Trackchampion Handicapping Contests For Horse Bettors - View Single Post

Breakage · 09-04-2008, 12:28 AM

III
Several times, I've referred to tax reductions on the rich being accompanied by equivalent reductions in government spending. It should be clear that reducing taxes without reducing government spending cannot promote saving and capital formation, but must undermine them further, even if the funds no longer claimed by taxes are overwhelmingly saved. For in this case, the government must substitute a dollar of borrowing for a dollar of tax revenues. Each dollar borrowed by the government is a dollar less of savings available for the rest of the economic system. Thus even if a dollar less of taxes results in as much as ninety cents of additional saving, there is a significant net reduction in the supply of savings available for the rest of the economic system. In this instance, while ninety cents of additional saving takes place as the result of tax reductions, a full dollar less of savings is available to business and private consumers as the result of the government's borrowing, and thus there is a net reduction of ten cents of savings available for every dollar of such tax cuts based on increases in the government's deficit.

Tax cuts to promote saving and capital formation which are financed by deficit increases are thus simply contrary to purpose. The fact that they are contrary to purpose remains if, instead of being financed by borrowing, the resulting deficits are financed by the more rapid creation of money. In this case, all of the destructive effects inflation has on capital formation come into play.

By the same token, balancing the budget by means of raising taxes is destructive of saving and capital formation to the degree that the additional taxes fall on saving and the productive expenditure of business firms for labor and capital goods. Ironically, it is precisely taxes that fall heavily on saving and productive expenditure that today's advocates of balancing the budget through tax increases favor. This is because the taxes they wish to increase are precisely those which land on corporations and the so-called rich.

The only way that these advocates of balanced budgets through tax increases could proceed consistently with the goal of capital formation would be by increasing the taxes of the very people they claim to be concerned about, namely, the poor and the mass of wage and salary earners, who save relatively little. Indeed, the only way that greater saving and capital formation is possible in the absence of decreases in government spending, is by means not only of increasing such taxes to the point of balancing the budget, but also increasing them still further, to compensate for decreases in the kind of taxes that land more heavily on saving and productive expenditure. In essence, if one advocates greater saving and capital formation and yet refuses to support reductions in government spending, one is logically obliged to advocate increasing the taxes of wage and salary earners and of the "poor" in order both to balance the budget and to compensate for reductions in taxes on profits and interest and on the "rich."

But there is absolutely no reason to advocate such a downright fascistic policy. (As I've shown, just such a policy has been pursued in Sweden, the model country of today's "liberals.") Instead of sacrificing anyone to anyone, the simple, obvious solution is sharply to reduce the sacrificing that is already going on — namely, sharply to reduce and ultimately altogether eliminate pressure-group plundering and the government spending that finances it at the sacrifice of everyone. (The ultimate, truly progressive long-range goal would be the elimination of virtually all government spending other than for defense against common criminals and foreign, aggressor governments. The first is the police function of state and local governments; the second is the national defense function of the federal government.)

This analysis makes clear that an essential flaw of so-called supply-side economics — the policy both of the Reagan administration and of the present Bush administration — was the failure to face up to the need to reduce government spending. While the policy of reducing taxes by both administrations was perfectly correct, most of the potential benefit of the tax cuts was lost through the corresponding enlargement of federal budget deficits. Regrettably, both administrations and their supporters lacked the courage required to abolish government spending programs to make those tax cuts possible without deficits.

"The essential flaw of so-called supply-side economics — the policy both of the Reagan administration and of the present Bush administration — was the failure to face up to the need to reduce government spending."Their failure to have done so explains why the great mass of the American people have not benefitted from the tax cuts as they should have. The explanation is that, absent equivalent reductions in government spending, the tax cuts did not translate into increases in capital formation, but the opposite. Instead of there being more demand by business for labor and capital goods, there was less; instead of more rapid economic progress and rising real wages, there has been economic stagnation or outright decline, along with stagnant or falling real wages.

Ever-growing government intervention, especially in the form of environmental legislation, has also worked against capital accumulation by requiring the use of more and more capital to achieve the same results, such as requiring gas stations, dry-cleaning establishments, and numerous other types of businesses to engage in costly capital investment for the sake of protecting the environment rather than for the production of goods and services.

