Thursday, July 23, 2009

Dear Serf - A Letter from the President, edited

Dear Serf,

As you read this, we are closer than ever to passing comprehensive health insurance regulation that mandates important rules for American families, and American singles, and small businesses, and medium business, and large businesses. Despite all the discussion in the news right now, it is important to understand that such discussion is irrelevant and will not stand in the way of reform.

That's why I'm holding a finely-pruned press conference tonight at 8pm ET, and having one of my secretaries write this email to let everyone know where we claim to be, what we imagine is ahead, and why further health insurance regulation is so important.

Let me be clear: although Congress is still debating parts of the legislation, such as how to pay for it and whether it’s a good idea or not, we have pushed through a critical consensus using political pressure and imaginative statistics on several key areas:

If you already have health insurance: regardless of whether you’re happy with it, our new regulation will mandate more security and stability. It will limit your own out of pocket costs by subsidizing them with money from rich people and prevent your insurance company from adjusting its business model to ensure profitability. Nobody should make a profit on something as essential as healthcare. We’ll also force the rich to pay for affordable insurance options for you if you lose or change your job, which will become more likely as our spending policies adjust business competitiveness and the value of the dollar some have inequitably saved during this time of crucial consumption. Further, we’ll force the rich to pay for your preventive care like check-ups and mammograms so that you can enjoy your natural right to a premium cable TV football package.

If you don't have health insurance: regardless of the reason you have not purchased it, you will finally be compelled to register for guaranteed, fairly-rationed access to healthcare paid for by people you won’t have to confront, and because it’s a free country you can choose the plan that best suits your family's desires. No insurance company will be allowed to deny you coverage because of a pre-existing medical condition. They will be forced to pay for your problems, even though it will raise their costs and force alterations in others parts of their policies which we haven’t yet had the time to regulate. But don’t worry, because we’re already drafting legislation to cover the loopholes we may create.

Now, I realize that the last few miles of any race are the hardest to run, but we can't stop now, because my political reputation will suffer. There's no dispute about it: we cannot control our long-term fiscal health as a nation without health insurance reform. The dispute is only regarding how to do this, but such details are irrelevant and inhibitive to the change I promised on the campaign trail. Americans understand that the health insurance status quo, which has thankfully been extensively regulated by the actions of your former overlords, is still awash with problems. Using my wit, I’ve helped American businesses understand that it is American businesses which caused these problems. The stability and security that comes with knowing that you can get the treatment you want (as long as its approved) when you want it (as long as a quota-based appointment is available), is paramount to a fair system in which everyone can be first in line. Without reform, we are consigning our children to a future of skyrocketing premiums and crushing deficits. Contrary to some 3rd party economic analysis and historical precedent, the reform I’m mandating will not consign our children to such stresses. Anyone who says otherwise is just playing politics, and hates poor people.

We have to seize this opportunity and pass health insurance mandates this year, before the economic consequences of my ongoing central planning begin to cast doubts over my macrofinancial omniscience. You will do your duty by forwarding this email to your family and friends and letting them know what's at stake in this debate, namely my reputation and the axiom that governments allocate resources better than profit-seeking robber baron mega corporations.

Thank you,
Barack Obama

P.S. Tune in to tonight's press conference on health insurance reform at 8pm ET on WhiteHouse.gov so you can be reminded of my charisma and confidence.


Article page

Wednesday, July 22, 2009

The Record of the Federal Reserve

Let’s talk about The Federal Reserve. Consider the following facts:
  • From 1776 to 1912 (136 years), the value of the dollar, relative to the Consumer Price Index, increased 11%. A dollar could buy 11% more goods in 1912 than in 1776. Thus, if in 1776, you sat on your savings pile of $1,000,000 for 136 years, it would then be worth $1,110,000 in purchasing power (it will have appreciated in value by 11%). A loaf of bread for Thomas Jefferson cost the same as a loaf of bread for Lincoln 50 years later and again the same for J.P. Morgan 50 years after that.

  • The United States Federal Reserve was created in 1913. The stated purpose of the Fed, by its own definition taken from its website, is to “conduct the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.” Note that “stable prices” is another way of saying “stable dollar,” they are two sides of the same coin (couldn’t resist the pun).

  • Then after The Fed’s creation, from 1913 to 2008 (95 years), the value of the dollar, relative to the Consumer Price Index, decreased by 95%. A dollar could buy 95% fewer goods in 2008 than in 1913. Thus, if in 1913, you sat on your savings pile of $1,000,000 for 95 years, it would then be worth only $50,000 in purchasing power (it will have depreciated in value by 95%). One would now need to pay about 20X more than J.P. Morgan for one’s bread. Ask my mother how much the price of milk has increase just in the last ten years alone.

In other words, the value of the dollar remained extremely stable for 150 years, then The Fed was created in order to “stabilize the value of the dollar” and the result has been a 95% devaluation of the dollar in less than 100 years following its creation. Below is a graph of this hisotry, which I’ve marked with the year 1913 so you can see the change. The graph is also marked with the years of decoupling from the gold standard, as no examination of dollar value would be sound without such mention.

While we all take inflation as a “given” – as something that “just happens” in the economy – we would do well to remember that this belief is utterly incorrect. Inflation, which is the loss of value in your saved dollars, is caused by The Federal Reserve through its management of the money supply. Next time you see Ben Bernanke on the television, telling you that they “will take the necessary steps” to help the country, consider their track record so far, and their dismal failure at their stated objective – preserving the value of America’s money.

Outrage doesn’t even begin to describe what Americans should feel in response to this. Yet, Americans aren’t very upset, and indeed the vast majority has no idea about any of this information. I would wager that this is because Americans are educated in Government schools, which barely teach basic accounting, let alone macroeconomic monetary theory. In public school I was forced to memorize the names of every country in Africa, yet never was there a discussion of the nature of money. Half the nations of Africa have been renamed since, but the economic principles which cause such political turmoil remain the same.

The Federal Reserve system is fraudulent. Whatever its stated purpose, its effective purpose is to create a mechanism of deficit spending by politicians, through the insidious invisible taxation of monetary debasement (aka inflation). With printed money, the Government can buy services for its voters before the effects of inflation are felt. It is then the voters whose money buys less the following year, as the new money has raised prices, and they are none the wiser.

Obama is now mandating that The Fed is to have more oversight, more authority and control over the markets of the United States. If we can learn anything from The Fed, it’s that the best way to succeed as a politician is to stretch one’s failure over a long enough period that people won’t remember it. Article page

Tuesday, July 21, 2009

Response to Alec the Communist

It so happens that a friend of one of my family members is a self-proclaimed communist. I applaud him for his honesty. In a couple of emails, Alec the Communist presented some arguments on the following topics:
1) Why it's okay to redistribute wealth
2) Why governments should spend our way out of recession
3) Why income taxes should be more progressive
4) Why the world would collapse without government programs
5) Why savings doesn't create growth
6) Why the rich will just keep on workin' if you tax them more

Needless to say, I took the opportunity to discuss with Mr. Communist why he is mistaken. The resulting document is about 20 pages long, and I would encourage anyone who must interact with statists of similar persuasions to read it. The discussion is annotated to make clear the two authors' points of view.

"
I object on principle to calling those who take government jobs created by the stimulus as "immoral beggar mobs." Is he channeling Ayn Rand? I have never seen a more blatant example of classism in my life. It is grossly insensitive, incorrect, and itself immoral to refer to the unemployed that way. Poverty is not a moral failing." -Alec the Communist


Click here for the full discussion...



To begin, the dialogue starts off with a discussion of tax rates and the economic strength of America...

