One of the more enticing things about financial markets is not that they’re predictable. Or that they’re not predictable. It’s that they’re almost predictable…or at least they seem they should be.
The economy, like financial markets, ebb and flow in rhythmic cycles; though, they never quite repeat with perfection. A shortage of wheat one year should compel production and an abundant harvest the next year. You can darn near count on it, so long as there’s not a late season frost, a mite infestation, or some other act of God that wipes out the crop yield.
Indeed, the economy’s dynamic. It expands. It contracts. But it does more than that. For it’s more biotic than abiotic. It changes. It evolves. It continuously reshapes and readjusts to the countless and ever changing inputs, innovations, and interactions of the people and resources that compose it.
The economy also adjusts to government intervention and the conceit of central planners. An economy with a soft government touch is lively, energetic, and innovative. Conversely, a heavy handed government calibrates an economy to be slow moving, lethargic, and predictable.
In addition to government, the economy mirrors the veracity of the money and the range of credit that flows through it. An economy with sound money and tight credit is industrious, thrifty, and honest. Whereas an economy with fake money and cheap credit is slothful, gluttonous, and deceitful.
Preparing for an Alien Invasion
Over time attitudes towards government and credit change too. One generation borrows money and spends it, while voting in an endless array of social welfare programs. The next saves and pays down debt, and is suspicious of the snake oil promises of politicians.
No graphical curve can precisely predict what way people’s behaviors and attitudes will swing from one period to the next. Nor can it predict the implications of a new technological advancement or other unforeseen developments that transform the world.
Still, this doesn’t stop a congregation of academic economists from explaining the economy like they’re explaining how to calculate the area of a circle. Some even win the Nobel Prize for their adventures into nonsense. Armed with pie graphs, aggregate statistics, and dot plot charts, they offer theories of how the great big economic machine works. What’s more, they propose and execute programs to improve their graphs and charts.
One of the more tedious drivellers of popular economic thought is the 2008 recipient of the Nobel Prize in Economics, Paul Krugman. He’s smarter than you and he’ll make sure you know it. There’s hardly a problem he doesn’t know the solution to. So, too, there’s hardly a solution he doesn’t know the problem to.
In fact, several years ago, Krugman, a Keynes devotee, drifted so far out of orbit that his thoughts literally took him to the outer limits of deep space. Following this righteous departure, Krugman went on cable television and explained that the proper way to propel an economic growth chart up and to the right is to borrow massive amounts of money and spend it preparing for an alien invasion.
We bring up this notable example of Krugman’s theoretical rigor to put what follows in proper context…
Washington’s Latest Match Made In Hell
The recent mid-term election demonstrates that the American populace wants the more abundant life to be given to them via the highly visible hand of big government. For example, 29 year old Alexandria Ocasio-Cortez was recently elected to the House of Representatives from New York’s 14th district.
Ocasio-Cortez is a socialist, and she’s determined to give the voters exactly what they’ve asked for. Free school. Free drugs. Free retirement. And a guaranteed income for showing up to pretend jobs that are little more than adult daycare – like many of those jobs currently on furlough.
One possible solution to satisfy the will of the people came this week from Ocasio-Cortez. It involves jacking the marginal tax rate on top earners up to 70 percent. The spoils would then be frittered away on a massive boondoggle, a “Green New Deal,” to save the planet from the menace of climate change.
Several days later Paul Krugman, in an article titled The Economics of Soaking the Rich, validated Ocasio-Cortez’s proposal. According to Krugman:
“Tax policy toward the rich should have nothing to do with the interests of the rich, per se, but should only be concerned with how incentive effects change the behavior of the rich, and how this affects the rest of the population.
“Or to put it a bit more succinctly, when taxing the rich, all we should care about is how much revenue we raise. The optimal tax rate on people with very high incomes is the rate that raises the maximum possible revenue.”
Krugman even mentioned several of his cohort’s academic research that had pinpointed the optimal tax rate on high earners to be 73 percent or even more than 80 percent. Based on Krugman’s referenced research, Ocasio-Cortez’s proposal doesn’t go far enough to produce economic salvation for the masses.
Nonetheless, Ocasio-Cortez and Krugman are a match made in hell. Should a Green New Deal, funded by a top tax rate of 70 percent, be put into practice, we presume it would have a far different result than Krugman advises. Remember, the economy, and the people that compose it, adjusts and recalibrates to the level of central planning and government intervention imposed upon it.
Hence, the promised nirvana of everyone getting rich selling rooftop solar power back to their utility at the expense of their neighbors will turn out to be a great big dud. Maximum possible revenue will diminish. In its place, will be an enormous pile of debts and an even greater pile of regrets.
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