Sunday, March 22, 2009

The Mysterious Case of Disappearing Prosperity

There is a reason that Walter Williams is in the top five star hitters of economists: his reasoning is so clear, his examples so down-to-earth, and his common sense so obvious that a middle-schooler would find his explanations accessible.

Some people have a gift for explaining and entertaining. Not enough of them become teachers, as those of us who have fallen asleep in class can attest. But Dr. Williams can do both, and if there were a hundred more of him speaking out, Americans would not be permitting the casual rape of their economy by the Obama Gang of One.

What follows is a good example of Dr. Williams' reasoning. He’s explaining how prosperity disappears. Along the way he gives us a few other lessons:

Ask the average person which is the correct answer to the following question: Which president gave the biggest tax cuts for the rich-Reagan or Bush? I would bet the rent money that you would not get the correct response, which is: Presidents have no taxing authority.

Article I, Section 8 of the U.S. Constitution says: “The Congress shall have power to lay and collect taxes, duties, imposts and excises.” I know that many politicians and news media people read my column. How do we characterize them if they continue to speak of presidents cutting or raising taxes?

Well, professor, since this is a PG-13 blog, I’d characterize them as ignorant at best. In fact, they ought to be held partially responsible for the mess we’re in. What they know about the Constitution you could fit in a thimble and have plenty of room left for their integrity. Even if their knowledge is crystal clear that Congress regulates the levying of taxes such comprehension will not change their reporting. The MSM is fading partially because they do not hew to the truth, Professor. Instead, they stick to what will further The Cause.

Another tax question:
- - - - - - - - -
If there’s an imposition of a property tax on your land, who pays the tax? I guarantee you that land does not pay taxes; only people pay taxes. That means a tax on your land is a tax on you.

You say, “Williams, that’s pretty elementary, isn’t it?” But what do you say to a politician or news media people who propose increasing corporate taxes as means to get rich corporations to pay their rightful share of government? They should be told that they speak nonsense because corporations, like land, do not pay taxes; only people pay taxes.

If a tax is levied on a corporation, and if it is to survive, it must raise the price of its product, or lower dividends or lay off workers. In each case, it is people, not some legal fiction called a corporation, who bear the burden of any tax levied on the corporation. An important subject area in economics called tax incidence says that the entity upon whom a tax is levied does not necessarily bear the burden of the tax. Some of the tax burden can be shifted to another party. That’s precisely what corporations do and as such they are merely government tax collectors.

Ah, yes. But you forgot to mention that the higher prices make the Eeevil Kapitalists look bad. Government gets away with another scam and lives another day to raise taxes in some other sector. Government is always hungry and can barely exist on the paltry amounts it confiscates now.

Here’s another tax question: Which worker receives the higher pay: a worker on a road construction project moving dirt with a shovel or a worker moving dirt atop a giant earthmover? If you said the guy on the earthmover, go to the head of the class. But why? It’s not because he’s unionized or that employers just love earthmover operators. It’s because having more capital (tools) makes him more productive and therefore earn higher wages.

It’s not rocket science to conclude that whatever lowers the cost of capital formation enables workers to have more capital to work with and enjoy higher wages. Policies that raise the cost of capital formation such as capital gains taxes, low depreciation allowances and high corporate income taxes, and thereby reducing capital formation, serves neither the interests of workers, investors nor consumers.

However, such policies feed the government and that’s the whole point. The government has long since ceased to serve the people. Instead, people exist to churn out food - in the form of money - for the bottomless pit of government’s stomach. Meanwhile, ask someone how much money they make and they’ll tell you their gross salary, which is a gross fabrication. What they truly earn is what is left after government eats (more than) its share of the pie. Anyone who is self-employed has long since learned to sneer at that airy-fairytale.

The invention of withholding taxes from the employed was diabolically clever. Now, when folks get a tax “refund” it is mentally processed as a “gift” from the government. In reality, if withholding tax has to be done at all (for our own good), we at least ought to get some interest back on what they kept for the year . But don’t hold your breath waiting for fiduciary fairness. Ain’t ever gonna happen as long as bureaucrats are in charge.

