Real Kato Blog: Five Lessons: Macroeconomics

Today's lesson: Five Lessons in Macroeconomics. Or, Five Things Conservatives Get Wrong About the Economy. This one is a little political, so sorry. Also, I'm just an armchair economist, so while I've put a fair amount of thought into these arguments, I'm not going to claim enough expertise to be 100% sure I'm right.

Enough disclaimers. On with the smackdown.

1. Free markets don't always give us the best outcome. If this wasn't made abundantly clear by the two worst economic periods in our country's history spawned by the excesses of unregulated markets, just note that all the theories behind laissez-faire economics are just that: theories. There are zero actual examples of pure capitalism in human history. We simply don't have markets that are completely unconstrained by geography, monopolistic practices, or lack of consumer understanding. So you can argue all you want about how great capitalism is in theory, but I could argue just as strongly about the theoretical merits of communism... and neither of us would be right.

2. The government bailout of the banking system was necessary. The last time we had a major collapse in the economy and the government failed to step in to save the banking system, we had the Great Depression: twelve years of economic contraction and unemployment reaching 25%. When the economy faces a major crisis, there is only one entity big enough of capable of staving off collapse, and that's the federal government. Yes, federal intervention on this scale causes other problems, like budget deficits (see next item). But doing nothing would have been much, much worse.

3. We have borrowed our way to prosperity. The booming economic growth we experienced in the late 90s and the mid oughts were largely illusory, and the reason for that is budget deficits, trade deficits, and speculative bubbles. Imagine if you were buying cars and big-screen TVs while racking up credit card debt... and counting on Amway revenue to eventually pay off that debt. When the pyramid scheme collapses, you're doomed. So when we do get through periods of economic prosperity, we need to use that time to shore up our economic fundamentals... like, for instance, raising taxes to get a handle on our federal debt. And that leads to the next item...

4. You can't always lower taxes. This might seem self-evident, but it's amazing how many people complain about every tax increase, as if the only valid tax rate were zero. Or perhaps the government should pay us for the privilege of providing military services and health care for the elderly? You can argue that taxes are structured unfairly, or that government is too large. But until you show me what your proposal is for balancing the federal budget while not raising taxes, your complaints about taxes just seem like self-serving whining.

"But oh," you might say, "taxes hurt the economy." Well, read on.

5. Taxes are not consumption. Taxes neither add nor remove money from the economy; they only move money from one place to another. A tax cut stimulates the economy, yes, but so does increased government spending. Fiscal conservatives generally argue that taxes (especially taxes on the wealthy) take money away from those who would invest and create jobs, but decreased government spending also reduces employment, and perhaps more importantly, it might reduce the circulation of wealth. Sure, we need to have investment for economic growth to occur; but we also need mechanisms to ensure that we have an educated workforce, a prosperous consumer class, and the free flow of goods and services throughout the economy. Are you counting on free markets to make that happen? Go back to item 1.

Permalink 2 Comment

Posted by Ken in: interesting, politics

Comments

Comment #1 from Jenn (Guest)
2009 Jul 24 - 11:19 am : #

I would like to print this out and start whacking people over the head with it.

Comment #2 from John C (Guest)
2009 Jul 30 - 2:29 pm : #

I like this post. I think you got everything essentially correct. No one wants to pay taxes. But grown ups pay them. It has so much more to do with the psychology of Americans than it does with valid economic theory. I am also proud of you for continuing to blog in the face of facebook.

Comments are closed for this post.

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