The Skeptical Optimist

Sophistry 101: “Increasing future taxes”

Are you aware that deficit spending absolutely requires “increases in future taxes”?  There is simply no question about this, and I see other blogs repeating the mantra incessantly.  After all, Milton Friedman said “To spend is to tax.”

Strange thing, though: I never see any elaboration.  Not only that, but I think I know why.  I strongly suspect it’s because they don’t want the conversation to go where elaboration would lead them. 

If I’m right about that, then there’s a perfect word to describe the tactic: Sophistry.  I looked it up just to be sure, and here’s the definition:

sophistry:  a subtle, tricky, superficially plausible, but generally fallacious method of reasoning.

I built the following graphic to illustrate the point.  Because I’ve been blogging about the importance of economic growth for almost two years, it should be obvious why I wanted to expose this subtle deception.  Please note that in both cases, taxes are increasing each year by exactly the same amount.

Growth, and what we might do to enhance it, has been getting short shrift in the national debate.  I hope it will have a better chance of getting more mindshare if we continue exposing deceptive tactics such as this.

-------------

Update:
Good question from a reader: Why did I show all the "?" instead of the numbers?  Answer: The listener's mental model for "tax receipts" typically does not already include the tax "base" (GDP).  If the speaker doesn't introduce it, that listener's mental model won't include it.  These tables depict what the listener envisions.

Thanks to Michael for catching that.

Wake-up call to Concord: It’s not about the money.

A few people (let’s call them, collectively, “John and Jane Doe”) have sent me emails recently, defending the Concord Coalition’s position on so-called fiscal responsibility.  It’s time I laid out my opposing viewpoint in detail. 

Incidentally, I see on Concord’s website that their “Fiscal Wake Up Tour” will be in Austin, TX, on Thursday, Sept. 28 at the Driskill Hotel; I’d love to attend and participate, but have other obligations in Dallas that day.  [By the way, if you happen to be one of the many Austin visitors to this website, and might be able to attend that event, send me an email; maybe a group of you would like to attend, after we exchange some ideas about questions that should be asked and topics that should be confronted.  The ideas expressed at this website have been attracting what is approaching a quorum of supporters in several cities—Austin is my #2 source of visitors—so it may be the right time to take this debate to the next level.  Let me know.] 

Anyway, what follows is an open letter to John and Jane Doe, Concord’s defenders.  It defines my basic disagreement with their philosophy and approach. 

The Carrot, the Stick, and the Correction to my Press Release

Recently I donated some of my money to the National Republican Congressional Committee.  (Why the Republicans instead of the Democrats?  Because more often than not, I tend to prefer the party of Carrot Economics to the party of Stick Economics; see the End Note at bottom for some quickie definitions.) 

Anyway, two days ago I found out that—because of my donation, plus the fact that I am the owner of a small business—they have bestowed upon me the title of “Honorary Chairman of the Business Advisory Council.”  Not only that, but they sent me a copy of their Press Release about me, designated “For Immediate Release.” 

For now, I’m taking this seriously.  As a result, I had no choice but to shoot off an emergency email to them, asking for a correction to the wording.  Best way to explain it is with a picture of the Press Release, followed by the important parts of my email to them explaining the urgency of my corrections.  I’m an optimist, so I’ll assume these corrections made it to them just in time.

Here’s the Press Release as they sent it, with my handwritten edits; click to enlarge.

Below are the important parts of my email back to Chairman Tom Reynolds:

Chairman Reynolds,

Although I'd like to thank you for my Honorary Chairmanship of the Business Advisory Council, I have an urgent change for you to make in my Press Release.  I hope it hasn't gone out yet, as it will no doubt be picked up immediately by the WSJ, NYT, WaPo, and Financial Times -- and you know those folks: it's like pulling teeth to get them to correct anything.  In any case, I hope you still have time to correct two errors in the last sentence: one minor omission, and one grievous factual error.

The factually incorrect sentence reads:

"Conover, who has long supported Republican ideals, particularly debt reduction and tax reform, will be a key member of the council."

