Presidential Economics

Presidential Economics

In recent months, as the economy has taken first stage, I’ve started following a few economist’s blogs (never thought I would ever say that).  Greg Mankiw is a Harvard Economics professor and surely leans right as he has been an economic adviser to President Bush and John McCain.  The other, who leans only slightly left, is Casey Mulligan, a Professor of Economics at the University of Chicago.

Interestingly enough, these two economists follow each other’s blogs and often comment on the other’s analysis.  Following both, I feel I get a fairly well rounded view of things.

Recently, Mankiw commented on the Presidential candidates tax plans and how it effects his incentive to work extra hard for his children.

Using the chart on the right (borrowed from the Wall Street Journal), an assumption that he will live another 35 years and some economic formulas, he calculates how much each dollar he earns now will be worth to his children when he dies.  Under McCain’s plan, each dollar will be worth $4.81 (in 35 years) while Obama’s plan would yield $1.85 for every dollar earned now. Sadly, he also points out that without any income, capital gains or estate tax, his $1 would be worth $28 in 35 years.

So in Mankiw’s view, Obama’s plan would, in a way, reduces or removes the incentive for Americans to work hard.

Of course, Mulligan doesn’t quite agree.  Well, he kind of does.  He argues that Obama won’t be able to get these tax laws passed.  In additional to that, Mulligan gives the following argument:

Second, most of the price-tripling result comes from the capital tax side. Because Professor Mankiw expects to live about 35 more years, the President during the next eight is hardly relevant. Indeed, if it were true that Obama would be a heavy taxer, Professor Mankiw and his kids might be better off if Obama gave a vivid demonstration of the harms of heavy taxation before they realized their capital gains in the year 2043.

So in essence, he agrees that Obama’s tax proposals would be economically detrimental, but claims that Mankiw’s argument doesn’t really hold much weight because policy can easily change in the next 35 years. And in fact he says that voting for Obama will help you enjoy your children more because you won’t have a desire to work additional jobs/hours because it won’t be worth as much.

Although Mulligan’s arguments may be relevant, I think Mankiw’s intention was to illustrate the problems associated with a higher capital gains tax and other heavy taxation.

So one of problems with both arguments is the that the details are what makes both arguments even close to valid.  Without the nasty formula from Mankiw, you can’t really understand the problems associated with the heavy taxation.  But without the understanding of when the taxes actually take affect, one can’t accept Mulligan’s argument.

What is the average person going to see when they look at this chart?  Do they see higher taxes are do they think, “Oh, that won’t affect me for a long time, so I’m not going to worry about it.”

Be sure to read both articles to fully understand the different arguments.

PS. Interestingly enough, both economists minimize the current downturn/recession/depression.  Mulligan claims that it’s not even a downturn as it only affects two markets (financial and real estate).

One Response

  1. Matt Snyder says:

    Very interesting. Sounds like whoever wins this election would be wise to surround himself with more than one economist. I think that’s one of the problems with macro-economics, there is simply too much data/variables to really predict what will happen. Instead, multiple outcomes should be presented. Good work!

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