The Texas Schoolhouse Test: A to F

Supercommittee -or- how politicos cause the taxpayer to foot their bill

The technical name for the Supercommittee is The Joint Select Committee on Deficit Reduction. The committee is made up of six democrats and six republicans of which six are from the Senate and six from The House of Representatives. Their charge is to reduce the deficit by one and one half trillion dollars over a ten year period. The dead line for their recommendation is November 23, 2011. Their recommendation then goes before Congress for a simple up or down vote that must occur before December 23, 2011.

The debate leading up to and surrounding the recommendation, in the main, is a debate of raising taxes, reducing spending or a combination of both. One item worth noting is a particular and long standing debate point used by particular politicos that promote raising taxes. The particular debate point is: the Reagan Administration caused deficits by reducing taxes.

This long standing debate point is in essence a long standing fallacy. How so? Evidence shows that tax receipts actually increased significantly after the Reagan tax cuts and moreover during the eight years of the Reagan Administration. In the last year of the Carter Administration federal tax receipts equalled $517 billion. During the last year of the Reagan Administration tax receipts were $909 billion. Stated alternatively, with a tax reduction in place, tax revenues increased by 75% over an eight year period. (1)

Then how do particular politicos construct their argument that the Reagan tax cuts left us with a deficit? That tax cuts cause a deficit? It’s merely a fallacious debate point that does not account for “spending” during the same eight years. The debate point is carefully constructed to avoid the increasing tax receipts fact and concentrates/focuses on the actual deficit which occurred. Simultaneously the debate point carefully avoids the enormous spending increases that occurred during the exact same period. Hence the debate point links deficit with tax when in fact the link is fallacious given rising revenue after the tax cut. That the link between spending and deficit is purposely removed from the debate point.

Federal spending was $678 billion in 1981 while spending stood at $1.064 trillion in 1988. Each and every year of the Reagan Administration tax revenues increased while each and every year spending increases where above the tax revenue increase. (2)

The Reagan Administration did not make appropriations for spending, congress appropriates spending. Hence the spending outpaced the tax receipts and hence a deficit. Ops!

What is the reasoning behind making such a fallacious debate point when the evidence shows otherwise? One must examine that particular politicos depend upon taxpayer dollars to bestow such dollars upon current politically constructed constituency groups and to fund future political constituency building exercises through the use of taxpayer dollars. That is to say, in order for the politico to build a growing constituency base the politico is dependent upon growing expenditures to conserve and expand the constituency base. Stated alternatively, the politico is much like the going concern business in that growth in revenue is a basic goal. However, unlike a firm producing a valuable product that consumers voluntarily purchase, the politico merely transfers money from the aggregate taxpayer to specific special interest groups and/or recipient classes that make up the politico’s constituency base constructed by the use of tax dollars.

Hence the argument from the politico’s point of view must be directed away from spending cuts. That the debate must concentrate on conserving and expanding spending in order to conserve and expand constituency and constituency building exercises.

Notes:

(1) (2) Budget of the United States Government: Historical Tables, Washington D.C. , U.S. government printing office, 1994, page 14.

"The Nine Most Terrifying Words" - a new rendition of Ronald Reagan

ObamaCare: governments fail too

Governments fail too

Many times you read articles or see news reports regarding "market failure". That some how the market has failed. What you intuitively know but is rairly reported is that "governments fail too". Both markets and governments fail basically because they are both made up of human beings that make errors. Some errors are unfortunately by design.

In a recent Kudlow Report segment Don Luskin, chief investment officer of Trend Macro made this instant- classic statement: "Government is the only enterprise in the world that when it fails, it does the exact same thing over again except bigger". (1)

Luskin is not alone. Milton Friedman also observed: "The government solution to a problem is usually as bad as the problem". (2)

Do we know of government failures?

We do in fact know governments fail. John and Jane Goodfellow have first hand experience from a simple trip to your local Department of Motor Vehicles that takes hours, to the out of body experience of trying to read and fill out you annual federal tax return. We also know government failure in a more complex proposition of unfunded future entitlements of Medicaid, Medicare, and Social Security that are now in excess of 100 trillion dollars.


Why are market failures reported yet government failures are under reported?

