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Democrats, taxes and the US economy
Gerard Jackson
Now that the Democrats have won both houses I think we can count on the leftwing Media Party to start reporting on the Bush boom — as soon as it figures out a way to credit the Dems for the economic recovery and full employment. As for most of the economic commentary during the last 6 years, nearly all of it has been journalistic disinformation designed to malign the Bush administration’s economic policies. (Every body knows — according to lefty journalists — that only Democrats have the ability to produce economic expansion).
Part of the problem is that Democrats — including virtually the whole of the mainstream media — have decided that tax cuts are anathema. A genuinely honest debate, something the media refuses to supply, about the recovery would have involved the role of tax cuts and consumer spending in promoting economic growth. When the economy was in recession a great many words were expended by Dems and their media mates on attacking rate cuts. This had the malign effect of largely drowning out whatever sensible economic commentary there was.
Let’s start at the beginning of the Bush administration. It was being argued by some that a sufficiently large rate cut would generate a consumer-led recovery. The logic for this view is based on the assumption that statistics prove that consumer spending has led every US economic recovery, at least since WW II. But this argument overlooks the fact that statistics generally prove nothing in themselves. Statistics need to be interpreted, which means that one needs a theory — accept if you are the union-busting Nancy Pelosi or the Castro-loving Charley Rangel . It follows from this observation that applying the wrong theory will render a wrong answer, particularly if the statistics are incomplete.
Economists who argued for a consumption-led recovery still genuinely believe that consumer spending accounts for about two-thirds of total economic activity. (The vast majority of economists are firmly addicted to this egregious blunder). They err by omitting spending on intermediary goods, those goods that pass through the capital structure, which in turn consists of incredibly complex stages of production. This omission is defended on the curious grounds of double counting.
To be blunt, it’s ridiculous to take account of fixed investments, i.e., durable goods, while ignoring ‘non-durable’ capital goods merely because they are unfinished. What these economists do not realise is that these particular goods are also savings. If spending on these goods were to contract then living standards would fall. Hayek illustrated this vital point in an illuminating disquisition on the error of ignoring intermediary spending.
(The Paradox of Saving in Profits, Interest and Investment, Augustus M. Kelley Publishers, 1975)
Therefore, only when we take into account intermediary spending does a true picture of gross spending emerge. Once this is done consumption as a proportion of total spending might drop to as low as 25 per cent if not lower. This approach obviously changes the perspective on the economic recovery. By taking into account total spending we will find that recoveries have not been led by consumption at all. In fact, I would bet that spending by manufacturing was the leading indicator. But as I have pointed out, national accounting methods omit this vital factor.
Let us assume, as our baffled commentators do, that consumption alone can drive economic growth. Now What would this mean for the US economy? Producers, in case anyone hasn’t noticed, direct production and investment in response to changes in demand. It ought to be clear that if consumption-based policies are used to lead recovery the effect will be to direct resources from the higher stages of production to the lower stages, those closest to the point of consumption. The term for this is capital consumption. In English so plain that even a post-Keynesian can understand it, stimulating the economy by continually promoting consumer spending will, at the very best, retard economic growth or, at worst, even shorten the capital structure and hence eventually lower living standards.
Most economic observers argue, unless they are Democrats, that cutting rates during a recession will stimulate consumption first and that this will eventually lead to increased investment as firms strive to meet consumer demand. However, there are several serious obstacles to this rather Pollyanna view:
1. There is the problem of serious ‘excess capacity’, which really means malinvestments that have yet to be liquidated. Although the gradual contraction in manufacturing may have already brought about a great many of the necessary adjustments in that area.
2. The effect of artificially lowering the rates before all of the boom-created “imbalances” have been eliminated will, if the stimulus is successful, only pile more malinvestments on top of the surviving ones which will then have to be liquidated at a later date.
3. If the malinvestments/imbalances are particularly severe rate cuts might prove ineffectual in the short-term.
4. As I have pointed out more than once, artificially low rates is the real source of the boom-bust cycle.
It ought to be clear that the Democrats’ proposal to rescind the Bush tax cuts would accelerate the approach of the coming recession and deepen. Their claim that they would be only taxing the ‘rich’ is a brazen lie. Their tax scheme would make a great deal of taxation for the super rich optional. You would have to be genuinely naďve to think that the super rich would fund the Democrats if they though for one moment it would imperil their own wealth. (Teresa Heinz Kerry: You pay taxes, I don’t).
Finally, I should like to draw attention to two rather curious myths regarding the Austrian explanation of the trade cycle. One has it that in later life Hayek abandoned the Austrian theory, and that consumer loans invalidate it. It is simply untrue to claim that Hayek recanted. As for consumer loans, Hayek dealt with this in his paper The Paradox of Saving in Profits, Interest and Investment, Augustus M. Kelley Publishers. (Douglas Jay made these baseless assertions in his book Sterling, The Guernsey Press Co. LTD, Guernsey Channel Islands, 1986).
A more serious myth has it that consumer durables are comparable to capital goods because they require maintenance over a number of years. But what matters is not their durability but the role they play in the capital structure. If a good’s services are directly consumed then it is a consumer good by definition. To argue otherwise would make the pyramids and medieval cathedrals capital goods, not to mention my DVDs
Note: Now that the Democrats have won both houses can we now expect their supporters in the CIA to cease betraying their country by releasing state secrets to media lowlifes, particularly at the New York Times?
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 13 November 2006