National Economic Systems: An Introduction for Intelligent Beginners-2.

Part Two: Taxing the Rich.

I argue in Part One of this essay that the stimulus package could not possibly stimulate the economy the way a stimulus package is supposed to do. That is, the present stimulus package cannot shorten or lessen the current recession by stemming the growth of unemployment and by jump-starting the national economy, the way Keynesian economics has it. I suggested there had to be another agenda for this massive spending of public money.

Recessions – two consecutive quarters when the national economy contracts instead of expanding – are common under capitalism, in market economies. They wane, whether or not anyone does anything about them. This fact makes if difficult to assign credit to government measures designed to lessen or shorten recessions when economic indicators do look good. Economic indicators don’t look good right now, although some of the press is announcing the beginning of the beginning of the end of the recession.

At any rate, the recession will end eventually. That is, economic growth will resume. I would bet on it but I don’t know when. When growth resumes, we will be left with the second economic crisis facing us. That second crisis is less routine, more extraordinary, and more worrisome than the first crisis, the recession itself. It’s massive public indebtedness. I have to go into the reasons why the Federal Government is even able to incur massive debt.

We are speaking of course of the public debt, of the debt that everyone in America owns to some extent. It’s the same debt on which we pay interest through a portion of our taxes. The higher the debt, the greater the amount you have to pay in interest, just to service the debt. It’s like a credit card balance. (But don’t confuse it with your own, personal credit card debt. Your share of the public debt is in addition to, on top of your credit card balance.)

First, contrary to a perception widespread among liberals, the government does not have any money. The money it spends comes from our taxes, or it’s borrowed, or the government just prints it.

The most honest way for the government to obtain money, to raise revenue, is to tax people and businesses. Taxing is taking money by force, under threats of fines and eventually, of prison. Taxation is also the easiest way in America today to raise government revenue. That’s because almost half the population does not pay any federal income tax. It’s fairly easy to convince that half, plus a few romantically-inclined taxpayers, especially among the young. that the taxes on “the rich” can be increased without damage. In this view of the world, “the rich” is a subjective category encompassing everyone who earns significantly more money than I. For those pulling in $300,000 a year, the rich are those taking in a million dollars. For the coffee-shop waitress who clears $20,000 after taxes, the small merchant and his wife who earn $80,000 together are rich. That’s human nature I think. So, there seems to be an infinite supply of “rich” people to tax.

Governments however, including Left-leaning governments such as we have now in America, know better. Organizations and individuals and households respond to increased taxation. Responses range from concealing earnings to working less (producing less), to withdrawing from the world of production entirely.

Imagine a medical specialist in his fifties, in another country. He clears $200,000 per years and he has accumulated two million dollars in assets over his career. The doctor is taxed at the rate of 50%. After taxes, he has $100,000 to spend each year. That’s a good living everywhere except in a few major world cities. Now, his government, having deployed a large number of generous social programs to help the poor ans the struggling, finds itself in need of a lot of money. It raises the tax rate for the rich, including our doctor, to 80%. The doctor calculates that even if he manages to double what he clears from his practice, he will still not be able to come close to maintaining his previous lifestyle. (He will have only $80,000 instead of the previous $100,000.)

The doctor says, “Screw it. I will live off my savings.” He find an annuity that pays him 5% per year forever and moves to Tahiti. The economy has lost a high-value worker who may not be paying taxes ever again. Government revenues decline. All this is in addition to the fact that society at large has lost a valuable worker, someone who did something useful for others.

There is worse. The doctor who retires in his fifties would have worked many more years. He would have probably invested some of his relatively high earnings. Investment buys the tools for the production of tomorrow. This is not a slogan but a simple statement of fact. The poorer the tools, the less the earnings of the next generation, the less they are able to pay  taxes.

