Good morning. So far, you have heard about why the left and right are the same (part I), that trends were altered around the 70s and 80s (part II), the role of markets in history (part III), and the dangers of debt (part IV). It has been a bit jumbled and confusing in parts, perhaps, but such muddled thinking can be hard to dis-entangle in a straight path. And it will only get worst today, with a discussion of taxes and regulations…
So what happened?
The extra wealth coming from productivity gains used to go to everyone. Now they go to the 1%. That’s the big social change of Reaganism.
What was the actual mechanism? Obviously it wasn’t just electing Ronnie. Several things went together:
A push to lower income taxes. This is of key importance, if nothing else because it’s all-important to the GOP, so we’ll get back to it below.
A rebellion against high property taxes‒ principally because middle class people didn’t want to help finance schools for poor people.
The decline of unions, which had operated as a restraining force on big business. Reagan signalled, by firing the striking aircraft controllers, that government would ally with the rich rather than with labor.
Not coincidentally: manufacturing, with its well-paid workforce, was offshored. Though this didn’t seem to matter in the tech-boom ’90s, it doesn’t seem like such a smart move today, with 8% unemployment.
A movement to pay executives in massive amounts of stock rather than money. The rationalization was that they’d be more motivated to benefit the stockholders, as they’d benefit only if stocks went up. Naturally they took the increased incomes but made sure they’d make money even if the company tanked. This was particularly prevalent in the financial sector… which destroyed itself by 2008.
Siding with “labor” is siding with a restriction on a supply – namely the supply of people
willing allowed to work. The effect of unions is always the same – the wages of a few may be raised (but this is not always true), but unemployment rises and the cost of the goods that are produced by the labor in that sector of the economy rises, making it more expensive for every consumer. Those who are pro-union seem to be unaware that unions have been the reason that some prices rise, while some people must sit in the unemployment line, and many even cannot afford food. The Wagner Act itself, when introduced, increased unemployment by 40%.
The protectionism that brought us unionism brings parallel restrictions of supply “such that we’d all be so rich.” In the exact same vein as restrictions on the supply of labor, politicians have done their best to make various goods more expensive, in hopes that it will help a small group. During the Great Depression and the Ukranian Famine, millions of people across Europe and at home were starving – some to death. In the effort to make us richer, the Agricultural Adjustment Act was passed, with the intent that it would make us all richer (via trickle-down forces starting with farmers) to kill millions of chickens, cows, and baby pigs and destroy huge swaths of crops – and this was AFTER the Smoot-Hawley Act kicked the price of goods up into the stratosphere for the average family. Think about what that does. It may improve the wages of farmers, but everyone else is made poorer and more hungry by it. This is the same exact type of thinking that drives unionism. Tom Woods takes this one further:
Indeed, for most of the twentieth century the price of sugar to Americans was 500 percent higher than the world price, thanks to government price supports. This is certainly a boon to sugar producers, who receive an average of $235,000 a year from the policy. But it costs consumers well over $3 billion per year, and it puts all American industries that use sugar at a competitive disadvantage vis-à-vis foreign producers who are not forced to pay such an inflated price for sugar. This latter point is always overlooked by opponents of free trade, who in their zeal to protect jobs in Industry X from foreign competition neglect altogether the destructive effects that their preferential policy for Industry X has for Industries A, B, and C that use X as an input in the production of their own products. Job losses in those industries, though, will hardly ever be attributed to the tariff or other privileges shown to Industry X. Meanwhile, the government can point with pride to the jobs it has “saved.” What is seen and what is not seen indeed!
Since 1937, as much as 40 percent of all oranges grown annually in the U.S. have, by law, been destroyed, fed to livestock, or exported in order to raise domestic prices. Quotas on peanuts—which, again, have exactly the effect on peanut production that a guild restricting entry into the field would have—effectively double the price of peanuts and peanut butter. Dairy subsidies are more outrageous still, with every dairy cow in America subsidized to the tune of $700 per year—”an amount greater than the income of half the world’s population,” Professor Eric Schansberg points out. All this inefficiency and destruction of wealth impoverishes society as a whole, and hurts the neediest the most. We will never know the full cost of these policies, since many of their costs include jobs never created and businesses never started. Let us be serious: is this really how we’d like our entire economy to be run?
