Wednesday, June 23, 2010

Dems Just Not That Into Economics

This is an expanded version of my column at (chart and video transcript).


Daniel Klein's article, "Are You Smarter Than a Fifth Grader?" (Wall Street Journal, June 8, 2010), is one you want to clip and save for handy reference. He documents how characteristically more ignorant liberals are of basic economics than conservatives are. Politicians in general are poorly versed in the dismal science, but the further left you are on the political spectrum, the more clueless you are likely to be on the subject. This is alarming because, while politics is not reducible to economics, most of what government does involves economics, directly or indirectly, and the further left the politician, the more likely he is to occupy himself with economic matters...sadly.

Here is an example of a question Klein posed to a range of respondents:

Consider one of the economic propositions in the December 2008 poll: "Restrictions on housing development make housing less affordable." People were asked if they: 1) strongly agree; 2) somewhat agree; 3) somewhat disagree; 4) strongly disagree; 5) are not sure. Basic economics acknowledges that whatever redeeming features a restriction may have, it increases the cost of production and exchange, making goods and services less affordable. There may be exceptions to the general case, but they would be atypical.

Therefore, we counted as incorrect responses of "somewhat disagree" and "strongly disagree." This treatment gives leeway for those who think the question is ambiguous or half right and half wrong. They would likely answer "not sure," which we do not count as incorrect.

In this case, percentage of conservatives answering incorrectly was 22.3%, very conservatives 17.6% and libertarians 15.7%. But the percentage of progressive/very liberals answering incorrectly was 67.6% and liberals 60.1%. The pattern was not an anomaly.

Liberals generally answer with what they want to be true, what they believe ought to be true, or perhaps with what they can force to be true with properly executed legislation, not with what actually happens in the world when it is left to itself. Klein observes that, "the left has trouble squaring economic thinking with their political psychology, morals and aesthetics." May I venture to say that they don't think; they feel?

Klein ends with this: "Governmental power joined with wrongheadedness is something terrible, but all too common. Realizing that many of our leaders and their constituents are economically unenlightened sheds light on the troubles that surround us."

David Ranson provides us with an all too real example of this economic ignorance and wishful thinking in "The Revenue Limits of Tax and Spend" (WSJ, May 17, 2010).

The feds assume a relationship between the economy and tax revenue that is divorced from reality. Six decades of history have established one far-reaching fact that needs to be built into fiscal calculations: Increases in federal tax rates, particularly if targeted at the higher brackets, produce no additional revenue. For politicians this is truly an inconvenient truth.

This little nugget of the way things work even has a scientific sounding name: "Hauser's Law." On the basis of 60 years of consistent data, W. Kurt Hauser of the Hoover Institution found that there is an impenetrable ceiling on what wealth squeezing government can ring out of the economy in the form of tax revenues. No matter how we try, federal tax receipts will not exceed about 19% of GDP under the best of circumstances. Under present conditions, which are far from the best, any attempt to raise taxes will reduce GDP and thus actually reduce revenues. This article is another one for my "keeper" file.

But liberals don't care. They're not actually interested in paying for anything as long as deficit spending allows them to charge it to generations who will not be voting until after they are out of office. They are also just not that interested in economics at all. What matters to them is "fairness," even if it means bankrupting the country to pay for it.

Consider this golden moment during the final stages of the 2008 Democratic primaries. Barack Obama, saying what he knows the American people believe and want to hear him say, but what is completely alien to his way of operating, says he believes in paying as you go. But in response to Charles Gibson's question, he shows his complete indifference to economic constraints when it comes to the egalitarian moral imperative of "fairness."

GIBSON: All right. You have, however, said you would favor an increase in the capital gains tax. As a matter of fact, you said on CNBC, and I quote, "I certainly would not go above what existed under Bill Clinton," which was 28 percent. It's now 15 percent. That's almost a doubling, if you went to 28 percent.

But actually, Bill Clinton, in 1997, signed legislation that dropped the capital gains tax to 20 percent.

OBAMA: Right.

GIBSON: And George Bush has taken it down to 15 percent.

OBAMA: Right.

GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.

So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?

OBAMA: Well, Charlie, what I've said is that I would look at raising the capital gains tax for purposes of fairness.

We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year -- $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That's not fair.

And what I want is not oppressive taxation. I want businesses to thrive, and I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don't have it and that we're able to invest in our infrastructure and invest in our schools.

And you can't do that for free.

OBAMA: And you can't take out a credit card from the Bank of China in the name of our children and our grandchildren, and then say that you're cutting taxes, which is essentially what John McCain has been talking about.

And that is irresponsible. I believe in the principle that you pay as you go. And, you know, you don't propose tax cuts, unless you are closing other tax breaks for individuals. And you don't increase spending, unless you're eliminating some spending or you're finding some new revenue. That's how we got an additional $4 trillion worth of debt under George Bush. That is helping to undermine our economy. And it's going to change when I'm president of the United States.

GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.

OBAMA: Well, that might happen, or it might not. It depends on what's happening on Wall Street and how business is going. I think the biggest problem that we've got on Wall Street right now is the fact that we got have a housing crisis that this president has not been attentive to and that it took John McCain three tries before he got it right.

And if we can stabilize that market, and we can get credit flowing again, then I think we'll see stocks do well. And once again, I think we can generate the revenue that we need to run this government and hopefully to pay down some of this debt.

Senator Obama weaves back and forth between advocating fairness at the expense of revenue considerations, and sounding fiscally responsible for the right-of-center American voter. But the two come crashing together in an embarrassing display of either contradiction or hypocrisy--Gibson caught it--when he says, "But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don't have it and that we're able to invest in our infrastructure and invest in our schools. And you can't do that for free." In other words, we want a tax system that seems fair to a progressive liberal, and yet one that can pay for the generous social programs which that same sense of fairness requires.

The Senator likely just didn't see the contradiction because he is what Klein calls progressive/very liberal, and so he thinks primarily in sentimentally moral terms,* not economic ones, and simply expects economic reality to support those judgments. That is also how Obama the President has been behaving. Wall Street ought to be punished, even though a crippled and fettered Wall Street cannot fuel a recovery. BP ought to be prosecuted and pillaged as soon as possible, even though a bankrupt BP can neither clean up the spill nor compensate anyone for damages.

That, at least, is the generous interpretation.

*One can also think rationally about morality, of course, but liberals will have nothing to do with it because it leads to moral absolutism, which they absolutely abhor.

No comments: