The economy is in a downturn, the worst since the beginning of the 80’s, and it has the potential to surpass that recession. Let’s examine what help we can hope for from the new administration:
There are two points regarding our president-elect’s plans for taxes to mention here: 1) increased capital gains tax—that is, the tax for positive returns on investments, 2) higher taxes for the rich. First, a brief economics lesson about the money supply:
The nation’s money supply consists of more than just what cash is floating around. When I lend you five dollars, expecting you to pay me a usury of 20%, I think I have six dollars, and you think you have five, and our money supply together is eleven dollars. Then we both continue to engage in trade with the “money” that we have: I buy a television on my credit card, and you buy lumber to build a lemonade stand. (A close enough parallel to what I mean by the nation’s money supply.)
What if because of the economic slump, you decide not to invest in a lemonade stand? You won’t borrow the money from me, and you won’t contribute to the market with your new lemonade business. And I’ll only have five dollars instead of six, so I won’t buy the television. When investment drops, the national money supply diminishes, and so does trade.
In light of our brief economics lesson, we see a solution for our economic downturn: to have the citizens with the most money (the rich) put it into the market by buying goods and services (investing). However, by means of the increase in capital gains taxes and taxing the rich harder, we are punishing the very people who have the means to correct the problem (the rich) for doing the very thing that we want them to do (pump money into the economy by making wise investments). “Punishing”? Yes, punishing, because if the investors do not invest or if they make poor investments, they will not be hit with the capital gains tax.
The capitalist’s hero, Adam Smith, explained that the invisible hand of a free market pushes the economy to its optimum. Artificial attempts to govern the economy prevent it from reaching that ideal. Need evidence? Look at the wealth that capitalism (free market) has produced compared with communism and socialism (government control). Our philosophy in the US for many years has not been one of a free market but rather of the idea that the economy should not be allowed to make decisions for itself because some people and industries will be marginalized.
Every year, we’re looking for “change,” the magic word to make all the problems go away. But the economic change we implement is only to shift in what way we artificially influence the market. This looks like change, but it is not a change of principle, a change in what we allow to govern the market. In fact, our “change” is often nothing more than intensifying previous efforts to effect change, which only exacerbates the problem.
Let’s lay the rosary of change to rest, stop calling on its name in prayer, and stop interfering with the capitalist free market via higher taxes, bailouts, stimulus packages, and heightened tariffs (there’s another thing that the new administration is considering).
Addendum:
What benefit comes from unshackling the market? The buyers patronize the suppliers who are offering what they want, with the marriage of quality and thrift which they want at the time. So the useful producers and are promoted, and their effective behavior is promoted in the market at large.
Not to forget that old axiom "a little from many is more than a lot from a few". By increasing taxes on the rich, we're 1) going for people who can "afford" to pay more taxes, 2) almost guaranteeing the passing of new taxes, because the poor believe that the rich are a) obligated to share their wealth, b) don't deserve their wealth, c) can pay more and not have it hurt them, and d) the more the rich pay the less the poor have to.
ReplyDeleteNot to mention #3) punishing the enterprising and frugal. As you said it's a punishment enacted on those who succeed. If I somehow earn $250,000 dollars only to have to pay $100,000 in various taxes, then I only earned $150,000 and lost 40% of my income, where as someone earning $21,000 would pay about $2,000 in taxes or about 10.5%. The argument many use to justify such a tax difference is that those who earn more will still have more after taxes, true, but you wouldn't stand for it if the poor had to pay a fair percentage.
This is also not mentioning the government funded programs for those who either pay little or nothing into the system. These programs disqualify the rich saying they don't need it. But the poor do. So the poor wind up getting more than they put in, and the rich get less than they put in. In effect, the government created a "parasite".
But what would happen if everyone had to pay an equal percentage of income? Say even 5%? Everyone would wind up with more. Even the government. How? Because Everyone is paying in! Not just a few.
I'm ranting aren't I? Oh well.
Well written article. Great Job. Thanks.
In my opinion there are some actions that a government should take to regulated the free market and/or to restrict the free market.
ReplyDeleteLet me give some examples. First, regulating the market:
It is possible for a business to limit free trade (called a monopoly). To counteract monopolies, governments enact and enforce antitrust laws. By legitimate "trust-busting" the government can actually promote a free-market, unhindered by unfair business practices.
Next, restricting the market:
A basic outcome of a completely free market is that if there's someone willing to buy it then there's someone willing to sell it. There are things that a large majority of people are willing to concede that shouldn't be sold on the free market—such as virulent anthrax spores or nuclear weapons. There are other "goods" and services for which there is currently a great deal of debate as to whether they should be legal to sell or not (e.g. pornography, abortions, guns, prostitution, and recreational drugs, to name a few). So, some "goods" and services, if allowed to be sold, have the potential to (drastically) negatively affect the free market. The government should restrict the sale of these "goods" and services in order to ensure the safety of the people.
But I agree that blind gouging of investors and consumers will only prolong the recession. Now is actually a great time to invest since the market will eventually upturn and stocks are cheap right now. But who's going to want to if they know the government will stick it to them if they choose their portfolio too wisely?
thank you for the brief economics lesson...it was good to brush up...and i wholeheartedly agree!
ReplyDeletealso, the idea of heightened tariffs makes me cringe. why do powerful people continue to think this would be a good idea? if they want legislated change, why don't they make econ 110 mandatory for everyone benefiting from US taxes?
addendum: mandatory to every mentally capable person of reasonable age, that is
ReplyDelete