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Charles Wheelan, Ph.D. The Naked Economist

Charles Wheelan, Ph.D., The Naked Economist

An Economics Laundry List

by Charles Wheelan, Ph.D.

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Posted on Tuesday, March 13, 2007, 12:00AM

When I was a kid, I remember being captivated by "The Book of Lists." The title was appropriate, because it was, well, a book of lists -- the American presidents, the world's longest rivers, the oldest living humans, and so on. It was a fun book, and even instructive in some ways.

Since I occasionally get queries from people looking for more information on economics, I thought it would be interesting to create my own list for economics. Here goes:

• My Favorite Economist: Gary Becker, who won the Nobel Prize in 1992 and still teaches at the University of Chicago. Becker's genius is that he's taken the core principles of economics -- basic ideas like how rational people make tradeoffs -- and applied them to subjects ranging from crime to discrimination to childbearing.

Some of Becker's most important contributions are in the area of human capital, which is the term economists give to all the skills embodied within a person. Education is an obvious example, but the ability to throw a baseball at 98 mph consistently over the plate also counts.

For those of us interested in public policy, Becker's ideas provide enormous intellectual traction. For example, his theory of human capital can help explain why fertility rates are dropping sharply across the developed world.

As women become more educated and have greater career opportunities, the cost of leaving the workforce to take care of children (in terms of foregone earnings) goes up. One rational response, which is borne out by data, is to postpone childbearing and have a smaller family.

Meanwhile, the same theory explains that the "cost" of children is going up. No, we don't buy our children, but we are expected to invest heavily in their human capital rather than sending them out to herd goats. So Becker would say that as the cost of children goes up, we "substitute quality for quantity."

• The Best Economics Writer: Milton Friedman. For all the praise heaped upon Friedman after his recent death, I think one of his great talents got surprisingly little attention: he was a wonderful writer.

Friedman magnified the power of his ideas by communicating them powerfully. Books like "Free to Choose" and "Capitalism and Freedom" aren't the kind of books that economists typically write.

For nearly two decades, Friedman also wrote a column for Newsweek, which isn't the kind of magazine in which most academic economists aspire to publish. Yet that kind of writing can have a huge impact in terms of moving the public (and the politicians who poll them) toward economic literacy, particularly on tricky issues like trade. I suspect the world would be a richer place, figuratively and literally, if more economists were able and willing to write like Friedman.

• My Greatest Economics Frustration: There's an entire sub-discipline of economics devoted to the field of economic development. And there are huge organizations staffed with economists who work on global development issues, such as the World Bank.

Then there's Africa, which is shockingly poor and, with some exceptions, drifting sideways or even getting poorer. Economists can do a reasonable job of explaining how places like Japan developed, or how India is getting richer now. And they can document all the things that contribute to wealth: education, infrastructure, good governance, empowerment of women, and so on.

But the discipline is frustratingly bad at taking a particular place at a particular time -- whether it's the Detroit region or the nation of Chad -- and offering a prescriptive set of specific steps for growth and prosperity.

• My Favorite Economics Blogger: Greg Mankiw is a Harvard economist, a former chair of the Council of Economic Advisers, and the author of a popular introductory economics textbook. In his blog, Mankiw does a nice job of posting interesting articles from all kinds of sources interspersed with succinct and insightful comments.

• My Favorite Obscure Economics Concept: Seignorage. Why do governments so often let inflation get out of control? Because they can profit from it. Seignorage is the process in which governments implicitly tax their citizens by printing money.

Suppose you're running a small, semi-corrupt country and you don't have enough money in the government coffers to pay your army. As the soldiers grow restless, you have two choices: 1) Raise taxes, which is politically unpopular but also harder than it sounds in poor countries without the infrastructure to collect the revenue. Or, 2) Phone the central bank and instruct them to begin printing money (which, if you've been in power long enough, probably has your picture on it).

Of course, when you print money to pay the army, it depreciates the value of all the currency already in circulation, which is effectively a tax on everybody holding cash. A loaf of bread now costs 10 percent more, or 50 percent more, or 500 percent more, depending on how much money the government prints. Seignorage is technically the purchasing power that the government derives (e.g., paying the army) from printing money.