It boils down to the "painting" of the subject matter. What exactly is the difference between politicos through the mechanism of government creating a cheap money bubble while simultaneously promoting purchases of single family housing units by low income marginal buyers and a financial advisor promoting a novice, part-time retail stock investor, with very modest means, into making risky trades using a margin account? (3)

The point being that both are highly risky practices especially for the type/kind of participants involved. One risky practice is promoted by the government while the other risky practice is promoted by the private sector.

If the outcome for both situations end in disaster, the government promoted activity is painted as merely public policy failure experiment albeit in-your-best-interest, helping the little guy, and social justice didn't work in this particular isolated incident. The other disastrous outcome from the private sector is painted in exact opposite terms where "greed", getting over on the little guy, and the-system-is-rigged are the overarching themes of the incident as well as the incident not being isolated but portrayed wide spread within the entire economic system.

In the larger picture, cases of government promoted failure and private sector promoted failure, yield only one report: "markets fail". The "governments fail too" proposition plays second fiddle and is only pointed out by a handful of people. Hence the public at large are feed the "markets fail" concept and the "governments fail too" proposition remains widely under reported.

ObamaCare and governments fail too

F.A. Hayek wrote extensively that centralized command and control programs only worked in the hunter/gatherer stage of economic evolution. When small groups of forty or so controlled a hunting/gathering region, centralized authority might have worked. Harold Demsetz has also written extensively regarding the subject. (4) (5)

However, both Hayek and Demsetz point out that when economies evolved into millions of people, the market became based on the individual, individuals in number that are far removed from the forty or so hunter/gather stage. That millions of unique individuals, through no master centralized plan, began to base information on "price" through no particular grand design. That an economy based on price, price being reflective of scarce resources with alternative uses, allowed the unique millions of individuals, within a vast economy, to communicate, economically speaking, in the universal language of "price".

Hayek went further and postulated that the summation of mundane knowledge of individuals was greater than the knowledge of any centralized authority. In effect, no centralized authority could mimic the knowledge of millions of unique individuals with specific mundane knowledge of their unique abilities, needs, wants, and desires. Thomas Sowell has also dispelled the myth that the knowledge of a centralized authority can supplant the billions of mundane knowledge decisions made everyday by individuals with specific mundane knowledge particular to each and every price decision. (6)

History repeats itself but market failure receives a front page headline

A quote by Ronald Reagan has been widely disseminated within the United States over the past half century: "....government is not the solution to our problem, government is the problem". Actually Reagan went on in his statement to basically summarize Hayek's position of centralized authority being unable to organize an economy. You can hear those remarks in the link below:

http://www.youtube.com/watch?v=cEuiI2PbSWQ


When ObamaCare, the first major entitlement introduced since LBJ'S Great Society programs, and with Social Security, Medicaid, and Medicare all basically bankrupt, many, many individuals in US society immediately recalled Reagan's remarks. That yet another entitlement stacked atop a bundle of bankrupt entitlements smacked of "..government is the problem".

Upon review, ObamaCare is merely a centralized authority trying to mimic billions of mundane decisions by unique individuals. ObamaCare attempts to manipulate price which would simply cause individuals to receive the wrong price signals regarding the allocation of scarce resources with alternate uses. Moreover, ObamaCare is a price fixing scheme that ends, as do all price fixing schemes, with a qualitative and quantitative reduction in supply aka rationing. (7)

Oddly enough, "Governments fail too", regarding the introduction of yet another vast entitlement, was elevated, through the voices of millions, to the forefront. Millions upon millions of citizens want to investigate "government failure" before it becomes government failure. Upon further review and investigation, the failure of ObamaCare has become daily reports. That the plan is unravelling daily and possibly for the first time "governments fail" may be stopped before it happens.

Notes


(1) http://www.cnbc.com/id/15838446/

(2) http://thinkexist.com/quotes/milton_friedman/

(3) Getting Off Track, John B. Taylor

(4) Hayek: His Contributions to the Political and Economic Thought of out Time, Butler and Riggenbach

(5) From Economic Man to Economic System, Harold Demsetz

(6) Applied Economic, Thomas Sowell

(7) Basic Economics, Thomas Sowell