Taxes also reduce transactions. I need my computer repaired. You and I agree that the job is worth $200. Suppose there’s the imposition of a 30 percent income tax on you. That means you would net only $140 and might refuse the job. You might suggest that if I were willing to pay you $285 you would do the job because at that price your after-tax earnings will be $200 -- what doing the job is worth to you. There’s a problem. The repair job was worth $200 to me, not $285. So it’s my turn to say the heck with it, or would we and society be better off if you and I agreed to the repair job but did not tell anybody? I’d say yes, but we’d be criminals.

Every tax raise breeds more of these “criminals”. The coming implosion of the economy will see an explosion of “off-the-books” employment. Here’s one view:

As many as 52 million people could lose their jobs from the economic crisis worldwide, says the International Labour Organization, an agency of the United Nations. Without the informal sector, many of them will have nowhere to go.

Informal jobs “will absorb a lot of people and offer them a source of income” over the next year, says W.F. Maloney, an economist at the World Bank in Washington. There are also some informal workers in the U.S. and other wealthy countries, including off-the-books maids, gardeners and “gypsy” cab drivers, though the phenomenon isn’t nearly as widespread as in the developing world. Analysts say it may add up to as much as 10% of the overall U.S. economy, and probably is growing now that employers are slashing staff, forcing more people to try their own small-scale businesses or make do with part-time contract work.

Massachusetts, in a laughable attempt to curtail “fraudulent” economic activity, has created something called the “Joint Task Force on the Underground Economy and Employee Misclassification”. These bureaucrats even have a toll-free number you can call to turn in the crooks. Ah, happy new Soviet Day. We get to spy on one another. I wonder if they offer rewards? If they do, the calls will certainly increase. Everyone will be looking for a way to pay the bills and the job of informer has a long, if disreputable pedigree.

Massachusetts is infamous for the most fraudulent public project in recent memory: The Big Dig. Here is a report from the Boston Globe from last July:

Massachusetts residents got a shock when state officials, at the peak of construction on the Big Dig project, disclosed that the price tag had ballooned to nearly $15 billion. But that, it turns out, was just the beginning.

Now, three years after the official dedication of the Central Artery/Third Harbor Tunnel, the state is reeling under a legacy of debt left by the massive project. In all, the project will cost an additional $7 billion in interest, bringing the total to a staggering $22 billion, according to a Globe review of hundreds of pages of state documents. It will not be paid off until 2038.

Contrary to the popular belief that this was a project heavily subsidized by the federal government, 73 percent of construction costs were paid by Massachusetts drivers and taxpayers. To meet that obligation, the state’s annual payments will be nearly as much over the next several years, $600 million or more, as they were in the heaviest construction period.

Big Dig payments have already sucked maintenance and repair money away from deteriorating roads and bridges across the state, forcing the state to float more highway bonds and to go even deeper into the hole.

Among other signs of financial trouble: The state is paying almost 80 percent of its highway workers with borrowed money; the crushing costs of debt have pushed the Massachusetts Turnpike Authority, which manages the Big Dig, to the brink of insolvency; and Massachusetts spends a higher percentage of its highway budget on debt than any other state.

Large government oaks from little acorns grow. When this project was proposed in 1983, the cost was supposed to be one-fiftieth of what it turned out to actually cost. And they only held it down to that by lopping off original parts of the proposed plan. In other words, they don’t call it Taxachusetts for nothing.

Back to Dr. Williams:

You might wonder how congressmen can get away with taxes and other measures that reduce our prosperity potential. Part of the answer is the anti-business climate promoted in academia and the news media. The more important reason is that prosperity foregone is invisible.

In other words, we can never tell how much richer we would have been without today’s level of congressional interference in our lives and therefore don’t fight it as much as we should.

He’s right. You can’t fight what isn’t there. Which is why, unless you’re willing to live outside the law, government always wins. It is as though they have set out to prove that crime does pay. In fact, criminals are often aided, abetted, and bailed out by government.

This has led to cynicism, indifference, and quiet defiance on the part of individuals who aren’t looking for a bail-out. As far as they are concerned, the actual quote would read: “Hi, we’re from the government and we’re here to eat you.”

Ronald Reagan put it best:

“The government’s view of the economy could be summed up in a few short phrases:

1.If it moves, tax it.
2.If it keeps moving, regulate it.
3.If it stops moving, subsidize it.”

Our nation is all the more poverty-stricken for the disappearance of politicians who could lead and who operated from a firm set of principles formed by experience and integrity. Our present situation, however, is simply another example of what is missing.

It's a case of the disappearance of public virtue. And if you imagine that Obama has this quality, just (for starters) look at the book deal he signed a few days before he took office.

