Sunday, November 29, 2009

A bit on policy efficacy

Quoth Becker:
I fully endorse Posner's suggestions to cut the minimum wage, but I do not see that happening with the present Congress. My favorite approach it to try to stimulate the economy by cutting income taxes, especially corporate income taxes and other taxes on capital, both physical and human capital. Such tax cuts will stimulate investments in the economy, and in this way increase the demand for workers.

I won't waste space addressing Posner's argument for these tax cuts - he's clearly a hack at this point. But, it is unfortunate that Professor Becker misses the most obvious and direct way to lower costs - cutting the payroll tax. Cutting the payroll tax would be a preferred and more direct intervention on labor costs than any fiddling with the overall rate of income taxes or capital taxes. Hiring workers directly into public works projects would also be a good short-run remedy.

It further surprises me that he does not recognize the obvious drawback to his own solution of cutting capital taxes - that it depends on the extent of complementarity (or substitutability) between capital and labor. (Then again, he may well recognize these things but is leaving them out of his story because it doesn't agree with his politics.) Reducing tax rates on capital might be desirable for other long-run objectives, but its effect on labor markets is theoretically ambiguous. It seems as if Dr. Becker has supported these sorts of tax cuts for some time for these other reasons, but arguing for them as a means for fixing the labor costs problem seems forced.

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