Alec 1. Our current tax rate for the rich and corporations is less than it was during the Clinton years which was the longest continual expansion in our economy in US history. Now I am not a Democrat and so I do not want to be drawn into defending Clinton or the Democrats generally because I do think their economic policies are generally terrible. The point is that empirically we had higher taxes and yet the economy did better. Also, doing cursory research on the competitiveness of global economies shows the US either in first place by a very small margin or somewhere near the bottom of the top ten. The other countries in the top ten are countries with significantly higher tax rates than the US. Any libertarian has to respond to the fact that even when rich people and corporations are taxed heavily the economy not only does well, it can flourish. I can already hear Jacques saying “but if the tax rate was 10% the economy would grow so much more quickly than the US during the Clinton years or Northern European countries,” but as Kristen has pointed out on multiple occasions, appeals to utopian hypothetical scenarios does not constitute an argument in favor of an economic system.


Erik’s Response:

This is a case of correlation and causation, and I’m sure Alec understands that the former doesn’t necessitate the later. The fact that taxes were higher under Clinton and that the economy was stronger under Clinton is not sufficient evidence on which to base the claim that higher taxes encourage economic activity. Likewise, the fact that other countries have better economic growth amidst higher taxes than the US is also not sufficient evidence on which to base the claim. There are billions of factors that influence a macro-economic environment, and to attribute either growth or loss simply to tax policy is na├»ve. If tax rates are high in a country and the economy is doing well, this is happening despite the tax rate, not because of it.

To suggest that taxation encourages economic growth is utterly preposterous. A similar suggestion would be that entrepreneurs do better under an environment with high borrowing costs. Another similar suggestion would be that businesses thrive to the extent that their profits are shrinking. Yet, another similar suggestion would be that joggers can run faster with lead weights tied to their ankles. For Alec’s claim to be true, the Government would have to be able to generate profits... and it isn’t. In theory it could encourage economic growth if the government invested the majority of tax revenue back into profitable ventures. However, A) this doesn’t occur and B) even if the Government tried to do this it would fail. If the Government could invest resources profitably it wouldn’t need to tax. The assertion that an individual working for Government can “out-invest” an individual in the private sector relies on the belief that Government employees are smarter than non-government employees. On what evidence does Alec base this? The Government cannot even run a mail service profitably (The Postal Service). The Government cannot even run a train profitably (Amtrak). The Government can’t even run itself profitably… every year the Government falls further into debt. Government is unable to generate sufficient revenue even to run its own activities, let alone those in the marketplace. This is not because those currently in office are ill-informed or insufficient for their jobs, rather it is because of the incentives which exist within governmental structures relative to the incentives which exist outside of it.

If Alec believes that taxation increases economic growth, then why do we not tax ourselves at 100% and all become wealthy overnight? Alec will surely respond that there is an “ideal equilibrium” point somewhere above 0% and below 100%. This is like saying the ideal number of lead weights for a jogger to drag behind him is something more than 0. Taxation removes wealth from those who produce it, and hands it to those who are less able to produce. Taxation is the extraction of wealth to be redistributed in some way, like on military expenses, farm subsidies, “promotion of the arts,” etc. One can make the argument that we should have taxes in order to have those services, but one cannot make the argument that we should have taxes in order to promote economic growth.

Finally, a 10% tax rate on the economy is not a “utopian hypothetical scenario,” A) it is not utopian because the tax rate is still much too high and B) it is not hypothetical because the US, for most of its history, had taxes lower than that. That someone would suggest that a 10% tax rate is some kind of “unreachable ideal,” and to be joking about the “ideal” part, is a tragic but not unexpected condemnation of the state of America’s citizenry. Has the nation moved so far from its ideals of liberty and limited government? Is a 10% tax rate so unbelievably low as to be laughable? If so, I should give up trying to fix the US and instead encourage industrious Americans to relocate to nations which respect their liberties and understand basic economics. Dubai, Singapore, and Hong Kong are well on their way, and have little competition to fear if Americans scoff at a 10% tax rate because it’s “unrealistically low.” I wonder if Alec can explain (or is even aware of?) the hundreds of US companies which have relocated here to Dubai over the past few years. Here’s a hint… it’s not for the sand.

Alec 2. I think Jacques overestimates the dampening effect taxes has on entrepreneurs and venture capitalists. In fact, I think his understanding of the situation is childish because his argument amounts to all these investors and business persons saying “I don't to share *humph* I am going home. You're mean!” He says people wont quit their day jobs to start a risky but potentially profitable enterprise or make a big investment in a risky but potentially profitable enterprise. I am highly skeptical that someone will give up a $50,000 a year for the potential to make two million but not to make one million. The amount of money a person would not make because it is taxed away is not enough to dissuade them from undertaking the enterprise in the first place. Also, a significant number of these types of people are not in it purely for the money. They engage in entrepreneurship and venture capitalism because it is what they like to do. Jacques implicit belief is that people always seek our the job that will give them the most money. That is a rather depressing and myopic view of humanity and human motivations. While it is true to some extent, people more commonly seek out the job that they like to do the best or makes them the happiest. Taxing these investors more wont prevent them from doing what they like to do.

Also, I suspect that people are more willing to make risky investments or quit their jobs to start a new business if there is a social safety net. People are more willing to take risks when failure does not mean death through starvation and exposure.

Erik’s Response:

I would emphasize that Jacques actually is an entrepreneur and can perhaps attest to their motivations. However, if anything, Jacques underestimates the dampening effect taxation has on individuals. When one judges the risk/reward ratio of a proposed venture, if the perceived reward doesn’t compensate for the perceived risk, the venture will not occur. Period. Taxation reduces the reward while the risk remains the same. Thus, in proportion to the tax rate, individuals’ interest in pursuing ventures declines. The investors aren’t being “childish.” On the contrary, they are being responsible adults. They are making rational decisions about their property, just as Alec does when he decides to take out a loan, buy groceries, or start a business. Raising the tax rate will certainly not cause all economic activity to stop, but what is important is to look at the “marginal effect.” What is the net marginal effect of taxing an activity? The answer is that is reduces profitability, and thus reduces the incentive to pursue it. To not understand behavioral changes in response to incentives at the margins is to not understand economics.

Alec continues: The amount of money a person would not make because it is taxed away is not enough to dissuade them from undertaking the enterprise in the first place.” The question is… at what point does the dissuasion occur? It is different for each individual. If Alec thinks that moving corporate tax rates from 25% to 30% won’t dissuade economic activity, then he has little understanding of the profit margins that companies generally make. I wonder what profit margin Alec believes that Shell, routinely labeled as accruing “windfall profits,” actually enjoys? Would he be surprised that last year when Shell made “record profits” from surging oil prices its profit rate was 7.9%? I wonder if Alec knows that the US government gets substantially more profit per gallon of gasoline than any oil company (meanwhile they berate oil companies for “gouging the consumer”)? Alec should realize that a 5% increase in taxes can very easily mean the difference between profitability and loss for many companies. Even the very possibility that tax rates will increase tomorrow or in ten years dissuades ventures from ever occurring because, simply, the perceived risk is higher than the perceived reward. Again, it is not that everyone stops producing when tax rates increase, rather it is that some do- those at the margins. The extent of the tax burden is the extent of the marginal change in behavior.

Further, Alec seems to think that capitalists will continue producing despite incessant taxation because “that is what they like to do.” Well, many of them indeed love their jobs. They love producing, they love being creative and problem solving, they love the infinite challenge of growing a business. But capitalists also like… capital. Is this a “sad view of humanity?” Not unless one believes money to be evil, and if this is the case one is welcome to surrender it to the Government at one’s own expense. Alec forgets that while capitalists may love their jobs, they’ll love their jobs even more if they get paid. Thus, those companies which offer to pay the highest salaries will likely get their services. Thus… the most profitable companies, in the regions where taxation is lowest (Dubai again?), will more easily attract the capitalists over time. Additionally on this point, all investments require risk, and whether an investor “loves investing” or not, he will simply not risk his assets if the reward is not high enough. No investor invests simply because he sadistically loves putting his money in danger.

