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Why 95% of Traders Fail

Politicians Get Away with Systematic Theft by Fostering Fiscal Euphemisms

Politics / Taxes Sep 13, 2010 - 08:56 AM GMT

By: Robert_Murphy

Politics

Best Financial Markets Analysis ArticleOne of the ways politicians get away with systematic theft is by fostering euphemisms to describe their activities. Murray Rothbard pointed out some of the typical tricks. More recently, even the supposedly "right-of-center" economists Greg Mankiw and Martin Feldstein do their part to muddy the terminological waters, making it harder for the public to understand just how much they're getting ripped off.


Rothbard's Critique of Fiscal Euphemisms
In his splendid collection Making Economic Sense, Rothbard has an essay on "Creative Economic Semantics." He writes,

If the federal government's economists have been good for nothing else in recent years, they have made great strides in what might be called "creative economic semantics." First they redefined the seemingly simple term "budget cut." In the old days, a "budget cut" was a reduction of next year's budget below this year's. In that old-fashioned sense, Dwight Eisenhower's first two years in office actually cut the budget substantially … below the previous year. Now we have "budget cuts" which are not cuts, but rather substantial increases over the previous year's expenditures.

"Cut" became subtly but crucially redefined as reducing something else. What the something else might be didn't seem to matter, so long as the focus was taken off actual dollar expenditures. Sometimes it was a cut "in the rate of increase," other times it was a cut in "real" spending, at still others it was a percentage of GNP, and at yet other times it was a cut in the sense of being below past projections for that year.

The result of a series of such "cuts" has been to raise spending sharply and dramatically not only in old-fashioned terms, but even in all other categories. Government spending has gone up considerably any way you slice it. As a result, even the idea of a creatively semantic budget cut has not gone the way of the nickel fare and the Constitution of the United States.

Rothbard goes on to say that the "creative semantics" applied not just to government spending but also to taxes:

Of course, government economists have been doing their part as well to try to sugar-coat the pill of tax increases. They never refer to these changes as "increases." They have not been increases at all; they were "revenue enhancement" and "closing loopholes." The best comment on the concept of "loopholes" was that of Ludwig von Mises. Mises remarked that the very concept of "loopholes" implies that the government rightly owns all of the money you earn, and that it becomes necessary to correct the slipup of the government's not having gotten its hands on that money long since.

Mankiw and Feldstein Keep the Tradition Alive

Harvard economist Greg Mankiw has a reputation as a Republican conservative, in part because he was chairman of the Council of Economic Advisers (CEA) under George W. Bush. Martin Feldstein, another Harvard economist, and chair of the CEA under Ronald Reagan, is a frequent writer of op-eds for such outlets as the Wall Street Journal, and calls himself a "conservative economist." In the narrow spectrum of "respectable" political debate, Mankiw and Feldstein are considered right-wingers. They are not as "out there" as Arthur Laffer, but even so they are supposed to represent the case for the market, in opposition to more interventionist economists such as Paul Krugman and Brad DeLong.

Yet despite this popular classification, a Rothbardian would be suspicious. Two economists who served as advisors to presidents and who now teach at Harvard? What are the chances these guys are really champions of the free market?

Such suspicion would be well-founded. In a recent blog post titled, "Government Spending by Another Name," Mankiw writes, "Wise words from Marty Feldstein," and then links to a Wall Street Journal op-ed where Feldstein argues,

When it comes to spending cuts, Congress is looking in the wrong place. Most federal nondefense spending, other than Social Security and Medicare, is now done through special tax rules rather than by direct cash outlays. The rules are used to subsidize a wide range of spending including education, child care, health insurance, and a myriad of other congressional favorites.

These tax rules — because they result in the loss of revenue that would otherwise be collected by the government — are equivalent to direct government expenditures. That's why tax and budget experts refer to them as "tax expenditures." This year tax expenditures will raise the federal deficit by about $1 trillion, according to estimates by the congressional Joint Committee on Taxation. If Congress is serious about cutting government spending, it has to go after many of them.

