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Posts Tagged ‘economics’

Today we move on to the economy and the role of government. Sparks are sure to fly.

6. “A few government and U.S. history textbooks suffer from an uncritical celebration of the free enterprise system, both by ignoring legitimate problems created by capitalism and failing to include coverage of government’s role in U.S. economic system.”

(a) Here, according to the Texas Freedom Network, are the kinds of outrageous remarks the textbooks under consideration make about free enterprise:

The atmosphere of a free market, as well as a free society that encourages the exchange of ideas, can and often does lead to innovation and scientific and technological discoveries. All these conditions promote growth in the economy and often improve the quality of everyday life.

The proper role of government in economic affairs should be restricted to functions intended to promote and protect the free play of competition and the operation of the laws of supply and demand. True laissez-faire capitalism has never in fact operated in this country, yet it has a profound effect on the structure of the nation’s economic system, which can be described as laissez-faire capitalism with limited government involvement.

The Network admits that the free enterprise system has led to great material and intellectual progress. But they want some discussion of its disadvantages and limitations.

… the text’s treatment of the free enterprise system is unbalanced and asymmetrical because the text provides little mention of the possible limits and disadvantages of a free enterprise and laissez- faire system. Students are given little awareness that critics of a laissez-faire system, both in the U.S. today and the past, have argued that an unfettered market can and has occasionally led to economic insecurity and inequality, unfair pay and unsafe labor conditions for many employees.

Identifying free enterprise and laissez-faire, as the Network and arguably the latter text do, is a mistake. The American market has not been “unfettered” anytime in the past century, and probably since the nation’s founding. In any case, it’s hard to evaluate this complaint without seeing the larger context in the texts in question. I’m inclined to count the complaint against the first text as bogus. A free market and free exchange of ideas do bring great benefits, and there’s no need for a “however.” The quote from the second text sounds as if it’s an endorsement of a libertarian approach to economic affairs, but I’m guessing that in context it’s clear that this is the proper role of government according to advocates of laissez-faire capitalism. I’ll hesitantly call this debatable.

(b) Another text mentions complaints about the Gilded Age, but responds,

The dizzying array of things to do and buy convinced the growing middle class that modern America was in a true golden age.”[…] [sic] The application of scientific discoveries and technological innovations by the free enterprise system improved the standard of living in the United States. Driven by entrepreneurs, American businesses were able to create products and services that made daily life easier and more fun for many people. Mass produced materials and products lowered the prices of many goods, enabling ordinary Americans to purchase items that previously had been out of reach.

The Network denounces this treatment, saying,

nineteenth-century free- market capitalism went hand in hand with governmental suppression of Native ownership over vast swaths of fertile land, leading to that land’s transformation (first) into public property and (second) into private property protected by law. Without governmental action, that transformation would not have happened. Second, nobody during the age of early industrialization disputed the importance of active governmental support for “internal improvements” that were beyond private means. And finally, any comprehensive discussion of the history of free-market capitalism in this country should note that the great driving commodity of the pre-Civil War economy was cotton, produced by slave labor on an enormous scale.

To call this complaint bogus is kind; it is ridiculous. The Gilded Age is the period, roughly, 1870-1900, in which the fruits of the Second Industrial Revolution spread to a growing middle class. It was the era in which department stores, music halls, theaters, large consumer products companies, mass circulation newspapers and magazines, team sports, and other accoutrements of an urbane middle-class lifestyle were born. The wealth that had concentrated earlier in the century as a result of the First Industrial Revolution began to spread throughout a substantial portion of society.

During this era, yes, the government fought wars against tribes in the West, swindled them out of large areas of land, confined them to reservations, etc. But this had little to do with the key developments of the Second Industrial Revolution or the rise of the middle-class. So, it’s hard to see how it’s relevant to the topic at hand. The closing decades of the nineteenth century were NOT “the age of early industrialization,” so it’s hard to see how the building of roads and canals earlier in the century is particularly relevant either. The Network wants the book to make a “They didn’t build that!” point. But it’s the Network, not the textbook, that’s pushing a political agenda here. Finally, why is the role of cotton before 1861 relevant to events in the Gilded Age? It’s not. The Network wants the text to say that the Gilded Age’s improvements in the quality of life were due, not to free enterprise, but due to earlier government involvement and to OPPRESSION, of slaves and of Native Americans. That’s preposterous. Bogus, bogus, bogus.

