Browsing the blog archives for June, 2011.

Asking the wrong question

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The headline in my local paper (The Morning News) was an eye-catcher: S.C. AIMS TO KEEP MILLIONS—STATE RACES TO KEEP $75 MILLION IN FEDERAL FUNDS FOR SPECIAL EDUCATION. The story opens, “South Carolina has lost $36 million in federal matching money and is scrambling to avoid losing another $75 million for not spending enough on special education the last two years.”

[read the entire story at http://www2.scnow.com/news/pee-dee/2011/jun/23/sc-loses-36m-scrambles-avoid-losing-75m-more-ar-2019306/]

Apparently, Washington requires states to spend a certain amount of special education and withholds matching funds to those that don’t. SC lost $36 million last fiscal year, prompting the Department of Education to send $75 million earmarked for special education to local districts by July 1. The author of the piece (Robert Kittle) then posed the following question: So why didn’t the state spend what it was supposed to on special education students? I seems that bureaucratic problems were to blame, but “lawmakers are taking steps to try to prevent this from ever happening again.”

Mr. Kittle has asked the wrong question, and I must wonder if any of my neighbors picked up on it. When he asks why SC didn’t “spend what it was supposed to,” he neglects to question the federal government’s right to make that determination in the first place. Washington’s figure—whatever it is—is presumed to be correct. To the left, Washington is the conscious that many states—especially more conservative ones—just don’t have. Never mind that our Constitution left education to the states in the first place, but I digress.

Kittle also fails to assess the intrusiveness of this scam. Let me simplify, using SC as an example. Washington confiscates the earned wealth of South Carolinians (or incurs debt on their behalf), ostensibly to support special education. Washington sends funds back to SC only if SC meets Washington’s requirements. If SC decides to spend less than the magic number, then a portion of its funds is redistributed to other states. To avoid this drain, state legislators must tax their citizens even more to pay for projects it would not otherwise support, compounding the waste.

I have nothing against special education, and I am aware that the left will castigate anyone who opposes this type of scheme as anti-children and/or anti-special education. Nonetheless, the underlying program is fraudulent, and our reporters should have the insight and courage to ask the right questions. It’s also time that we elect a President and Congress that will put an immediate halt to this type of fraud and leave states to address their own budgetary concerns as they see fit. This is the leviathan we must fight at every turn.

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Government spending and job creation

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Economist Alan Blinder wrote an op-ed in the June 21 Wall Street Journal entitled, “The GOP Myth of ‘Job-Killing’ Spending.” He opened by citing Keynes—no surprise here—and then stated the following: Right now, I’m worried about the damage that might be done by one particularly wrong-headed idea: the notion that, in stark contrast to Keynes’s teaching, government spending destroys jobs. Without getting into the specifics of the piece, I am challenging his central thesis. Contrary to Blinder and Keynes, government spending is not the appropriate response to high unemployment, and it’s not difficult to understand why.

Let’s start with one crucial point: Government dollars must come from the private sector, sooner or later. Government cannot spend unless it first (1) confiscates it in the form of taxes, (2) devalues the currency by printing money, or (3) incurs debt that we (or our children) must pay down the road. Understanding each of the possibilities is the key.

In the first instance, government is merely spending what would have been spent in the private sector; there is no increased demand to “stimulate” the economy and create jobs. Put another way, government spending $10 on paperclips might help the office supply industry, but the $10 a taxpayer doesn’t have to spend on a movie ticket will hurt the entertainment industry. Unless government spending improves efficiency in some way—building a critically needed road, for example—Washington is merely substituting our spending with its own, complete with the political paybacks and bureaucracies that must be created to oversee it. In almost all cases government spending produces less bang for the buck as well. Would you rather spend $10 on your own or ask someone in Washington to spend it for you?

The second instance is just like the first because the $10 bill government prints is offset by comparable inflation—a reduction in value of existing currency. The money is your pocket or in your 401(K) is worth less, a whole lot less when this is done on a large scale. Financing government spending with the printing press is an insidious form of taxation. You don’t see the money taken from you, so you are tempted to believe that you’re getting something from Washington for nothing.

In the third instance, government can create jobs in the short run by spending money it does not have, thereby creating the need for more labor and additional hiring. This is the crux of Keynesian philosophy: Government must intervene when the economy is in a slump to get things moving again. The problem here is that the jobs created are not sustainable, unless you plan to borrow forever. Don’t laugh…this appears to be the strategy of many on the left, although most would agree that the bills must be paid at some point, ostensibly by “the rich.” Just take a look at the massive national debt and you should see the folly in this argument. Politically speaking, borrowing to ease the pain of current economic adjustments is doomed from the beginning.

