Economics Folklore on the Left, Part I of II

In keeping with my lifelong pastime as a scold and a nag, I’m going to trot out and debunk my favorite misconceptions about economics that I see among my lefty comrades. Originally this was just going to be a single post, but then I found some notes I had made for additional bits.

Profits, Boo!

In Marx there is the fundamental idea of “surplus value,” the amount of value or produced output over and above the labor and capital required to produce it. This is not a strange notion by any economics. Economies may produce enough to defray the costs of production and still have something left over. If they don’t, there is liable to be trouble of one sort or another. At the level of the individual firm, revenue less costs is profit.

At a macro or aggregate level, I would say the idea of surplus value is useful. It highlights a fundamental economic decision: how to dispose of the surplus. Invest it, finance more consumption with it, or even consume so much that the capital stock is drawn down. Without a surplus, or profits, economies and living standards cannot grow. Of course, how all this is measured is important, but I’m not getting into that.

The upshot is that without profits, living standards are likely to languish. That doesn’t mean profits should not be taxed or otherwise redistributed. Unless you oppose economic growth, you want to see profits, most of which are applied to new investment. Consumption by the rich may look obscene next to grinding poverty, but by the numbers it is not a big deal.

Even a public enterprise would want to at least cover its costs. Even better, if it runs a profit, it can return something to the public treasury, pay its workers more, or expand its services. The trick there is for it to set the correct prices for its services, possibly zero, another sidetrack I’m not getting into.

Universal Basic Income (‘UBI’)

I’ve been ranting about UBI for years now. It’s become quite a thing in progressive discourse, including in Erik Olson Wright’s (EOW) book that I spent three recent substacks discussing. My review of Annie Lowrey’s book (neither she nor her famous, brilliant hubby Ezra Klein, since then on speaking terms with me, LOL) encapsulates my grievances. (Here’s a critique by UBI boosters of something else I wrote, and here’s another.)

A short version: UBI is neither universal nor basic. A $10,000 benefit, barely ‘basic,’ would if ‘universal’ cost over three trillion dollars, a crazy-large slice of the Federal Budget. End of story. If I wanted to pose as a Marxist, I could say it elevates individualized consumption over collective, or money over public services. We’re going to need much more of the latter for most of the usual progressive agenda.

I’ve always upheld the case for cash assistance. In fact, a good part of my career was devoted to it. No matter what the Gov provides, folks will still need cash, and we will want to provide some to many who are unable to provide much for themselves. The way to go, on top of the existing support for so-called “refundable tax credits” (not actually a refund of anything, but again, I digress) is a revival of support for a negative income tax (‘NIT’), decidedly not the same as the ‘UBI.’

Another canard, also found in EOW and in simplified takes on Marx, is that under capitalism people lack the spending money to buy up all the output produced. Ergo, another reason for a UBI. Actually this bit was well served by John Maynard Keynes and subsequent followers. The Gov can buck spending up to whatever it wants, short of exceeding what there is to spend money on. It needn’t go to UBI. It could go to perverse objects, such as defense or Trump’s hotels, or to better purposes.

Automation

One of the oldest chestnuts in the pseudo-left inventory, in the ‘50s it was called “cybernetics,” and more recently included as a rationale by EOW for a UBI, automation will destroy jobs and raise unemployment because robots will do everything. History is not kind to this canard. Automation has been going on for a hundred years. We could say it’s measured by productivity growth. Employment surges right along with it. The latter incurs shocks from time to time, not incidentally with human suffering resulting, but in the longer run there are always more jobs.

The Ruinous Debt

Another repeated focus in my life’s work is the priority of Federal budget deficit reduction. After upholding fiscal conservatism for decades and excoriating Democrats’ thirst for public spending, the Reagan Administration emptied the till with tax cuts in the 1980s. Ever since, Democrats have tried to make political hay out of this, to no avail.

By now the game is pretty obvious. Democratic Administrations do politically painful austerity measures — spending cuts and tax increases — in the name of fiscal probity, and Republicans throw parties with the proceeds. That’s how Bill Clinton and Barack Obama turned comfortable Democratic majorities in Congress into Republican ones.

The Biden Administration has distanced itself from deficit mania, thanks I believe to the advice of former EPI colleagues Jared Bernstein and Heather Boushey. I’m not all that sanguine about Kamala in this regard, but we’ll see. Putting Wall Street hedge fund types and tech billionaires into the top jobs will not be a good sign.

My first big piece on this linked above preceded broader acceptance of the ideas. Others ripped off my paper — friends! — but I can’t quite claim to total originality. It was edgy for its time, but it relied on prior work by the eminent Professor Robert Eisner. I wish I could find his mark-up of my draft. At any rate, I am proud to say he once referred to me as “my partner in crime.”

Debt is intrinsic to finance and would be so as well under any sort of socialism you could name. It’s status as a popular bogeyman may stem from ancient religious disapproval of usury or Jewish money-lenders. Now of course usury in the form of thirty percent credit card interest rates and much higher implicit rates on things like payday loans have put usury back in style.