Protectionism of any group, via tariffs, unions, taxation, and regulatory impediments makes all of us poorer, without exception.
Back to our friend’s column…
Deregulation of the financial industry.
Obviously, a lot of this was done using smoke and mirrors. Though Republicans haven’t been coy about favoring the rich, Republican candidates don’t campaign on the slogan “Nothing for the majority; everything for the super-rich.” They have to distract the electorate with cultural issues, and pretend that their policies are good for everyone.
Now, in 1980, they could claim ignorance: maybe Reaganism would work, maybe tax cuts really would increase tax revenue! Maybe this next perpetual motion machine will really work! But we’ve been drinking the magic kool-aid for thirty years now, and it’s not working. So the program now has to be maintained by pure denial.
For much more detail on how the 1933-80 period worked and how it was different from what came before and after, see Paul Krugman’s The Conscience of a Liberal.
Ah the deregulation myth. Notice that there is no specificity here. On this issue, it is difficult to refute an argument that simply isn’t there. Even the smart arguments about deregulation fail to connect cause and effect. The regulatory burden in the U.S. has been accelerating with government spending. The 1994 Code of Federal Regulations is made up of over 200 books. The index alone is 750+ pages. And that was almost 20 years ago. Estimates in the increase in the amount of regulations since that time range from 13-26%. “Deregulation” simply isn’t happening. But it should. Economic and environmental regulations drive costs up for small firms, choking them out and ensuring that other countries maintain an economic edge on us. Further, regulation has adverse disproportional impacts on certain groups, most notably the poor. Walter E. Williams’ book State Against Blacks details this trend very nicely, and shows how regulation itself could have much to do with the growing wealth disparity.
Above, you might have noticed a slight reference to the fact that regulations often favor insiders that have the ability to use an uneducated public and lobbying to their advantage. This practice is called regulatory capture, and it is the thesis of an entire branch of economics called public choice theory. Generally, regulatory capture means that regulations are not designed to protect the public at all. They are instead written and paid for by lobbyists who work in the particular industry of interest, who ensure that competition will be restricted in their favor. Since Tom Woods is doing such a great job, I will let him have a word:
All of these examples of genuine exploitation amount to one of many reasons that free-market economists hold the beliefs that they do. The greater the scope of state activity, the greater the potential for each pressure group to use the state apparatus for its own enrichment, at the expense of the rest of society. Since the benefits that accrue to such pressure groups from their political agitation are sizable and concentrated, while their costs are dispersed and hidden, the tendency over time is for more and more of this kind of activity to go on at the expense of the ordinary person.
Even if someone did make the connection between the higher prices he has to pay for peanuts and the government’s restrictionist peanut policy, the amount of his individual loss is low enough that he has next to no incentive to devote himself to lobbying for its repeal. The relatively few beneficiaries, on the other hand, since they benefit so handsomely, have every reason to devote energy and resources to the maintenance of the policy. The great nineteenth-century political economist Frederic Bastiat called all this looting “legal plunder,” and who can blame him?
A recent CEI study determined that the cost of regulations was over $1.75 trillion of productivity. I am not of the thought that productivity is the only measure of a country’s success. But what we are talking about is increases in wealth that are spread throughout every strata of society. People will be poorer as a result of regulation, and it will be the poor that are most “punished” as a result of such measures. Regulation also causes a false confidence in societal order. Watch this, this, and this lecture for more information on that theory.
Generally economies with a lower tax and regulatory burden do far better than those with both. Economic freedom, as it is called, creates more wealth for everyone, and leads to greater happiness overall, on average.
Our buddy has much more to say, though, so let’s not hover too much on those studies. Google them if you like:
The death of taxes
There’s one bedrock goal of the conservative movement: lower taxes for the rich. And they’ve plugged away at it steadily for forty years. The top tax rate has been repeatedly cut from the 1960s on.
