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FairTax Chronicle of the Day

FairTax Chronicle of the Day:

Between 2003 and 2012, the IRS cost U.S. taxpayers between $110.8 billion and $132.6 billion in faulty earned income tax credit (EITC) payments. Under the FairTax plan, no EITC, no IRS, no faulty payments.

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TIGTA: IRS Fails to Comply With Mandated Reduction in Improper Payments -- 25% EITC Fraud Costs $14 Billion/Year

Government Debt Limits

The PBS NewsHour has a post titled Why Paul Krugman, Others Think Reinhart and Rogoff Are Wrong About Debt (government debt limits).

Krugman is an economist who favors Keynesian government stimulus spending and no effective government debt limits. Even Keynes later realized he was wrong about the effectiveness of such spending, partly because he personally failed to get an agreement to coordinate international stimulus efforts. Absent this coordination, any stimulus spending  by a country (much less a state or city) escapes its borders. This makes a mockery of the famous Keynes multiplier math, so the effective stimulus never justifes the extra lack of government debt limits.

The post has a ridiculous error. "...all you have to do is look at Japan, a country with a government debt GDP ratio of more than 200:1 -- debt taken on almost wholly to stimulate the economy in the wake of a major recession. (A side note: that hasn't worked either)." In fact, the Japan government debt to GDP ratio is only 200%:1 or 2:1. Others had already pointed this out, so I added a comment based on personl knowledge of government debt limits.

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As a CPA, I extensively audited government programs. That is why I know it is impossible for government to spend money intelligently. This is partly because it spends based on lobbying and graft, while limiting market-driven economic allocations of capital. Every government manager also spends everything he can, since his future revenue will approximately equal what he spends, LESS what he has left in the current year.

It also is not possible for government to take money intelligently. Its taking is driven by lobbying, not its effect on the economy (jobs). Moreover, combined government and private compliance, planning and misplanning costs are about 50% of what government takes in income and payroll taxes.

That is why the FairTax should replace current income and payroll taxes. This national sales tax will not take more money, except from prostitutes, drug dealers and tax evaders. As a CPA, I know that it is far harder to avoid this than an income tax and that it will cost almost nothing to collect (piggyback on state sales tax). It also has monthly rebates for poverty level expenses and limits lobbying for market damaging exemptions.

In short, it is what PBS, and its unlimited government debt limits supporters, will try hardest to avoid. 

Obama Economics

This is from a recent Facebook exchange on Obama economics

Kenneth Robert Block shared Ike Burke's photo.

Hmmm.

Mike Block 

Subsidize anything and you will get more of it. Birds taught me more about economics, at age 16, than Obama economica will ever teach. A few birds emptied my small bird feeder in three days. I did not want to refill it so often, so I got a bigger bird feeder. More birds emptied the new feeder faster. I did not learn initially, so I built a big feeding tray. Still more birds emptied it still faster. I then decided that I could not afford free food for all birds and stopped.

When a freeze caused a massive fish kill, over fed vultures completely blanketed every tree in a very large area. Early federal Head Start and similar CPA audits quickly showed these programs also rewarded big spenders, regardless of fraud and waste.

We cannot afford to feed all the vultures that flock to get unemployment and welfare, without effective means testing, enforcement and incentives to get them to STOP. Of course, these vultures will fight to keep their poisonous carrion, at the ballot box and otherwise.

 

The Real 'Stimulus Record' and Keynes - Instant Understanding

I got many favorable comments on my first Real 'Stimulus Record' and Keynes post. It made my computer professional son create the terrific 'instant understanding' chart below.

This instant understanding chart shows you conclusively, without editorializing, the real record of stimulus in many countries, vs the theories of Keynes. Note that the source data for this chart is the International Monetary Fund, which often talks of stimulating economies.

The horizontal position of each chart dot shows the amount of stimulus, as a percentage of a country's economy. The vertical position shows the percentage of later economic growth in this country. There are, of course, significant country by country variations. However, the genius of the chart is that you can clearly see the trend. The more a country tried stimulus, to increase growth, the more it hurt its growth and worsened its recession.

This shows dramatically and conclusively that Keynes was completely wrong about stimulus. The only time he got it right was near the end of his life, when he doubted the practicality and applicability of his earlier theories. Every pro-stimulus proponent should have to explain that and the results shown in the chart.

The Real 'Stimulus Record' and Keynes

The Real 'Stimulus Record' and Keynes is that, in country after country, increased government spending acted more like a depressant than a stimulant.

Policy makers in Washington and other world capitals are debating whether to implement another round of stimulus spending to combat high unemployment and sputtering growth rates. But before they leap, they should take a good hard look at how that worked the first time around.

