Category Archives: political economy

Keynesian Spending vs. Personal Spending

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In this post, I want to talk about two fundamentally different views of spending in an American economy.

One view of spending is Keynesian: any spending is stimulative, and so government’s (stimulative) spending helps a stagnant economy break out of its stagnation.  Further, only government has the resources to provide the size of spending stimulus needed to break a downward cycle.

Thus, if we have a Keynesian stimulus of, say, the $800 billion of an Obama Stimulus bill, or the similar-sized aggregated stimulus spending of a New Deal 80 years, or so, ago, we would expect to see a stagnating, if not sharply contracting, economy break out of its doldrums and return to solid growth.  Yet we did not, in either case.

I won’t get into things like the fact that current government stimulus spending represents future taxes, or government stimulus spending represents a wealth transfer from productive sources to unproductive targets (in the laudable, but unsatisfied, hope that the recipients will become productive), or that government stimulus spending is aimed at a temporary response, while the costs of that spending—those taxes, and debt incurred—are long-term.  The reason government stimulus spending isn’t all that stimulative is that a tax dollar collected from an individual isn’t completely spent in the first place.  Some of that dollar is retained by the government for its own purposes, and some of that dollar is simply lost to intra-government friction.  Less than a dollar makes it out the door as actual spending.

The other view of spending is that personal spending is stimulative, and that were individuals in their aggregate to spend (or resume spending), a stagnating economy would break out of that stagnation.  Associated with this view is the commonly held belief that individual saving, by not being spending, does not contribute to breaking out of that stagnation.

When an individual spends a dollar, though, that whole dollar makes it out the door.  Of course, when the individual also saves that whole dollar is saved.  None of an individual’s dollar, while it’s in his hands, is lost to intra-individual purposes or to friction.

What happens to that individual’s dollar when he spends it, or to the government’s six bits that finally get into the economy as spending?  From here, they follow pretty much the same path: an initial food purchase is made at the local grocery store, some is spent on rent or mortgage, some is spent on the car, and so on.  Each of those recipients then spend some of their parts of that original dollar: on wages, on rent, on supplies, and so on.  All along the way, each individual or business recipient also siphons off a small amount as savings.  Each of those recipients, including the wage earners, repeat this general cycle until finally that original dollar has been consumed.  In general, the original dollar that an individual spends, in all of its spending incarnations through all those recipients’ subsequent spending, turns out to be worth around $1.75 to the local economy.  That government’s six bits, following the same path, though, can only amount to a little over $1.30 for the local economy at that same turnover rate.

Consider the money that’s saved instead of spent, now.  How non-stimulative is that money, really?  In the immediate term of a dollar actually spent, it’s not stimulative.  But it is stimulative in the not too distant future: that dollar saved either is held under the individual’s mattress against a future spending need, or more likely, it’s deposited in a bank or other financial institution.  Once that dollar makes it into the bank, it becomes part of a collection of lots of individuals’ dollars, and that collection is loaned to a number of individuals and businesses—for spending.  Saved money, thus, represents not too very delayed stimulus spending by others who have borrowed the money for the purpose.

But in the end, who is really doing the spending?  Either way, whether government or individual spending, it’s the individual individual’s money that is spent, and so it’s the individual who’s doing the spending.  A critical difference is in the pathway described above that is followed by the individual’s dollar, and this difference determines how much of that dollar actually gets spent and so the final value of that spending.

A dollar taken from an individual in taxes is therefore an expensive dollar.  It represents a loss of a dollar of private saving for future spending or for future private lending for spending, or it represents a loss of $1.75 to the taxed individual’s local economy that would have resulted from his spending that dollar himself.  If that tax dollar—or the roughly three quarters of it suggested above—comes back to that same local economy, it’s only worth $1.30, a reduction in value of 45¢.

Since government spending can only come at the expense of taxing the individual, it cannot be as stimulative as the aggregation of individual spending, even when some of that individual spending is delayed through saving mechanisms, and even if that government spending comes during an economic contraction.

What is the President’s Jobs Agenda?