Summary of corrections, and explanation:

1. (The minor omission.)  Please insert the word "some" just before "Republican ideals"; the reason is because I am flatly, unequivocally opposed to a balanced budget, and will remain that way until it is redefined to mean "the fiscal budget which results in a steady, unchanging ratio of debt to Gross Domestic Product."  I am also strongly opposed to using our nation's hard-won creditworthiness as a political weapon, as Newt Gingrich and others attempted in 1995 when they almost took the USA into default on its Treasury obligations by refusing to increase the financially-meaningless "Debt Ceiling" -- you know, the same meaningless "Debt Ceiling" the Democrats were so worked up about earlier this year (2006).

2. (The grievous factual error.)  Please remove the words "debt reduction and"; the reason is because I am flatly, unequivocally opposed to debt reduction.  I have been blogging for almost two years explaining why debt reduction is unnecessary in a growing economy, and have been lambasting politicians for demagoguing the debt question -- including any Republicans who attempt to play on the public's unfounded fear of the debt.

The factually correct sentence would therefore read:

"Conover, who has long supported some Republican ideals, particularly tax reform, will be a key member of the council."

Thank you for making those last-minute changes in my Press Release, Chairman Reynolds. 

Lastly: I presume you will be happy to know that, at my weblog, I have spent a lot more time lambasting Democrats than Republicans.  I think I've detected that the party which does not occupy the White House tends to say far more stupid things about the economy than the party in power—although it's definitely not a shutout by any means.

Sincerely,
Steve Conover
Honorary Chairman of the Business Advisory Council

Whew.  I sure hope they received these corrections in time.

==============

End Note:  Two quick definitions (mine, of course), as promised in the first paragraph above...

1. Carrot Economics:
"Growth is good."  Encourage innovation, and allow rewards to be reaped by anyone who can make better quality of life more affordable to the masses.  Expect median income to grow as a result, and expect some to get rich in the process.  Have faith in the future.  Trust in the competitive marketplace of ideas and incentives, and in the process of creative destruction.  Favor the experiment, learn, and adapt approach over the predict, commit, and plan approach.  The Carrot Economics crowd thinks "success" is when aggregate growth not only accelerates, but also produces pleasant surprises benefiting not just aggregate income, but also national security and the environment. 

2. Stick Economics:
"Rich is unfair."  Tax more and more heavily anyone who somehow got "rich" -- even if that status was achieved by making better quality of life more affordable to the masses.  Try not to get cornered into defining the word "rich" or discussing causes of "growth."  Trust the government to make fewer mistakes than the market makes.  Favor the predict, commit, and plan approach over the experiment, learn, and adapt approach.  Spread fear of the future, and suspicion of people and organizations who practice Carrot Economics.  The Stick Economics crowd thinks "success" is when the top two quintiles of households get their comeuppance for destroying the environment and for mercilessly suppressing the bottom three quintiles. 

Fed Funds now highest rate on the chart

Where are interest rates going?  As usual, I don’t know—but I do know where they are now.  Fed Funds are the highest on the chart, including all the long-term rates.  I updated it yesterday, and thought it was about time I published it again.  Click to enlarge.

False Phobia #2: “Printing Money”

I’m encouraged when I visit discussion forums on the internet (usually to see where visitors to this blog are coming from), because a growing number of people are challenging others to start placing deficits and debt into proper context by relating them to the size of our economy, and by introducing the positives of economic growth into conversations previously dominated by false hysteria over the word “debt” (...the word which, incidentally, is False Phobia #1; I’ve been writing about it for almost two years now). 

But there’s still one button the debt-phobes are fond of pushing, and too frequently it “succeeds” in shutting down the discussion.  The show-stopper goes something like this:

Right, just keep running up more and more debt—then watch the government turn the printing presses up to full speed, inflating its way out of the debt burden.  Inflation, the hidden tax, is the secret weapon governments use to "fulfill" their debt obligations.