It worked miserably, as indicated by the table nearby, which shows increases in government spending from 2007 to 2009 and subsequent changes in GDP growth rates. Of the 34 Organization for Economic Cooperation and Development nations, those with the largest spending spurts from 2007 to 2009 saw the least growth in GDP rates before and after the stimulus.The four nations (Estonia, Ireland, the Slovak Republic and Finland) with the biggest stimulus programs had the steepest declines in growth. The United States was no different, with greater spending (up 7.3%) followed by far lower growth rates (down 8.4%).

Still, the debate rages between those who espouse stimulus spending as a remedy for our weak economy and those who argue it is the cause of our current malaise. The numbers at stake aren't small. Federal government spending as a share of GDP rose to a high of 27.3% in 2009 from 21.4% in late 2007. This increase is virtually all stimulus spending, including add-ons to the agricultural and housing bills in 2007, the $600 per capita tax rebate in 2008, the TARP and Fannie Mae and Freddie Mac bailouts, "cash for clunkers," additional mortgage relief subsidies and, of course, President Obama's $860 billion stimulus plan that promised to deliver unemployment rates below 6% by now. Stimulus spending over the past five years totaled more than $4 trillion.

If you believe, as I do, that the macro economy is the sum total of all of its micro parts, then stimulus spending really doesn't make much sense. In essence, it's when government takes additional resources beyond what it would otherwise take from one group of people (usually the people who produced the resources) and then gives those resources to another group of people (often to non-workers and non-producers).

Often as not, the qualification for receiving stimulus funds is the absence of work or income—such as banks and companies that fail, solar energy companies that can't make it on their own, unemployment benefits and the like. Quite simply, government taxing people more who work and then giving more money to people who don't work is a surefire recipe for less work, less output and more unemployment.

Yet the notion that additional spending is a "stimulus" and less spending is "austerity" is the norm just about everywhere. Without ever thinking where the money comes from, politicians and many economists believe additional government spending adds to aggregate demand. You'd think that single-entry accounting were the God's truth and that, for the government at least, every check written has no offsetting debit.

Well, the truth is that government spending does come with debits. For every additional government dollar spent there is an additional private dollar taken. All the stimulus to the spending recipients is matched on a dollar-for-dollar basis every minute of every day by a depressant placed on the people who pay for these transfers. Or as a student of the dismal science might say, the total income effects of additional government spending always sum to zero.

Meanwhile, what economists call the substitution or price effects of stimulus spending are negative for all parties. In other words, the transfer recipient has found a way to get paid without working, which makes not working more attractive, and the transfer payer gets paid less for working, again lowering incentives to work.

All of this is just old-timey price theory, the stuff that used to be taught in graduate economics departments. Today, even stimulus spending advocates have their Ph.D. defenders. But there's no arguing with the data in the nearby table, and the fact that greater stimulus spending was followed by lower growth rates. Stimulus advocates have a lot of explaining to do. Their massive spending programs have hurt the economy and left us with huge bills to pay. Not a very nice combination.

Sorry, Keynesians. There was no discernible two or three dollar multiplier effect from every dollar the government spent and borrowed. In reality, every dollar of public-sector spending on stimulus simply wiped out a dollar of private investment and output, resulting in an overall decline in GDP. This is an even more astonishing result because government spending is counted in official GDP numbers. In other words, the spending was more like a valium for lethargic economies than a stimulant.

In many countries, an economic downturn, no matter how it's caused or the degree of change in the rate of growth, will trigger increases in public spending and therefore the appearance of a negative relationship between stimulus spending and economic growth. That is why the table focuses on changes in the rate of GDP growth, which helps isolate the effects of additional spending.

The evidence here is extremely damaging to the case made by Mr. Obama and others that there is economic value to spending more money on infrastructure, education, unemployment insurance, food stamps, windmills and bailouts. Mr. Obama keeps saying that if only Congress would pass his second stimulus plan, unemployment would finally start to fall. That's an expensive leap of faith with no evidence to confirm it.

Mr. Laffer, chairman of Laffer Associates and the Laffer Center for Supply-Side Economics, is co-author, with Stephen Moore, of "Return to Prosperity: How America Can Regain Its Economic Superpower Status."

Note: This should not be a surprise. What no stimulus proponent seem to know is that Keynes finally concluded that his theories did not work. This related to his leading the British delegation to a major international conference. The conference ended prior finacial cooperation agreemnents. It did so though Keynes said that the absence of joint stimulatus efforts would make stimulatrion ineffective. That is why stimulus efforts by cities and states are guranteed to damage the economy.