E.J. Dionne’s “What,
me worry?“ opinion of America’s
federal and state budget problems should frighten anyone who has
had the misfortune to prosper through hard work or wise investment.
Arguing that those who claim “we’re broke” are crying wolf, Dionne
uses economic idiocy and moral travesty to aid those whose goal is
to keep as much taxpayer money as possible flowing through the
grasping hands of government, the long-term consequences be
damned.
Imagine a man, the breadwinner for his family, who loses
his job. He has enough in savings to cover his mortgage, country
club membership, utilities, food, and payments on four cars for
three months. Is he broke today? No. Is he about to be
broke if he doesn’t dump the country club membership and two of his
cars, and start eating at cheaper restaurants, at least until he
gets a new, and hopefully stable, job? Absolutely.
Under Dionne’s analysis, however, that man is fine because
someone else hasn’t lost his job. It’s the same thinking a mugger
might have.
According to his analysis, Wisconsin isn’t broke because
“employees and bills are being paid” and the U.S. isn’t broke
because it can still borrow money at low interest rates. Dionne is
whistling past the graveyard of government budgets, bringing out
the Keynesian and Progressive zombies there entombed.
The U.S. can borrow at low interest rates because the
Federal Reserve is spending the better part of a trillion dollars
in “QE II” to “flatten the yield curve” (causing long-term interest
rates to drop so the spread between long and short rates narrows,
thus forcing investors to take more risk rather than save money or
buy bonds.) And that’s on top of a couple trillion more the
government has forced into the financial system in the past two
years. Those actions are exacerbating the consistent weakening
trend of the U.S. dollar over the past couple of years, risking
inflation and lessening the wealth of all Americans in a way that
most, who don’t think about currency rates daily — or even yearly
— don’t recognize.
The federal government can get away with these damaging
shenanigans because it can print money and cover up its mistakes by
taking more of your (or your child’s future) paycheck. In that
sense, the federal government won’t technically go broke — but it
can sure seem like it has when exploding entitlements and interest
payments consume 100% of tax revenue — projected to happen within
30-40 years if we don’t reform Medicare, Medicaid, and Social
Security. This will leave Big Brother to borrow all the money
needed for national defense, infrastructure, and politicians’
undying love of bridges and highways with their names on
them.
That borrowing means nothing more than taxes to be imposed
on our children and grandchildren once the current scoundrels are
safely in retirement after having hooked the nation on the narcotic
of “free money” and scurrying away once their supply (of other
people’s money) dries up.
States are in a different situation. They can’t print
money and generally must balance their budgets. When Wisconsin
expects a $3.6 billion budget deficit over two years, it must be
closed by spending cuts, entitlement reforms, and revenue
increases. Entitlement reforms are needed most, with one
analysis suggesting that half of the
state’s budget deficit is due to the cost of Medicaid.
But, Dionne and his Progressive fellow travelers see tax
hikes and “soaking the rich” as the only policy change needed to
solve all our fiscal ills. Dionne approvingly quotes
comedian-turned-political-joke Al Franken’s description of the
income growth of America’s top earners as “unbelievable” and
concludes that governments are not broke because “some people are
definitely not broke.” What’s yours is mine, after all.
The left’s inclination to make our income tax system even
more “progressive,” which is to say even more punitive of success,
ignores several key facts:
First, the tax cuts passed under President George W. Bush
gave our nation its most “progressive” tax system in modern
American history, with the share
of taxes paid by the top 1% going from
under 34% in 2001 to over 40% in 2007, before dropping to 38% in
2008. (The economic turmoil of 2008 and 2009 hit the taxable
incomes of upper earnings in the reverse of the prior years’ growth
of their incomes that Franken and Dionne bemoan. I wonder if they
feel better now that the rich are less rich.) The top 5%, earning
about $160,000 a year or more, pay about 59% of all federal income
taxes, up from 53% in 2001. And the bottom 50%’s share of income
tax payments has fallen from 4% to 2.7%.
