Scholar Emphasizes Individual Responses to Macroeconomic and Tax Policies
On Monday one of the fathers of the Hall-Rabushka Flat Tax, Robert E. Hall of Stanford University, was awarded the Nobel Prize in economics. While the Royal Swedish Academy of Sciences cited Hall’s work developing microeconomic foundations for macroeconomic stabilization policies as the basis for the award, a recurrent theme in his scholarship is individual responses to government policies.
After World War II, many economists viewed the economy in simplistic, top-down terms. In accordance with the prevailing Keynesian orthodoxy, if the economy slipped into a recession, they believed the federal government should step in and stimulate it by printing and spending money.
By the mid-1970s, this approach had clearly failed. The money supply kept expanding, which led to high levels of inflation, yet economic growth was anemic and unemployment remained high. Professor Hall argued that the flaw in this approach is that it treated individuals like pieces on a chessboard who could be easily manipulated. Instead, he pointed out, people anticipated government action and adjusted their behavior accordingly. As a result, policies such as predictably increasing the supply of money were doomed to failure and only resulted in rising prices.
Hall and his co-author Alvin Rabushka, also a Stanford professor, took a similar approach in their classic book The Flat Tax. They point out that people do not passively respond to changes in tax policy. Instead, when governments penalize people for working and saving, for example, they indeed work less and save less, producing widespread societal harm. To mitigate this, Hall and Rabushka devised a tax system which raises the revenue necessary to fund the government while distorting individuals’ incentives to engage in productive activities far less.
Patrick Fleenor is a Tax Policy Fellow at Americans for Prosperity.