In addition, capital accumulation has been enormously undermined by the Federal Reserve System's policies of credit expansion and inflation, extending back to its inception. In the last decade, these policies were responsible first for the stock-market bubble and then for the housing bubble. In both cases, vast sums of capital were wasted through malinvestment and eaten away through overconsumption based on delusions of prosperity. Thus, for example, in the housing bubble, not only were the housing-construction and building-supply industries greatly overexpanded and an enormous number of homes built that should not have been built, but millions of homeowners were led to greatly increase their consumption on the strength of no foundation other than the rise in house prices induced by inflation and credit expansion. Earlier in the decade, the same kind of overconsumption took place on the foundation of inflated stock prices, and similar malinvestment took place in other industries, such as telecommunications.

Finally, it must be mentioned that the Fed's inflation and credit expansion have also been responsible for a vast, artificial increase in economic inequality since the mid 1990s, just as they were during the 1920s. This economic inequality was built not on inequality of economic contribution, as is normally the case, but merely on new and additional money. This new and additional money created by the Fed and its client banking system, poured into the stock market and then the housing market. In the process, it created vast paper capital gains in terms of stock and housing prices — the same paper gains that brought about overconsumption. In the case of the stock market, the paper gains went overwhelmingly to the wealthy; they had the largest investments in stock and were more likely to be in a position to know how to take advantage of the rising market. At the same time, the artificially low interest rates caused by the infusions of new and additional money encouraged an artificial lengthening of what "Austrian" economists call the structure of production. Such artificial lengthenings create a corresponding artificial increase in the magnitude of profits in the economic system.

This last point can be understood by recognizing that when taken in the aggregate, the funds business firms expend in paying wages and in buying capital goods (e.g., materials, components, supplies, advertising, lighting and heating, as well as machinery and plant) generate or, indeed, directly constitute the great bulk of business sales revenues in the economic system. In every year, the expenditure for capital goods constitutes equivalent sales revenues to the sellers of capital goods. In every year, the payment of wages enables wage earners to expend an approximately equivalent amount in buying consumers' goods from business. Thus the total of business firms' productive expenditures in any given year directly or indirectly show up as business sales revenues in the economic system, for all practical purposes within the same year. (The extent to which the wage earners of any given year might wish to defer the expenditure of some the wages paid to them in December into January, say, is counterbalanced by the same kind of choices made the year before.)

Now sooner or later, those same productive expenditures that underlie most of the sales revenues of business also show up as costs of production of business needing to be deducted from sales revenues in the computation of profits.

A key question is when do they show up as such costs of production? The same dollar amount of productive expenditure is capable of showing up as an equivalent amount of cost to be deducted from sales revenues within days or weeks or only over a period of months or years. For example, $1 million expended by grocery stores in buying produce at wholesale will show up as $1 million of such cost within days. However, $1 million expended in the construction of a new building with a depreciable life of forty years will show up as a cost of production to be deducted from sales revenues only after the building is fully completed, and then at the rate of just $25,000 per year, as per its forty-year depreciable life. Before $1 million of expenditure for the construction of such buildings could result in $1 million of depreciation cost being incurred each year, the process would have to be repeated for forty years, by which time forty such buildings would be in existence, each being depreciated at $25,000 per year.

The implication of this discussion is that shifts in the pattern of productive expenditure, with respect to the time when the expenditures will show up as costs ready to be deducted from sales revenues, are capable of having a profound effect on business profits for a more or less considerable period of time. This is because while the sales revenues that result in any given year from any given amount of productive expenditure in the economic system remain the same, the costs to be deducted from those sales revenues that correspond to that given amount of productive expenditure are capable in varying degrees of being deferred to future years. Thus, for example, shifting $1 million of productive expenditure from the purchase of groceries at wholesale to the construction of a new building implies a reduction in the costs deducted from sales revenues in the economic system in the amount of $1 million in the current year. (The reduction is a full $1 million, because while the building is under construction it does not yet give rise even to the $25,000 per year depreciation cost that it will occasion when completed and brought on stream.) Thus, to the extent that the structure of production is lengthened and more and greater deferrals of cost accordingly take place in the face of sales revenues of any given amount, profits in the economic system are correspondingly increased. These are the profits of the boom period.