Modern Monetary Theory (‘MMT’)

Another of my pet peeves that I’ve written about before. It may interest you to learn that on the left, publications are afraid of criticism regarding this subject. It has, or did have, a huge hive of rabid supporters. I’m not exactly a big MMT denier, as the linked article reflects. Still, its principal scholars and advocates tend to be very thin-skinned and dogmatic, even though they have waged a brilliant, spectacularly successful marketing campaign for MMT. In a Twitter dust-up, one of them called me a liar for disagreeing with one of his cockamamie theoretical pronouncements.

As progressive in economics as the Biden Administration has been, MMT has not broken through there. Even Bernie, a booster of fiscal responsibility, has not bought into it. AOC has, or did. I seem to hear less about MMT these days. Perhaps its moment in the sun has passed.

Means-Testing

Means-testing means conditioning public benefits, typically inversely, on a prospective beneficiary’s income and/or wealth. It became an object of attack thanks to the tireless advocacy of my friend Matt Bruenig, a UBI enthusiast. The idea is that means-testing is a cruel complication to the efficient transmission of cash.

In principle any public benefit is means-tested, in one way or another. There are simply more and less efficient ways to do it. The UBI, for instance, is means-tested because it is financed by an income tax. There are net payers and net recipients. The higher your income, the less you get back, all the way into negative territory. The inefficiency lies in the fact that a huge volume of money does a round trip from taxpayer to recipient. Given the burdens of administration, this entails many a slip between the cup and the lip. It also puts a huge burden on the Federal budget. By contrast, the negative income tax is a much easier lift for the Federal budget.

UBI advocates like to liken everything to UBI, including the NIT. They are fundamentally different animals. President Nixon toyed with an NIT proposal in the 70s. So did patron saint of right-wing economics Milton Friedman. Neither were these UBIs. Only George McGovern suggested on in his doomed presidential campaign.

Around the year 2000, Bernie Sanders suggested a UBI, especially poignant for me since it helped to bury my much more realistic and specific refundable tax credit proposal. Neither ever saw the light of day.

Tax Incidence and Trumpo-nomics

Tax incidence is the topic of who bears the burden of a tax. It is not necessarily the person who actually pays the tax, a concept that tends to be lost on the average person. For sales taxes, it is pretty obvious. People know when they pay sales tax to a merchant, the merchant passes it along to the government, but the burden is really on the customer because the tax is included in the sales price.

So too with tariffs, really no more than a sales tax on imported goods. If the import is what economists call an “intermediate good,” something used in production, the amount is usually thought to be passed along to the customer at the end of the chain. Though that is not the total of the burden. The impact of a sales tax or tariff on the ‘sticker price’ has some deterrent effect on the customer. She buys less, maybe more of something else. Because her no-tax option is discouraged to some extent, she is worse off. That too is part of the burden.

More than once I’ve heard from the left that a tariff is a sales tax and could provoke a trade war. Both cannot exactly be true. If the burden is entirely on the customer, there is no cause for a trade war, except to the extent she buys fewer imported goods. If however one nation’s tariffs sets off reactions in other nations that cascade on top of one another, possibly out of pure political hysteria, there is some danger of a global economic downturn. This is sometimes said to have caused the Great Depression of the 1930s, though I don’t believe that.

Another left misconception, not quite folklore, comes from Trump’s claims that a cut in corporate taxes flows back to workers. The incidence of the corporate income remains a subject of dispute. A common compromise is to say it is divided more or less evenly among workers, consumers, and the owners of corporations. (As Mitt Romney was mocked for saying, “Corporations are people, my friends.”) This means at least part of a corporate tax cut would in fact be expected to partially benefit labor. That is not the end of the story either, since there could be negative effects from whatever a tax cut has on other taxes, on spending, or on borrowing.

Another bit of problematic left assumption about corporate taxation is that the globalization of capital makes it infeasible. This cynicism does not serve the cause. Insofar as such capital is immobile — it can’t move out of the corporate sector or the geographic confines of the country — a corporate tax is borne by owners of capital.

Immigration

I’ll end with a case where the Left’s failure to reject common misconceptions sets back its cause. Popular animus to immigration rests to some extent on economic misconceptions. The Left response tends to rely on moral appeals.

The economics of immigration are simple. More labor means more output, or more GDP. Every investment has costs that predate its benefits. You give up something now to get something more later. Immigration brings the up-front costs of adjusting to new people, which costs throughout U.S. history have always been more than defrayed eventually. So immigration is an economic investment.

Some recent analysis points out that mass deportation means the loss of low-cost labor, which should raise wages, reduce output, and raise prices. Industries that tend to employ immigrants, such as restaurants, construction, and health care, would be hard hit. Mourning the loss of cheap labor is not a great thing to hang your hat on. There are better ways to raise wages.

The house-poor may fear the impact of immigration on housing availability, or the cost of local public education. But more people means more income, more commerce, and more tax revenue. Housing construction is stimulated by a bigger market.

More to the point, mass deportation will require concentration camps and an enormous repressive apparatus to gather immigrants and curb dissent. In this context, the economics are not the most important thing to me, but moral appeals do not speak to citizens’ misperceptions of their economic interest.