Tag Archives: political economy

Income Inequalities

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“Income inequality is a strange obsession, at least to the extent the obsessives focus their policy responses on trying to adjust the condition of the top 1% rather than improving the opportunities of everyone else.”
–Holman Jenkins, The Wall Street Journal

As Freud put it, “Everyone must be the same and have the same.  Social justice means we deny ourselves many things so that others may have to do without them as well.”

Or we could follow an alternative.  We could worry less about equality of outcomes and more about equality of opportunity, as our Founders suggested.  Since we don’t all have an equal endowment of ability or work ethic, and more importantly, we don’t all have the same goals for our lives, equal outcomes—equal incomes, equal wealth—is necessarily impossible.

But those equal opportunities, and the ability of everyone to satisfy his own potential in the manner and to the extent each sees fit, is the stuff of rapidly increasing wealth for all of us—not only of the pecuniary variety, but of the moral, as well.

Expanding Government Dependency

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Who benefits from government benefits?

This is what we have today:

  • 49.1% of the American population lives in a household where at least one member received some type of government benefit in the first quarter of 2011.  This is an increase of two-thirds since the end of the Reagan era:
  • 45 million people in 2011 received Supplemental Nutrition Assistance Program benefits, a 70% increase from 2007 according to a CBO report.  That report also  said that the number of people receiving the benefits, the food stamps, would continue growing until 2014 and would not, in the foreseeable future, revert to anything like the Clinton/Bush era lows.
  • The median number of weeks before someone unemployed leaves the labor force is 21.4.  That’s about five months—a long time.  But then it seems to be final.  Out of work too long, and employers view that person as damaged goods.  Out of work too long, and skills are eroded, and employers are less interested.  That person needs more government benefit payout.

Again, I ask: who benefits from this?  The answer is: follow the money to the source.

A Lack of Understanding

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Earlier this week, the Congressional Budget Office projected that if Congress fails to act [on tax policy], the U.S. economy will enter a recession next year, with a 1.3% annual rate of contraction in the first half of 2013.  It also said that if Congress extended current policy without “comparable restraint in future years,” federal debt levels would balloon, leading to negative consequences [that] include higher interest payments and less ability to use tax and spending policies to respond to economic challenges. [The CBO’s report is here.]

This is a fundamental lack of understanding—by the CBO, yet—of the role of government.

The Federal government has no business using “tax and spending policies to respond to economic challenges.”  This is nothing less than the government’s attempt to centrally manage the economy.  The Federal Reserve Bank has the goal—the responsibility—to seek price stability in our economy.  The Federal government has a responsibility to maintain a stable environment within which a free market can operate without Federal interference.  The optimal way—the only real way—for the government to achieve this is through low, and stable, tax rates that have no loopholes for special interests, and through low, and stable, spending rates that have no exceptions for special interests.  Indeed, that is the only economic challenge to which the Federal government must respond.  Moreover, answering this challenge enables the free market economy to achieve the full employment that is another claimed goal of the Fed.

And that, thereby, answers the question of what the government must do about the looming Obama tax increase.

Déjà Vu All Over Again

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This post is taken from “Economic Strategy for the Reagan Administration,” a memo summarizing studies commissioned by candidate Ronald Reagan and delivered to President-elect Reagan on mid-November 1980, as summarized in The Wall Street Journal.  The memo began

Sharp change in present economic policy is an absolute necessity.  The problems of inflation and slow growth, of falling standards of living and declining productivity, of high government spending but an inadequate flow of funds for defense, of an almost endless litany of economic ills, large and small, are severe, they are not intractable.  Having been produced by government policy, they can be redressed by a change in policy.

Aside from the high inflation of 1980, that could have been written today.  Besides, the actual inflation then is a threatened inflation today, with the Fed’s policy of deliberately depressed interest rates and rapid printing of money coupled with the administration’s prolific spending.

