Shlaes and Mandel
By Arnold Kling
At the Kauffman forum that I attended in Kansas City the other day, I thought that the most interesting comments, neither of which I agreed with, were offered by Amity Shlaes and Michael Mandel, who blog here and here, respectively.Shlaes argued against cutting payroll taxes. She was making a comment during a discussion, rather than a formal presentation, so she might not agree with my interpretation of what she was saying.
Economists take the view that Social Security benefits and Social Security taxes are basically disconnected, so it does not matter if you substitute another tax for payroll taxes to pay for benefits. Shlaes said that what economists would call the illusion that benefits and taxes are linked is actually a key to maintaining American exceptionalism and avoiding a welfare state. That is, our Social Security system falls within a tradition of individual contracts and obligations rather than a tradition of socialism. Cutting payroll taxes and substituting other taxes would be a cultural shift toward socialism. I may be putting words in her mouth, but I think that is what she was saying.
Michael Mandel’s view is that our current macroeconomic and stock market troubles reflect the readjustment of estimates about economic growth since 1997. He sees a need for both investors and statisticians to revise those estimates. The statistical argument is that when a firm outsources production overseas, it fails to report to the government statisticians the payments that it makes to overseas producers. Thus, what should be counted as imports instead gets counted as domestic production. One implication of this is that productivity growth has been over-estimated. We had a long argument starting at about 5 AM Saturday morning (we had early flights out of Kansas City) over whether overall economic statistics are or are not consistent with his suggested revisions.
Apart from that, I have an even harder time with Mandel’s story relative to investors. The way I look at it, an investor who looks at a firm’s accounting statements would know whether it is producing or importing its intermediate products. If investors knew the reality all along, then this should have been reflected in stock prices all along–it does not explain the sudden drop in the last six months.
Mandel’s view is that investors, particularly foreign investors, had a rosy view of American firms’ ability to grow and hence to repay debt. Thus, they treated American private debt as risk-free. This changed when the housing bubble burst. High stock prices depended on the “credit bubble” continuing to inflate, and when it popped the market crashed.
Again, I may be putting words in his mouth.