The false fear of “printing money” comes in several degrees.  Some people think any increase whatsoever in the money supply is inflationary, having misinterpreted Milton Friedman’s comment that inflation is everywhere and always a monetary phenomenon.  Other people think annual money supply growth should be pegged at something like 4%, the number I remember being promoted by the Monetarists a few decades ago.   But regardless of degree, the common denominator is a fearful overreaction to the term “printing money.”  [Note: In reality, the Fed only has indirect control over the money supply, by controlling its overnight lending rate; however, for this illustration, I'll stick with the "printing money" concept.]

The fact is, when the economy is growing, a growing money supply is necessary, as explained in the first article of the money series.  More specifically, there are at least two logical truths about money and the economy: (1) A growing money supply is a necessary but not sufficient condition for non-inflationary economic growth; and (2) an unchanging or shrinking money supply is a sufficient condition for stifling economic growth. 

Shaq’s shoe size
Shaquille O’Neal wears a size 22 basketball shoe; that means his foot is around 15” long.  My guess is that his foot at birth was around 3” long, and that it took 20 years to grow to its present size.  Doing the math: To grow to 15” from 3” in 20 years, Shaq’s foot had to grow at an average real growth rate of 8.38% per year. 

It’s a good thing Shaq’s mother and basketball coaches didn’t believe in limiting shoe-size growth to 4% per year, isn’t it?  (...not to mention 0% per year.)  Footbinding would not have been good for Shaq’s basketball career, would it?  Annual growth of 8.38% was required to accommodate real growth, not some arbitrary 4% number.  (The 4% might have been a best guess by some group of shoe-size experts—but, as the libertarians have tried to teach us, central planners usually get it wrong when they make their expert guesses about what the masses “need.”) 

It’s also a good thing Shaq’s mother and basketball coaches didn’t believe in inflating his shoe size beyond what his real foot needed.  Imagine how well (...correction, how poorly) Shaq would be performing today if he were wearing a kayak on each foot.  An inflationary shoe-size policy would have been just as undesirable as a footbinding policy. 

Same principles go for the USA’s money supply.  The inflation question has been addressed ad nauseam by just about everybody, but what about the opposite mistake: Why would anyone think 0% money supply growth is just right for our economy?  I don’t know why, but that is apparently what some people incorrectly think a gold standard would “achieve.”  [In Ayn Rand’s Atlas Shrugged, one of my favorite books, I can’t remember any explanation in the story about how John Galt’s mini-utopia would increase the supply of its little gold coins, as the mini-utopian economy grew; on the other hand, it’s been more than twenty years since I read it, and my memory could be failing me.  Did Galt trust South African and Russian gold mine owners to grow his economy’s money supply at just the right pace?  I’ll probably never know the answer to that.] 

Similarly, why would anyone think that even 4% growth is just right?  That implies they think they know what real growth can be and will be: nothing more and nothing less than 4%.  Isn’t that a bit presumptuous?  If our economy had the potential for 8.38% real growth, that type of arrogant central planning limitation (4% max growth) would stifle the economy from achieving its potential. 

“Printing money” is not the lurking monster that will bring us down.  It is a necessity for a growing economy.  And—unlike Shaq’s foot—our economy will not stop growing ... unless, of course, we stupidly choose footbinding. 

FQ.06.36: Favorite Quote for This Week

Just as highly accurate long-range forecasting of the weather will always be impossible, so too will highly accurate long-range forecasting of the economy.
—Eric Beinhocker

How to calculate GDP growth rates

I see a lot of hits from people doing Google searches on the phrase “how to calculate GDP growth”—so I decided to make it more explicit and easier to find.  If you aren’t interested in the math, skip this post.  If you are, click on the two thumbnails; the first one (at left) is the math, the second one (at right) is an example using real GDP (USA) from Q4 2005 and Q2 2006. 

Energy, post 3: Yes, growth DOES require more energy

This is the third in a series of articles addressing the USA’s energy situation (...see article 1 here, article 2 here). 

In the previous article I pretty much laid down the following as an axiom:

A growing economy requires growing energy input.

