Tuesday, July 10, 2012

Paul Krugman Does Not Sympathize With Those Who Claim To Be Our Engines Of Growth

There has been a lot of chatter and handwringing about class warfare as the 2012 election campaign heats up.  Krugman takes this opportunity to explain why the super rich are not essential to the economy even when their marginal contribution to output is equal to their pay. That of course, is one of the foundations of microeconomic theory.  We are all paid in relation to our contribution to output.  If we raise taxes on Joe Rich who earns $30 million, and he cuts back his work by one third because that makes him unhappy, GDP will fall by $10 million but so will our payments to Joe Rich.  That does not affect anyone's income except Joe Rich, and the governments share of his income in lost taxes. Krugman also goes on to explain why optimum tax policy suggests that social welfare would be higher if we had a more progressive tax system like we had before the Reagan revolution, when the economy was doing better than it has been doing for most of the last 40 years.

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