Saturday, March 14, 2009

Unnecessary Economic Complications

You've got to love economic theories. Cute perfect-world scenarios wrapped up nicely in elegant algorithms. The problem is much of the assumptions are pure drivel.

I've always found that historical trend analysis seems to offer the most insight into where we've been and how to handle challenges presently and in the future. History is a wonderful guide in locating the norm (mean reversion) of whatever it is we're measuring. By just looking at how inflated the price-to-income and price-to-rent ratios had become towards the late 1990s, a few of our better economists were able to call the housing bubble back in 2002. They didn't have to dress-up the obvious in fancy mathematical models to show what was plain as day.

One particular Homo Economicus assumption I've seen popping up lately is the idea that people are averse to working more if they know it will lead them into a higher tax bracket. Of course this argument was brought out by conservatives as a warning against President Obama's plan to raise taxes on the wealthiest amongst us. [By the way, during our most robust period of growth from the late 40s to the late 60s our highest marginal tax rate varied from 90 to 70 percent.] It may be true that higher taxes lead millionaires to find more and more clever ways to avoid taxation, but regardless of the amount they are making, they always seem to be trying to avoid taxes. And, let's face it, can we really say many of these people are "working" that hard? Avoiding taxation isn't the same as doing less. This has more to do with profit and greed than some efficient decision about taxes and time worked.

This is especially true for the 85 percent of the population earning under $100,000. Most people work as much as they can for as long as they can. Which is why even though our productivity per hour has increased, so has our number of hours worked.

But I guess when our economic system is constructed toward rewarding the Haves every example displayed and the indicators used to explain what's going on will no doubt be more geared to their wealth -- the S&P, the Dow, Russell, Nasdaq, Goldman, etc. These have become the markers we all watch and live by. Yet the wealthiest control nearly all of the stock market. This misdirection is comparable to tracking sales at Neiman Marcus as a guide for the shopping patterns of average Americans.

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