Update: Thanks to alert reader Independent Accountant, I’ve corrected my mathematical error.


Independent Accountant said...

Learn your math. You mean one fiftieth (1/50), not fifty times less. Think about it.

Henrik R Clausen said...

Phew, that was a long one!

One reason wealth disappears is that loans are being paid back at a staggering rate, because people have lost confidence in starting new and exiting projects, and are scaling back.

When loan meets money, what happens? They eliminate each other and cease to exist. Thus, the amount of money in the system declines. The amazing magic of fiat currency :)

Of course, the central banks and governments don't exactly thrive on that. Thus, the need to create more money through more debt. That is an approach that is bound to implode some day.

Question is, will we still have enough trust in government to permit it to take even more extraordinary measures by then?

I hope not...

spackle said...

It appears our economy is being run by Tony Soprano. Actually, thats an insult to Tony Soprano.

Henrik R Clausen said...

Actually, thats an insult to Tony Soprano.

Agreed. For Tony and his 'family' take some serious personal risk when doing their .. business. What do the Plutocrats of Wall Street get? A golden parachute - for messing up amounts of money orders of magnitude larger than the mafia ever did.

Ilíon said...

Money isn't wealth; debt isn't wealth.

And, so long as people allow themselves to be distracted by envy about "plutocrats," government will keep drinking our blood.

Robert Marchenoir said...

Walter Williams writes :

"Which worker receives the higher pay: a worker on a road construction project moving dirt with a shovel or a worker moving dirt atop a giant earthmover? If you said the guy on the earthmover, go to the head of the class. But why? It’s not because he’s unionized or that employers just love earthmover operators. It’s because having more capital (tools) makes him more productive and therefore earn higher wages."

I think this is wrong.

Of course, a company using a giant earthmover is way more productive. The extra value thus produced may be allocated to the earthmover operator's wages. But that's only a possibility.

It may also be allocated to buying more earthmovers, to hiring more workers, to increasing shareholders' dividends, or to fatten the CEO's paycheck.

If the earthmover operator was an independant contractor, chugging along from city to city with his own giant machine and offering his services, he would certainly earn more than if he did the same with just a shovel, because the productivity gains would be automatically directed towards his own pocket.

However, if he works for a salary and the equipment belongs to his boss, the level of his wages would be determined by the supply and demand on the labour market for giant earthmover operators.

I guess the reason why Walter Williams chose that example is that giant earthmover operators do earn high wages. I also suppose that the reason why they do is that it's a very qualified job, that those machines are not only very efficient, but difficult to operate, hugely expensive to repair if you crash them, and potentially very dangerous if mishandled.

Therefore I would bet that training to become a giant earthmover operator is long, difficult and very selective. Few people manage it. Demand exceeds supply. Wages are high.

Let's prove it with an opposite example. Suppose you chain people to a desk with a mission to answer the telephone. It's a 1930-type, black bakelite contraption. All they have to do is take the receiver off the hook when it rings, and answer repetitive customer enquiries by reading instructions off printed cards.

How much would you pay them ? Very probably, the minimum wage.

Now, let's take the same people, and put them in front of a modern computer connected to a large network with a big server, running sophisticated and expensive customer management software. In other words, a call center.

Those workers would be much more productive, answering more phone calls per hour and giving out answers quicker. How much would you pay them ? Still the minimum wage, very probably.

Why ? Because in both cases, it's a low-qualification job. It's easy to find people able to do it, and they do not need to be very educated.

In this case, the extra productivity coming from the use of a computer system does not go to the workers. It goes somewhere else.

Zenster said...

Much of what Walter Williams has to say is spot on. However, this statement:

If a tax is levied on a corporation, and if it is to survive, it must raise the price of its product, or lower dividends or lay off workers. In each case, it is people, not some legal fiction called a corporation, who bear the burden of any tax levied on the corporation.

... makes a serious and false presumption. Namely, that the CEO and other executive staff are not being over-compensated. The current survival of many American corporations is not entirely compromised by taxation but by the bloated and totally unjustified salaries and benefits of these "Good-Old-Boy" Ivy League elites.

Considering how Harvard University churns out, not only so many of our lawyer politicians, but the MBAs who go on to run the companies that make campaign contributions to said politicians, am I the only one who detects a distinct whiff of abject cronyism?

