What this covers
Garrett Jones and Russ Roberts explore how economic reasoning often reveals that common-sense intuitions about policy backfire. The conversation spans tax cuts, earmarks, productivity measurement, and the role of incentives in reshaping political and business behavior. Jones draws on his experience as a Senate staffer to unpack these reversals, while Roberts hosts the discussion as they move from abstract principle to concrete policy example. The core thread is that good economic analysis requires distinguishing between marginal and infra-marginal effects—the difference between whether a policy changes behavior or merely subsidizes what was already happening.
The substance divides into several territories. On taxation, Jones argues that when businesses claim a tax cut won't help them, they are often signaling that the cut targets infra-marginal activities and will therefore benefit consumers rather than distort production. He draws on work by Christina and David Romer and William Niskanen suggesting that tax cuts predict future spending increases rather than starving government, upending the Milton Friedman thesis. On earmarks, Jones offers a counterintuitive defense: party leaders use them as disciplinary tools to align individual members toward longer-term party interests, and they cost far less than permanent entitlements. On labor markets and recessions, he explains why measured productivity has risen in the last three downturns—not because workers labor harder, but because firms shed organizational-capital workers while retaining final-production staff. The conversation also touches on Twitter's utility as an economics teaching tool, where the 140-character limit forces economists to strip ideas to their essential core.
Jones argues that political and economic puzzles often invert common sense—businesses prefer tax cuts that don't change their behavior, earmarks may actually discipline spending, recession productivity gains reflect organizational capital not effort, and tax cuts may grow rather than starve government—so good economics requires distinguishing marginal from infra-marginal effects and reading incentives carefully.
- Businesses lobby for infra-marginal tax cuts on activities they already do, so their saying a cut 'won't help' signals it would create consumer value
- Earmarks are a cheap tool party leaders use to discipline members toward the long-run party brand
- Modern measured productivity rises in recessions because organizational-capital workers are laid off while final-production workers stay
- Empirical work (Romer, Niskanen) suggests tax cuts predict future spending hikes rather than starving the beast
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When a supply curve is relatively flat (elastic), there is little producer surplus, so producers won't lobby hard for or get excited about a price/tax change; yet because the demand curve's shape is independent, consumers can capture huge gains from the same change—explaining why innovations are often small producer-side tweaks that yield large consumer value.
“the consumer might benefit tremendously because the shape of the demand curve has nothing to do with the shape of the supply curve”
Measured labor productivity has risen during the last three recessions (1991, 2001, and the 2007 downturn), reversing the historical procyclical pattern, because firms lay off organizational-capital workers (innovation, R&D, cubicle process workers) while retaining the small number of final-production workers—so output per worker rises even though no one is necessarily working harder.
“for the last three recessions it's been this way but before then it was not”
Cutting the pay of doctors would reduce the number of people who become doctors, because while many would remain for non-monetary reasons, millions more are marginal entrants who would choose other professions like law; this shows money matters at the margin even when people aren't primarily money-motivated.
“if you make it less lucrative they're gonna go do something else so it's not to say that that people are motivated to be doctors for the money it just says that money matters and people respond to incentives”
The way to control congressional spending is to create more earmarks, because earmarks are a cheap tool party leaders use to discipline individual members—who behave as entrepreneurs building personal brands—toward the longer-horizon interests of the party brand.
“I thought that the way to control congressional spending is to create more earmarks”
Most modern work is not producing physical capital or final consumer goods but building organizational capital—the cultures, patterns, processes, databases, R&D, and trained workers that make a firm function—so very few people are needed for actual final production (e.g., a handful of workers at a car assembly line or two workers at a fortune-cookie factory).
“organizational capital is it's basically the ideas and the habits of work that people build at work”
If businesses say a tax cut doesn't help them, that is an argument for the tax cut, because businesses get most excited about cuts on activities they are already doing (infra-marginal), which create no new behavior; whereas a cut that businesses are indifferent about may produce large consumer benefits by shifting behavior at low cost.
