There is also Keynes’ admirable view that it is better for a man to tyrannise over his bank account rather than his fellow men. But what happens when a man’s bank account gets so big that it can tyrannise itself, leaving him with the freedom to do as he pleases? That, I think, depends on whether he, like Mr Bernstein, understands that making a lot of money does not in itself make you the moral and intellectual superior of others, whoever they may be. To do otherwise is to suffer what the Greeks called hubris. Both Buffett and Rubin fall into this category. As my time is limited I shall focus on Rubin, leaving Mr Buffett — who is a complete economic ignoramus — for another day.

Rubin was a Wall Street financial wizard and Clinton’s Treasury secretary. Unfortunately for Americans Rubin’s financial wizardry did not translate into economic literacy. Anyone who asserts, as does Rubin, that Clinton’s 1993 tax hike generated the 1990s boom is a person whose knowledge of economics as well as economic history is tenuous to say the least.

Nevertheless, we need to understand the process by which Rubin arrived at his preposterous conclusion. His line of reasoning is as follows: When a government obtains a surplus by raising taxes it also increases its savings. This in turn lowers interest rates which then stimulate investment. It therefore follows that tax cuts that creates deficits have the reverse effect.

One way of testing the validity of a proposition is to carefully follow its line of reasoning. When we do this with Rubin’s argument we are led to the absurd conclusion that imposing an ever increasing tax burden in order to expand a government surplus would drive interest rates down to zero. Taking his proposition even further, interest rates would eventually turn negative! Rubin’s ‘thinking’ certainly suggests that he has no knowledge whatsoever of economic thought regarding the nature and role of interest.

Moreover, Rubin evidently does not understand — and he is not alone here — that surpluses are not savings. Genuine savings occur when money is used to direct resources from consumption to invest, i.e., greater future consumption. This is called investment. If the government merely sits on the money, then the surplus is nothing more than a gigantic cash balance. Moreover, it should be noticed that a surplus squeezes out private investment.

This whole process is muddied by loose monetary policies. If the money supply was fixed then a surplus would have a deflationary effect. If, however, the government spent its receipts there would be no deflation but production would be redirected. The reason why in today’s world surpluses don’t depress prices is because they are fuelled by central banks letting loose with the money supply.

Australia has been running massive surpluses. According to Mr Rubin’s Australian interest rates should therefore be much lower than US rates. At the time of writing our 30-year fixed mortgage rate stood at 6.6 per cent while the American rate for the same mortgage is about 6.75 per cent. Last time I looked America was still running a deficit and Australia a surplus.

Having made an utter ass of himself on interest rates Rubin has now turned around and done the same thing with capital gains taxes, arguing that they should be doubled on private-equity buyouts. (Charles Grassley [R., Iowa] supports him, once again demonstrating how many stupid Republicans there are). In Rubin’s view the “lower rate on capital gains hasn’t contributed one iota to the economy”. This statement reveals an astonishing degree of economic illiteracy — even for him.

Let me highlight a self-evident economic axiom: If you want more of something reduce the cost of producing it. If you want less of a commodity increase the cost of producing it. So what do these buyouts produce? Capital, that’s what — the material means of production that raises living standards.

Buyouts are a means of raising more investment funds. In other words, savings. Capital gains are profits, maladjustments between supply and demand. When these gains appear they attract competition as well as more savings. By these means the market process eventually eliminates the profits. Note that this is basically done by expanding output and raising the demand for labour. Rubin, however, would tax these profits away and hence reduce the demand for labour.

This policy amounts to taxing future investment and hence living standards. Rubin and his mates in the Democrat Party and the media may think this is brilliant thinking — it isn’t. One only has to reflect on the damage the Hoover-Roosevelt tax increases inflicted on the US economy to realise how destructive the Democrats’ policy on taxation and spending really is.

On a final note: The Democrats and the media allies screamed blue murder that the President’s tax cuts would create an unsustainable deficit. The only thing that is unsustainable is the Democrats’ absurd ‘economic’ thinking. In the past 12 months the deficit has dropped by about 35 per cent. Tax-collection data for last April put the federal deficit over the 12-month period ending April 30 at $144.7 billion, thereby reducing the deficit to about 1 per cent of GDP.

This reduction was made possible by the very tax cuts that Rubin and the Democrats condemn. However, I do not want to give the impression that cuts per se raise tax receipts. The process is a lot more complex than the Laffer curve suggests. I believe that a production structure approach, keeping in mind the Taylor rule, would reveal the process by which tax cuts expand the capital structure while raising government revenue in the process.

Gerard Jackson is Brookes’ economics editor

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