Economic Realities That Need to be Accepted

Reagan Tax cuts

Political talk in America has reached new lows and it has become evident that our pundits and politicians are not having the right conversations.

Ultimately, there are a handful of undeniable economic truths that need to be acknowledged, for the time being, until new information legitimately challenges it. In the meantime, however, the jury isn’t out on these and it’s time for the government to act accordingly.

These are a few issues that should be put to rest.

Free trade is excellent for the economy

The fact is that this is not up for debate, but the idea that there are probably more major politicians on both sides of the isle that are protectionist is unnerving.

The “democratic socialists” and the “right-wing nationalists” have it all wrong and elude settled conclusions with fear mongering.

The left sees it as a wealth transfer to the top, where poor people suffer; while the right sees it as a drain on the middle class at the expense of foreign workers. Here’s the reality.

First, there is an overwhelming consensus in the economic community that free trade is vital to a prosperous economy.

The IGM economic experts panel found that 90% of economists agree with free trade with China, 96% agreed that free trade improves productive efficiency and again, 98% agreed the US is better off with NAFTA than the trade laws prior.

Adam Smith, Frederic Bastiat, Thomas Sowell and Paul Krugman – four economists from four different schools of thought – who reached their largest following in four different centuries – all champion free trade. Why? Because while NAFTA lead to stable inflation, job growth, and real wage growth, protectionist policies like the Smoot-Hawley tariff worsened the depression in every way and the increase in the tax actually reduced revenue, thereby failing to achieve the one thing it was supposed to.

Tax cuts don’t always equate to less revenue

This is an enormous misconception originating entirely from the left and rarely repudiated by conservatives. The Laffer curve, which is often misinterpreted, is actually very true and few experts deny it.

Charles Wheelan, a centrist economist who ran for congress unsuccessfully, made a great comparison of lower tax rates in a growing economy the same as getting a smaller arc to a growing pie.

What is often disputed is what tax rate maximizes revenue.

Christina Romer, the chairwoman of Barack Obama’s economic advisory, conducted a study with her husband at University of California Berkeley which found the revenue maximizing tax rate to be 33% (as published in the American economic review).

During both the Reagan and the George W. Bush years, income taxes were cut dramatically, but revenue went up relative to inflation.

Reagan cut the top tax rate from 70% to 28% between the 1981 and 1986 tax reforms, but tax revenue increased by 65.44% compared to inflation of 36.41%.

Crony Capitalism isn’t Capitalism at all

Of all the terms that should die in politics, this would be in the top ten.

Corporate welfare isn’t capitalist by any means.

Every major libertarian or capitalist economist or activist has opposed state intervention to prop up major companies.

There’s nothing capitalist about raising taxes or plain old deficit spending to pay for a sports event or prop up a dying coal company.

Really, this is all about labeling.

Leftists didn’t have the evidence to prove capitalism is at fault for the middle class decline, so simply changing the name (of something that is responsible for it) and putting the word capitalism in there provided a nice buzzword.

Republicans use this same strategy when they label themselves “fiscal conservatives” to hide the massive deficits of Nixon, Reagan and the Bushes.

The tax code isn’t exactly progressive or simple

At first glance, the federal tax code seems like it is a progressive utopia, where the rich pay higher percentages and the poor pay no more than 10% in the lowest tax bracket.

So why is it that the poor are struggling, seeing we spend so much on entitlements?

It is probably because the idea of progressive and simple taxes in the United States is a misconception.

First, this doesn’t at all include payroll taxes, which disproportionately hit the poor and middle class while the richest in society don’t pay a dime over the cap at $117,000 and probably only lose half a percent of their income compared to the more than ten percent for middle class earners.

This alone causes some bumps in the effective tax rate on the income ladder – and we’ve barely begun.

The other main component to why this simply isn’t true is the fact that wealthy people pay entirely different taxes.

Some, like Donald Trump, pay through the alternative minimum tax for roughly a quarter of their income, while others pay almost strictly capital gains or corporate tax.

Not to mention, there are many deductibles, tax credits, and so forth that alter the amount people actually pay.

The truth is that the actual tax code is thoroughly disguised in the 74,000 page behemoth, and no matter your politics, altering the tax code should be of utmost importance.

The Republican Party is only fiscally responsible in name

If there’s one concept I wish people understood in politics, it is that, just because a party or individual says they’re something, it doesn’t mean they are.

President Reagan ran on a spectacular “small government” platform, but in the end managed to nearly triple the national debt and raised taxes on poor people by hiking the lowest bracket to 15% and increasing payroll taxes.

George Bush Sr. famously promised no new taxes to the American people, but as we know, that was an empty promise.

Finally, Bush Jr. left office after doubling the national debt to 10 trillion, despite having a cooperative Republican majority in congress for the first six years.

Presidents aside, the rest of the party isn’t any better. Rather than fighting harder to rein in entitlement spending or slash military spending, they seemed to be more interested in defunding microscopic programs like meals on wheels and Planned Parenthood. They aren’t even all that capitalist, either.

Despite GOP majorities across the county, Obamacare is still the law of the land, and the 2008 stimulus act experienced two thirds Republican support, including votes from McConnell, Hatch, Collins, Graham, McCain and Cornyn.

All of these issues, along with inconsistency on free trade and corporate welfare, prove that they are unreliable when it comes to promoting lower taxes and deficit reduction.

Immigration can be a tool for economic growth

This new wave of right-wing populism sparked by Trump’s nationalist appeal is very concerning. It is further evidence that the right, like the left, doesn’t have much of a sensible economic platform, ideology and goal.

Don’t get me wrong, immigration programs can be abused if we provide free healthcare, education, and social services to non-US citizens, but we need to recognize the positive economic repercussions caused by immigration.

For one, the so called “Brain Drain,” in which intellectuals from the third world (usually doctors and medical professionals from Southern Asia) immigrate to the United States, has done wonders for the American economy as a whole, and economists agree.

When asked if average Americans would be better off with large numbers of legal, highly educated foreign immigrants entering the country, 95% of economists agreed that they would.

Even illegal (blue collar) migrants tend to help the American economy and work visa programs are usually successful.

This isn’t to say we should “open the border,” but points out the major flaws in building an expensive wall on the northern or southern border; walls that Scott Walker (R-WI), Donald Trump, and Bobby Jindal (R-LA) all wanted.

National minimum wage decisions are bad

You would think this would be self-explanatory, but apparently it isn’t. Bernie Sanders (I-VT), Elizabeth Warren (D-MA), Chuck Schumer (D-NY), Jill Stein (G-MA), Barbara Lee (D-CA) and Patty Murray (D-WA) – I hope you’re all paying attention.

You see, Brazil tried this not too long ago.

Brazil was a prospering South American country, one that avoided the 2008 recession, but things went lopsided when it tried socialism.

Every year, Brazil increases the minimum wage, but in 2012 it was both overconfident and run by liberals, so they raised it by 9% overnight.

From December of 2012 to March 2013, unemployment climbed 15.9%, while inflation was up 12.8%.

Brazil isn’t doing better, as the government spending to GDP is up 11.8% since 2012 and GDP per capita has dropped 7.2% since 2012.

The problem is that, much like the payroll tax, minimum wage laws makes hiring unappealing to businesses.

The usual responses are either to raise prices, make employees work part-time, fire employees altogether or all three.

Enormous companies like Wal-Mart support a higher minimum wage because it will be profitable in the end; local small businesses however do not.

The big concern that 79% of economists share is that minimum wage laws increase unemployment among young and unskilled workers, groups that will often become prone to crime as a result of joblessness.

Price control is harmful

Martin Shkreli became a celebrity overnight and the boogeyman of the left for his massive price hikes, so does it follow that we should immediately put price ceilings on everything?

Well, according to economists, no.

The big issue where this is used is in rent control, where an entire party called the “Rent Is Too Damn High” Party was created by living internet meme Jimmy McMillan to raise awareness on the issue.

Unfortunately, as John Stossel and 95% of economists agree, a price ceiling on rent is a bad idea and will lead to a shortage in the market.

Landlords and investors won’t try to build new apartments and certainly won’t care about the maintenance of the pre-existing ones and the people that need housing will bid up the price of homes or will go homeless. Everyone loses.

