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Wednesday, November 18, 2009

The End of Prosperity: How Higher Taxes Will Doom the Economy–If We Let it Happen

If you were to believe spokesmen for the Obama regime and its allied pseudo-economists, there is no tradeoff between the size of government and our standard of living. On the contrary, they would like people to believe that the bigger the government gets, the more it can “stimulate” the economy and solve all sorts of alleged social problems, like the need for “affordable” health care. In their Alice-in-Wonderland world, government is the source of prosperity.

Opposing that view are numerous writers who understand the simplest of economic concepts—that scarcity imposes tradeoffs. The more government grows, the more it consumes and directs resources that would otherwise have been put to use by individuals, firms, and other voluntary organizations. Government has no wealth and creates no wealth. All it can do is redirect wealth, employing it in ways chosen by politicians rather than the ways consumers would have chosen. Once you understand that political choices are dominated by short-run, vote-buying concerns that impede productivity, you see that the bigger government gets, the less prosperous the people will be.

Among the writers who understand this are the authors of The End of Prosperity, three advocates of the supply-side theory, which says that when taxes are too high, the government strangles the incentives for investment and productivity. Their book, published before the 2008 election but clearly anticipating the victory of Barack Obama and the dominance of demand-side economic thinking (the notion that the more the government spends, the stronger the economy will be), explains why the high-tax, big-government approach always puts the economy on downers. Laffer, Moore, and Tanous provide a good survey of our last several economic decades for Americans either too young or too forgetful to know that there is an inverse relationship between government and prosperity.

It’s a useful history going back to the 1960s that connects our economic ups and downs to what they call “The Four Killers of Prosperity”: trade protectionism, tax increases and profligate spending, regulations that increase government intervention in the economy, and mistakes in monetary policy. We had big doses of all of them in the late 1960s and throughout the ’70s, when the nation was socked with the Nixon-Ford stagflation and later the low-productivity, high-interest-rate economic malaise under Carter. Then we experienced somewhat less of the Four Killers in the Reagan years and the economy improved considerably.

The authors might have done more to explain how the current economic debacle (especially the housing bubble) was caused by policy blunders, but at least they debunk political insiders’ arguments that the economic crisis was due to laissez-faire. “As if we ever had that,” they write. The Obama economic policy agenda, they show, is a disastrous concoction of those prosperity killers, and if it goes through we will face the end of prosperity.

That’s all good, but the book has a serious weakness. Like most writings by people in the supply-side camp, it overemphasizes tax policy and underemphasizes the need to reduce government spending. Worse, it repeatedly says that one of the reasons to favor tax cuts is that they can increase government revenues. But increasing government revenues just means more spending on military adventures, failed social policies, and special-interest group handouts.

As Milton Friedman used to point out, government’s true burden on the economy is measured by its spending not its taxing. It has to get the money one way or another: taxation, borrowing, or printing money.

The problem we face is how to keep Leviathan from destroying what is left of liberty and property rights. That being the case, the authors missed an opportunity to drive home the point that the federal budget must be put on a crash diet.

Our real problem isn’t so much getting tax policy right; it’s persuading people we should radically downsize government. If we can do that, how it collects tax revenue isn’t very important.