Knowledge that Transforms

I am indebted to Edgar Browning for calling attention to some peculiarities of the data underlying the estimates in my 1985 study. He is quite right that the ratios of transfer payments to income in the files for 1975 and later years are inconsistent with the corresponding ratios in the 1966 and 1970 files and in the Consumer Population Surveys, particularly in the lower part of the income distribution. I do not believe, however, that the baby should be thrown out with the bathwater, as Browning seems to suggest. I made available to him detailed data on the tax burdens of labor income, capital income, and consumption by income classes which provided a basis for revising my calculations for 1975 and later years. Instead, he chose to draw inferences about the progressivity of U.S. taxes since 1966 on the basis of changes in the relative importance of the various taxes, which is not appropriate for this purpose. These inferences would be correct only if there were no changes in the structure of each tax and in the composition of income in the various income classes during the period studied (for example, if there were no changes in the progressivity of the individual income tax or in the distribution of dividends by income classes).' It is straightforward to improve on this procedure. Where in the income distribution the share of transfer payments in total income is too low in 1975 and later years, the shares of labor and capital income are correspondingly high, and vice versa. To arrive at more realistic estimates of the shares for labor, capital, and transfer income, I first applied the 1970 shares to adjusted family income in each income decile in 1975, 1980, and 1985, and then made proportional adjustments in the columns and the rows alternately until they added to the correct totals.2 The incidence calculations for 1980 based on the revised weights are given in table 1 of my study, which shows the effective rates of the major taxes by deciles.3 These calculations are based on the most progressive set of assumptions (variant lc) presented in my study. Variant Ic assumes that the corporation income and property taxes are borne by capital in general, the payroll tax by labor, consumption taxes by consumers, and the individual income tax by those who pay it. I believe that this variant more nearly reflects the present state of incidence theory than any of the other variants.4

Our paper in this Review (1984) aroused a controversy we did not anticipate, but no one has yet convinced us that our basic point is wrong. Joe Bell (1988, p. 282) now makes the assertion that our conclusion rests entirely upon unexplained asymmetries in mobility. This seems to us a very curious assertion indeed. The main problem with Bell's analysis is that he treats investment in capital assets as perfectly malleable. A lawyer trained to argue rate cases is not perfectly suited for other jobs when electric utility deregulation occurs. The time and effort spent by the lawyer to acquire the requisite skills are irretrievably lost. This is the point of our paper. Even though future labor can be supplied by this lawyer after deregulation, it definitionally has a lower value. Lawyering before a regulatory commission is a specialized input. When the demand for these services falls, the capital value of the intensive and extensive investments vanish. No asymmetry is implied or required. More generally, capital consumed in using the political process to secure a wealth transfer-the resources devoted to organizing coalitions, investing in lobbying activities, contributing to political campaigns, advertising a point of view, acquiring the stock of human capital necessary for dealing with regulatory bureaucracies, and so onreduces the wealth of society in opportunitycost terms. For the reasons just stated, the cost of obtaining additional output in the regulated industry following deregulation is higher. We also pointed out that the increase in marginal costs due to what Bell calls resource immobility may only be a short-term phenomenon: Over time, resources in the [deregulated] industry will adapt to the new competitive environment, and new resources coming into the industry will embody the r quisite skills for working in a competitive rather than a government-sponsored sector. Thus, after the relevant adjustment period, marginal costs in the deregulated sector may decline, but it is simply wrong to suppose that deregulation enables the capital value of resources specializing in rent-seeking activities to be used again in the production of goods. Anyway, in present-value terms it does not take very long for this adjustment process to impose significant costs on the economy. This point is covered in fn. 7 in our original paper.

In answer to the question, What can we expect of schools (K-12) in raising the level of economic understanding?, my first reaction is, Not much. We can't expect much from the schools unless the economics profession is prepared to offer strong and continuing support that will advance the training of teachers and improve the quality of the materials available to help them teach economics. Therefore, my appeal in this paper is for increased assistance from the economics profession. The Joint Council of Economic Education (JCEE) has been in the forefront of the endeavor to teach economics at the primary and secondary school levels for some 37 years now. Lately, we have stepped up our efforts considerably, with encouraging results. Still, we have a long way to go, and we cannot broaden our reach as far as we should without more help from you and your colleagues. Historically, too few teachers have had any training in economics whatsoever. According to the Southern Regional Education Board (1985), only 25 percent of graduating teachers' transcripts show even a single course in economics. The only other liberal arts subject in which they had fewer courses is philosophy. Once in the classroom, teachers receive precious little in-service training to update their skills, according to William Walstead and Michael Watts (1985). Surveys of elementary teachers report that about half had no coursework, and another 25 percent had taken only one course. Surveys of secondary social studies teachers who specialize in teaching courses or units in economics show about 15 percent with no coursework and another 25 percent with one course; 30 percent reported taking only two courses in economics. In other words, 70 percent of teachers who teach economics have had two courses or less in the subject. Further indication of the weak knowledge base of teachers in economics is demonstrated by the relative ranking they give to key concepts in the discipline. The National Survey of Economic Education, 1981, asked junior and senior high school teachers to rank economic concepts by their importance. The results show that 24 percent ranked the key concepts of tradeoffs (24 percent) and opportunity costs (34 percent) as relatively unimportant.