The Country Cannot Afford $700 Billion in Tax Breaks ...

... that benefit "millionaires and billionaires" - so said President Obama, as reported in a New York Times article. This statement somehow implies that the reason America is facing deficits is that the wealthiest among its citizens somehow have it easier than the rest of them; or, that, in the natural state of things, a large chunk of their earnings belongs ipso jure to the government - for how else can one understand that a decision not to tax part of their income in the first place should be considered a tax "break"? Of course, the Bush tax cuts are considered just that. Slashing the top tax rates was, at the time, politically expedient only when labeled a "break" and only because it was not permanent. Remember how the conversation went: making these changes permanent was not called amending the tax code or rewriting it, but making the tax "breaks" permanent.

Anyway, this statement of the President is called "sharply populist" in the story. Bordering on demagoguery would be a more accurate description, since it is pandering to a majority not as wealthy as the "beneficiaries" of the "tax breaks". The statement of the President to the voters reads, in essence, something like this: "You are the majority. Vote for my party this November and we will tax you less and tax the minority more. You deserve to benefit from the $700 million of the minority's money, so vote to get it". Or, more bluntly: "A Democrat-controlled Congress and I are here to see to it that you benefit from other people's earnings, as you deserve, on account of being more than them".

And let us not even get started with the President's "fear vs. hope" rhetoric: "Do not fear, because I am here to tax the rich and give you hope". The President invoked the surpluses of the Clinton years, compared them with the deficits of the Bush administration and went on to attribute the change to President Bush's tax breaks for the wealthy. Of course, the President distorted the picture (never mind that he failed to account how actual growth and prosperity were compatible with surpluses -Clinton years- and not with deficits - Bush years- despite his own position in favor of deficit spending), because he failed to put into the picture the horrendous government expenditures and the protectionist policies of the Bush years. This was, of course, no accident: downsizing the government or doing away with stimulus spending, in order to decrease spending, is out of the question, because it would lose the votes of those who get money to perform unnecessary tasks and it would decrease the government's ability to buy votes with the taxpayers' money, so he will not criticize his predecessor on the increased spending so easily.

I'll just take the opportunity to once again present two of this blog's major mottos, both of which apply in the context of opposing the President's economic policy:

1. Money is better spent by those who earn it. This means that the "natural state" of earnings is to remain in their proprietors' pockets and not go to the government.

2. Giving false hopes is almost criminal: The more the government taxes, the less there will be to tax next time. Therefore, if some form of prosperity is built around government spending, which is in its turn funded by deficits or taxation, such prosperity is of its very nature temporary, a bubble; and, when the time for the bubble to burst comes, people dependent on the government (and I am not referring to welfare recipients, but to people doing government or government-mandated work, which the market would reject as useless) will lose their jobs and have no training for the vocations which a market might require; plus, the government will no longer have the resources to provide these people with any sort of financial relief.

P.S. On a theme this blog has not touched yet, but is of some relevance in the present post, check in this post by Daniel Mitchell of the Cato Institute a chart by the New York Post on what kind of redistribution actually takes place through the stimulus program.

A Case for More Stimulus Spending. Again. Wrong. Again.

Once again, Nobel laureate Paul Krugman, in a New York Times Op-ed, makes the case for more stimulus spending and tries to draw historic analogies with the FDR administration and World War II. His case, in a nutshell:

Premise: 5 years of deficit spending (1933-1938) did not produce growth. Conclusion: 5 years of deficit spending is not enough and can show only few results; the government must borrow and spend even more.

Premise: World War II necessitated a very large amount of borrowing and, following its conclusion, the U.S. economy boomed. Conclusion: deficit spending of an enormous scale leads to prosperity.

That he fails to point out any causal connection between what he wants us to understand as cause and effect should be an initial indication that, perhaps, something is amiss in Krugman's reasoning. If what he proposes is correct and can be generalized, then it would apply equally to other economies - so, why don't we see the course of the economy of another victorious power of the Second World War, which also had to resort to massive borrowing to sustain the war effort: Great Britain.

1939-1945: great deficit spending to fund the war effort

1945-1950: post-war consensus, nationalizations, National Health Service

1954: end of all food rationing

1950s-1960s: growth rate smaller than that of most Western European countries; large debts still looming

1967: devaluation of the pound sterling

1976: $4 billion loan from the International Monetary Fund

1978-1979: Winter of Discontent

This period ends with the election, in 1979, of the Conservatives under Margaret Thatcher, who completely reversed the policies followed up until then and turned the United Kingdom from the sick man of Europe to the strongest European economy. If Krugman's reasoning were correct, Great Britain would not have had to face such financial difficulties; all the more so, since the post-war consensus was very close the economic policies Krugman supports. Instead, it is the very debts Britain inherited from the war that proved to be a constant burden on its development. This means that either there was some other factor disqualifying deficit-spending Britain from growth (which I cannot imagine), or that it was not deficit spending (or, at least, not deficit spending per se) that led to the expansion of the U.S. economy following the war; and that Krugman's reasoning is flawed.

Let me finish by copying a quote by Ludwig von Mises from my friend, and excellent essayist, Tilemachos Chormovitis - according to von Mises, "War prosperity is like the prosperity that an earthquake or a plague brings. The earthquake means good business for construction workers, and cholera improves the business of physicians, pharmacists, and undertakers; but no one has for that reason yet sought to celebrate earthquakes and cholera as stimulators of the productive forces in the general interest."

To that, let me add that a disease does not mean good business for a physician, if it is he or she who has it; the destruction of one's home by earthquake does not mean that that person will thrive, even if he or she is in the construction business. This is a hint as to the explanation I will try to offer for America's post-World War II economic boom in a subsequent post.