When Ideological Bubbles Trump Economic Thinking


by Paul Mueller

Sometimes smart people make remarkably naïve or deeply problematic comments because their view of the world has been molded by narrow ideology, reinforced by significant consensus in their social circles.

Recently Esther Duflo, a Nobel prize winning economist, revealed herself to be such a person. In a Financial Times interview with Simon Mundy, she said the West owed a “moral debt” of about $500 billion annually to the global south due to its contribution to climate change and the resulting harm.

I’ve questioned such a calculation elsewhere. And I am not commenting on her published economic work, some of which is no doubt decent. Instead, I want to highlight how outrageously naïve global elites, in this case within the economics profession, have become. There are three major examples of Progressive groupthink in this relatively short interview.

Example 1 – People advance the public good by paying taxes

I think we need to rely on taxation because that is the way in which traditionally we ensure that everyone in the economy, private companies and individuals, contributes to the public good. 

Setting aside the dubious claim that all or even most government spending advances the “public good,” what a narrow view of the world!

Does this mean that farmers or doctors or mechanics only contribute to the public good when they pay taxes? The question (should) answer itself! This reasoning suggests that her taxes contribute to the public good, not her research. But perhaps if her work is funded by tax dollars…

The idea that taxes advance the public good informs her claim that we ought to further tax the ultra-wealthy. The super rich don’t and won’t contribute to the public good because, she thinks, they can basically avoid paying taxes.

Example 2 – The ultra-rich don’t pay taxes

In terms of the ultra-rich, I think everyone has recognized [sic] the fundamental unfairness in the fact that the ultra-rich are not being taxed on the income that they are making from their wealth. You are being taxed on the income you’re making by interviewing me; I’m being taxed on the income I’m making as an academic. But if we are sufficiently wealthy to have a lot of money invested in various places, and we keep reinvesting this money, we never have to take it out, and therefore, we are never taxed on it. If [the super-rich] want to consume, in a lot of cases, they will borrow against their wealth. So it’s a loan, not an “income” — so they are not taxed on it. That seems to be fundamentally unfair.

This view that the ultra-wealthy can avoid paying taxes by simply reinvesting their money indefinitely has become canonical in Progressive elite ideological circles due to the peddling of misleading or even incorrect data on income and wealth inequality by economists like Picketty, Saez, and Zucman. They do not seem to care much about the nuanced disincentives of different kinds of taxation.

A capital gains tax, for example, is a third-order tax. Companies already pay corporate income taxes which, all else equal, reduces the price of a stock. And when people buy stock initially, they usually do so with previous income that has also already been taxed. Group think among elites means that many of them have never even questioned the validity of this data or the downsides of taxing “capital” because it is all “based on a lot of empirical work.”

As a result, a smart economist like Duflo can say that a 2-percent wealth tax is “not going to be a big burden on the ultra-rich, because 2 percent of their wealth is only 30 percent of their income from their wealth, which is currently untaxed.” As if ultra-wealthy people have a simple mixed stock/bond portfolio that averages a seven or eight percent return annually without any volatility.

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What is it about giving an economist a Nobel prize that makes them stupid?