Beauty is Imperfection

Here’s a nice post by Megan McArdle at the Atlantic that will largely be disregarded because it’s a spit in the eye to a lot of people. Not only to supply-siders and free-market fundamentalist crazies, prolific as they are like mushrooms after the rain, but to people who consider themselves reasonable when they suggest that, of course, tax increases harm the economy. But what if that weren’t true?

“Ugh,” say those ultra-generous and altruistic supply siders, who only care for the common good and fairness. “How horribly mean and counterintuitive you are, Eric. ” This is where conservatives with fraternal patronizing smiles pull out the only mathematical graph many of them ever bothered to learn–the Laffer curve, which for them is more important than the Pythagoras theorem, the concept of pi or even 2+2 =4. The Laffer curve says that the lower taxes are, the greater the incentives for people to produce, which actually means more revenue. This graph has proved to be increasingly meaningless in the real world. It’s true in a very cramped perspective: Arthur Laffer, its namesake, originally explained that you can raise taxes and raise revenue, but only up to a certain point. That’s the “curve” part. After you reach this “inflection point,” for lack of a better phrase, then supposedly you kill incentive. But in the real world, tax cuts have never raised revenue and economists don’t take the idea seriously. The idea as practiced in the military-industrial idiom offered by the Ronald Reagan and George W. Bush administrations has proved a horrible failure as those two “conservatives” ran up massive deficits, one of which had to be cleaned up by “tax and spend liberal” Bill Clinton. And yet the supply-siders, possessed of a faith one can only call religious, still hang onto their silly idea that high taxes applied in the U.S., even those at their highest in the New Deal years, should naturally stop people from working.

I won’t step on Ms. McArdle’s glory  and repeat her argument as if it were my own, but the gist is this: at a certain point, rich people have enough that they don’t have a greater incentive to work, and they might trade the money by, let’s say, monetizing their leisure time. In other words–I’ve got mine, time to relax. In other words, greater tax breaks for them at some point equals less revenue. Meanwhile, there is another simple incentive–the one to hoard. Congressional Budget Office notes, in fact, that sometimes tax cuts for businesses and the wealthy do not lead to reinvestment or hiring but simply to keeping it all in house.

McArdle has a great way of making difficult subjects simple, but in this case I hope to one-up her (or one-down her, as it were), because this argument I think can be made even simpler than that. I believe Republicans, financial geniuses that they are, can’t do the simplest calculation: that one half and zero are not equal.

The argument of the Mad Laffers, as I can’t resist calling them, is that the rich will stop working if they have had their taxes increased to some larger number. Why would they work, after all, if they got nothing? A very linear argument for a very linear crowd. The financial advisors I interview might call this an example of the tax tail wagging the dog: You wouldn’t ignore a good investment, say, just because you’re worried about the taxes on it. Nor would you stop working. In the worst case scenarios in the past, the very rich were getting 10% of an obscenely large number–which in this country today could be something like 450 times what their lowest paid countrymen are getting. Just to keep you guys up to date, 10% is never zero unless it’s a percentage of zero. If the government asked for a part of your bar of gold, would you turn down the bar of gold completely if the choice were nothing?

The argument seems counterintuitive, of course, to people who believe Ronald Reagan invented economics (and who have no real idea of how our last 30 years of “prosperity” really came about). These people can conveniently ignore the fact that our post-World War II economic boom, and the inventions of tons of gadgets and the building of oodles of homes and the construction of myriad space craft, took off in an atmosphere of progressive tax rates that reached 90% for the wealthiest Americans. Now why would the rich work under those conditions? Were they just stupid? Could it be, as Karl Smith, McArdle’s muse for this article, says, that people making less because of taxes actually work harder to make up for it (and goose the economy forward)? Or was it simply that the rich were still getting paid PLENTY? Is it that something is still better than nothing? The incentive, after all, is not gone, nor is the ability to live well.

Instead, what really disappeared with 90% tax rates was the incentive of people to hoard money and join a rare set of American aristocrats in a country that’s not supposed to have an aristocracy. Of course, following Reagan’s tax cuts of the 1980s, as Paul Krugman and lots of other people have noted, the economy has continued to ebb and flow just as it has before, only now we have fewer people getting a hold of the wealth. The disparity in riches has reached outrageous proportions. The wealthy are holding back more of their money and wages are stagnating for everybody else, especially those making less than the median household income–$50,000 a year or so.

Republicans, convulsed with fear as they usually are that their calculations don’t work out, lash out at Obama with exceedingly silly charts such as this one, which does the unthinkably stupid thing of blaming Obama for not directly controlling world commodity prices, which would, if they thought through it, turn him into Hugo Chavez.

And yet there is a broad dislike of taxes among all Americans, not just red staters. A feeling that it’s the feds who are taking more of your money and your soul and keeping you from the American dream. As far as I know, they haven’t invented an economics term for this fallacy, but I’ll try one from psychology: transference. It’s hard to blame the company that hired you for keeping your wages low or even to blame them for sending your work overseas. The real problem is that your pie is shrinking, but instead you want to blame the entity that’s cutting off a piece of it, even if the portion hasn’t changed in 25 years. Meanwhile, the good that entity is doing for you (keeping your roads built; giving you a good, free education; giving your parents Medicare; giving you unemployment benefits; and pumping R&D money into your economy) largely goes unnoticed.

Another fallacy regular people believe is that Reagan cut taxes and that led directly to making them wealthier. That wealth, however, is largely a phantom euphoria of having credit cards and asset inflation (from your house and stocks, which is mainly rising because foreign money is coming into your economy to take advantage of a cheap dollar). And of course, your feelings of wealth also stem from a completely fallacious belief that a pension and a life of ease on 12% laddered bonds await you as they did for your Greatest Generation Dad.

All bullshit. Even a lot of conservatives would laugh today if you asked them how a single employed household member could support a spouse and children and two cars and a mortgage. The answer: he can’t. It’s a pipe dream of the post war era.

Liberals, of course, have a lot of dippy ideas about the economy. If some pinko told me that it’s common sense wealth should be redistributed, I’d ask him if he’s aware how vanishingly small that wealth would become in transit. (Believe me, after seeing “Capitalism: A Love Story,” I’d like to beat up on some liberals for a while–maybe later.) But why punish hippies for their financial ignorance, when they are usually the first to admit it? Conservatives are far worse, because they are the ones who, according to their own advertisements, are supposed to know better. But the more I get to know finance as a reporter, the more I feel that conservatism, per se, doesn’t necessarily know more about money. Conservatives just love money a lot more and would hold onto it at the detriment of everything else.

Here’s an argument: a person will work for a living. He will work whether that money is a little less or a little more, he’s not going to stop. A living is a living, even if it means living with taxes.