Since then, I’ve received five emails (four friendlies, one smart-alec) questioning that assertion—and they all point to our nation’s track record of steadily improving energy efficiency, year by year.  Although they are all correct that we have established a long track record of using energy more and more efficiently to generate each dollar of GDP, the axiom above still stands. 

Two pictures are worth two thousand words.  Chart 1 shows “Energy Efficiency.”  Click to enlarge. 

 
[Sources: Energy; GDP.]

Since 1947, the (real) economy has grown at a 3.47% average annual pace, and energy efficiency has improved at a 1.37% annual pace.  Compared to 1947, we now use less than half the amount of energy for each dollar of GDP.  That’s good.

Chart 2 adds “Total energy consumption” to the mix.  Click to enlarge.

Total energy usage (Quadrillion Btu’s consumed by our economy) grew at a 2.05% annual pace.  Compared to 1947, we now use three times as much energy to drive our (much bigger) economy.  We're lighting a lot more 10' x 10' rooms at night—a lot more effectively and efficiently per room.  We're moving a lot more tons of consumer goods cargo to the store shelves—at a much higher efficiency per ton of cargo.

I hope that clarifies the point, which bears repeating:

A growing economy requires growing energy input.

Also, please note the question mark next to the word “Future” on each chart.  It’s important—because even though extrapolating the past is usually about the best anyone can do in the forecasting arena, I can guarantee that things will not unfold that way.  Changes come in surprising spikes with surprising timing, and that’s what will happen in energy.  (The “Peak Oil” folks are counting on a bad-news spike, by the way.  Others of us think the opposite kind of spike just might be possible, and some of us even think our nation might have a little influence over the timing of a good-news spike.  More on this in future articles.) 

Lastly: In the first article of this series, I estimated we’d be using 250+ Quads in twenty years.  That was probably too high, as the chart indicates—unless future economic growth is a lot higher than 3.5% (...a distinct possibility, if Ray Kurzweil is correct that we're now at "the knee" of an exponential growth curve).

==========
Here are links to all seven articles in the energy series:

• Article 1: Energy facts, certainties, and possibilities
• Article 2: Government spending and its consequences
• Article 3: Yes, growth DOES require more energy
• Article 4: Dissenting from Mr. Gore
• Article 5: The obstacle to oil independence
• Article 6: A tankful of electrons
• Article 7: A 21st Century “GI Bill”

Energy, post 2: Government spending and its consequences

What will bring an end to the Oil Age?  Hint: The Stone Age did not end because we ran out of stones.

[This is the second in a series of articles addressing the USA’s energy situation.  See article 1 here.] 

Energy is a huge subject, because it’s not just about economics; it also has implications for national security, the environment, and global politics.  My own top two priorities are economics and national security (not necessarily in that order) because of their long-term implications for future generations.  If your priorities differ, so be it.  In any case...

...here are three truths:

• A growing economy requires growing energy input (see End Note for details).
• Energy sourcing has significant national security implications.
• National security is a fundamental duty of government.

I presume those three bullets are unarguable.  The first bullet is backed by the Second Law of Thermodynamics, as explained in the End Note below.  The second bullet should be obvious to anyone who has watched CNN, Fox News, or The Daily Show for more than ten minutes in the last 4.95 years.  The third one comes to us from Adam Smith, in his 1776 best-seller, An Inquiry Into The Nature and Causes of The Wealth of Nations (specifically, Book V, Chapter I, Part I). 

This article lays some groundwork regarding government actions and their results.  Because most actions by government require—horror of horrors—"government spending" ...and because there is so much oversimplified, bumpersticker-grade rhetoric cluttering up the national debate about government spending, I have no choice but to address this issue before I can address the rest of the energy topic. 

By the time you finish reading this post, I hope two things will be a lot clearer:

1: Not only is government spending not always synonymous with "burning the money," but...

2: Frequently, the choice not to spend money is detrimental if not catastrophic.

Figure 1 below is a simple matrix showing four combinations of government actions and their consequences.  (Government actions almost always require "government spending," by the way.)   

