Sinclair Davidson rediscovers the Laffer hypothesis

John Quiggin17 Comments

In today’s Fin (subscription required), Sinclair Davidson, author of a recent Centre for Independent Studies monograph on income tax, restates the hypothesis[1] , most famously associated with Arthur Laffer, that governments could reduce revenue by raising tax rates. He claims that his own calculations have revealed that revenue would be maximized with a marginal tax rate of 35 per cent.

Does the CIS endorse this claim? I don’t recall seeing it in the monograph. But the article refers to Davidson as the author of the CIS monograph, and this piece is associated with a broader campaign by the CIS on this issue, which has included a number of policy monographs and opinion pieces, including a recent attack on me by Peter Saunders. In the absence of some specific disclaimer, I think it’s reasonable to take this piece as part of the CIS campaign[2].

I commented previously that the Davidson monograph represented an alarming lapse in quality control on the part of the CIS, but I’m now coming to think that the problem may be more systemic.

fn1. It is common to refer to the Laffer curve, but the idea behind the curve is obvious, and had been observed by many writers before Laffer. Laffer’s justified claim to fame is the assertion that the US in the early 1980s was on the declining section of the curve. This was one of the arguments supporting the Reagan tax cut. Of course, revenue fell after the Reagan tax cut and Reagan partially reversed it.

fn2. Of course the CIS doesn’t have an official set of policy positions. But it seems reasonable to speak of a CIS viewpoint and to regard Davidson as being representative of that viewpoint as regards tax policy.

Bremer's last trick

John Quiggin7 Comments

Juan Cole is spot-on, as usual

The Guardian reports that US civil administrator Paul Bremer signed an order Monday banning Muqtada al-Sadr and his lieutenants from running for elective office for 3 years because of their membership in an illegal militia. Muqtada and his lieutenants rejected this decree and said that the CPA and the caretaker government had no right to make such decisions.
…

Bremer’s action in excluding the Sadrists from parliament is one final piece of stupidity to cap all the other moronic things he has done in Iraq . The whole beauty of parliamentary governance is that it can hope to draw off the energies of groups like the Sadrists. Look at how parliamentary bargaining moderated the Shiite AMAL party in Lebanon, which had a phase as a terrorist group in the 1980s but gradually outgrew it. AMAL is now a pillar of the Lebanese establishment and a big supporter of a separation of religion and state. The only hope for dealing with the Sadrists nonviolently was to entice them into civil politics, as well. Now that they have been excluded from the political process and made outlaws in the near to medium term, we may expect them to act like outlaws and to be spoilers in the new Iraq. (emphasis added)

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Elect the Governor-General !

John Quiggin11 Comments

Governor-General Michael Jeffrey has been criticised, again, for political comments, this time backing George Bush against Mark Latham. Such criticism, in my view, is obsolete. Although he was more subtle about it, Jeffrey’s predecessor-but-one, William Deane made his disagreement with some of the more brutal policies of the current government pretty clear. The attempt to restore the status of the GG as an impressive nonentity was tried with Peter Hollingworth, and failed miserably. Next time around, not surprisingly, Howard chose to play it safe and appoint a Liberal party loyalist.

The real problem is with the GG position itself. It is now inherently political, but the appointment is entirely in the personal gift of the PM. This is most unsatisfactory, particularly when a change of government produces a situation where the GG and PM are of opposite parties. Under our current system, this will produce increasing pressure for the GG to resign when the government that appointed him/her loses office.

The only adequate remedy is direct election. A directly elected GG (or President) would be free to speak out on public issues from time to time, while maintaining a primarily ceremonial role. The case for direct election would be even stronger if we became a republic, but it’s overwhelming in any case.

Hat tips: The title of this post is from a book by David Solomon and Ken Parish revived the idea a while back.

Risk and Reagan

John Quiggin20 Comments

Since the obituaries and eulogies for Ronald Reagan have now been read, I think it’s reasonable to take a critical look at his historical contribution. It’s often argued that Reagan accelerated the end of the Cold War by raising US military expenditure, thereby forcing the Soviet Union to increase its own military expenditure and crippling its economy. I think this argument has some plausibility in relation to the dissolution of the Soviet Union itself, though not in relation to the fall of the Berlin Wall and the collapse of the Communist governments in Eastern Europe[1].

So granting that this analysis is correct, should Reagan be praised. For the argument to work at all, the buildup must have raised the probability of nuclear war, unless you suppose (improbably) that the Russians were absolutely convinced of the peaceful intentions of the West and responded to Reagan purely to build up their own offensive capability[2]. Let’s suppose that the annual risk of war was raised by one percentage point. Then over the eight years Reagan was in office, there was a cumulative 8 per cent chance of a war that would certainly have produced tens of millions of deaths, probably billions and possibly the extinction of the human race. Against this, the early collapse of the Soviet Union produced benefits (mixed, but still positive on balance) for people in the Soviet Union, and perhaps also a reduction in the likelihood of an accidental nuclear war in the period since 1990. These benefits are small in relation to the potential cost.

