I had lunch with a bunch of liberals over the weekend. Mrs. Knabe had strict instructions: Be nice, or else.
What did I think would be the impact of the fiscal cliff I was asked? Nothing. Defense companies are already adjusting their headcount for a lower level of business, with our without sequestration. Workers and consumers know the President wants to raises taxes on the rich, but also know the rich is a fluid concept that almost always means everyone. Besides, even with confiscatory tax rates there isn't enough gold in that pot. The current deficit is unsustainable, so it must end; either in higher taxes, lower spending, higher inflation or all of the above. What changes if we go over the cliff? Nothing. The higher taxes and lower spending we all know have to occur, occur. If we go over the cliff, taxes will go up and spending cut or if we don't go over the cliff and taxes will go up and spending will be cut. The cliff is not a surprise and spending and saving habits already reflect this.
Will the Fed's quantitative easing program work?
I have no idea. But I don't think there is a magic wand that can be waved by either the Fed or Congress. We seem to want to believe if Congress avoids The Cliff all will be right with the world. Or if the Fed would only engage in more QE growth will accelerate. But what if the problem is micro, not macro? What if growth is being impeded by the mountain of regulations we have imposed over the decades? Minimum wage laws raises labor costs, which reduces labor demand. That is obvious to everyone. If it weren't obvious we would simply mandate everyone be paid one million dollars per year. Increasing generosity for food stamps and unemployment benefits may be humane but increases unemployment. Period. Full Stop. Forcing Intrade to cease and desist may serve some social purpose but it dampens economic activity or dampens the desire of others to engage in risk-taking. Farm supports mis-allocates resources. Ethanol subsidies raises prices. Forcing GM to build electric vehicles may serve a social purpose but it lowers profits and mis-allocates resources. Renewable energy standards raises prices to consumers and mis-allocates resources. I could have gone on, and on, and on. Maybe the issue isn't the Fed or taxes or spending. Maybe it's the million little cuts we have inflicted on ourselves.
Why shouldn't we tax the rich like we did in the '50's. There was pretty good growth then, so 90% marginal tax rates can't have an impact on growth. Right? I asked what is the purpose of taxing the rich. If it is based on the belief taxing the rich causes growth, there is no evidence of that. If the purpose is to make the incomes of others higher, there's no evidence of that either, unless you are one of the lucky recipients, but society as a whole getting wealthier by taxing the rich isn't a calculus that works. If the purpose is to reduce the deficit solely or mostly on the rich, those numbers are challenging as well. It seems the purpose is to satisfy envy. Slippery slope. I think it's a smokescreen anyway for higher taxes on everyone.
Sure, the 1950's had high marginal tax rates for the wealthy and the economy grew. But federal spending to GDP was about 15%, not 23% as it is now. Plus there was little industrial competition, plus the massive regulatory state had yet to be built. There was no EPA, OSHA, Medicare, Medicaid, ethanol, FDA and on and on an on.
What I found most odd about this desire to tax more was this was a group of people who recognize the monetary value of an education. Yet they couldn't see the disincentive higher tax rates, particularly on the wealthy, has on education.
Bill
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