Chapter 32

Tax Policy

Ha! Talk about strange sex habits!

For most of America's life as a nation, we observed a sensible policy of spending and taxation. The underlying notion was that the government would not spend more than it took in from taxation.

This was an incredibly basic idea that made a lot of sense. Of course, there were times (such as during wars) when government had to spend more than it took in from taxation, but those instances were rare. The generally agreed-upon notion was that over any meaningful period of time, the federal budget had to be balanced. Taxes and spending had to be about the same. That was true under both parties and in every kind of situation except wars—and even then, the budget had to be balanced after the wars were over.

Then along came what was probably the worst idea in the history of free nations: supply side economics.

This idea, proposed by a genial, likeable fellow named Arthur Laffer, stated that if the federal government drastically lowered tax rates, this would stimulate the economy so much that it would boom—and that even with the lower rates, the government would collect more revenue than it did when tax rates were higher.

Now here comes the interesting part. There was never any evidence at all that this was true.

Let's be fair. The ultimate book of economics—The Wealth of Nations—had no collected data of any serious magnitude that would have gotten Adam Smith a degree in econometrics. It was based on incredibly acute observation of a small number of what we today call data points. But it was so sharply observed—and so consistent with what has turned out to be reality—that it has been considered the Bible of economics since 1776. (By the way, the three greatest works of writing ever struck off by the human mind—the Declaration of Independence, The Wealth of Nations, and The Decline and Fall of the Roman Empire—were all written and published within months of each other, without the Internet, without Google, and without electricity. To my mind, there is just no question that human beings were smarter at that time. I do not know why. By the way, that is within a few decades of when the other greatest works of man—the Constitution, as well as the music of Mozart and Beethoven—were written and published. As I said, people were smarter then.)

But back to supply side.

There never was any data showing that tax cuts would stimulate the economy enough to offset revenue losses to the federal government. It was just a pipe dream.

It was possible that the tax cuts could stimulate economic activity. But to fuel such growth to the point that it generated more revenue than it lost would have been virtually impossible.

The economy can grow in two ways: either by adding more man-hours to the labor supply, which raises total output but tends to lower output per worker—as the new hires tend to be less productive due to lack of experience. Or, the growth would come from greater worker productivity, which would happen if there were some important technological breakthrough like the steam engine or the railroad.

But the data is clear that productivity per worker hour has hardly grown at all in the past several decades, despite astonishing improvements in technology and those immense tax cuts. And, “hours worked” has barely budged.

Some say that supply side works by increasing the supply of capital. Thus there is more capital to work with, and worker productivity should therefore rise.

But the data is clear that—once again—worker productivity has not risen at an accelerated rate since the era of supply side began, in the 1980s.

More important—capital is a worldwide commodity that is available to rent from any quarter of the globe. China is amassing capital at a phenomenal rate, which it will lend to the United States or to anywhere else in the developed world for an extremely modest rate. The oil-producing states have massive amounts of capital they will lend out. There is no shortage of capital—so the aspect of supply side that states that there is has turned out to be utterly irrelevant. Lowering taxes does not add to capital or to productivity at any measurably meaningful rate.

And in fact, by generating such immense deficits as it has, supply side has actually sucked capital out of more productive uses and into buying government debt (although a large part of federal government debt is just financed with the printing press through Federal Reserve purchases. . .and again, capital is endlessly recirculated, so that if it does go into buying government debt, it can come out later as a factory). Still, capital is only meaningful as it adds to productivity, and that meaningful addition has not yet happened—alas.

Now some will say that the efficacy of supply side is shown by the fact that federal revenues were higher at the end of the Reagan years than before he cut taxes. That would be a good argument—except that in fact, Ronald Reagan raised taxes for six of his eight years in office—sometimes quite substantially. If we wanted to emulate Mr. Reagan, at this point we would raise taxes, just as he had the guts to do.

The cut-taxes crowd and the deficits don't matter crew are seeing the results of their well-meaning but deeply mistaken handiwork.

Mr. George W. Bush, a wonderful, kindly, good-natured and intelligent man—a true prince of a gentleman—inherited a sound budget and tax policy from his predecessor, Bill Clinton. He had a recession and a stock market crash to deal with. He had a defense challenge, or at least he thought he did.

Next thing we knew, he was cutting taxes like wildfire and raising government spending, especially on defense, like another wildfire.

