Friday, August 23, 2013

Distortions, Taxes, Absurdity, and What they can Teach Us about Tyler Cowen

Recently, Professor Cowen made the post, "I am sorry but this is absurd" in response to an article by Charles Manski, summarized on VOXEU. The crux of the paper, and of the summary, is that too much analysis of taxation focuses on the various distortions they create, and too little of the analysis goes towards what the tax revenues are used for (infrastructure, in the complete version of the research). How I feel about this issue is not the topic of my post. Instead I choose to focus on Professor Cowen's response to it, and what it really teaches us.
1. I do not believe that Professor Cowen is truly sorry for saying Professor Manski's article (and post in VOXEU) is absurd. I think that at best Professor Cowen has what he might call "meta-preference" for feeling sorry, because he thinks that he "should" feel sorry for posting such an unprofessional and unthoughtful headline to his response to Manski, but I don't think he is in fact sorry. The reason is that if you read Cowen's post, it is quite long, and in fact contains some intelligent and well thought-out points, which to me shows that he has carefully thought about how he feels about the issue.
2. I think the statement "this is absurd" tells us more about Cowen than it does about the piece by Manski. I do not mean this to be turning the term "absurd" on Cowen's view, because I think the details of his post have some merit. Rather I think his use of "absurd" mostly tells us that Cowen feels very strongly that taxes are distortionary and that this should be a topic of focus when economists discuss them. This view has some merit, but it fails to recognize that the alternative to a market "distorted" by government and taxes is seldom a free and well-functioning market in the neoclassical sense. Focusing on the distortions of taxes and government do a poor job of recognizing the ways in which a well functioning (even if also very large) government can help to make property rights more secure and reduce the transactions costs and risks associated with impersonal market exchange. Higher taxes can introduce some distortions, but they may be better than the distortions introduced under the next-best (institutional) alternative.