Wednesday, November 21, 2012

We Gather Together; the Economic Version

by Fred Foldvary, 2012

We gather together, as thanks for our blessings.
Remember the lesson the Pilgrims did learn.
They first reaped in common, and then they found out,
That keeping what you sow, is the best way to earn.

The Pilgrims at first, they were communist thinkers.
They thought that the Lord wanted all to be shared.
Then they had no harvest, and they faced starvation.
To work for all the rest, was not what they cared.

A meeting they held, and kept the land common.
But each family could obtain its own plot.
Then they went to work, and the harvest was bountiful.
This economic lesson should not be forgot!

Sunday, November 18, 2012

The Fiscal Cliff

The “fiscal cliff” is the economic plunge that will occur in the U.S.A. if Congress does not change the big tax hikes and spending reductions that will otherwise start on January 1, 2013. The income tax rate cuts enacted at the beginning of the ozo years (2000 to 2009), as well as the payroll tax cuts that followed the Crash of 2008, were temporary and are scheduled to expire at the close of 2012.

Congress enacted the Budget Control Act of 2011 to require “sequestration” - automatic sharp spending reductions in 2013 - unless it enacted the recommendations of a “supercommittee,” which then failed to achieve a consensus on raising revenues and cutting spending.

Now in mid November 2012 the economy is a train heading towards the cliff, and if Congress does not lay down a track to make the train veer off to the side, the economic train will plunge into another depression.

The redistributionists seek to sharply increase taxes on high incomes while leaving the reduced tax rates in place for lower and middle-income people, but merely taxing the rich will bring in much less revenue than needed to plug the deficit, and over the long run the high tax rates will shift ever more enterprise and employment out of the country.

Most politicians agree that government spending has to be cut, but few are proposing specific programs to cut. The scheduled cuts include less military spending, and it would be sensible to greatly reduce U.S. military bases in Japan, South Korea, and Europe, but conservatives have opposed reductions in alleged “defense spending.”

Another good candidate for spending cuts would be the elimination of the federal war on drug use. Colorado and Washington have now legalized the use of marijuana, but the possession remains illegal by federal law, despite any Constitutional authority for federal prohibition.

The best short-run remedy for the fiscal cliff would be the elimination of excessive spending such as for foreign military bases and the failed war on drugs, allowing the payroll tax cut to expire, and most of all, the removal of massive subsidies to land-rent seekers.

The public goods provided by government make territory more productive and attractive, which increases the demand for land, which generates higher land rent and land value, as the goods are paid for mostly by workers rather than landowners. The greatest of all subsidies is this increase in land value that subsidizes the owners of land and induces the excessive land speculation that results in real estate bubbles followed by economic collapse.

The optimal long-run remedy would be the replacement of all taxation with levies on pollution and land value. These levies would in substance not be a tax but the prevention of subsidy, by having those who receive this unearned value pay it back. This tax shift should be combined with the elimination of government programs that do not generate land rent, such as the failed wars on victimless acts, and the reduction of military bases that originated in the occupations of Japan and Germany and the subsequent Cold War with the USSR that no longer exists.

The optimal long-run remedy would also phase out mandatory Social Security and offer workers the alternative of enhanced private retirement plans that would provide triple the retirement income while greatly increasing the supply of the savings that fuels investment and growth.

Congress could simply continue its current spending and tax rates while eliminating the legal obstacles to borrowing more funds. The “lame duck” session of Congress during November and December 2012 could postpone action to January 2013, when Congress could make retroactive changes. One of the most urgent needs is to again patch up the alternative minimum tax, a second calculation of taxes that increasingly burdens the middle class, as the previous patch expired at the close of 2011.

Another source of damage would be the scheduled sharp increase in taxes on dividends, as dividend income would be taxed at the same rate as most other income. The problem there is that this income comes from corporate profit that is already taxed at rates up to 35 percent. Although some corporations avoid taxation with various exemptions and deductions, the corporate tax rate does affect many companies, and the result, including state taxes and steeper taxes on dividends for higher-incomes, could be a total tax rate of up to 90 percent on dividend income. Because cash dividends are the foundation of sound financial investing, this capital punishment would stifle investment, growth, and innovation, and increase the use of risky debt, even more than has already been done.