The Federal Reserve's easy-money, low-interest-rate policy both puts new and additional money into the market that raises productive expenditures and sales revenues and simultaneously encourages the shifting of productive expenditures to points more remote from the time when they will show up as costs of production. Productive expenditures aimed at results further in the future are an inevitable accompaniment of lower interest rates. In this way, the policy of credit expansion brings about a systematic deferral of business costs in the face of any given volume of business sales revenues and a corresponding enlargement of business profits for which there is no sound underlying economic basis and which would not exist in the absence of credit expansion.

Thus, to the extent that it is not the result of economic ignorance and/or sheer malicious envy, the Left's resentment of economic inequality turns out to be a resentment that logically should be directed against its own beloved policy of credit expansion.

IV
All of the Left's dissatisfaction and resentment should be directed against its own policies and against itself for its volitional, chosen economic ignorance. It knows nothing about the role of capital in production or what real wages and the standard of living actually depend on, or practically any other aspect of economics. It is intent on driving the machinery of government in a mental state comparable to the driver of a car or truck under the influence of alcohol or other, stronger drugs.

Its response to the growing destruction it causes as it proceeds along in its mental fog is to call again and again for "change." It brings about one change after another, each time for the worse. It can neither tolerate the conditions its policies create nor find the courage to admit how profoundly wrong it has been in urging its policies, which might then permit its members to begin to learn the economics and political philosophy they need to know to urge rational policies. Instead, it is so fundamentally and profoundly wrong that it goes on upholding its ignorance as truth even in the face of the worldwide collapse of what for generations its members had expected to become a utopia, namely, socialism.

Instead of taking the failure of socialism as evidence of its own ignorance, it chooses to take it as a failure of human reason. And, in consequence, it has now turned on reason, science, and technology. Perhaps in implicit recognition of its own capacity for destruction and carnage, it has turned from a movement that only a few decades ago eagerly looked forward to the results of paralyzing the actions of individuals by means of "social engineering" to now seeking to paralyze the actions of individuals by means of more and more prohibiting engineering of any kind. What the Left should want to stop are its own actions, because they are truly dangerous, and on some level it knows this.

$95 $80

Instead of taking the failure of socialism as evidence of its own ignorance, the Left chooses to take it as a failure of human reason.Of course, in a further display of their ignorance and blindness, members of the Left will undoubtedly characterize the line of argument I've presented in this article as the "trickle-down theory." There is nothing trickle-down about it. There is only the fact that capital accumulation and economic progress depend on saving and innovation and that these in turn depend on the freedom to make high profits and accumulate great wealth. The only alternative to improvement for all, through economic progress achieved in this way, is the futile attempt of some men to gain at the expense of others by means of looting and plundering. This, the loot-and-plunder theory, is the alternative advocated by the redistributionist critics of the misnamed trickle-down theory. The loot-and-plunder theory is the theory of Obama, of the Democratic Party, and of much of the Republican Party. It is time to supplant it with the sound economic theory developed by generations of intellectual giants ranging from Smith and Ricardo to Böhm-Bawerk and Mises.

George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics. His web site is Capitalism: A Treatise on Economics. His blog is at George Reisman's Blog on Economics, Politics, Society, and Culture. View his archive of daily articles. Send him mail. Comment on the Mises blog.

Portions of this article are adapted from pp. 308–310 and 830–831 of Capitalism: A Treatise on Economics.

(A PDF replica of the complete book can be downloaded to the reader's hard drive simply by clicking on the book’s title, immediately preceding, and then saving the file when it appears on the screen.)

Copyright © 2008 by George Reisman. All rights reserved.

