From my Rajan post:
Regulation is ineffective. The profit motive is an irresistible force. Regulation is not an immovable object.
The trick is to use taxation to make different things profitable. Use it to make some things more profitable, and other things less profitable.
For example, the existing business income tax favors bigness. So, if things go their way, a business can grow like crazy. That's how you get giants like Microsoft and Google and the too-big-to-fail banks.
And then we have anti-trust, because sometimes we seem to think some companies are too big. But it would be much more effective just to change the tax system. We could redesign the business tax to favor small business instead, for example. But it would be better to make the tax so it favors no one by size. Let Walmart compete on equal footing with Mom-and-Pop.
5 comments:
The real wold offers few opportunities for simple solutions. Changing the tax code in the ways you suggest is directionally correct, but we also need regulation.
Capitalism is dynamic, inquisitive, and acquisitive - like a 2 year old. So it needs to be monitored, disciplined and trained, and that is what regulation does.
I just read Karl's take down of Rajan. Of course, if Tyler Cowan likes it, it's going to be nonsense. This is close to axiomatic.
Karl:
However, that is not the current situation. While the dollar has fallen and US manufacturing has risen, the balance of trade remains weighted towards imports. Unless this price changes Americans will either spend beyond their means and go deeper into debt or spend below their means and go into recession.
If the consumption and production habits of the US need to change vis-à-vis the world then prices need to change. This should be the core lesson of recessions and indeed, macroeconomics.
This related directly to your idea of debt as the central problem, and suggests that there are no easy solutions.
JzB
Did you think I was saying we should deregulate? Have a couple beers, Jazz, and read it again.
I had a couple of glasses of pinot noir for dinner. That will have to do.
But it would be much more effective just to change the tax system.
I didn't think you said we should deregulate, but it didn't strike me as being favorable to regulation.
Anyway, there's that identity thang involving public and private debt and the trade balance.
Knotty problem.
JzB
Isn't the difficulty in achieving this ideal setting up incentives for policy makers that don't lead to the current favoritism of bigness?
A tax system that is less biased would be great and regulation is not always bad. The problem is that regulation often leads to these outcomes that are not ideal.
Woj, hi.
today: "Isn't the difficulty in achieving this ideal setting up incentives for policy makers that don't lead to the current favoritism of bigness?"
couple days ago: "Unfortunately that solution remains politically unfeasible."
I want to generalize, and say your view is far more political than mine. No surprise; I try to separate politics from economics, the better to understand economics.
You may be right, the problem may be the politics. Many, many people say so. Filtering out the politics as best I can, all I can say is: I dunno.
But what I think is, policymakers DO NOT KNOW how to fix the problem. If they knew, then why would they create antitrust laws and at the same time create a business tax that favors merger and consolidation and bigness rather than free competition?
I just don't see it.
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