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What, exactly, is the President’s jobs agenda, now that he’s begun campaigning on one, a year ahead of the next election and three years into his administration—three years in which unemployment has been as high as 10% and has stagnated at 9% for the last two years?  Three years in which he has pushed through his Obamacare health care legislation and his Dodd-Frank Wall Street legislation.  Three years in which he has shaken his finger very firmly at America’s enemies as he has presided over our retreat from the world stage.

Let’s review the bidding.  His opening move, at the end of summer, was a $440 billion bill in which he collected parts of Stimulus I, with its spending imperative, added a push for higher taxes for his class warfare reelection campaign theme, and titled the collection “The American Jobs Act.”  What were the jobs?  There weren’t any, directly.  Much of that spending, though, was aimed at transfers of national taxpayer monies to state and local public service unions—teachers, police, and fire fighter unions—to retain their support in Obama’s campaign.

When that failed, his next move was to pull his jobs bill’s spend and tax legislation apart and push the spending piece parts—always paid for with higher taxes, rather than spending cuts elsewhere—separately.  He did this against the backdrop of his campaign for reelection.

In parallel with that, he’s been having his EPA write “clean” air rules that are Draconian in their effect on, for instance, coal-fired electricity generating power plants.  As Josiah Neely, an Analyst with the Texas Public Policy Foundation, points out, these rules threaten existing and future jobs in return for highly doubtful favorable effects on air quality.  The Electric Reliability Council of Texas, reports Neely, says that enforcing the Cross-State and related rules could result in power plant closures to the extent that 183,000 jobs could be lost every year until 2020.  Our president is unconcerned about this, however.  In 2008, Candidate Obama bragged that under his proposals “if somebody wants to build a coal plant, they can—it’s just that it will bankrupt them.”

Just last week, Obama has decided to punt on the Keystone XL pipeline, a project proposed—in 2008—to build a pipeline to carry oil from Canadian tar sands to refineries in Texas and along the Gulf coast.  He said that, after these three years of review, he wants yet more, “to ensure that all questions are properly addressed and all the potential impacts are properly understood.”  This delay will cost 20,000 construction jobs and potentially 100,000+ downstream, more permanent jobs in the US.

Finally, we have this announcement from the Stryker Corporation, a firm that makes implants and instruments for orthopedics and neurosurgery.  Stryker is reacting to Obamacare taxes that are soon to take effect, and their press release, presented 10 November, says in part [emphasis added]:

Stryker Corporation announced its intention to implement focused workforce reductions of approximately 5% of its global workforce and other restructuring activities….  The targeted reductions and other restructuring activities are being initiated to provide efficiencies and realign resources in advance of the new Medical Device Excise Tax scheduled to begin in 2013….

Obama’s Medical Excise Tax is an Obamacare tax that applies to revenues, as opposed to profits, and it is driving companies that want to do development work in this area to reduce effort in this area and to reduce associated employment.  Other companies will likely outsource jobs to overseas jurisdictions that don’t have such counterproductive employment policies.  (As an aside, it needs to be noted that Stryker’s implants now will be harder, and more expensive, for our wounded veterans to obtain.)

Finally, Obama’s do-nothing Democrat Senate is sitting on 15 jobs bills that would have a real impact on our unemployment and our unemployment rate.

What is Obama’s jobs agenda, then?  He doesn’t have one.  He’s still working on his tax and spend agenda, and pushing class warfare to get more of it imposed.

What about the Euro?

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Spiegel Online International writes that “in the end, only the ECB will be able to save the euro if the crisis continues to escalate.”  It’s useful to examine all three of the premises contained in this statement, which was made in the context of a discussion of the current Greek default crisis, the looming Italian default crisis, and the not far behind Portuguese and Spanish default crises.

One of those premises is the assumption that the euro should be saved.  Another of those assumptions, closely related to the first, is whether the euro can—or should—be saved in its present form; that is, should the current euro zone remain intact.  The third assumption, closely related to the second, is that, given a truth of either of the first two, the ECB is the only means of salvation.

On the first assumption, I suggest the answer is a qualified yes, the euro in some form is worth saving.  Free trade arrangements among nations are economically more efficient than trade among nations that have no such agreements among them.  The benefits for each of the member nations, for all of the taxpayers involved, include the following.  Free trade zones reduce the costs of the goods traded by smoothing their shipment and by reducing/eliminating costs associated with the process of trade: tariffs, for example; border delays in goods’ movement; reduction of bureaucracy and of bureaucratic costs associated with managing trade without such agreements.

