Department of "Huh?" (Wall Street Journal Op-Ed Edition)
One of the deepest bedrock beliefs held by all neoclassical economists is that, to a first cut, market failures, policy distortions, and other problems with resource allocations do damage roughly proportional to the square of the disequilibrium--to the square of the deviation of price from social value, or of the deviation of quantity from its optimal level. The damage done per unit of resource misallocated will be proportional to the gap between the price seen by the decision maker and the social value. The deviations of prices and of quantities from their ideal values will be related. Thus the bigger the already existing market failure, the more damage is done by making it worse.
This is, as I said, one of the deepest bedrock beliefs, ground into all neoclassical economists by every single course they ever took, starting with the first Harberger triangle they ever saw.
So when I read Ed Prescott's pro-estate-tax repeal op-ed and come across this sentence:
Ed Prescott, "Death and Taxes": [E]state taxes... would still do little to address the budget deficit. In 2003, net estate taxes accounted for $20.7 billion, a drop in the bucket of an $11 trillion economy. Clearly, we are not going to balance the budget by grave robbing.
I cannot believe my eyes. A neoclassical economist like Ed Prescott could write something like:
The budget is in approximate long-run balance, so little damage is done by a small increase in the deficit...
The fact that the long-run deficit is huge means that even a small increase in the deficit is very costly indeed...
A neoclassical economist is prohibited from writing:
The problem is really bad--so let's make it even worse!
For embedded in the deep structure of neoclassical economic thought is the judgment that it is the problems that are really bad that are the ones for which even marginal improvements are the most valuable.
Prescott's is not a neoclassical economic or economist's argument. Indeed, I would not know how to characterize it.