To Alec’s last point regarding safety nets… capitalists don’t assume the government will be there to help them (although that may change with Obama bailing the failure out). They also don’t generally “bet the farm” in order to get returns. Generally, they are well-off individuals who are at no risk of starving, even if all their bets go south, because they don’t make bets which are, as previously mentioned, too risky! Safety nets for the least productive are of little concern to the most productive (yet of course they’re the ones who are forced to pay for it all).

Alec 3. Why is taxing people at 10% not stealing when anything higher is stealing? Or is it simply that any taxation is stealing (hello Ayn Rand!) but a limited amount of stealing is alright so the government can run. If it is the first explanation, then that is the most ludicrously arbitrary and ad hoc double standard I have ever seen. There is absolutely no reason to think that 10% is the dividing line between stealing and not stealing. If it was, why not 20% or 50%? I suspect that Jacques is more likely to defend the second explanation, that some stealing is justified. If that is the case then Jacques should check himself because he is a lot more utilitarian and socialist then he realizes. If a limited amount of “stealing” (and I do not concede the point that taxation is stealing) is justified for practical, empirical concerns then really our debate boils down to a disagreement over what amount of stealing is practical. At this point I have already won the debate because Jacques is not respecting property rights like a good libertarian ought to. But because I like debating anyway, I will continue...

Erik’s Response:

Taxing people at 10% is stealing, but it is not as bad as taxing at 15%, so I’d be in favor of any legislation which moved us in that direction. A step in the right direction is good, even if the result is not good enough to subsequently justify complacency. So Alec doesn’t need to worry about a “ludicrously arbitrary and ad hoc double standard.” On the contrary, libertarians tend to be the most consistent in their beliefs. We believe in freedom on every issue. I’d guess Alec supports free association between people when it comes to personal relationships, but not when it comes to the trading of property? One might call that an arbitrary double standard. I’d guess Alec claims to support free speech, though he would willingly promote legislation which mandates that the media should treat news in a “balanced” way. One might call that an arbitrary double standard. Alec likely believes that a man working for Government should be allowed to own a gun, though a man not working for the government should be prevented from the same. One might call that an arbitrary double standard. Alec’s also made it clear that the poor shouldn’t pay taxes but the rich should. One might call that an arbitrary double standard. I’m sure on some issues Alec supports the concept of private property (does one own his clothing?), though when it comes to “big business” I know he’d like to give unions special privileges, thereby undermining the property rights of the company’s owners. One might call that an arbitrary double standard. I’d suppose Alec defends the rights of minorities, but when it comes to the most vulnerable minority – the individual – his defense is absent. One might call that an arbitrary double standard.

Any taxation is legalized theft, so of course by definition it isn’t technically theft. However, labeling taxation as theft can be legitimate because they are both wrong by the same moral reasoning, and they both cause a similar effect. It does not matter if your neighbor across the street robs you, or if several guys from across town rob you, or if a whole mob with uniforms promising to provide “services” robs you… if legitimate property is removed by force, it is immoral. Now, if Alec thinks that no property is legitimate because he’s a communist, then that’s his opinion, and we must leave it as a fundamental disagreement on the rights of man.

Alec 4. Diminishing returns. An extra 100 million for someone who already has 500 million is essentially meaningless. That person does not need that money. And since we all agree that we can take money when it is empirically expedient to do so, I suggest we take it. Jacques suggests we let them keep it because they will spend it (increasing some businesses profitability meaning they can hire more people) or invest it (giving a business more money to work with and so increasing jobs) or saving it (giving a bank more money to lend to people who need houses or want to start a business). Ultimately these are less than ideal ways of using that money.

Spending it will ultimately have a negligible effect. This is true for a couple reasons. The first is that consumer spending is not directly correlated with wealth levels. The vast majority of consumer spending is not done by those with the vast majority of the wealth. It is done by the middle class and the upper-middle class. That means that letting them keep the money isn't going to be directly going into that part of the economy which is the most important. Secondly, the types of things they will be buying with all that extra money will not benefit anyone else. Buying Brazilian hardwood floors instead of the laminated crap the rest of us have will not create any more jobs. Getting $500 dinners, buying expensive jewelry, or fancy imported German cars instead of a Subaru will not lead to a creation of more jobs. And even if it does, there are much more efficient ways to create those jobs.

So what if they invest it? The reason 'trickle down economics' is such a good metaphor is because you start with a gallon at the top and by the time it reaches the huddled masses yearning to breathe it is but a few precious drops. Even if they invest it in American companies so the benefits stay here, it will still be less of a benefit than if it had been given to the poorest in the form of government sponsored jobs, education, health care, ect. This problem is also subject to the problem of diminishing returns. These people are already investing millions. Why would I want to give them another million to invest when I could give several others a college education, healthy food, or a home with that money? Those benefits are not only more needed but more immediate.

Finally, Jacques says they could save it. I am glad he admits this is an option because this is what most people do with they money when they are given tax cuts. Saving it in the bank does absolutely nothing to stimulate the economy and can actually lead to a slowdown by creating unexpected contractions in the money supply. Putting it in the bank does not increase loans. Banks, in 99% of circumstances, have plenty of money to lend out (they are required to have plenty of cash on hand by federal law). Moreover, the amount of lending banks engage in is only tangentially affected by how much money they have saved in their accounts. Much more relevant factors are, for example, the state of the economy and economic forecasts. When the economic contracts because everyone is stashing away their money rather than spending it businesses will in fact loan less.

Erik’s Response:

Okay, now things are getting ridiculous and I’m going to need to just list bullet points of refutations, else my keyboard will crack and I’ll be forced to ask the government to subsidize a new laptop. I apologize for resorting to bullet points.

