Friday, July 22, 2011

Response to Ebert

In this country there are two competing theories about economics whose positions are mutually exclusive.  The free market approach believes that government gets in the way of economic growth by misallocating resources, by redistributing wealth,  by deterring incentive and innovation through excessive taxation and regulation, and by rewarding corruption and sloth.  The Keynesian theory, which has dominated our government for almost 80 years, believes that government is the driver of economic growth or at least can stimulate it.  Both sides cannot be correct. 

Keynesian economics was a response to the monetary deflation of the Great Depression, caused by the Federal Reserve not obeying the rules of the gold standard.  There is no question that during a period of monetary deflation that the government needs to find a way to inject money into the economy, but that does not mean that this is the solution to our economic problems during non-deflationary times.

The evidence of history is that Keynesian approach has a terrible track record.   Over and over again different governments have tried to stimulate their economy by injecting government spending, but this money has to come from somewhere.  There is no free lunch.  Not only have the stimulus attempts repeatedly failed, but they have prolonged economic misery like Japan's lost decade of the 1990's and deteriorating economic conditions up until about 1939.

Keynesian economics has a certain political expediency by promising people something for nothing.  In a quotation attributed to the French author, Alexis de Tocqueville, the dangers of loose fiscal policy were stated as follows: "A democracy cannot exist as a permanent form of government. It can only exist until the voters discover they can vote themselves largess out of the public treasury."  Few people get elected promising to cut free goodies at the public trough.  It takes a crisis like the current debt to make that happen.

The prosperity of almost every nation is inversely proportional to the size of  their government and to their level of taxation.  This was shown by Milton Friedman and by the Cato institute.  In fact, the most prosperous countries in the world are the ones with the lowest tax rates.  The least prosperous are the ones with authoritarian regimes. However, it is not just an issue of prosperity.  It is also an issue of freedom.  The more government implements its schemes, the more it controls and interfere with our lives.

Way too frequently I hear people say that we should be more like Europe, which makes little sense because the average household income in Europe is half that of the United States.  Although Sweden is often held up for example as an ideal socialist state, Sweden had to cut back on their top tax rates to deal with their stagnant economy.

A secondary issue is whether the rich "pay their fair share."  Government has a few legitimate purposes for which it must tax its citizens.  Beyond that the government is playing Robin Hood to benefit some people at the expense of others.  With the top 1% paying 38% of all income taxes, and the lower 50% paying almost none, you would think that fairness wouldn't be an issue.  Raising taxes fails both practical and moral tests.  The practical failure is that all the federal government tax schemes ever enacted have failed to collect more than 19% of GDP, which means that we have a spending problem and not a tax problem.  We were far better off when fedearl government spending was only 19% of GDP (under Clinton!).  Raising taxes will certainly have a negative impact on economic growth.  Even  a 1% change in economic growth up or down will have a dramatic effect on the government balance sheet.  The moral failure is that government steals from people because it arrogantly assumes that they don't have a right to own the property in the first place.

The left uses the financial crisis to propagate one of the great liberal myths:  That free market is corrupt and causes financial calamity.  The liberal myth of the free market leading to the collapse of the economy completely ignores the reality that government created this mess, through its GSE's and requirements that banks lend money to people who are not credit worthy. In a economy not so distorted by the government, banks have no incentive to make bad loans because it is their money they are going to lose.  But if the government requires people to make bad loans while promising to buy up those bad loans and sell them to investors with an implied government backing, how can the banks be called immoral?  They are simply following the rules that the government created.  If people acted in a corrupt fashion, it is because the government gave them an incentive to do so.

This is not the first time in history that we have seen real estate busts.  There have been several.  The government failed to learn the lesson of history by encouraging people to invest in real estate.  

The Tea Party movement is an appropriate response to excessive public debt.  These people are wiser than they are given credit.  They are not a bunch of rednecks voting against their own self interest. (i.e. "What's the matter with Kansas.")  They are people who realize that the country is driving off a cliff because of liberal spending policies.  They are people who realize that we have gotten too far from the concept of limited government that this country was founded on.

The issue of war is a valid concern and also a complicated issue.  The current administration has done nothing to keep us out of war.  I personally would like to see us get out of the Middle East altogether. 

The health care issue is also complicated, but much of the rise in cost of health care is due to third party payer programs, both public and private, that separate the concept of cost from the consumer.  A better solution, even if subsidized, is the concept of medical savings accounts that require the consumer to make choices about cost versus benefit.  If we put the entire country on a program like this, then we would see more price competition in the medical field.  As for a single payer system:  The Canadian system is fraught with problems and is unsustainable in its present form due to costs.

All other issues are minor and are unlikely to have any consequence nor change very much from the status quo.  The left is good at going on the attack by nitpicking these minor  issues.  The logic seems to be "The other side is so evil, we must be right."  This isn't necessarily the case.  I have noticed that all political sides tend to be reactionary because it is easier to attack what they are against than to defend what they are for.

Best wishes,

John Coffey

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