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Thursday, February 24, 2011

A Boost for the Managed Economy

Nowhere is it easier to miss the forest for the trees than in discussions of government policy. Late last year the media were saturated with debates over the compromise tax package agreed to by Barack Obama and congressional Republicans. The package that passed the House and Senate included a two-year extension of the Bush-era tax-rate cuts for all income levels, a one-year two-point reduction in the employee’s Social Security payroll tax, and a 35 percent estate tax beginning at $5 million for an individual and $10 million for a couple (up from the current zero rate and heading off the scheduled 55 percent beginning at $1 million). The bill also contained an extension of unemployment benefits.

What prompted the compromise was the looming increase in everyone’s income tax rates on January 1 and Obama’s inability to maintain the middle-class rates while letting the rate on the top 2 percent of income earners rise, as he had promised to do during his campaign.

The first thing to note is that the media and other participants in the discussion have been sloppy (at best) in calling this a debate about tax cuts. Preventing a tax increase—even one set on automatic—is not a cut. Under the bill passed the tax rates in effect on December 31 were the same as those in effect on January 1. How is that a cut?

More important, all players in the game have revealed themselves to be interventionists. Regardless of party, they see the economy as something to fix by turning a knob here, pulling a lever there, and stepping on a pedal over yonder in order to get the desired performance: higher consumer spending, lower unemployment, and increased investment. It’s as though the economy were a machine. But an economy is not a machine. It’s a network of people engaged in myriad exchanges of goods and services—pursuing end-oriented activities informed by subjective values and expectations. Such information is largely unavailable to politicians, bureaucrats, and their economic advisers. That’s why politically managed economies are chronically problem-ridden.

With unemployment at press time officially at 9.4 percent, the economy indeed remains in the doldrums. None of the palliatives that George W. Bush or Obama tried has worked, but instead of realizing that government and its corporate-state policies are the obstacles to a flourishing economy, the ruling elite remains committed to the managed economy. So it’s decided not to raise taxes—for two years—and to reduce the employee payroll tax—for one year. These expiration dates are signs of political management. Understanding the necessity of a freed market would lead one to call for permanent—not temporary—government retrenchment.

Some questions were apparently overlooked. If tax rates may go up in two years, why make tax-sensitive long-term plans? If the payroll tax is to be two points lower in 2011, that implies it will most likely be two points higher in 2012. Will people spend the extra money next year or save it in anticipation of the tax increase to come? In any event, they will need to make an unpleasant adjustment in their household economies on January 1, 2012. People do think long-term, even if politicians don’t.

Of course, there was scarcely an acknowledgment during the debate that money subject to taxation belongs to someone and not the State. You’d think it magically appears in a common pot and the government’s job is to ladle it out effectively and fairly.

In objecting to politicians’ taking money through taxation, I am not unmindful that in America much money is made through what sociologist Franz Oppenheimer called “the political means” (as opposed to the economic means: voluntary exchange). The plutocracy is real, thanks to the centralizing effect of much government intervention and the nature of politics. But the way to prevent accumulations of wealth via the political means is not taxation but elimination of privilege—that is, all competition-stifling interventions, including barriers to self-employment. The answer to government power can never be more government power. All that gets you is bigger government.

* * *

In 1950 FEE founder Leonard E. Read faced a hostile congressional committee. Those were the days when advocates of individual liberty were subpoenaed by government investigators because of their views. David Beito tells the story.

Regardless of what selected statistics indicate, for many people the Great Recession goes on. Angel Martín Oro discusses the various theoretical explanations of what’s happening.

Newsweek has declared the U.S. presidency an impossible job. Did it therefore recommend shrinking the size and scope of government? Richard Fulmer analyzes the mainstream news magazine’s solution.

Though expelled from the monetary system long ago, gold refuses to go away. Why does it have such an allure, and will it make a comeback? Warren Gibson begins a two-part series on what some call real money and Keynes called the “barbarous relic.”

When the United States was demoted from “totally free” to “mostly free” in a recent measure of economic freedom, Kevin Carson wondered when it was “totally free.” That depends on whose freedom matters to the measurers, he explains.

Advocates of freedom constantly look for an effective strategy to roll back the power of government. What about establishing freedom outside government’s reach on the high seas? Patri Friedman and Brad Taylor see promise in that approach.

Much of the impetus for government stimulus of the economy comes from the notion of “underutilized resources.” Private spending is insufficient to put labor and capital to work fully, so government spending will have to do it. Tyler Watts exposes the bad economic theory within.

Our columnists have these enlightening offerings: Thomas Szasz explores how psychiatry thinks about coercion. Robert Higgs revisits Lyndon Johnson’s Great Society. John Stossel asks why some people in the world are stuck in poverty. Charles Baird warns of union card check by nonlegislative means, while Art Carden and Steven Horwitz, having been bombarded with the message that the TSA keeps us safe, respond, “It Just Ain’t So!”

Books on liberty, too-big-to-fail, economic self-interest, and intellectuals have occupied our reviewers.

—Sheldon Richman
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  • Sheldon Richman is the former editor of The Freeman and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America's Families and thousands of articles.