The political classes of all developed countries all know this scenario, more or less diffusely: Today’s taxation usually slows economic development tomorrow and it dries up taxation for the day after tomorrow. To make matters worse, today’s taxation fairly often results in a decrease in government revenue today. That’s because people are often very quick to respond to tax increases.

For all these reasons, contemporary governments tend to satisfy their need for money by borrowing instead of through immediate tax increases. Why they are able to borrow at all, and to borrow massive amounts, is an interesting story I will tell in a subsequent installment.

Technical note: Since I began posting this essay, I have heard several people – all young – tell me that they did not trust government figures, such as the unemployment rate, and GDP growth rates. I have to say the statement is the expression of a kind of naïve cynicism. Here is why: Common figures such as those two, are scrutinized daily, even by the hour, by thousands of pairs of trained eyes. The eyes belong to specialists located in the US and abroad, both. The fortunes, and even the daily bread, of many such specialists depends on their ability to get the numbers right. Training matters a great deal. If you look at GDP figures frequently, for instance, any anomaly jumps right into your face. (I can attest to this because I use to pore at such figures, in a previous life.) Even a number that merely fails to conform to expectations is thus perceived as an anomaly worth checking. The news of such anomalies travel instantly across the globe and questions are asked until the discrepancy is resolved.

When they wish to fudge, governments of all stripes do not cook well-known indicators. Instead, they rely on less well familiar, esoteric,measures hoping that the usual specialists will be too lazy to check the government’s interpretation. This ploy often works with the general media because they are lazy. It’s never successful with the likes of the Financial Time or the Wall Street Journal. But those have limited audiences and the news move fast.

Contrary to a popular saying, statistics do not “lie,” except to those who don’t know how to read them.


About Jacques Delacroix

I am a sociologist, a short-story writer, and a blogger (Facts Matter and Notes On Liberty) in Santa Cruz, California.
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2 Responses to National Economic Systems: An Introduction for Intelligent Beginners-2.

  1. I read the following interesting article, but I didn’t follow the links. Due to my personal critical-thinking-inertia I succumbed to vaguely buy into this commentary. Even better, I decided to forward it to Jacques Delacroix. I avoid forwarding email to him ever since he despised a series of photos of the giant sink holes around the globe, because he shot back that should I ever again send him such tripe I would be very sorry. Jacques’s a pseudo-abrasive jocular swashbuckling dude, but could he have been serious that time.

    More in this comment to follow below the copy of what I sent him:

    US Economic Myths Bite the Dust
    by Mark Weisbrot
    The Great Recession is allowing some widely held beliefs about the US economy – which were the source of much evangelism over the last few decades – to run up against a reality check. This is to be expected, since the United States has been the epicentre of the storm of policy blunders that caused the world recession. This month my CEPR colleagues John Schmitt and Nathan Lane showed that the United States is not the nation of small businesses that it is regularly dressed up to be for electoral campaign speeches and editorials. If we look at what percentage of our overall labour force is self-employed, or what percentage of manufacturing workers or high-tech workers are employed in small businesses – well, the US ranks at or near the bottom among high-income countries.
    As economist Paul Krugman noted after reading the study: “One more American myth bites the dust.” Indeed it has. And as both the authors of the paper and Krugman note, there is a plausible explanation for the US’s low score in the small business contest: our lack of national health insurance. There are enough risks associated with choosing to start a business over being an employee, but the Europeans don’t have to worry that they will go bankrupt for lack of health insurance.
    A number of other alleged advantages of America’s “economic dynamism” are also mythical. Most people think that there is more economic mobility in America than in Europe. Guess again. We’re also near the bottom of rich countries in this category, for example as measured by the percentage of low-income households that escape from this status each year.
    The idea that the US is more “internationally competitive” has been without economic foundation for decades, as measured by the most obvious indicator: our trade deficit, which peaked at 6% of GDP in 2006. (It has fallen sharply from its peak during this recession but will rebound strongly when the economy recovers).
    And of course the idea that our less regulated, more “market-friendly” financial system was more innovative and efficient – widely held by our leading experts and policy-makers such as Alan Greenspan, until recently – collapsed along with our $8tn housing bubble.
    On the other hand, most Americans pay a high price for the institutional arrangements that bring us these mythical successes. We have the dubious honour of being the only “no-vacation nation “, ie no legally required paid time off and of course some weeks fewer actual days off per year than our European counterparts enjoy. We have a broken healthcare system that costs about twice as much per capita as that of our peer nations and delivers worse outcomes, as measured by life expectancy and infant mortality. We are near the top in terms of inequality among high-income countries and at the bottom for parental leave policies and paid sick days . The list is a long one.
    Yet it was just two years ago that Nicholas Sarkozy successfully won the presidency of France by arguing that the French could not afford their welfare state and had to adopt a series of reforms that would make the French economy more “dynamic” like that of the US. These included tax cuts for the rich and labour law changes that would make it easier for employers to fire people.
    Many French are now sorry they voted for this guy and very glad that they have more protection than most Americans have from the ravages of the recession. Of course they could also use a larger economic stimulus, but the fact that they don’t have one is due to the neoliberal policies of their own government and those of the European Union, especially the European Central Bank.
    There is another area where the comparison between the American and European model has serious implications for the future of the planet: climate change. “Old Europe” uses about half as much energy per capita as the US does. A big part of this difference is because Europeans, in recent decades, have taken much more of their productivity gains in the form of increased leisure time, rather than working the same (or longer) hours in order to consume more.
    We estimated that the US would consume about 20% less energy if it had the work hours of the EU-15. This would have a significant impact on world carbon emissions. Furthermore, when the world economy recovers, there are a number of middle-income countries that will approach high-income status in the not-too-distant future (South Korea and Taiwan are already there). Whether they choose the American or the European model will have an even bigger impact on global climate change.
    The major media in both Europe and the United States have played an important role, for decades, in helping politicians capitalise on economic mythology to push policy in economic and socially destructive directions on both sides of the Atlantic. It remains to be seen how much the Great Recession will influence the thinking and reporting of these influential institutions.
    © Guardian News and Media Limited 2009
    Mark Weisbrot is co-director of the Centre for Economic and Policy Research, in Washington, DC


    First things first: I cannot give you the Krugman reference but you can be absolutely sure that he said what I said he said. You can find it yourself. It was in a column several years ago. I don’t make up stuff and I cannot be mistaken on something so precise.

    Krugman is an interesting guy; an excellent economist and a madman when he acts as politician. I read his scholarly articles. His columns make we smirk, squirm and laugh nervously.

    Why you want to be six times richer than the Chinese makes no sense to me. The fact is that you are three times richer than you were when you were six times richer than they. (Still with me?)

    If you could come up with anything objective about “intrinsic value” you would make economic thinking take a giant leap. You ain’t there. In any case, you have three times more of what you would define that way (such as cars and bicycles) and many toys you did not even know existed then because they did not. You are better off in every way.

    I don’t know what America’s philanthrophic efforts have to do with economics. THe biggest recipient of American civilian aid are Egypt and Israel. The Marshall PLan was less philanthropic than an amazingly imaginative and generous way to fight the spread of communism, I think. Worked like a charm, too.