You can receive the Mises Daily Article in your inbox. Go here to subscribe or unsubscribe

09-04-2008, 12:28 AM	#3 (permalink)
Breakage Status: Super Horse Join Date: Sep 2003 Posts: 6,397	III Several times, I've referred to tax reductions on the rich being accompanied by equivalent reductions in government spending. It should be clear that reducing taxes without reducing government spending cannot promote saving and capital formation, but must undermine them further, even if the funds no longer claimed by taxes are overwhelmingly saved. For in this case, the government must substitute a dollar of borrowing for a dollar of tax revenues. Each dollar borrowed by the government is a dollar less of savings available for the rest of the economic system. Thus even if a dollar less of taxes results in as much as ninety cents of additional saving, there is a significant net reduction in the supply of savings available for the rest of the economic system. In this instance, while ninety cents of additional saving takes place as the result of tax reductions, a full dollar less of savings is available to business and private consumers as the result of the government's borrowing, and thus there is a net reduction of ten cents of savings available for every dollar of such tax cuts based on increases in the government's deficit. Tax cuts to promote saving and capital formation which are financed by deficit increases are thus simply contrary to purpose. The fact that they are contrary to purpose remains if, instead of being financed by borrowing, the resulting deficits are financed by the more rapid creation of money. In this case, all of the destructive effects inflation has on capital formation come into play. By the same token, balancing the budget by means of raising taxes is destructive of saving and capital formation to the degree that the additional taxes fall on saving and the productive expenditure of business firms for labor and capital goods. Ironically, it is precisely taxes that fall heavily on saving and productive expenditure that today's advocates of balancing the budget through tax increases favor. This is because the taxes they wish to increase are precisely those which land on corporations and the so-called rich. The only way that these advocates of balanced budgets through tax increases could proceed consistently with the goal of capital formation would be by increasing the taxes of the very people they claim to be concerned about, namely, the poor and the mass of wage and salary earners, who save relatively little. Indeed, the only way that greater saving and capital formation is possible in the absence of decreases in government spending, is by means not only of increasing such taxes to the point of balancing the budget, but also increasing them still further, to compensate for decreases in the kind of taxes that land more heavily on saving and productive expenditure. In essence, if one advocates greater saving and capital formation and yet refuses to support reductions in government spending, one is logically obliged to advocate increasing the taxes of wage and salary earners and of the "poor" in order both to balance the budget and to compensate for reductions in taxes on profits and interest and on the "rich." But there is absolutely no reason to advocate such a downright fascistic policy. (As I've shown, just such a policy has been pursued in Sweden, the model country of today's "liberals.") Instead of sacrificing anyone to anyone, the simple, obvious solution is sharply to reduce the sacrificing that is already going on — namely, sharply to reduce and ultimately altogether eliminate pressure-group plundering and the government spending that finances it at the sacrifice of everyone. (The ultimate, truly progressive long-range goal would be the elimination of virtually all government spending other than for defense against common criminals and foreign, aggressor governments. The first is the police function of state and local governments; the second is the national defense function of the federal government.) This analysis makes clear that an essential flaw of so-called supply-side economics — the policy both of the Reagan administration and of the present Bush administration — was the failure to face up to the need to reduce government spending. While the policy of reducing taxes by both administrations was perfectly correct, most of the potential benefit of the tax cuts was lost through the corresponding enlargement of federal budget deficits. Regrettably, both administrations and their supporters lacked the courage required to abolish government spending programs to make those tax cuts possible without deficits. "The essential flaw of so-called supply-side economics — the policy both of the Reagan administration and of the present Bush administration — was the failure to face up to the need to reduce government spending."Their failure to have done so explains why the great mass of the American people have not benefitted from the tax cuts as they should have. The explanation is that, absent equivalent reductions in government spending, the tax cuts did not translate into increases in capital formation, but the opposite. Instead of there being more demand by business for labor and capital goods, there was less; instead of more rapid economic progress and rising real wages, there has been economic stagnation or outright decline, along with stagnant or falling real wages. Ever-growing government intervention, especially in the form of environmental legislation, has also worked against capital accumulation by requiring the use of more and more capital to achieve