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Economic Bedrock Principles

I’m convinced that the greatest challenges we face as a nation are exacerbated by a woeful ignorance of basic economic principles that is not accompanied by an appropriate uncertainty in expressing economic opinions.

In other words, when it comes to economics, our stupidity has done nothing to undermine our confidence.

For instance, there are those who insist that we can balance the budget by slashing the Defense Department. “Don’t cut entitlements like Social Security and Medicare; cut defense instead!” Well, OK – except we spend three times as much on entitlement programs than we do on defense, and that disparity will continue to grow exponentially as more baby boomers retire. And since our federal budget deficit last year was about $400 billion than the entire defense budget, you can see where, mathematically, it all goes awry. If you completely eliminate the Defense Department – indeed, if you wipe out the entirety of the discretionary federal budget – you will still have a budget deficit if you leave entitlements untouched.

So, that said, I get very frustrated with people who demand I “respect their opinion” when their opinion is objectively, factually incorrect. I don’t respect the opinion of those who think we can balance the budget solely through defense cuts, just like I don’t have any regard for the musings of those who believe 2+2 equals 5, or 2+2 usually equals 4 but sometimes equals 5, or 2+2 equals Bette Davis or Joan Crawford or any other cast member for Whatever Happened to Baby Jane.

People can think such things, certainly, but those people are wrong.

Thus I readily concede that there is tremendous room for opinion on economic matters, but such opinions have to be rooted in a common set of facts to earn my respect. This is true in every field of human endeavor. You may have many opinions about the sky, but if you think the sky is pink and not blue, then there’s no point in trying to engage you in discussion about sky-related matters. You’re proceeding from a false assumption that will warp all of your later conclusions, and without an agreed-upon frame of reference, our discussions will be fruitless.

I bring all this up as prelude to a declaration of economic fact, which is as follows:

Taxation stifles economic activity.

Our good friend Paul Krugman and his ilk have gone to great lengths to cite data showing strong economic growth in periods of high taxation, and the not-so-subtle implication is that Republicans and other foul creatures are flat wrong when they acknowledge the undeniable truth that taxation stifles economic activity. Notice that Krugman doesn’t have the chutzpah to openly claim that taxation encourages economic activity. He would never suggest, for instance, that the way to get a small business off the ground is to sic the IRS on it. Instead, he just offers two separate data points – i.e. there was stronger economic growth under Clinton than Bush I, and there were higher taxes under Clinton than Bush I – and allow the ignorant and the gullible to draw a helpfully incorrect conclusion.

But the fact remains that taxation stifles economic activity.

“But, Stallion, how do you explain that the economy grew under Clinton with his higher taxes?” I explain it by saying that taxation is not the only element contributing to – or detracting from – the country’s growth rate. Under Clinton, the Internet unleashed the most powerful burst of economic innovation since the Industrial Revolution, creating a frenzy of economic activity that Bubba’s higher taxes did not have the power to squash.

Would economic growth in the 90s would have been even stronger if the tax rates had been even higher? If taxes had been lower, would that have squelched the dot com bubble? No and no. There’s no way to argue otherwise.

And I can prove it.

An economy is not a closed system, and a myriad of factors come into play in determining whether or not a country will grow. So, for purposes of this experiment, let’s close the system and control for everything but taxes.

I offer you, for sale, two widgets.

Physically, these widgets are identical in every way. Indeed, there is no possible way to distinguish between the two, except the purchase of one includes a paltry 2% sales tax. The other widget will be sold tax-free. Other than the tax, the price is exactly the same. Assuming you are in the market for such widgets, which widget do you buy?

Easy. You buy the less expensive one. You will always buy the less expensive one. And lo and behold, the tax undeniably stifled economic activity. Case closed.

“Not true, Stallion! I might buy the more expensive one.”

You might?

“Sure! Maybe my brother made it, and it has sentimental value. Or maybe I just want to show what an arrogant jerk you are and buy the more expensive one just to prove you wrong. There are a whole number of reasons why I might buy the one with the tax.”

But those reasons prove my point. To pay the higher price, some other factor has to come into play – in this instance, sentiment or spite. If all such factors truly are equal, and you don’t see any possibility of zinging me with your vengeful widgetry, the higher price discourages the sale. Every time. Every single time.

Taxation stifles economic activity.

The question then becomes whether the economy is strong enough to weather such stifling.  (Stiflement?) And that’s a discussion that can produce a plethora of opinions. But if you try to pretend that Republicans are just expressing their opinion when they say taxation stifles economic activity, and your opposite and incorrect opinion is just as valid as their correct one, then you’re simply wrong.

2+2 never equals Bette Davis. Furthermore, I don’t care what kind of eyes she has.

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17 Comments

  1. you know I like you as a person Stallion, but it seems like perhaps the numbers you’ve added up for the defense budget are missing significant amounts of money that are expenditures which sole purpose is to support “defense”

    and perhaps medicare/cade and Social Security expenditures are significantly inflated and maybe you are counted dollar amounts given as tax breaks to private insurance industry as dollar amount expenditures as if they got tacked on to the public’s federal bill and state bill and then by some accident counted the total twice. Those numbers seem to be slightly inaccurate.

    • Nope. Those are the numbers. Since 2010, mandatory spending has eaten up all federal revenue, and everything else the government does in discretionary spending is done on borrowed money. Eliminating the entirety of the federal government, including the Defense Department, would not balance the budget.

      Them’s the facts. I didn’t make ‘em up. If you have different facts, I suggest you produce them. Otherwise, you’re dead wrong.

      Glad you like me as a person, though.

      • If I am dead wrong, I’ll apologize from the grave, it’s just that using the terms mandatory and discretionary seem to mask the true cost in dollars and sense compared to running the numbers by using a dollar amount estimated for a discretionary purposes without totalling how much was actually spent.

        Wars tend to be a tad expensive and often have hidden costs other than having to pay the amount spent, even when said amount exceeds every estimation by astronomical exponents

        • Look at the numbers, sir.

          http://www.cbo.gov/sites/default/files/cbofiles/attachments/01-31-2012_Outlook.pdf

          Defense spending: about $700 billion. (That includes wars.)

          Additional discretionary spending: about $550 billion.

          Mandatory spending: about $2.35 trillion.

          Deficit: $1.3 trillion.

          Deficit if 100% of all discretionary spending is eliminated, including all of the military (including wars): About $50 billion.

          Again, those are the facts. If you can prove them wrong, do so. Otherwise, you cannot balance the budget without addressing mandatory spending.

          • Thank You Stallion, now I can see that you are calling all mandatory spending “entitlements”

            Not only medicare/aid and SSI

            Still the numbers seem off and it’s likely the website you obtained the numbers from. Dot gov doesn’t mean squat these days because there is no penalty for impersonating accurate numbers with inaccurate ones. For all the people who claim freedom of speech to be so important (esp on the interwebs where because of the non-existent laws the www should stand for Wild Wild West) it would sure be easier on lawmakers if people didn’t behave in ways where the law has to step in.

            But lets use your numbers,

            Fortunately, neither political party is attempting to wipe out the entire deficit nor debt. They are trying gain a footing. What Boehner is doing is holding the Entire Economy Hostage over tax rates going from 33-36% to 36-39% effectively expiring the Bush II tax breaks for American earning over a quarter million dollars a year.

            Boehner’s action of stalling will not only insure those tax break expiration, but by holding out those same expiration will be across the board which hits many many times more America Families, the ones who work 40-50 hours a week doing the jobs that are necessary that nobody wants. The ones who can’t afford that 3 percent increases because it equals a late credit card payment. And those companies will suddenly raise their interest rate from 10% to 29% which is something they wouldn’t dare do to people earning more the 250K because they would lose their account.