• My Favorite Economics Book: "The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers" by Robert Heilbroner. The beauty of this book is that it explains the importance of economic thinkers ranging from Adam Smith to Karl Marx and puts them in context with succinct biographical sketches.

• The Biggest Economics Charlatans: The supply-siders who continue to insist, in the face of all evidence and academic opinion to the contrary, that a country like the United States can boost tax revenues by cutting taxes.

Based on my past skepticism of the supply-siders, I know that I'll soon be bombarded by angry comments and emails pointing out government revenues went up after some favorite tax cut, such as the Reagan or Bush tax cuts.

But that alone tells us nothing, as government revenues always trend up due to inflation and economic growth. The appropriate question is not whether government revenues were higher after the tax cut than before, but rather whether revenues are higher than they would have been in the absence of the tax cut.

All credible evidence on this subject says that there are a lot of good things about tax cuts, but raising extra revenue is not one of them.

• The Greatest Economic Challenge of Our Time: Reconciling the tradeoff between a decent safety net and the bad incentives that it creates.

There isn't a politician on the planet who doesn't want to create more jobs. But, paradoxically, those same politicians often cling to policies like trade barriers and excessive protections for workers that end up inhibiting job growth. The economic reality is that creating new jobs involves creating a climate in which workers can be fired and companies can go bankrupt.

That's not intuitive. I recall an academic in India asking me, "We have an unemployment problem. Why would we make it easier to fire people?" The answer, of course, is that I'm not going to hire someone I might never be able to fire. Most developing countries, and the more rigid economies in Europe, are dealing with some variation of this challenge.

And, of course, cushioning the blow for those who are chewed up and spit out in a dynamic economy creates problems, too. Providing a safety net -- a perfectly reasonable social objective -- usually creates perverse incentives: unemployment insurance diminishes the incentive to find a new job; welfare benefits discourage recipients from working; subsidized government health insurance gives employers less reason to provide private coverage, and so on.

The challenge around the world is to enable capitalism to do what it does best -- build better mousetraps -- without leaving the people who made the old mousetrap living on the sidewalk outside their shuttered mousetrap factory.

So that's my list. I hope it provides some resources for those with a deeper interest in economics.

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  • Yahoo! Finance User - Thursday, April 26, 2007, 2:50PM ET  Report Abuse

    • Overall: 1/5

    Increasing taxes also pertuates government waste because it destroys incentives to become more efficient and cost-effective. With free enterprise, the cream rises to the top. Bloated government bureaucrasies and public schools with tenured teachers destroy incentives and foster poor performance

  • Yahoo! Finance User - Friday, April 13, 2007, 12:29PM ET  Report Abuse

    • Overall: 1/5

    Wheelan is a privilidged rich boy who hates the middle class and supports the offshoring of good-paying jobs to asia. You really have to love the selfish people on this board who give this guy five stars.

  • Yahoo! Finance User - Tuesday, April 3, 2007, 10:44PM ET  Report Abuse

    • Overall: 4/5

    But how do we differentiate the lazy ones from the stupid ones, so that we can punish the lazy and help the stupid. And do nothing about the stupid & lazy.

  • Yahoo! Finance User - Monday, April 2, 2007, 6:32PM ET  Report Abuse

    • Overall: 4/5

    Anotther interesting read. Especially the frustration part. This has been one of my pet peeves since my gradualte school days from long time ago. My international finance/ macro prof and I have had a lot of interesting conversations on this topic. May be behavioral science and economics can come together to provide some answers. As for the supply side chaos - Time will tell.

  • Yahoo! Finance User - Sunday, April 1, 2007, 5:28PM ET  Report Abuse

    • Overall: 1/5

    This idiot wants to eat his cake and have it too. True capitialism rewards those that produce and leaves behind those that don't. It's that simple. That why you have wealthy people and poor people. Poor people are either lazy or stupid. You want the truth- You can't handle the truth!!!!

  • Yahoo! Finance User - Saturday, March 31, 2007, 1:36PM ET  Report Abuse

    • Overall: 1/5

    Why deny supply-side when we know it works,?

