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  • Larry Kudlow

    Posted by In-Cog-Nito on June 17th, 2004 (All posts by )

    Good article by Larry Kudlow:

    “It rarely occurs to economic thinkers that people work or invest in order to generate the highest possible after-tax return. When it pays more, after tax, to take investment risks, more individuals are willing to change their behavior and assume greater risk. Tax risk less, and get more of it. Tax production more, and get less of it.

    This was the essence of Reaganomics. It recognized the power of the individual to make choices in daily economic life. It also recognized the crucial economic theory of marginality. At the margin, what truly matters is the extra work effort, the extra investment dollar and the extra unit of profit, all measured in after-tax terms.”


    17 Responses to “Larry Kudlow”

    1. Lex Says:

      “It rarely occurs to economic thinkers that people work or invest in order to generate the highest possible after-tax return.”

      Kudlow is at once wrong and too nice. Economic thinkers without any ideological agenda know this perfectly well. Tax any kind of behavior, you get less of it.

      What is really going on is people with “economic” credentials who want to support higher tax, higher regulation, more powerful state, whether out of ideology (e.g. to promote “equality”) or self-interest, choose to obscure this rather simple reality.

    2. In-Cog-Nito Says:

      Agreed Lex. Common sense ain’t too common nowadays.

    3. Mitch Says:

      You get what you pay for. Duh! Where’s my Nobel?

    4. Sylvain Galineau Says:

      Mitch, if you spend a few decades killing innocents, you’ll get one eventually. Call Yasser, he knows the procedure.

    5. spongeworthy Says:

      And my lefty friends simply don’t believe enough analysis takes place on the margins to make any generalizations about tweaking the tax code at all. They aren’t capable of imagining an entire country with a million different businesses actually doing ROI calculations, or else they are pretending they can’t so they can use the code to punish folks for working harder than they do.

      Whatever it is, it convinces me that Econ 101 ought to be a core requirement for simply drawing breath on a college campus.

    6. social democrat Says:

      As a values conservative, I’d think you’d recognize Kudler’s formulation “people work or invest in order to generate the highest possible after-tax return” as a pretty good definition of greed, unless maximizing that return is modulated by other values.

      If we don’t tax, how are we going to cover those checks to Halliburton?

      As far as regulation’s concerned, I tend to enjoy a steak far more when I don’t worry if it’s going to kill me. And I really don’t mind that cops are out there regulating how fast we drive our privately owned cars.

      Best way to inhibit the state’s power: Democrats in control of at least one branch of govt.

    7. In-Cog-Nito Says:

      Social Democrat,

      For lack of a better cliche, greed is good. Greed in terms of the market and investors acts as a check on itself. Investors tend to want the most bang for their buck. For example, if you knew Tyco was blowing millions on exec perks and parties, you would be less likely to buy its stock, because in essence, they’re taking value away from your shares by not paying dividends, decreasing the E in the P/E ratio, etc. Investors acting through the markets also tend to be phenomenally faster at checking excesses. For example, if the word gets out that a company is blowing money excessively, its stock would tank at the openning bell. This is a much faster check than say going to court or the SEC, filing a complaint, etc etc.

    8. social democrat Says:

      We agree that a well-functioning market is irreplaceable as a tool for determining the relative value of public companies. And I think a better example to your point is the ongoing Conrad Black-Hollinger Int’l saga. Those cases are driven by investment groups who are betting on a capital gain reward if they can push out Black entirely and distribute the profits equally among equity holders. It’s working. The day after Black was forced out as CEO he noted how much his stock had jumped. But the investors couldn’t have acted without SEC-enforced access to company documents and the power of a judge’s decision.

      My problem with Kudner is that he’s so reductive, both in his own argument and his characterization of other viewpoints. Yes, the action’s at the margin, but that’s also where you find the point of diminishing returns.

      I’m hard-pressed to think of anyone who’s ever promoted the idea of more government for its own sake.

    9. In-Cog-Nito Says:

      Social Democrat,

      Thanks for the tip, didn’t know about the Hollinger/Black saga until now. I guess I’m not a very good Chicagoboy.

      Agreed, government is there to facilitate a level playing field.

