Friday, January 4, 2008

Voodoo Economics

Under the continuing theme of "How did this happen?", we can all thank the policy of "Supply Side Economics" for being the specious excuse by which massive debt accumulation was not only tolerated, but condoned. You see, in order to convince average citizens to do something that we have been taught from our birth is very bad (increase debt), it takes a Ph.D (in this case Arthur Laffer), some good old fashioned fantasy story-telling, and of course a receptive audience.

The basic theory behind SSE is that if you cut tax rates, you will reduce the size of government, free up capital for investment and hence increase economic growth rates. But wait! It gets even better! This new high level of growth will provide an increased tax base and therefore have an overall offsetting effect against the rate cut by actually INCREASING Government revenues! But wait! It gets even better! Act now and we will throw in 6 free Ginsu knives at absolutely no cost to you!!!

Now, in all fairness, it's mathematically possible, that at extremely high tax rates of say 80%, that an ensuing growth burst would be large enough to offset the direct reduction in tax revenues; however, at moderate tax rates (30-40%), it becomes essentially mathematically impossible for the tax cut growth to offset the lost revenues.

I will leave to the academics to debate the mimimum tax rate at which the Laffer curve becomes feasible, HOWEVER, as usual, in all of this specious reasoning, the real point got missed:

In order to free up the economy for long-term and sustainable increased growth, government spending must ALSO be controlled, or else, the plan isn't based on sustainable growth, it instead becomes a cleverly disguised deficit-driven Ponzi Scheme. And of course, the politicians (starting with Reagan), did the first part of cutting taxes, but conveniently skipped the part about cutting spending, and instead proceeded to massively INCREASE spending, hence kicking off the massive debt ponzi that we live under today.