  1. An extra 100 million for someone who already has 500 million is not meaningless for the millionaire. It’s clearly meaningless to Alec, because it’s not his money, and he doesn’t feel the pain of having the product of his life’s work ripped away from him to pay for government programs he neither advocates nor supports. I will simply suggest to Alec that he speak with someone who is that wealthy and get their opinion on the subject. No matter how much property one man has, if he got it legitimately then it is his to do with as he so pleases. Even if the money were “meaningless” to that person (if Alec can find someone to whom 100 million dollars is meaningless I will concede the point), the fact remains that the money is owned by that individual and thus no other person has the right to force him to surrender it. Again, if Alec thinks property rights are illegitimate than we must simply disagree here.
  2. The vaporous, indefinable concept of “need” does not give a man a blank check to enslave another man. No matter how much a man “needs” something, it does not give him the right to take it by force from someone else. If a man needs something, then by all means help him out!!! Or, convince others to help him out without resorting to government force . It is incredible that some people have no moral qualms about holding a gun to someone’s head and forcing them to pay for their “charities.” Robbing from one man to give to another is no different than robbing from one man to give to yourself, contrary to what Disney movies teach us. A man in need is entitled to exactly the amount which others are voluntarily willing to provide. I’d also like Alec to define “need,” an exercise which quickly becomes absurd once attempted.
  3. Jacques is not suggesting that we let the wealthy keep their wealth because they “spend” it. He will be the first to tell you that spending doesn’t necessarily create growth. Rather, he is suggesting that rich people invest which is altogether different than spending (Obama is struggling hard with this concept). Here’s the difference: I’m consuming when I buy a computer to play games on, I’m investing when I buy a computer to manage my business. The former creates no net increase in my productive capacity, the later does. Successful investing creates net gains in the productive capacity of capital. By so doing, the wealthy make labor more productive and it is the poor, not the rich, who benefit most relative to their effort and expense. What kind of living can a basic worker make today? What kind of living could he make before capital was developed over the past few hundred years? Investments in capital are what brought society from a life of subsistence agriculture to a life of surplus. Alec is welcome to return to the subsistence agriculture in many parts of the world, but he is not welcome to take me there and it is unfortunate that he advocates policies which would return vast swaths of mankind to that state of living.
  4. Buying Brazilian hardwood floors does create jobs (and eliminates jobs in competing industries). If Alec disagrees, he’s welcome to inform the Brazilian hardwood workers that they’ve been swindled. I’m sure they’ll be grateful to be released from the delusion. Alec can start with these guys: http://www.brazilianhardwood.com/
  5. Everything that we have today, which seems like a “necessity,” used to be a luxury. One’s bread was once a rare commodity. One’s toaster used to be in the category of hardwood floors. One’s Xbox used to be a pipe dream. One’s car would’ve been killed-for by the wealthiest kings only 150 years ago. Who is Alec to mandate that certain luxuries are okay for people to buy, and others are not? Again, one might call that an arbitrary double standard.
  6. If Alec knows “much more efficient ways to create jobs,” all he needs to do is put a business plan together and perhaps I’ll invest in it. Then he can make lots of money and donate it to all the charities which he supports.
  7. Unfortunately, Alec doesn’t understand that “creating jobs” is not the goal of economic innovation. He has it backwards. In fact, “destroying jobs” is the goal of economic innovation. Weird huh? This is why all the spear hunters went out of business. This is why the typewriter union no longer exists. This is why the Pony Express workers were all fired. This is why chainmail and battleaxe artisans are no longer paid what they used to be. Economic progress is about producing more, with fewer inputs. Until Alec comprehends this he will be eternally under the delusion that everyone should try to “create jobs.” This does not mean companies should necessarily fire people in order to grow, of course. It simply means that whenever an increase in efficiency allows a company to let someone go, real economic growth has occurred.
  8. Alec states, “Why would I want to give them another million to invest when I could give several others a college education, healthy food, or a home with that money? Those benefits are not only more needed but more immediate.” Here Alec seems to be arguing that he wouldn’t give his own money to rich people because there are better uses for his own money. That’s his right to make that choice. Alec can do what he wants with his own money, but he shouldn’t force me to do what he wants with my money. Why is that so hard to understand??
  9. Alec states, “Saving it in the bank does absolutely nothing to stimulate the economy and can actually lead to a slowdown by creating unexpected contractions in the money supply.” He must be joking, but in case he’s not here’s Banking 101: Alec, banks loan money based on their reserves (among other things). When they have more reserves, they can loan more money. This is managed through the mechanism of “interest rates” which fluctuate relative to a bank’s reserves. When a bank has no money, its interest rates rise. When a bank is flush with cash, its interest rates can fall. As interest rates fall, more people can borrow for their projects, and any borrowing which increases the productivity of capital (ie new businesses) will subsequently “stimulate” the economy and produce profits. If Alec needs some evidence of this very basic mechanism… Here in Dubai when the credit crisis hit, people from all over the world took their money out of Dubai banks and brought it back home (understandably, they wanted to be more safe during the crisis). This caused huge shortfalls in the banks’ capital levels, and interest rates here skyrocketed. A home loan last summer could be had for about a 5% interest rate. In January of this year, banks couldn’t even loan and the very few loans that did occur paid around 11-13% in interest. As a real estate company, this hit us hard. Because people couldn’t get loans they weren’t buying property, and thus we had to fire over 300 people. As the economy seems to be through the worst (according to some people), tons of money is flooding back into Dubai banks and, guess what, interest rates on a home loan are now around 7%. Just as I wouldn’t argue chemistry before learning what a “periodic table” was, so should Alec perhaps learn about interest rates and banking before debating economics.
  10. As a final point in this bullet list, regarding “trickle down economics,” Alec- who do you think pours the “gallon at the top?” Have you ever pondered where that gallon came from?

Alec 5. Jacques also argues that if the income tax was reduced to a 10% flat tax and corporate taxes eliminated that economic expansion would be so rapid that the government would actually take in more money in the long run. This argument demonstrates a reckless misunderstanding of economic and tax policy. In order for the government to actually see a net increase in tax revenues people's wages would have to rise to something like 6, 8, 10 times their current levels. Such rapid wage increase would lead to incredibly high inflation that would destroy any economic improvement and offset and gains in tax revenue. There is no way that reducing taxes to the level Jacques recommends would actually boost revenue.

Erik’s Response:

First of all, Alec may be surprised to learn that no matter what the top marginal tax rate has been in the US, over the past 55 years government tax revenues hover around 19.5% of GDP, regardless. This is known as Hauser’s Law. Consider this for a moment… no matter the top tax bracket, tax revenue remains at 19.5% of the economy’s output. Assuming this “law” is accurate, a rational person may suggest that a government which seeks to increase tax revenues should do everything possible to grow the GDP of the economy. A great way to do this is to lower tax rates. I’m sure Alec will be extremely confused at how Hauser’s Law can be true, given his assumption that wealthy people will “just keep on goin’” no matter their tax burden. He’s welcome to try and refute half a century of data below. Actually, he might suggest that the top tax bracket is only a minority of the total tax revenue and thus the graph is misleading. I would then remind him that the top 5% of income earners (those in the top tax bracket) pay 60% of the government’s tax revenue.

I think it would further surprise Alec if he found out that we could eliminate income tax in America altogether, and the Federal budget would have to shrink down to the size of... the mid 1990’s. That’s how much government has grown in just over a decade. The entire income tax, 20-30% of the entire nation’s work effort during the year, could be returned to them forever, if we just shrank government all the way back to where it was under Clinton. From what I remember, Americans were just fine when the government was so “small” 15 years ago. Whatever additional improvement we’ve gotten in the last 15 years from new Government “services” is certainly not worth 20-30% of EVERYONE’s salary. So, when I advocate the abolition of income tax, Alec need not be frightened that bridges would collapse and the police would disappear.

Regarding Alec’s “6, 8, or 10x” assumptions… how does he get these figures? If tax rates fell from 30% to 10%, then a $100,000 salary which yielded $30,000 for the Government will now only yield $10,000. In order to beat the previous tax revenue, the salary needs to rise to $300,000 (times 10% = $30,000) which is an increase of 3X… not 6,8, or 10. Salaries of $14,000 or $752 have the exact same dynamics. Salaries must increase by 3X to make up for a tax rate 1/3 as large. Furthermore, and more importantly, Alec is forgetting the millions of ways that revenue is sheltered, hidden, mis-reported, and moved off-shore, so it’s only the “taxable amount” which needs to increase by 3X, not the actual salary. Taxable amounts could increase by 3X without any increase in the actual salary. Also, people would be encouraged to move back to the US and work there (like myself), if the tax was lowered. Businesses would likewise return to the US. It is not hard to imagine 3X taxable revenues if the tax rates lowered to 1/3 of their present level. It wouldn’t happen in the same year, but 10 years later the government would be raking in substantially more if it reduced its income taxes to 1/3 of their current level. Any Big Government proponent should vehemently defend lowering marginal tax rates, because it will yield more income for government in the long term. Unfortunately politicians don’t much care for the long term, as they likely won’t be in office, and the sheeple that ironically call themselves “citizens of a free nation” are inexcusably ignorant when it comes to financial understanding (ask a random person the difference between APR and APY).

Regarding wage increases and inflation: wages could all go up substantially without any price increases at all (inflation is different than price increases). Don’t believe me? All it requires is for production to match consumption. If 20% more goods were produced, and salaries were 20% higher (allowing people to consume 20% more), the price of goods would not increase, because they wouldn’t be any scarcer. Inflation is an increase in money supply, not prices (although almost every politician gets the term confused).

Alec stated that Jacques had a “reckless misunderstanding of economic and tax policy.” This is the claim I would make about Alec. One of us is wrong.