  • Yahoo! Finance User - Thursday, March 22, 2007, 11:18PM ET  Report Abuse

    • Overall: 3/5

    Actually, supply-side economics fully explains Africa's plight of non-growth -- namely authoritarian governments / IMF interventions that turn incentives upside down through high levies, subsidies and "loans." The Euro examples of Ireland and Estonia -- two countries that cut taxes to spur growth -- are proof of economics in action to lift all boats and create wealth -- all while eliminating terrorism (when's the last time the IRA has been heard from? They are all too busy now counting their new found wealth....)...

  • Yahoo! Finance User - Wednesday, March 21, 2007, 4:16PM ET  Report Abuse

    • Overall: 5/5

    Excellent article and recommendations. The book, the blog, and the discussion on the artificial creation of purchasing power are superb. Looking forward to more.

  • Yahoo! Finance User - Tuesday, March 20, 2007, 3:38PM ET  Report Abuse

    • Overall: 2/5

    Frankly I expected a bit more than was provided. While his commentary has more substance than some of the other articles appearing on Yahoo! Finance, there is still a lack of depth and novelty. For those seeking a completely different point of view I suggest reading the posts on worldlyphilosophy.blogspot.com The articles are not for those seeking intellectual fluff; rather they are geared to people eager to think differently about investing.

  • Yahoo! Finance User - Tuesday, March 20, 2007, 2:02AM ET  Report Abuse

    • Overall: 2/5

    Mr. Wheelan needs to inject a little reality into his biased thinking. He is apparently against tax cuts and tries to "pooh pooh" them by saying that they really don't work like we are "sold" that they do. However, while Mr. Wheelan may hate the Laffer curve, it is instructive to visit it again. I don't think Mr. Wheelan would truthfully believe that the government would be making any money at all with a tax rate of 100% because no one would work at all and therefore, the government would get nothing. So to lower the tax rate from 100% to anything less than that would "increase" government revenue simply because some economic activity to tax would occur. Likewise, to lower it from 90% to 50% (for instance) would also be an example of lifting the artificial tax lid on production of wealth and would therefore increase the government's take. I'm not for lowering tax rates to increase government spending although the evidence does show (contrary to whatever skewed statistics Mr. Wheelan would prefer we focus on or whatever excuse he gives as to the reason) that treasury revenues do go up as a result of the increased economic activity related to tax cuts. So even Mr. Wheelan (and those like him) would have to admit that it's really based on how high the taxes are and how much the cut is worth that determines whether it creates enough more economic output as to offset or even surpass the initial drop in treasury revenue. However, maximizing governmnent revenue is not the best use of the Laffer curve or low tax rates. What I would prefer is low tax rates so as to "spoil" the populace into expecting those low tax rates to be the norm. That way, government can't easily raise rates. The pressure to fulfill social entitlement programs allowed to let parts of society mooch off of other parts is already rampant in Europe and destroying their economies. The more stubborn we "spoiled" taxpayers here in the United States are, the more we will fight to fend off the vultures who want the government to confiscatorily transfer wealth to them in the form of income subsidies. Earned Income Tax Credit is the most obvious example of one that got by us. Now that tax credit that fosters so much corruption will forever have to be funded by those that create the wealth. Citizens used to paying low taxes and want to keep it that way are the only defense against even more of these types of programs.

  • Yahoo! Finance User - Monday, March 19, 2007, 4:13PM ET  Report Abuse

    • Overall: 4/5

    Mostly fine article except on the "Biggest Economic Charlatans" argument. Whelan again slanders the supply-siders by totally misstating their argument. I don't know of any supply-sider who ever argued that the PURPOSE of tax cuts is to increase tax revenue. They always argued that tax cuts will increase economic production/growth, and sometimes the increase in economic growth is large enough that tax revenue will be larger despite the lower rate. But, increased tax revenue itself is NEVER the desired result of a supply-side argument. Most supply-siders would like less tax revenue since that means smaller federal government.

  • Yahoo! Finance User - Sunday, March 18, 2007, 11:54PM ET  Report Abuse

    • Overall: 4/5

    Understanding this is one person's opinion, I found the article thought provoking, BUT.....the poorly thought out condemnation of supply side tax revenue is anti-intellectual. Mr. Wheelan refers to Reagen and Bush tax cuts, and discounts them due to the presence of "inflation and economic growth"?? I take issue with the presence of inflation during the post Bush tax cuts, and isn't it possible or likely that economic growth was spurred by tax cuts or the anticipation of tax cuts? Come on, Mr. Wheelan, you've been hanging around the Liberal Arts faculty a bit too long. The lack of ability for economoists to help Africa progress is interesting to be sure. Is this a surprise? Not to me or anyone who has seen the folly of trying to generalize social and economic factors in different cultures.

