Friday, April 08, 2011

The Government Shutdown

A member of the studio audience has asked my opinion on the matter of shutting down the Federal Government through its inability to pass a budget.

I do not feel qualified to give a final verdict on this issue because of its complexity, but I can comment on some of the principles involved.

First, we are dealing with an issue morally comparable to theft on a massive scale. Our legislators are engaged in a continuing practice of buying votes by taking money from those who have no voice in our elections (thus no voice in who gets to become a Senator or Representative, and completely unrepresented in Congress) and giving that money to those who are eligible to vote.

Specifically, they vote to take money from children and those not yet born and give their future earnings to current voters through a process of deficit spending.

This practice should end.

This is not to say that government debt is never justified.

When the benefits for a project are to be harvested by future generations, then we can give an argument defending the practice of going ahead with the project and sending the future generations the bill. This happens, for example, when we spend money on improvements in infrastructure where the benefits are realized when the project is done - and those who benefit can pay off the loan. Future generations may also benefit from a war fought today that would have left them under the rule of some tyrant.

However, much of our debt is outright theft. Children grow up to discover that they have been robbed of tens of thousands of dollars by past generations who spent that money in themselves before they even have their first job.

So, morally, we need to end this practice. We need to cover our debts and the thefts committed against us from past generations, and make sure that we treat future generations better than past generations treated us.

Second, how should we do this?

The government either has to increase revenue, decrease spending, or both.

The same is true of a family that discovers it has run up $50,000 in credit card debt. To start getting out of debt, it needs to cut spending, increase revenue, or both.

However, telling the current spenders that they cannot have the goodies they have been accustomed to because we are going to end this practice of robbing from future generations is not going to be popular. It is going to make a lot of current voters angry – and a lot of those voters are going to tend to favor those who WILL rob from future (voiceless) generations to please the current voters.

With these two options on the table, we seem to have a situation in which the Democrats are saying, "do both - cut spending and increase revenue (taxes). While the Republicans say "cut spending only".

To be fair, the Republican position is that raising taxes will decrease revenue. Increasing taxes will harm the economy by forcing marginally successful businesses to close and reducing incentives for productive labor that would then be subject to the higher tax. Working to pay taxes just isn’t worth the effort.

To see the truth of this, imagine a situation in which the tax rate is 100 percent. I suggest it would be quite difficult to get somebody to do work when somebody else gets to walk off with everything the worker makes.

Now, imagine a place with a 95 percent tax rate where the tax rate is dropped to 90 percent. This change amounts to doubling the amount that each person gets from a unit of work. If they were used to getting $1 (from every $20 earned), they now have $2. On the other hand, the direct change to revenue for the government will be small. We can well expect that the extra effort people will put in to earning $2 instead of $1 will more than cover the loss in government revenue from $19 to $18 per unit of taxable activity.

On the other hand, if we have a place with a tax rate of 10 percent that drops to 5 percent, we have the opposite effect. People will see their return from productive labor increase from $18 to $19 (out of every $20), but the government’s revenue will be cut in half. It is unlikely that dropping the tax rate from $10 to $5 will double the amount of productive work people are willing to engage in.

So, the question is, where are we between these extremes? Are we at a point where a cut in taxes will increase revenue, or decrease revenue?

I don’t know.

This leads to the third point. Politics needs to be an arena where people with different ideas reach a common conclusion. However, this political process is blocked when arrogant people pretend to be incapable of error and, thus, unwilling to listen to alternatives.

On these matters, I tend to think that the Republicans are more likely right than the Democrats. However, I recognize the possibility of error, and that leads me to be willing to compromise and accept solutions that Democrats will favor.

However, our current species of Republicans tend to be a particularly arrogant group who are so certain of their infallibility that they are unwilling to compromise.

When we note the contempt for evidence and reason that many Republicans tend to show in the fields of biology, chemistry, and physics – the hard sciences - the idea that they are the model of intellectual integrity when it comes to economics is laughable. They have not, in any way, earned the right to be as arrogant and uncompromising as they are showing themselves to be in the current situation.

They particularly have not shown the level of intellectual discipline necessary to cause the harm to others that a government shutdown will cause. They have gotten much of what they wanted. In the current negotiations, it seems that the Republicans have gotten more than the Democrats. Yet, they still refuse to sign the papers that would end the shutdown and prevent the harms that would follow.

18 comments:

Chelsea said...

