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Economic Fallacies of the Right

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Austen Posted: Sat, Sep 29 2012 7:20 PM

1. Everything is linear.
The idea that cutting the top tax rate from today's level, 35% ordinary income will produce the same result as a cut like Reagan's 70% to 28%. Many factors play into how well money moves through the economy. The only transactions that produce value directly are purchases for goods and services. Everything else creates money for future purchases of goods and services. "Future" is the key there.

2. Constant Credit
Credit is treated as a constant, but in reality it involves a cycle and is very key to money velocity and how effective investment results in down stream benefits. This is key as to why supply side economics does not consistently work. Demand can not be ignored and the boom bust cycle of credit should not be ignored.

3. Credit...<cough><cough> I mean SAVINGS is key
The white elephant in the room. Everyone talks a good talk about savings and how important it is to have a healthy environment. The reality with today's system is that deficit spending at a government level and private level is required to maintain the growth. The record string of 3% or higher growth that Bush II achieved was done via home investment. Credit went haywire in that companies took on unprecedented risk for immediate profit. We are still paying years later as the credit cycle still unwinds. Reagan ran 4% plus deficits. How do we grow without blowing up the next credit cycle? without blowing up the credit worthiness of the USA?

4. Investment gains are greater the working man.
A dollar that enters the system via an investment gain versus a dollar that enters the system via a pay check provides more lift to the economy. Fortunately even Ronald Reagan understood this fallacy and set the capital gains rate at the same level of ordinary income. The end consumer and health care spending accounts for 70% of GDP. Money spent on goods and services is a direct shot to the economy. Investment, while very much needed, trickles down indirectly which requires strong money velocity to produce the intended effect.

The right would like you to believe that tax cuts are the cure all, all the way down to a zero tax rate. The reality is that capital economic systems are complex. There are many variables, many of which are critical but often ignored. Unfortunately, understanding the complexities and where the "sweet spot" exists for taxation gets buried under rhetoric on both sides.

The entire system must be looked at as a whole. Cutting the top bracket from 35% to 25% may not produce the gains expected when capital gains rate is already at 15%. Higher unemployment for 20 years may be better than running extreme deficits. Lowering business tax rates may be more productive than further adjusting individual tax rates.

Unfortunately opinion rules Washington rather than fact. As a result we have gotten very different tax rates, which always creates uncertainty. Let's just chock that up to another left and right fallacy, which is "we are always right".

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So saving money to purchase something is a bad idea? I should simply take out a loan to buy a new iPhone? Instead of saving 30k for a car, I should get a car loan? Wait, better yet! I should simply fund all of my consumptive habbits using an assortment of credit cards and never bother to wonder how to pay it off. One better! I should take out a loan during a boom period to fund a long term project and not care about that other people are doing the same and hence bidding up the factors of production. Need more funds to finish the project, just borrow. Would people invest in a half finished project? Not a clue. When it happens to everyone at once due to false price signals and a propagation of a failed economic system? Don't care. Foresight? Don't need it.

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Austen replied on Sun, Sep 30 2012 3:02 AM

Why do you think savings is key?

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eliotn replied on Sun, Sep 30 2012 4:10 AM

Ok, I think this post might contain economic fallacies:

"1. Everything is linear.
The idea that cutting the top tax rate from today's level, 35% ordinary income will produce the same result as a cut like Reagan's 70% to 28%. Many factors play into how well money moves through the economy. The only transactions that produce value directly are purchases for goods and services. Everything else creates money for future purchases of goods and services. "Future" is the key there."

I don't see how "Everything is linear" relates to the point about tax rates.  Of course different tax cuts will be different, as different people will experience changes to their incomes.  Another problem with this is the assertion that only some categories of transaction produce direct value.  This is nonsense, unless you analyze value objectively.  Rather, every voluntary transaction produces value for both, as both have subjective values and believe that the transaction will benefit them.  Even in the case of a coercive transaction, one person gains value, at the expense of another.  Value cannot simply be measured in the purchases of goods and services, because people find different ways to gain value.