  • Yahoo! Finance User - Sunday, March 18, 2007, 11:29PM ET  Report Abuse

    • Overall: 1/5

    I was one of the “angry” people who “bombarded” him with emails over his comments about supply side economics in a previous article. At least in this article he admits that government income went up following tax cuts. His last article denied that provable item. But that inconvenient fact was totally contrary to his preconceived notion. Now he expects us to believe that government revenue would have doubled, (as it did soon after Reagan’s cut), anyway. That’s funny! Got any more good ones?

  • Yahoo! Finance User - Sunday, March 18, 2007, 11:28AM ET  Report Abuse

    • Overall: 3/5

    On charlatans your argument is flawed. A higher rate does equate to higher revenue on the same income. But the basis of "boost revenues by cutting taxes" is that the lower taxes give people more money to spend which stimulates the economy which means more people working and paying taxes (something you've already admitted). It's worked every time. It's no different than retailers like Sears arguing that they can make more money (revenue) with higher prices (taxes). Just look at Wal-Mart and how lower prices have vaulted them ahead of Sears. As for the greatest challenge let's not make the mistake of requiring a set minimum standard of living (War on Poverty) for everyone. Attempting to raise the standard for someone not willing to work for it only lowers everyones standard. Look at failed communism. If someone isn't willing to do for themselves why should anyone else do it for them? Safety net? Yes! Set Standard of living? NO! Raising the Standard should be a goal achieved through a level playing field where those with less have an equal opportunity through assistance in education. Perhaps that is the real challenge, reforming our education system to one of promoting excellence and actually showing and encouraging the kids (and adults) how to achieve.

  • Yahoo! Finance User - Saturday, March 17, 2007, 7:52PM ET  Report Abuse

    • Overall: 4/5

    Where he wrote: "Providing a safety net -- a perfectly reasonable social objective -- usually creates perverse incentives: unemployment insurance diminishes the incentive to find a new job; welfare benefits discourage recipients from working; subsidized government health insurance gives employers less reason to provide private coverage, and so on...", he might have included the fact that providing tax exemptions for employers who provide health insurance, but not exempting persons who buy their own coverage, discourages the latter from going out and getting the coverage that they prefer and need while it puts businesses, which have no intense interest in employee health, in the position of dictating the coverage that the employee shall have (redundant coverage purchased by the employee then being economically infeasible because some of the employee's wages have been allocated to the company-provided health insurance).

  • Yahoo! Finance User - Saturday, March 17, 2007, 5:40PM ET  Report Abuse

    • Overall: 5/5

    Thank you for the informative article.

  • Yahoo! Finance User - Saturday, March 17, 2007, 4:12PM ET  Report Abuse

    • Overall: 1/5

    That government is the be all end all for human fulfillment is a ludicrous position to hold. Taxes feed government by forced confiscation, not free choice. Whether tax increases bring more revenue to government or vice versa is irrelevant. Taxation is confiscation. Confiscation is theft. It is immoral. Whatever your favorite government program might be, you must realize solving the problem it is supposed to means the need for said program/agency is nullified. Where's the incentive to succeed? Keep your left wing dogma in Red China or Russia. I opt for free choice!

  • Yahoo! Finance User - Thursday, March 15, 2007, 5:51PM ET  Report Abuse

    • Overall: 3/5

    I’d like to respond to “so dude, keep the anger, but leave the math to the pros” March 15, 2007, 1:15AM ET. The guy’s argument works for me without the math. Yours doesn’t, and I suspect your math. Specifically the Laffer curve is a model so your objection about pi dollars seems invalid. Clearly a continuous function can model a discontinuous world. We have largely abolished slavery, so, at least in much of the developed world, your problem with zero revenue at 100% taxation seems bad. From the article you reference: “Conventional economic paradigms acknowledge the basic notion of the Laffer curve….”

