There is an interesting economics column in the Wall Street Journal on the similarities between the Greek meltdown and our own fiscal policies. I have long been a critic of the wild spending of both Congress and President Obama, including the recent proposal to simply pay for an over $200 million short-range missile program for Israel (here). This article discusses the possible disaster awaiting the United States as our leaders blissfully assume that a recovering economy will pay for their various programs and pet projects.
The column questions the logic of being able to tax their way out of this deficit. While I am socially liberal, I tend to be fiscally conservative and I find the current situation extremely alarming.
This article is interesting for its proposition that higher taxes are not able to close such a gap:
The feds assume a relationship between the economy and tax revenue that is divorced from reality. Six decades of history have established one far-reaching fact that needs to be built into fiscal calculations: Increases in federal tax rates, particularly if targeted at the higher brackets, produce no additional revenue. For politicians this is truly an inconvenient truth.
This is a different take on the problem. I have always been skeptical of the “spend out way out of the crisis” approach — which is an awfully convenient theory for members who are always inclined to spend more and put off payments to the future. Once back in power, the Democrats seemed to immediately fulfill a stereotype of higher spending and immediately turning to higher taxes as the solution. This is precisely the course that led to the last Republican takeover of Congress. In their defense, Democrats faced a crisis left to them by the Republicans and particularly George Bush who was one of the greatest spendthrifts in our history. However, they have shown no serious commitment to tackle these dire economic forecasts — gushing money in Iraq and Afghanistan while watching cities and states shutting down basic programs. Our debt is now growing at a record pace — roughly $5 billion a day (here).
This is not to excuse the Republicans who, under Bush, showed no restraint and left Obama with a massive debt. I simply have little faith in our current economic policies or a sense that leaders are seriously addressing the growing threat to the nation from our growing debt. Various countries have raised alarm over our debt and the similarities to the Greek meltdown, here.
For the column, click here.
Buddha:
Thank you for the offer, but Gyges will have to choose the beer :).
America has always had its fair share of Mountain Men …
Byron,
One of these days you’ll realize the true nature of fascism. When you do, if you just want to cry in your beer, the first one is on me. Until then, keep dreaming that all men are good actors. History teaches a different lesson. Freedom isn’t free. It has to be torn from the hands of those who would enslave you be it with money or with chains.
Puzzling:
good presentation. But those concepts are apparently very hard to grasp. They seem self evident but to many they are not. I have been trying to figure out why they are so hard to grasp, I haven’t figured it out yet.
Fear, maybe, of having to fend for yourself, the Christian morality of self sacrifice, the idea that you are responsible for your fellow man?
Let me know if you do.
By the way that society is pretty much here, when you pay 40-60% of your income in taxes you are not a free man/woman.
Lottakatz wrote:
Should government be allowed to kill its citizens if this results in benefits to society at large? If our lives are not our own, who owns them? The majority?
I think you’ve reached the core of our disagreement. Your argument is equivalent to saying that citizens are slaves and property of government. If that is the kind of society you wish to construct, I will actively work against you.
It is also disappointing to hear that you will not read differing points of view. Are you at least willing to consider an argument for the morality of liberty and limits to government power?
Tony C:
Hoovers and FDR’s policies extended the depression, we got out of it after WWII because of post war production. Why did we have rationing? We didn’t have rationing in Korea or Vietnam or the current misadventure. Government monetary/fiscal policies created the great depression and the response by government prolonged the duration.
Government did not vault us to a super power, it was the private sector, government produces nothing of value. We pay for roads, defense, social programs with tax dollars. No private sector production no bucks, it really is pretty simple stuff.
Roads are not free, we pay for them with taxes and directly through gas taxes which amount to about 50 cents per gallon. How is that free?
I have nothing against paying for roads or bridges although you could make a case for toll roads and bridges built and funded by the private sector.
I have nothing against government just overbearing government. Some government is necessary so I am not an anarchist like some libertarians such as Rothbard. He has a great book about the causes of the depression it is pretty compelling, Walter Williams, Thomas Sowell, Von Mises, Hayek, and others are in agreement with my assessment. Anyone of these men is a better economist than Maynard Keynes or Paul Krugman could ever hope to be.
So who have you read that are ideologues and what did they have to say? What is the straw man and how do they construct him?
@Puzzling, Byron:
“Puzzling” is right! So inflation hurts the people with huge cash assets (retirement accounts) but not the rich? That is hilarious. most of those retirement accounts are in mutual funds, either directly or indirectly. The “fixed income” being complained about is generally social security, which can be increased simply by printing money.
