I see Eric has done a post this morning on scientist making policy prescriptions outside their field of expertise. I have a good example from some physicists. I think it is syncronicity.
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I was visiting a physics blog (well the Duke case has lost my interest so I have to do something) and came across this astonishing discussion of economics. They are discussing how stupid the Laffer curve is as presented in a recent Wall Street Journal article. It seems like our vaunted physicists believe a linear curve better fits the data than the third or fourth order curve the Wall Street Journal presented. He shows the two curves with some comments and then says:
No, I am not being unfair. I did not draw the "Laffer Curve" on top of those data in order to embarrass the WSJ or AEI. They did it themselves; the second graph is how the plot was actually published by the Journal, while the first one was Mark Thoma's subsequent reality-based-community version of the plot. As Kevin Drum says, it's "like those people who find an outline of the Virgin Mary in a potato chip."
Among other features, we note with amusement that the plotted curve implies that tax revenues hit zero at a corporate tax rate of about 33%, and become dramatically negative thereafter. As of this writing, it is unclear what advanced statistical software package was used to fit the Laffer Curve to the data; the smart money seems to be on MS Paint.
So I have a question or twenty:
Can you explain why tax revenues in America have been rising at double digit rates despite the tax cuts of 2003? They started going up as soon as the reductions were passed and have been rising ever since.
It seems that the experiment is being done and it proves that the Laffer curve guys may be right.
As a good aerospace engineer I trust the data over theory every time.
There is a very good reason that, for the most part, money decisions are made by engineers and rarely by scientists. Engineers are expected to make things that work.
I would like to see more engineers in Congress. More scientists would be a disaster due to insufficient contact with the real world.
Let me note that the WSJ graph (mistaken in derivation or not) most closely fits the evidence. Lowering tax rates raises government revenue. At least in America.
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B said: If the people in country X want more (public transport? social security? health insurance? unemployment insurance?) to be shared responsibility, the thing to do so is to use taxes.
Let me rephrase that:
If the people in country X want to steal other people's money the responsible way to do it is to use taxes.
I agree.
Hey physics guys. The USSR failed. Europe can't support its welfare state. America will be severely strained by its welfare state. And you guys want more of the same? With Big Physics on the government dole I understand your orientation. However, it may not be popular with the run of mill citizen who dislikes having his pocket picked.
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I know how you can get back in the good graces of the average citizen. Give them the physics to build a low cost p-B11 (proton - Boron 11) burning fusion reactor which can deliver power to the grid and your esteem in the eyes of the average citizen will go way up. They might be more willing to open their wallets.
Get cracking.
BTW I'm working on an open source test reactor along the Bussard Polywell lines. I'm short a plasma physicist. Any one care to join in?
If you are not familiar with Dr. Bussard's work here is a good place to start:
Easy Low Cost No Radiation Fusion. Actually it is not no radiation. A 100 MW reactor will produce about 1 Kw of neutrons. Not too hard to shield. Not significant for making plutonium. So I learned a bit since I wrote that.
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You really want to do something for the poor of the world? Forget Socialism. Reduce the cost of energy. That is actually within your means.
Better yet get us off the oil standard.
Yeah. The LHC (Large - they are not kidding - Hadron Collider) is sexy. And the superconducting magnets are thrilling. Well they thrill me, but I've been known to have some strange fetishes. Evidently that is one of them.
Seriously.
You guys need to focus for a few years on providing benefits to society. Don't you know there is a war on? It could be ended with physics and I don't mean bigger bombs.
There are a number of IEC fusion devices out there. From my studies the Bussard Reactor looks to be the most likely to succeed. However, if you don't like that there is a commercial venture Tri Alpha Energy. Or the guys at the University Wisconsin. Or Champaign Urbana.
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Comments
Am I missing something? That Laffer curve plot looks ridiculous.
In addiiton, the linear plot looks ridiculous (though not as ridiculous).
Most problems aren't linear problems, but everyone seems to think a linear fit is appropriate.
I'd say it's probably more likely to be not that silly curve going all the way up to norway and down, but a curve that has two mins and one max, such as that one. Just not as dramatic.
silvermine · July 16, 2007 01:53 PM
Silvermine,
You will note that I said:
Let me note that the WSJ graph (mistaken in derivation or not) most closely fits the evidence. Lowering tax rates raises government revenue. At least in America.
I do agree that the curve you describe is probably a better representation. However, it was not on offer.
Funny that the physicists who deal with all kinds of strange curves could only imagine a linear fit for the data. In fact these very physicist have all kinds of fancy curve fitting programs available to them.
You tell the curve fitter "assume a first order (linear) curve", "assume a third order curve". Heck I have gone up to fifth or sixth order to reproduce my data exactly.
However, as I point out. You don't need any of that curve fitting non-sense in this case. The actual experiment is being done. The results are obvious. No data mining required.
The worst part about the graph is the poor choice of axis. There is no useuful data I can think of in looking at the overal government income as a percent of GDP versus the corporate tax rate. At most it tells you what portion of the overall tax structure the coroporate tax rate represents for a given point. And not a single person on the original thread focused on that.
A useful plot would be per capita government income versus overall tax rate. Even then, there is the hidden assumption that the goal should be to maximize tax revenue.
Anonymous · July 16, 2007 03:54 PM
I think you'll get a better result by drawing a Laffer Curve much the same way the WSJ did, but ignoring Norway--it's such an outlier it can only interfere with averages.
I have to wonder about the physicists. Their own linear plot clearly ignores the data points (it continues to go up in a straight line where the points universally go down) and then ridicules the WSJ for having its curve actually attempt to reflect the plots. Here I disagree with Silvermine--the linear plot may be more visually satisfying, but as a representation of the data points, it is by far the more rediculous of the two.
tim maguire · July 16, 2007 03:56 PM
That's a great point anonymous. It's a bad argument about how to best present meaningles data.
tim maguire · July 16, 2007 04:00 PM
A problem with all these attempts to fit this to a Laffer curve is that you're implicitly assuming that the one variable is really determined by the other, or by a set of variables highly correlated to the other. When describing an economy, this is highly unlikely: all sorts of globalization is changing the nature of the economy, and what kind of work people do, and where they do it.
The point of trying to fit it to a straight line is that it's a way of asking the question, Is this curve basically going up or going down? If you want to do better than that, you need a model to suggest a curve defined by parameters - and then you can optimize the parameters for a best fit. But I haven't seen anyone propose an economic model that gives a Laffer curve.
I spent some time awhile back trying to research the claim that "lowering the tax rate increases the tax revenue". The cases most cited were the Reagan years. But all the more careful analyses that I saw concluded that, although there was a stimulating effect of a reduced tax rate, the net result was to offset the immediate tax-revenue reduction by something like 30% (from memory).
So, instead of taking a $1 for $1 revenue hit for reduced taxation, the government took a $0.70 per $1 hit.
Neal J. King · July 17, 2007 02:20 PM
It's possible to take the Laffer curve seriously and regard the graph in the Wall Street Journal as a pile of organic fertilizer.
I've seen similar graphs (on non-political topics) ridiculed in scientific journals.
The Anti-Idiotarian Rottweiler
Don?t bang your head!
Am I missing something? That Laffer curve plot looks ridiculous.
In addiiton, the linear plot looks ridiculous (though not as ridiculous).
Most problems aren't linear problems, but everyone seems to think a linear fit is appropriate.
I'd say it's probably more likely to be not that silly curve going all the way up to norway and down, but a curve that has two mins and one max, such as that one. Just not as dramatic.