    10. social democrat Says:

      If you’re interested in the Black case, a good place to catch up is Jim Kirk, a business columnist for the Chicago Tribune. Of course the Chicago Sun-Times is part of Hollinger and the other paper in town, but the schadenfreude is pretty controlled. His coverage is still up in the biz section of the Trib’s web site.

    11. Mitch Says:

      I’m hard-pressed to think of anyone who’s ever promoted the idea of more government for its own sake.
      No, you usually won’t hear that explicitly. It’s just that when you hear more government proposed as the solution for so many different problems, a reasonable person would start to detect a pattern.
      My problem with the libertarians is pretty much the same issue. Not all problems are amenable to the same solution, whether that solution is government programs or no government at all. There must be something else about a one-size-fits-all solution that appeals to its proponents. My skin crawls every time I hear a politician start a sentence with “We must …” It usually comes down to “I’m going to make you …” Similarly, when I hear that market forces will take care of my house burning down (believe it or not, this was tried in Philadelphia), I know I’m being hosed.
      Where on the political spectrum do you find skeptics? Probably soft right-libertarian. Mencken gave high praise to Calvin Coolidge when he described him as “not a nuisance.” That’s really about all we can expect. Coolidge and Reagan both took a lot of naps. This is a practice we should encourage.

    12. social democrat Says:

      I remember when only libertarians and communists had an ideology.

      Here’s the regulation pattern I see: anti-social behavior by business is identified, newspaper articles are written, then ad hoc political organizations form which have to battle entrenched lobbyists and trade groups for years, even decades. Nixon signed the law creating the EPA only after Lake Erie caught fire. By then, the Sierra Club wasn’t just a group of California hikers.

      The regulations are mind boggingly complex because that’s what happens when lawyers negotiate. Imagine if teens had an effective lobby for traffic laws and enforcement. Then consider the army of lawyers fighting attempts to regulate the air and water emissions from contemporary hog farms. I think you’d want govt. to wake up if you heard someone was planning to build one upstream and upwind.

    13. DSpears Says:

      It really crawls under some people’s skin that the tax code could be used simply to raise neccessary government revenue in the most efficient way instead of using the tax code to punish people or enact some kind of perverted social justice.

      The most efficient way to maximize revenue is to minimize the percent of income paid in taxes on each individual so that the tax doesn’t impel him to change his behavior so as to produce less. Nobody I know of has refuted the fact that taxes retard economic growth. Since taxes are a percentage of economic growth the government aught to keep taxes to a minimum. Arthur Laffer didn’t invent this, Alexander Hamilton among others sited this principle in 1790’s, and he didn’t invent it either.

      Supply-side economics is a more complex theory than most people give it credit for, but if you were to boil it down into a simple form, the Laffer Curve would be the best representation.

      The 2nd leg of Supply-side economics is reduction in government regulation of the economy. Few supply-siders would advocate the elimination of all government regulation (we’re not anarchists), that’s a not so clever straw man created to be knocked down by silly references to driving without traffic lights or speed limits.

      But the amount of complex, unintelligible and most times contradictory regulations does nobody any good. The least glorified piece of Reagan’s legacy was his significant reduction in the regulatory apparatus (since renewed and then some). This is what liberals howled the most about (to many liberals, tax cuts were a classic Keynsian move) during Reagan’s term, and they were right in a sense, this was his most important legacy and the thing that Bill Clinton worked the hardest to change (he succeeded).

      The Contract with America, before it’s signers got swallowed up by and became part of the Washington machine, understood this by proposing to eliminate whole departments of the government, not trusting them to simply reduce their own size. They actually succeeeded in eliminating the Interstate Commerce Commission, but failed in eliminating others like Energy, Commerce and Education. In fact those agencies have more than doubled their budgets since Bush took office. In fact, Spencer Abaraham introduced a bill in the Senate to eliminate the dept. of Energy as a huge waste of taxpayer money. He now heads that agency and has been such an advocate for it that it’s budget has more than doubled. It’s amzing to watch a politician change his mind right before our very eyes.

      This is why Bush, despite cutting taxes, is not the heir to Reagan’s legacy. Neither was his father.