Thank you so much for replying to my previous post. I am a college student and am working really hard to not only come to terms with my atheism (and its effects on everything I have been taught growing up in a catholic and creationist family)but to also make logical sense of past and current situations.

It is an almost exhausting and simultaneously thilling undertaking and I have found that your blog has helped me in a lot of ways.

I truly appreciate you taking the time to keep up this blog and respond to both hypothetical and current issues.

Thanks,
Chelsea

Anonymous said...

"To see the truth of this, imagine a situation in which the tax rate is 100 percent. I suggest it would be quite difficult to get somebody to do work when somebody else gets to walk off with everything the worker makes."

1. The "truth" is that we're talking about a progressive tax system where such a situation wouldn't occur. The ethical thing to do would be to suggest a realistic hypothetical where one is taxed 100% on every dollar above some amount. After deductions. Still not a good situation, but nothing at all like what you describe.

2. Why do we even need hypotheticals? We have empirical evidence of people's behavior in nearly the situation you describe: the top marginal tax rate was 82% in 1949 and 92% in 1953. Did people work less? If your argument holds, it should also hold in the reverse: people work more when taxes go down. So, did people suddenly start working lots more and lots harder when the top marginal tax rate dropped from 50% in 1986 to 28% in 1988? Can't say that I've seen any evidence for any of that. Granted, there were different social circumstances during those eras, but its implausible that the differences were enough to completely counter what you describe if, in fact, it were a necessary and expected consequence of raising marginal tax rates.

3. Another flaw here is the notion of "work." When it comes to those who would be most affected by raising the top marginal tax rate, how much of their income really comes from what we traditionally think of as work and how much through investments and other non-labor sources?

4. And when it does come to the top income earned through anything like work, we're talking about lawyers, CEOs, hedge fund managers... now are they really going to stop working so much if their top marginal tax rate is raised to what it was during Reagan's first term? Do lawyers and bankers in other nations with higher tax rates really work so much less? Are the top basketball and football players going to stop trying so hard? Are actors going to start phoning it in even more than they do now? Will Justin Bieber just not try anymore?

Your comments don't quite pass the reality test.

jimrandomh said...

Deficit spending by the US government is not like a loan, because the US government has the unlimited, exclusive right to print US dollars. The downside to doing so is inflation, which acts as a tax on all outstanding monetary assets. So really, it's taking money from today's asset holders, not from future generations.

The Heathen Republican said...

I think you've offered some interesting insights on the ethical and ideological issues at play, but those are eternal and not specific to the current budget showdown. In other words, your words are true all year round.

My perspective is that this is more of a political exercise, with some very straightforward facts in play. The Democrats, when they owned both the White House and the congress neglected to offer a budget. President Obama offered a budget earlier this year and the Republican House passed a budget last week. The hold-up is from Senate Democrats and, of course, Obama opposes the Republican budget.

What amuses me is how Democrats and some in the media are trying to hang the blame for a possible shut down on Republicans when Democrats failed to do their duty last year, and Senate Democrats are failing to do their duty now.

Second, I'm curious why, after your analysis and concluding that Republicans are "more likely right," you felt the need to add a couple extra paragraphs calling them arrogant, unwilling to compromise, etc. Do you have regular readers that you're afraid will attack you as a closet Republican if you fail to include disclaimers and ad hominem attacks?

Personally, you would've earned more credibility as an analyst if you'd simply offered your take and left out the attacks against Republicans.

The Heathen Republican said...

You touched on tax rates and the Laffer Curve... You might be interested to read something I wrote in January about an optimal income tax rate

Anonymous said...

When Tax rates go up Lawyers, Doctors and others in high brackets work four days instead of five as one example. They also put their money into tax free bonds and other investments that aren't taxed. It's the wage earner that suffers as they get a W-2 that they can't avoid paying taxes on. No matter what the tax bracket is for the wealthy they will find a way to avoid paying.

Larry, a.k.a. The Barefoot Bum said...

You are as ignorant of economics as you are of philosophy.

All money is debt; all demand is debt. Government debt by itself is not stealing from anyone, it the creation of new money, the creation of new demand. Since we are in conditions of depressed aggregate demand, the creation of government debt is about the only way we have to create new demand in an orderly and systematic way.

In fact, unless you are in possession of a time machine, it is physically impossible to steal anything from our children. Asserting that a deficit now as stealing from our children is as utterly deluded as belief in God.

Of course, it is possible that some of our children could use a deficit to justify theft from others of our children, but that theft is not really dependent on our actions now; it will be our children's choice whether or not to steal from each other.

