We Need to Raise Taxes and Protect the US Market

[James Madison Fanboy]

What follows are some vapid, economically ignorant statements from a friend of mine on another site. The problem is that while I know he's off the mark, I'm having a hell of a time trying to argue against him because I lack coherence in thought right now. I need some help. The below are his words: It should be noted that my friend is debating a conservative.

Obviously, what to do about the budget deficit has been a huge point of contention in Congress this year. And neither side is coming out of it looking pretty. The Republican make ridiculous demands, including the Tea Party being ready to let the US default on its debts if they didn't get their way, and the Democrats once again bending over and not sticking up for anything. I have a lot of thoughts on this, but the debt ceiling debacle left me with one burning question I just have to ask the conservatives out there: has there ever been any country that managed to cut its way to prosperity? Seriously. I expect an answer. For all the war drum pounding going on over the "no taxes, more cuts" ranting, I expect you to provide me with examples of countries that cut spending, generated no new revenue, and achieved prosperity. Define non-essentials, please. Because I hear "increase sales tax" and I get very nervous because that effects the middle and lower class much worse than it does the upper class. When you factor in the cost of essentials, sales tax, and utilities, people like me are paying a much bigger fraction of our income for all those things than the wealthy are.

I've always found that to be a dubious premise. We actually had a very stable period of economic growth under LBJ. Yes, he lowered taxes on the rich, but he closed so many tax loopholes that they were still paying more. Essentially, he forced them to start making smarter, less foolhardy investments. As for outsourcing, it doesn't matter how low a corporations taxes are. Unless there is a law stopping them from outsourcing jobs to countries with no labor laws or organized labor, they'll keep doing it. Apparently, tech support is coming back to the US and more Americans are being hired as personal assistants instead of Indians. Do you know why? Nothing to do with tax rates Stateside. The Indian workers started demanding more money.

We do agree that there is a lack of production in the US and that is further destabilizing our economy. We don't make anything anymore. One of our largest industries is the financial sector, and that produces absolutely nothing. Our last major export is movies. Blockbusters actually make more money for us overseas than they do domestically. The Dark Knight and Toy Story 3 both grossed over $1 billion when you combine the domestic and foreign box office totals. A certain degree of protectionism may be necessary to revitalize our economy over the next few years. It certainly worked for Japan.

There is a silver lining in that we're finally commencing with an exit strategy for Iraq. Over the next few years, that will help wind down some of our spending. Remember that after WWI in 1919, it took 2 or 3 years to wind down all the defense spending that came with it. Granted, the military industrial complex will fight that tooth and nail. Makes me wish we had another John Boyd at the Pentagon. It saddens me that the bill to punish defense contractors who had defrauded the government multiple times was shot down.

Further, I don't accept the argument that the rich will just find tax shelters and loopholes to get out of paying all taxes, so we should lower their taxes. That won't help. That's not going to magically help them develop a sense of civic duty and altruism. We need to go after the tax shelters and loopholes. If they want a tax loophole for having an office in the Caiman Islands, then they have to actually staff it. I'm not kidding. Right now there are office buildings set up in foreign countries for the sake of exploiting a tax shelter, but the only employees are security staff. No actual employees from the companies renting the office space work there. Why not introduce legislation that says that if you're going to have that building, you have to actually staff it? Oversimplified, yes. But if you want the super-wealthy and large corporations to start paying their share, you have to hit them where it hurts: the bottom line.

Again, I need some help fighting off this ignorance of my misguided leftist companion.

[softwareNerd]

"...has there ever been any country that managed to cut its way to prosperity? "

At least your friend is asking for examples. too much of economics is argued about in a rationalistic way. It is not easy to get good examples in economics. For instance, take the idea of cutting fiscal expenditure. One can look into history and find some countries suffering through all sorts of rationing and so on, because their governments cut fiscal expenditures. While a free-market economist will blame the rationing, the Keynesian can say it was the cuts that caused the problem. Before the era of fiat money, the typical response to a bust was to raise interest rates (not to lower them), to cut staff and wage-rates, and to cut back on spending (both private and public). Also, the most important: the clean up of credit. None of this will create a boom in and of itself; quite the opposite. Typically, one would see a year or two of bad times. However, cleaning out the system of bad-debts and by readjusting expectations, created a climate where people are ready to invest again.

