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Wednesday, June 27, 2007

Caution is advised

In advocating for what I would consider to be pro growth policies, it is advisable to avoid scare tactics and proclaim that things will be terrible if x,y and z are not done. It might be possible to have an OK economy in the face of poor policy due to the benefit of accelerating trends of technological progress.

In any event, the world of 2100 will be more different from 2006 than 2006 is different from 8000 BC.

Biotechnology is converging with information technology, and by some estimations medical knowledge is doubling every 8 years at this point.

Even energy has burst forth from what appeared to be a century of stagnation into an area of rapid technological advances. Beyond simple market forces like the price of oil, the revolutions in computing, biotechnology, and nanotechnology are all converging on the field of energy through multiple avenues to chip away at the seemingly gargantuan obstacles we face. Energy, too, is in the process of becoming a knowledge-based technology, and hence guaranteed to see accelerating exponential innovation.

Furthermore, the case must be made clarifying that which is less than desirable about current policy so that people don't opt for worse policy because they believe that this is as good as it gets. The economy is better than it is portrayed by the media, however:

The reality is the U.S. economy is under-performing because there's still too much intervention by government at all levels around the world.

The pro-market arguments must be more sophisticated then simply too much taxing and regulating.

Food prices are soaring because federal politicians manipulated incentives to produce more corn to make into ethanol.

Oil and gasoline prices are soaring. Supply cannot keep up with demand because all levels of the supply chain are constrained, from the prevention to build more refineries to government's ownership of petroleum assets globally. This article illustrates one problem.

Health care seems to be a perpetual political problem because the market has been interfered with by government for sixty years. Governments around the world put ceilings on prices, thereby forcing producers to try to make up for the skimpy profits there by pushing prices higher in the U.S.

Hidden from plain view but a burden nonetheless is the cost of regulatory compliance.

The costs to the public of complying with federal health, safety, environmental and economic regulations appear nowhere in the federal budget.

Economist Mark Crain's research for the U.S. Small Business Administration finds that in 2006 regulatory compliance cost Americans $1.14 trillion. Astoundingly, that approaches half of last year's total federal spending of $2.6 trillion, and exceeds 9% of U.S. GDP — and tops Canada's $1 trillion GDP.

Combining regulation and spending, the federal government's share of the economy is a whopping 29%.

We might be getting much less benefit than this cost.

The case for limited but effective government must be made in simple clear terms, again and again without risking the loss of credibility engendered by an hysterical approach.


Bret said...

I was hoping you'd write something like this post, especially the first part. Many of the Dems' proposals (such as letting the tax cuts expire) are probably bad, but even in sum total may not be bad enough to cause a serious and long recession. Kudlow and a number of other commentators have been painting doomsday pictures and I think they are way overly pessimistic. Just another variety of apocaholism.

There was good news today - the non-secret ballot for union votes didn't pass. Congress may not ultimately be as anti-growth in practice as some people fear.

Howard said...

positives:low 15% tax rate on capital, generally good rule of law, accelerating tech. progress, recent setbacks of litigousness in court

negatives:uncompetitive corporate tax structure, regulatory burden, threats to free trade and favorable taxation of capital

As long as not too many threats are actually realized we'll be fine. This is a great country and we can endure much (including a Hillary presidency) and do well. I'd just rather not conduct that experiment.

Duck said...

Great post, Howard. I agree with you. Republicans bellowed over the disastrous consequences to come when Bill Clinton passed a tax increase early in his term. By the end of his term the economy was booming and we were producing a budget surplus.

I've always thought that the tax law should treat capital and labor equally. You neither want to punish the supply side or the demand side of the economy. I would be in favor of a "meeting in the middle" approach, say 20%. If all we do is raise capital gains taxes and leave income taxes as is, I do think that the economy will suffer.

Bret said...


I think that capital gains taxes are inherently worse for the economy than income taxes. For example, income is taxed when you make it. Capital gains aren't taxed until you sell. That tends to cause investors to hold longer than is optimal which means that less good, older investments get too much money and newer potential ventures end up being starved for investment.

However, at least for the moment, there seems to be adequate liquidity for most businesses, so a slight increase in capital gains may not make much difference.

Oroborous said...

But income being taxed as it's made, rather than when it's spent, is also a tax on wealth-creation.

I'd be more in favor of abolishing income taxes rather than consumption taxes.