Believe it or not, government action can have positive results (see green boxes, 1 and 4).  That is, not only can government “create something good”; government can also “prevent something bad.” 

The opposites of those two scenarios, unfortunately, are also true—see black boxes, 2 and 3.  But I think way too many people (including libertarians, Republicans, and Democrats) categorize too much government spending as burning-the-money.  Well, to put it mildly: I disagree with that.  I am far less concerned with the money than I am with what we get for the money: if it’s a bad investment, we should refuse to spend any money on it—neither taxpayer money, nor borrowed money; if, however, it’s a good investment that falls into one of the green smiley-face boxes above, we should spend the money without hesitation, regardless of whether we finance that spending by taxing money from ourselves or by borrowing it from willing lenders.  I’ve said that a hundred times before, and I’ll keep saying it again and again.

Let me make Figure 1 a little more specific by listing just a few quick examples of government actions that fall into each of the four boxes; if you can think of one more for each box, send me an email and I'll add them to my lists.  [By the way: Too bad there isn't a box for "supreme political idiocy," because that's where I'd put "Start building multibillion-dollar Supercollider, then stop midstream, say 'OOPS, we can't afford this because we'll have a bigger dificit,' then fill in the hole."] 

Anyway, here’s Figure 2.

But the story doesn’t end with Figure 2.  There’s one more nuance.  It’s the one that has, in my experience, been the toughest concept to convey, because it’s kind of a double-negative with a full twist: it’s when government fails to take actions that would yield positive results, especially failing to prevent something bad.  But the bottom line is still this: Inaction can be catastrophic.  The reason for inaction doesn't matter—whether it’s incompetence, political posturing, or perceived funding constraints, the result is negative. 

Examples are in order.  The WW2 generation, just ahead of mine, could no doubt illustrate this point with some Pearl-Harbor-avoidance scenarios that could have happened, but didn't.  But I'm a baby boomer, and the first example that comes to my mind happened more recently, during the Clinton administration: late-1990s bipartisan myopia—well-marinated for decades in oversimplified, spoon-fed pablum about “fiscal responsibility”—that misled us into sacrificing our national security on the false altar of surplus-worship.  Because it was bipartisan, finger-pointing by either side won’t work here; sorry.  We all did it to ourselves.  [Republicans wanted a reduction in Big Government; Democrats wanted a reduction in military spending.  The resultant compromise: Big Cuts in national security spending, which in turn resulted in surpluses galore—that is, until just after the war started.  Then the deficits came back, didn't they?]   

In any case, here’s Figure 3 illustrating the negative effects that government inaction can have.

Can I prove that steady spending of 5% GDP on national security (intelligence + diplomacy + military force potential) would have prevented 9-11 and the subsequent Hundred Year War, now in its fifth year?  Nope, sure can’t.  But can anyone prove it wouldn’t have?

Or, how about an easier question, now that we're armed with 20-20 hindsight?  Try question number two at the bottom of this article I wrote a year ago.  (Nostalgia buffs should enjoy that one, because the letter I quote in that article is almost eight years old; I've been asking question #2 for twelve years, but I still haven't received one coherent answer.)

Energy articles coming up

The energy discussion in subsequent articles will lean heavily on the key points I hope I’ve made here:

• More growth requires more energy.
• Energy has national security implications.
• National security is government’s duty.
• Some, maybe much, government action is beneficial.
• Failing to take action can be catastrophic.

Don’t worry, I will not be advocating that government start “picking winners” on the energy technology front.  But don’t think laissez-faire is quite the solution, either.  If it hadn’t been for "government spending" (on DARPA), we wouldn’t have today’s internet.  Similarly, if we can handle government’s energy role properly, we just might be able to speed up Oil Independence Day.  By a few decades. 

---------------------
Read on to see the End Note explaining why a growing economy requires growing energy input.

FQ.06.35: Favorite Quote for This Week

I haven’t slept for ten days, because that would be way too long.
—Mitch Hedberg