Also, printing money is not theft at all. The government is not some separate entity, it is US. If the government prints money to pay for roads, or military equipment and salaries, or medicare or medicaid or environmental protection, these are majority decisions we have collectively made (by our votes) and the beneficiary is US. We don’t live as slaves of a dictatorship, I am unaware of any American politician ever allowed to keep office after losing the final decision in an election.
I am actually NOT for endless expansion of government spending. To claim that I am, just because I am for SOME government spending, is just silly. Not all of us think every principle must be stretched to the extreme or to the ridiculous.
To Byron: Only anti-government ideologues dispute that government spending in the New Deal saved the country, and government spending in WW II was solely responsible for vaulting us to the premier world economy in the post-WWII era (plus we did not have to rebuild our country). Government spending on the Interstate Highway system has had some totally ridiculous measure of returns (thousand-fold returns) for the companies that use it essentially for free, and for the consumers and businesses that get goods and supplies cheap, fast, and reliably because of it.
It is completely false to claim that it has been shown, “pretty much” or otherwise, that government spending in these circumstances failed to accomplish its goals. I have read some of these supposed claims and they are written by ideologues that put up straw men for what they claim the spending was supposed to accomplish, and then gleefully knock them down, while ignoring all of the real world effects the spending had, and pretending that if the government hadn’t of spent the money people wouldn’t have starved or turned to crime. These people are liars.
Gyges:
I looked at that chart again, I think there is something wrong with it. It shows total revenues greater than the debt, how is that possible?
I don’t think we can talk about this on the blog because we would have to be looking at the same chart and the same items. I would certainly be happy to discuss off blog, maybe I am missing something.
“lottakatz, Henry Hazlitt…”
It’s all in the book he wrote in 1942 … “A New Constitution Now”
Byron,
Once again, The numbers don’t back up your claim that raising taxes lowers revenue, not when you look at it in dollars, dollars adjusted for inflation, or total percentage of GDP. When taxes were raised, the revenue was raised, when they were lowered, the revenue lowered.
So either your theory is wrong and tax increases don’t lead to a decrease in revenue, or the numbers are wrong. Those are the two options.
I’ll also point out the only relationship between the federal deficit levels and taxes seems to be roughly negative.
SM:
So did the Clinton tax increases and the Reagan tax decreases. And during the time that taxes were high there was much less revenue. Take a look at the link Gyges has above and see for yourself. Gotta cut spending and heavily. Raising or lowering taxes is not nearly as important. But based on the evidence of that graph a lower tax rate will produce additional income.
So raising taxes and doing nothing about spending is also going to ratchet up the debt.
The Bush tax cuts added to the national debt and extending them would ratchet up the national debt.
Gyges:
If you look at that graph in terms of billions of dollars straight up it appears that total revenues started rising in 1980. But then total debt also starts rising and quickly, much faster than spending.
Currently gross public debt is 3 times revenue. But in the past gross public debt had been fairly close to income as you were saying.
The year it took off on its climb is 1970, what happened then? And why did it really take off in 1980. Depending on your political bias you could say that the tax cuts lead to increased spending. But why? What was significant about that date? Total tax revenue rose as well but not as quickly. And why when taxes were in the 75% range did spending not take off? The pre 1980 years. The economy was very bad from about 1970 to 1982. Nixon had his wage and price freezes, the oil embargo, high inflation, high interest rates, etc.
The high debt is going to lead to higher interest rates on credit which will lead to higher cost of goods and services (inflation). It is going to be a real mess, if you are a young person in their 30’s your life is pretty much f . . . d as far as income potential if you have large debts. I would get out of debt as quick as you can and ask mom and dad to pay cash for your house if you can.
Greece is going to look like a kindergarten caper compared to what is coming for us. Basically our elected officials have really let us down in a huge way. But then most don’t understand it is our money and that is the problem.
So in my understanding if you spend more than you make you end up with inflation and if you have relatively high tax rates (which we haven’t from 1981 to now) you are going to not have much revenue (look at the pre 1980 income). What caused what we see now is out of control government spending by fools who couldn’t balance a check book if their lives depended on it.
If you raise taxes and don’t cut spending significantly our economy is done. If you cut taxes and don’t cut spending significantly our economy is done. From that chart we know that reduced taxes generates a good income and that high taxes don’t generate much income (see pre 1980 revenues). So the solution based on that chart would appear to be cut taxes and significantly reduce spending to have any hope at all of ever fixing this problem. You have got to let the free market work, reign it in once the crisis is past otherwise this will last for a generation or more. The current course is unsustainable, that chart of yours is proof positive.
