Monday, January 9, 2012

Conservative Economists' Foolishness

Today's Wall Street Journal shows that right wing economists are no better than their left wing brethren at separating economics from politics. Professor Robert Barro of Harvard University and the conservative Hoover Institution of Stanford University opines today for the Wall Street Journal that the Euro should be abandoned and outlines a gradual policy to convert the Euro back into the original currencies of the countries presently in the Eurozone.

Why does Barro reach this remarkable conclusion? "In light of the ongoing fiscal and currency crisis -- which is leaning strongly toward a centralized political entity that will likely be even more unpopular than the common currency -- I would suggest it would be better to reverse course and eliminate the Euro." Politics is the reason!

So, toss aside the enormous benefits of a single currency union simply because of the "ongoing fiscal and currency crisis." Nowhere does Barro propose any economic solution to the crisis, although there are several good candidates available. Instead, he simply throws up his hands and says "drop the Euro." If Illinois and California get in fiscal trouble, will Barro advocate a separate currency for Illinois and California to avoid their "ongoing fiscal and currency crisis?"

The common currency is a good idea and should not be abandoned. What should be abandoned is the idea that creditors and debtors cannot sit down and readjust their unrealistic contracts with one another. Going back to separate currencies, with the implicit idea that weaker countries will inflate their way out of their debtloads is a cop out.

On the same editorial page, the WSJ has another conservative economist arguing for a wealth tax. Why? Because income is hard to define, according to Professor Ronald MacKinnon of Stanford University. "The basic problem is that defining 'income' becomes progressively more difficult as income and wealth rise." So, is wealth any easier to define? What is a piece of land worth? or an old building? or anything that isn't trading on an exchange every day. McKinnon looks like a shill for the appraisal industry in this piece. His proposal would simply lead to an enormous incentive to hide wealth or distort its value in various ways, much as takes place today with reported income for tax purposes.

Professor McKinnon might raise the more relevant question: why is there such an enormous need for revenue? Answering that question might spares us more inefficiencies and distortions in our economy than McKinnon's proposed strategy of creating a new bonanza for tax lawyers.

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