Alec 6. Another reason such an approach would be folly is because, even if it worked in the abstract (and I am not even admitting that), it does not work in the real world. A government which slashed taxes and along with them nearly every regulatory oversight and every social program would utterly crush business confidence, consumer confidence, and consumer spending. The abrupt shift in policy alone would be enough to send most businesses and investors diving for cover, especially considering most benefit from government programs that make it easier and cheaper for them to offer their employees health care coverage or to start a new business. The absence of any social programs at all would mean the vast majority of people would start stashing their money under their mattresses rather than spending it for fear of the inevitable rainy day when they will have no assistance from the government. That decrease in spending means a decrease in business revenue which leads to a decrease in employment which leads to a decrease in spending and so on and so forth in an ever increasing spiral of economic decline that will go unabated because the libertarians just took away all of the government's fiscal policy tools.

Importantly, such a strict libertarian policy with no social programs necessarily means condemning millions to die each year. Even with full employment, there will still be 2-3% of the population unemployed. These are people not jobless because of any moral failing on their part or because they are lazy or anything, its because even the best of economies cannot employ everyone. The unemployed in Jacques', Kristen's, and Erik's ideal world will be condemned to die of preventable, treatable, and curable illnesses, of malnutrition, of exposure, and of starvation. There will be absolutely no safety net to support them and they will die. Now I can already hear Kristen saying that there will be private charities to support these people but that is ultimately not enough. Contrary to what Kristen claims, Americans only give about $250-$300 billion a year, significantly less than what the government spends in all its social programs. Worse, charity donations dip during recessions, exactly when they are needed most and exactly when the government can increase its spending. Private charities absolutely do not provide enough of a safety net and would do nothing to abate to reverse the spiraling economic decline that would result from any decrease in consumer spending.

Erik’s Response:

Again, to Alec, we could eliminate the entire income tax and have all the great services and benefits that we enjoyed in the 1990’s. This isn’t exactly “slashing nearly every regulatory oversight and every social program,” as he claims. And to suggest that “business and consumer confidence” would be “utterly crushed” because tax rates were lowered... which businesses and consumers does Alec hang out with??? I would love to meet a business owner who would feel “utterly crushed” when his tax burden was lifted. As a consumer myself, I would be overjoyed! I would save more money, I would spend more money, I would invest more money, and I would donate more money to the causes I support. If Alec thinks the problem is that rapid policy changes can be destabilizing, he’s being prudent… so let’s reduce taxes slowly! I’m not against that.

Alec says, “the absence of any social programs at all would mean the vast majority of people would start stashing their money under their mattresses rather than spending it.” Well, Alec is speculating here, but I know in Dubai there are almost no social programs at all… MANY fewer than existed in the US during the mid 1990’s… and people don’t stash money in mattresses. What do they do? They rely on themselves, their friends, and their family for support instead of resorting to coercion. People here don’t force others to make sacrifices for them. There is also much lower unemployment and almost nobody out on the street. All people should have the right to ask for assistance, but no person should have the right to force it.

Alec’s presumed never-ending spiral of death and destruction is not based on reality, but I can understand why he’s a communist if he thinks that’s what occurs when government gets out of the way. I wonder how, during the 1800’s, the US went from a rural nation of farmers to one of the most powerful industrial economies on the planet, surpassing nations that had existed for hundreds or thousands of years, without any income tax and without any corporate tax? How did mankind survive, let alone thrive, without social security and medicare? By 1900 the US was the envy of the entire world, and it all happened in an environment where the government was a tiny tiny fraction of what it is today. A popular joke in the early 1900’s was that the only time they ever were aware of the Federal Government was when they went to the Post Office. Just 100 years later the Federal Government claims a third of our income. How times have changed.

Regarding the lack of social safety nets for the “millions who would die every year without government,” he mentions private charity is around $300 billion per year. The stats on government “social program” spending put its number around $1-1.3 trillion. So, it appears government spends about 4x as much as private individuals. Two questions are immediately crucial. Is each government dollar as effective as each private dollar given to charity? And, if people weren’t forced to pay the government, would they not A) have more money to donate to charity and B) feel more responsible for helping the poor, since Government didn’t claim to do it for them. I think any academic analysis of these questions would suggest that if Government weren’t involved in charity, the private sectors would, at the very least, be close to matching the effectiveness. This though is a conservative answer, for the more likely result would be A) more money in aggregate going to charity and B) that money being better spent. This is of course just an assumption on my part. Also you can bet that a good chunk of the Government’s “social spending” goes to projects which are “disagreeable” to put it nicely. With private charity, I have a choice of what I support. With Government controlled charity, I don’t; I’m forced to pay for programs which I think damage the very people they claim to help. I’m thus forced to be an accomplice in funding harm upon others. I don’t sleep well with that on my mind. However, even if private charity didn’t match the effectiveness of government charity, it still wouldn’t give one man the right to force charity upon the public. No man has the right to force servitude on another, if no crime has been committed. As stated before, need is not a legitimate claim with which to enslave, in full or in part, another human being. Shall we discuss how often southern plantation owners claimed they “needed” slaves for their livelihood? “Need” is not justification for aggression.

Is human suffering terrible? Yes. So help those who warrant it and encourage others to do the same. Ridicule, lambaste, and ostracize anyone who is more selfish than you deem appropriate. But, don’t throw people in cages, or hold a gun to their head, for not agreeing with your idea of what’s best for society.

Alec 7. Furthermore, giving people jobs is actually the less expensive solution to the problem. If these people do not have jobs now then they will be forced to collect unemployment benefits and welfare and medicade. They money they receive from these programs plus the bureaucracy needed to run them would be more than it would cost to pay them to build a road in the first place. Additionally, since poverty is cyclical their children, instead of going to college, will get poor paying jobs with terrible job security and will most likely be collecting government benefits as well. All of this is to say nothing of how large the recession will become if the government does absolutely nothing about it. Paying someone to build a road or repair a bridge nips the problem in the bud and prevents it from becoming a much larger and more expensive problem.

Erik’s Response:

Alec is welcome to provide people jobs at his expense, not at mine. The fact that if someone is unable to find a job (ie has no skill demanded in the labor market at his desired price) he will attempt to collect government unemployment benefits and welfare is not a legitimate moral reason to take my money and create a job for that person. If unemployed will cost “society” more money, then perhaps one shouldn’t force “society” to pay the unemployed, no?

Alec 8.

(1)Erik says that anyone who believes they have the right to the labor of another is part of the immoral looter mobs. To him I pose the question of whether or not he has ever ridden the Summit Stage? Even attended public school? Gotten government subsidized student loans? Used the post office? Benefited from the protection of the US military? Have you ever benefited from the protection of the local policy or fire department? Why should I pay taxes for your public transportation? Why should I pay taxes for you to attend school? Why should I pay taxes for you to get to send letters at a cheaper than market rate? Why should I pay for you to be protected? Erik, you have absolutely demanded the right to other people's labor and you do it every single day. The only way to make your position consistent is to advocate that all taxes be voluntary (as Ayn Rand believed). Anything less is nothing more than hypocrisy beneath a thinly coated hatred for the poor.

(2) If you do believe that all taxes should be voluntary (unlike Jacques who believes that stealing 10% of our money is alright) then please say so. That is a whole other can of worms I would be delighted to debate you on.

(3) Erik says that public school's are a joke and that instead people should have their money given back to them so they can spend it as they please. But what about the family that only makes $20,000 and already loses almost nothing to taxes? There is absolutely no way they can afford private school? What about the family now making $10,000 a year because the minimum wage has been abolished? What about the women makes 50 cents on the dollar because fair wage statues have been abolished because they were seen as intrusive government regulation and bureaucracy?

