Larry Summers Does a First-Rate Economic Analysis
By David Henderson
Bottom line: If you’re someone who wants to see good economics being done or wants your students to see good economics being done, watch the video I discuss below. Larry Summers’s inputs are a microeconomics tour de force. Be aware, though, that Larry has one pretty awful proposal.
Various friends on Facebook and various bloggers have been recommending a panel discussion held at the Peterson Institute for International Economics and featuring Emmanuel Saez of UC Berkeley, Greg Mankiw of Harvard, and Larry Summers of Harvard. The recommendation is well deserved. The session is titled “Would a ‘Wealth Tax’ Help Combat Inequality? A Debate with Saez, Summers, and Mankiw.” It occurred at an October 17-18 conference.
Normally, I state exact times in such long discussions so that you can quickly go to those highlights. I’ll do so to some extent here, but I highly recommend that you watch the whole thing. If your time is limited, then watch Larry’s part, which begins at around the 20 minute point and the panel discussion, which begins at around the 50 minute point.
I’ll mention many high points and two criticisms of Larry, not of his analysis, but of his values.
First, although it isn’t absolutely necessary, you’re probably wise to watch Saez’s talk, which goes first and sets the stage. Second, the thing not to miss is Larry Summers’s talk. It’s a relentless application of microeconomics. He lays out how a wealth tax will give incentives to hide wealth or, to the extent it doesn’t, will give wealthy people incentives to donate more to their favorite causes.
Mankiw adds a number of good points but the real show is Summers.
In the panel discussion, Saez makes a weak attempt to back up his claims but Summers just doesn’t let go.
6:25: Saez claims that Amazon’s wealth and Jeff Bezos’s wealth are due to monopoly rents. Really? Amazon cuts prices on virtually everything and delivers incredibly quickly and that’s monopoly? I’ll mention a recent story whose type is not uncommon. I lost my pickleball paddle on Thursday morning and wanted to have a replacement so I could play Saturday morning. So on Thursday at around noon, I went to Amazon’s site. It told me that I had ordered a paddle 2 years ago. I liked it and so I ordered the same one. When I bought it 2 years ago, I paid about $150, including tax. When I bought it this time, I paid about $85 including tax. And it arrived in time for most of my play on Saturday. Those damn monopolists!
7:30: Saez says that it’s hard to measure wealth (true) because we don’t have a wealth tax yet. But even if we had the kind of wealth tax that he, Senator Warren, and Senator Sanders advocates, it would be hard to measure most people’s wealth because over 99 percent of Americans wouldn’t be subject to it. That is, unless he has something else in mind that he’s not telling us.
Now to Larry Summers.
20:45. Larry has been following the Twitter wars between Saez and his critics and finds himself 98.5% convinced that the critics are right. Saez’s data are “substantially inaccurate.” Phil Magness has weighed in on this.
22:00: The arguments about how the wealthy can use money to get a lot of political power don’t make sense in the context of a wealth tax. The reality is that with either the Democratic Party or the Republican Party, a wealthy person can get a lot of clout by spending $4 to $5 million a year. No substantial wealth tax is going to prevent the wealthiest people from spending that amount or even a multiple of that amount.
22:00: When you think about the worst special interest abuses, it’s things like the NRA. Really, Larry? How is the NRA abusive? He doesn’t say. He probably thinks, and probably correctly, that his audience doesn’t like the NRA and, therefore, he doesn’t need to make the case.
22:40: If you had a wealth tax, you would likely increase the clout of the wealthy because a standard way around wealth taxes [DRH note: just look at the estate tax for evidence] is to give away wealth.
24:40: Larry makes a point that his late mentor Martin Feldstein made. The higher Social Security and Medicare benefits are, the less need there is to save. So if you measure wealth the way it’s typically measured–tangible net worth–which excludes the present value of future retirement income streams, the bottom half will look very unwealthy.
25:50: Larry considers 3 activities wealthy people can do. Activity A is continuing to invest it productively. Activity B is consuming it. Activity C is donating it to causes and, thereby, having large political influence. A wealth tax, he notes, is most punitive of Activity A.
At around the 37:30 point, Greg Mankiw starts off strong, giving a comparison of Frank Frugal and Sam Spendthrift. A wealth tax, of course, would cause Frank Frugal, who is doing more for society, to pay higher taxes. I don’t know if Greg knows this, but his discussion is very much in line with early mid-19th century French economist Frederic Bastiat’s discussion in “What is Seen and What is Not Seen” of Mondor and his brother Ariste.
41:45: Greg makes an interesting point about 2 versions of a Universal Basic Income, pointing out that though they look different, they are exactly the same. I was disappointed, though, that he didn’t point out that such a plan would, in one fell swoop, make the federal government much closer in size to the size of Western European governments. See my article for more.
52:38: Larry goes back to one of his themes that I criticized a decade ago–going after wealthy people who illegally hide their wealth. He says that government officials who go after them “are doing the Lord’s work.” I’m not a Christian, but if I were, I would never use that term to describe what they’re doing. Relatedly, Larry approvingly quotes Gene Sperling’s claim that wealthy Americans who renounce their U.S. citizenship to avoid U.S. taxes are “economic Benedict Arnolds.” Would he say that about Californians renouncing their California residency to move to Florida and avoid California’s high taxes? And if not, why not?
53:30: Larry says it’s good to penalize people for leaving the United States. I’m glad he didn’t have a say about people leaving Europe in the late 19th and early 20th centuries to avoid conscription, thus leaving their human capital intact.
1:01:40: Catherine Rampell of the Washington Post makes the point that Bastiat refuted in the link above, and Greg does a nice job of refuting it here. Actually, though, I think Bastiat did it better.
1:05:30 to about 1:10:00: Must be seen. Larry makes a point I made in some articles in Red Herring in the late 1990s about how Bill Gates’s wealth did not protect him from the Clinton Administration. Larry tells Saez he’s looking for a case when reducing a multi-billionaire’s wealth by 20 percent would cause better policy decisions or better decisions in general. Saez can’t give him one.
1:09:24: I missed it the first time around but Greg Mankiw makes the point that if Bill Gates had had 20 percent less wealth, he might have put less into eradicating disease in Africa and that’s what Saez is trying to get rid of.
1:10:10: Saez says “robber barons” means something. Unfortunately, Saez seems ignorant of that issue also.
1:11:20: Heather Boushey in the audience says that she wants wealthy people to have less influence about how their wealth is spent. Larry agrees with her, unfortunately, but points out, as he had earlier, that a wealth tax will give wealthy people an incentive to spend their wealth in ways that she doesn’t want. But before we get to Larry, Greg Mankiw has his finest moment of the session, pointing out that he, Greg, thinks Bill Gates spends his wealth better than Donald Trump would spend it; Greg points out how badly democracy works.
1:17:00: Larry makes a very good point about the practical issues involved that make it hard to tax capital gains annually rather than when realized. His hardware store story is great. He then goes on to point out that an increase in the future path of your income is a capital gain. He does that nicely too.
Overall, Larry was pretty much at his best. At times, he reminded me of David Friedman at his best, although with less of a twinkle in his eye.