A common currency is nothing more than a logical extension of this, and it carries further reductions in costs to the ultimate consumer—the businesses in the member nations and their cost of supplies and labor, and the citizens of the member nations as they go about their own business.  Another cost reduction is the loss of the cost of currency conversions from one nation’s to another’s.  Finally, if done right, the common currency eliminates currency speculation within the zone and the price excursions that can result from such speculation (even if the excursions are inherently short-lived).

A common currency, though, even more than a free trade zone, puts demands on achieving a commonality of mores among the nations involved.  The cultural imperatives, the views of a government’s role in a nation’s economy and in the people’s lives, even the views of the purpose of a currency (national or common) must have a very great deal of overlap and agreement.  If these do not exist, ultimately there will result a net flow toward some member nations and away from others; this instability means that a common currency cannot exist for long.

Additionally, a common currency stands on a very large leap of faith by all the members of the common currency zone.  This faith is that agreements made among sovereign nations in the creation of the currency, and that underlie the nature of that currency and its usability, will be kept.

With the euro, neither of these conditions obtain.  If we look at “northern” Europe we see a common attitude that still values smaller governments (if not as small as many Americans believe appropriate) with limited roles in lives and economies.  We also see a general culture that values individual work ethic, initiative, and a degree of frugality.  This tends to be the case of “eastern” Europe, as well: Poland, Estonia, and Slovakia, nations that experienced directly the failures of large government  involvement are examples of this.  Additionally, the memories of the failures of this large, controlling government involvement are still fresh in their minds, pushing them further in the direction of individual responsibility.

Mediterranean Europe operates from an entirely different culture, one whose work ethic seems centered on working to obtain as early a retirement as possible.  This is a culture, also, that holds that government’s role is to take care of the citizens in all respects.  This is a culture that sees currency, not as a store of value to be divided between current needs and desires on the one hand and future needs and desires on the other, but to be used solely for current consumption (that future being a purpose of government).  Regardless of what one might think of the merits of the two different mores, they do not mix.

We’re also seeing the routine breakdown of those agreements solemnly entered into at the creation of the euro.  The agreement that only stable nations, with sound economies, would be allowed to join has proven to be a chimera.  Greece’s membership demonstrates that.  That the signs were visible ahead of its joining is apparent in the contrast with Slovakia, which had much the same economic condition, only more so, as Greece when Slovakia began discussions to join the euro zone.  The differences starkly demonstrate the visibility of those signs.  Slovakia had to undergo severe “austerity” measures to get its economy and debt in order so that it could join, and the people set about to do that.  The Greeks lied about their progress in making the necessary changes and presented falsified books to the EU in order to gain accession, yet those falsifications would have been readily apparent to any serious audit.  And today the Greeks riot in the streets at each set of austerity measures demanded as a condition of bailout.

Italy’s political instability and its resulting inability even to think about cutting spending below revenues is another example of that broken commitment.

The member nations also were assured by the agreements that created the euro and the euro zone that their taxpayers would not be held liable for the debts of any other member.  But we have two bailout packages—and a looming third—for Greece that are built explicitly in the wallets of French, German, Slovakian, Swedish, et al., taxpayers.

On the assumption that the European Central Bank is the only mechanism available to save the euro and the euro zone, this is plainly false.  If ECB were to print money to pay individual national debts, there would occur explosive inflation from that enormous spike in circulating money, and this would blow up the euro.  The ECB cannot be involved in this at all.

The real question the euro zone faces is whether there will be a monetary union or a stable currency.  With the current composition of the euro zone, the two are mutually exclusive requirements.  To save the euro, the zone must be pruned, if not divided into two separate zones, each with its own common currency.   “Northern” Europe and likely eastern Europe must form their own “euro” zone, and let the Mediterranean members go their own way or form their own “mediterrano” zone.  Within each zone there will exist the commonality of purpose and of culture that will give their respective common currencies a chance to survive for the long term.  This, of course, elides the questions for either zone of what entity should have control over the parameters of the common currency, and of how far that control should extend.

