VAT and a Humane Economy Mail 20110824

View 689 Wednesday, August 24, 2011

Today’s Wall Street Journal offers us “A Value Added Tax Fuels Big Government”.

President Obama is now talking about a "balanced approach" to deficit reduction that includes a "revenue component" achieved by "tax reform."

Among the tax reforms getting attention is a value-added tax, or VAT. Similar to a sales tax (more about this below), the value-added tax has become a significant part of the revenue systems of Europe and also has been adopted by over 100 other nations. The VAT is believed to be a magical device that can stuff government coffers with money without untoward economic political consequences. It is no such thing.

http://online.wsj.com/article/SB10001424053111903596904576518274100145458.html?mod=googlenews_wsj

It is a warning that ought to be taken seriously. A VAT would lock the 7% exponential growth of government in place for decades; the result would be a doubling of the size and cost of government every 12 years until the collapse of the economy. The effect on the deficit would be even more drastic: at first the added revenues might reduce the deficit but as the effect of the tax worked its way through the economy, more jobs would be exported, more freedoms would be lost as we floundered about trying to keep things going, and more money would have to be borrowed to meet the costs which rise steadily.

If you doubt this, note that “Agriculture Secretary Tom Vilsack said recently that food stamps were an "economic stimulus" and that "every dollar of benefits generates $1.84 in the economy in terms of economic activity." There is always a good reason to spend more money. This is from an article entitled “Keynesian Economics vs. Regular Economics” which continues

Many observers may see how this idea—that one can magically get back more than one puts in—conflicts with what I will call "regular economics." What few know is that there is no meaningful theoretical or empirical support for the Keynesian position.

Economist Robert Barro then goes on to examine the evidence for the Keynesian multiplier, and finds little to none, while there is historical evidence that it doesn’t work.

The multiplier theory says that paying money to the poor for existing – Keynes once used the fantasy of burying jars of money for the poor to go out and dig up – gets that money into the economy. They will spend it, because they don’t have any money, and they need to eat. This creates demand for food, employing farmers, millers, bakers, teamsters, and others. The increased demand sparks the economy.

All of which sounds reasonable, but note that what happened in the housing market was that inserting money into the housing economy stimulated demand, that demand drove up prices, and the result was a bubble. The same seems to be happening to education. I was able to get through University by working. I did have three years of something like $30/week on the Korean GI Bill, out of which I had to pay tuition, books, and all living expenses. The GI Bill essentially covered tuition and my rent in an elderly lady’s home; food, books, clothing, and everything else were up to me. Fortunately we did not have federal minimum wage laws. I was free to engage with Reich’s Café, and took a “board job”. That consisted of an hour’s work at noon each day for a meal at any non-rush hour I chose. I also got tips, usually about a quarter for the hour. It wasn’t much, but it kept me fed. As to books, there was the library. It wasn’t a lavish living but I managed until I wangled an undergraduate assistantship in the animal lab.

With today’s education costs a year on the GI Bill wouldn’t cover a quarter’s tuition, and certainly wouldn’t leave anything over for rent.

My point is not that the GI Bill benefits ought to be larger: it is that the costs of education have risen exponentially, largely because so much money was injected into the system. When more money chases goods, the costs of the goods rise. In the case of education, I would argue that each rise in cost has come with a diminished quality all up and down the education line from Kindergarten to Graduate School, but that’s another discussion. Certainly the costs have risen exponentially and well above inflation rates.

Feeding the beast with VAT will produce more of what we have, without a lot of benefits; but be prepared for an onslaught of arguments for “Balance” and to be seduced with fair words about how painless and invisible a VAT will be.

Don’t feed the beast.

Notes on Economic Liberty

For those interested in Distributism, there is a discussion in yesterday’s mail. This morning I added a few more remarks to my reply. It is a discussion worth continuing. The late economist David McCord Wright speculated that Marx was correct in his prediction that capitalism inevitably trended toward greater and greater concentrations of wealth into fewer and fewer hands, and noted that there is considerable evidence for that observation in the pre-WW II concentration of European wealth into cartels. He also noted that the United States with its Sherman Anti-Trust Act had to some extent avoided that, and that this deserved much more study.