You have identified in the campaign the key issues and lines of policy necessary to restore hope and confidence in a better economic future:

  • Reestablish stability in the purchasing power of the dollar.
  • Achieve a widely-shared prosperity through real growth in jobs, investment, and productivity.
  • Devote the resources needed for a strong defense, and accomplish the goal of releasing the creative forces of entrepreneurship, management, and labor by:
  • Restraining government spending.
  • Reducing the burden of taxation and regulation.
  • Conducting monetary policy in a steady manner, directed toward eliminating inflation.

This amounts to emphasis on fundamentals for the full four years, as the key to a flourishing economy.

Sound like what’s needed today?

The need for a long-term point of view is essential to allow for the time, the coherence, and the predictability so necessary for success. This long-term view is as important for day-to-day problem solving as for the making of large policy decisions.

This was true then, 50 years after the start of the New Deal, a 50-year period of spendthrift policies and high taxes, and it’s even truer today, 30 years farther down that road, with this administration’s effort to raise taxes on top of its already explosive spending and debt accumulation.  It’ll take a long time, and a long-term strategy is critical, to repair the damage.

The memo went on with sound advice concerning budgeting, tax policy, regulation, energy, and monetary policy—it could have been written for delivery to President-elect Mitt Romney in mid-November 2012.  And we can certainly hope both for President-elect Mitt Romney, and that he takes this advice to heart.  The incumbent certainly has already eschewed it.

I’ll more on the Reagan memo in the coming days.

The Long and Short of Fiscal Policy

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Sorry, I couldn’t resist.  That’s the title of another missive by Alan Blinder in a recent Wall Street Journal issue.

He begins with this Keynesian fiction:

In the short run—let’s say within a year or so—a larger deficit…boosts economic growth by increasing aggregate demand.  It’s pretty simple.  If the government spends more money without raising anyone’s taxes to pay the bills, that adds to total demand directly.

Umm, well, no, it doesn’t.  That increased government spending (accepting, arguendo, no associated increase in taxes) only comes at the expense of future taxes or current borrowing—which is more future taxes.  People aren’t as dumb as Keynes thought they were, or as Blinder thinks they are.  In the present case, Americans see this trap, and they reduce spending (and investing) today in favor of saving and/or paying down their own current debt, thus offsetting that spike (again assuming, arguendo, that a government actually can reduce spending after its spike up).

Moreover, that government spending crowds out a significant fraction of remaining private spending.  After all, why should we buy something that the government is going to buy and give to us?

On top of this, Swedish economists Andreas Bergh and Magnus Henrekson have a 2011 piece (login required; sorry), that surely Blinder has read, in the Journal of Economic Surveys that shows the deleterious effects of increases in government spending.  They conclude that a 10% increase in government size (relative to GDP) is associated with a 0.5%-1.0% lower annual growth rate in the economy.  This is no spike, but then governments don’t spike spending.

It really is pretty simple.  Just not as oversimplified as Blinder suggests, and not in the same direction.

In short, money that folks, and businesses, are paying in higher taxes is money that folks, and businesses, no longer have available for current spending.  Or investing, or saving.

It is true, though, that spending is increased relative to taxes.  But the only result of this “increase” is in the deleterious effects of deficit spending.

On this matter, Romer and Romer have a 2010 piece (login required here, too; sorry), that surely Blinder also has read, in American Economic Review, that shows the powerful effect of increasing tax rates on economic growth: an increase in taxes of 1% of GDP lowers GDP by nearly 3%.

Blinder has more in his piece, but with his underlying assumptions shown to be false, the rest has no more value than that.  For instance, he writes in all seriousness

But don’t we need to reduce the deficit—and by large amounts? Yes, we do, but that’s in the long run, where the effects of larger deficits are mostly harmful to economic growth.

Of course, as Blinder’s own Keynes noted so long ago, in the long run, we’re all dead.  More empirically, over the long run, governments do not unroll spending increases that they’ve foisted off on us for that good cause of the time.  As long as Blinder is satisfied that our present enormous debt can be safely reduced in that far-off fantastical long run, he’s satisfied that our present enormous debt never will be reduced.

Update: Deleted a section where I’d simply–and carelessly–misread Blinder’s statement, and so my argument became irrelevant.