Your continued egregious philosophical and economic errors are completely inexcusable in a person of your education and apparent skill at language. You are living proof that sometimes an atheist is someone with just one fewer stupid idea than a theist.

You're a pathetic excuse for an intellectual.

Larry, a.k.a. The Barefoot Bum said...

Seriously, Alozno, Your ignorance of basic economics is appalling. You sound like a creationist railing against evolution on the basis of the Second Law of Thermodynamics. Cough up the $300 and take Principles of Macroeconomics at your local community college.

Tim G said...

Hello Alonzo,

Wow, for someone who tries so hard to be rational, you kinda get your facts upside-down a bit easy...
Technically, in the current 'show-down' the Republicans have written the budget proposals, and it is the Democrats who refuse to sign. The Republican leadership has REPEATED asked the Dems to actually put in writing what their budget plan would be, (i.e. put up their own bill,) but they refuse to. The Dems are just wailing about 'hating' the Republican plan, but not offering a full plan of their own. They just want to take whatever the Republicans put forth and 'half it.'
Also note that the Dems had a FULL YEAR to write out and pass a budget for this year while have massive majorities in all branches of government, and they chose NOT to do it. They slacked on their duty, and still are.
The current situation exists because all negotiators know that whomever puts a 'number' on the table first, ends up 'losing' the most in the end compromise. Especially with Obama's veto power. So the Dems stretegically kept 'punting' on the budget for 12 months because they knew that what THEY wanted would piss off all the voters with moral objections to this debt binge. And no, we can't just 'print' our way out of this. at least 33% of the national debt is REAL debt to foreign countries. I'd rather not be slaves to the Chinese or even Japanese, thank you. And especially not the Saudis.

Anonymous said...

There should be a solution for every problem. Would this work? Cut 5% from every government check issued. The president and congress would take a 5% paycut. Social Security recipients would have a 5% cut. They'd cut Medicaid 5%, and Medicare too. Then no one can claim they are being picked on. Everyone is treated equal. No one would like it but no one can claim "not in my backyard". Sounds fair, would it work?

Clemens P. Suter said...

Difficulty is the tax system. As long as nobody is interested in paying more taxes, and the electablity of a president depends on keepijg taxes low, how can any debt ever be paid off? It isn't so much the goverment spent, but society's unwillingness to reduce the debt. You can't have it all...

Gaius Sempronius Gracchus said...

Alonzo,

You wrote, “However, much of our debt is outright theft.”

My emphasis, but your own blunt and even harsh words.

You go on,

“Children grow up to discover that they have been robbed [again, my emphasis but your blunt, even aggressive word] of tens of thousands of dollars by past generations who spent that money in [sic] themselves before they even have their first job.”

I am sure you will forgive my equally blunt response that these claims are arrant right wing balderdash.

In effect, we tax those who have money to support those who don’t or who have less or who have special needs.

When – but not only when – taxation is inadvisable or impossible, sometimes because the rich refuse to be taxed and don’t care at all about the resulting horrors, borrowing takes place.

It is far from immoral for the government to borrow to save Granny from starving, freezing, or dying of untreated medical problems.

Even if it isn’t your personal Granny and the resulting debts will be partly paid out of taxes collected from you.

On the contrary, it is immoral and unjust for the government to neglect this duty.

The same is true in connection with public education, public health, public safety, national defense, the police of the public food supply, and many other necessary government functions.

You also write, “Politics needs to be an arena where people with different ideas reach a common conclusion.”

But I assume that was a momentary lapse.

Wasn’t it?

What politics needs to be is a process through which the sovereign people of the community decide issues related to their common life, including the organization and operation of their common economic life.

A common conclusion is neither expected nor required.

America has in the past had a maximum income tax rate above 90% and should have one, at a sufficient height, of 100%.

America has had a considerably higher estate tax than we have now and ought to have one both higher and graduated, topping at 100%.

America has in the past understood the necessity of trust-busting but has, under the leadership of confessed Randians, allowed decades of harmful and virtually unrestricted mergers.

We need a return swing of the pendulum and a new era of very, very extensive trust-busting, especially in regard to media conglomerates.

NewsCorp, for example, needs to be very nearly broken up and sold for scrap.

That is what we need.

Doug S. said...

I don't want to get into partisan political fights right now, but I do feel compelled to point out that the Congressional Budget Office has predicted that the proposed tax cuts will indeed lower, not raise, revenues.