            It’s predatory,

            And if I were a Republican, I would be screaming at Boehner to pull his head out instead of making the case for his foolish leadership because if pulls the same stunts he did last year, He could single handedly cost the Republicans the next election.

  2. 2 + 2 doesn’t equal squirrel either.

    http://www.factcheck.org/2011/07/fiscal-factcheck/

    Entitlements are much closer to 2x defense than the 3x you claim. Yes, that’s a significant portion of our budget, but it’s also mostly paid for by payroll taxes that are earmarked specifically for those programs. Small adjustments to benefits will keep the programs solvent indefinitely. The only reason there is no cash surplus for those programs is that the rest of the federal government has been borrowing against the surpluses for years:

    http://en.wikipedia.org/wiki/Social_Security_Trust_Fund

    If you’re relying on cutting entitlements to balance the budget, you’re also going to need to cut the associated taxes and be net 0, or somehow justify why people are paying just as much but getting significantly reduced benefits. You could also cut entitlements and payroll taxes while raising income tax rates, but then you’re just shifting the tax burden around, not reducing it.

    Another significant point that you have ignored is that these funds exist largely to keep our society healthy. The economic impact of chronic illness is tremendous. While you could argue that the money spent on treatment remains in play in the economy, you’d have to ignore the tremendous associated productivity loss to call that a good or even neutral thing.

    Almost everyone agrees that the right amount of tax to maintain a civil society is somewhere between 0% and 100%. Too little and you don’t get as much economic activity as you could. Taxes built our national transportation system, the infrastructure of the internet, GPS, etc. all of which have allowed our economy to grow faster than it would have without. Too much tax and you remove opportunities for individuals to innovate. It’s hard to argue that we’ve hit the too much tax threshold when the overall tax burden is quite low by historic standards.

    Balancing the budget can’t be achieved by simply targeting any single segment of revenue or expense.

    • Total mandatory spending accounts for 62% of all federal spending. Defense is 19%. Mandatory spending currently eats up 103% of all tax revenues generated, and that number will grow as boomers retire.

      http://www.cbo.gov/sites/default/files/cbofiles/attachments/01-31-2012_Outlook.pdf

      That’s the math.

      Not all mandatory spending is entitlement spending, but entitlement spending is scheduled to grow exponentially. No proposal can balance the budget without reforming it, no matter how noble the programs may be.

      • The biggest drivers of entitlement spending are Medicare and Medicaid with dollars spent on both projected to roughly double over the next 11 years. Again, Social Security is solvent with small changes. To me, this speaks more to the need to reform our medical system than to reform our tax code.

        • Agreed on Social Security. It’s a relatively simple fix, but, still, Democrats refuse to fix it. It goes without saying that the fix gets harder and harder over time.

          Also agreed on controlling health care costs, although Obamacare takes precisely the opposite approach, so I’m not encouraged.

          • My guess is that the Social Security eligibility age will go up some and the payroll cap will go up some- that seems to be the compromise that we’ll end up with. The Affordable Care Act is actually designed to keep medical costs down over the long term and reduces the deficit.

  3. ACA is “designed” to do that, but I have yet to meet somebody for whom their health care costs have lowered. For most of us, they’ve gone up. Mine went up $1000/year with the message “be grateful it wasn’t worse”. I know there are other benefits, but ironically enough, (considering its name) cost doesn’t seem to be one of them. Many employers are cutting workers hours because they can’t afford the mandate. Others are raising costs to cover the requirement. Others are simply not hiring full time or closing their doors.

    • Correlation is not causality. Health care costs were going up regardless. The bulk of the ACA provisions have yet to take effect. One of the key piece to the Affordable portion of the bill is the health care exchanges provision which goes into effect Jan. 1, 2014: http://www.healthcare.gov/law/features/choices/exchanges/index.html

      Exchanges are especially important for individuals not insured through their employer and for those running and working in small businesses.