October 11, 2007

Draw your own conclusions...

Naomi Klein has written a thoroughgoing indictment of Milton Friedman and his Chicago School of economic theory which is functionally supply-side with a penchant for what Friedman called 'economic shock treatment'. Basically, you create the conditions that allow the economy to get sooo bad that the people will accept a change, any change, that promises to fix the problems. In theory, it should expand services and create wealth across every economic level. In practice, it creates massive stratification and does little to fix or create critical services. It also makes everyone not already wealthy destitute...

Klein argues that Friedmanian free market rules do exactly what they were designed to do: they don’t create a perfectly harmonious economy, complete with the much-lauded “trickle-down” effect, but rather, turn the already wealthy into the super-rich and the organized working class into the disposable poor. Further, she describes these orchestrated raids on the public sphere in the wake of catastrophic events, like war, as exciting marketing opportunities or “disaster capitalism.”

So, why even mention this? Simple. This is about to happen to us and you might as well be prepared for it. Since the supply-side revolution Reagan ushered in more than 26 years ago, we've seen economic stratification climb to alarming levels not seen since the Gilded Age. Despite the fact that it doesn't really help anyone other than those already rich.

Which brings us to the tax issue we mentioned yesterday. The supply siders will tell you that cutting taxes will increase economic growth and create surplus revenues. That's actually not true since it's dependent on the Laffer Curve and even it is subject to the law of diminishing returns. What's needed is a balance in marginal tax rates and efficient use of the money by the government, not endless deficits, mounting debt and low taxes for the already rich. That and the fact that tax policy has less of an impact on business conditions than interest rates.

Think, for a second, about our crumbling infrastructure, our rising deficit, underfunded entitlement programs... it's all leading up to a situation in which things will spin violently out of the control. Of course, when that happens, then we'll be ready for shock treatment.

Think it can't happen here? Cause a massive economic disruption in the US and people will accept anything that will fix it.

They elected Reagan, didn't they? Think of that as a dry run.

One other note about investments and taxes... I'm a HUGE fan of massive capital gains taxes, especially on gains realized in less than two years. Why? Because I hate traders and speculators. I'm a long term investor...THAT more than anything done by private equity companies actually provides long term stability and growth in businesses. It also stabilizes the retirements of hundreds of millions of people.

Posted by mcblogger at October 11, 2007 03:15 PM

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Great Entry McBlogger: ------------------------------------------ You quoted: "The supply siders will tell you that cutting taxes will increase economic growth and create surplus revenues. That's actually not true since it's dependent on the Laffer Curve and even it is subject to the law of diminishing returns." ------------------------------------------------- Here is the view of an ex-Republican who knows how the Laffer Curve is used and misused (from the inside). I think the Laffer Curve is the most understudied and misunderstood item in the Republican Dogma. We as Democrats can not pretend that the Laffer Curve is always wrong, we must understand how and when it is correct, and how and when it is either incorrect or misused. Fortunatley, it is really not that difficult. ---------------------------------------------- There are so many plain mistruths/misunderstandings about how the GOP uses the Laffer Curve. But like almost everything that has power, there has to be some truth to the Laffer Curve for it to have any power at all. Unfortunately, even the truth of it is overstated. ------------------------------------------------ Here is how to understand it: If we think of the economy as a fire, then the fuel of the fire is more money. Thus, if you want to increase a fire, pour on more fuel, and if we want to increase the economy, pour on more money. --------------------------------------------- The problem is, where do you get that money. Older Keynesian theory said you could get it by running a deficit. In other words, borrow fuel from future generations. Ain't that grand. -------------------------------------------- What Friedman said was that the key to stability is lack of inflation, which meant tight money supply. If you have tight money supply, you can't run a deficit, so increase the fuel on the fire by decreasing taxes. ---------------------------------------------- But, if we decrease taxes, to put more fuel on the fire, will we end up with a bigger deficit? ---------------------------------------------- What the Laffer Curve tries to predict is the impact of the increased fire has on warming those in its glow. In other words, is there a point where economic activity has increased additional tax streams to overcome reduced tax rates. In numbers, if a 2% drop in tax rates produces a 5% growth in the economy, taxes revenues should increase 3% and not drop 2%. ------------------------------------------------ The main problems with the Laffer Curve are: (1) In order to work, any tax cut must be implemented when taxes are too high. In other words, if taxes area already low, a 3% tax cut might only produce a 1% increase in economic activity, then the deficit still grows 1% (-2% rate drop + 1% economic activity). Thus the Laffer Curve has a break point. However, there has been little or no empirical study to show when the Laffer Curve is actually an effective tool in predicting when increased economic activity will be greater than the reduced tax rate decrease. Right now we have very low tax rates, so I think we are well below the breaking point. Think of it this way, if a store places an item on sale, cash flow will be expected to increase as more of the product is sold, but if each widget is sold at a loss, then the store will lose money no matter how much cash flow they have. While a store knows what the break even point is for each widget, there are no studies to predict at what point taxes are so high that the Laffer Curve is actually a good predicter of future increased tax revenues. ---------------------------------------------- (2)Those who seek tax cuts based one the Laffer Curve assume that a tax cut is better than other types of increase to the money supply. That is, for the fire of the economy, they assume that tax decreases are jet fuel, but tax decreases are really wet logs. That is, tax cuts are actually poor methods to increase money supply -- the cause and effect are way too delayed. A much quicker way is to simply lower interest rates. (Of course since this is the FED doing this, no political credit to the Party in power). ---------------------------------------------- (3) The Laffer Curve ignores all other inputs to the economic fire -- thus, if we lower taxes 3% to increase the money supply 3%, but the very next day the FED raises interest rates in a manner to produce a 3% restriction in the money supply, then the net effect will be zero as to economic increase, but a 3% reduction in tax revenue. ----------------------------------------------- (4) Basic math here, Laffer curve only measures predicted tax revenue, does not impact spending. ----------------------------------------------- All of this to get to a simple point: GOP DOGMA is that all tax decreases is good; that all tax decreases will produce increased tax revenue. This is simply false. ------------------------------------------------ Some tax decreases actually do produce increased economic activity. Sometimes this is even greater than the incremental loss of revenue. The Laffer Curve itself only predicts increased revenue streams significant enough to offset the lower tax rate at the top of the curve. (How come no GOPer knows this stuff!) ------------------------------------------------- Thus, some tax cuts do not increase economic activity enough to ever reach the breaking point, and some tax cuts do not even increase economic activity at all, especially depending on other items in the economic mix. ------------------------------------------------ So what is the simple point. The Laffer Curve is an overused economic predictor that Democrats must understand to fight. Indeed, the Laffer Curve works as a predictor only some of the time. We Democrats can not let the GOP pretend that every tax cut for the rich is "good for everybody." ----------------------------------------------- The fact that the Laffer Curve has been misused does not mean it is always wrong. (Hey, my neighbor may be overweight and an alcoholic, but I still going to have some beer and brat before the big game!). Food for thought (and hopefully discussion). Eric

Posted by: Eric Roberson [TypeKey Profile Page] at October 12, 2007 12:28 AM

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