(4) Erik says that under his system that people are not forced to pay for things they don't support. The problem is that such a world is not possible, people will always be forced to pay (in one way or another) for something they do not disagree with. Under your proposals I would be unable to go to college because I would not have any student loans from the government. Under your proposal I would not have health care because I get insurance through my parents from their employer and they would be unable to offer health care to employees anymore. Under your system I would be unable to go to work or...anywhere because I rely on public transportation to get where I am going and if I paid the actual cost of what a bus ride costs I would unable to afford it. I absolutely have to pay to support your opinions; I am absolutely forced to support them. Frankly, I don't care if you have to pay for things that you don't support Everyone has to put up with policies they don't approve of, that is the necessary cost of living under a government, in a society. The alternative of trying to create the impossible system where no one has to support anything they disagree with creates much more significant harms than the status quo has.

(5) Ultimately, I believe Rawl's was right when he said that policies should be judged by how they help the least advantaged among us. I am entirely uninterested in the impact that economic and tax policies have on millionaires and billionaires. These people already have enough advantages, enough power, and enough people looking out for them. We do not need to rush to the defense of the richest people in the world. I am entirely interested in the impact that economic and tax policies have on the poorest people in America. In fact, I think that the impact on the poorest people is the only thing we should worry about. Only once everyone has access to food, water, shelter, and essential medical care should we worry about the property rights of billionaires.

Erik’s Response (numbered according to the above paragraphs from Alec):

1. Yes I have ridden the Summit Stage, that does not mean I support it as an institution. If I could snap my fingers and abolish it I would, and I would be happy to live with the consequences of not having that transportation option. My parents, living in Summit for over 20 years, have had to pay taxes that fund that damn bus. They’re forced to subsidize the transportation costs of others, and it’s absurdly immoral. A small piece of every day that my father works is taken from him, by force, and given to someone so they can have free bus travel. Does the Stage help the economy of Summit, allowing easier transport for skiers? Well, probably. But most ski tourists would (and should) pay for the bus if it ran like any other legitimate business. Those who couldn’t pay for the bus travel aren’t exactly contributing much to the economy, I’d imagine. Regardless, even if the Stage did wonders for the economy, it wouldn’t give the right to usurp wealth from the residents to pay for it. I could think of a hundred programs which could claim to bolster the economy… does that give me the right to take everyone’s money to prove so? It does not.

Government takes my wealth, and the wealth of everyone else (everyone who produces wealth, that is) regardless of whether we use the services or not. So, is Alec suggesting that I stop using the services I’ve been forced to pay for? If I was forced to pay for satellite TV, one can bet I would subsequently sit down to watch it from time to time. This does not mean I support it, or condone it, or that it’s legitimate. The fact that I use something I’ve been forced to work for doesn’t mean that thing has my sanction. Only a fool wouldn’t use something he’s already been forced to pay for. If I stole Alec’s wallet, bought Das Kapital, and then gave it to him, should he throw the book away? Well, he should, but for a different reason.

Regarding the Post Office… I’ve used it because the Government prevents competitors from entering the market. Government doesn’t even allow competition in basic mail delivery! Why is this so? The Government sues Microsoft billions for being an alleged monopoly (even though it isn’t) and yet it runs its own monopoly in the mail service (amongst countless other concurrent coercive monopolies). One pays FedEx every day that one uses it. One pays the Post Office every day that one doesn’t use it, and then also on those days when one does.

Regarding the military… I don’t necessarily disapprove of all military spending. There is a lot of room for discussion on this point, although I think the military’s general strategy of policing the world makes me less safe, not more safe. There’s a reason the terrorists didn’t crash a plane into Zurich on September 11.

Regarding Alec’s questions on “why should he pay taxes for my…fill in the blank” He shouldn’t!!! He shouldn’t pay for my mail, he should pay for my transportation, he shouldn’t pay for my school, why does he? Because he’s forced.

And let’s get one thing straight, I do not “demand the right to other peoples’ labor.” This is a fallacy I can’t let slide. It is not me condoning policies which force sacrifice on others. One has no right to other peoples’ life nor labour; this is consistently my thesis. The fact that the government forces everyone to pay, and then doles out services at its whim, doesn’t mean I am responsible for such treachery. Every vote I’ve cast, and every word I’ve written, has occurred with the explicit intention of reducing the state in every possible way, or in other words, reducing the burden that any man may place on any other.

2. Yes, I would like all taxes to be voluntary, though I acknowledge it may not work. The government would have to be much much smaller than it is, and that is exactly what I want. Since voluntary funding would require a miniscule government, the US Gov has kindly provided me a list of those agencies I’d like to discuss eliminating: http://www.usa.gov/Agencies/Federal/All_Agencies/index.shtml

You can bet that I’d donate to the US government if its role was limited to the protection of life and property. Ultimately, if we got to such a situation of voluntary taxation and it simply didn’t work – as in there simply were not enough voluntary donations to form a government which protected domestic life and property – then I’d be open to discussing alternatives. We can debate this later, but let’s focus on the issues at hand first.

3. Public schools are a joke, and I say this because American students are taught garbage, and everyone is forced to pay for this garbage. Does Alec think US public schools have done a good job? While there are certainly some public schools that are enviable, they are the minority. The majority are incompetent. Many public schools still debate whether to teach “evolution” or “intelligent design,” as if those two concepts belong in the same classroom. Basic literacy has fallen over the past hundred years. Literacy!! Let alone advanced education. I recommend this article for Alec: http://www.learninginfo.org/illiteracy-statistics.htm

Some highlights:

- “After edging upward for apparently more than a century, the reading, writing, and mathematical skills of American students from elementary school through college are now in a prolonged and broad scale decline unequaled in history. The downward spiral, which affects many other subject areas as well, began abruptly in the mid-1960s and now shows no signs of bottoming out.”

- A study in 1985 found that “only 5% of the 17-year-olds tested had advanced reading skills – the kind needed to understand complex ideas found in professional or technical journals and textbooks.”

- A study in 1993 found that “25% [of adults surveyed] were plainly unable to read, period.”

- “Reading levels of young Americans fell so low in the 1970’s that the Army was forced to rewrite its operating manuals in comic fashion.”

- “For the first hundred years of its existence, a college like Harvard would not graduate a student without a knowledge of Hebrew. Now the point is approaching when one can be graduated without a knowledge of English.”

- “Sunday Times reported in 1997 that the standards of education are so low in the U.S. that black Americans are returning to Kenya to get better schooling.”

Now, it’s widely believed that US literacy rates are actually wonderful, at around 99%. This figure is of course taught in… Government schools. But this figure is very basic literacy, and is thus very misleading. The more important definition is “functional literacy.” I wouldn’t expect most Americans to understand the difference between “literacy” and “functional literacy” because they aren’t, ironically, functionally literate. From our wonderful Government’s own data, here is the breakdown in 2003, which was the last National Assessment of Adult Literacy (NAAL). Notice that a whopping 13% of US adults are considered “proficient” in “functional literacy” by the US Gov. (whose standards aren’t exactly Dartmouth level)

Only 13% of The Public is categorized as “functionally literate,” yet they vote on policies which affect the trajectory of international economics! When education is a joke, democracy is a joke. Here’s some more information from Wikipedia (and I know Wikipedia isn’t omniscient), if Alec’s still not convinced that public education is a joke: http://en.wikipedia.org/wiki/Literacy_in_the_United_States

Perhaps the most telling quotation from this page, They [the CIA, who reports the official US literacy levels] also considered individuals literate if they simply stated that they could read and write, and made the assumption that anyone with a fifth grade education had at least an 80% chance of being literate.”

Public education is making people more stupid, but hey at least it’s making the poor stupid equally, right? It’s a shame that I’m forced to pay for the organization which dumbs down those most in need.

Americans should get their education from competing institutions, just like they get food from competing grocery stores, and computers from competing manufacturers. I know Alec distrusts the free market, because the all-knowing and never-motivationally-biased Politburo isn’t in control, but how difficult is it to see the dismal failure that is American public education? And with our nation’s childlike intellectual state, is it any wonder that “The Public” votes in politicians who promise free candy?

