Monday, July 05, 2010
  Abusing Keynes and Laffer

While England is zooming toward cultural oblivion, it does seem to be recovering economic sanity. Its new gov't is making serious cuts in spending, significant raises in tax, and reforms in welfare.

Meanwhile, Ireland has been running Austerity for a while and shows that it works.

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Will the gov't in America ever regain its senses? I doubt it.

Part of the problem is theoretical, and relates to our loss of intuitive How-knowledge in recent decades. Each party has its pet economic theory, and each party completely misreads the originally intuitive theory to serve its own purposes. The misreadings are interestingly similar: in both cases replacing a natural and organic curve by an arbitrary and false straight line.

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Brand-R abuses the Laffer curve to justify its subtle, nuanced and complex agenda, namely (1) ZERO TAX FOR GOLDMAN SACHS!!!!! (2) ZERO TAX FOR GOLDMAN SACHS!!!!! (3) ZERO TAX FOR GOLDMAN SACHS!!!!! (4) ZERO TAX FOR GOLDMAN SACHS!!!!!

Trouble is, Laffer's original intuitive theory is a CURVE, to be determined empirically by feedback, while brand-R treats it as a straight line that needs no monitoring. Laffer said that you can find an optimal level of taxation which allows best economic growth without losing the benefits of government. You can find this point by adjustment and feedback. Lower taxes until you see the economy no longer growing. If you go too far, raise taxes again until you see the economy no longer growing. Loop and refine until you hit the optimum for current conditions.

To do it right, you've got to keep up a cycle. The Lafferian growth spurt comes from the delta, from the cut itself, not from a steady low rate. In order to make room for growth spurts when needed, you must allow the tax rate to creep upward in good times.


Real Laffer


Repooflicans say you should simply keep dropping taxes forever, whether you're seeing any growth or not.


Repooflican misreading of Laffer


A proper reading of the curve would tell us we've dropped taxes WAY past the true optimum. Since 1999 the only growth in our economy has been in the fraudulent areas of real estate and Wall Street, made possible by underregulation. In other words, we're off to the left of the optimum point, and still going farther left.

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Brand-D abuses the ideas of Keynes in a similar way to justify endless spending on murderous tyrannical shit like Diversity and Global Warming. Keynes originally proposed a common-sense cyclical process: use government as a reservoir to smooth out the floods and droughts of a raw economy. When you're rich, fill up the government reservoir. When you're poor, let some of it out.


Real Keynes

Just as Repooflicans have forgotten the let-taxes-creep-back part of Laffer, Democrats have deliberately forgotten the fill-it-up part of Keynes. Their version of Keynes has no ups and downs; it's just a constant outflow, a constant flooding of the land with money from the government reservoir. Of course you can't do this in Nature: when the lake is empty, you can't take any more water from it. And we've long since passed the dry-lake point in so-called "Keynesian stimulus". We've been trucking in water from China and pretending it comes from the lake.


Democrat misreading of Keynes

How does this relate to Austerity? Easy.

Several decades of co-operative misreading have taken us to a place where the underlying assumptions of both Keynes and Laffer are invalid. No growth is available because the production is in China, and no stimulus is possible because the money comes from China. We're no longer a self-sustaining "closed-circuit" economy. Instead, we are merely a raw-material colony of China.

A full solution will require a declaration of independence from China, a restoration of the closed-circuit economy that prevailed from 1940 to 1980. But since we're not going to do that, we must at least stop the fake theories, stop the mindless and endless tax cuts and spending rises. We have to restore some kind of equilibrium first, so we can be ready for whatever happens next.
 


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Polistra was named after the original townsite of Manhattan (the one in Kansas). When I was growing up in Manhattan, I spent a lot of time exploring by foot, bike, and car. I discovered the ruins of an old mill along Wildcat Creek, and decided (inaccurately) that it was the remains of the original site of Polistra. Accurate or not, I've always liked the name, with its echoes of Poland (an under-appreciated friend of freedom) and stars. ==== The title icon is explained here. ==== Switchover: This 2007 entry marks a sharp change in worldview from neocon to pure populist. ===== The long illustrated story of Polistra's Dream is a time-travel fable, attempting to answer the dangerous revision of New Deal history propagated by Amity Shlaes. The Dream has 8 episodes, linked in a chain from the first. This entry explains the Shlaes connection.

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