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The Recession Spectator
Prophets and Losses, Part II
Why central planning soothsayers are constantly wrong.
The government can only raise or lower the tax rate. Whether the actual tax revenues that the government will collect as a result will go up or down is a matter of prophecy. And these prophecies have been far too wrong far too often to base national policies on them.
When Congress was considering raising the capital gains tax rate from 20 percent to 28 percent in 1986, the Congressional Budget Office advised Congress that this would increase the revenue received from that tax. But the Congressional Budget Office was wrong, not simply about the amount of the tax revenue increase, but about the fact that the capital gains tax revenue actually fell.
There was nothing unique about this example of tax rates and tax revenues moving in opposite directions from each other — and also in opposite directions from the predictions of the Congressional Budget Office. Reductions of the capital gains tax rates in 1978, 1997 and 2003 all led to increased revenues from that tax.
The Congressional Budget Office is by no means the only government agency whose prophecies have been grossly unreliable. Anyone who looks at the history of the Federal Reserve System will find many painful examples of wrong prophecies that led to policies with bad consequences for the whole economy.
In a worldwide context, during the 20th century economic central planning by governments — prophecy at the grandest level — led to so many bad consequences, in countries around the world, that even most socialist and communist governments abandoned central planning by the end of that century.
The failures of governmental prophecies in so many different contexts cannot be blamed on stupidity. Most of the people who made these prophecies were far more educated than the average person, had far more information at their fingertips and probably had higher IQs as well.
Their intellectual superiority to others may well have given them the confidence to venture into areas where no human being has what it takes to make prophecies that lead to policies overriding the plans and actions of millions of other human beings.
As John Stuart Mill said, back in the 19th century, “even if a government were superior in intelligence and knowledge to any single individual in the nation, it must be inferior to all the individuals of the nation taken together.”
People competing with each other, and being forced to make mutual accommodations with each other in the marketplace, are operating in a trial and error process.
Human beings are going to make errors in any kind of economic or political system. The question is: Which kind of system punishes errors more quickly, and more effectively, in terms of forcing errors to be corrected?
A market economy with many competitors has incentives and constraints that are the opposite of those in a government monopoly.
Anyone familiar with the economic history of businesses knows that their mistakes have been common and large. But red ink on the bottom line lets them know that they are going to have to shape up or shut down.
Government agencies face no such constraint. The Federal Reserve can keep making the same mistakes in the next hundred years that it made in its first hundred years. Or it can make new and bigger mistakes.
Nor is the Federal Reserve unique. The same thing applies to the Congressional Budget Office and to government agencies on down to the local DMV.
Elected politicians not only can keep making the same mistakes. They have every incentive to deny that they made a mistake in the first place, since such an admission can end their careers.
That is why these prophets can lead to our losses.
COPYRIGHT 2013 CREATORS.COM
About the Author
Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com. To find out more about Thomas Sowell and read features by other Creators Syndicate columnists and cartoonists, visit the Creators Syndicate Web page at www.creators.com.
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Alan| 2.6.13 @ 7:55AM
"That is why these prophets can lead to our losses"
These prophets can only lead those ignorant of history whether willfully so or by institutional design.
JD| 2.6.13 @ 10:35AM
So... almost everyone?
MarkJeff| 2.6.13 @ 8:31AM
And yet, with History on our side, showing us all of the examples of central government planning failures, we find ourselves in the midst of it again, not because everyone in power (certain liberals & RINO conservatives included) fail to understand it never works, but because those certain liberals & RINO conservatives in power want control over all of us, and their own power unchecked!
RJ| 2.6.13 @ 11:37PM
Spot on MarkJeff - The economic formula for national well being is not a secret. The fact that it is ignored by those in power simply means that they favor a system that better rewards them and to hell with the rest of society. Power is usually abused; that is one of the main reasons why governments need to be limited in their scope of authority.
Tina B| 2.6.13 @ 9:01AM
And. . . So they are. Ignorance of history is the issue here, at least for those under the power of the prophets. This wasn't true in the US until the government schooling system began to dictate what history was taught in the classroom.
As I have said multiple times here at TAS, I am 63 but I didn't know what was being taught in the history classrooms of my children, or, for the past 30 years, in the classrooms all around me. I was taught by Catholics and the only history that they revised may have been the Church History as seen through the eyes of the nuns and textbook companies writing for Catholic schools. In either case, Communism was revealed to be anti-God and anti-Liberty. No need to revise that.
We have lost several generations of voters to these liars who have taught teachers to teach what they are told, be it true or false. So it is both types of ignoranti who lead America to her national doom. The wilfully ignorant desirous of power, and those "students" of American history and Western Civ as fancied by the textbook companies and teacher colleges' design.
Pecos Pete| 2.6.13 @ 10:35AM
Tina: Excellent comment.
Von Mises Jr| 2.6.13 @ 10:29AM
I visited DC and spoke to a young Aide in either Boehner or Cantor's Office. He was a Graduate of Hillsdale College. At Hillsdale, a Business Major must take two Semesters of Economics and they utilize Von Mises "Human Action" as the text.