(c) One text contains praise of capitalism:

The capitalist economic system of the United States helped spur industrial growth. In capitalism, individuals and businesses own property and decide how to use it. The people—not the government—control capital, which includes the buildings, land, machines, money, and other items used to create wealth.

Again, the Network insists on a “You didn’t build that” approach:

This passage ignores a very important dimension of American economic development after the Revolution: the argument, developed by Alexander Hamilton, that government power is needed to foster development in an active way, including projects that are beyond private capital’s reach. The declarative statement that “people – not the government – control capital” seems to dismiss even the possibility of this more complicated relationship between individuals, the government and capital. In addition, the debate over public regulation of both individual and corporate enterprise remains an active subject of contention in American economic and legal life to the present day. Students should have a context for understanding that debate.

Let’s look carefully at what the text is saying. Capitalism “helped spur industrial growth.” It doesn’t say that capitalism was solely responsible for growth. Second, it says that our economic system allows people and businesses to own property and decide how to use it. Is the Network denying that? Finally, the text says that the people rather than the government control capital. Again, isn’t that true? The contrast is with socialism, which puts government in control of property and centralizes decision-making. I don’t read the passage as denying the possibility of regulation or of public projects. This, moreover, is a middle-school U.S. history textbook that ends its coverage in 1877. There were important public works projects within its time frame, and important issues about the proper role of government—the Hamilton/Jefferson debate, Andrew Jackson’s assault on the Bank of the United States, Henry Clay’s “American system”—all of which receive coverage in the book. But the main expansion of the government’s role occurs after 1877, outside the frame of coverage of the book. Asking it to do more than it already does on this score is bogus.

(d) One government text says, to introduce its discussion of taxation,

In the words of Oliver Wendell Holmes, Jr., taxes are ‘what we pay for civilized society.’ Society does not appear to be much more civilized today than it was when Justice Holmes made that observation in 1927. However, ‘what we pay’ has certainly gone up.

Ah! But society is much more civiilzed today, says the Network:

The text neglects to mention that defenders of increased taxation for an expanded safety net would respond that programs adopted since 1927 such as Social Security, Medicare, Medicaid, and the Affordable Care Act have produced such ‘civilized’ benefits as a drastic reduction of poverty and economic insecurity among the elderly, children, and the population at large, and improved and more equal access to health care.

The text should be insisting on the benefits of the welfare state, and trumpeting Obamacare! (I thought Obamacare was going to lower costs, by the way, not justify increased taxation in the decades since 1927. But, whatever.) Again, it’s the Network that’s trying to politicize things. The points they raise are in any event irrelevant to the point the book is introducing, which is that income tax rates have skyrocketed from a top rate of 7% when the tax was introduced. Social Security, Medicare, and Medicaid are financed separately; in theory, at least, they have no bearing on income tax rates. Obamacare hasn’t even been fully implemented yet; it’s no explanation for the increase in the tax burden that’s taken place over the past century. The Network’s objection is completely bogus.

(e) The Network complains about a cartoon—a cartoon!—implying that taxes are high and that people don’t like paying them:

The text also includes an ideologically slanted cartoon. [“Gibbs, I subtracted your federal, state and social security taxes and medical from your paycheck, and you owe the firm $50.” The caption for the cartoon reads: “Taxes fund public programs and services, but some question the need for that spending and criticize the burden those taxes place on taxpayers. What comment does this cartoon make?”]

What’s Wrong? The text gives students the impression that Americans are very heavily taxed without placing this information in historical or cross-national context. For instance, the text could have mentioned that according to the Congressional Budget Office in 2011, federal taxes as a percentage of the GDP were at their lowest rate since 1950. The text might also have mentioned that the United States has the lowest corporate tax burden of any member nation of the Organization for Economic Cooperation and Development (OECD). The use of this cartoon is also unbalanced because the text provides no counterbalancing illustration suggesting that excessively low taxes might lead to economic insecurity and poverty, or critical of the lack of an adequate safety net for low-income Americans.

