So Less Is….More?
When you absorb as much business news as I do, you are exposed to a wide spectrum of opinions on any given issue. Of course these days, all business news has an element of political news and it’s a very rare pundit that doesn’t mix one completely with the other. In the case of economists, for all of the sobriety that seems inherent in their profession, there is always at least the element of humor in their presentations, intended or otherwise. When the chief economist for Brokerage firm A pronounces that growth will be 2.1% vs the earlier forecast of 2.3%, that’s big news and can frequently spark millions of dollars of securities trades just because of that 0.2% difference. You’d think that these numbers were proclaimed by guys sporting robes and sandals reading from tablets; the stone kind, not the IPad kind.
In order to create some interest in the aptly named ‘dismal science’, some TV networks interview people who exude some kind of personality, as if that would make the pronouncements more believable. Fox for example regularly brings on Ben Stein, he of the dry persona made famous by his role in the 80’s movie, Ferrris Buehler’s Day Off. Think of his deadpan delivery of, ‘Buehler, Buehler, Buehler’. Apart from being a character actor, Stein is also in reality, an economist, one that is acclaimed enough to merit being interviewed on various talk shows. I won’t quibble over the complex models that these guys use to come up with a result of 2.1% vs 2.3%, after all, somebody believes it. What I do have issue with is the very basic premise of economics that all economists should have learned in their first year in school.
While there are really no laws in economics, unlike for instance the law of gravity in physics, certain tenets must pass the smell test of common sense. In particular, unless they’ve changed the entire premise of economic theory, demand responds to supply and price is a function of scarcity. In the interview on Fox, Stein is pushing some economic heresy that even a kid running a lemonade stand would laugh at. His premise is that tax rates should be increased significantly on the ‘rich’ so as to contribute to the federal deficit, since, according to him, during the ’40’s , ’50’s and ’60’s, tax rates were higher and the US economy had no trouble growing. Like Warren Buffet before him, Stein thinks that tax rates on the ‘rich’ should approach 90%. The rich can afford it and the economy can still grow.
This is as logical as the idea that a restaurant can keep hiking prices because they’ll just keep on making more money. What Stein does not mention in his astute analysis is that the period mentioned happened to be the largest economic expansion in the history of the world in the aftermath of World War 2. There was demand for everything in the world since everything was destroyed and the US was in the unique position of being the only functional industrial economy. Taxes may have been high, but the economy was expanding at a scale that had never been seen before. The bulk of the workforce was young and contributing to growth. We did not yet have the pull of entitlements on the economy anywhere near the degree that we do now. Great fortunes were made and great corporations built.
If Stein’s premise is correct, why don’t we just pay everyone a flat income and and tax the rest away? In addition, running a business will be easy, just set the prices as high as you want, since that must mean more income, not that you’d be able to keep it. Maybe we’re all being conned here. Maybe Stein is actually an actor posing as an economist. That makes more sense.