So it is unconceivable that this young want-to-be politician was unfamiliar with Mises catallactics (marginal pricing based on free market supply and demand directing allocation of goods) or what Hayek called "Spontaneous Order." Dr. Sowell explains them well in simple terms.
But I also think that we get sidetracked with the tax rate and do not concentrate on the spending. Government Spending IS A TAX. When BJ Clinton left Office, for all the bad things he caused, the Budget was $1.8T. At the end of eight years of Bush it was $2.95T or increased by two-thirds. Obama is ratcheting it up over $3.6T or double a dozen years ago.
So while the tax rate debate is critical, the Laffer Curve and total spending limit the success we can achieve through tax policy. The real culprit is the SPENDING.
John Navratil| 2.6.13 @ 11:39AM
Von Mises Jr.,
It was Friedman who said that all government spending is a tax. He also said "Inflation is the one form of taxation that can be imposed without legislation."
The wool Obama is pulling over everyones eyes is that raising taxes to pay for his spending will do anything but more damage by choosing the losers to pay the tax. While balancing the budget helps controls inflation, in a perverse sense, inflation has the benefit of distributing the tax more broadly. As you say, the problem is spending.
cicero| 2.6.13 @ 11:13AM
Tina and Jr., - Spot on. When you consider that Zinn's "Peoples' History of the United States" is the most utilized American History survey textbook ussed in this country's colleges, you really have to wonder. I believe that the only way to break this up is to break the strangle hold the teachers; unions have on the educational process. This is beginning with the cahrter school movement. The next move has to be to get rid of the rediculous "student loan" fiasco. If the families of this country believe that a college education is worth the money, they will pay for it. The government take over of the student loan industry is merely a prelude to a foregiveness of student loan debt.
This will be desastrous to the country, but will allow the post secondary educational scam to continue unabated. If the students and their families were paying for their education, they would be more discriminating on where the money is spent, and on what. While it may be true that the student at present is required to be aid back, reality is that very little of it will be. Right now, it looks like free money.
Petronius| 2.6.13 @ 11:48AM
Those who ram laws down our throats have no clue about the effects of those laws since they don't have to endure the results.
Stan Redmond| 2.6.13 @ 7:39PM
It is not that central planners are wrong. It's that we mere peasant refuse to work in their magical world filled with numbers and predictions like good little obamatons. All of their "unexpected" unexpectations are our fault.
Marc Jeric| 2.8.13 @ 6:02PM
As part of the engineering curriculum, I had to work 6 months in various industrial factories (in that communist hell before my escape). In my first week in that nationalized Siemens factory I was to assist in production of large steel bolts tying the generator housing together. My boss was a worker there who showed me how to pick up a hexagonal steel rod from the magazine of raw materials, how to cut a piece of it for a length of the bolt in the cutting machine, how to fix that piece in the machining lathe to cut the excess material, then how to cut the thread on it, measure it for accuracy, how to turn the bolt around and finish the head of it. (cont.)
Marc Jeric| 2.8.13 @ 6:03PM
We were to do that for a whole week - the “norm” was to make 8 bolts in the morning four hours from 6 to10 and another 8 bolts in the rest of the day from 10 to 2 in the afternoon. The fellow would leave me alone for hours on end, doing what I did not know what else elsewhere. One day he disappeared around 10 AM, and I took a rod, cut it in 24 pieces, then reduced the diameter of all 24 pieces in one operation, then in another single operation I cut the thread in all of them, finally finished the heads, in about one hour of work. (cont.)
Marc Jeric| 2.8.13 @ 6:03PM
When the fellow showed up at about noon, he was flabbergasted to see the 24 bolts all finished, measured, and tagged with proper documentation. He immediately hid those bolts in his tool drawer and sat down to give me a confidential lecture. He said that the norm on which their salaries were based was 16 bolts per day and that if they produced more than that the norm would be increased for no change in salary and everybody would be forced to work harder for nothing. So it was essential for the survival of everybody and the sign of workers’ mutual solidarity that nobody would try to produce more; in addition most of them used their excess hours in the factory to prepare work for their outside jobs (illegal, of course). Briefly, I should not rock their boat in this irresponsible way or else. I immediately acquiesced in his reasoning and promised not to engage in any more of such demonstrations - this was just an amusement on my part trying to kill hours - you see I do not have a second job outside to be doing something else. He said - if you are bored go to the area of the plant where they store the big generator housings, go there and you can sleep in them big housings without anybody seeing you. And so we three students slept for hours on end while completing our practical factory work requirements. There was a saying among friendly workers: “They pretend to pay us, and we pretend to work”.
effinayright| 2.9.13 @ 10:35PM
@ Marc Jeric: But...you said your "work" in that factory was part of your engineering curriculum, right? So you got paid for doing almost nothing --- no "pretend to pay" there, right?
As for the workers in that plant: unless this was East Germany, workers in German industry are highly paid. So no "pretend to pay" there, either.
Seems like the more apt "motto", one unions worldwide would quietly agree with, is: "They pay us, we pretend to work."