Tony Cohen's Reviews > Armchair Economist: Economics & Everyday Life

Armchair Economist by Steven E. Landsburg
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Mar 02, 2008

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Read in January, 2008

I have to give this book a three since I did learn something, although I really hold it in remarkable contempt. For the first time ever while reading an economics book, I felt like I understood the contempt held for the 'dismal science'.

I feel like delving into this a bit. The author makes a claim that taxes don't add value to a society, because what you take from Peter, you pay to Paul, and in a sense of absolute value, it is true. If I have a million millionaires, who each earn 10 million a year, and I tax 1 million from them and give it to the poor, I have not made my society richer in absolute monetary terms, but this completely ignores one of his other insightful claims.

In a previous example, when discussing logging, he claimed that the actual economic benefit of cutting down trees, has to not only take into consideration the positive economic impact for the company, loggers, etc., but it also must factor in the emotional cost to the environmentalist who is upset about loosing said trees. Critically, and I must give credit where credit is due, the economist in question recognizes that labour is not valuable in and of itself, but the fruits of said labour are. So if I work my ass off and buy an Ipod, it is my enjoyment out of the purchase which is the true reward...this is what I work for. Hopefully, what I spend my money on brings me some form of satisfaction.

Now this is critical because this explains the real monetary value of walking along the beach. Non-economists might gag that this activity has a value, but it does. I could have done anything with my time, like work, but I chose to spend it in this particular manner, and that is worth something. So if enjoying nature means something, there could theoretically be a dollar value attached. In fact, there often is. My friend Judy owns a fat pad in Marin county (which she got for a song from a person shortly thereafter indited for international drug smuggling...but that story is for another time :-) Anyway, you would be hard pressed to find someone who loves nature more...for walking in it...swimming in it...and merely knowing it exists. But it does have a value. I don't know the number, but I would imagine that if a suitably ludicrous offer was made for 40 acres in Marin, that love of nature could be quantified. This insight, the fact that value must be attached, as hard as it may be, to non nuts-and-bolts numbers is true....and valuable...and then completely ignored as evident by the aforementioned millionaires example.

So lets look at those folk again. Let us say, that we tax the million millionaires earning 10 million dollars a year at 100,000 dollars annually. In actual dollar transfers, no one is richer or poorer. The big wage earners have lost 1% of their salary, and now there are 100,000,000,000 floating about to disperse to the poor. So lets play with my imaginary (but inspired from the book example) and up this tax to 5%, leaving our society, in the form of taxation from these sole 1 million millionaires 500 BILLION dollars to play with. Now, recognizing the principle of the need to weigh emotional benefits and costs with any economic plan, (accepting the complete dollar exchange equality) 1 million people have suffered. Now, how much they have suffered is hard to quantify. They have been taxed at 5%, and that is real. There may be an extra cottage in Aspen un-purchased, a Mazzerati (sp) undriven, or some classy couture unworn. Now, to say that the tax generated no value is to assume that the net emotional worth/perception of the 500 Billion to the poor is equal to the ennui suffered from the mega-wealthy, knowing that they have had a small percentage of their earnings accosted. So what emotive benefits do our poor people gain from this. That list is extensive, so how about we focus on the emotive benefit of what the wealthy gain from giving.

While some might wish they had an extra 10 Ferragamo shoes to wear, I am guessing others feel happy that the poor are better off. If nothing else, seeing poor people beg around you does have a tendency to be a wee bit depressing. Oh yeah, and when people are less desperate, they tend to not commit crimes...a portion of which maybe (just maybe) directed at the aforementioned maybe rich people might enjoy not living with constant security and behind gated fences....they may like having competent people do have to interact with poor people, even if the later only serve them, and maybe they would like them to be able to do simple sums (only in terms of effective service mind you :-)...which they are likely to learn in school. Oh...and health care...poor people can spread infectious diseases...but not so likely if they have health care and last I checked rich people don't like dysentery either....and rich people might like the emotional value of living in a stable society unlikely to suffer from a despotic overthrow....also less likely in a country with people not at the mere level of starvation. Still think taxes don't produce anything Mr Economist? And I haven't even gotten to the benefits the poor might feel not living in the gutter.
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Peterboh You completely missed the point about taxes. Taxes are bad because they create a dead weight loss - they are not efficient. Someone has to produce the Ferragamo shoes (probably poor). So you are taking away poor people's job as shoe makers and rather give them a welfare check. Not smart.

Landsburg makes no normative judgment about income distribution. That is a completely separate issue from taxes. The method of raising money (ideally a lump sum tax) is completely separate from the distribution. You can still give millions of dollars to poor once you have them, you just want to raise money efficiently. That is what he is trying to say.

Health care same thing. You can give poor a check and have them decide what they do with it. No need to give them health insurance. That is best for poor (not necessarily for society).

Tony Cohen Actually, I think the dead-weight loss issue is more complex. It is true that when we take taxes from people and 'give' it to others, we are doing so in a sub-optimal level, but I am not sure that this level is worse off due to our 'humanity mandate'. This is an idea I have been kicking around for a while, so let me know what we think.

There are many cases where we just won't do the optimal thing: let someone starve and die. Because our humanity, for the most part, prevents us from doing things, I question the numerical value of many discussions about dead-weight loss. Since we won't let people die, then a true simple rationalisation of 'efficiency' will always come up against this unspeakable truth.

Many conservative economists are right when they look at the inefficiencies of taxes, and there are many areas where they are right, but in some areas their rationality flounders because they won't touch the area of brutal efficiency when discussing deadweight loss taxes and inefficiencies.

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