On the Financial Crisis

While thinking of the current economic crisis, you may keep this in mind: man does not live by the market alone. Therefore, since it is something over which you have no control, you should quick worrying about it. That's my bit of guru advice for the day.

Steven Landsberg's Alternative Tax Plan

Though I doubt that he was the formulator of this tax plan, Steven Landsburg, writing in the Wall Street Journal, mentioned a brilliant formula for making the consumption tax progressive rather than regressive. The Rochester University-based economist suggested that, at the end of the fiscal year, the IRS could add up the amount of money that a citizen earned during the previous twelve months and, from this number, subtract the amount that the citizen saved. The difference to this equation should be, roughly, equal to the amount that this citizen has spent on consumption. In summary, you could write the equation something like this:

Earnings - Savings = Consumption

The consumption would be the number used to determine that citizen's tax amount, but the total amount of earnings could determine whether their consumption amount should be multiplied by a fraction or integer. In other words, as Landsberg says, this is a consumption tax which can be made as progressive as we want.

Of course, this raises the question of why we would want to change our tax code to begin with. Isn't it already progressive enough? Well, yes, but that isn't really the point. Growth and individual ethics, as well as communal fairness, should also be factors in determining how we tax, and, by this standard, a consumption tax significantly more justifiable than a income tax.

As Landsberg points out, it is simply crazy to tax people for saving (which is what we do now) rather than spending (we also do this, but not as much); this is because saving is a common good, whereas spending only benefits the consumer and the producer; the third men (the society in general) actually lose because of the consumption of others, if only slightly. Income tax, on the other hand, is nothing short of a tax on productivity. Essentially, it is a punishment for working. To state the principle more simply: citizens should be charged for what they take from society, not for what they give to society.

This tax would also very likely lead to greater economic prosperity as it would influence more citizens to spend wisely, save and invest by eliminating all the annoying taxes on stocks and bonds.

This doesn't, of course, establish that this consumption tax would be superior than a that could be collected at the point of purchase. That is because there are other reasons for the superiority of this tax over the consumption taxes that currently exist. Just last year, Mike Huckabee had to assure everyone that he would first eliminate the black market before he implemented his plan for an across-the-board consumption tax, but the beauty of Lansberg's system is that there is no need for the government to do so; the invisible hand does so automatically. Because the amount of money that does not show up in savings is used to determine the citizen's taxable assets, rather than using the amount of money that does show up in the grocery store, all consumption is taxed, whether it is on the black market or not.

The same principle applies to services. Many economists who favor consumption taxes believe that services, as well as goods, ought to be taxed, but realize that this would require an enormous bureaucracy so that the services could not, by and large, be performed under the table. Again, because this tax collects from the consumer rather than the producer, it would not matter whether the service provider were a licensed carpenter, part-time worker or illegal alien, because the service will be taxed, no matter who it is.

There are several drawbacks to this plan, as there are with any plan. One of these may be that it would discourage enormous purchases, such as housing. This is only a tentative problem, though. Obviously, borrowed money would not be taxed under this plan and, in the same way that we currently allow real-estate purchasers to write their debts off on their tax forms, a set of laws could be passed to exclude such purchases from taxable consumption. (They could even be categorized as an investment, which they most certainly are.)

Another drawback to the plan is that it taxes people who hide their money under their mattress more than it does people who put it in a bank. To this objection, though, I would have to say that this is a reasonable group to tax more highly. Their use of money does neither themselves, nor their society in favors, and, therefore, they should be more taxable. That being said, people of this demographic who are over the age of sixteen compose of very small minority of the population and, as this tax plan would provide further incentives to abandon this boondoggle, the numbers of such ardent individualists would significantly decline.

Naturally, I don't expect anyone ever to implement these policies in this country, but I hope that they might be implemented elsewhere. Isn't it pretty to think so?

Taxes (Blech!)

According to my tax form I'm in the 2.68 % tax bracket, but, according to the turbotax site, I'm supposed to pay somewhere in the neighborhood of 50% of my income this year. Can anyone tell me what is wrong with this picture?

The Archbishop Is Not an Economist, And It's a Good Thing, Too

I looked up Rowan Williams tonight on wikipedia to see what he actually said about Sharia law. I still have no clue because I am not sure if he has any clue what he is talking about anymore, but I was struck by another comment of his that I came across in the same article. Something to the affect that every score in the developed world can be interpreted as an economic loss in the developing world. What a load of rubbish. Does he have any idea how many people are not starving today in Taiwan or South Korea or Vietnam because their governments opened their borders to foreign business?

On Money

I heard of a guy named Chris Hedges who has a new book called "American Fascists: The Christian Right and the War on America". Naturally, I think that he is an utter loser, but I'll leave that aside (for now).

What progressives (they aren't worthy of the title 'liberals') don't realize is that as long as people are allowed to control their own money, there is no need to fear totalitarianism. Money is quite a liberating commodity. We're lucky to have it.

It's for this reason that Barack Obama is more likely to be a fascist (even though he isn't one . . . yet) than is John McCain.