So what about the family that only makes $10,000? Well, in a free market there will be very cheap private schools (there are already). If parents still don’t make enough to get their children very cheap basic education then they shouldn’t have children. Alec probably thinks this is cold and cruel, but I think it’s cold and cruel to bring a child into the world if you can’t support it, and it is definitely cruel to force others to pay for one’s bundle of joy. Do parents have a right to have children? Yes (or more specifically they have the right to pursue it), but they don’t have a right to take other peoples’ wealth to pay for it. Just like if a family can’t afford food, they shouldn’t have children! Does Alec think I should be forced to pay for the food of a couple who wishes to have a child? Clearly he does, I guess. We don’t centrally control food just because it’s “important,” and actually the fact that it’s important is precisely why it should not be handled by a coercive, politically motivated monopoly.

The bottom line is this – in a free market there would be cheap schools, just like there are cheap foods and cheap cars in the market. If a family can’t afford a child with their income, they ought not have a child. Fornication doesn’t create a legitimate claim on upon the work efforts of other people who had no part in the fornication.

Finally, if we lived in a free society, and there were families asking for financial help with their children, I would sure as hell try to help them, but only to the extent I believed them to be responsible and deserving… a criteria absent in forced Government handouts.

4. On point 4, Alec is suggesting that he has a right to my money to pay for his education. How is that not stealing? On health care, it shouldn’t come from his parents’ employer anyway. Why don’t companies pay car insurance? Life insurance? Property insurance? Is he saying his parents don’t have those because their employer doesn’t provide it for them? This is important for Alec to understand – employers pay healthcare because it isn’t taxed as income to the employee, whereas if employees buy their own healthcare, they are taxed on the money first. Not complicated. Again, this is a government-created distortion. Regarding public transportation… perhaps if gas wasn’t taxed, and cars weren’t taxed, and Alec’s salary wasn’t taxed (does he have a salary?), and the companies who make cars and gasoline weren’t taxed, and the companies who provide those companies with their supplies weren’t taxed, Alec might have a better chance of paying for his own transportation, instead of forcing others to do so. Alec thinks he has a right to be moved around the world at others’ expense… how is that not slavery?

Alec is honest, at least, when stating, “frankly, I don’t care if you have to pay for things that you don’t support.” The true morality of communism emerges.

5) On point 5, let’s assume for a moment that Rawls was a moral man. If we ought to judge policies by how they help the least “advantaged” among us, then we ought to judge centralized control of production as an enemy to be resisted at every opportunity. Welfare does not help the poor, it perpetuates poverty. Minimum wages do not help the poor, they prevent employment. Public education does not help the poor, it keeps them ignorant. Taxes on the rich do not help the poor, they stifle production and wealth creation. However, what all these “social” programs do is to help those who feel guilty for living in a nation of builders, those who think wealth is evil, those who think trade is immoral, those who think thought and reason are crimes against the needy, those who think that by building a business, they are robbing the resources of their customers (and therefore prefer to hire the government for that purpose), those who think that by enjoying their bread, they are preventing others from eating… it is these people whom the “social” programs help, not the poor.

The poor are helped when you allow producers to produce and trade amongst the populace, but this is not the main reason to allow production and trade. These activities should be allowed because all men deserve to be free, whether poor or rich, and we can thank the natural mechanism of economics for the result that all people tend to be improved when each person is allowed the right to his own life. If you want to help the poor, either do it yourself, or get out of the way so that the world can be built for them.

Response to Alec’s follow-up, “Crystallizing important points”:

Alec:
Jacques says that he supports a social safety net and also a government 10% its current size. I assume 10% of its current size means collecting 10% of its current taxes, not 10% of the current spending or number of programs because that would mean the death of a social safety net. So the only way he could have a government with a safety net but 10% of the taxes is the belief that elimination 90% of taxes would result in such a large increase in tax revenue that it would offset the 90% loss. If cutting taxes by 90% does not yield a net tax increase then Jacques will either have to abandon his support for a social safety net or his support for libertarianism.

Erik’s Response:
As mentioned in my former diatribe, we could eliminate the entire income tax and have the size and services of 1990’s government. Quite clearly we could eliminate 90% of the income tax and Jacques will not have to abandon his support for social safety nets nor libertarianism. If such a miracle were to happen, the US economy would surge and Jacques’ safety nets would be ever more secure.

Alec:
My argument was that in order for net tax revenue to increase after a 90% cut in taxation that wages would have to rise dramatically. That dramatic rise in wages would cause an increase in inflation and would result in a decrease in actual purchasing power for individuals and the government. Jacques says that inflation is caused by the government expanding the money supply by printing more money. This is incomplete because there are other causes of inflation.

Erik’s Response:

This is discussed also in my diatribe. Only “taxable income” needs to increase, which is very different from income. See diatribe for details.

Regarding inflation, there are other ways for money supplies (m1, m2, m3, etc) to be inflated, but they are generally self-correcting and temporary. These ways involve the actions of commercial banks, and the actions are self-correcting so long as interest rates are allowed to move freely. Again, as mentioned, incomes can increase without any inflationary effects (price increases) so long as production keeps pace. Production would keep pace if taxes were lifted.

Alec:
Jacques says that since the richest pay most of the taxes only the richest have to see an increase in their salary in order for the government to see a net increase in tax revenue. So his argument is that only the super rich need to, and will, experience a dramatic increase in wages. Awesome, the government will have a net increase in tax revenue because millionaires will become billionaires and billionaires will become trillionaires all the while everyone else sees no increase in wages. Increasing the salary of the richest 1% tenfold while there is absolutely no increase in the salary of the poorest Americans, or any other Americans for that matter, is hardly a good argument for an economic policy.

Erik’s Response:

The top 5% pay 60% of the nation’s income tax. This means that 1 in 20 people pay the cost of all government services for about 11 of the other people. How much more does Alec think is just to tax them?

Alec is twisting Jacques argument severely. Jacques is not saying that only the rich will see wage increases, he is saying only the rich need to see wage increases for government revenue to increase. Big difference.

Alec says that it is bad policy to “increase the salary of the richest 1%” I agree! Policy should not dictate salaries, although Alec thinks it should when it comes to certain peoples’ wages. Is this another arbitrary double standard, or did I already cover this?

Alec:

Additionally, Jacques is living in the land of gumdrops and lollipops if he thinks the country can experience that kind of massive increase in wages and not see any inflation. If millionaires and billionaires are now making 10 times more than that money will have to come from somewhere. Either the money supply will increase to adjust for the massive increase amount of money they are being paid or that money will have to be taken from somewhere else. That means either there will be inflation or regular workers and the poorest will have their wages cut The bottom line is that the necessary increase in wages to result in a net increase in tax revenue would either mean a dramatic increase in inflation which would cripple the economy or a dramatic decrease in everyone else's wages. Either way it would to a decrease in the real purchasing power of almost everyone else.

Erik’s Response:

Once again, price increases are only inevitable if production doesn’t keep up. More money chasing more goods won’t increase prices. Prices increase when more money chases the same or fewer goods (which is the current course Obama is speeding down).

Now, if we lived in a truly free market (the kind which the world is claiming has “failed” even though it never existed), then what would occur is that wages may rise or fall nominally, but the cost of goods would tend to fall across the economy over time, so purchasing power would increase. All of Alec’s concerns are a great argument in favor of a commodity backed monetary standard, but this would prevent prolonged federal budget deficits, something Alec would support in Bush’s case but not in Obama’s… another arbitrary double-standard!