So how can Keynesians like Blinder actually argue for more government spending as a solution to high unemployment? The answer lies in two assumptions. First, Blinder assumes that government is smarter than you are. If left to make your own financial decisions, you just might not spend it wisely. Instead, government can “invest” in education, technology, healthcare, and so on in ways that “grow” the economy. There might be a kernel of truth in this statement in limited instances, but the political process makes implementing such a top-down approach unworkable. It just creates more bureaucracy, debt, and dependency.

Second, Blinder assumes that government is actually capable of managing the economy. Even if economic models were reliable predictors, it is ridiculous to suggest that even the best minds are capable of collecting and processing the data needed to plan an economy. As Hayek put it, economics is about conveying to leaders how little they know about the world they think they can design.

In the end, the issue is one of freedom. Are we best suited to make our own decisions or is government capable of managing our decisions more effectively? Keynesians like Blinder and Obama argue for the so-called experts in government. I’ll put my money—what’s left after taxes at least—on individuals making their own decisions.

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Revisiting the FairTax

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Neal Boortz and John Linder officially introduced their version of a national sales tax—the FAIRTAX—in 2005. It’s been one of the most demagogued political issues ever since. With the 2012 election season upon us, it’s certainly worth a second look.

The FairTax is a specific proposal, not a set of general principles; visit fairtax.org for all of the details. The idea is to replace our current income tax and corporate tax schemes with a single 23% national sales tax. Everyone gets a monthly “prebate” to cover the taxes they would pay on life’s necessities so that individuals and families living at the poverty line would pay a zero effective tax rate. Note that the FairTax is proposed to REPLACE other taxes, NOT as an additional tax.

The proposal is not that complicated, but there’s a lot of confusion around when it comes to the FairTax. Let’s look at a few basics.

1. What’s the difference between the FairTax and a flat tax? The term “flat tax” typically refers to a single INCOME tax rate that everyone pays after a limited number of deductions. The FairTax refers to a single SALES tax rate that everyone pays whenever they purchase a good or service.

2. Why tax sales instead of income? Taxing income discourages work because individuals know they’ll never see a big chunk of what they earn, especially those in punitive tax brackets. It also allows individuals complete control over earnings until such time that they are converted into tangible benefits (paper money is traded for a good or service).

3. Isn’t the FairTax really a VAT (value-added tax) like they have in Europe? No. A VAT inserts taxes at various points of production, whereas a sales tax is a single levy imposed at the retail level. This distinction is important because a sales tax is transparent. Unlike the VAT, you always know how much tax you’re paying in when it’s calculated at the end.

4. Does it really matter how we fund the government? YES IT DOES. Here are 4 basic factors I consider whenever anyone proposes an alternative tax scheme.

(1) Liberty: Does the system manipulate otherwise lawful behavior by giving “breaks” to those who meet Washington’s requirements (i.e., obtain a mortgage, buy an electric car, have more children, etc.)? Remember, tax “breaks” must be balanced with higher initial rates to obtain the same level of revenue. The current system gets an F here—just consider the vast array of tax reduction schemes available to those who are willing to work the system. The FairTax gets an A. You pay only when you spend.

(2) Growth: Does the code encourage entrepreneurial activity devoid of government interference? Both large corporations and small businesses consider their tax liabilities before they hire or invest. The current system gets a D here. While it includes a number of tax incentives for businesses, they are short term, largely unpredictable from one year to the next, and require specific business investments that are often inefficient. The FairTax gets an A. Businesses could examine the economic merits of a particular business decision without regard to tax implications. Moreover, savings associated with the elimination of other taxes would result in lower prices at the wholesale and retail levels (before the FairTax is applied). This would reduce the prices of our products abroad and make our exports MUCH more competitive.

(3) Equity & Redistribution: Do those who earn and spend more pay proportionally more in taxes, or is the system used as a means of wealth redistribution?  The current system gets a F. Higher income earners pay more—a lot more. The top 10% of wage earners pay over 60% of the income taxes, while the bottom 47% either break even or take from the system. Such imbalance is punitive, not proportional. I’d give the FairTax a B here. The prebate effectively reduces the tax liability of those at the poverty level at the expense of other taxpayers, but some modest form of net wealth redistribution is probably required for a the proposal to receive serious consideration anyway.

(4) Simplicity: It doesn’t make sense to spend billions in productive resources every year simply to calculate taxes. The current system fails here as well; its complexity is mindboggling. In contrast, the FairTax gets an A. If you can multiply a price by 23%, then you can fully understand your tax liability.