The results were predictable. We got much higher deficits and a federal debt that was stupendously larger than had been anticipated when those tax cuts went into effect.

Then we got the financial panic of 2008–2009, a direct result of human incompetence at the Treasury and the Federal Reserve. This led to a severe recession. These slowdowns always cut into individual and corporate tax revenue, and so they did this time as well.

Soon we had a deficit under Mr. Barack Obama that made the Bush era deficits look modest.

Now it's the summer of 2011. As your humble servant writes this, we were in serious danger of spending so much and taking in so little that we would just blow right past the federal debt limit. In that case, we risked a default on interest payments on federal debt. On the one hand, we had a last minute deal that avoided default on our federal debt. On the other hand, we had a major ratings firm downgrade our sovereign debt.

We don't know the results of this, but they are unlikely to be good. The US debt might not be as worthless as Confederate bonds were in 1866. But they will be a lot less sterling than they were in 2000, when Bill Clinton had us on a path to long-term fiscal strength.

So What Would Ben Stein Do about this?

I would raise taxes. Now make no mistake; your servant hates to pay taxes. It pains me to write out those quarterly checks. I can't bear to see that money for which I have worked so hard over the years and decades disappear into the coffers of Uncle Sam.

I worked for that money. It's mine.

Only, by law, it isn't mine. According to the law, the government can take as much of it as they want. And if the law does not change to allow the government to take more of my hard-earned money, my country will be in dire financial straits. I do not want that to happen. My son and his wife just had a baby as I write this. I do not want my son and his bride and my granddaughter to live in an America that is a fiscal shambles. I know that rich people and well-to-do people can afford to pay more taxes. We simply have to do it, as unpleasant as that will be.

Yes, we should cut spending as much as we reasonably can. Yes, Medicare in particular should be cut. There are too many tests and too much looting of the system by doctors, labs, and hospitals. But in a world as dangerous as ours; where many other countries throughout the world hate us; and where two of the most dangerous, vicious nations on this earth—North Korea and Iran—either have or are about to have nuclear weapons; we do not want to cut defense by any but token amounts, if that.

Most of our nation's budget is made up of untouchable items like Social Security, interest on the national debt, pensions to federal and defense personnel, and Medicare. These can be cut, as mentioned above, but only in small measure.

The deficits are in very large measure. And there is just no way to eliminate them except to raise taxes. To say we can do it any other way is to dwell in a fantasy world.

I am sorry to say this, because I genuinely loved Mr. Bush—and still do—and Arthur Laffer has never been anything but friendly to me. But we got into this mess by lowering taxes. And we are going to have to get out of it by raising them. There is simply no other way. No Republican candidate for any high office will tell you that; but I just did. Of course, I am not a candidate for office and I stole that cute rhetorical trick from a speech by Walter Mondale long ago.

On the other hand, Keynesian deficit spending—short of spending as much as one spends on a world war—doesn't work either. That's the Democrats’ Kool-Aid.

Meanwhile—somehow, some way—Guatemalan immigrants who don't speak English find jobs in an economy with unemployment above nine percent, while graduates of prestigious colleges don't find jobs.

Motivation is everything. Work discipline is everything.

For example. . .there is almost no unemployment in Utah. Why? They don't have oil. They don't have casino gambling. They have an incredibly well-motivated, disciplined, eager work force. That's what you learn in The Church of the Latter-Day Saints. That's what all Americans once knew. That's how we got to be number one: hard work and discipline.

Yesterday I went into a drugstore in West Los Angeles. The cashier kept a line of customers waiting while she sampled designer cupcakes her son had brought her—then took them around to the other cashiers. . .while we waited. That would not happen in Utah.

Obviously, if there were a real Depression, with a total failure of demand, we would have even disciplined and hardworking people out of work. But in today's America, there are plenty of jobs. It is simply that native-born Americans generally won't take the ones at the bottom of the ladder, and we as taxpayers pay them to stay home and play Solitaire on their computers.

If we stopped paying these people to simply sit around their homes, they might be as eager to work as the immigrants from Guatemala—and we might have a lot less unemployment. We do not need more tax cuts with a government that's already broke. We don't need more government stimulus. We need a work force that's willing and eager to work. That's how we'll get back to high prosperity—or won't.

I know this is heresy. But that's why you bought the book.