Tuesday, 12 April 2016

More about the obscene lie of "trickle-down" economics

     I've written before about how trickle-down economics is mislabeled, because it mixes metaphors with inconsistent gravitational fields. The term will not die, though; just the other day I found myself in an argument with a business owner who insisted that if only his taxes were lower, he could afford to hire more people and let that wealth trickle on down.
     Inadvertently, he formulated his claim in such a way as to make the absurdity of the theory so clear to me I felt compelled to blog about it here. Think about this: What he's saying is that unemployment happens because rich people don't have enough money to hire anybody.

     Seriously, that is what the whole tax-cuts-for-the-rich, trickle-down ideology really boils down to. If only the rich could get a break on their taxes, they could afford to hire some of those unemployed people and create jobs and wealth for everyone. Our economic ills are, apparently, due to the rich not being rich enough.

     Now, if you have any sympathy for the idea of the rich being job-creators, you'll probably be suspecting at this point that I've unfairly stated the theory in the most absurd way possible, and I'm ignoring the subtle genius of Reagan's brilliant insight. After all, the fellow I was arguing with seemed pretty sure that it was his hefty tax bill that kept him from expanding, and shouldn't he know better than I the details of his own business? Doesn't it make sense that, if the state confiscates too much of the proceeds of productive enterprise, there will be nothing left to finance the further growth of that enterprise?
     Of course it sounds plausible, and all the more so because it has been so enthusiastically promoted as wise economic insight for nearly four decades now. But that plausibility begins to fall apart if you look a little closer at it.

     For example, if you've ever done your own taxes, you're probably aware that you can deduct expenses from your gross income. The basic principle is that if you need to spend money to make money, the money you had to spend is not counted as income when you recover it. Think of it this way: If you buy $100 of materials, and turn them into finished goods which I buy for $120, your income is $20, not $120. So our tax system is set up to tax you on your $20 gain, not the $120 in gross revenue.
     Now, if you run a business in which you hire people to work for you, their wages are classified as an expense for your business. This means they're not taxed (though your employees may have to pay income tax on it, minus their own deductible expenses -- the same rules apply to them). So what this means is that in fact, you can't actually blame taxes on your profits for not leaving you with enough  money to hire more workers; if you just went ahead and hired those workers from your business' pre-tax revenues, you wouldn't pay taxes on the portion of revenue used to pay their wages.

     The point here is that if a business isn't hiring new people, it's simply wrong to blame that on their taxes being too high. And the same is true for capital investment and other forms of expansion: our tax system is carefully designed to have all sorts of exemptions and deductions to encourage growth, which only makes sense, because the more money you make, the more taxes there are to collect. The taxman's interests are actually aligned with yours here. Sure, tax policies can be made smarter, but that's not a synonym for "lower".

     The other thing that's disastrously wrong about trickle-down theory is that it applies an extremely simplistic model of investment. To be fair, it's the model that most of us learn through school and which is reinforced in ordinary household economics and even in games like Minecraft: You need to save up a surplus pool of resources to build stuff. If you haven't punched enough trees or gathered enough vespene gas or saved up enough coins in your piggy bank, you can't start your project.
     This makes good intuitive sense, and it is a prudent way to manage your affairs. But it is almost shockingly naive to assume that entrepreneurs and job-creators are limited to this approach, and all the more so when you consider that the richest of the rich made their fortunes either in or at least in large part with the assistance of the finance industry.
     You see, entrepreneurs do not start out rich, and then decide they finally have enough money to trickle it down to everyone else. They start out by seeing an opportunity to get rich, a way to provide something that people will pay them for. Of course, as mentioned above, it often takes money to make money, so they have to come up with the capital to get started, to build a factory and to buy materials and hire and train staff, and in so doing they create jobs and growth. But here's the thing: they don't need to have all the resources to do that themselves up front.  They can get a business loan from a bank. They can incorporate a corporation and sell shares. This is why we even have a finance industry: to raise the capital to finance the exploitation of profitable opportunities!

     (It's true today, of course, that a large amount of entrepreneurial activity is dependent on billionaire investors, but that's largely because we have concentrated so much wealth in the hands of billionaires; the institutions of finance and banking would work just as well with millions of small investors as they do with a few huge ones. Indeed, billionaire investors are the old-fashioned, pre-finance way of doing things. Back in the day, you had to go to the king or some other extremely wealthy noble to get your bright idea funded, and there was little incentive to do so since His Majesty would own it all. Also, he only had so much time to divide among all the clever people pitching ideas, and would probably rather be hunting anyway. This is why the emergence of financial markets, publicly traded companies, credit and other innovations in the Renaissance led to such unprecedented economic growth as we've seen in the last few centuries. It's also, I submit, why that growth is slowing down as we concentrate the money again in the hands of a few billionaires.)

