Economics & Finance

The importance of the growth rate increases, the further into the future we look. If a country grows at two percent, as opposed to growing at one percent, the difference in welfare in a single year is relatively small. But over time the difference becomes very large. For instance, had America grown one percentage point less per year, between 1870 and 1990, the America of 1990 would be no richer than the Mexico of 1990. At a growth rate of five percent per annum, it takes just over eighty years for a country to move from a per capita income of $500 to a per capita income of $25,000, defining both in terms of constant real dollars. At a growth rate of one percent, such an improvement takes 393 years.

–Tyler Cowen

Some manufacturing executives are complaining that they can’t find applicants with the right skills for the available jobs. According to John Engler, President of the National Association of Manufacturers, “A full 36 percent of our members have said they have employment positions unfilled right now because they cannot find qualified workers. This confirms what our members have been telling us: that the people applying for manufacturing jobs today simply do not have the math, science and technological aptitude they need to work in modern manufacturing.”

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My view is that innovation by trial-and-error is the most valuable economic process, and government intervention tends to be inimical to such innovation. Even when the market is producing unsatisfactory outcomes, my view is that eventually innovators will come along with better ideas. In that way, the market’s errors tend to be self-correcting. Government’s errors tend to perpetuate and to deepen.

–Arnold Kling

David Bradford was an advocate of tax simplification and flattened rates, and the author of “Untangling the Income Tax” (Harvard University Press, 1986). His first preference was for a straight consumption tax (VAT or sales tax). Another interesting proposal was a tax only earned income, leaving returns on capital untaxed. The reasoning behind this was that

• earnings are roughly equivalent to consumption, given a low rate of savings;
• such a tax could be made politically palatable by allowing some different tax rates;
• it would eliminate the “tax arbitrage” of the mortgage interest exemption (high-bracket taxpayers pay deductible mortgage interest, some of which is in turn paid to low-bracket taxpayers as taxable income on passbook savings), and
• it would be easier to administer and harder to evade than a VAT.

Dr. Bradford served in the Ford and Bush 41 administrations. His analysis of the income tax law in effect in the 1970’s led to the extraordinary bracket-flattening of the Tax Reform Act of 1986 during the Reagan administration. Another obituary here.

Update: Plus ça change, plus c’est la même chose.

The reason why the Social Security system is in the news is easy enough to understand. The population of the US is aging, and when that big bubble of elderly demographic slides over into retirement age there won’t be enough people working in the country to support the people who want to see a benefits check sitting in the mailbox every month.

So the debate in the US is about a benefits package that, for most people, doesn’t provide enough after-retirement money to live on. This means that most people have to make some other arrangement in order to maintain their standard of living after they stop going to work every day. Heartless as it sounds, even if SS fails it won’t be a terrible tragedy for the majority.

This is the big debate in the US. What about the increasing number of old people in other countries?

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