Francis W. Porretto said...

Nor is this some sort of new discovery. Hearken to this fictional vignette from the pen of the late, great Cyril Northcote Parkinson -- yes, he of Parkinson's Law -- in which a British surgeon has just presented a bill of $4000 to his patient:


"Your fee of $4000," he concluded, represents the proportion I retain from the last $44,500 of my income. To pay you without being worse off would mean earning another $44,500 more than last year, no easy task."

"Well," replied the surgeon, "you know how it is. It is only by charging you that much that I can afford to charge others little or nothing."

"No doubt," said the patient. "But the fee will absorb $44,500 of my theoretical income -- no inconsiderable sum. Might I ask what proportion of the $4000 you will manage to retain?"

It was the surgeon's turn to scribble calculations, as a result of which he concluded that his actual gain, after tax had been paid, would amount to $800.

"Allow me to observe," said the patient, that I must therefore earn $44,500 in order to give you $800 of spendable income; the entire balance going to the government. Does that strike you as a transaction profitable to either of us?"

"Well, frankly, no," admitted the surgeon. "Put like that the whole thing is absurd. But what else can we do?"

"First, we can make certain that no one is listening. No one at the keyhole? No federal agent under the bed? No tape recorder in the -- ? Are you quite sure we can keep this strictly to ourselves?"

"Quite sure," said the surgeon after opening the door and glancing up and down the corridor. "What do you suggest?"

"Come closer so that I can whisper. Why don't I give you a case of Scotch and so call it quits?"

"Not enough," hissed the surgeon. "But if you made it two cases -- "


"-- and lent me your cabin cruiser for three weeks in September -- "


"-- We might call it a deal!"

"That's fine. And do you know what gave me the idea? I studied Parkinson's Second Law and realized that excessive taxation has made nonsense of everything!"


(Please pardon the use of the dollar sign in the tale above. It should be the sign for the British pound, but I was unable to find the HTML escape character for that.)

Henrik R Clausen said...

Ilíon, I don't think using the term 'plutocrats' about the Wall Street, ehm, advisors to president Obama constitutes envy.

Mainly, I'm trying to figure out what is going on, how it is working, and what would be the proper terms to describe things. I don't mind income and profit - not at all - and I don't mind people keeping what they earned.

What I do mind, however, is this manipulation of our financial and monetary systems that seems to have no particular purpose, except keeping the incumbent elite in power.

I want to take democracy back, for I think it has been hijacked by the elite - here in Europe as well. A return to the gold standard might be a way to accomplish that.

For now, battling the onsetting debt-and-inflation machine seems the thing to do. Discrediting the undue influence of the wizards of finance, who deserve shame, not rewards, is part of that.

Ilíon said...

Zenster: "[a statement by Williams] ... makes a serious and false presumption. Namely, that the CEO and other executive staff are not being over-compensated."

And what does "over-compensated" mean? And who gets to decide? Is there a "moral" price to be paid as compensation to a corporate executive -- such that to pay an executive either more or less is an offence against morality?

Might it be that there is also a "moral" price for the work that non-exectuives do? Perhaps even Mr Zenster is "over-compensated?"

Henrik R Clausen "Ilíon, I don't think using the term 'plutocrats' about the Wall Street, ehm, advisors to president Obama constitutes *envy.*"

I can read only what you write.

And thus might we come to believe that most people do not wish to free their minds of the politicised envy by which their "public servants" control them.

Zenster said...

on: And what does "over-compensated" mean?

I think it's pretty safe to say that awarding oneself several thousand times the average worker's pay at a given company can constitute "over-compensation".

An important qualification is that all cases of over-compensation should only deal with publicly held business entities. Privately held companies may pay themselves whatever the heck they want.

However, one could only hope that stock holders had the wits to constrain executive compensation for the sake of their own dividends. To date, this has not proven the case and, due to this lack of corporate restraint, we are treated to the sordid spectacle of under-performing AIG executives being treated to some 165 million dollars in bonuses.

And who gets to decide?

As I noted, shareholders.

Is there a "moral" price to be paid as compensation to a corporate executive -- such that to pay an executive either more or less is an offence against morality?

To some extent, yes. Sadly, as must be the case in a free society, that "moral" decision must be left to the individual in question. Be it the person who is knowingly receiving ridiculous sums for doing very little or the free man on the street who is entitled to adjudge such over-compensation as being immoral.