The Network evidently has no sense of humor. Instead of including a cartoon that’s making a joke, the text should have told students that taxes in the United States are low by historic and international standards. The Network’s “facts” are incorrect; federal taxes as a percentage of GDP sank in the aftermath of the economic crisis, but have rebounded, and are nearly as high as they were in 1942! And, we have the highest corporate tax rate in the OECD; we collect less revenue from it than the other members because (a) Congress enacts loopholes to benefit campaign contributors and (b) our high rate encourages firms to structure their earning to avoid taxation—and even to shift operations and ownership overseas. I’m inclined to count this complaint trivial, but it shows how far the Network is willing to go to insist that textbooks ought to reflect Democratic talking points. Bogus.

 

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Inequality

Thanks to James Pethokoukis and economists Richard V. Burkhauser, Jeff Larrimore, and Kosali I. Simon for tackling the Left’s absurd claims about income stagnation for the middle class. I’ve never understood how the stagnation argument gets any traction, since it’s obviously false. Anyone who has lived in America for the past several decades knows that there has been a tremendous rise in the median family’s standard of living. Look at the vast and affluent areas of metropolitan Atlanta, Austin, Charlotte, Houston, Las Vegas, Los Angeles, Orlando, Phoenix, Seattle, and a host of other cities—areas that were undeveloped forty years ago—and tell me that increases in income and wealth have been restricted to the top 1%. Someone’s living in all those areas, and there aren’t enough people in the top 1% to explain even a tiny percentage of it.

Here’s the key chart:

See that? Inequality is down over that period. That’s in spite of massive immigration that leads to a flood of newcomers coming in at or near the bottom of the distribution. People in the bottom two quintiles have seen increases of at least 25%; those in the middle quintile, almost 37%. The effect to which leftists point is due chiefly to decreases in the size of households.

Even the above numbers can understate the rise in living standards considerably. Mom and Dad are bringing in $50K while junior is in college. Junior gets a $20K a year job and moves out, filing his own tax form. Per household income has dropped precipitously, from $50K to $35K—a 30% decline! But everyone is better off. Per person income is up 40%.

The moral: Be careful about statistics. You’re going to hear a lot of them during this campaign season, and a lot of them are going to contradict what you see around you every day. Trust your eyes, and watch those statistical arguments very, very carefully.

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Obama and the Democrats have been spending money like there’s no tomorrow, sinking the country deeper into debt than we’ve ever been before. Moreover, we’re getting nothing for our money. At least the New Deal gave us the San Antonio Riverwalk. The U.S. has already been downgraded, and is bound to be downgraded again if Obama is reelected.

Can’t Democrats do math? Don’t they realize that our present path is unsustainable? Some, undoubtedly, can’t and don’t. But I’ve thought for some time that the leadership knows that the current pattern of spending 40% more than the government takes in can’t continue. They also know that before long there will be a stark choice: cut spending back at least to 2007 levels, or raise taxes—massively, and on the middle class, since that’s where the money is. Of course, campaigning on a massive tax increase for everyone isn’t likely to work. So, they’re trying to maneuver the country into bankruptcy so that we have no choice.

I’ve been expecting this to remain a secret until after the election, when, suddenly, if Obama wins, he’ll propose a European-style VAT, and the Democrats will all say, “Of course! Europe’s way ahead of us on this. Adults have realized this was bound to come for a long time. Anyone who opposes it is in favor of bankruptcy, or wants vicious cuts that will hurt the poor.” The Seattle Times, however, has let the VAT out of the bag. They blame the debt problem on Bush, which is disingenuous. (They also seem not to realize that state and local taxes are deductible. Is no one at that paper familiar with a Form 1040?)  But they do recognize that reversing the Bush tax cuts and even raising taxes on the “rich,” however one cares to define it, would scarcely make a dent in the deficit. The solution: a value-added tax, which has the effect, essentially, of a national sales tax, but tends to have its full effects hidden from the consumer. It’s a politician’s dream: it raises large amounts of money while remaining mostly invisible to the voters.

At some point, Americans will have to engage in a grown-up discussion about a value-added tax, which is a kind of national sales tax. Critics on the right complain that it’s a sneaky way to fund government programs. Critics on the left grumble that it is regressive: It doesn’t distinguish between rich and poor shoppers.

To the left we say, if it funds government programs for the middle-class on down, its end results are progressive. That’s how Europe pays for its social safety net.

