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Monday, May 4, 2009

Incentives Matter, Except for When They Don't

From Mankiw:
http://gregmankiw.blogspot.com/2009/05/should-us-tax-corporate-income-overseas.html

It seems Dr. Mankiw is all about supporting green taxes, and doing away with many post-Keynesian principles in support of market activity because as he says both directly and in his text book, "incentives matter." Well it seems his recent post, which peddles research suggesting that the decision to locate overseas causes increased domestic activity as well (as opposed to REPLACING this activity), seems to just throw the whole 'incentives' idea out with the bath water.

I work in location-based incentives. Let me tell you, costs matter. Relative costs across borders matter. They aren't the be all end all as many development businesspeople would have you believe, but they are important. I don't buy the whole idea that foregin operations is a compliment to domestic operations. I haven't read the paper yet (can I get a free copy?), but I bet there is a huge correlation vs. causation issue here. Just because a firm gets big and ships overseas, and this is (DUH) correlated with increased domestic operations as well, does NOT imply that the relative cost difference due to the foreign tax shelters is what is causing this increased domestic production. The whole concept is ludicrous and smacks of political pandering, not economics.

But beyond that issue, "welfare economics" is stupid...the entire field is a waste of time because it starts out with assumptions about welfare that pretty much every person based in reality knows is stupid - like the idea that you can't compare utilities across people (ie. fairness is not important to welfare since fairness cannot accurately be incorporated into utility). BAM... welfare econ is useless. You need to think outside the box whenever you mention the word "welfare" because economics is NOT where you go to find such answers.

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