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Friday, September 17, 2010

The Grasping Macroeconomic Managers

Our incomes are not their tools.

A tax cut for the top 2 percent is “just not a good use of limited resources.”

That’s what Treasury Secretary Timothy Geithner said on television the other day. Sorry, but I can’t get my mind off taxes. So even though I wrote about them two weeks ago, I must do it again. Call me a masochist, or a sadist.

Geithner was talking about Barack Obama’s wish to let the 2001 and 2003 tax-rate cuts expire for individuals making over $200,000 and families making over $250,000 a year. I’ll resist wisecracking about Geithner’s enacting his own personal tax cut until he was nominated to be Treasury secretary.

It’s worthwhile dissecting his statement because it’s typical of Washington-think. If we are ever to get ourselves free, we will need to teach people why they should be furious at such words.

Let me preface this by saying that in the current context I have no automatic sympathy for “the rich.” In theory I like the idea of people getting rich. I’d like to be rich (and not just nominally). But where and how one gets rich makes a difference. In a freed market one might get really (relatively) rich — apart from inheritance or gambling — by having an extraordinary combination of entrepreneurial prescience and good luck. Someone might imagine a blockbuster consumer product about which no one else had a clue. Of course in a market economy unencumbered by anticompetitive privilege, extraordinary profits would get competed away.

I need not remind readers, however, that we don’t live in a free market. Our economy is encumbered by an array of anticompetitive privileges that can produce monopolistic returns. Intellectual “property” laws, the differential effects of regulation, and government contracting are just a few ways that fabulous wealth can be obtained with political help. Not everyone who makes a fortune does so that way. But enough do.

About Taxes

But this article isn’t about the rich. It’s about taxes. If people are able to gain unjust returns in a corporatist economic system, the appropriate redress is to abolish the privileges, not raise taxes, for reasons that should become clear if they aren’t already.

Look at Geithner’s statement again: A tax cut for the top 2 percent is “just not a good use of limited resources.”

I see four pernicious assumptions right off the bat. Geithner assumes:

1) Incomes are a common-pool resource the use for which is properly the government’s province, thus

2) Cutting taxes – that is, leaving additional money in the pockets of those acquire it – is a form of government spending.

3) Whether a sum of money is to be left in someone’s pocket is properly determined according to politicians’ and their court economists’ estimate of its effect on the macroeconomy.

4) Politicians know better what to do with the money than do those who will receive it through their transactions.

Balderdash. All of it.

Here is Geithner’s reason for thinking tax cuts are a bad use of limited resources:

“It’s asking us to go add another $700 billion to our nation’s debt over the next 10 years to extend tax cuts which have a terrible record in helping economic growth and helping spark business investment.”

He wants to know how the government can “spend” that much money on tax cuts when it could be used to reduce the budget deficit that is running at more than a trillion dollars a year.

As a matter of fact, extending the tax cuts need not add to the debt because there’s another way to adjust for the “lost” revenue: Cut spending by $700 billion over ten years. Notice how that is not worthy even of consideration. Heck, $70 billion a year is less than 2 percent of a $4 trillion budget. You mean to tell me they can’t cut that piddling amount? The military occupations cost far more than that.

As the Cato Institute reminds us, candidate Obama promised to do some serious cutting: “We will go through our federal budget — page by page, line by line — eliminating those programs we don’t need.”

And as a Cato newspaper ad says, “With all due respect, Mr. President, we’re still waiting.”

Well no one really believed he would do that. It’s what you say when you need independent votes to get elected. Besides “need” is a highly subjective criterion.

Tools of Policy

Geithner’s premise that our incomes are mere tools of government macroeconomic policy is really quite offensive. When high-ranking officials believe that, you can be sure we have a managed economy. This barb is aimed at tax-cutters too, incidentally. I like tax cuts but I am not comforted by politicians who condescend to let me keep my money because they believe it’s good for the economy. In any event, whether the top 2 percent will spend or save the money is really none of Obama’s or Geithner’s business. (The Keynesian notion that if the people in that category don’t spend it on consumer goods, they’ll stuff it in their mattresses is too ridiculous to respond to here.)

Finally, even if all that I’ve said were invalid, there remains the unalterable fact that if the tax cuts expire, politicians will control the money. They say they will pay down the debt, but who in his right mind believes that? They’re more likely to bail someone out. Government as we know it is a transfer machine.

Sen. John Kerry says this is no time to “reward” – with tax cuts – people who have done well financially. His alternative is to reward the politicians who have made such a mess of things. That his suggestion fails to evoke universal scorn only shows what bad shape this country is in.

  • 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.