As I’ve argued previously, if you think that a good policy is one which, in expectation, has good consequences, Reagan’s policy fails this test. On the other hand, standard accounts of consequentialism say that a good policy is one that has good actual consequences. If you accept this, and the assessment of the facts given above, Reagan’s historical record looks pretty good.

fn1. It had been obvious for many years that these governments were sustained only by the threat of Soviet military intervention. Gorbachev still had the military capacity to intervene in 1989 (in fact, on the argument presented above, the Russians had a bigger military than they would have had if Reagan had not been elected), but he chose not to do so. As soon as this became evident, the Communist bloc governments collapsed.

fn2. As an aside, in debate at the time, it was widely asserted that the Soviet government was actively planning an attack on the West, to be undertaken if Western defences could be weakened sufficiently. Has the collapse of Communism produced any archival or similar evidence on this? I would have thought that the Warsaw Pact countries would have had to have had a fair degree of involvement, and, since they are now in NATO, there would be no reason to keep any secrets.

Monday Message Board

John Quiggin19 Comments

Time as usual for the Monday Message Board. Post your thoughts on any topic. Since some commenters have been getting heated in recent weeks, let me remind everyone of my policy requiring civilised discussion and no coarse language, and raise the discussion starter: Does coarse language make for a coarse culture?
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A question on the cost of nuclear power

John Quiggin24 Comments

If you take the problem of climate change at all seriously, it’s obviously necessary to consider what, if any, role nuclear (fission) energy should play in a response. I discussed this not long ago and concluded that “it may well be that, at least for an interim period, expansion of nuclear fission is the best way to go.” However, on the basis of my rather limited survey of the evidence, I suggested that, as a source of electricity, nuclear energy is about twice as expensive as coal or gas. If so, conservation is the first choice, and we should only move to alternative sources of electricity when the easy conservation options are exhausted.

By contrast, Mark Kleiman says that “Nukes, if run right, are fully competitive with coal, and a hell of a lot cleaner”, and Brad DeLong says “He’s 100% completely correct”, and Matt Yglesias takes a similar view.

Kleiman cites the example of France, which I don’t find entlrely convincing, since the French have always given substantial subsidies to nuclear energy. He argues that the US made a mess of nuclear energy for regulatory reasons, but doesn’t say anything about the British experience, which didn’t have the same problems and was still an economic disaster. I’ve looked briefly at Canada’s CANDU program, where experience appears to be mixed at best.

Can anyone point me to a reliable source of comparative information on this? Is there general agreement, or a partisan divide between pro-nuclear and anti-nuclear advocates ? I’d also be interested in comments on the general question raised in my opening sentence.

Blue

John Quiggin4 Comments

Big news from today’s karate training session! Having had the stuffing kicked out of me during the grading session at our annual training camp a couple of weeks ago, I wasn’t too sure that I’d get my upgrade to 9th kyu, which would have entitled me to a black tip on my orange belt. But, in a continuation of my recent run of luck, when our Kancho (founder) announced the results, I got a jump to 8th kyu, entitling me to a stylish blue belt (I’ll try and post a new photo soon). Perhaps this will discourage my opponents more effectively than the Fed Fellowship has done!

For those readers who live in Brisbane or the Gold Coast and are interested in learning karate, I strongly recommend Seiyushin for a traditional and rigorous style of karate training. Kancho Nagayama was the winner in the 1988 All Japan National OpenWeight Tournament, and is a great teacher. The group is friendly, and open to a wide range of ages and skill levels (roughly 5 to 50 at present), and welcoming to both men and women. Dojos are in St Lucia, Toowong and Southport.

Big and small targets

John Quiggin18 Comments

Tim Dunlop has raised the question of whether there are enough reasons to vote Labor, and the related question of whether Latham has adopted a small target strategy. Having taken the “Anybody But Beazley” line in response to the last round of the small target strategy, the latter idea is really scary.

In general terms, the notion of a small target strategy is refuted by Latham’s stance on Iraq, which I support. I think the occupation is now doing more harm than good and needs to be brought to a conclusion, or at least greatly scaled down, in the near future. Elections should be held before the end of the year, which would fit Latham’s timetable neatly.

More generally, I think the current talk of a small target strategy is due in part to the fact that Labor hasn’t gone after the government aggressively over Iraq, or even the travel scandal. This is a sound tactical decision, and doesn’t necessarily imply a small target strategy.

The big problem relates to tax and public expenditure and here the problem is not so much that Labor has a small target strategy as that it doesn’t have an agreed strategy at all. This is not surprising in itself, since, except at election time, the natural tendency of opposition is to say nice things to everybody without worrying about the budget constraint. But this won’t work well at an election. Labor needs to decide what it stands for, in particular on the general relationship between tax and services. I’ll be putting forward some proposals on this soon.

If it isn’t obvious, since the shameful events of 2001 (Tampa, SIEV X, Children overboard), there is nothing that would induce me to put this government anywhere other than last on my ticket. But I certainly hope for more from Labor than the almost-equally shameful capitulation we saw last time around.

Tim’s post has a lot of worthwhile comments, and links to others who have posted on this, including Steven Wade, Tubagooba, John Abercrombie and Ken Parish

Copenhagen Interpretation

John Quiggin10 Comments

How would you rank the following priorities for making the planet a better place?

* A major improvement in health in poor countries, saving millions of lives each year

* Substantial progress in reducing the rate of climate change, preventing large-scale species extinctions and other environmental damage

* New and improved advertisements for consumer goods
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