 

"2. Constant Credit
Credit is treated as a constant, but in reality it involves a cycle and is very key to money velocity and how effective investment results in down stream benefits. This is key as to why supply side economics does not consistently work. Demand can not be ignored and the boom bust cycle of credit should not be ignored."

The problem with many economists is in their treatment of credit.  I would agree that constant credit is an economic myth, similarly to the myth of constant apples, oranges, or any other scarce good.  Rather, credit demand and supply fluctuates.  Another myth is that credit involves a cycle.  In reality, the cycle is artificially created when the fed presses some buttons to create more money, and sends the new money to lenders.  If this was instead sent to other people, for a temporary amount of time, there would be a cycle in another good.  Not sure where you are going with the last two sentences.


"3. Credit...<cough><cough> I mean SAVINGS is key
The white elephant in the room. Everyone talks a good talk about savings and how important it is to have a healthy environment. The reality with today's system is that deficit spending at a government level and private level is required to maintain the growth. The record string of 3% or higher growth that Bush II achieved was done via home investment. Credit went haywire in that companies took on unprecedented risk for immediate profit. We are still paying years later as the credit cycle still unwinds. Reagan ran 4% plus deficits. How do we grow without blowing up the next credit cycle? without blowing up the credit worthiness of the USA?"

The truth is that savings is key.  People need saved goods in order to undertake future projects.  The statement that deficit spending is required to maintain growth the way its traditionally understood is a fallacy, most predominently with government debt (caused by deficits).  Government deficits without savings are a bad idea (actually all spending is), because they transfer money from efficient projects to inefficient ones, with the lure being a government taxation guarantee.  

 

 

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Anenome replied on Sun, Sep 30 2012 12:09 PM
 
 

Actually the problem with rightist policy on the economy is that they still frame the argument primarily on utilitarian grounds, when they should be making a moral case against taxation completely.

If zero taxes didn't result in the best economy possible the libertarian would still be against taxation on moral grounds, because it is theft, it is aggression. That zero taxation also results in the best economic outcome is fortunate.

The right cannot win the economic argument against the left on utilitarian grounds because its case is innately compromised by being a half-measure. The left wants to intervene in the economy to the hilt, what does the right want? Oh, they want the same as the other guys, just less of it. That's not a principled position at all.

It's sill to say, "You can't tax at 35%, we should tax at 30%!" The only principled position against taxation is on moral grounds, against it as theft and robbery.

Why can't the right make that argument, even if they did believe it? Because they'd lose their voter base. It's too radical a change. This is how libertarians on the right in politics end up converted into compromisers, by the necessities of the path to power. They tamp down their rhetoric to make it palatable, and in the process the principle is lost. Then the next generation grows up used to the compromised principle, doesn't question it, and the original principled position is lost to history.

Ultimately the right in America also want to use the vast power of the state, just for their own pet ideals, to be less radical.

But in any contest of ideals, the more consistent and more principled position eventually wins out. The left is able to be openly consistent in their ideals in public. The right not so much, even if they did have those ideals.

In part that's because the intellectuals have captured the schools and trained the average public person with a set of ideals that makes freedom philosophy anathema, unthinkable and scary upon first encounter.

Secondly it's because the left has been massively successful in creating a tax-consumer class--people whom are net tax consumers now make up nearly half of the country. The left did this consciously, applying modern Bismarckian theory to capture a voting class.

I think a point is coming then when republican rhetoric will begin to lose any power it has on the public at all. There will come then a historic opportunity for libertarians to capture the reins of the republican party. They will do so only because their message no longer becomes viable among the electorate and with the resulting loss of power a crisis of ideas must emerge, and the traditional alliances with big business will end as business will only support those capable of delivering political favors to them, and that will increasingly be democrats.