  • Yahoo! Finance User - Thursday, March 15, 2007, 4:29AM ET  Report Abuse

    • Overall: 4/5

    Nice article and wheelen is quiet clear when he says Freidman is the best writer of economists. And also that many economists are quiet indesciplined when it comes to taking forward a issue. As it is said, no 2 economists/2 philosophers/2 psycologists can ever agree on all the terms..

  • Yahoo! Finance User - Thursday, March 15, 2007, 2:16AM ET  Report Abuse

    • Overall: 5/5

    The Laffer curve is more meaningful at the extremes. At an 80% taxation rate, bringing taxes down to 50% will increase revenues, at a 10% rate, bringing taxes to 50% will increase revenues. But if you're at 50% or some reasonable level then the effect on tax receipts isn't well defined. Also, kudos to pointing out the myth of "increasing tax revenues means supply side works". I hear this a lot. No, it means inflation happens. I think a meaningful measurement is tax receipts as a percentage of GDP. And those are down since 2001 (chart 3): http://www.whitehouse.gov/omb/budget/fy2007/pdf/07msr.pdf I have a good laugh at those who think you are a left wing lunatic for daring to question supply side "economics". I guess they didn't realize that the economist you praised, Friedman, tends to swing to the right. You seem genuinely open minded and approaching economics from an insightful unbiased and sound position. I too admire Milton Friedman esp. his views on immigration and social spending. He, like you, just makes sense. Thanks for another great article.

  • Yahoo! Finance User - Thursday, March 15, 2007, 1:15AM ET  Report Abuse

    • Overall: 5/5

    I'd like to respond to the angry fellow using L'Hopital's rule on the Laffer curve, March 14th 3:51pm. Let's start with the Laffer curve itself. 1) OK, a tax rate of zero yields zero tax revenue; however, we don't KNOW that a 100% tax rate also yields a revenue of zero. This is an assumption. Human history has tragically been witness to unknowable human productivity under conditions devoid of free will. Any good definition of the Laffer Curve will give 'choice' or 'free will' as a prerequisite condition. (See Wikipedia) For tax rates at or near 100%, I don't necessarily see free will as a valid assumption, hence I don't necessarily see a zero tax revenue there. 2) L'Hopitals's rule is not an existence theorem. I really don't see where it would apply here. From the context of the surrounding argument, I believe the author intended to invoke the Mean Value Theorem for Derivatives instead. The Mean Value Theorem can be used in Calculus to prove the existence of relative extrema between two x-intercepts. But in this case, we have a problem with that too. 3) The mean value theorem only applies to continous functions. By virtue of being in dollar units, function values on the tax revenue axis are discretized, unless, for example, someone has found a way to pay pi dollars to the government. Consider this, for any two dollar amounts on the revenue axis there exists a real number between them with no corresponding tax rate in the domain. What we have here is a discontinuous function, No Mean Value Theorem, No proof of relative extrema. Incidentally, L'Hopital's rule is also predicated on continuity. IMHO, the author has thinly enshrouded an emotionally based appeal with political overtones in a morbidly flawed mathematical argument. We all hate taxes, so dude, keep the anger, but leave the math to the pros.

  • Yahoo! Finance User - Wednesday, March 14, 2007, 11:59PM ET  Report Abuse

    • Overall: 3/5

    You may be right that tax cuts do not usually result in revenue increases. But, it is indisputable that the they result in a bigger pie which at least partially offsets the decrease. And, that is the point. Those tax cuts resulted in very strong economies, which benefit everyone. Calling those who believe in this concept charletans does them a serious disservice. Personal Finance Guru www.personalfinance-guru.blogspot.com

  • Yahoo! Finance User - Wednesday, March 14, 2007, 11:27PM ET  Report Abuse

    • Overall: 3/5

    I'm no expert in economics, but it stands to reason that decreasing taxes must boost revenue *at some point*. To suggest otherwise implies people don't care what they make -- they'll work and produce regardless of the return. That's clearly wrong. If our marginal tax rate was 99% we wouldn't show up for work -- it wouldn't be worth it. In that case, dropping the tax rate would have to boost tax receipts. Where's the line that maximizes both? No idea, but it must exist.