Alec:
Not only is such a dramatic increase in wages inherently undesirable but it is incredibly unlikely. The tenfold increase in executive wages would not only be very unlikely but would not be indicative of and proportional to an increase in the productivity and profitability of the company they work for. Additionally, the majority of tax profits come from corporate taxes rather than income taxes on individuals. In order for individual income to increase enough to offset the loss in tax revenue from the elimination of corporate taxes the income of the richest 1% would have to increase by more than tenfold. it would have to increase fifty fold or one hundred fold, or more. The bottom line is that it is utter fantasy to expect a net increase in tax revenue after a 90% cut in income taxes and the elimination of the corporate tax. There is absolutely no way for that to happen and for Jacques to both support a social safety net and a libertarian tax policy is inconsistent. He must abandon one or the other.

Erik’s Response:

I believe Alec is pulling his numbers out of, as he called it, “the land of gumdrops and lollipops.” He states, “the majority of tax profits (the Government doesn’t make profit, fyi) come from corporate taxes rather than income taxes on individuals.” So, how does Alec explain this chart from the Congressional Budget Office for Federal Taxes in fiscal year 2008:


I guess technically he is correct (although I have a feeling he was referring to just corporate income tax, in which case he’s somewhat exaggerating). 48% of the above revenue comes from Payroll + Corp Income taxes, and only 45% comes from individual income tax. Alec says, “In order for individual income to increase enough to offset the loss in tax revenue from the elimination of corporate taxes the income of the richest 1% would have to increase by more than tenfold. It would have to increase fifty fold or one hundred fold, or more.” Let’s do the math, shall we?

Disclaimer: ignore all laws of economics which would suggest that treasury income may increase when tax rates decrease. Let’s assume for the below analysis that when rates decrease, income decreases proportionately, even though that’s preposterous.

If we eliminate the corporate taxes (income and payroll) then the tax revenue will have lost 48% of its former total. Since the income of the richest 1% pays for 35% of the IRS’ personal income tax revenue (http://www.ncpa.org/sub/dpd/index.php?Article_ID=13984), that means they pay 15% of the entire federal budget (.35 x .45 = .15). Since we lost 48% of the budget, the richest 1% will need to pay an additional 3X on top of their current payment to make up for it. If all factors are held constant, that means the salaries of the top 1% need to increase by 300%, or “three fold”… not fifty fold or one hundred fold or more, as Alec asserts. If the top 1% had a salary increase of 100 fold, that would mean the Federal Revenue would grow about 15 times larger! (100fold x 15% of federal budget = 15 federal budgets) The land of gumdrops and lollipops, indeed.

If we cut 90% of the personal income tax, and the entire corporate income tax, the federal budget would be 4.5% income + 36% payroll + 4% other + 3% excise = 47.5% So, if we shrank government by just over half, we could eliminate 90% of the personal income tax and the entire corporate income tax… pretty incredible. And, as according to the disclaimer above, this all assumes that the economy wouldn’t grow under conditions of lower taxation, which is of course preposterous.

Alec then claims… “There is absolutely no way for that to happen and for Jacques to both support a social safety net and a libertarian tax policy is inconsistent. He must abandon one or the other.” Well… I think a government 47.5% as large as the one in 2008 would be able to provide a few safety nets, at least, so Jacques is being utterly reasonable.

Yet, I fear this isn’t a fair critique of Alec’s philosophy, because communism and math have never mixed very well.

Alec:
Jacques also claims that I do know know what the Laffer Curve is. This is both the uncharitable interpretation of my argument and slightly insulting. Of course I know what the Laffer Curve is. My point is that we are on the opposite of the curve that Jacques believes we are. I believe that it is possible to raise taxes and still raise net tax income. Our disagreement is in many ways which side of the curve we are on and to simply accuse me of not understanding what it is in the first place entirely sidesteps the issue.

Erik’s Response:

Alec is allowed to believe whatever he wants regarding where we are on Laffer’s Curve. However, if he’d read anything recently about the thousands of millionaires who are moving their money out of the US, then perhaps he’d alter his opinion. If he’d read anything recently about companies relocating to tax-friendly nations like the UAE, then perhaps he’d alter his opinion. If he’d read anything recently about the relocation of jobs and divisions to subsidiary outsource companies that aren’t subject to US taxation, then perhaps he’d alter his opinion. If he’d ever earned a good income, or run a business, and felt the relentless sting of taxation poisoning his efforts every quarter, then perhaps he’d alter his opinion.

Alec:
Jacques also claims that there were a number of other factors that lead to the expansion in the economy during the Clinton administration. This is fair enough, I am not making claims about what causes the economic expansion during the Clinton administration. My argument is that low taxes are not a necessary part of economic expansion. My argument is that the economy can expand and become more competitive even when taxes are high and that is empirically true. Since that is the case, low taxes are not a necessary component of economic expansion and high taxes do not necessarily lead to economic contraction. This is the final nail in the coffin of Jacques position. His libertarianism is not based in principle, only expediency. So unlike most other libertarians, he should actually be forced to abandon his position if it is shown that it does not or cannot work. The empirics are not on his side. The economy has expanded when taxes are high. The economy has retracted when taxes were low. There is no way for there to be a net increase in governmental revenue when taxes are cut by 90%. There is no principle that supports his tax policy, there are no empirics to justify such a policy.

Erik’s Response:

Alec is correct that “low taxes are not a necessary part of economic expansion.” Economies can expand under high taxation (the US is evidence of this). The crucial idea here, however, is that high taxation suffocates/limits/restricts growth, so that even though a nation can grow under taxation, it would grow faster without such burdens. And, because the poor are most easily helped the richer a nation is, anyone who advocates help for the poor should do everything they can to unshackle the economy.

It comes down to a question of short-term and long-term. Short-term, it may help some families to give them free __________, but long-term it is much better to allow the economy to surge ahead. Every child Alec feels good about helping in the present is helped at the cost of being less able to help children in the future. I suppose that’s a personal judgment, except that it’s not because Alec forces me to abide by his short-term philanthropic strategy.

Regarding the “final nail in the coffin of Jacques’ position”… I fail to see how the statement “high taxes do not necessarily lead to economic contraction” is a nail in any coffin. High taxes, if other factors aren’t held equal, may not visibly cause the economy to contract. However, high taxes, if other factors are held equal, will prevent the economy from growing as quickly as it otherwise would, and if they’re high enough they’ll cause the economy to indeed contract. An increase in taxation will virtually always stifle, to some degree, economic growth (though it doesn’t necessarily make it contract), and so the only “nails in the coffin” must be for the poor who would have otherwise been helped, had the economy been just marginally stronger.

Jacques also never claimed that his libertarian ideology was based on principle. I believe he is a libertarian for pragmatic, rational, and utilitarian reasons. The empirics are on his side, though Alec disagrees. Not only is it possible for there to be a net increase in governmental revenue when taxes are cut by 90%, it’s just a question of how long it would take (1 year? 10 years?). The principle that supports Jacques’ tax policy is called the principle of “economics,” and there are numerous empirics to justify such a policy.

I encourage Alec to attempt refutation on any of the above.

Some final thoughts for Alec…

Take two identical countries, and hold all factors equal except the size of government. In one country keep the government small. In the other country, let the government grow (and let it provide any and all services). Then, let’s make a bet on which country will have the highest standard of living at the end of 100 years. I’ll bet that the small government country will win, and you’ll bet that the large government country will win.

Unfortunately, because you’re a statist, you’ll also force me to bet on your country. You won’t give me a choice, whereas I would never make you bet on my country. This is the difference between us. You force other people, through government, to accept your opinion, whereas I do not. I respect your right to bet on whatever you want. You not extend the same respect to me. Statists force others to agree with them, libertarians do not. So even if your bet happened to be correct (!), and your country was better off after 100 years, the libertarians would still have the moral upper ground, because they didn’t hold a gun to anyone’s head and force them to surrender their property for the experiment.

-Erik



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