Arnold Harberger
Encyclopedia
Arnold C. Harberger is a United States
economist
. Harberger's Triangle
, widely used in welfare economics
, is named after him.
. He finished an MA in international relations in 1947 and a Ph.D. in economics in 1950, both at the University of Chicago
. After teaching at Johns Hopkins, Harberger returned to Chicago to teach full time, from 1953 to 1982, and part time from 1984 to 1991. Since 1984 he has had an affiliation with the University of California, Los Angeles
. Harberger is married to a Chile
an and speaks fluent Spanish. He is widely acknowledged as being a great supporter of his students and has championed them in their careers.
, was on international macroeconomic theory, but his academic reputation is primarily based on his work in public finance
, the economics of taxation. Harberger was awarded a honorary degree at Universidad Francisco Marroquin.
In 1954, Harberger published an article claiming that the welfare
cost
of monopoly
in the US economy was unlikely to exceed 0.1% of US GDP. Harberger devised a rough estimate of the deadweight loss
from monopoly, namely the producer and consumer's surplus that fails to materialize under monopoly. In the standard diagram used to teach the theory of monopoly, this loss corresponds to the area of a triangle. Such triangles are now named in his honor, especially since Harberger (1971), a classic expository article on applied welfare economics that clearly highlighted the role of deadweight loss.
Harberger's estimate assumed that the elasticity of demand for all output was -1, when no monopolist will ever set a price in that region of the demand curve for his output. Later calculations taking this and other criticisms of Harberger's analysis into account showed that the welfare loss from monopoly was unlikely to exceed 0.5% of GDP. A subtler critique is a point Richard Posner
raised in 1975, namely that the welfare cost of monopoly should include all monopoly profits as well as Harberger's triangle.
Harberger (1962) is the classic economic analysis of the corporate income tax. Harberger's key insight was to see that the classic Heckscher-Ohlin model
of international trade with tariffs could be recast as a general equilibrium model for one country with two sectors, one made up of incorporated firms subject to the corporate income tax, and the other sector consisting of unincorporated firms. Harberger's work spawned a whole literature using trade theory to address questions in public finance.
Both the incorporated and unincorporated sectors make 2 goods, using the same constant returns to scale Cobb-Douglas technology. The factors of production are labour and capital. Labour is free to move between the two sectors, so that labor is paid the same in both sectors. Installed capital is not free to move, but new capital (investment) goes to where it enjoys the highest return. All consumers have the same Cobb-Douglas utility functions. The corporate income tax is a flat tax on the return to corporate capital. The flat rate may differ from the top rate of personal income tax, the marginal tax rate to which the return on unincorporated capital is subject. There is no integration of the corporate and
personal income taxes, so that any dividends are taxed twice.
Harberger's conclusion, seen as surprising at the time, was that the corporate income tax lowers the after-tax marginal product of all owners of capital equally. Since labor and new capital were free to costlessly change sectors, each factor got paid exactly its "value of marginal product" and because constant returns to scale are assumed, the total payment to each factor exactly equals the total value the factor contributed. Therefore if the corporate sector were taxed and the other not taxed, the output of the taxed sector would shrink so as to equilibrate the marginal revenue products of both capital and labor to higher pre-tax levels. Hence the after-tax payments to each factor of production would be the same in both sectors. Net after-tax prices of goods in the taxed sector would go up since the total spent by consumers on the output of each sector remain unchanged, since we assume Cobb-Douglas utility.
An implication of Harberger's analysis is that the corporate income tax lowers the steady state capital-labor ratio, and hence real GDP per capita and the standard of living. Feldstein and others have argued that a corporate income tax in the range of 35%-50% could lower steady state real GDP per capita by 15% to 40%; these findings are not canonical.
The incidence of the corporate tax falls not only on the owners of corporations, but on all owners of all firms, whether incorporated or not, because the corporate income tax changes the prices of all capital goods. While Harberger's analysis has become more or less canonical in academic economics, Harberger has distanced himself from it in recent years.