The last few years have been a crash course in what really matters to the GOP. They reversed themselves on health insurance. They reversed themselves on TARP. They spent wildly under Bush (“deficits don’t matter”); now they want to chop government spending. They’re not exactly eager for Bush’s wars anymore. They haven’t even gone along with Obama’s proposals to make Bush’s tax cuts permanent for the middle class. Bush expanded Medicare; Ryan wants to replace it with vouchers and then make the vouchers ever-smaller. They’re consistent on just one thing: the need to give the rich even more money.
Oh, and they want to end health insurance for the elderly and those newly insured by Obamacare, repeal financial regulation, and maybe start a new war on Iran.
To Republicans, it’s always 1968, with taxes sky-high and hippies revolting in the streets. Whatever the situation, their answer is always to lower taxes on the rich. But we’ve been doing that since the sixties, and it never helps the rest of us. Quite the opposite; the rest of us are stagnating or worse off.
When we talk about taxes, by the way, don’t get snowed by the GOP preference to talk only about the federal income tax, which is highly progressive. For the poor, state and local taxes are a much bigger bite:
The poorest 20% pay less in total taxes, but you know, they’re poor. You’re not going to make a lot of money trying to tax them more. Conservatives are fond of pointing out that the rich pay the lion’s share of taxes collected. Well, duh. That’s because they’re getting all the money. You’ve probably been forwarded that e-mail about how the rich guy is paying so much in (federal) taxes. It’s intended to make you focus on the question “Why is he being taxed so much?” Instead, ask “Why is he being paid ten times more than in 1970?”
Don’t tax cuts promote growth?
To argue for lower tax cuts on the rich, right-wingers argue that tax cuts promote growth, job creation, government income, hair growth for men, etc. None of this is true.
Bush II cut taxes, and the economy tanked. Real GDP increased at about 2% a year.
Common sense suggests that when you reduce government revenue, government revenue will go down. And it’s right! Over Bush’s term, as a percentage of GDP, federal revenue dropped from 20.5% to 17.5%. (One consie trick is to count dollars instead. But revenue in dollars will go up due to population growth and productivity growth; you have to look at the percentages, instead.)
Ironically, one of Bush’s justifications at the time was precisely to reduce the budget surplus. That was the conservative doctrine of 2001: Alan Greenspan gravely informed Congress of the terrible dangers of reducing the debt. They don’t really care about the debt; all they care about is taxes.
In 1993, Clinton raised taxes, in order to reduce the deficit brought by years of Reagan-Bush irresponsibility. Right-wingers frantically prophesied disaster. Instead we had an economic boom; real GDP increased at 4% per year for the rest of the ’90s‒ far higher than under Bush II. Growth also rose after the 1982 tax increases. (Do you think modern conservatives remember that Reagan raised taxes?)
As for job creation, over the eight years of Bush II, 2.6 million jobs were created. Over Clinton’s presidency the figure was 22.7 million, nearly ten times larger. (And that actually gives too much credit to Bush, as jobs were hemorraging in the first months of Obama’s term, delayed casualties of Bush’s blow to the economy.)
Perhaps confusingly, to get us out of our present crisis, Keynesian economists advocate… tax cuts, among other things. This isn’t a contradiction; we’re in a liquidity trap, when the economy can’t be jumpstarted simply by lowering interest rates (because they’re already effectively zero). This isn’t the sort of recession we’re used to in the post-WWII era, though it’s very similar to the Great Depression. Tax cuts are a cheap stimulus right now, because the cost of borrowing is very low. However, tax cuts can’t be the only solution‒ they do very little for the unemployed and the poor, for instance. They need money and jobs, not tax cuts.
Ah, HERE we go! Here is a bit more of the meat of our leftist friend’s theory. Low taxes hurt the economy! Let’s think about this for one second critically. What he is saying is that without someone reaching in your pocket and taking what is found there, you are going to be worse off. Let me repeat that. Without someone taking money from you that you don’t want them to, you will be poorer overall. How this kind of twisted logic makes it through people’s neurons and out of their heads without a second thought is beyond me. Perhaps we would all be better off if they just took everything from us and told us how we can use it!
