The essence of the matter

Have you wondered why economists seem so divided over on their interpretations of the current economic crisis? Here is my attempt to boil it down.

Keynesians and Classicals (of various kinds) agree on one key point; there is currently a serious lack of confidence in the economy that is inhibiting private business investment expenditures. What sharply divides them are views as to what caused this crisis of confidence and what needs to be done to fix it.

Keynesians think that the market failed because of lack of regulation in a dynamic innovative environment. Those with Classical inclinations believe that exactly the opposite is true; that it was ill-conceived regulatory initiatives like the concerted push to expand home ownership in America, underwritten by FANNIE MAE and FREDDIE MAC, and facilitated by easy money, that caused a housing bubble and runaway financial asset expansion. The latter was seriously aggravated by a cartel of rating agencies indirectly created by government licensing requirements and operating with serious conflicts of interest.

Keynesians think that more government-Fed-financed stimulus is needed, and that higher taxes don't matter. Those who believe in the market believe that permanent significant tax reductions (comprehensive tax reform) and a commitment to fiscal responsibility at the various levels of government is what is needed. This will entail credibly limiting the power of the Fed as well.

Look not to Israel, the Arab states or the U.S. for a solution - look to the United Nations!

See the pdf file at this link

click here

- an article from Commentary magazine, current issue, by Michael Bernstam.

I found this article amazing in its simplicity. It seems so obvious to me after reading it that I marvel that anyone carefully contemplating the Israel-Palestinian conflict could fail to consider the role of UNRWA. But you never hear a word about it.

If Bernstam is right, then UNRWA must stand as the most perniciously destructive and counterproductive of the agencies of the UN. The "achievements" of the UN in the world have been rightly criticized and even vilified. But this must be the worst of them. It is a case mostly of unintended harms, but that is no mitigation to those millions whose lives it has affected.

Those who rise to condemn Israel pointing to the injustice of the displacement in 1949 of the Arabs whose descendants became today's Palestinians, should read this article carefully and consider the balancing of evils over the years that have attended all of the many refugees from that awful period in history. Absent the dependency enabling (nay producing) role of UNRWA, the refugee status of the Palestinians would not have endured. In the meantime, UNRWA has evolved into a Palestinian controlled, terrorist sponsoring, paramilitary organization that is also an all-encompassing welfare state perpetuating refugeeism. Remember, this is an agency of the United Nations.! And, as such, it receives most of its financing from the taxpayers of the United States!

What this article tells me (and I do not discount the possibility that I am naïve about some of it) is that while we correctly report, analyze and condemn current injustices on both sides of the issue - being the predictable result of political opportunism and the racism of fundamentalists and ultra-nationalists - the foundationally pathological structure of the Palestinian situation is at the root of it. If this is not fixed the problem quite simply will never go away and will probably get steadily worse. Yet, if Bernstam is correct, the solution he offers, the abolition of UNRWA, is the obvious fix.

I highly recommend you read this article.

Income inequality is NOT a bad thing.

In light of the current debate in the Congress about extending tax cuts for the "rich," I feel compelled to revisit the question of economic inequality.

Perhaps the most stubbornly persistent idea embraced by American "liberals" (statists) is the idea that the rich ought to pay more tax (meaning a higher proportion of their income) because income inequality is a bad thing. This idea is widespread. It has achieved the status of a self-evident truth. And yet when one examines it carefully one sees that the belief is not only illogical, it is also unworthy.

At the most practical level it is just silly - though dangerously so. There is no reason to believe that target-taxing people who earn more than $250,000 a year will help anyone at all. The argument is that government needs that revenue to prevent the deficit from getting any worse. And, after all, the "rich" can afford it. This kind of reasoning comes from economic ignorance (notwithstanding the fact that many of the people who are making it should know better). It comes from focusing on the short-term-direct effects of any policy and ignores the longer-term-widespread effects. The deficit is the result of a shortfall of tax-revenue against expenditure. But taxes affect behavior. A lower tax rate may actually boost revenue if it encourages economic activity. This is not just a theoretical possibility; there are many historical examples of this. So, if its just the deficit that is the problem, it is by no means clear that soaking the rich will help and may likely hurt. There is nothing that helps cure government deficits more than vigorous private-sector economic activity which generates lots of tax revenue, and low levels of taxation are crucial for this in the long term.

