2009-03-16

The Visible Handout vs. the Invisible Hand

(Originally Featured in The Claremont Review): In the current financial and political circus, with Fabian fantasists and climate cranks in control of economic policy, the mainstream media join Ivy League sages in condemning Adam Smith's invisible hand. Free market ideology has blinded conservatives, say many sophisticates, to a crime wave on Wall Street, as Adam Smith gives way to Bernie Madoff as the epitome of capitalism.

For perspective on what is going on, however, we should contemplate the view of Richard Armey, the crusty cowboy who long served as Republican majority leader and economic guru in the House, who pointed out to me more years ago than I want to recall, that economics has more hands and feet, visible and invisible, than the media imagines. Confounding the market's invisible hand during the past decade's financial follies were the government's very visible handouts. These outlays massively and conspicuously supported popular causes and constituents: low income mortgage seekers, affirmative action litigators, failed farmers, US automakers, ethanol junkies, sugar beet shysters, hustlers of solar power and windmills, socialist educators, climate cranks, and other altruistic but addled government dependents, plus all the interventionist CRAP (Community Reinvestment Act programs) that mandated the suspension of credit rules for politically favored home buyers. With much of this murky activity guaranteed by the government, it prompted orgies of overreach, with the "assets" of Fanny Mae and Freddy Mac rising from a few hundred million to five trillion in a decade or so. Democrats fervently celebrated all these visible handouts and wish to expand them hugely.

Meanwhile (in perhaps Armey's best trope), the invisible foot of government went to work. This millipedal regulatory force covertly kicks at the underpinnings of private economy activity by capriciously debauching the dollar; imposing onerously progressive tax rates on successful economic ventures but making investors eat the losses; fostering anti-business law suits and class action rackets; restricting access to energy resources; snarling international trade; and enacting ever more intricate mazes of contradictory laws and regulations with ever more acute moral hazard, which assures that the results of the intervention will be the opposite of its goals. The effect of these relatively inconspicuous activities is to unleash the visible foot of the market―all those bankruptcies and foreclosures―and increase demand for the visible hand of government largesse.

In general, to rectify the situation, the invisible foot of government must be removed―regulations retrenched, tax rates reduced, tariffs eliminated, the value of the dollar restored. But instead conservatives focus most of their energies attacking Leviathan at its strongest and most popular point: the visible handouts of government spending―earmarks, subsidies, and such―which matter relatively little if the invisible assaults are suppressed. Since the visible handouts cannot be reduced in a recession, the only spending cuts that actually happen as a result of the Republican complaints are in defense.

A few decades ago, supply side economists, such as Arthur Laffer and Robert Mundell and inspired journalists such as Jude Wanniski and Steve Forbes pointed out the politically feasible remedy. Lower tax rates and retrenched regulations result in more revenues for the government and less need for visible handouts. Because this footloose outcome allows the expansion of government and the defense of the country while the private sector grows even more rapidly, it was extremely popular for a few years. Its truth, demonstrated globally (look it up), is incontrovertible. Supply side policies enable the otherwise impossible combination of guns and butter: large defense efforts with low tax rates and rapid economic growth. Countries with low or declining tax rates can increase their government spending three times faster than countries with high or rising tax rates, because the low tax countries grow six times faster than the high taxers.

Why then is this truth controverted today by all reputable economists? Even the disreputable supply siders seem to concede to the Democrats that it is possible to increase revenues by increasing tax rates from current levels or to sustain social security and medicare without reducing the payroll tax. The reason is that all economists have been tied to the procrustean bed of existing national models which exclude all the factors―economic growth, tax shelters, entrepreneurial innovations, transnational and interstate investment flows and demographic migrations―that register the supply side effects.

Meanwhile, the profession upholds the phantasmagorical models of demand side economics. Because these models find no confirmation in reality―as Jean Baptiste Say proved centuries ago, demand is always and only a side effect of real supply―established economic theories are extremely difficult to learn and remember. You get Nobel prizes for minor and obvious insights in economic geography. Thus the exponents of the standard model are deeply threatened by any reality-based economics.

These experts are now completely in control of Washington, attempting to spend their way to political dominance, while taking well over half the voters off the federal tax rolls and giving actual taxpayers a greater incentive to hide and shuffle existing wealth than to earn or create new wealth. These measure will retard recovery from the recession and reduce revenues. But globalization means that entrepreneurial creativity―in which the United States is increasing it lead―can survive by adopting foreign locales and resources. Countries such as Israel (a global center of innovation) and Ireland (a low tax haven), China (a manufacturing dervish) and India (ascendant in software), are taking the lead and will help capitalism survive the Lilliputians currently trying to ruin it in the United States. What will matter, after all, is not whether President Obama approves of markets but whether markets approve of President Obama, who may think he has protected his future by buying off the middle class with tax rebates but will soon discover that his future will be decided by global markets for currencies and stocks market.

