Finance: June 2008 Archives
Wait...WHAT?
I never anticipated applying the Bizarro-World version of the fourth principle of economics to Greg Mankiw himself.
But today, Greg references the WSJ in his blog, in a manner that I can only presume means he agrees with the contents:
I know Greg is a smart guy (I'm not so sure about Steve), but this is...well...brain dead.
Seriously, by consuming more, you "grab a larger share of the consumption pie". Who invents this drivel?
Let me clue Steve and Greg in a little suttin'. When Jon Edwards "consumes" a $400 haircut, he may receive some emotional value, but his pie does not get any bigger (in fact, from an investment perspective this is a pretty fucking terrible deal for the former senator). When Paris Hilton buys a $5.9 Million house, sure, her pie gets bigger. But so does the pie of her real estate broker. And the construction firm that built that house, and all the contractors that work for him, and all the laborers that work for the contractor. When a wealthy person buys a Porsche, his "pie" does not get bigger (again, the re-sale value on that brand new Bentley? Not so high).
You want to know the easiest way to grab the biggest piece of the pie? Live way below your means and invest your capital in positive net-present-value investments instead of "wasting" it on consumption. Things you consume don't earn compound interest, most of the things you consume aren't assets at all, and the assets you do acquire through consumption can rarely be re-sold at book value. And yes, this is all true even after you account for capital gains taxes. Seriously, we learn this shit in Finance 101, Steve. And you work at the Journal.
News flash: for those of us who aren't rich, it is in our best interests that richer people save, since that consumption drives the economy. We like the fact that wealthier people have incentives to eat at outrageously expensive restaurants and get very expensive haircuts and get very expensive cars/boats/houses. Because most of the people who waiter or cook at expensive restaurants aren't rich, most of the stylists at expensive salons aren't rich, and most of the laborers at Porsche or BMW aren't very rich, and their lives would sort of suck if the demand for their products dried up. And Steve's implication that I would be richer because there are more Porsches to go around (or, relatedly, because Porsches get cheaper because there is less demand) if all the rich people stopped consuming is more than laughable.
Oh, it is entirely clear why Mr. Mankiw and Mr. Stevens want savings to be tax-free -- they are probably savvy with their money and do more saving than consuming (because they know that saving and investing leads to wealth, and consuming doesn't). And it is true that for the average american, who has way too much debt, saving more and consuming less would be very wise, and the government might do well to encourage that behavior among some income groups. But saying "Hey, that's unfair, look, the incentives for rich people is to buy lots of stuff and we all know that buying lots of stuff makes you even richer!" is, well, I'd say disingenuous but, are you kidding me? Steve, you're either being stupid or you are running a con job.
If you want to be progressive, incentivize the poor to save and the rich to spend. And don't give me any bullshit about how the markets need capital. The incentive scheme would have to be very perverse before wealthy investors would "spending their money on goodies" a better positive net-present-value investment than the stock market.
I never anticipated applying the Bizarro-World version of the fourth principle of economics to Greg Mankiw himself.
But today, Greg references the WSJ in his blog, in a manner that I can only presume means he agrees with the contents:
Steve in the WSJ:At this point I have to say...what the hell?
Like philanthropy, saving is an act of self-denial that enriches your neighbors (by leaving more goods available for them to consume). But unlike philanthropy, saving is punished by the tax system (via the taxes on interest, dividends, capital gains and inheritance). That's nuts. When you tax saving, you encourage people - wealthy people in particular - to spend more and grab a larger share of the consumption pie. "More consumption by the rich" should not be among the primary objectives of the tax code.
The alternative is to tax consumption....you can easily implement a consumption tax with a Form 1040 that says: "How much did you earn this year? How much did you save? Now pay tax on the difference." And you can make that tax as progressive as you like.
I know Greg is a smart guy (I'm not so sure about Steve), but this is...well...brain dead.
Seriously, by consuming more, you "grab a larger share of the consumption pie". Who invents this drivel?
Let me clue Steve and Greg in a little suttin'. When Jon Edwards "consumes" a $400 haircut, he may receive some emotional value, but his pie does not get any bigger (in fact, from an investment perspective this is a pretty fucking terrible deal for the former senator). When Paris Hilton buys a $5.9 Million house, sure, her pie gets bigger. But so does the pie of her real estate broker. And the construction firm that built that house, and all the contractors that work for him, and all the laborers that work for the contractor. When a wealthy person buys a Porsche, his "pie" does not get bigger (again, the re-sale value on that brand new Bentley? Not so high).
You want to know the easiest way to grab the biggest piece of the pie? Live way below your means and invest your capital in positive net-present-value investments instead of "wasting" it on consumption. Things you consume don't earn compound interest, most of the things you consume aren't assets at all, and the assets you do acquire through consumption can rarely be re-sold at book value. And yes, this is all true even after you account for capital gains taxes. Seriously, we learn this shit in Finance 101, Steve. And you work at the Journal.
News flash: for those of us who aren't rich, it is in our best interests that richer people save, since that consumption drives the economy. We like the fact that wealthier people have incentives to eat at outrageously expensive restaurants and get very expensive haircuts and get very expensive cars/boats/houses. Because most of the people who waiter or cook at expensive restaurants aren't rich, most of the stylists at expensive salons aren't rich, and most of the laborers at Porsche or BMW aren't very rich, and their lives would sort of suck if the demand for their products dried up. And Steve's implication that I would be richer because there are more Porsches to go around (or, relatedly, because Porsches get cheaper because there is less demand) if all the rich people stopped consuming is more than laughable.
Oh, it is entirely clear why Mr. Mankiw and Mr. Stevens want savings to be tax-free -- they are probably savvy with their money and do more saving than consuming (because they know that saving and investing leads to wealth, and consuming doesn't). And it is true that for the average american, who has way too much debt, saving more and consuming less would be very wise, and the government might do well to encourage that behavior among some income groups. But saying "Hey, that's unfair, look, the incentives for rich people is to buy lots of stuff and we all know that buying lots of stuff makes you even richer!" is, well, I'd say disingenuous but, are you kidding me? Steve, you're either being stupid or you are running a con job.
If you want to be progressive, incentivize the poor to save and the rich to spend. And don't give me any bullshit about how the markets need capital. The incentive scheme would have to be very perverse before wealthy investors would "spending their money on goodies" a better positive net-present-value investment than the stock market.
