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Arnold Carl Harberger (born July 27, 1924) is an American economist. His approach to the teaching and practice of economics is to emphasize the use of analytical tools that are directly applicable to real-world issues. His influence on academic economics is reflected in part by the widespread use of the term "Harberger triangle" to refer to the standard graphical depiction of the efficiency cost of distortions of competitive equilibrium.
He married a Chilean woman named Anita Valjalo in 1958. The two remained together until her death in 2011.
Harberger speaks fluent Spanish. He is known for maintaining close ties with his former students, many of whom have held influential government posts throughout Latin America, especially in Chile. Among his former students are 15 central-bank presidents and about 50 government ministers. He takes pride in the work they have done to advance sound economic policy in many countries over many decades. Interview at the Minneapolis Fed, March 1999 He has been criticized for giving economic advice to some authoritarian governments in Latin America. In the case of Chile, Harberger's influence on the "free-market" reforms undertaken by the Pinochet regime (after the failure of its initial policies of direct economic control) was solely through former students of his, dubbed the Chicago Boys by commentators, who had agreed to work in that government to address the ongoing economic crisis. The core of those reforms has been continued by a succession of democratically elected governments in Chile since the end of the Pinochet government in 1990.
His former student Ricardo Ffrench-Davis has praised Harberger for being free of ideological prejudice, which according to Ffrench-Davis was not the case of Harberger's colleague Milton Friedman.
Harberger Centenarian on July 27, 2024.
Using the formula developed by Harold Hotelling, Harberger measured the efficiency loss from noncompetitive pricing in each industry as the excess of the implied willingness to pay by consumers for each increment to output over the estimated cost of that increment. His conclusion was that monopoly power was not pervasive in the U.S. economy, so that the manufacturing sector could be treated as nearly competitive.
Over a decade later, Gordon Tullock argued that Harberger's estimate of the welfare cost of monopoly was low because some resources would be used to compete for or protect monopoly rents, but his argument applies principally to instances of non-price Rent-seeking, as in the case of tariffs or restrictions on entry into an industry through government regulation.
In Harberger's model, the output of both sectors is produced under conditions of constant returns to scale, using homogeneous labor and capital. Labor is perfectly mobile, so wages are equalized between the two sectors. The corporate income tax is a tax on the return to corporate capital. There is no integration of the corporate and personal income taxes so any dividends are taxed twice. In the long run, capital is also fully mobile between sectors.
Harberger's key insight was that the mobility of capital between sectors means that in long-run equilibrium the after-tax rate of return to capital is equalized between the two sectors. In this way, the corporate income tax lowers the after-tax real rate of return to all owners of capital equally. When the income of capital owners in the corporate sector is taxed, the initial after-tax rate of return on corporate capital falls, prompting a shift of capital to the untaxed sector. This shift continues until the rate of return in the untaxed sector falls, and the before-tax rate of return in the corporate sector rises, by amounts sufficient to equalize the after-tax rate of return to capital in all uses. The contraction of the corporate sector leads to a reduction in that sector's demand for labor and a fall in the output of that sector. Some labor is thereby induced to move from the corporate to the non-corporate sector. The flow of labor and capital into the non-corporate sector results in an increase in that sector's output. The change in the relative quantities of output in the two sectors leads to an increase in the price of the taxed sector's output relative to the output of the untaxed sector. The response of wages to the shifts in production depends on several factors: the relative substitutability of labor for capital in both sectors, the relative labor intensity of both sectors, and the relative sizes of the two sectors. If the net effect of the intersectoral shifts is to reduce the total demand for labor, then the wage falls and workers bear a part of the burden of the tax. If the aggregate demand for labor is unchanged, then capital bears the full burden of the tax. If the aggregate demand for labor (and so the wage) rises, then capital's income falls by more than the revenue raised by the tax. This latter case, which Harberger showed to be not at all unlikely, completely overturned the previous consensus within the profession, which had been that the burden of the corporate tax was distributed among the workers and capital owners in the taxed sector, and the consumers of the goods produced in that sector, in amounts that were individually between zero and 100 percent of the tax revenue.
Some years later, Harberger extended his analysis to the case of an economy that buys and sells goods, and imports or exports capital, in worldwide markets.Harberger, Arnold C. "The ABCs of Corporate Tax Incidence: Insights into the Open Economy Case," in Tax Policy and Economic Growth. Washington, DC: American Council for Capital Formation, 1995 The results from this specification differ markedly from those of the closed-economy version. In particular, if externally provided capital is in perfectly elastic supply to a country, then capital cannot bear any part of the tax burden in the long run, and it is quite possible for labor to bear more than 100 percent of the burden of the corporate income tax. He views the open-economy case as relevant for the analysis of a single country's choice of tax rate, with the closed-economy model as applying to the effects of a general movement of worldwide corporate tax rates in the same direction, such as the decline that has been observed over the past several decades. A summary of his views on the practical policy considerations regarding the corporate income tax in particular countries can be found in his 2008 paper.
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