“if businesses say that a tax cut doesn't help them that's an argument for the tax cut”
Party brands have a longer time horizon than individual politicians, who plan to serve only a few years before cashing in as lobbyists, so leaders managing the brand internalize long-run consequences much as a corporate CEO protects company reputation against the indifference of anonymous individual workers.
“the party brand might be on average probably have a longer time horizon a longer focus on the future then individual politicians would”
Real business cycle theory (Kydland and Prescott, ~1980) explains business cycles as driven by exogenous productivity changes—from regulation, tax rates, oil prices, or innovation—where people work more hours when productivity is high ('make hay while the sun shines') and fewer when it is low, generating procyclical productivity, wages, and investment.
“it's known as real business cycle theory and Ed Prescott and Finn Kinlan won a Nobel Prize partly for inventing this theory”
About 22.6 percent of the job reductions since the peak of the recession in December 2007 were construction workers, because construction requires workers at every step of production and cannot shed labor while maintaining output the way organizational-capital-heavy industries can.
“about twenty two point six percent of the job reductions since the peak of the recession in 2007 December or construction workers”
Empirical analyses by Christina and David Romer and by William Niskanen find that tax cuts do not starve the beast as Milton Friedman theorized; instead the one thing a tax cut reliably predicts is a future tax increase and possibly higher future spending, consistent with a 'Puritan vs. partier' model where parties restrain each other's tax cuts and spending hikes together or indulge both together.
“when taxes are cut today it looks like spending might be increasing in the future not decreasing”
If supply-siders were right that small tax-rate changes have large effects on the rich's labor supply, then 2010 should be a massive boom year for work by America's rich (anticipating 2011 tax hikes), making labor supply shift hay-making forward; Jones predicts this will not happen, because labor supply responds to tax rates far less than supply-siders claim.
“2010 should be a massive boom year at least for America's rich because by all accounts the taxes of tax rates are going to be going through the roof in 2011”
Bringing home pork was once considered somewhat dishonorable but is now treated as a sign of a skilled, good politician; this cultural inversion—where the once-shameful becomes honorable—reflects a deeper civic problem, since societies are better off when people refrain from harmful acts because they are wrong rather than merely because they are illegal.
“is it imaginable that part of our challenge as a body politic in the United States today stems from the fact that what was once considered honorable is now considered dishonorable and what was once considered dishonorable is now considered honorable”
Earmarks are a far cheaper way to buy a member of Congress's vote than the alternative of permanent entitlement spending—e.g., a two-million-dollar post office versus a permanent two-billion-dollar Medicare increase—so retaining earmarks will help parties cut hard deals on entitlement reform.
“earmarks are a much cheaper way of buying the votes of members of Congress than the alternative which is extra entitlement spending”
Earmarks function culturally like steroids in baseball: they are tolerated but practiced quietly, with politicians using disguised mechanisms (like a 'rifle shot' tax provision targeting a single product) rather than openly subsidizing a named beneficiary, because doing it openly is considered gauche.
“steroids as the earmarks of the sporting world”
Government consistently grows regardless of conditions—it gets bigger during national security threats, economic downturns, and economic booms alike—so those who want smaller government have been losing and should think about how to reverse the direction.
“it's bigger in times of threats to national defense... it gets bigger in economic downturns it gets bigger during economic boom times it just gets bigger”
Twitter's 140-character constraint functions like haiku, forcing economists to distill ideas to their essential core insight and strip away the rest, which is itself a core skill of economics.
“I find Twitter somewhat like haiku in that there's a certain eloquence that arises from the constraint of 140 characters”
Across history and social science, more than half the time the best explanations for social puzzles come from economic ideas.
“every time people in social sciences are raising puzzles more than half the time the best explanations are coming out of econ”
Earmarks represent a remarkably small share of the federal budget, around twenty billion dollars in normal years—a drop in the bucket of total federal spending.
“it's something like 20 billion it's in that I in normal years it's about in that area”