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.

The Parable of the Rolling Stones
It's Gary Mitchell

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