James Buchanan 1919 – 2013

"The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that "water runs uphill," no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores."

~James M. Buchanan, 1986 Nobel laureate in economics, writing in the Wall Street Journal on April 25, 1996

[Obviously that last sentence was written prior to Paul Krugman becoming a columnist for the NY Times]

The Rent Seeking Drag

Rent Seeking is sort of an arcane economic term for those who seek to obtain benefits for themselves through the political arena. 

It is, of course, not news to anyone that people lobby the government for privileges that the marketplace doesn't afford them. But why is this so bad economically? Beyond the fairly obvious fact that it diverts resources from the most productive uses to ones of lesser value (else why would you need to lobby government in the first place?), there is also an insidious dead weight cost.

Let's say, for example, a steel firm spends ten million dollars lobbying for restrictions on steel imports. Whatever money it gains by succeeding (presumably more than ten million), is not a net gain. From this gain must be subtracted the $10MM cost of seeking the restrictions. Although such an expenditure is still rational from the viewpoint of the firm that spends it, it represents a use of real resources to get a transfer from others and is therefore a pure loss to the economy as a whole.

As more and more economic decisions are made in the political arena rather than the economic marketplace, more and more money will be spent on influencing the decision makers. This dead loss starts to add up to a significant drag on economic growth. It's as if every time you went to the supermarket you had to spend an hour lobbying the store manager to put on sale the particular things that you want to buy. And others did as well. What would that do to the overall efficiencies of the retail food system?

Only The Rich Will Pay More Tax in 2013? Think Again.

For the last five years President Obama repeatedly told Americans earning less than $250,000 a year that their taxes wouldn’t go up — “not one cent.” Only “millionaires and billionaires” would see their taxes increase. So you think you're not the target of  "Fiscal Cliff" agreement? Think again.

The Tax Policy Center of the Brookings Institute provides a simple Do-It-Yourself calculator to compare what you would have paid if Congress had simply kept 2012 taxes as they were to what you will pay in 2013

A family of 4 with a salary income of $150,000 (certainly not officially one of The Rich)  plus some minor dividends, interest and capital gains, would pay nearly $5000 more in Federal income tax in 2013 on exactly the same taxable income as they had in 2012.

Let's halve that income to $75,000 (what would certainly qualify as the Middle Class that the President promises to protect). That family would pay almost $2000 more this year.

On top of that the $75,000 earning family is going to be paying another $1500 in federal payroll tax this year. So $3500 more -- or nearly 5% of their gross income. Think that will have any effect on economic activity in the future?  Of course, not. The President has told us it won't. Just like he told you that you will pay “not one cent” more.

Clinton Era Growth. Taxes or Spending?

Democrats often proffer the following logic:

The economy during the Clinton administration was strong.
Marginal tax rates were generally higher during the Clinton administration than they are now.
Ergo, raising tax rates would be a positive economic move.

There is another part of the story that receives almost no attention (because, of course, it  doesn't support the liberal narrative). Government spending was also a declining as a burden on the economy through the Clinton years.

Now, which do you think had the bigger positive impact on economic growth? Higher taxes? Or restrained government spending? Is it possible that it is the unrestrained Federal spending of the last six years that keeps us from achieving growth rates we experienced in the 90s?