    So this is why I say that trickle down theory is so preposterously backwards. Despite its superficially plausible rhetoric, it really does boil down to the claim that our economic malaise is due to rich people not being rich enough, and that if only they had all the money, we would all be much better off. And that is an obscene lie.

Sunday, 3 April 2016

How to be an Informed Voter: Ignore Election Coverage!

     Yesterday I had a conversation with a friend who wishes she were more informed about the upcoming election, and asked me if I could recommend any reading material. My first instinct was to suggest both a left-leaning and a right-leaning source, in order to try to hear different perspectives, but in all honesty it seems to me that, at least within the United States, that's a bit of a problem. Frankly, I could not think of a right-leaning source I felt in the least bit comfortable recommending, because the once respectable GOP conservatism of Eisenhower and Arnold Vinick seems to have imploded into a seething morass of irrationality, anger and hatred, and explicitly right-leaning press is what dragged it there. But of course, I also couldn't in good conscience recommend just following the explicitly left-leaning press.
     Nor, however, could I recommend even the most steadfastly nonpartisan press. It isn't that they don't make an effort to give voice to both sides. Indeed, that in itself is sometimes a dangerously misleading tendency; by being impartial between any two opposed positions, you may give undeserved credibility to the flaky crackpot view that probably ought to be ignored. ("Is the Earth toroidal? Most scientists say of course it isn't you idiot, but here's someone with a revolutionary new theory that we're standing on the inside of a big donut. Let's hear both sides.")
     No, the real problem with election coverage is that the attempt to cover it impartially inevitably reduces to horserace analysis: who's ahead in the polls, how people are reacting to this or that speech, what strategies the candidates will use to win this or that demographic, who "won" the debate, how many electoral votes this state is worth, and so on. And none of this is in the least bit helpful to the voter who is trying to decide whom to vote for.

     I confess, I follow that stuff, too. I do, after all, care passionately about the outcome of each election, and it's hard to resist any information that may shed light on what's going to happen. But from the perspective of someone wanting to figure out whom to support, it's worse than useless. So I was at a bit of a loss for how to answer my friend's question: what could she read, in order to become better informed when the time comes to cast her ballot?

    So here's what I ended up suggesting: don't pay too much attention to the election coverage, at least until you've got some idea which way you lean. Instead, remember what's important about elections: whoever gets elected is going to be making policy decisions about important issues, and this is really what matters. You may not know or care about every issue, but there are many that will affect you personally, and many more that you probably ought at least to be aware of.
     Ask yourself, then, what it's important to you that government deal with. Are you worried about the economy? About terrorism? Crime? Climate change? Good. Pick one or two issues, and read up on them. Newspapers, magazines, books, blogs, videos, everything. Become known to your friends as someone who's very interested in a particular subject, and they'll often send you links or refer you to people with similar interests. Talk. Listen. Think.  Get to know enough about a subject that you feel astonished at how much more there is to learn. Be able to fairly represent at least two contrary opinions held on the subject.
     Bear in mind that each and every author or source you consider has its own biases and agenda, and take that into account. Read and research with the understanding that nobody is going to give you The Answer, though most of them will try; you're going to have to formulate your own opinion by synthesizing everything. While there's a good chance you'll find some expert in an area with whom you agree on an awful lot, realize that there's no escaping responsibility for forming your own opinion; even the decision to defer to an expert is a decision to choose that expert to defer to.

     You don't need to become an expert, of course. The goal here is really just to become an educated lay-person, so that you know enough about the vocabulary and concepts to be able to understand the gist of what the experts are talking about. And once you've reached that point, then you might want to go and hear what the candidates in the election campaign (remember the election?) have to say about it. Because then you will be able to listen to their ideas, and get some sense of whether or not they actually have any understanding of the issue, and whether or not their policy proposals make sense. Only then should you start to make up your mind as to which candidate you support.

     If you start at the other end, choosing a party or a candidate, and then forming your policy opinions to follow, well, you're kinda shirking your democratic responsibilities. It's all very well and good to look to your leader for leadership, and defer to him or her on those areas you don't know enough about to form your own opinion, but before they're elected they've no claim to your deference. Their authority as a leader is something that you choose to give them, and you ought to think carefully about whom you entrust with it.

     Once you have decided who you're going to vote for, of course, it's going to be very hard to resist the temptation to follow the horserace. So go ahead. Watch the pundits, read the polls, get frustrated and irate or thrilled and elated. More likely both. You'll want to know who wins, because you'll have a good reason to care, and that is actually a good thing.