A number of Harberger's students were Latin America
ns who became high level civil servants in their native countries after they became dictatorship
s, especially Chile
and Argentina
. Harberger acquired a considerable consulting practice as an economic adviser to Latin America. This work was not free of controversy, because Harberger did not shy away from giving economic advice to the Pinochet regime in Chile
.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
. Harberger's Triangle
Harberger's Triangle
Harberger's triangle, generally attributed to Arnold Harberger, refers to the dead weight loss associated with government intervention in a perfect market...
, widely used in welfare economics
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...
, is named after him.
Life
Harberger completed a B.A. in economics at Johns Hopkins UniversityJohns Hopkins University
The Johns Hopkins University, commonly referred to as Johns Hopkins, JHU, or simply Hopkins, is a private research university based in Baltimore, Maryland, United States...
. He finished an MA in international relations in 1947 and a Ph.D. in economics in 1950, both at the University of Chicago
University of Chicago
The University of Chicago is a private research university in Chicago, Illinois, USA. It was founded by the American Baptist Education Society with a donation from oil magnate and philanthropist John D. Rockefeller and incorporated in 1890...
. After teaching at Johns Hopkins, Harberger returned to Chicago to teach full time, from 1953 to 1982, and part time from 1984 to 1991. Since 1984 he has had an affiliation with the University of California, Los Angeles
University of California, Los Angeles
The University of California, Los Angeles is a public research university located in the Westwood neighborhood of Los Angeles, California, USA. It was founded in 1919 as the "Southern Branch" of the University of California and is the second oldest of the ten campuses...
. Harberger is married to a Chile
Chile
Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...
an and speaks fluent Spanish. He is widely acknowledged as being a great supporter of his students and has championed them in their careers.
Work
Harberger's PhD thesis, written under Lloyd MetzlerLloyd Metzler
Lloyd Appleton Metzler was an American economist best known for his contributions to international trade theory. He was born at Lost Springs, Kansas in 1913. Although most of his career was spent at the University of Chicago, he was not a member of the Chicago school, but rather a Keynesian...
, was on international macroeconomic theory, but his academic reputation is primarily based on his work in public finance
Public finance
Public finance is the revenue and expenditure of public authoritiesThe purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, and macroeconomic stabilization.-Overview:The proper role of government provides a...
, the economics of taxation. Harberger was awarded a honorary degree at Universidad Francisco Marroquin.
In 1954, Harberger published an article claiming that the welfare
Welfare
Welfare refers to a broad discourse which may hold certain implications regarding the provision of a minimal level of wellbeing and social support for all citizens without the stigma of charity. This is termed "social solidarity"...
cost
Cost
In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...
of monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
in the US economy was unlikely to exceed 0.1% of US GDP. Harberger devised a rough estimate of the deadweight loss
Deadweight loss
In economics, a deadweight loss is a loss of economic efficiency that can occur when equilibrium for a good or service is not Pareto optimal...
from monopoly, namely the producer and consumer's surplus that fails to materialize under monopoly. In the standard diagram used to teach the theory of monopoly, this loss corresponds to the area of a triangle. Such triangles are now named in his honor, especially since Harberger (1971), a classic expository article on applied welfare economics that clearly highlighted the role of deadweight loss.
Harberger's estimate assumed that the elasticity of demand for all output was -1, when no monopolist will ever set a price in that region of the demand curve for his output. Later calculations taking this and other criticisms of Harberger's analysis into account showed that the welfare loss from monopoly was unlikely to exceed 0.5% of GDP. A subtler critique is a point Richard Posner
Richard Posner
Richard Allen Posner is an American jurist, legal theorist, and economist who is currently a judge on the United States Court of Appeals for the Seventh Circuit in Chicago and a Senior Lecturer at the University of Chicago Law School...
raised in 1975, namely that the welfare cost of monopoly should include all monopoly profits as well as Harberger's triangle.
Harberger (1962) is the classic economic analysis of the corporate income tax. Harberger's key insight was to see that the classic Heckscher-Ohlin model
Heckscher-Ohlin model
The Heckscher–Ohlin model is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based...
of international trade with tariffs could be recast as a general equilibrium model for one country with two sectors, one made up of incorporated firms subject to the corporate income tax, and the other sector consisting of unincorporated firms. Harberger's work spawned a whole literature using trade theory to address questions in public finance.
