes and then setting the money raised on fire, or putting it in a bank vault, or shipping it overseas, would not help your economy. That's not what Korea is doing.
This new method of raising capital that the article mentions might not be the best method, but it offers a new approach. It offers something different, and I believe, will allow for other new methods to arise that will better support the entrepreneur.
What exactly is the alternative that everyone here is suggesting? Lower taxes and the growth will somehow give these people more money? Really? No. It may increase growth, but that money will go to the people on top and the people on the bottom will be exactly where they were.
At least in this case, the money is redistributed to people who need it.
Lowering tax rates can actually increase a country's total tax receipts. Having more GDP not only means more stuff per person, but also more stuff to tax.
That said, the goal of a country is not even to maximize its tax receipts in the first place. Taxes are one way that a country achieves its goals. A country's goals are going to be a mixed bag, anything from redistribution wealth to the poor as you've said, to reducing tax burdens on its citizens.
Also - case in point - Kansas. Lower taxes, and they now can't fund schools properly - which means no educated workforce 10-20 years down the line.
Better yet would be to create programs that offset taxes by opening/hiring more employees. I'd personally like to see the money stay in the private sector than go to the government directly. Hiring more people still increases taxes through personal income taxes.