Are the Republicans Panicking?

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It’s beginning to look like the Republicans are losing their nerve and starting to duck away from the fight that must be fought for our nation’s soul.

House Speaker John Boehner looks like he’s beginning to bend on the matter of tax increases; he’s conceding that a final deal, from the super committee or in Congress, could include revenue increases; although he maintains that “there clearly is a limit.”  Additionally, 100 Representatives, including 40 Republicans, have signed a letter to the super committee that insists that “all options for mandatory and discretionary spending and revenues” be considered.  Unfortunately, we know what the limit invariably is, once the camel’s nose is in the tent.

Senator Jim DeMint (R, SC), while professing general optimism, notes that one of the reasons he’s not endorsing any of the present Republican candidates for President is that he wants to focus on getting a greater number of conservative Republicans elected to the Senate in 2012.  He’s already seen in the past week, for instance, 32 of his colleagues side with Senate Democrats to block an amendment offered by Senator Tom Coburn (R, OK) that would have cut spending by $1 billion through reducing funding for the Rural Development Agency.  In the same week, 11 Republican Senators, together with the Democratic Party, couldn’t even figure out how to cut $6 million from the Small Community Air Service Development Program.  Senator DeMint has been forced to take a different route than he did in 2008 when he endorsed then-candidate Mitt Romney:

I want to do better for our next president than we did for George Bush. [He] had a Congress that wanted to spend money, and if he wanted anything done, he had to agree to that spending….”

Apparently too many Republicans, in the Senate, at least, have lost their stomach for this fight to reduce government and cut spending.

We cut our deficit and our debt by cutting spending.  Period.  This isn’t rocket science.  The government has too much money, already; there’s no need to raise taxes.  Eliminate loopholes—starting with the energy subsidies, both oil and gas and “green” energy subsidies—absolutely, and this will raise revenue sufficient to Boehner’s “revenue increases,” but it does so without raising taxes, without raising tax rates.  The surest way to increase government revenue, and the most economically sound way, the most moral way, is to get government out of the way of our economy, out of the way of our businesses, and let our economy recover and our citizens get back to work.  This demands, as a first step, spending reductions.  This requires cutting wherever the opportunities arise.  This requires forcing the Democrats—alone—onto the record as voting for spending increases.

If we need to alter our taxes, and we do, we need to do so by reforming our present system by replacing it in its entirety with a flat tax that has no subsidies, no credits, no loopholes, and that has everyone paying something.  Ten percent of Americans paying 70% of the nation’s income tax, while 50% of us pay 3%-4%, is a system that cries out for wholesale replacement.

The Republicans need to find their…sticking-place…and rescrew their courage to it.  One sitting Senator understands this need.

Thoughts on Taxes and Property

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I’ve written elsewhere about the property nature of money that is taxed, and how that property is owned by the individual and not by any government.  In this post, I’d like to talk about another aspect of taxes and about the concept of eminent domain as a kind of tax.

The House Committee on Small Business, a few days ago, held hearings to see what the major target (whether intended or not) of the Obama increase-taxes paradigm thought about taxes and what a tax régime out to look like.  The question of interest here was Congressman Joe Walsh’s (R-IL), and he asked this of a number of small business owners.

When it comes to this issue, tax reform and specifically how it impacts pass through entities*, what’s one word of caution or one word of advocacy — what would you advocate for if you had a moment or two in front of the super committee?

To a man, they decried the uncertainty in the current administration’s proposals.  They can’t plan for the future when they can’t know that their costs—of which taxes are a major part—will be reasonably stable.  When businesses can’t plan from one year to the next, there are a lot of other things they can’t do: they can’t predict the cost of components for their own production, since their suppliers can’t predict their costs, so purchase are held down, and production is held down; they can’t plan for R&D since they can’t know the tax costs, or subsidy availability, of those, so R&D falls off; they’re inhibited from hiring, since one of the costs of an employee is the incremental tax cost just from having him on the payroll.