So…if the FairTax is a better system across the board, why are so few in Washington willing to give it a fair hearing? Unfortunately, some politicians don’t understand how it works. However, most probably understand it all to well; they fear it because it restricts Washington’s ability to social engineer via the tax code. In lay terms, it gets the government out of the way in terms of tax collection efforts. Tax breaks for special constituencies would be severely hampered.

Some resist the FairTax because it eliminates the [fill in the blank] tax break. The mortgage interest deduction is a popular one, but keep in mind that this tax policy has artificially lowered the price of homes subsidizing them. Someone else is to pay, and we’ve all been paying for each other’s tax breaks for too long.

A few intellectuals have opposed the FairTax because they claim it won’t produce sufficient revenue. These detractors actually studied the plan, so at least some credit is due here. I’ll avoid a long academic discussion, but it’s worth noting that the models they employ to evaluate the FairTax are static, not dynamic. In other words, they assume that individual and business behavior would not change if a radically different tax code were introduced. This is simply not true.

The FairTax is an idea whose time is long overdue. It’s hard to imagine anyone except strict wealth redistribution types and social engineers preferring the current system. Then again, I probably just described most of the Democrat party.

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Engaging Moderates

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Debating with the left is a mixed bag. Many liberals are so wedded to their positions that alternative logic and reason is simply meaningless. Discussing economics and politics with so-called moderates can be equally frustrating, but in a different way. Several underlying premises have crept into our culture and are subconsciously accepted by undecided voters. Three of them can be particularly difficult to overcome.

1. “WE’VE GOT TO DO SOMETHING.” Americans have a bias for action, but solving problems should not be confused with taking action. Sometimes “doing something” can make a problem worse, just as barking dogs often don’t stop until they are left alone. And even if taking action contributes to a solution, it’s not always a wise use of resources. Going to the doctor with a head cold might result in some marginal benefits, but doing so is usually not worth the time, energy, or money.

This is a particular problem when discussing economic problems. The solution to most of them is to get government out of the way and let markets sort out the inefficiencies. During the 2008 presidential election I recall being asked the same question numerous times: If you don’t like Obama’s plan to fix the economy, then what’s yours? My contention that government causes most economic problems and can’t directly fix most of them is logical and accurate, but often fell on deaf ears.  Waiting for the markets to work out a real, sustainable solution just doesn’t seem to make sense to many moderates. Besides, the market solution might not be “fair.”

2. “THE TRUTH IS ALWAYS IN THE MIDDLE.” Ask most Americans about the Israel-Palestinian dispute and they’ll tell you that both sides are to blame. Ask them why the NFL labor dispute is ongoing and they’ll tell you that both players and owners are at fault. Ask them why we’re on track to have a $1.7 trillion deficit this year and they’ll tell you that we need both tax increases and spending cuts. Ask them to support their middle ground positions with evidence and few will present a logical argument.

Sometimes the answer is in the middle, but assuming the superiority of the middle position from the outset is intellectual laziness. In fact, the left has used this premise to win a number of political battles. For example, various components of Obama’s spending spree have been justified as fiscally responsible over the long term (e.g., the flawed argument that Obamacare will actually lower healthcare costs) or just temporary (e.g., the stimulus). Now that we’re facing record deficits, they argue that the solution can only be found in a combination of minor spending cuts and tax increases (the notion that tax increases raise revenues is suspect anyway, but I’ve addressed that previously). Their position is presented as some sort of reasonable compromise while those who argue for spending cuts alone—repeal Obamacare, for example—are labeled as unrealistic or extremists. Many of my friends and coworkers accept this “middle ground” logic without any serious analysis.

3. “CAPITALISM BREEDS CORRUPTION.” Even many self-defined pro-capitalists fall for the notion that wealthy business tycoons are greedy and cannot be trusted. Unchecked power can certainly breed financial corruption, but many leftist politicians are the most corrupt in this regard, freely spending other peoples’ money on programs that pay off political allies or simply don’t work. The problem is not capitalism, but human nature. At least capitalism generates wealth in the first place.

Overcoming these barriers can be a challenge because they are subtle, but recognizing them is paramount in order to attack them directly. Look for these flawed premises the next time you engage a moderate or “independent” voter, but make sure you avoid the traps they create. Don’t propose some sort of government action when no intervention is the best alternative. Don’t propose a “middle ground” solution to a problem just to sound reasonable. Any by all means don’t give ground to the misconception that capitalism is immoral. Nothing could be further from the truth.

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