In Defence of Governmental Education

Steven Landsburg, a radical libertarian economist at the University of Rochester, had a somewhat polemical article in the NYTimes today in which he argued that the government should not pay for the reeducation of workers who lose their jobs to globalization nor give them workers' benefits. The premise on which he based his argument was that if people are unwilling to give money to the government when the benefit from free-trade, why should the government have to give to the people who don't benefit. Landsburg went on to argue that protectionists are "bullies" of sorts. They keep consumers from getting the best deals possible by regulating what leaves the country and, more importantly, what comes into it. For example, if I could buy a car in the United States for $10,000 and the same car in Mexico for $5000, then it is unfair for the government to charge me an additional $5000 to import the car in order to protect the autoworkers' union. On this basis, I agree with Dr. Landsburg from a purely theoretical point-of-view. I support free trade. But I disagree that reeducation programs and/or workers' benefits are unethical and should, therefore, not be practiced by our government. Education (and reeducation) of our workers, in fact, has largely positive economic benefits from the standpoint that it allows us to reallocate our industry in this country and find a new workforce whom we can adapt to it. This is the entire point of free trade: To assure that the right person fills the right job. Furthermore, if our trade deficit (the margin by which we buy more than we sell) continues to grow in this country, it may very well lead to further economic instability and higher chances of recession. With the decreasing value of the dollar, we have an opportunity to reverse this trend, and trade barriers are the last thing that we need to plague both the supply- and the demand-sides of production. Nevertheless, we're going to need a technologically literate workforce if we want to keep our edge as one of the world's leading industrial nations. Reeducating the unemployed is a step in the right direction, regardless of whether they deserve it or not.

An Unhealthy Alliance: Supply-side Economics and Keynesianism

N. Gregory Mankiw, a Keynesian economist and former adviser to President George W. Bush, has, for the past three-and-a-half years, taken staunch criticism for his support of the president's tax cuts. Many of the people who argued that he compromised his economic principles to appease his boss would probably consider themselves Keynesian. (Paul Krugman is one such example.) If they want to argue that the tax cuts were probably not the best plan in as far as they widened the national deficit, creating a debt that will take generations to pay off, I would agree. But the argument that Dr. Mankiw compromised his principles are, according to my limited knowledge of economics, fallacious. I would expect Dr. Mankiw to advise the tax cuts not in spite of his Keynesianism, but rather because of his Keynesianism--Let me try to explain.

It is true that Keynesians strongly believe that the government has a valuable impact on the economy which should be exploited to the fullest degree, but, unlike certain libertarians would have us believe, Keynesians do not fundamentally and unequivocally believe in raising taxes in every situation. On the contrary, Keynesians believe that there is a time for raising taxes and a time for cutting them. During a recession, the textbook Keynesian solution for reinvigorating the economy is Expansionary Fiscal Policy; in other words, a Keynesian economist asserts that in these troubled times the government should simultaneously increase spending, to get people working again, and cut taxes, to increase expansion in the business sector.

With this in mind, let us consider the situation in late 2002, when Dr. Mankiw supported President Bush's tax-cuts. At the time, the country was ending its second year of recession, following the panic that had been brought about by the 9/11 attacks. Unlike his critics assert, Dr. Mankiw did not fall for the supply-side myth that the tax cuts, in the long-run, would increase government revenues, but, in keeping with his Keynesianism, endorsed the tax cuts hoping that they might galvanize economic growth. Arguably, they did. By the end of 2003, even with the war in Iraq, the U.S. market value had reached another all-time high. But our deficit had expanded, too, and it continues to expand. So much so that Alan Greenspan has expressed regret for his support of President Bush's tax policies, stating that he had hoped that the Republicans would have been more "conservative" on spending.

My main point is not to vindicate Dr. Mankiw for his actions. In retrospect, I would not have supported the tax-cuts if I were he. The point is that Keynesians and supply-siders, despite the disdain they often express toward one another (interestingly, in a 1998 textbook, Mankiw once referred to certain supporters of supply-side theories as "charlatans and cranks" though he removed the phrase in later editions) are actually much closer than they are willing to admit. Who knows? Perhaps one day they will be considered members of the same economic school.

The Road to Serfdom

I finished The Road to Serfdom yesterday. Friedrich A. Hayek's book caused somewhat of a controversy when it was first published 1944, especially in the British parliament which, by the time that it had gained notoriety, was led by Clement Atlee. Reading the book now, one can see why it was controversial then.

Stated briefly, the book is an attack on statism. Its primary thesis, written more or less plainly on the back, is that social planning cannot be reconciled with democratic liberalism. The specter that haunts the book is Nazi Germany which Great Britain was fighting when the book was published. This is perhaps the most valuable lesson which the book can teach us today. In an age when some university professors (somewhat oddly) claim that fascism is the most extreme form of capitalism, Dr. Hayek produces a strong rebuttal. National Socialism, in fact, was embraced by many of the former followers of Karl Marx's ideas and is the end result of socialism once socialism has proved insufficient. Dr. Hayek notes that the ideological roots of fascism were laid long before Hitler was elected; they could even be traced back to before the first war. However, if you believe that the government should sustain the environment, provide workers' unemployment insurance and subsidize the people's health, this book will not necessarily offend you, for Dr. Hayek argues that such undertakings are acceptable if they allow market forces to iron off the rough edges. Though a liberal, he is not an extremist and believes that the government does have a role in the economy. He merely argues that it should be, more or less, passive, providing a framework in which the free-market can operate. For Hayek, this is acceptable as long as the government does not prohibit freedom of enterprise. In short, while the book is still valuable, if it is read today it is unlikely to offend any Republican or Democrat who possesses ideological substance.