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Source link: http://archive.mises.org/11709/crowding-out-a-cartoon-thats-making-the-rounds/

Crowding Out: A Cartoon That’s Making the Rounds

February 22, 2010 by

Crowding Out: A Cartoon That’s Making the Rounds, via Cafe Hayek (and a bunch of other places). I’m reminded of other ventures that create “prosperity,” such as when rural Chinese peasants were melting down useful pots, pans, tools, and doorknobs to meet iron and steel production quotas under Chairman Mao (of course, most of the metalthey ultimately produced was worthless) and when Hurricane Katrina created prosperity by wrecking New Orleans.

Identifying good policies can be really difficult, and appearances can be deceiving. It’s easy to point at unionized Detroit during the 1950s and 1960s and say “see? Labor unions brought us prosperity!” It’s also easy to point at European welfare states and national health care programs and say “see? Socialized medicine can work!” As my adviser said about the French welfare state, they can enjoy such high standards of living now because “they’ve spent the next two generations’ incomes.” Imagine that I were to pawn the title to my car, take out a home equity loan, and claim prosperity by counting only the cash in my wallet and the new deposits in my checking account. I could then wallow in apparent prosperity for a while. Eventually, it will come time to pay the bills, and there’s a limit to the amount of time you can spend liquidating capital before it runs out. Like James Buchanan, I’m optimistic when I look at the past; however, when I see people suffering around me and when I anticipate the suffering that our current policies will produce, I’m filled with a deep sadness at the fact that it could have been prevented.

Here are a couple of (sort of) related links:

1. Tyler Cowen asked an interesting question a few days ago and offered a few answers: the United States is on an unsustainable fiscal path, but it isn’t reflected in long-term interest rates. Why not?

2. Francisco d’Anconia’s money speech, which deserves a careful reading every so often.

3. The utterly amazing Keynes-Hayek rap battle, which deserves to be watched again and again. Unfortunately, we’re pursuing a series of short-run policies that will hasten the onset of the Keynesian long run, all else equal, and we know what happens then.

{ 9 comments }

fundamentalist February 22, 2010 at 2:39 pm

Cowen: “3. I would prefer spending cuts, but voters seem too irrational to be willing to cut spending;”

Cowen and Caplan are always quick to label voters irrational when voters refuse to do what Cowen and Caplan think they should do. But are voters irrational, or victimes of mainstream economics? I say the latter. Voters are rational in that they don’t specialize in economic theory. Voters practice comparative advantage and leave the economics to the experts. And they should. But the majority of those experts are socialists, as are the media which explain expert theory to the voters.

As for solutions to the US unsustainable path, the founders set up the government so that not much will happen until a large number of people become very concerned about it and can agree on a solution. That means that we will lurch from one crisis to another because people can come to a consensus only in a crisis.

Why don’t long-term interest rates reflect concern for the unsustainable path? Because concern about the future is only one of many factors that determine market interest rates. Other factors include monetary policy (a big factor) and the relative attractiveness of other investment opportunities. What would people invest in today besides US debt?

BTW, the correct translation of the Biblical passage on money is that the love of money, not money itself, is the root of all kinds of evil; not all evil.

George February 22, 2010 at 3:11 pm

“But are voters irrational, or victimes of mainstream economics? I say the latter. Voters are rational in that they don’t specialize in economic theory. Voters practice comparative advantage and leave the economics to the experts. And they should. But the majority of those experts are socialists, as are the media which explain expert theory to the voters.”

Call it folk economics, or tribal economics if you prefer, but many voters do vote with their hearts and their instincts and not with their heads, and to that extent people can be considered irrational.

There will be no adjustment until there has to be. Greece is a great example of that. Would you call the protesters demanding ever-more benefits rational? Yes, but only in a limited sense.

fundamentalist February 22, 2010 at 4:42 pm

Most people get a heavy dose of folk marxism by the time they bail out of high school, especially in literature and history classes. Charles Dickens is a good example. Socialism is the water in which students swim at an early age. Because it is so pervasive, few people question it.

newson February 22, 2010 at 5:42 pm

http://stockcharts.com/charts/gallery.html?$USB

technical analysts would probably point out the massive head-and-shoulders top potentially forming in the long bond. a break of the neckline around 112.50 should solve cowen’s conundrum.

Kerem Tibuk February 23, 2010 at 7:01 am

VAT (value added tax) is the most ingenious (read most evil) tax that was ever invented.

I live in a country where VAT exists (ranging from 1% up to 23%!!!) and since I am both a consumer and an entrepreneur I know how the thing works from all angles.

I also know a bit about the general tax situation in the US and I believe a federal VAT is on the way for the US.

The only practical problem would be the tradition of announcing of the prices without the sales tax. Usually when VAT is used, the price is announced including tax so that the consumer thinks the tax is not something he pays but a cost inherent in the product.

And in a way it is. Everybody that is doing business and writing up invoices works as a tax man and collects VAT and reports to the treasury. Not everybody is personally responsible for the VAT so the popular dissent would be only against the apparent price increases. It wouldn’t be anything like income taxes where almost everyone is personally liable.

If VAT comes to the US, it would come on top of the local sales tax but I don’t know how the price would be announced.

Also if VAT comes it will definitely start with a very low percentage point and then eventually rise.

Kerem Tibuk February 23, 2010 at 7:08 am

Oh and technically VAT is a gross margin tax.

It is a tax that is taken from the difference of buying price and the selling price. You can deduct the VAT you pay when you purchase anything that is used in business from the VAT you collect when you sell but can not deduct things like payroll since the employers can not write you an invoice for the paycheck they receive.

Also one of the worst aspects of this thing is you pay the VAT up front when you buy raw materials and if you can not sell the product quickly, or keep stock you finance the whole VAT until (or ever) you sell your products and get the VAT you paid back.

Laurence March 10, 2010 at 1:27 pm

I have always enjoyed this comic. Political satire is really one of the best artforms left

talkpc June 21, 2010 at 2:50 am

I know a bit about the general tax situation in the US and I believe a federal VAT is on the way for the US.

website June 21, 2010 at 2:54 am

Voters are rational in that they don’t specialize in economic theory. Voters practice comparative advantage and leave the economics to the experts.

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