the same results, such as requiring gas stations, dry-cleaning establishments, and numerous other types of businesses to engage in costly capital investment for the sake of protecting the environment rather than for the production of goods and services. In addition, capital accumulation has been enormously undermined by the Federal Reserve System's policies of credit expansion and inflation, extending back to its inception. In the last decade, these policies were responsible first for the stock-market bubble and then for the housing bubble. In both cases, vast sums of capital were wasted through malinvestment and eaten away through overconsumption based on delusions of prosperity. Thus, for example, in the housing bubble, not only were the housing-construction and building-supply industries greatly overexpanded and an enormous number of homes built that should not have been built, but millions of homeowners were led to greatly increase their consumption on the strength of no foundation other than the rise in house prices induced by inflation and credit expansion. Earlier in the decade, the same kind of overconsumption took place on the foundation of inflated stock prices, and similar malinvestment took place in other industries, such as telecommunications. Finally, it must be mentioned that the Fed's inflation and credit expansion have also been responsible for a vast, artificial increase in economic inequality since the mid 1990s, just as they were during the 1920s. This economic inequality was built not on inequality of economic contribution, as is normally the case, but merely on new and additional money. This new and additional money created by the Fed and its client banking system, poured into the stock market and then the housing market. In the process, it created vast paper capital gains in terms of stock and housing prices — the same paper gains that brought about overconsumption. In the case of the stock market, the paper gains went overwhelmingly to the wealthy; they had the largest investments in stock and were more likely to be in a position to know how to take advantage of the rising market. At the same time, the artificially low interest rates caused by the infusions of new and additional money encouraged an artificial lengthening of what "Austrian" economists call the structure of production. Such artificial lengthenings create a corresponding artificial increase in the magnitude of profits in the economic system. This last point can be understood by recognizing that when taken in the aggregate, the funds business firms expend in paying wages and in buying capital goods (e.g., materials, components, supplies, advertising, lighting and heating, as well as machinery and plant) generate or, indeed, directly constitute the great bulk of business sales revenues in the economic system. In every year, the expenditure for capital goods constitutes equivalent sales revenues to the sellers of capital goods. In every year, the payment of wages enables wage earners to expend an approximately equivalent amount in buying consumers' goods from business. Thus the total of business firms' productive expenditures in any given year directly or indirectly show up as business sales revenues in the economic system, for all practical purposes within the same year. (The extent to which the wage earners of any given year might wish to defer the expenditure of some the wages paid to them in December into January, say, is counterbalanced by the same kind of choices made the year before.) Now sooner or later, those same productive expenditures that underlie most of the sales revenues of business also show up as costs of production of business needing to be deducted from sales revenues in the computation of profits. A key question is when do they show up as such costs of production? The same dollar amount of productive expenditure is capable of showing up as an equivalent amount of cost to be deducted from sales revenues within days or weeks or only over a period of months or years. For example, $1 million expended by grocery stores in buying produce at wholesale will show up as $1 million of such cost within days. However, $1 million expended in the construction of a new building with a depreciable life of forty years will show up as a cost of production to be deducted from sales revenues only after the building is fully completed, and then at the rate of just $25,000 per year, as per its forty-year depreciable life. Before $1 million of expenditure for the construction of such buildings could result in $1 million of depreciation cost being incurred each year, the process would have to be repeated for forty years, by which time forty such buildings would be in existence, each being depreciated at $25,000 per year. The implication of this discussion is that shifts in the pattern of productive expenditure, with respect to the time when the expenditures will show up as costs ready to be deducted from sales revenues, are capable of having a profound effect on business profits for a more or less considerable period of time. This is because while the sales revenues that result in any given year from any given amount of productive expenditure in the economic system remain the same, the costs to be deducted from those sales revenues that correspond to that given amount of productive expenditure are capable in varying degrees of being deferred to future years. Thus, for example, shifting $1 million of productive expenditure from the purchase of groceries at wholesale to the construction of a new building implies a reduction in the costs deducted from sales revenues in the economic system in