Enjoy the summer: An economic crisis is coming
DAVID WARREN
Sun
An LED display of the public debt in Germany : High tax rates are counterproductive because they reduce economic activity.
If my reader is not enjoying fiscal 2010, he should be encouraged to do so. There are signs of impending catastrophe in almost every direction. In the world at large, tyranny is almost everywhere advancing; the prospect of serious war is growing. Our ability to rise to each potential crisis is diminishing; for economic collapse is also looming, with all that entails. Not since the 1930s have the prospects for the West appeared so grim, to clear-sighted people.
But look on the bright side. We are entering what may well be the easiest summer for the rest of our lives. We may come to look back on it as a kind of paradise, and therefore we should enjoy it, now.
Contrary to leftist dogma, Arthur Laffer is not a joke. This is the economist who was saddled with credit for what we call the “Laffer curve.” He himself attributed the insight behind it to the great Berber sage Ibn Khaldun, who died in 1406, arguable founder of many social science disciplines. He has also mentioned John Maynard Keynes among various older economists who got the point.
Let us briefly remind ourselves of this proposition of “Reaganomics” that has long been an object of ridicule among the progressive types.
If a government has a tax rate of zero, there will be no revenue. (I hope this is self-evident.) If it has a tax rate of 100 per cent, there will also be no revenue because there will be no private income, or at least, none willingly declared. Between those two extremes are tax rates that generate revenue. (Those who “have a problem with this” can stop reading now.)
The question is: What rate will maximize it? And to that question, Laffer and any sane economist would admit a number of considerations. They may argue the comparative weight of these. But universal experience shows optimum rates are low, not high.
The underlying reason is plain. As tax rates rise, the return on additional effort diminishes. On the other hand, the effort to conceal income, or move it offshore, increases. A government might collect more from a lower rate than from a higher one. But whatever that case, high tax rates grind down economic activity and, so, are counterproductive across the board.
In a recent piece for the Wall Street Journal, this same Laffer predicts that the American economy will go into a tailspin at a predictable date: Jan. 1, 2011. This is the day the Bush tax cuts expire and U.S. rates return to much more destructive levels.
It’s worse than that, for, as Laffer explains, people do have options for earning and declaring income, and every motive is in play to artificially raise this year’s financial results. The statistical drop in economic activity should be memorable; and the psychological effect will compound the damage.
So remember: You read it here second.
Economics, as we know, cannot be an exact science, for reasons the classical economists themselves supplied. No one person, or even committee of persons, can know everything. That is the very reason why government attempts to micromanage economic activity (a.k.a. socialism) invariably fail to achieve their objectives. In the short, medium and long run, gravity rules, and, while you can twist its effects, you cannot reverse them.
Yet the economists can tell us a few obvious things, and have been telling them for a long time. If you “incentivize failure,” you get more failure; if you “incentivize success,” you get more success. And, from a government’s view, since it’s the people with money who pay the taxes, you might as well incentivize success. For this also leaves governments with less wreckage to pay for.
All this should be obvious, but isn’t. As another Wall Street Journal piece showed just last week, there is a direct relation between ability to grasp economic realities and political outlook.
According to a Zogby International poll, the further to the left people are (by self-identification), the worse they do in spotting elementary economic relationships between cause and effect. And this is not a subtle thing: Large parts of the electorate have become convinced that gravity is legislated. And, to make a long story short, they voted for Obama.
The wealthier countries generally, and the U.S. in particular, have been playing an incredibly reckless fiscal game, with deficits and debts exploding to levels far beyond anything ever sustained in peacetime.
The U.S. Fed and other central banks have been inflating the money supply to match, far beyond the irresponsible levels of the 1970s, from fear of deflation.
No economic recovery could be adequate to balance the books, and yet the one we have is transient and illusory. The latest job numbers from the U.S. showed this crisply: that almost all new jobs were in the public sector. Those who consume taxes are rapidly outpacing those who produce them. And that is before we factor in demographic trends.
So we must make a point of enjoying this summer.
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