Sunday, March 8, 2009

How the Laffer Curve fundamentally undermined fiscal conservatism

Just about everyone knows the basic idea behind the Laffer curve: at both 0% and 100% taxation, the government gets no tax revenues, meaning that decreasing taxes can theoretically lead to increased revenues. The resultant theory of supply-side economics helped catapult Ronald Reagan to the Presidency in the 1980s, and controlled GOP economic policy for a generation. It also crippled economic conservatism on the national stage, perhaps beyond our ability to heal.

But wait, you say. Isn't lower taxation in line with the goals of fiscal conservatism? Well, yes and no. To economic conservatives, lower taxation is a desirable but secondary byproduct of lower spending. This unremarkable revelation came to me when I was thinking about the California budget deficit (see two posts down) and realized that the debate was framed incorrectly.

We don't have a budget deficit. Wait, don't leave, let me explain! The term "budget deficit" implies that the problem is insufficiency; specifically, that tax revenues are insufficient to cover spending programs. But this is an absurd way to view the problem. For starters, tax revenues have consistently increased relative to inflation over any period of time you care to name. Some data: here are historical records of tax revenues over the last 75 years and an inflation calculator. I challenge readers to find any time period 10 years or longer where real tax revenues decreased. Factor in population growth if you like; it doesn't matter. America's government, just like California's, has generally taken in more money from its citizens each year.

Furthermore, tax revenue is, by and large, the independent variable in this equation. The only government that has absolute control over how much money it gets is a dictatorship. More to the point, changes in tax policy don't have any real long-term effects on tax revenues, which have hovered around 18% of GDP for at least 30 years and probably much longer (here's some historical GDP data for curious readers to play with). George Bush's much-reviled (or much-vaunted, in the right crowd) tax cuts led to a short, sharp fall (>10%) in tax revenues as a percentage of GDP between 2000 and 2004 - but by 2007, revenues were right back on the long-term trend line. The limited effect of political decisions on tax revenues is amply illustrated by this graph from Paul Krugman's 1/16/08 NY Times editorial, "Taxes and revenues - another history lesson." Krugman contends that this graph shows the benefits of increasing taxes, but fails to note that the graph correlates much more closely to GDP than to either Clinton's or Bush's tax policies.

Clearly, tax revenues aren't the problem - they're perhaps the last consistent performer in Washington. Hence I repeat my point: we do not have a budget deficit. Rather, what we have is a spending surplus. Basic economics teaches us that we have limited resources to satisfy unlimited needs; but when politicians can punt scarcity into the national debt, they tend to spend beyond their means in attempting to deliver instant gratification of their constituents' demands. This leads right into the basic tenet of fiscal conservatism: the key to responsible governance is restraint in government spending. In short, the problem isn't how much money government takes in, it's how much money government puts out.

In this sense, the Laffer curve is nothing but trouble for economic conservatives. Here's the core of the problem: the Laffer curve diverts focus from the problem of excessive spending by dangling the dual carrot of lower taxes and higher revenues. Supply-side economics is only useful insofar as it suggests that raising taxes is not necessarily an efficient revenue collection instrument; taken any further, it generally becomes an argument for lower taxes in order to spend more. Hence absurdities like conservatives compromising with liberals by spending money on social programs as well as the war effort; like the "compromise" between tax cuts and increased spending in the recent trillion-dollar stimulus bill; like the generation-old tendency of the opposition party to accuse the majority party of indiscriminate spending, ignoring its own indiscretions when it was the majority party (blatantly evident in both parties over the past three years). Rather than measuring our wish-list against our budget, we measure our budget against our wish-list. Then we wonder how it is that so many people bought houses they couldn't afford to keep, caught up in the dream of a permanent real-estate boom.

Tuesday, March 3, 2009

Perspective on Religion, Prayer, and Meditation

I recently received a questionnaire from a classmate related to a class assignment, and I feel like my responses were worthwhile enough that I should lengthen my memory of them by posting them here. Some of the answers are very shallow; I plan to contemplate the questions further when I have time.

1. What is prayer to you? What is your definition of prayer?

Prayer (meditation) is a process of stillness, focus, awareness, contemplation, and understanding - in that order.
[secondary] Prayer is stress relief, an emotional buffer between my raw feelings and my actions.

2. Why do you pray?

I pray (meditate) when I am most emotional, and when I am least emotional. When I am intensely emotional, I seek to calm my feelings and restore my self-control. When I am emotionless, I seek to enter the process described above through stillness.

3. What form does your prayer take?

I quiet myself, assume a posture (no specifics other than tucked chin and straight back; it's pretty spontaneous) and focus on my breathing.

