Hard Heads, Soft Hearts

I just finished reading Alan Blinder's excellent book "Hard Heads, Soft Hearts" (1987).  It is interesting, well written, and at times, laugh-out-loud funny.  For example, this comes amongst his withering criticism of supply-side economics (p. 87):

The supply siders had learned their history lesson.  Monetarism had stormed the Keynesian castle with statistical evidence, but little theory.  Rational expectationists had attacked with a powerful new theory, but no evidence.  Combining the best features of both tactics, supply siders armed themselves with neither theory nor evidence....  It proved to be an effective arsenal.

Here are a few of my highlights:

1. The book has a chapter on taxes, which mentions the regressive nature lower tax rates on capital gains (as I mentioned here).  He also notes that the gap between capital gains and income taxes is abused in many tax shelters and that deductions for business expenses of travel, dinners, etc. are also quite regressive.


2. His chapter on protectionism has some new points.  Readers with an economics background will know that protection for one industry usually comes with (even larger) costs paid by consumers across the country.  However, Blinder also points out that other workers can also lose out.  This occurs when the output of one industry is input to another.  For example, tariffs on steel increase prices to auto companies, so we may trade auto jobs for steel jobs.  This also occurs when other countries retaliate with protectionist measures aimed at other industries.  For example, rather than increasing tariffs on our steel (where they are already winning), they raise tariffs on our computer software (where they are losing), so we trade computer jobs for steel jobs.  Thus, the total cost to the economy is often larger than the wages of the jobs we are supposedly "protecting".  Blinder references a study showing, for example, that saving one auto job costs over $100K per year to the rest of us.


3. Finally, in politics, he notes that the special interests often win out because the benefits to them are visible while the costs to the general interest are hidden, or in Blinder's eloquent words, because "the benefits are concentrated, visible, and well understood, while the diffuse, subtle, and barely visible costs are sprinkled like a light mist across the electorate".  He describes how the 1986 tax reform succeeded by requiring those costs to be visible.  Specifically, since the tax changes were required to be revenue neutral, any deduction for a special interest had to be paired with a tax increase somewhere else.  This caused nearly all proposed amendments benefiting special interests to be voted down.