Both the incorporated and unincorporated sectors make 2 goods, using the same constant returns to scale Cobb-Douglas technology. The factors of production are labour and capital. Labour is free to move between the two sectors, so that labor is paid the same in both sectors. Installed capital is not free to move, but new capital (investment) goes to where it enjoys the highest return. All consumers have the same Cobb-Douglas utility functions. The corporate income tax is a flat tax on the return to corporate capital. The flat rate may differ from the top rate of personal income tax, the marginal tax rate to which the return on unincorporated capital is subject. There is no integration of the corporate and
personal income taxes, so that any dividends are taxed twice.
Harberger's conclusion, seen as surprising at the time, was that the corporate income tax lowers the after-tax marginal product of all owners of capital equally. Since labor and new capital were free to costlessly change sectors, each factor got paid exactly its "value of marginal product" and because constant returns to scale are assumed, the total payment to each factor exactly equals the total value the factor contributed. Therefore if the corporate sector were taxed and the other not taxed, the output of the taxed sector would shrink so as to equilibrate the marginal revenue products of both capital and labor to higher pre-tax levels. Hence the after-tax payments to each factor of production would be the same in both sectors. Net after-tax prices of goods in the taxed sector would go up since the total spent by consumers on the output of each sector remain unchanged, since we assume Cobb-Douglas utility.
An implication of Harberger's analysis is that the corporate income tax lowers the steady state capital-labor ratio, and hence real GDP per capita and the standard of living. Feldstein and others have argued that a corporate income tax in the range of 35%-50% could lower steady state real GDP per capita by 15% to 40%; these findings are not canonical.
The incidence of the corporate tax falls not only on the owners of corporations, but on all owners of all firms, whether incorporated or not, because the corporate income tax changes the prices of all capital goods. While Harberger's analysis has become more or less canonical in academic economics, Harberger has distanced himself from it in recent years.
A number of Harberger's students were Latin America
Latin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
ns who became high level civil servants in their native countries after they became dictatorship
Dictatorship
A dictatorship is defined as an autocratic form of government in which the government is ruled by an individual, the dictator. It has three possible meanings:...
s, especially Chile
Chile under Pinochet
Chile was ruled by a military dictatorship headed by Augusto Pinochet from 1973 when Salvador Allende was overthrown in a coup d'etat until 1990 when the Chilean transition to democracy began. The authoritarian military government was characterized by systematic suppression of political parties and...
and Argentina
National Reorganization Process
The National Reorganization Process was the name used by its leaders for the military government that ruled Argentina from 1976 to 1983. In Argentina it is often known simply as la última junta militar or la última dictadura , because several of them existed throughout its history.The Argentine...
. Harberger acquired a considerable consulting practice as an economic adviser to Latin America. This work was not free of controversy, because Harberger did not shy away from giving economic advice to the Pinochet regime in Chile
Chile
Chile ,officially the Republic of Chile , is a country in South America occupying a long, narrow coastal strip between the Andes mountains to the east and the Pacific Ocean to the west. It borders Peru to the north, Bolivia to the northeast, Argentina to the east, and the Drake Passage in the far...
.
External links
- Arnold Harberger's UCLA web page
- Interview at the Minneapolis Fed, March 1999
- http://newmedia.ufm.edu/gsm/index.php?title=Especial%3AGSMSearchPage&termbuscado=harbergerVideo Collection from NewMedia Universidad Francisco MarroquínUniversidad Francisco MarroquínUniversidad Francisco Marroquín is a private, secular, university in Guatemala City, Guatemala. According to the school's website, "the mission of Universidad Francisco Marroquín is to teach and disseminate the ethical, legal and economic principles of a sociey of free and responsible persons."...
] - https://www.ufm.edu/cms/es/honorary-doctoral-degreesHonorary Doctoral Degrees, Universidad Francisco MarroquínUniversidad Francisco MarroquínUniversidad Francisco Marroquín is a private, secular, university in Guatemala City, Guatemala. According to the school's website, "the mission of Universidad Francisco Marroquín is to teach and disseminate the ethical, legal and economic principles of a sociey of free and responsible persons."...
]