“Energetic Government”

In the American Enterprise Institute’s Debate, How Much Government is Good Government?, David Brooks makes a case for an “energetic government” that “builds character.”

I believe the following passage from Brooks provides the key assumption for his energetic government stance:

…the reason that America got rich in the nineteenth century was because we were the most educated country on earth, and we could count on a certain level of social capital we no longer can.

I don’t believe that’s why America “got rich”.

To me, that’s like saying, I got rich by saving for retirement.  That’s not accurate.  You were able to save for retirement, and become rich, by creating enough value for others to generate an income for yourself.

Similarly, I believe the cause and effect flows the other way from how Brooks describes it.  America became the most educated country on earth, with a certain level of social capital [i.e. things like public education, social security, unemployment, etc.], because America “got rich”.

America got rich through bottoms-up innovations enabled by the most democratic, fair and socially mobile system the world has ever witnessed, capitalism.

If Brooks were to consider that he is wrong about how America got rich and wanted to learn other possible explanations, I’d recommend that he start with Matt Ridley’s book The Rational OptimistThis post and this one discuss some of Ridley’s, and my own, insights on the matter.

Of course, Matt and I could be wrong, but I have not found convincing evidence of that yet.  But, would love to hear some.

More debates like this, please

My family and friends are surprised to find out that I’m not a fan of TV-based political debates.   They figure that since I have an above average interest in politics, television debates must be like my Super Bowl, or something.

I prefer debates like How Much Government is Good Government? between New York Times columnist David Brooks and Representative Paul Ryan.   It’s written.  You can download it and read it on your iPad, Kindle or any device that supports .pdf.

I think TV debates don’t give a true picture of the candidate.  Its like trying to pick a wife while watching ladies perform in a roller derby.

There’s more opportunity in the written format to filter out the shenanigans and articulate a more complete representation of your positions and your criticisms of your opponents’ positions.

I downloaded the Brooks/Ryan debate for my Kindle iPhone app and read about 60% so far.  I’ll have more to say about it soon.

I do recommend it.   If you’re the least bit interested in politics, you will find it easy reading and interesting.

Good points for Buffett to consider

Thanks to W.E. Heasley of The Last Embassy for providing a link to this article from the American Enterprise Institute’s magazine, The American.  The article is titled, Obama’s Folly: Why Taxing the Rich is No Solution.

I enjoyed this article because it’s a good example of a well-argued position.  The authors do a fine job of properly characterizing their opponents’ argument that the wealthy should pay more taxes. They don’t resort to inaccurate straw men.  We could make much progress with debate in this country if more people could do this. That would be a great course to add to our public education curriculum–how to accurately characterize your opponent’s position.

The authors also provide many valid points for their opposition to consider and none of it is about coddling the rich.

Their examination of the numbers should be sobering to the tax the rich folks:

According to the New York Times, the president’s plan to abolish the Bush tax cuts for those making more than $250,000 is expected to bring in merely $0.7 trillion over the next decade, or about 0.4 percent of Gross Domestic Product per year. As a comparison, the Congressional Budget Office estimates that the deficit over the same period is going to be $13 trillion, more than 6 percent of GDP per year.

If this is accurate, then it alone should end the debate.  Focusing so much attention on taxing the rich brings to mind the old saying to be penny wise but pound foolish.

Next, the authors address what has become a popular argument put forth by a member of President Obama’s advisory board, Laura Tyson, and published in The New York Times:

The most common fallacy repeated by Tyson is that taxes do not matter because the economy was booming during the Clinton years even though taxes went up.

They go on to point out that the 90s had other economic events as well — NAFTA, welfare reform and the Internet boom — to name a few.

I’ll add that in 1997 significant reductions were made in the capital gains tax rates for assets held more than one year (source), so not all tax rates for the wealthy increased.  I’ll also add that much of the increase in tax revenue in the last part of the 90s came from capital gains taxes.

The authors correctly point out:

Instead of picking one historic event that happens to fit your preferred theory, a more reasonable approach is to investigate all historical periods where taxes increased or decreased.

This has been done by former Obama advisor Christina Romer and her husband David Romer. They also take into account the causes of tax increases.1 They find that tax increases tend to reduce economic growth, stating that “tax increases appear to have a very large, sustained, and highly significant negative impact on output,” as “an exogenous tax increase of one percent of GDP lowers real GDP by almost three percent.” Similar results have been obtained by Harvard economist Alberto Alesina using a different methodology.2

I don’t trust studies like that of the Romers.  However, their finding is not surprising.  It’s called incentive effects and believe it or not, they exist.  Believe it or not, you respond to them everyday of your life, whether you realize it or not.

But other people put more stock into statistical studies.  Many of those people also think we should raise taxes on the rich.  So, the Romers’ studies and the other economic events of the 90s should at least give those people something to consider.

I also appreciate the authors’ encouragement to look at more than one data point on which to draw our conclusions. That’s great advice.  When someone does that, or when you do it yourself, your skepticism should rise.

Here’s why.  Do you think it would be tough to find one data that says the opposite?  I doubt it.

I appreciate actual experience over conjecture.  But to focus on a single time period and neglect other important factors (like the reduction in capital gains tax rates) is not good practice.