The Heathen Republican said...

@Doug, the CBO has a policy to not evaluate tax changes in a dynamic way. In other words, every tax increase is a revenue gain and every tax decrease is revenue lost. As a matter of policy, the Laffer curve doesn't exist for the CBO.

Alonzo Fyfe said...

Anonymous

The purpose of the hypothetical is simply to illustrate how it can be the case that raising taxes can lower revenue, and lowering taxes can raise revenue - for the sake of those who think this is impossible. The hypothetical serves the task of illustrating the possibility quite well.

Once it is determined to be possible, the next question is whether it is actual.

Here, you seem to have read a great deal into my comment that "On these matters, I tend to think that the Republicans are more likely right than the Democrats." Your points are relevant, but there is a lot to be said on both sides - more than can be put into a single post. You have asserted a lot of connections between marginal tax rates and government revenue as if we have the power to discern the right answers just by thinking about it. However, what matters is the hard data. It is easy for somebody emotionally attached to a particular theory to imagine relationships that exist only in their imagination. What does the hard data say?

jimrandomjh

The government has the option of paying back loans with printed money, true. That will likely lead to inflation - also true. But that just turns out to be a different kind of theft. Those who get the new dollars buy goods at the uninflated price (injecting the money into the system). Those further down the economic chain pay the inflated price.

There is little difference between taking $20 out of the wallet of somebody of has $100, and reducing the purchasing power of $100 down to $80.

Heathen Republican

Second, I'm curious why, after your analysis and concluding that Republicans are "more likely right," you felt the need to add a couple extra paragraphs calling them arrogant, unwilling to compromise, etc. Do you have regular readers that you're afraid will attack you as a closet Republican if you fail to include disclaimers and ad hominem attacks?

I would suggest that the best explanation is because I hold that the Republican position in these negotiations displayed the vice of arrogance. My point is that even people who I think are more likely right need to compromise with the people I disagree with because they (and I) just might be wrong. It is arrogant not to do so.

Personally, you would've earned more credibility as an analyst if you'd simply offered your take and left out the attacks against Republicans.

Well, I might have earned credibility with you, given your particular biases, but that is not my concern.

If a claim that I make is false, please let me know your reasons for thinking that it is false. If you have no reason to give for thinking it false, then it's a bit odd to say, "Even though this is true, you ought not to have said it."

Alonzo Fyfe said...

Tim G

Wow, for someone who tries so hard to be rational, you kinda get your facts upside-down a bit easy... Technically, in the current 'show-down' the Republicans have written the budget proposals, and it is the Democrats who refuse to sign.

On what moral principle to the Democrats have an obligation to rubber stamp anything the Republicans write?

Also note that the Dems had a FULL YEAR to write out and pass a budget for this year while have massive majorities in all branches of government, and they chose NOT to do it.

I would suggest that one reason for this is that Democrats, unlike Republicans, tend to have and express differences of opinion, as opopsed to marching in lock-step to the voice of a single leader. This makes them politically weaker than Republicans in spite of larger numbers. Yet, I do not hold that this is necessarily a sign of greater Republican virtue.

Gaius Sempronius Gracchus

It is far from immoral for the government to borrow to save Granny from starving, freezing, or dying of untreated medical problems.

I have written on this issue before, and I intend to write on it in a couple of posts in the future.

I do argue that some redistribution of wealth is legitimate. However, it is a mistake to ignore what often happens in the real world when the government attempts to exercise that right.

There are reasons to expect that it is easier to pass taxation and regulation of the middle and lower classes to support the rich, then it is to pass taxation and regulation of the rich to benefit the middle and lower classes.

I will discuss those in future posts.

Gaius Sempronius Gracchus said...

You wrote, "There are reasons to expect that it is easier to pass taxation and regulation of the middle and lower classes to support the rich, then it is to pass taxation and regulation of the rich to benefit the middle and lower classes."

You have convinced me, already.

llamaFaceKillah said...

"The true goal of any economy is to preserve - or "economize" - this is not occurring and cannot occur in a monetary driven system where labor for income requires consumer demand. We actually live in a global "anti-economy" by all rational standards."

Seriously people... Increase taxes, Cut taxes, blame the democrats, blame the republicans, blame the rich, blame the poor...Blahh blah, it's all bullshit.

These are all systemic problems created by our profit driven monetary system.

http://www.youtube.com/watch?v=4Z9WVZddH9w