The morality of taxation is also a twisted game. The theory is that the government has a right to your money, merely for the fact that you live within its borders (borders, by the way, that are likely made up of private property – so right off the bat you have the government claiming that simultaneously you own the land and it can exert its complete influence over the territory thereof. Stay with me now). You cannot opt out of any of the programs that the government spends money on, no matter how morally appalling they may seem to you. How does the government get this power? We delegate our rights to the government, as a group, in what is called a social contract. In this implicit contract, we give the government the ability to steal from people and redistribute the wealth as it sees fit. No matter the logical inconsistency of social contract theory – namely, how can we delegate the right to steal and use force when we ourselves do not have that right in the first place? – just go with it. This type of thinking, being rooted in legal positivism (the moral worth of a legal proposition is irrelevant; only the fact that the axiom has legal force is necessary for it to be right) and utilitarianism (if the ends justify the means, go for it), ensures that the coherence of its premises are immaterial. Theft is okay when we say it is. As is murder, rape, and lots of other evil shenanigans. As the late Lysander Spooner said, “Social contract? I didn’t sign shit.” (paraphrased.)
I will let you look up the data on taxation, but let me add in a few of my own factoids…
First, I am not going to defend Republicans. They are just as guilty of high taxation, burdensome regulation, and crony capitalism as the other side of the aisle, and anyone arguing otherwise needs to examine the level of dissent allowed in the Acceptable Range of Opinion that has led to men like Ron Paul being blacklisted from party events. I want lower (or no) taxes for everyone, and I refuse to engage in the debate on the side that says 47% of Americans do not pay taxes and that is wrong. Yes, it is wrong. Were that the other 53% never paid another dime. Mitt Romney is a fool of a man, arguing that more people need to be taxed. And he is the “small” govermentalist, remember!
Historically, taxes have not resulted in higher government revenues. This is called Hauser’s Law. I will let you just look at the chart. No need to explain this one if you can just see the damned thing.
Every Tom, Dick, and Harry who doesn’t get economics always brings up the Bush tax cuts as a strike against low taxes. Few realize that 2007 was the greatest year for tax revenues ever. In absolute terms, the rich paid more in 2007 than they had ever paid. The cuts were also a response to a recession, which is a logical step. Now if there is one thing I can’t stand, it is a guy who says he defends small government policies justifying the government stealing by bragging about how there is a perfect area in which tax revenues will be higher for the government. Guys like me would rather see the government bled dry for every dollar it has taken. But there is something to the argument that lower taxes can generate more revenue – and it is called the Laffer Curve. Since I don’t love the concept of the Laffer Curve, I won’t discuss it much here, but it would do well for those who know little about economics to go read about it. Further, if the Bush tax cuts were abolished, the CBO estimates that the revenues from the increase would be a mere $90 billion. In the face of trillions of dollars of shortfall, this amount is laughable – and it is clear that the lack of funds is no hindrance for politicians eager to spend money, what what’s the point?…
The effects of theft:
HAHAHA JUST KIDDING. Fairness is really a made-up word. But what’s fair? Probably a flat tax, if taxes are to exist at all (I would be glad to discuss taxes not existing some other time if you want that discussion). In absolute terms, a guy with $1,000,000 in income will pay a helluva lot more than a guy with $100,000. Hong Kong has a flat tax of 15%, a free economy by nearly all indicators, and has been able to afford one of the greatest public infrastructures in the world.
Sadly, I do not have a chart for it, because my bandwidth is limited. Here is a link to a chart. Corporate taxes in the U.S. are the highest in the world (of an industrialized nation). The problem is, corporate taxes are always passed on to the consumer, which drives the cost of living up. Most people don’t understand the fact that taxes are simply a cost within a corporate budget that must be covered by revenues. They drive up costs for consumers and discourage business growth. They are all around a bad idea.
Finally, think about how often every dollar is taxed (New York State has a great example here, I believe just for state taxes).
Though I could easily do a number on taxes (that’s what the blog is for), that is enough for today. See you on the next round.