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Here’s Why The Left’s New Economic Policies Are Just Stupid

Politics / Economic Theory Feb 19, 2019 - 02:11 PM GMT

By: Jared_Dillian

Politics Somewhere in the last 30–40 years, we have become economically illiterate.

Elizabeth Warren wants wealth taxes that would impose asset forfeitures of 2–3% on households with more than $50 million in assets.

There are practical and legal problems with their implementation. But she wants to implement them anyway.

Alexandria Ocasio-Cortez wants a 70% income tax rate on incomes over $10 million. This would be the highest income tax rate in the OECD. And yet, it would affect only 16,000 households and only return marginal rates to historical levels, anyway.


Stephanie Kelton, an economist at Stony Brook University, wants to implement something called Modern Monetary Theory. MMT is where the central bank prints money and pays government expenses.

In effect, this would free the government from reliance on fiscal policy, which is constrained by the amount of money it can collect.

This is some crazy stuff. Crazier than a road lizard.

Let’s deconstruct it since this side of the story isn’t often heard.

The key points here are trade-offs and incentives.

You Can’t Have Everything

We live in a world of constraints.

If you wear mittens, your fingers are warm but you can’t pick things up. If you wear gloves, you can pick things up but your fingers are cold.

You don’t get to have it both ways.

The weird thing about economics is that some people think we get to have both. Because… we are special?

There is an economic concept known as scarcity. You can’t have everything. You can have a little bit of a lot of things, or all of one thing and none of another. But you can’t have everything.

This is where people go crazy. Economics isn’t physics, but in a lot of ways, it is. There are physical laws that you must simply obey. You can have money, or you can have food.

MMT says you can have money and you can have food.

It says that you can have money, food, aircraft carriers, social security payments, maybe even basic income. There are no constraints! You can have whatever you want.

There are always, always, always… trade-offs.

In this particular case, a third-grader could identify the trade-off. If you printed money to buy food, aircraft carriers, entitlement payments, and basic income, you would probably end up with inflation.

More money chasing around a finite quantity of goods results in inflation. This is common sense.

The really, really smart people in economics come up with ideas that defy common sense. If you question them, most say you are just too dumb to understand them.

I don’t think we are too dumb. I really don’t think it’s that hard.

You simply can’t have everything you want. You have to make choices. Even the richest country in the world has to make choices.

If you want to give everyone three squares and a basic income, there are choices involved with that, too. There are trade-offs.

Higher Taxes Don’t Collect More Money

Now, to the tax stuff.

I’ve found that economically left people fail to understand that human beings respond to incentives in ways that are fairly easy to predict.

If you tax income at 70% (or higher), then you create a strong incentive not to earn $10 million. People will earn less or figure out how to avoid the tax.

Confiscatory taxes never raise any money. People just get clever, or they go somewhere else. Taxes, both high and low, have historically always collected roughly the same percentage of GDP.

As for the wealth tax, it’s not really a tax. It’s an asset forfeiture—the kind we dislike so much when the police do it.

Asset seizures are not in the Constitution. So, you would have to pass a constitutional amendment. This is how the income tax got passed back 100 years ago. In today’s environment, it is highly unlikely, though.

Wealth Taxes Are Impractical

The practical problems with wealth taxes are astounding.

Take Jeff Bezos, who pre-divorce, was worth around $140 billion. Tax that at 3 percent, and you take $4.2 billion. That is a lot more than he has liquid lying around.

He’d have to sell stock to raise money to pay the tax. Multiply that by 3,000 other CEOs, and you see the magnitude of the problem.

It would be a lot harder for privately held businesses. Imagine the administrative nightmare of hiring an army of IRS workers to obtain appraisals of hard-to-value assets and charge tax.

Worse, most people would be too illiquid to pay that tax. So, they’d probably just get fed up and leave.

Elizabeth Warren has a plan for that, too—charge an exit penalty. But then we are building walls to keep people in rather than keeping them out.

If you don’t like rich people for whatever reason, and you’d like to see them leave, well, then great. We will see how things turn out.

It’s Just the Beginning

Here is the one scary thing: I don’t think we’ve hit the top of economic stupidity yet!

We are going into the 2020 elections, and we are going to reach Brobdingnagian levels of stupidity—on both sides.

If you spent your life worrying about this kind of stuff, you would not be a happy person. Don’t dwell on it. The only advice I can give is:

  1. Stay mobile
  1. If you can’t stay mobile, get positively exposed to stupidity

I spend pretty much all my time trying to figure out how to make money off other people’s stupidity. It’s a strategy that seems to be coming back in favor.

I’m cursing the guy who once said, “May you live in interesting times.”

Interesting Times at SIC in Dallas

If you want to save $1,000 on your SIC 2019 ticket, now is the time to do it.

I’m putting together my own session, complete with speakers I want to hear from. I’ll tell you more about that soon, but suffice it to say I’m super excited about it.

There is too much amazing stuff happening at the SIC to list here, but I want to point out that the debt panel has a lineup that guarantees fireworks. It includes both Howard Marks, co-Chairman of Oaktree Capital and Carmen Reinhart, Professor of the International Financial System at Harvard Kennedy. In other words, a famous debt investor and a famous academic on debt cycles—pull up a chair!

It’s going to be great, and I hope you can join me there. February 18 is the cutoff point if you want to take advantage of priority pricing, so there isn’t much time to lose.

By Jared Dillian

© 2019 Copyright Jared Dillian - 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.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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