Friday, June 24, 2011

"The Data Says 'No'"

Journalist Fareed Zakaria has a disappointing article in Time Magazine entitled "How Today's Conservatism Lost Touch With Reality." The disappointment does not come from a disagreement with the overall point. I find that most political battles rely solely on rhetoric and, as Zakaria puts it, "abstract theories" that have little to do with practical application and do nothing more than provide bumper sticker slogans (pounding your fist and declaring "Freedom!" is not viable strategy). What is disappointing is the fact that Zakaria's argument is mainly economic, yet actual data is replaced with the very rhetoric and wave-of-hand dismissals he condemns. Zakaria, quite astonishingly, asks, "What is the evidence that tax cuts are the best path to revive the U.S. economy?" The implication is that evidence is lacking: a position that is blatently false.

In a December 2010 issue of The Wall Street Journal, Stanford’s Michael Boskin provided an extensive list of recent studies from Columbia, University of Chicago, Stanford, UC Berkeley, University of London, and others that support the notion that reduced taxes and decreased government spending bring about economic growth. Some have interpreted this as a movement toward a new economic consensus. The research of Harvard's Alberto Alesina and Silvia Ardagna on fiscal policies spanned 21 countries and roughly 40 years. Their findings indicate that economic expansion occurred under reduced taxes, while recessionary periods were under tax hikes. A 2010 study by Swedish economist Andreas Bergh and Oxford's Martin Karlsson found that increased government spending (surprise, surprise) reduces economic growth, even in Bergh's own country (the poster child of social democracy). 

Economist Thomas Sowell writes,

When the tax rate on the highest incomes was 73 percent in 1921, that brought in less tax revenue than after the tax rate was cut to 24 percent in 1925. Why? Because high tax rates that people don't actually pay do not bring in as much hard cash as lower tax rates that they do pay...Then and now, people with the highest incomes have had the greatest flexibility as to where they will put their money. Buying tax-exempt bonds is just one of the many ways that "millionaires and billionaires" avoid paying hard cash to the government, no matter how high the tax rates go...Even more so today than in the 1920s, billions of dollars can be sent overseas electronically, almost instantaneously, to be invested in other countries--creating jobs there, while millions of Americans are unemployed...Despite political demagoguery about "tax cuts for the rich," in human terms the rich have less at stake than working people. Precisely because the rich have so many ways of avoiding taxes, a high tax rate is likely to do them far less harm than it does to the economy, on which millions of people depend for jobs. 

Zakaria's foreign evidence (e.g. China, Germany) lacks a sense of proportion. The “German Miracle” is largely due to the elimination of price controls and the slashing of marginal tax rates following World War II and Nazi rule. China's success includes a number of factors, but owes much to the economic reforms of the late 1970's that began liberalizing their markets. Of course, things like trade, technology, culture, and so forth play a role in economic success, but to look at these countries and assume more government is the answer is historically irresponsible. America’s own welfare state has been expanding since the early 20th century thanks primarily to FDR's New Deal. The ideologies of the Progressive Era infected Democrats and Republicans alike and changed the way present-day Americans view the role of the state. America has been slowly moving away from a market-friendly economy, while emerging markets have been doing the opposite.

Zakaria's best argument is that of government investing in technology, but perhaps he is unaware of our politicians' complaints of “jobs lost” because of the iPad or ATMs. Compared to the massive spending of the past decade, cutting both taxes and government spending appears to be the best way to go.

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