    Let me put it this friendly, almost affectionate way, Larry: About the EU : You are fucking wrong! The laggards are Germany and France, the biggest. See OECD, World Bank and EU’s own figures if you can read them
    I shall reply to you by repeating key clauses/sentences from your email above. Each reprinted remark of yours will be prefaced by “Jacques>>”. My replies to each remark will be prefaced by “Leo”.
    Two things: Size of trade deficit is not evidence of international competitiveness, one way or the other. It means that others are willing to deliver toys, cars and cheese in return for printed paper. Not bad!
    I suppose that toys, cars, and cheese are more intrinsic than nationalistic IOU paper. But somehow, when we were running trade surpluses, we prospered much more than did those trading partners. Now that we are running trade deficits, our trading partners (especially China and the Middle Eastern OPECtites) are prospering as our prosperity declines.
    Perhaps there’s factor regarding the (intrinsic) “value” of the purchases. As we buy more relatively transitory goods compared to our trading partners (e.g., we buy twitter boxes that stop functioning in 3 years whereas they buy road-construction equipment and services), this becomes evident (evidence, in your words) in the shift towards international competitiveness.
    Beginning with the Marshall plan, America’s philanthropic efforts in uplifting other peoples has narrowed the disperity such that as they’ve moved upwards, we have declined.

    Second thing GDP growth remains a good if crude indicatoro f value of production. The US GDP grwoth rate has been higher than the combined EU GDP growth for years. We must be doing something right.
    The EU has some laggards that I suspect are disfiguring the EU’s growth rate.

    PS Nation-sates don’t really “compete” economically. Krugman himself wrote good stuff on this.
    I love Krugman. Can you cite me an article or two where he elaborates on this? Thanks.
    Leo (from here til the end (thus far)
    Reading email from you is always a personal, evocative, and delicious experience. Your powerful presentations typically knock me back a bit, as did this one. But then, after 10 hours, my mind remembered why it thinks/judges as it does (looks like I’m describing my self in the third person).

    Intrinsic values is the more serious of the issues you mentioned, but I want to defer that for later in this email.
    Your remark, “Why you want to be six times richer than the Chinese makes no sense to me. The fact is that you are three times richer than you were when you were six times richer than they,” (and I don’t doubt the accuracy of your figures) felt very reassuring. But I think that is too myoptic an algorithm for such a complex topic. At some point quantity becomes a quality of it’s own (Dirkson). It’s not just about ratios.

    The news sources declare that the rising consumerism in China, in particular, due to their rising wealth, is both consuming valuable resources, and in turn diminishing the global environment. (I read two years ago that California has a 50% increase in cloud cover due to the pollution generated in China, and that progression seems almost asymptotic). At some point, if not already, the growing Chinese economy empowers the pow their cultural/political values has on the global society. Our burgeoning horde of toys is a pile of crap. Man cannot live on crap. But China can live very well off the greenbacks they received for their toy sales, with which they then bought-up hordes of oil so they could build their 863 new coal-firing plants this year alone.

    For most Americans Europe is too expensive a vacation. Being able to go to Europe for 1-2 months used to be doable. I may have, as you say, three times more toys than before, but I can’t enjoy Europe which used to be doable.

    There are limits to natural resources, and even greater limits to available quality services; e.g., medical. Is it my ignorant imagination that an increasingly larger share of our finest higher education goes to foreigners? We’ve been selling our brain-drain. Global capitalism, which seems firmly in place to me, is competitive in spirit, n’est pas? Not cooperative, but competitive. And the playing field has been changing faster than to which we are accustomed. Our value is more determined by others now.

    Our value to the rest of the globe is our currency. We’re propping-up our automotive industry with freshly printed “Cash for Clunkers” money ($63 billion, I believe).

    Intrinsic value can be quantitatively amplified by leveraging. Leveraging sort of relies upon the nefarious free lunch: give a man a fishing pole rather than feed him fish; in that way he’ll be forever able to feed himself. But then again, fish seem more intrinsic than fishing poles. Qualitatively, and I don’t want to even consider Maslow, intrinsic can only be experienced by the beholder, along with those who share this empathy. Besides, the intrinsic-ness is not intrinsically enshrined in the goods or services themselves. How much intrinsic is very dependent upon the current mood, situation, emotion of the buyer. What could be more intrinsic to a patient with acute appendicitis than a surgeon specializing in appendectomies?

  2. Pingback: National Economic Systems: An Introduction for Intelligent Beginners – 2 « Notes On Liberty

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