Soaking the Rich

The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.  -- Thomas Jefferson, 1816

Insanity, they say, is doing the same thing over and over again, and expecting a different result. This is why voting republican is insane. It is also why voting democrat is insane. Neither party has our best interests at heart (or even in mind) when they talk about limited government. When they talk limited government they are referring to limiting the other party from doing what they want to do. Meanwhile, all current politicians believe they have a better idea how to spend our money.  But do they have the first clue on how to raise it? Consider this chart:

Most politicians talk about raising and lowering the marginal tax rates like it is the magic dial that determines how much revenue is received. Many of us simply take it on faith that this is true. However, the dirty little secret is that no matter what the tax rates are, the revenue remains a straight percentage of GNP. How can this be?

At high marginal tax rates, the wealth is moved to outside the country, or is never created in the first place. It's a law of supply and demand. When you tax something, you get less of it. When people are taxed at a high rate, their capital is quickly invested where the tax rates are lower. People with capital do not free it up when rates are confiscatory. They wait. Patiently, quietly, and without reservation. This, in turn, causes GNP to fall.

The main idea should be to raise revenue. Since revenue (as a percent of GNP) is independent of tax rate, burdening the rich is an illogical and ineffective remedy  The only thing that will raise revenue is higher GNP. That requires an economy that achieves an increasing productivity jolt. Less government would work. Fewer regulations would work. Ways of unlocking higher productivity would work. Soaking the rich? That won't work.

Intersecting Hayek with Keynes: a brief confluence of thought

In general, the art of government consists in taking as much money as possible from one party of the citizens to give to the other. – Voltaire (1764).

Recently I had occasion to talk at length with another friend on the subject of economics and investment strategies. We started out on the very same page, agreeing that the government had badly screwed up the recent past, and that inflating the money supply was the only possible outcome as far as the eye could see. There was no argument that the range of possible investments had narrowed, and the further away we got from the US Dollar, the better off we were going to be.

So far, so good. Then my friend laid the foundation of the collapse at the feet of GWB (okay, sure), and thought Obama was doing the best he could to keep us out of the soup (Whu- what?) And that lack of government oversight under Bush caused this problem in the first place. ("lack of?")

As the conversation went along, it became clear that my friend had come from a different point on the scale to his present (correct) assessment of the future. A very intelligent fellow, who usually has a good handle on things that require study (like science and the arts).

Maynard (I'll call him --after John Maynard Keynes himself) is a dyed in the wool Keynesian, who believes that all useful economic theory was tied neatly into the bundle with Keynes. He believes in the veracity of the historical record as outlined by traditional economic texts. Among other things, Maynard believes that Hoover was an unrepentent  free market fundamentalist, and FDR did the best he could to keep us out of the soup.

Well, as John Adams said, facts are stubborn things, and it was necessary to inform Maynard that not only was Hoover not a free market anything, he was a government interventionist of the highest order. He believed in central planning and huge public works projects ---perhaps you've heard of one of them:  the Hoover Dam.

Fast forward now to 2011, you see Obama has inherited not only the interventionist and spendthrift legacies of Bush, but those of FDR, Truman, Eisenhower, JFK, LBJ, etc., all since the ruinous days of Herbert Hoover. And Obama has his own redistributionist agenda to advance too, don't forget.

Anyway, while resolving why Maynard and I both see the future exactly the same, I thought, well perhaps some clarity is coming to the average American, some kind of convergence of thought. Is this what Obama meant by bringing us all together? That the future holds for high inflation, high energy costs, much slower growth and a sustained deterioration of the currency. But Wait, Maynard believes that it is a good thing that all savings accounts and fixed pension accounts are going to be depleted. (Too much unused money out there anyway I suppose), and that it's our last best way to get the economy going. In other words, Maynard believes it is a valid function of the government to tamper with the money.

Well, after all that, maybe we don't see things the same at all. Maybe we just both see clearly what happens between now and January 2013. Total agreement is such a temporary thing.