There are many other critics of unrestricted capitalism (including, of course, me). Among them were Wilhelm Roepke with his “Humane Economy” which was at one time a great deal more popular among conservatives than it is now. Neo-conservatives like Irving Krystal who came out of the Marx-Trotsky tradition did not so much reject Roepke as pay attention to others, particularly Hayek who favored a more “pure” libertarian approach to economics. Roepke was from a different tradition. He began as a socialist, but over time that changed. He also had practical experience: Roepke was one of the architects of the German Economic Miracle, and his Humane Economy rejects unrestricted capitalism and unrestricted growth; it is not an endorsement of Distributism so much as an attempt to apply many of the distributist principles to practical economics.

Wilhelm Röpke considered Ordoliberalism to be "liberal conservatism," against capitalism in his work Civitas Humana (A Humane Order of Society, 1944). Alexander Rüstow also has criticized laissez-faire capitalism in his work Das Versagen des Wirtschaftsliberalismus (The Failure of Economic Liberalism, 1950). The Ordoliberals thus separated themselves from classical liberals^[2][6] like Ludwig von Mises and Friedrich Hayek. [From Wikipedia]

Roepke’s goal was freedom, and he repeatedly said that he rejected “all forms of collectivism.”

Notice that easily missed word: he distrusted all forms of collectivism. Roepke was an equal opportunity individualist. He feared the tendency even of capitalism to instrumentalize human beings, to turn the “market” or the “state” or “the forces of history” into things in themselves, crushing the very freedom it claims to admire. The market is made for man, not man for the market.

Freedom, then—rightly understood as obligation—is at the core of Roepke’s thought. But why should freedom work and socialism fail? Because it understands man not as an embodied appetite but as a soul. Our deepest need is not for things but for each other. He wanted a society in which

“… wealth would be widely dispersed: people’s lives would have solid foundations; genuine communities, from the family upward, would form a background of moral support for the individual; there would be counterweights to competition and the mechanical operation of prices; people would have roots and not be adrift in life without an anchor; there would be a broad belt of an independent middle class, a healthy balance between town and country, industry and agriculture.”

http://www.amconmag.com/article/2009/apr/20/00016/

It is also argued that Roepke had some influence over the direction of the Chinese economy, but I have no direct evidence of this.

If I seem to devote a great deal of time to Roepke, of whom many readers will find this the first clue to his existence, it is because I find his views congenial. I assigned A Human Economy along with Parkinson’s Evolution of Political Thought to my senior political theory seminar when I was teaching political science, and I would certainly include it on the reading list now. I do not believe that unrestricted capitalism can survive populist democracy, even when there is a strong Constitutionalist tradition. The trend is toward the more usual cycle of political systems, with Republics leading to Democracy and Democracy leading to a servile state and the rule of a New Class if they do not succumb to a Friend of the People who becomes a tyrant. Roepke and Wright offer an alternate path that may be acceptable to both masses and elites.

At one time Congress took such matters seriously, and produced documents discussing economics, the Welfare State, and Freedom. I even contributed to such discussions. I don’t think Congress has done that much since the late 1990’s.

I have often summed my political/economic views into a few simple axioms (which are not original with me, but I do not remember their source): Freedom is not free. Free men are not equal. Equal men are not free. I find those principles consistent with all I know of politics and economics and their history.

More another time; it is a subject worth continuing.

A note on Parkinson’s book. The book is public domain, and there is a free copy available in pdf format on line. I gave that in a previous note. We are working on putting together a Kindle edition, which we will sell at a nominal fee. This will be in a good format and copy edited; the pdf version is very hard to read and I fear will drive potential readers away from what I still consider one of the best histories of political philosophy. Parkinson is not sufficient for understanding political thought, but he is better than most standard works, and his critiques of some of the political philosophers borders on being necessary. He raises points that need to be considered. Anyway we are working on that, and I’ll let you know when it’s done.

Regarding the eBook of Mote in God’s Eye, some formatting and proofreading errors were discovered and the book has been taken down temporarily while those are fixed. It will be back then the proofing is done. (This is being done by my New York agent so I don’t know the schedule but they regard it as high priority given the volume of sales we’ve had since it went up.)

And I am still working on getting the California Sixth Grade Reader into eBook shape; my advisors and readers who worked on it have done an admirable job, but now it’s pretty well up to me. I’m dancing as fast as I can.

Can anyone suggest a good free cover for WEST OF HONOR? It’s a story of infantry war with essentially modern weapons in a Beau Geste setting…