      In addition, there is a serious argument to be made that administrative law-making is un-constitutional: The Constitution specifically delegates the function of making laws to the Legislative branch, not the Executive branch. There was a very good reason for this which should be obvious. The 10th amendment is truely dead.

    14. In-Cog-Nito Says:

      Looks like the Chicago Sun Times/Tribune circulation flap is becoming national, Drudge has a link to an article about it casting doubt on the industry’s circulation numbers as a whole.

      Good comments folks. Too bad the Contract w/ America lost its legs. Plenty of departments that deserve to be put out of business.

    15. social democrat Says:

      “But the amount of complex, unintelligible and most times contradictory regulations does nobody any good. The least glorified piece of Reagan’s legacy was his significant reduction in the regulatory apparatus (since renewed and then some). This is what liberals howled the most about (to many liberals, tax cuts were a classic Keynsian move) during Reagan’s term, and they were right in a sense, this was his most important legacy and the thing that Bill Clinton worked the hardest to change (he succeeded).”

      Nobody likes unintelligible regulations, except the people who make very good livings interpreting them. Glad to see you credit Clinton too.

      My point about traffic laws is that they are clear and concise (compared to the tax code and environmental laws and regs) because there arenít any lobbyists seeking to gain advantage for their clients when theyíre drafted. As I said, itís what happens when lawyers negotiate, and itís has been going on maybe not since Hamiltonís time, but certainly since Jay Gouldís.

      There is a distinction, I think, between whether a thing should be done at all and whether it is done badly or well.

      Liberals howled when Reagan diminished the substance of regulation. And cut effective and efficient anti-poverty programs like school lunches to reduce govt. spending. Even John Heinz wasnít happy when someone tried to categorize ketchup as a vegetable.

      Tax cuts are an effective stimulus, but only if the deficits arenít so big they send interest rates soaring. That depresses investment across the board, plus housing, cars, etc.

    16. DSpears Says:

      Tax cuts are not a “stimulus”, which implies in classical Keynsian fashion that cutting taxes is identical to increasing government spending. Tax cuts re-deploy capital to the productive activities which lead to future economic growth instead of non-productive government uses, which don’t tend to do anything other than transfer dollars from one place to another without adding any economic value, adn sometimes subtracting it.

      Of course the real problem with the Clintonian “deficits cause high interest rates” theory is that experience shows just the opposite. Once the budget was “balanced” and the government was running an on-budget “surplus” interest rates were higher than they were when deficit’s peaked at over $300 billion during the ’90-’91 recession. In 1981 interest rates peaked before Reagan’s tax cuts were enacted and continued to decline throughout the decade despite budget deficits.

      There is a simple explanation for this: decreasing interest rates and increasing budget deficits are caused by the same thing: Declining economic growth. Absent significant Fed policy action (like in the early 80’s) deficits and interest rates tend to move in opposite directions, not the same.

      The big problem with the “deficits cause higher interest rates” theory is not so much in it’s utter ignorance but in it’s misunderstanding of realtive quantities. The fact is that the single biggest determinate of longterm interest rates is the market’s expectations for future inflation. This makes sense because any lender can have his investment wiped out in real dollars by inflation and base the amount of money in return (interest) on that expectation.

      Of course supply and demand come into play and all things being equal i.e., a static pool of capital to lend and and static demand for that capital, an increase in government borrowing will affect the price to some degree. The problem with the theory is that the relative quantities involved are too small in comparison to the total market to have a significant effect and are easily overpowered by other weightier factors.

    17. Anonymous Says:

      Great post DSpears, but then I have to ask myself, what about the interstates built in the 50’s?

      Every other country has to deal with balancing thier budget if they want to attract capital. Your second paragraph leads to believe that deficits cause low intrest rates, but they are both effects of declining economic growth.

      I definatly concur that expectations on inflations are the biggest determinant to set the intrest rate, but I also think that, unfortunatly, the FedRes has a big influence. Inflation was over 2% YTD, and I can still get a car loan, or home equity for 4%. Are these banks stupid enough to lose money?? I just laugh because I just bought a car at 4% for 5 years!