Around 1920 the U.S. has a recession. This was the first real recession of the FED era. Commodity prices fell, that precipitated a fall in land-prices, that pushed many farmers into "negative equity". The government did nothing substantial to help. Also, in their post-WWI phase, European countries had bought a lot of U.S. goods, but that dried up because a lot of it was based on loans from the U.S., and those were drying up. The government continued to run a budget surplus. However, it was not the fact of the surplus that caused the economy to bottom out quickly and turn around in a little over a year. Rather, it was the fact that bankers did a good job of cleaning up credit. When a loan was not performing, they tries to make a judgement whether its performance depended upon a return to high commodity prices and other boom-type conditions. If it did, they would usually foreclose/liquidate. In cases where they thought that the non-performance was temporary, due to bad times and that the loan would be viable in normal times, they tried to work with debtors. Sometimes, they designed special procedures for banks to oversee debtor companies in order to avoid bankruptcy.

Today, what the U.S. needs is to get balance sheets cleaned up: of banks and private individuals. Secondly, real wages need to fall. If those two things can happen, the U.S. will be ready for a boom. Instead, U.S. policy makers have chosen to extend unemployment benefits and to cut the payroll tax. Both are bad ideas.

The GOP keeps on about cutting taxes. It is fallacious theory to think the tax-cuts will result in growth.

Edited August 13, 2011 by softwareNerd

[2046]

Your friend is taking an approach that a lot of advocates of intervention take which this question of "has there ever been any country that managed to cut its way to prosperity?" I don't agree with the above post that examples can or should be provided in this way, or that arguing economically is rationalistic. When Austrian economists such as Mises defend the free market, what is the underlying structure of their arguments? It is deductive: using undeniably certain economic principles, Mises shows that intervention in the free market will fail to achieve the ostensible goals of its proponents. It is not historical. They don't point to the past and say "look, we cut taxes under President X, and we had a lot of growth." What your friend is saying is basically that under previous administrations, we had higher taxes and so forth, and look we had undeniable growth, therefore we should do it again.

This is a post hoc ergo propter hoc fallacy. A occurred, then B occurred, therefore A caused B. But that isn't at all logical. In order for the scientist, such as an economist, to know what caused what, he has to actually look at the nature of things, and explain the causal connections in order to come up with a cogent theory for how things work. How do we not know that growth would have been greater without LBJ taxing the rich?

He says this forces entrepreneurs to make less foolhardy investments, but he doesn't explain how this works. How does it follow that I'm going to be smarter because someone is stealing from me? This is crankish pop-economic theorizing. Can he point to any kind of study done that shows this is the case? Can he show us that if entrepreneurs have more money over certain amount, that they become stupider suddenly, and how does this work? Of course he can't show this, he just asserts it and hopes that some kind of intuitive sense that you tend to spend your money more wisely the more restrictive your budget is will kind of influence your opinion on this. But that isn't a coherent theory of entrepreneurship.

What there is a theory of, is the business cycle, which shows that entrepreneurs make a "cluster of errors" resulting in the need to liquidate malinvestments due to the central bank's credit expansion and manipulation of interest rates. (See Austrian business cycle theory) Also, incidentally, this monetary problem is also at the heart of the artificial stimulus to outsource domestic production as saving-consumption ratios become unhealthily distorted.

But anyway, it's true that a mantra of "cut taxes, cut taxes!" isn't necessarily an immediate formula for growth because there are a myriad of other factors involved as indicated above in Snerd's post. But we can say that what causes growth is capital accumulation, and what hampers growth is barriers to capital accumulation. This includes taxation on the rich, since it makes for less funds available for investment. But, in the end, it doesn't matter how much savings are available for capital investment if the central bank is causing business cycles and practicing an inflationary policy.

The whole "should we cut spending alone, or cut spending and raise taxes on the rich" debate is primary a moral debate and not an economic one. Economically, you can go either route to achieve a balanced budget. It's just a matter of which one achieves moral goals of "fairness" or "a balanced approach" as they are now calling it, and constitutes a "rediculous demand," i.e. drastically cutting spending and scaling back the role of government in society goes against their political philosophy, so they don't want to do it.

Anyways, hope that helps, and here's some additional reading that may also provide intellectual ammunition:

Binary Intervention: Taxation

Study Guide to that chapter

Capital Supply And American Prosperity

Economic Depressions: Their Cause and Cure

Salvation Through Government Spending

Man vs. the Welfare State

See chapters:

14.Soaking the Rich

15.Soaking the Corporations

16.Government Planning vs. Economic Growth

17.Government As Prosperity-Maker