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Thursday, May 15, 2014

Drum beats Rubio to a pulp

Keeping up his usual standard of being a better economist than the vast majority of PhD economists, Kevin Drum has an absolutely brilliant first back of the envelope score of Marco Rubio's pension reform proposal. Just read it. I have a pointless comment on one point here
so let's read Rubio's plan. It contains a grand total of four policy proposals: 1) Allow workers to invest money in the federal Thrift Savings Plan. 2) Eliminate the payroll tax for anyone over age 65 who continues to work. [skip] Item #1 may or may not be a good idea, but it has no impact on Social Security. Item #2 reduces payroll tax income and therefore makes Social Security less solvent.
Later Drum attempts to calculate the cost of item #2, but that's enough to motivate my comment (which concludes supporting both Drum's conclusion and his decision to not bother dealing with the possible counterargument discussed at boring length below). My comment. This post is wonderful. I can't say how impressed I am by your knowledge. I do have one possibly mildly interesting comment. The logic, such as it is, of exempting people over 65 from the payroll tax is the usual conservalogic which depends on a very strong behavioral response to changes in incentives. The story (which you quite reasonably ignore in your post) is that the increase in take home pay will cause people to delay retirement past 65. This would increase the solvency of social security, because even if they wouldn't paying payroll tax, they wouldn't collecting a pension. The logic of item 2 is Laffer curve logic -- I'm sure Rubio would argue that the indirect effect of a change in taxes due to the resulting change in behavior outweighs the direct effect so cutting taxes means higher net revenue (here in the form of lower pension payments). I think you are quite right to ignore this argument (I have no doubt you considered dealing with it and decided it wasn't worth the pixels -- I agree about main post pixels, but comment pixels come at a discount cause who reads comments anyway ?). Dealing with it here, I note that it was always obvious that Laffer curve logic is fantasy. It is possible to estimate the elasticity of labor supply with micro data. All such estimates always show behavioral effects smaller than direct effects. This was well known in 1980 (I think there was a Tip n Ronnie conversation in which Tip told Ronnie that 97% of economists disagreed with him and Ronnie said something like yes but what if the other 3% are right -- if so the 97% sanification factor of Laffer and Global warming might join the 27% crazification factor). The results of the Kemp-Roth experiment, the Clinton 93 experiment and the Bush 2001 and 2003 experiments should have removed all doubt. But Rubio is doing penance for his sanity on immigration, so he must declare absolute faith in Laffer. It is the central tenate of Republican dogma (even Megan McArdle admitted she was wrong to deny Chait's claim that it is and when was the other time McArdle admitted she was wrong about anything ?). Ignoring Laffer logic when discussing fiscal policy is like ignoring global warming denial when discussing carbon policy. It is the right choice for a post, but hey it's not as if I would be doing anything useful if I weren't Laffer bashing.

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