To the right we say, the VAT is a tax on consumption, not investment. That’s how your hero Margaret Thatcher pulled off cutting income taxes without bankrupting Britain. As prime minister in the early 1980s, Thatcher raised the VAT to 15 percent from two rates of 8 percent and 12.5 percent.

Expecting Obama to share stern truths before the November election may be unrealistic.

It certainly is.

What would a VAT do? The first and most obvious effect would be to raise the prices on almost everything by the amount of the tax—in Europe, usually 15-25%. But that’s just for starters. That price increase will depress economic activity and drive a lot of smaller firms and stores out of business. That will decrease supply, further driving up prices, while throwing people out of work, increasing demand for social services and forcing what might be an initially low rate up to European levels.

Here’s what I’ve seen in Denmark: the total effect of such a tax is gigantic. Prices there are 50-100% higher on everything (except leather jackets, which are for some reason fairly reasonable). You’d like a beer at the local bar? $8. A mattress? On sale, this weekend only, for $3,200. A new Mazda 6? $40,000. Energy prices? Insanely high. The effects ripple through the economy. A 2,000 square foot house in a distant suburb costs well over $1 million. The stores are mostly empty; so are the bars and restaurants, except in the most fashionable areas frequented by tourists. People dress in dark colors and don’t make eye contact with one another. I don’t think it’s just the Baltic weather. There is no sense of opportunity, no sense that the future might be better than the past. The entire nation becomes like a business with massive overhead costs; there’s no money left to take risks, expand, or do anything frivolous. The most one can hope for is to find a slot in the system. Many won’t. But even those that do just fill the slot; innovation is virtually impossible.

That’s our future, America. At least, it’s the future that Obama and the Democrats have planned for us. Ironic, isn’t it, given that Europe is demonstrating for us, as we speak, that even that bleak future is unsustainable. High unemployment, massive deficits, falling birthrates, economic decline—that’s what socialism brings in its wake. In Virginia Postrel’s phrase, it’s an enemy of the future. Well, of course it is—the future brings uncertainty, and that’s what socialism, in a misguided attempt to usher in a paradise on earth, tries to eliminate.

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That’s New York magazine’s title. They asked 50 people in Zuccotti Park some questions. Here are some of the results.

Maybe the most interesting question concerned the capital gains tax rate. What should it be? The occupiers were all over the map. 14% said zero. 10% said between 10% and 25% where it is now. 30% thought it should be between 25% and 50%; 28% wanted a rate between 50% and 80%. 6% thought all capital gains should be confiscated—a rate of 100%. 12% had no idea.

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our stock price would be plummeting. That’s the upshot of this report, which is worth studying. The beginning:

Our country is in deep financial trouble. Federal, state and local governments are deep in debt yet continue to spend beyond their means, seemingly unable to stop. Our current path is simply unsustainable.

That’s what the Tea Parties have been all about. And that’s what the Left and the mainstream media desperately want to deny.

The Left tries to portray the Obama administration as well within history’s boundaries on the size and scope of the federal government. If we ignore the spikes caused by World Wars, however, that’s just not true. There’s been a drastic increase in the role of the federal government in the past century, and also in the past two years:

FDR took the federal government from 3% of GDP to about 10% of GDP, a vast increase. Obama has taken it from 19% to 25%—not quite as drastic an increase, to be sure—but to a level previously seen only at the height of World War II.

There are many reasons for the financial troubles of the United States, of course, but the report’s analysis makes it clear that entitlements are the chief source of the trouble. The Great Society was barely noticeable on the chart above, but that’s because the costs of LBJ’s programs were not immediate, but set on a path of very rapid growth:

That can’t continue, and, as Glenn Reynolds like to remind us, what can’t continue, won’t. We don’t have much longer before entitlements and interest swallow the entire federal budget:

That’s only 14 years away. No wonder there’s a growing movement of labor-skeptic Democrats. Can we raise taxes to deal with the problem? Look again at the slope of that line. Moving to European levels of taxation by doubling the federal tax take would delay the date of swallowing only by about 25 years.

Medicare and Medicaid, even more than Social Security, are the monsters threatening to swallow the entire federal government. In that sense, critics are unfair when they say that Obama concentrated on health care when he should have been concentrating on federal finances. Health care is the most important driver of our long-term budget difficulties. The accurate criticism, I think, is that he addressed the central long-term problem and got it wrong, following the model of the Great Society programs that got us into this mess rather than making hard choices to rein in growth.