In other words, a binding price ceiling isn’t a simple fix, and suggestions to use this on healthcare, education, or drugs are well-intentioned but short-sighted.

The social safety net as we know it is useless

Even most leftist economists would agree with this statement.

Unemployment checks, SNAP benefits, and social security haven’t served their function of reducing poverty; even when implemented while the economy is thriving.

Despite massive spending during the Obama administration on SNAP benefits, the poverty rate didn’t plummet as the economy escaped the recession.

Obama’s government spent $575 billion on SNAP, far more than the $203 billion spent in Bush’s eight years. The result? The poverty rate was 13.54% in 2015, a modest increase from when he took office.

Another financial mishap has been the handling of Social Security.

The claim that congress raids Social Security isn’t entirely true or false; it depends on your definition of “raid.”

Since 1982, the treasury began collecting surpluses for the program through a tax hike.

Congress would take funds from Social Security to pay for other federal expenditures.

The first problem is that the interest rate on those bonds is almost always lower than the inflation rate. If congress dipped into the Social Security fund in September 1987 to grab $50 (to pay off a bar tab for wild congressional interns for example) and replaced it with a $50 series EE savings bond, in best case scenario, it would be redeemed today for over $101.

The problem is that when you count for inflation, it loses value. The real value of 1987 bonds is 94% of its initial value, or $47 in 1987 dollars.

Further, if the government does pay a fair interest when redeeming this fund, how can we pay for it when we’re up to our eyeballs in debt?

In reality, the couple of trillion dollars in the trust fund, doesn’t exist, it’s all bonds ensured by the US government (wink).

The other major problem is that, as of 2011, we’ve begun seeing deficits, not surpluses in the social security fund and is expected to be dry by 2034. Congress, making poor financial decisions to keep their seats, might threaten even that date.

Essentially, if you were born in 1969 or more recently, all the money you’ve paid in taxes for this program will be gone when you retire and you’ll be lucky to see a fraction of it.

This is what happens when Uncle Sam tries to run a retirement fund.

Many economists on the left suggest replacing the current social safety net with an earned income tax credit.

While it is an improvement from just throwing money towards inner cities, it’s fair to have doubts over a system like that.

Monetary policy is both overlooked and complicated

This is actually one of the most ignored issues in politics.

Dodd-Frank, Glass-Steagall, the 2008 bailout, and so on are largely ignored for more sexy issues.

The most airtime this issue got in the last election was when Mike Huckabee (R-AR) made a joke that was playing off of Chairwoman Janet Yellen’s name.

Monetary policy is what many believe saved the economy under Reagan and also what destroyed it under Bush.

Federal Reserve Chairman Paul Volcker raised the federal funds rate to 20% and inflation dropped from above 11% to 3% shortly thereafter.

Meanwhile, people could put a lot of blame on Chairman Alan Greenspan for dropping the rate from 6.5% to 1% in the early Bush years and remaining negligent of the impending recession.

The reality is, every single candidate for the Oval Office should be asked who they would appoint as chairperson, how they want the discount rate, required reserve rate, and federal funds rate to be and what role they want the Federal Reserve to have.

This isn’t a simple topic at all. The ideas behind banking vary from Hamilton’s plans to repay state debts and improve credit to the Fed’s gamble with quantitative easing in the recession. But it seems the more we try to improve and understand monetary policy, the better we all are.

Conclusion

The field of economics, much like the hard sciences, has historically changed from decade to decade regarding any theory, idea or conclusion.

It is important to constantly challenge ideas and evolve our line of thinking, but these conclusions have been challenged and rivaled and it has become evident that they are no longer theories as much as they are truths.

Perhaps the Republican Party can become a fiscally-responsible entity that champions capitalism in its entirety, just as it is technically possible for free trade to become destructive.

Until then, we should put these issues to rest and encourage these changes to public policy.

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Jake Dorsch

Jake Dorsch is a libertarian activist, bank teller, investor and aspiring future economist from Green Bay, Wisconsin that is pursuing a bachelor’s degree in both political science and quantitative economics at Drake University. He is currently on track to graduate a year early and will likely continue to obtain a master’s degree in econometrics.

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