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Archive for August 10th, 2012

I’m reluctant to disagree with two excellent economists, but I’m rather disappointed that Gary Becker and James Heckman have a piece in today’s Wall Street Journal arguing that the federal government should subsidize economic research.

With the burden of government spending at record levels, every beneficiary of federal largesse should be willing to back away from the trough.

They obviously have a different perspective. Let’s look at some excerpts from their column.

…the great majority of economists have long agreed that the federal government should have an important role in the sponsorship of basic research. …Yet recent actions by Congress have threatened to restrict funding for basic research that focuses on economics. We believe such actions are misplaced… We cannot expect the market alone to support basic economic and social research, including data collection, since they are public goods that are difficult to appropriate privately. In cutting out the considerable fat from the public diet we should not cut the muscle that has helped make our economy the largest and strongest in history.

Much of their column is dedicated to examples of academic research that have yielded benefit for the rest of society. But even if we assume their examples are completely accurate, that doesn’t necessarily mean that federal subsidies generate a good rate of return.

I’m sure there must be examples of people who took welfare money, managed to avoid the trap of dependency, and then went on to live very productive lives. That doesn’t mean that welfare programs, on net, have a positive impact on the economy.

Likewise, there must be tens of thousands of people who became entrepreneurs, investors, and business owners after getting government grants and other subsidies to attend college. But that doesn’t mean that those success stories aren’t outweighed by costs such as diversion of capital, tuition hikes driven by third-party payer, and excessive student debt.

Should you pay higher taxes to subsidize me?

This doesn’t mean that spending on economic research is necessarily counterproductive, but it does mean that a few positive examples are not enough to settle the debate. Likewise, if I had an intern find examples of government-funded economic research that was either frivolous or destructive, that wouldn’t prove such spending is automatically wasteful.

Let’s close this post by suggesting where there could be consensus. As I noted in my Rahn Curve video, there are some forms of government spending that are associated with better economic performance. Examples of such “public goods” include expenditures to maintain the rule of law, uphold property rights, and enforce contracts.

I’m skeptical about whether economic research is a public good that requires government subsidies, but Becker and Heckman are right in the column when they note that our fiscal problems are due to the “growth of entitlement spending.”

So let’s all agree that we should reform entitlements and shut down useless federal departments.

Then we can have a good debate about spending for “major public physical capital investment” and “conduct of research and development,” which I’ve previously explained amount to less than 10 percent of the federal budget.

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While I disagree with statists, I sometimes admire their discipline. They are very good at staying “on message.”

I am 100 percent confident, for instance, that they intend big tax hikes on the middle class, even though they would piously swear an oath to the contrary. Indeed, I suspect more than 90 percent of them secretly would like a value-added tax.

It’s not that they necessarily dislike ordinary people, but privately they understand that you can’t finance big government by taxing rich people.

Simply stated, there aren’t enough of the “1 percent.” Moreover, rich people have significant control over the timing, composition, and level of their income, so class-warfare tax hikes inevitably will fail to generate much revenue (yes, the Laffer Curve exists).

So it makes sense that they want to screw the middle class, but it’s also obvious that they don’t want to admit this is their goal. As such, it’s always interesting and revealing when folks on the left slip up and admit their true intentions.

In recent days, more leftists have come out of the we-only-want-to-tax-the-rich closet.

Here’s some of what Jared Bernstein, former economist for Vice President Biden, just wrote for the U.K.’s Financial Times.

That plan will have to include tax increases beyond just the wealthiest households, although that is the right place to start. But what should happen next? …The best thing to do, once the economic recovery is solidly under way, is to simply let the Bush tax cuts expire and return to the tax structure that prevailed under Bill Clinton. …I’d urge Democrats to be forthright with the fact that we’re way below where we need to be in terms of revenue collection.

Bernstein, by the way, was a co-author of the infamous prediction that enacting Obama’s stimulus would keep the unemployment rate below 8 percent.

The Washington Post also is on board with the idea of big tax hikes on ordinary folks.

…it’s impossible to tackle the federal debt by taxing only the wealthy. …the middle class is going to have to pay more…the only way to achieve tax reform with a reasonable increase in revenue is to reset everyone’s rates at Clinton-era levels.

Keep in mind, by the way, that these proposals are just the tip of the iceberg. Once tax rates are pushed back to 2000 levels, then the drumbeat will sound for additional tax hikes.

“The middle class is an easy target”

And, sooner or later, the left will push for its big goal of a value-added tax.

This is not a trivial threat. Obama, for instance, already has expressed support, saying that the VAT is “something that has worked for other countries.” Romney’s also untrustworthy on the issue, having left the door open to this European-style national sales tax.

But the main point of this post is to explain that class-warfare taxes on the rich are a real threat, but they’re also just the camel’s nose under the tent. The left’s real goal is to fleece the middle class.

There’s no way to boost the burden of government spending to European levels without mimicking European tax policies.

And the dirty little secret about European tax policy is that taxes on the rich are about the same on both sides of the Atlantic. The reason government is so much bigger in Europe is that they ransack the middle class.

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