Those Who Do Not Remember the Past

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“Those who do not remember the past are condemned to repeat it.” (George Santayana)  Apparently over and over. This quotation is brought to mind by today’s Wall Street Journal lead editorial. The Journal correctly notes that temporary tax changes do not affect spending.  None other than the late Milton Friedman formalized this relationship with his permanent income model of spending.  In a nutshell, this model says that permanent spending depends on permanent income. In other words, people use saving and dissaving (including, perhaps, going into debt) to smooth temporary changes in their income and maintain relatively level spending.  People try to stick to their chosen lifestyle.

I first became aware of this in the early 1970s.  Then-president Lyndon Johnson wanted to fight the war in Vietnam, fight his “war on poverty” and not increase taxes.  Eventually he agreed to a one-year 10 percent income tax surcharge.  Which had no impact on the economy at all.

Having recently read material by fairly young economists, I am appalled at how little they know about even the most significant events in economic history.  Unfortunately, non-disclosure agreements prevent me from giving detailed examples.  Suffice it to say that Ph.D. programs are apparently doing a terrible job of teaching real-world economics.  Today’s economists can solve systems of partial differential equations and understand set theory, but many don’t seem to know much about reality.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.