4. To whom do you pray? What is your image of God?

If I pray to anyone, I suppose it's myself. In a sense, I pray that I may improve myself.

5. How often do you pray?

Intermittently over the past five-ish years, recently increasing in frequency. I now pray (meditate) in some fashion on most days.

6. Do you feel that God ever communicates to you? How?
7. Have you ever had a time when you felt that one of your prayers was answered? Describe the incident. If not, is there a time where you feel or felt close to God?

No, and no.

8. At what point do you feel most spiritual? With whom? When?

I am most spiritual when I am surrounded by my own thoughts. In that sense, I am always alone when I am spiritual, even though I may be with other people.

9. Why are you religious (or not)?

Because I was not brought up in a religious context, I am not predisposed to believe in a higher power, which precludes a belief in most religions. When it comes to my worldview, I value the empirical over the hypothetical, the descriptive over the normative, the real over the ideal; as such, I prefer to restrict my belief in the supernatural and/or transcendent. Finally, the material plane satisfies my capacity for wonder, so that I have no real desire to add a divine element to the mix. The causes and consequences of humanity interest me more than the causes and consequences of deities.

10. Do you want to be religious or are you pushed otherwise? Why?

While going to a religious school has certainly opened my eyes to the possibilities of faith, I remain unwilling to circumscribe my worldview with religious doctrine. To adopt religion seems a limited and limiting way of life. At this time, the most religion I would allow into my life would be the admission of a higher power (Deism) mixed with elements of philosophy and meditation from various Eastern religions. And at this point, I think my beliefs would be most accurately described as agnostic, which is a shift from my atheism prior to entering Bellarmine.

California's Budget Crisis and the Economic Stimulus

My father often tells me that he has only ever seen one graph in the San Jose Mercury News that concisely conveyed relevant information without distortion. The graph was in an article from the late '90s discussing California's budget deficit, and it graphed the California government's inflation-adjusted revenues and expenditures over time. The notable point to be recognized, my father would say, is that although both lines steadily increased as time passed, the line representing expenditures was consistently higher than the line representing tax revenues. California's tax revenues had increased at a rate significantly outstripping inflation, meaning that in any given year, Sacramento politicians had more real resources than the previous year--yet the government's response was simply to keep spending beyond its means. Worse, my father would tell me, California was making long-term spending commitments, out to a decade or more, based on the assumption that these trends would continue, that the tech boom was a permanent phenomenon. This article, said my father, plainly showed the seeds sown for a California crisis down the road.

Of course, I'm not saying my father was some kind of genius just because his prediction is coming true. Anyone with the same information and a basic capacity to reason could have done the same, and many probably did. Still, I have to say, this sounds a lot like what my father's been saying:
California spends far more than it takes in, despite having some of the highest taxes in the United States. It is hostile to business, and the middle class is fleeing in droves. It runs huge deficits every year, yet the Dem dominated legislature refuses to do anything effective to cut spending.

Now one in ten Californians is unemployed. Does any of this sound familiar? It should. It’s what Obama and the Democrats have in mind as a “solution” for the rest of the country.

I don't really agree with Bill Quick on that last point. The problem with California is that politicians based their spending commitments on the rose-colored glasses theory of economics. They planned based on an eternal boom, and it came back to bite them. Obama, on the other hand, knows the economy's tanking, and he's promoting spending in order to fix it. In other words, rather than being the fuel for spending (as in California), the economy is now the impetus for spending. As such, I don't think it's fair to say that Obama and the CA legislature are touting the same solution, because they've been working on different problems.

However, it is telling that when the economy was booming in California, the answer from the left was increases in social spending on education and healthcare, coupled with tightened environmental regulation under the recently established California EPA. And here is Obama's analysis of the economic crisis, taken from his recent not-State-of-the-Union speech to Congress:
The fact is, our economy did not fall into decline overnight. Nor did all of our problems begin when the housing market collapsed or the stock market sank. We have known for decades that our survival depends on finding new sources of energy. Yet we import more oil today than ever before. The cost of health care eats up more and more of our savings each year, yet we keep delaying reform. Our children will compete for jobs in a global economy that too many of our schools do not prepare them for. And though all these challenges went unsolved, we still managed to spend more money and pile up more debt, both as individuals and through our government, than ever before.

(emphasis mine)
So Obama advocates increased spending on education, healthcare and the environment as partial solutions to the crisis (even accepting the nebulous connection between the former and the latter), while California Democrats advocate increased spending on education, healthcare and the environment as something to do with cash from boom times. It's almost as if their drive for this social spending is completely indifferent to economic concerns, and all the wailing and gnashing of teeth over the economic crisis is just a means to push through the left-wing political agenda. "Never let a good crisis go to waste" and all that.