I had originally planned on putting the most shocking portions of Feldstein's quotation in bold, but I realized that the whole thing is shocking. (If you don't think so, I encourage you to slow down and read the whole quotation again.)

Feldstein is claiming that, in the categories of how the federal government spends money, the big ones are the military, Social Security, and Medicare. But after those whoppers, the bulk of "government spending" — according to Feldstein and endorsed by Mankiw — are things like tax deductions on mortgage interest, or tax credits based on how many children a person has.

In other words, Feldstein is completely obliterating the distinction between (a) the government handing Paul $1,000 that it has previously taken from Peter, and (b) the government refraining from taking $1,000 from Paul that he earned. Either way, from Feldstein's viewpoint, that is a government expenditure.

Of course, these two processes are "equivalent" (Feldstein's term) if we think that property rights are irrelevant when it comes to the distribution of income. If we assume by default that the government starts out with all income in the entire economy, then, whether it cuts a check to someone or merely allows that person to retain his market income, it is all a gift of the government to the person in question.

On the other hand, if we think that people are actually entitled to the income they earn in the market, then there is a huge difference between the government redistributing some of it and the government not taking it in the first place. It is the difference between theft and nontheft.

Now don't get me wrong, I understand the sense in which Feldstein's analysis goes through. If you're narrowly focused on balancing the federal budget, then "closing a tax loophole" and sucking in $10 billion in extra revenue is just as fruitful as cutting $10 billion in direct outlays.

But there are two problems with this. First, there's the simple fact that words are supposed to mean something. It is an abuse of language to say that a tax hike is "equivalent" to a spending cut. With equal justification, Timothy Geithner could defend the hated TARP bank bailout as an $800 billion "tax cut." Or, proponents of the wars in Afghanistan and Iraq could refer to them as trillion-dollar-plus tax cuts. After all, Goldman Sachs, Halliburton, and other major corporations ended up with more money than they otherwise would have had, so these programs were basically tax cuts, right?

Beyond the sheer silliness of it all, there is the simple fact that the "tax expenditures" are not equivalent to actual expenditures, even for the narrow purpose of deficit reduction. Feldstein quotes the JCT estimate that this year, the deficit is $1 trillion higher because of these "expenditures."

He seems to imply that, if only the government got rid of the deductions, credits, and other loopholes, the deficit would be that much smaller. But this is nonsense. People wouldn't behave the same if the tax code were significantly altered. The tax base, upon which this imaginary $1 trillion in tax revenue is founded, would shrink considerably once the loopholes were removed.

Raise Taxes Now, Lest We Raise Taxes in the Future
The funniest part of the whole episode is Feldstein's dire warning of what happens if Congress doesn't eliminate those pesky tax expenditures:

If tax expenditures are not cut, taxes on households and businesses will have to rise to prevent an explosion of the national debt, which is now projected to increase to 90% of GDP by 2020 from today's 63%. When benefits for Social Security and Medicare are set aside, the rest of the outlay side of the budget is too small — 7.5% of GDP — to provide much scope for reducing annual budget deficits that are now projected to average 5% of GDP for the rest of this decade. In contrast, total tax expenditures are now 6.4% of GDP.

At first glance, this is just the type of analysis we expect from a "right-winger": slash government spending in order to get the debt under control and protect households and businesses from tax hikes! Amen, Brother Martin!

But once we run Feldstein's prose through the Orwellian Translator, we realize what he's actually saying: The government needs to raise taxes on households and businesses right now, so that it won't have to do it later.

Conclusion
Government economists are up to the same rhetorical tricks that Murray Rothbard exposed long ago. It takes a lot of PhDs to convince the public that their systematic looting at the hands of politicians is actually for their own good.

Robert Murphy, an adjunct scholar of the Mises Institute and a faculty member of the Mises University, runs the blog Free Advice and is the author of The Politically Incorrect Guide to Capitalism, the Study Guide to Man, Economy, and State with Power and Market, the Human Action Study Guide, and The Politically Incorrect Guide to the Great Depression and the New Deal. Send him mail. See Robert P. Murphy's article archives. Comment on the blog.

© 2010 Copyright Robert Murphy - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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