And they want lower tax rates.  This isn’t just a self-serving matter, either.  Money the government taxes is money the business does not have to spend on its own needs.  What are those needs?  Supplies for their own production, R&D, labor.  And in the present administration, part of that labor cost is the mandated set of benefits levied on them.  Additional costs, which high(er) tax rates reduce their funds for covering, include regulation compliance costs from financial reporting, environmental reporting, privacy reporting, and the like.

But these businessmen aren’t alone.  Americans, generally, are tired of the constant drumbeat of raising taxes to claim monies for government to spend on politicians’ purposes.  Coloradans, a number of years ago, passed a state constitutional amendment requiring that the citizens of Colorado, not the politicians, approve any new tax, tax rate increase, emergency tax spending, or any tax policy change that causes a tax revenue increase or creates more debt.  In special elections just concluded, Coloradans suited these words to action.  Earlier this week, Colorado’s citizens defeated, roughly 2-1, a state measure that would have increased income and sales taxes, ostensibly to provide funding to the state’s K-12 schools.  The rejection was local, also.  More than 10 separate local tax questions, with the funds claimed to be aimed at schools, were put to local communities.  They all were voted down.  This, though, wasn’t a decision by Coloradans to reject supporting their education system; it was a rejection of higher taxes as a useful or effective means of doing that.  It was a rejection of higher taxes.

Aside from that, some taxes are simply capriciousness, which brings me to eminent domain.  Under our Constitution, governments have the authority to seize private property, paying the erstwhile owner “just compensation.”  But even though compensation is paid, this is little more than a tax on the individual whose property is confiscated.  It’s true enough that the man gets something of value back, but that’s the idea behind taxes, generally—a public good (roads, education, national defense)—is returned to each man for the money property taken as taxes.  Indeed, as the 5th Amendment is written, the government’s sole legitimate purpose for such a seizure is that the property taken had to be for public use—to provide a public good.

20th Century Supreme Court decisions, though, have morphed that public good requirement into a simple need asserted by a private commercial interest for whom a man’s house has greater value than that house has to the man who owns it.  Google on Kelo v. City of New London, for instance.  The claim here is that there is in fact, some sort of public good resulting from this: jobs, perhaps, and certainly higher tax income for the government exercising that eminent domain.

One of  the fallouts of this is a referendum next week in Mississippi that, if passed, will essentially bar the state of Mississippi, or any jurisdiction within it, from exercising eminent domain for such purely private commercial/economic purposes.  One brief discussion of this can be heard here (click on the video link, and sorry about the lead-in commercial).  The eminent domain part can be heard beginning at about 5:30 of the video.  Oddly, Gov. Haley Barbour is hoping the referendum is defeated; he insists the economic gains are worth the costs of such an eminent domain tax—and the costs to freedom.

Stephen Hayes makes a very good case concerning the centrality of individual property rights, a natural right, to American freedom.  Charles Lane, though, makes the governor’s case, and he utterly misses the point of property rights (and so of taxes levied on property, whether money property or real).  Lane assures us that a man’s land wouldn’t just be taken from him; he’d be paid for it.  But other taxes are agreed to by the citizenry as a whole through their elected representatives and through those citizens’ collective decision concerning who should represent them.  The man whose land is seized has no say in the matter.

In the Mississippi case, the man wouldn’t even share in a public good—his land would be turned over to another private enterprise for that enterprise’s benefit, which might also have a general economic benefit for the region.  But there’s a problem here.  The rights to private property are durable, long-lasting (I won’t get into their inalienable nature in this post).  The economic benefits are not long-term, and often they’re pure chimera.  That seminal Kelo case provides an illustration.  A private developer got the city of New London, CT, to condemn a neighborhood-full of private houses so he could develop the property for a shopping mall.  The public good these displaced homeowners (assuming they could stay in the area, absent any homes) and the remaining community were to get were jobs, a new shopping mall, and more taxes for their city government.  In the end, the developer was unable to finalize financing, the mall never was built, and the jobs and tax income never materialized.  The homeowners are still out of their homes, though.

More than that, the 5th Amendment demands “just compensation.”  But there is not enough money in the world to pay a man, there is no way at all to make him whole from his loss, if what is taken from him is something with which he does not wish to part.

 

*Pass-through entities, according to Congressman Walsh, are partnerships, S-Corporations, LLCs, sole proprietorships, and so on.