  • Yahoo! Finance User - Wednesday, March 14, 2007, 10:40PM ET  Report Abuse

    • Overall: 1/5

    In calling supply siders "charlatans" he is engaging in an ad hominum attack. He argues that in "a country like the United States. . ." does he know of one other country like the U.S.? Whether a reduction in tax rates increases or decreases tax revenues depends upon the particulars: what is being taxed, the current tax rate, the costs of avoidence and other details. To argue that any reduction in tax rates will reduce tax revenues is simply incorrect. I will it to him to attach the correct adjective to people who promote this non-sense.

  • Yahoo! Finance User - Wednesday, March 14, 2007, 10:21PM ET  Report Abuse

    • Overall: 4/5

    I disagree with Whelan on the tax cut issue. However, I don't think he's the left wing socialist some commenters say he is. He DID mention that tax cuts are GENERALLY A GOOD THING. He just said they shouldn't be justified as a way to raise revenue. I say we should have a goal of gradually reducing taxes regardless of the revenue consequences as I don't want the Federal Gov't. to have too much revenue. To Nordmann: I say the high tax rates of the post WW2 era took their toll. It just took a few decades for the effect to kick in. Communism (in an economic sense) in Russia and Eastern Europe worked pretty well until the mid 1960s when it began falling apart under it's own weight. I might add that in the idyllic world of the 1950s and 1960s that you describe, there was not a 50% divorce rate, and out of wedlock births were rare instead of the 35% they are today. I'd also add the number of people per household has also declined over the years. Interestingly enough, the liberal media never mention these things when they cry about the decline of the middle class. A strong argument can be made that the high divorce rate and high rate of out of wedlock childbirth has hurt the middle class more than any other factors.

  • Yahoo! Finance User - Wednesday, March 14, 2007, 9:19PM ET  Report Abuse

    • Overall: 1/5

    I don't know where my posting went but this guy is a lame liberal pundit trying to act free market.

  • Yahoo! Finance User - Wednesday, March 14, 2007, 9:01PM ET  Report Abuse

    • Overall: 5/5

    Eugene K, he admires Milton Friedman's writing, not necessarily his views on economics. In that light, his opinions aren't that bizarre. I agree with the multitudes that really wish Robert Kiyosaki would disappear from this website.

  • Yahoo! Finance User - Wednesday, March 14, 2007, 8:17PM ET  Report Abuse

    • Overall: 1/5

    Wow, you are really naive... Using your logic, JF Kennedy should have left the 90% tax bracket in place and this country would be swimming in revenue right now. LOL. The mega-rich will simply side-step Socialists by forming corporations and taking their money offshore if the tax rate goes too high. That leaves the middle class to take it up the ***.

  • Yahoo! Finance User - Wednesday, March 14, 2007, 8:12PM ET  Report Abuse

    • Overall: 1/5

    Africa is poor because they lack justice. Without justice there is no law. Without law there is no business. Also, its fallacy to say that tax cuts don't correlate to economic stimulation. If not for tax cuts, no, revenues would not have just "magically gone up anyway" due to random select. What sloppy analysis.

  • Yahoo! Finance User - Wednesday, March 14, 2007, 7:40PM ET  Report Abuse

    • Overall: 3/5

    Africa is poor because it is a collection of dictatorships and despotisms. Most countries in Africa have a very rich strong man, a handful of rich cronies and generals, and millions of poor subjects (not citizens - subjects). Seinorage is a great economic concept - it is also highly applicable to the U.S. public and private sectors in that (1) seinsorage applies to the interest that the gov't doesn't have to pay on cash it prints (versues T-Bills it issues which are interest bearing); and (2) retailers take advantage of seinorage when the take in cash and issue gift cards. They collect interest on the cash but have no interest cost on the gift card IOUs that they issue. Wheelan is in denial regarding tax cuts and his charachterization of the history of tax cuts. The 1986 Tax Reform Package was a combination of eliminating loopholes (broadening the tax base) and decreasing tax rates. If tax rates are set at 25%, people are likely to work, invest, take risks, sell when they have gains, and to pay their taxes. If tax rates are set at 78%, people are likely to cheat on their taxes, arrange "barter" transactions, not invest, not work so hard, hold their assets rather than realizing gains etc.

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