Recycling electrons & some ideas

I was searching the “accumulated wisdom of TOC” today (;)) on a slightly different topic.  Serendipitously, this June-09 post struck me as worth repeating: 

Taxes and the economy

Some comments on Sunday’s post, Health care notes, were interesting to me and resulted in this post. Here are the comments:

Janet Brown said…

This is just one more reminder that the only real way to keep our economy strong is not by raising taxes, but by keeping taxes low, fair and simple.

We need to take action and contact our legislators and sign petitions like the ones the U.S. Chamber of Commerce backs (here).
1:08 PM EDT

Life Insurance Broker said…

@Janet Brown

Explain to me how keeping taxes low will help anything? With no tax money there will be no money in the government thus no money for the economy.

Take care, Lorne
12:00 PM EDT

Paladin said…

@Lorne

By “money in the economy” let’s presume you mean the value created in the economy. Almost all of this value is created by private productive individuals and organizations. The allocation of that value is properly vested in free markets. The government’s legitimate role is to take a very small portion of that value and use it to provide its legitimate services. High taxes reduce “money in the economy”. Low taxes increase it.

Thomas Sowell has written an excellent overview titled “Basic Economics”. Henry Hazlitt’s “Economics is One Lesson” is good too, but maybe not quite as accessible.
12:55 PM EDT

Lorne,

There are so many very basic, common, and erroneous assumptions packed into your short comment that I am not sure if you are serious. I will respond as if you are, however, because you would be far from alone in such thinking, and I hope addressing these ideas may be useful to others as well.

You seem to be confused about how wealth is created. We may call it money, but that is just a proxy. I think Paladin well addressed this issue, but there are other questionable memes he left unanswered.

One of your problematic assumptions is that without “the government” there wouldn’t be an “economy.” This begs the question of what “the economy” is, and we don’t have time for that here. Suffice it to say that, historically, good government has assisted economic activity by providing a stable and trusted medium of exchange, i.e., money, in a stable environment. This is not to say government must do this, it has just been convenient. It is also not to say that government can be trusted to be a good steward. Recent events prove this.

As to what is “money,” it has ranged from Cowry shells to tulip bulbs to tobacco to limestone wheels 12 feet in diameter. All of these things were a medium of exchange (could be traded for something else), a unit of account (could be traded at a standard value), and a store of value (could be put aside and used later at a similar exchange rate). Whenever they lost any one of those characteristics, they ceased to be money.

Government, then, has hardly been the sole source of money. At one time banks issued their own currency. Gold and silver have themselves served as money without any government’s imprimatur. Not so long ago, our national paper currency was backed by those precious metals. Paper was simply easier to transport.

So, it is not necessary to have government to have either money or an “economy.”

Money, today, in the US, is not backed by any commodity with intrinsic value. What used to be silver certificates, redeemable for the actual metal “payable to the bearer on demand”, are now Federal Reserve notes backed by the “full faith and credit of the United States government.” The intrinsic value is zero, or at best equal to the value of a good counterfeit. The value of a Federal Reserve note is psychological.

As to money supply, to over-simplify, good government should provide a psychologically acceptable currency in sufficient volume so as to allow for the orderly exchange of goods and services. The volume of money in circulation should keep pace with the value of productivity: It should grow at the same rate as productivity. Too much growth in the money supply begets inflation, too little means deflation.

Inflation is itself a tax, and therefore a conflict of interest for your government, because when that government issues (prints) money in excess of the requirement, the money you got paid yesterday suddenly buys less. It becomes diluted, and the real value of your savings shrinks. The Weimar Republic and modern Zimbabwe are extreme examples. As a thought experiment, imagine what would happen if the government decided to wipe out its deficit by the simple expedient of printing money equal to the amount of the deficit. Don’t laugh, in a similar vein Zimbabwe declared inflation to be illegal while printing new money at a ratio of a million to one to the old. Zimbabwean inflation in July 2008 was 40-50 million percent.

Lorne, you seem to think that government may actually create wealth. It does not. Not even when it owns General Motors. If General Motors could produce cars people wanted to buy at a profit, what role does government have? If General Motors cannot produce such cars at a profit, how can government fix that? Certainly not by simply taking your money and giving it to General Motors. That does not create wealth, it destroys it by robbing you.

Government, at least in Western democracies, has typically reasonably well performed one function beneficial to the economy. It provides a mechanism for the enforcement of contracts – the rule of law. Not that this could not be done privately, but we have generally ceded the responsibility to government because we trust the process (even so, special entities exist for arbitrating disputes). If we were to cease to trust the government process it would be a serious problem.

So, what does this say about a government, like the Obama administration, willing to quadruple the deficit and to abrogate legal contracts? Quite simply, it erodes the faith and confidence necessary to assign value to the money that government produces. The Chinese have noticed.

Further, it damages the economy by misdirecting resources for political purposes. Resources taken from you. Higher taxes is the government taking more of those resources. From you.

So, when that same government raises taxes what is it doing? [It is] Illustrating another misconception in your comment. Taxes do not create jobs or products or the economy. The jobs that money could have created, and the investment in productivity and innovation that could have been made, are stopped in favor of tattoo removal among Los Angeles gangstas, or propping up a failed auto workers union.

Without economic freedom you cannot have political freedom. All of this economic discussion should be framed with that reference. Specifically, the loss of political freedom represented by government intervention in the form of excessive direct taxation, or in indirect taxation through regulation and inflation. You are not free to choose.

On that note, I will add three other books to the ones Paladin mentioned in his comment (Thomas Sowell’s Basic Economics and Henry Hazlitt’s Economics in One Lesson) that could also help you understand this better. I assume you would like to.

1. Eat the Rich, P.J. O’Rourke. A really fun read. Pay special attention to the chapter on Hong Kong under John Cowperthwaite.
2. Free to Choose and Capitalism and Freedom, Milton Freidman. Classics, easily understood, but take them in that order.
3. The Road to Serfdom, Freidrich Hayek. Heavier going and appropriate for more advanced study.

Thanks for stopping by and inspiring this post.