Arnold Harberger

Arnold Harberger
Born	(1924-07-27) July 27, 1924 Newark, New Jersey, U.S.
Residence	U.S.
Nationality	American
Fields	Economics
Institutions	UCLA 1984– University of Chicago 1953–91 Johns Hopkins University 1949–53
Alma mater	University of Chicago MA 1947, PhD 1950 Johns Hopkins University BA 1943
Doctoral advisor	Lloyd Metzler
Doctoral students	Gregory Chow Robert Lucas, Jr. Zvi Griliches Marc Nerlove Sebastián Edwards
Known for	Public finance

Arnold C. Harberger (born July 27, 1924) is an American economist. Harberger's Triangle, widely used in welfare economics, is named after him.

Life

Harberger completed his B.A. in economics at Johns Hopkins University, and his MA in international relations in 1947 and his Ph.D. in economics in 1950, both at the University of Chicago. After teaching at Johns Hopkins, Harberger returned to the University of Chicago to teach full time, from 1953 to 1982, and part time from 1984 to 1991. Since 1984, he has been a professor at the University of California, Los Angeles. Harberger is married to Anita Valjalo (Chilean) and speaks fluent Spanish. He is known for having close relationships with his past students, many of whom have held influential government posts in Latin America (and esp. Chile).

Work

Harberger's PhD thesis, written under Lloyd Metzler, 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 Americans who became high level civil servants in their native countries after they became dictatorships, 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.

See also

• Chicago Boys

References

• 1962, "The Incidence of the Corporate Income Tax," Journal of Political Economy 70: 215.
• 1971, "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay" Journal of Economic Literature 9, 785-97 .
• 1974. Taxation and Welfare. Little, Brown.
• 1976 "Economic Genocide in Chile" Andre Gunder Frank (pamphlet)

• van Overtveldt, Johan, 2007. The Chicago School. Chicago: Agate.

External links

• Arnold Harberger's UCLA web page
• Interview at the Minneapolis Fed, March 1999
• Video Collection from NewMedia Universidad Francisco Marroquín
• Honorary Doctoral Degrees, Universidad Francisco Marroquín