24 October 2008

No windows were broken in the fixing of this economy

Responding to a question on Good Morning America about whether he regrets what he said to Joe the Plumber, Senator Obama said he doesn’t. “Americans know,” he said, “that the way you grow an economy is from the bottom up.”

Yes. We do know that. The problem is Obama doesn’t believe that. Note that this truism is given in justification of his desire to “spread the wealth”. This “wealth-spreading”, however, is coming from the government and constitutes the growing of the economy.

Now, it occurs to me that if one believes that it is the role of government is to "spread" wealth, one really must believe that the wealth being spread really belongs to the government. If not, then one must at least believe that the government is in a position of superiority to, and supervisory of, an economy, observing growth of wealth, taking note of who has more and who has less and then stepping in to take from those who have relatively more and give to those with relatively less. The government, on this view, is above the economy.

So, really, an economy is grown from the top down. That’s what he really believes.

If he does believe that you grow an economy from the bottom up, it would be awfully nice if he would explain just exactly how that happens. It would be great if he would explain what he means by the word economy in the first place. Then he can explain what he means by growing an economy. When he does those two things, perhaps we’ll understand how taking money from those at the “top” and giving it to those at the “bottom” grows an economy.

It’s easy to see why Obama’s plan makes sense. People with more money spend it, which results in economic growth. That’s the general tendency: people generally prefer present consumption to future consumption. But we can anticipate economic growth even in the absence of present consumption: those at the “bottom” could just as easily save that money. If that happens then banks, having more in deposits, and thus more to loan would likely be motivated to lend more. Why? Banks pay interest on those deposits; the money to pay that interest has to come from somewhere. Lending money at interest is a good way for a bank to make money to pay interest.

Hard to see a down side, isn’t it? It would be easier to see that down side if we turn our gaze from the net (income) tax receiver to the net (income) tax payer. (Remember him? He’s the evil sack of garbage making more than $250K per year. You know, professional athletes, movie stars, plumbers.) The net income tax payer now has less money than he had before. Well, now if the net income tax receiver was spending, or saving, more because he had more money in his hands, might we not justly suppose that the net income tax payer would spend less? They might save more, which could motivate banks to extend loans. But to whom would banks be lending this money?

What we don’t have is an explanation of how “spreading” the wealth grows an economy, just the assertion that it does and will. So far, all we really have is reason to believe there will be more consumption, not growth. We have no explanation, despite use of the phrase, “grow an economy”, for how “spreading” the wealth increases the amount of goods and services produced by the economy, not consumed. Just how is it that the “spreading” of this wealth will result in an increase in real gross domestic product.

I think any explanation we would be likely to get would sound much like Frederic Bastiat’s Parable of the Broken Window:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.
All we have is an explanation for how money from the baker, who might have spent it elsewhere, gets into the hands of the baker.

So in just the same way as a broken window is said to be good for a poor glazier and by extension a whole economy, simply “spreading” the wealth is supposed to be good for the economy. In fact, if you think about it, simply “spreading” the wealth is even better because we don’t even have to break a window! We just take the money from the rich baker and give it to directly to the glazier, who doesn’t even have use any of it to purchase the glass which he’ll use to repair the next window. That's a really big gain for him. (Thankfully, though, not a capital gain!)

There are two more things it would be nice to have. First, an explanation of how the purchasing power of this “spread” wealth will not be decreased by the not-so-federal government creating new money ex nihilo whenever it thinks it needs more money. (This used to be called inflation. In Newspeak, inflation refers not to the government’s reducing the purchase power of dollars by printing new ones, but to “rich” and “greedy” owners raising their prices because they’re, well, greedy. But I digress.)

Second, given the relation between economic downturns and the effect they have on capital goods, as opposed to consumer goods, Senator Obama can explain just how this “spreading” of the wealth will result in an increase in the amount of capital goods purchased. (Economic downturns affect capital goods sold much more than they do consumer goods.)

Are the rich business owner (the typical purchasers of capital goods) going to continue purchasing and/or maintaining those goods? To what purpose, make even more money? We have a graduate income tax. The more income they receive the more of it is subject to higher tax rates. $250K is chump change and isn’t like the tax rate (say 25%) on that $250K is going to be 25% on $500K. No that percentage goes up. Maybe the tax rate on $500K will be 35%. Who knows?

Oh, and don't forget. We're going to be getting an increase in capital gains taxes. Because that's only fair too. I'm sure that won't have any negative effect on capital goods -- or consumer goods.

Heck, if the man really wants to grow an economy by “spreading” the wealth, why not just cut out the government middlemen and legalize theft, burglary, embezzlement, extortion and so on? That’ll do it real quick.

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James Frank Solís
Former soldier (USA). Graduate-level educated. Married 26 years. Texas ex-patriate. Ruling elder in the Presbyterian Church in America.
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