the amount of $1 million in the current year. (The reduction is a full $1 million, because while the building is under construction it does not yet give rise even to the $25,000 per year depreciation cost that it will occasion when completed and brought on stream.) Thus, to the extent that the structure of production is lengthened and more and greater deferrals of cost accordingly take place in the face of sales revenues of any given amount, profits in the economic system are correspondingly increased. These are the profits of the boom period. The Federal Reserve's easy-money, low-interest-rate policy both puts new and additional money into the market that raises productive expenditures and sales revenues and simultaneously encourages the shifting of productive expenditures to points more remote from the time when they will show up as costs of production. Productive expenditures aimed at results further in the future are an inevitable accompaniment of lower interest rates. In this way, the policy of credit expansion brings about a systematic deferral of business costs in the face of any given volume of business sales revenues and a corresponding enlargement of business profits for which there is no sound underlying economic basis and which would not exist in the absence of credit expansion. Thus, to the extent that it is not the result of economic ignorance and/or sheer malicious envy, the Left's resentment of economic inequality turns out to be a resentment that logically should be directed against its own beloved policy of credit expansion. IV All of the Left's dissatisfaction and resentment should be directed against its own policies and against itself for its volitional, chosen economic ignorance. It knows nothing about the role of capital in production or what real wages and the standard of living actually depend on, or practically any other aspect of economics. It is intent on driving the machinery of government in a mental state comparable to the driver of a car or truck under the influence of alcohol or other, stronger drugs. Its response to the growing destruction it causes as it proceeds along in its mental fog is to call again and again for "change." It brings about one change after another, each time for the worse. It can neither tolerate the conditions its policies create nor find the courage to admit how profoundly wrong it has been in urging its policies, which might then permit its members to begin to learn the economics and political philosophy they need to know to urge rational policies. Instead, it is so fundamentally and profoundly wrong that it goes on upholding its ignorance as truth even in the face of the worldwide collapse of what for generations its members had expected to become a utopia, namely, socialism. Instead of taking the failure of socialism as evidence of its own ignorance, it chooses to take it as a failure of human reason. And, in consequence, it has now turned on reason, science, and technology. Perhaps in implicit recognition of its own capacity for destruction and carnage, it has turned from a movement that only a few decades ago eagerly looked forward to the results of paralyzing the actions of individuals by means of "social engineering" to now seeking to paralyze the actions of individuals by means of more and more prohibiting engineering of any kind. What the Left should want to stop are its own actions, because they are truly dangerous, and on some level it knows this. $95 $80 Instead of taking the failure of socialism as evidence of its own ignorance, the Left chooses to take it as a failure of human reason.Of course, in a further display of their ignorance and blindness, members of the Left will undoubtedly characterize the line of argument I've presented in this article as the "trickle-down theory." There is nothing trickle-down about it. There is only the fact that capital accumulation and economic progress depend on saving and innovation and that these in turn depend on the freedom to make high profits and accumulate great wealth. The only alternative to improvement for all, through economic progress achieved in this way, is the futile attempt of some men to gain at the expense of others by means of looting and plundering. This, the loot-and-plunder theory, is the alternative advocated by the redistributionist critics of the misnamed trickle-down theory. The loot-and-plunder theory is the theory of Obama, of the Democratic Party, and of much of the Republican Party. It is time to supplant it with the sound economic theory developed by generations of intellectual giants ranging from Smith and Ricardo to Böhm-Bawerk and Mises. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics. His web site is Capitalism: A Treatise on Economics. His blog is at George Reisman's Blog on Economics, Politics, Society, and Culture. View his archive of daily articles. Send him mail. Comment on the Mises blog. Portions of this article are adapted from pp. 308–310 and 830–831 of Capitalism: A Treatise on Economics. (A PDF replica of the complete book can be downloaded to the reader's hard drive simply by clicking on the book’s title, immediately preceding, and then saving the file when it appears on the screen.) Copyright © 2008 by George Reisman. All rights reserved. You can receive the Mises Daily Article in your inbox. Go here to subscribe or unsubscribe __________________ "An inexhaustible good nature is one of the most precious gifts of heaven, spreading itself like oil over the troubled sea of thought, and keeping the mind smooth and equable in the roughest weather." Washington Irving Last edited by Breakage : 09-04-2008 at 12:55 AM.