Blouise: “lottakatz, Henry Hazlitt…”
Thanks for the additional information. I knew he was a libertarian and that was cause enough for me to never read his work. House of Lords eh, the HoL is a hereditary body as I recall. I wonder how the American Lords would be selected. I may be motivated to look some of that up.
Byron,
What I’m saying is “Debt is not caused by matching your income to your spending, it is caused by spending more then you make.”
I just played around with this chart:
http://www.usgovernmentrevenue.com/downchart_gr.php?year=1940_2010&view=1&expand=&units=p&fy=fy10&chart=F0-total_10-total_60-total_G0-total&bar=0&stack=0&size=m&title=&state=US&color=c&local=s
And I noticed that the the two revenue sources I picked (income and business taxes) and “Total government revenue” follow each other pretty well (with the increase in business tax making up for the difference in slope between the IT and TGR). It looks like the numbers don’t back up your claim that raising taxes decreases revenue. This holds true for whatever unit you stick into the Y axis.
lottakatz,
Henry Hazlitt also recommended changing the Constitution to reflect a parliamentary/cabinet model. He also wanted the Senate to become more like the House of Lords, with Senators and the President appointed, and with Congress having the vote of no confidence.
He was a conservative journalist with 3 semesters of college at New York’s tuition free, City College. He had no formal training in economics or anything else. He was closely associated with the Austrian school of economics.
He knew and, of course, admired Ayn Rand.
He was in his early 20’s during WWI and in his 40’s during WWII. He did not serve in either war.
Lottakatz:
“Society is subjugation. Making it work is balancing the benefits against the oppression. That’s reality 101.”
No that’s the reality of certain political philosophies. What you see today is the end(?) result of a long continuum of moral and political philosophy at odds with human existence.
Man is not naturally good at being “subjugated”, oppression never works but keeps being tried.
Society is made up of individuals, it is not some all knowing organism that can trample on individual rights for it’s own benefit. The “human rights” of some are bought at the expense of the individual rights of others. How is that fair?
Gyges:
““So increasing income so that it would match increasing spending leads to an increase in debt?”
It seemed to me as if you are talking about inflation. Therefore the explanation of inflation.
If government would pay down debt and stop spending then additional taxes might, and I say that with great reservation, be justified. But money government takes from the private sector is not there to purchase additional capital goods and hire people, so essentially taxation does not reduce debt because it generally restricts private sector growth. Which in turn reduces revenues to the treasury. Which necessitates additional borrowing/deficit spending. Which is fake money, so you could say that taxation leads to inflation.
This has all been proven in reality, revenues are down even with all of that deficit spending and revenues increased during the Reagan years (biggest tax increase in our history) because of lower taxes.
Maybe I need a little more clarification on what you are saying so I fully understand your point. I should have asked for clarification above.
puzzling: “You seem to think that central planning of an economy is so vital that the idea of individual freedomz should itself be deemed traitorous. … You might consider starting with Economics in One Lesson by Henry Hazlitt.”
—-
Henry Hazlitt, a libertarian economist. I’ll pass.
I’m willing to demonize in order to clear a path; that’s just politics as usual these days and Rupert Murdock is as rich as Croesus because of it. I actually don’t like it, I grew up with civilized political debate in public forums. I don’t think we’re going back soon and really, didn’t “Hell NO you can’t!” on the floor of the Senate kind of drive a stake in the heart of civilized, non-partisan political dialog?
Central planning as a label does not automatically translate to Soviet style central planning. Places like Norway, Denmark, Germany, Spain, Sweden,,, just about the rest of the West have central planning (and ownership and distribution in many cases) regarding energy, health care, education, etc.
Central planning regarding those items that are vital to national security and what I would characterize as the human rights every society must extend to it’s citizens does demand central planning because they are too important and massive to be left to private industry. The basis for interest is not only different but incompatible between the government and private industry. In most industries it doesn’t matter so the government shouldn’t involve themselves but in some industries the interest factor for the population and country is paramount and the private industry model is incompatible with achieving the appropriate aims. Example: just look at the headlines, it isn’t as if private industry is doing health care and energy production in a manner that makes me hopeful massive intervention isn’t vital.
Frankly, it’s not about who owns your life, our lives are hardly our own, we get to choose from choices allowed us. It’s about which sector external to you will be the master, how well we can demand they treat us and the quality of services and choices we can demand from them.
The first time two Neanderthal families moved into close together caves and agreed not to throw their offal if front of each others cave we lost ownership of our lives collectively. Society is subjugation. Making it work is balancing the benefits against the oppression. That’s reality 101.