To any socialist revival, the invisible hand will still deliver the final finger.

STEVE FORBES, Forbes.com "Fact and Comment" (2/26/09): Nina Olson heads the Taxpayer Advocate Service, an independent division within the IRS that is supposed to help taxpayers resolve complaints with the agency when those problems can't be dealt with satisfactorily through normal channels. Each year the Advocate must report on problem areas within the IRS that are in need of improvement. This year's submission--unusually blunt for a government agency--is a taxpayer's delight: "The most serious problem facing taxpayers is the complexity of the Internal Revenue Code. The only meaningful way to reduce these burdens [of compliance] is to simplify the tax code enormously."

Olson didn't go so far as to advocate a flat tax, but anyone who looks at the report can only conclude that we must start over again. As the report states: "Taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them either to overpay their tax or to become subject to IRS enforcement action for mistaken underpayment of tax. [However,] sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities." The Advocate goes on, chronicling the grim realities:

--Individuals and businesses spend 7.6 billion hours a year filling out tax forms for the IRS. "And that figure does not even include the millions of additional hours that taxpayers must spend when they are required to respond to an IRS notice or an audit." Those 7.6 billion hours consume the equivalent of 3.8 million full-time workers.

--The cost of complying with the code comes to $193 billion. Other experts think that assessment is too low and have come up with estimates approaching $300 billion.

--The number of words in the code has grown by 2.3 million since 2001. In 2008 there were more than 500 changes to the tax code. Other surveys have found that the code has been amended some 14,000 times since the mid-1980s.

--No one can cope anymore: "Individual taxpayers find the return preparation process so overwhelming that more than 80% pay transaction fees to help them file their returns."

There are countless examples of the code's mind-numbing complexity. For instance, there are at least 11 incentives to encourage taxpayers to save for and spend on education, with each having different particulars on definitions, eligibility requirements, income-level thresholds, phase-out range and inflation adjustments.

There are at least 16 incentives to encourage saving for retirement, again with different parameters.

The alternative minimum tax is an atrocity in a class all its own. It was enacted four decades ago to ensure that everyone pays income taxes, no matter what loopholes or deductions they might employ. In 1970 only 20,000 filers were affected. By 2010 the number will reach 33 million.
Congress, knowing the outcry that would ensue if it whacked the middle class that harshly, regularly enacts a so-called patch, which results in the AMT hitting around 4 million filers. The biggest trip wires for AMT are family size and living in a high-tax state. In other words, if you have a lot of kids or you reside in California, New York or a similarly tax-greedy state, you will fall into AMT quicksand. Writes Olson: "Few people think of having children or living in a high-tax state as a tax avoidance maneuver, but under the unique logic of the AMT, that is how those actions are treated." Olson wants Congress to get rid of the AMT once and for all.

And God help us if Congress again tries to help beleaguered taxpayers….

DAN RAYBURN, Seeking Alpha (2/27/09): A few days ago, Qualcomm acquired privately held Digital Fountain. The deal went down almost a week ago and while I have yet to see a press release, Digital Fountain's website now has a brief announcement about the acquisition on its home page. While Digital Fountain does have a CDN offering, that's clearly not why Qualcomm wanted them.

Digital Fountain's CDN offering only recently got off the ground and its real value is the technology it provides to the defense department and other companies in the IPTV and mobile space. Much of its core technology has been adopted by standards bodies including 3GPP, DVB and others.

"Qualcomm has acquired a team of seven key engineers that will continue to support the technology and existing Digital Fountain customers. The Digital Fountain team will be located in Qualcomm's Santa Clara campus. Also, that team will be led by Mike Luby, Digital Fountain's founder and CTO, who will report to Qualcomm's Chief Technology Officer."

GEORGE GILDER, Gilder Telecosm Forum (3/01/09): That's what I told Qualcomm founder Klein Gilhousen on stage with Mike Luby of Digital Fountain at Telecosm--that the Raptor codes are far superior to Q's MediaFlo. I was one of the initial funders of Digital Fountain and brought Garage.com into the company. But my $100K has been diluted to literally pennies. It is not enough to be right.

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