Catching Tim Worstall Up on 120 Years of Economics

There is a lot to unpack here, but for starters, let me just say: Thank God Worstall is not a doctor. “No, Mr. Smith, I do not think a change of diet will do, I am afraid the only treatment for a case of gout is a good bleeding.”

In our paper, “Fool Me Once: Why Another Corporate Tax Cut Won’t Boost the Economy,” we demonstrate the flawed logic underlying the House Republicans’ now-likely-defunct tax plan using recent economic analysis and evidence. We argue that corporate tax cuts will not deliver the economic growth that’s been promised because the benefits of those tax cuts will be pocketed by the wealthy instead of reinvested in productive growth. This argument is based not on populist fury (though we have plenty of that) but on recent research by top economists from places like Berkeley, NYU, and Harvard, who have analyzed past corporate tax breaks and found the benefits to the American economy and American workers were nil.

To Worstall, all of this nitty-gritty economics stuff was settled long ago. He explains, as any freshman year student of basic macroeconomics will tell you, that average wages are determined by average productivity, and thus increasing available capital (through tax cuts) will increase wages. Even as a response to a summary of a paper Worstall hasn’t read, this is half-baked.

First, the relationship between taxes and stepped-up investment has been sorely tested over the last 40 years and the results have been highly problematic for the acolytes of economics 101. As we discuss in the paper, dividend tax cuts, repatriation holidays, and individual income tax cuts have all failed to stimulate lasting increases in investment and growth. Instead, corporations used additional capital to increase payouts to shareholders with no increase in meaningful economic activity.

Second, even if we accepted that tax cuts would lead to greater investment and productivity, the disintegration of the productivity-wage relationship has been widely acknowledged, even by conservative economists. The operative debate, which Worstall somehow missed, has actually centered on the question of what is causing the growing divide between wages and productivity that is apparent to anyone familiar with major economic indicators. To summarize that debate: Our side thinks, based on recent analysis by reliable research organizations like the Economic Policy Institute, that the gap is driven by declining unionization and the growing concentration of market power; the other side, based on very little, thinks it is all about technology.

And while I am not assigning the label of intellectual laziness to all conservative economists, and certainly not to all conservatives, reliance on oversimplified economic theory is a hallmark of a certain brand of conservative thinker. In fact, the long history of misguided conservative economic evangelism is the topic of an excellent new book by James Kwak of the University of Connecticut, entitled Economism. Worstall should give it a read. He may, in particular, enjoy finding his own name on the top of page 69.

Moving beyond his unsound theoretical defense, Worstall also cites the “assembled multitudes of the world’s economists” as being in unanimous agreement about the direct relationship between productivity and pay. Yes, the world’s economists would agree that basic macro theory assumes a correlation between wages and productivity, but that is a tautology: No one is arguing whether or not macro theory says what macro theory says; those of us who examine real world outcomes are simply pointing out that it’s false. And the Roosevelt Institute is not alone in that analysis.

With regard to the unified economists he cites, I don’t know the field quite as well as my coauthor Marshall, but below are some economists, off the top of my head, who are not as sold on the relationship between taxes, investment, and wages as Worstall is:

• Nobel Laureate Paul Krugman (who Worstall also misinterprets in his piece)
• Nobel Laureate Joseph Stiglitz (who happens to be the Roosevelt Institute’s Chief Economist, and who was consulted on the paper in question)
• Harvard Professor (and Economist top 15 economist) Larry Summers
• MIT Professor Simon Johnson
• Princeton Professor Alan Krueger

Not a Forbes blogger among them. Weird.

Worstall, as Kwak would agree, is correct in suggesting that many economists believe, even in the face of overwhelming evidence to the contrary, that large, top-heavy tax cuts will boost growth. And that is precisely the problem, which Marshall and I aim to address in our paper, and which we here at the Roosevelt Institute aim to address in our broader tax policy work.

Perhaps when he’s done with Kwak’s book, Worstall can check out some of that as well. He might be interested to see what’s been going on in the field these last 120 years.