The left thinks it has won the ultimate victory with the passage of healthcare, that as that system takes root the right's opposition to that system can be use to drive the repubs against a wall, much as the British right was forced to cease their opposition to healthcare just to maintain any kind of electability.

At that point we libertarians will cry fowl, and will have a chance to make our argument that the republican strategy of compromise with statism has failed and that only opposition to statism on principled grounds can change the direction of the country.

If you think those are optimistic words, they're not. Ultimately I don't think it will work. It has a very small chance of working and leading to real change. We face a country with political momentum towards statism that cannot be stopped any time soon without drastic market consequences bashing the system to near the point of failure first. The left itself would have to have a crisis of confidence before that could happen, and that won't happen any time soon. It requires that all of the cushion in the economy be drained out by gov interference in the market.

That cushion finally drained out of Europe after some 80 years of statism, and I read yesterday about Portugal facing tough decisions over debt. They tried to pass a tax increase but revoked it after country-wide protest. Country-wide protest! In a leftist Europe over a tax increase!

But the crowd also is protesting the austerity moves. Meaning the consumer class of net-tax consumers wants the politicians to fix it without taking away their goodies. But that's impossible. And thus things are coming to a head. Portugal is scrambling to somehow find a solution.

Eventually the wall of reality comes crashing down against the internal contradictions of the system.

Portugal, and much of Europe, could be ripe for a libertarian revival in the face of the failure of their system generally. But we're not there yet. And it might be 20 years before we reach that wall, even with trillion dollar deficits.

 
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Wheylous replied on Sun, Sep 30 2012 12:22 PM

Economics is not morality...

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Anenome replied on Sun, Sep 30 2012 1:55 PM

Wheylous:

Economics is not morality...

It's not. But I maintain that we must fight economic policy questions in the political sphere on moral grounds. That's all. That's why the right has been losing the argument and have muddied their thinking in that sphere, because they've lost the moral issues that lay behind the economic ones.

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Anenome:

The left wants to intervene in the economy to the hilt, what does the right want? Oh, they want the same as the other guys, just less of it. That's not a principled position at all.

It's sill to say, "You can't tax at 35%, we should tax at 30%!" The only principled position against taxation is on moral grounds, against it as theft and robbery.

I don't know about tax rates trends when comparing the republicans and the democrats, but I can tell with pretty damn near certainty that republicans have traditionally spent more than democrats have. Republican controlled executive and legislative spends more than democratic controlled executive and legislative, which spends more than republican executive and democrat legislative, which spend more than democratic executive and republican legislative...surprise, surprise, government spends least when it is in stalemate.  See here

 

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You should never use as an argument that revenue to government will increase with a tax rate deducation. Who cares. People keeping more of their own money is always correct. It's self-defeating to use this as an argument as if the health and prosperity of government is the chief concern. No. The chief concern is a free people. Do you realize how bad a shape we're in? The idea of a tax cut is perceived as a bad thing, especially 5 trillion dollars of tax cuts! The Left is concerned only with government. Government is the beneficent source of all. At least some on the Right have this notion of limited government.

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Neodoxy replied on Tue, Oct 9 2012 9:06 PM

"Actually the problem with rightist policy on the economy is that they still frame the argument primarily on utilitarian grounds, when they should be making a moral case against taxation completely."

1. This is proper, not a problem. The fact is that a majority of individuals will not accept your system if they are convinced that it will be harmful for them and those who they care about.

2. This is not the point of the thread. No matter what the "proper" method is, the fact is that these are economic fallacies in vogue by people generally "on the right". They could be using the "proper" strategy and still falling into economic fallacies when they do mention the economy.

"It's sill to say, 'You can't tax at 35%, we should tax at 30%!' The only principled position against taxation is on moral grounds, against it as theft and robbery."

If taxing at 30% would increase the wellbeing of the right's target voter then this would still not be an economic fallacy.

I think that those who focus upon the matter of morality are misguided. That is not where the victory will be achieved, nor ultimately where libertarianism is the strongest.

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