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It’s no surprise that the economy is sputtering:

CHART OF THE DAY: The Scariest Job Chart Ever Gets Uglier

The Obama administration has done its best to attack the private sector ever since it came to power. Its regulatory expansion, its massive and little-understood bills governing health care and the financial sector, its attacks on business in the media and before Congressional committees, and its push for cap-and-trade, card check, and other anti-business legislation have sown vast uncertainty. It’s easy to forget, amidst all of that, that the largest tax increase in history is headed our way January 1. You think you’re safe, because you make less than $250,000 a year? Think again. This is only the beginning:

– The 10% bracket rises to an expanded 15%
– The 25% bracket rises to 28%
– The 28% bracket rises to 31%
– The 33% bracket rises to 36%
– The 35% bracket rises to 39.6%

Higher taxes on marriage and family. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income.  The child tax credit will be cut in half from $1000 to $500 per child.  The standard deduction will no longer be doubled for married couples relative to the single level.  The dependent care and adoption tax credits will be cut.

The return of the Death Tax. This year, there is no death tax.  For those dying on or after January 1 2011, there is a 55 percent top death tax rate on estates over $1 million.  A person leaving behind two homes and a retirement account could easily pass along a death tax bill to their loved ones.

Higher tax rates on savers and investors. The capital gains tax will rise from 15 percent this year to 20 percent in 2011.  The dividends tax will rise from 15 percent this year to 39.6 percent in 2011.  These rates will rise another 3.8 percent in 2013….

The AMT will ensnare over 28 million families, up from 4 million last year. According to the left-leaning Tax Policy Center, Congress’ failure to index the AMT will lead to an explosion of AMT taxpaying families—rising from 4 million last year to 28.5 million.  These families will have to calculate their tax burdens twice, and pay taxes at the higher level.  The AMT was created in 1969 to ensnare a handful of taxpayers.

Oh, yes. Prepare to add a lot to that to cover the costs of Obamacare. It’s hard to say how much, but here’s an indication: Germany is raising the health care premium to 15.5% of gross pay. Think about that for a while.

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Posting has been light this week, which was my spring break.  Despite the well known spring break acceleration of time, however, the explanation has little to do with spring break and much to do with a cat, an open laptop, and a bottle of Hefeweizen. Luckily, the cat and the laptop survived.

Here are some links to articles that I find well worth reading:

Jonathan Davis defends Serbia against the myth of Serbian depravity.

Instapunk asks, “Who is Barack Obama?” and finds that he is everyone and no one.

Alan Greenspan on our current economic woes:

The current financial crisis in the US is likely to be judged in retrospect as the most wrenching since the end of the second world war. It will end eventually when home prices stabilise and with them the value of equity in homes supporting troubled mortgage securities.

Gary Becker and Richard Posner discuss the erosion of individual responsibility and the virtues of free markets in encouraging responsibility.

Jules Crittenden talks about poltical correctness in the campaign for the Democratic nomination.

Andrew Ferguson analyzes Obama’s phrase “We are the ones we’ve been waiting for,” which seems to mean we’re the smartest people ever:

No one who’s wandered through an Obama rally and heard the war whoops and seen the cheerful, vacant gazes would come away thinking, “These are the smartest people ever.” I’m sorry, they just aren’t. What is unmistakable is the creepy kind of solipsism and the air of self-congratulation that clings to his campaign. “There is something happening,” he says in stump speeches. And what’s happening? “Change is happening.” How so? “The reason our campaign has been different is about what you, the people who love this country, can do to change it.” And the way to change it is to join the campaign, which, once you join it, will change America. Because this is our moment. The time is now. Now is the time. Yes, we can. We bring change to the campaign because the campaign is about change. We are the ones we’ve been waiting for. Obama and his followers are perfecting postmodern reflexivity. It’s a campaign that’s about itself. The point of the campaign is the campaign.

They don’t put it this way, of course, which just confirms a suspicion that’s been creeping up on some of us for months: As a speech-giver, a man who has wowed the nation with the power of his language, Barack Obama is getting away with murder. Rhetorically, he is a master of le baloney.

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