Of course the best way to reduce the deficit is to cut government expenditure - but that is a subject for another blog.

If, alternatively, the liberals are concerned about jobs (especially for the poor and for minorities) they should understand that it is only the rich who create jobs. Government jobs depend parasitically on value created in the private sector; government does not create much value itself. Its role is to create conditions that allow for the creation of value by productive, entrepreneurial activity. Without the rich there are no jobs. Without the rich there is no economic growth. If you tax the rich you tax the desire to become rich and create jobs.

So, at a practical level, the policy is ill-advised. Liberals reading this will roll their eyes. "We have heard this before from the likes of Ronald Reagan - it is 'trickle down' economics and it is nonsense. The rich don't spend their money on creating jobs, they save it and the money does not trickle down to the poor." Again, economic illiteracy. Those making that argument could not possibly really believe what they are saying. If they did why would they stop short of advocating the complete elimination of all income inequality? Why not raise income taxes on the rich sufficient to erase all income gaps? Contemplating that, they will realize that this would be disastrous, that it would most probably destroy the economy by killing golden egg-laying goose. But somehow mild income leveling has no bad effects on the goose? Listen guys, we know that 'trickle down' must work. Even if the rich save their income, that money comes back into the economy through the capital market (at least it will when it starts working again!). Its not really 'trickle down.' Its 'spread it around.' Taxes shrink the pie, tax-cuts expand it. Its not a zero-sum game and its not rocket science. You can't simply take taxes from the rich and give them to the poor (which rarely actually happens anyway) without destroying economic value.

Yet, having said all this, I suspect that deep down the intelligent liberal knows it already. I suspect that this is not what its really about. We have had upwards of forty years of the war on poverty and there is apparently no victory in sight. If you add up all of the money extracted by taxes for so-called poverty programs, and divide it by the number of people classified as "poor," there should not be any poor people left. Contributions are more than adequate to ensure no poverty. Why are the poor not getting "their" money? Why indeed? Poverty in America is actually less of a condition than an industry employing millions of parasitical bureaucrats with a vested interest in its perpetuation. [Many of them are sincere - they know not what they do.]

No, I suspect the real reason behind the desire to sock it to the rich with a big tax stick, is the powerful visceral appeal of the act of reducing income inequality. Inequality has taken on a life of its own as a bogey man. Its not really poverty that is the problem in liberal eyes, it is inequality. Sans poverty, inequality would still be problem for them. If somehow the poorest person in America earned a million dollars annually and the richest earned a billion, this would still be a problem for them. If the rich billionaires were small in number yet owned a large proportion of the wealth, and the millionaires were large in number yet owned a proportion less than their numbers in the population, this would still be a problem for them. I think they will admit this. Inequality, in and of itself, is a problem for them.

Now, why should this be so? Oh, they have ready answers. But, though they may dress it up in all manner of respectable rhetoric like "the dangers of relative deprivation," in the end it comes down to just two basic and very base emotions - resentment and envy! That is what it is really about. The liberal mind hates all inequalities. It cannot abide "gaps." Its policy motivations are all about the eradication of gaps. There is a deep-seated resentment of the acquisition of riches. There is a barely acknowledged envy of the rich. How much is resentment and how much envy, who knows? I suspect the intellectuals are more resentful and the liberals who are poor are more envious, it doesn't matter much. Both are equally unworthy.

Think about it. What are the values we try to inculcate in our children? Generosity, sharing, joy for the good-fortune of others. And what values do we condemn in them? Resentment, envy, and the inability to rejoice in (or at least respect) the achievements of others. Yet when it comes to the fashioning of economic and social policy we somehow think its ok to reverse these values and extol the benefits of enforced equality, elevating resentment and envy to national virtues. Echoing Adam Smith, how can what are vices of private behavior become virtues when practiced by government?

Poverty is bad. Income inequality is not. It is a necessary outcome of a free society in which people make different lifestyle choices and encounter different odds. To be sure, all free people should be equal in the eyes of the law, they should be equally subject to the rule of law, but they should not be made to be equal in results when they violate no law.