Given the divided party control of Congress, the action with the least political resistance is the continuation of trillion-dollar federal deficits. That could avoid the fiscal cliff of 2013 but make that much worse the coming fiscal crisis, crash, and depression of 2026.

Sunday, November 11, 2012

Forward to the Failed Past

Some politicians like to use the slogan, “forward.” Sometimes it is more emphatic: forward!

But one may well ask, forward to what? Time and the current of events are always moving us forward already, so evidently the forward-seekers want to change the existing flow sideways. The slogan “forward” has often been used by those who seek greater state-imposed collectivism. As propaganda, “forward!” sounds better than “leftward!” or “towards ever greater statism!”

Several publications of socialist parties during the 1800's were titled “Forward.” Lenin continued this tradition when he founded the Bolshevik newspaper “Vpered” (or “Vperyod”), which is “forward” in Russian. German socialists had already published the periodical “Vorwärts,” and the German national socialists continued the use of the slogan. Several communist and socialist parties still use “Forward” as the title of their publications.

On April 30, 2012, “Forward” became a slogan of the presidential campaign of the Democratic Party, later enhanced with an exclamation mark. An editing war erupted in Wikipedia about the socialist roots of the slogan about deleting the socialist references.

The issue here is not about any political campaign, but the social concept of “forward.” Socialism is, first of all, a family of concepts. Some socialists seek greater statism, the control of society by the state. Other seek “social democracy,” whereby people vote on the major policy options. There are also socialists who seek to put the means of production, land as well as capital goods, in the hands of worker cooperatives.

Usually the “forward” thinkers seek, if not as an ultimate goal, then as the instrumental goal, a governmental control at least of the “commanding heights” of the economy: the financial system, the highways, education, medical care, and retirement pensions. Socialists seek strong controls on the remaining private production, and they also seek an equalization of wealth through a massive redistribution, with highly progressive taxation.

But the world has already experienced the results of “forward” policies in the failed economies of the old USSR, the China of the 1950s and 1960s, Cuba, North Korea, and Eastern Europe. The “forward” socialists seek a progression to the failed past. Of course they claim that their brand of socialism is different from that of the collapsed USSR, but the evidence of history reveals what was attempted in practice world-wide, even when it differs from hypothetical doctrines.

Even though American politicians who trumpet “forward” do not generally seek complete socialism, the greater interventions and state controls they do favor have been analyzed by many economists as ineffective and wasteful.

Instead of “forward,” a better metaphor may be “upwards.” Upward takes us to a higher place, and also to the origin of a flow such as a river. But how do we know which way is “up”?

We need to use a “Unified Field Theory of Social Policy.” A theory of “upward” policy needs to begin with ethics. The absence of a sound ethical foundation is the key flaw in most socialist thought, most of which does not even distinguish voluntary from forced human action. The optimal direction of reform has to be away from what is morally evil. The foundation for upward progress has to be a universal ethic that expresses the rules of natural moral law.

Next, a theory of upward progress requires a fundamental understanding of economic principles. The most important economic idea is precisely what is left out of almost all economics textbooks: the generation of land rent by the population, commerce, and public works of society. To that we add that land rent is based on the differing productivities of locations, and therefore that rent is an economic surplus that can be tapped for public revenue without harm to the economy; indeed the very collection of rent even enhances the economy.

But it is not enough to have this economic insight. Modern political economy studies how government operates, and concludes that our systems of mass democracy will not adopt the upward reforms prescribed by ethics and economics. Mass democracy requires mass campaign funds to pay for mass media. This inherent demand induces the supply of funds by special interests in exchange for the political clout that gives them subsidies. Modern economists ironically call these privileges “rents” without being aware that the greatest of all subsidies is the implicit generation of land rent by government’s public goods.

Therefore it is not enough to preach ethics and economics as though to a benevolent despot. A political movement to progress upwards needs to also include the reform from mass democracy to small-group democracy, where voting is decentralized to a human scale. Anarchists such as Bakunin have long recognized the principle of bottom-up voluntary association.

Our cultures have frequently looked up to the sky as heaven, and thought of downwards as the various versions of hell. People naturally seek to move up, and so “upwards” as a slogan would have great appeal, but it would only be worthwhile if we move up from a sound foundation.