Second, “Hauser’s
Law” suggests — though not without
skeptics — that the share of GDP which the government can collect
in tax revenue falls within a narrow band centered roughly around
19% for the past three decades. So, similar to the Laffer Curve’s
concept of a revenue-maximizing tax rate, Hauser’s Law posits that
raising tax rates won’t substantially increase tax
revenue.
Third, and related to Hauser’s Law, is the fact that, as
Alan Reynolds of the Cato Institute
notes, “squeezing…a tiny sliver of
taxpayers who already pay more than half of all individual
taxes…won’t work. It never works.” Reynolds goes on to explain that
“successful people are not docile sheep just waiting to be shorn”
and how the non-sheep can and do change their investment and income
structures to avoid punitively high tax rates.
Fourth, as President Obama’s recent chief economic
advisor, Christina Romer, showed in a paper
she wrote with her husband, “tax increases
have a large, rapid, and highly statistically significant negative
effect on output.” More specifically, “Our baseline specification
suggests that an exogenous tax increase of one percent
of GDP lowers real GDP by roughly three percent.” To be fair, the
Romers argue that tax hikes implemented to lower a deficit have
less negative economic consequences. However, history shows that
tax hikes implemented to cut deficits inevitably lead to higher
spending and higher future deficits. Thus, financial markets and
entrepreneurs’ “animal spirits” will not react to any tax hike as
if it will actually reduce the deficit.
Fifth, every bit of economic history, including our own
nation’s recent self-destructive spending binge, suggests that the
“multiplier” on government spending is less than one. In other
words, every dollar that the federal government spends raises GDP
by less than $1 because that money was taken from the private
sector where it would have been more productive. Many studies by
“Chicago” or “Austrian”-school economists suggest the multiplier is
a substantially negative number, with the most anti-Keynesian
report claiming that $1 of government spending reduces GDP by
$3.40.
By thinking that America’s budget problems can be solved
by taxing the rich, Dionne and Franken make both an economic and a
moral error. Economically, they think in a “static” model, meaning
they assume that people’s behavior does not change when tax rates
change.
While no rational person would make such an assumption, it
happens to be the way that Congress also analyzes tax proposals,
leading to a bias toward tax hikes. A more rational “dynamic”
model, while certainly subject to bias from the modelers’ political
leanings or pressure from politicians for tweaks that benefit their
desired results, would nevertheless be more realistic than viewing
Americans as sheep. As Richard
Rahn points out regarding static modeling
and bogus multiplier assumptions, “bad numbers lead to bad
policy.”
Dionne’s moral error is perhaps even greater than his
economic naïveté. He sees governments which if not technically
“broke” today are rapidly speeding toward that wall, either for
actual bankruptcies of states or for federal actions to pay bills
that devalue the dollar so dramatically that America’s condition
will be with compared Greece’s without hyperbole. The dollar
demolition risks rapid inflation and devastating effects on
Americans’ net worth. But instead of putting the brakes on the
speeding car about to hit the wall, Dionne suggests taking the cars
of the “rich” and smashing them first as if that actually
accomplishes anything but to salve his disdain for those who have
achieved the American Dream.
The fact that some Americans aren’t broke does not mean
that our governments are solvent. While “we” are not all broke,
that says nothing about the financial state of governments. As
George Mason University economist
Don Boudreaux rightly argues, “Just
because (government) is a creature of popular sovereignty and has
the muscle to confiscate assets doesn’t mean that every cent of
every citizen’s property belongs to a collective pool of assets
owned by ‘us.’”
In other words, Dionne and his ilk’s argument to tax “the
rich” implies nothing less than socialism: from each according to
his ability, to each according to his need, laziness, pre-existing
condition, or excitement that she
won’t have to pay her own mortgage once Barack Obama takes
office.
For liberals, the top 5% of earners and perhaps the top
25% of earners (the threshold for which is a hardly-rich $67,000
adjusted gross income) are little more than serfs, people who
should be thankful that they’re allowed to work in a nation
properly owned by everyone but them. The “rich” should apparently
pay more and shut up, allowing Dionne’s beloved governments,
engorged like leeches on the financial blood of its citizens, to
keep on drinking.
