Saturday, January 22, 2011

What Defines Our Differences?

What is the encompassing issue that divides liberals and conservatives?

Consider, for example, the following debates: socialism vs. a free-market economy, higher taxes vs. lower taxes, more regulations vs. deregulation, bigger government vs. smaller government, federal control vs. state and local control, government ownership vs. private property, government-run health insurance vs. private health insurance, or coercion vs. voluntary exchange. All of these debates are different applications of the same principle. What’s at the bottom of the difference between each of the two positions?

The common element in all these debates is this — do we want power and control to be centralized or decentralized? Should control be in the hands of politicians and bureaucracies or individuals and private entities?

For example, think about what actually happens when your taxes are raised. Your control over your own life is diminished, the power of politicians is increased, and control is centralized.

The most commonly used words to describe the two sides of the divide are liberal and conservative. However, the words themselves do not accurately reflect what liberals believe or what conservatives believe. They are not good descriptors. Liberals aren’t really liberal and conservatives aren’t really conservative. Those terms do not help either side understand and define what they believe. The labels “left” and “right” offer even less guidance than liberal and conservative.

Furthermore, the terms have evolved over time. Those who would have described themselves as liberal a hundred years ago would today be called conservative. On the other hand, centralized and decentralized are words that maintain their meanings relatively well.

The centralized-decentralized spectrum closely parallels the tyranny vs. freedom spectrum. Having control over our choices is essentially the definition of freedom. One of Milton Friedman’s most popular books was titled Free to Choose. Friedman saw clearly that freedom is fundamentally about choosing. Another of his influential books was titled Capitalism and Freedom. In that book he explained why true and lasting freedom is a practical impossibility under socialism.

A central difference between liberals and conservatives revolves around the issue of individual responsibility. The more we take the power to choose away from individuals, the more we diminish the meaning of, and opportunity for, individual responsibility. If you do what you do because you’re forced to, are you exercising morality? Are you responsible for your actions? The most insidious result of liberalism is that when control is centralized, so is morality.

There is what could be called the logistics of information — having information at the right place at the right time. Leaving control in the hands of individuals leaves it closest to the information and incentives required for efficient decision making.

No one can know as much as you do about your goals and priorities. Even if you assume that Harry Reid and his fellow lawmakers are smarter than you are, does it follow that they should make your choices for you? It’s not very efficient if information has to make a round trip from you to Washington, D.C. and back.

Not only is the best information held by individuals, so are the most powerful incentives. It’s only natural that you will work harder for your own goals than for someone else’s. This is one of the main reasons why free market economies are by far the most powerful generators of prosperity and economic growth.

The Heritage Foundation’s recently released 2011 Index of Economic Freedom once again confirms the almost perfect correlation between freedom and economic vitality. Terry Miller, one of the survey’s authors, confirms that the freer economies are “more efficient at protecting the environment, better at improving health, and better… in enhancing life satisfaction and overall happiness.” Rather than “spreading the wealth” as Mr. Obama wants to do, we would be better off if we spread the control.

When making choices with their own money, individuals are most motivated to make careful decisions that produce the desired results. Individuals don’t typically spend their own money on mini-versions of “pork-barrel projects.”

If choices are made for you, you will not automatically agree with them. Consequently, centralization always involves force.

Most people have probably not thought about controversial political issues along the lines of centralized and decentralized. Nevertheless, it is probably the best way to frame the debate for a number of reasons.

The centralization-decentralization framework is the most inclusive way to categorize the issues. Framing the debate in this way makes it possible to resolve a whole category of issues rather than countless specific ones and win the debate wholesale rather than retail.

The framework could essentially be thought of as a compass when assessing, for example, proposed legislation. Besides asking, “Is it constitutional?” we could also ask, “Does it centralize or decentralize control?”

Should we begin calling liberals “centralists” and conservatives “decentralists”? Although those aren’t words with much pizzazz, using them, or at least keeping them in mind, would definitely go a long way in making it clear what we’re arguing about.

One big advantage of using the centralism/decentralism terminology is that the words have little or no emotional baggage. The words liberal and conservative carry with them a number of assumptions and stereotypes. These are serious impediments to rational debate.

If you ask, “Are you a centralist or a decentralist?” you are more likely to start a discussion rather than trigger a defensive reaction. Maybe it would even add some “civility” to the debate, if you should care about that kind of thing. It’s also not a bad question to ask yourself to help determine what you believe and why.

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What Defines Our Differences? January 21, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

Friday, January 7, 2011

Lessons From the Lame-Duck Tax Rates Battle

n the recent debate about ending or prolonging the Bush tax rates, the Democrats subtly staked out a new fiscal doctrine — not increasing tax rates costs the government money and increases the deficit.

What we heard ad nauseam from President Obama and congressional Democrats was that keeping the Bush rates in effect for those earning more than $250,000 will “cost” the government $700 billion in lost revenue over the next ten years and increase the federal debt by the same amount. That supposedly is the difference in revenue generated by the top income Bush rate (35 percent) relative to the Clinton era top rate of 39.6 percent.

The Bush tax rates had been in effect for seven years and represent what had become the status quo. Although they were originally passed with an expiration date, that hardly makes them unique in any meaningful sense. Since tax rates have been increased and decreased numerous times in the past, no one could assume they are ever permanent, whether they have built-in expiration dates or not.

The top rate decreased under President Reagan (from 70 percent to 28 percent), increased to 31 percent under President G.H.W. Bush, increased to 39.6 percent under President Clinton, and decreased to 35 percent under George W. Bush.

If we are going to calculate revenue lost when tax rates are not increased by 4.6 percent, why stop there? Following the Democrat logic, it “costs” the government money whenever taxpayers are allowed to keep any of their earnings. Accordingly, any tax rates below 100 percent on everyone are costing the government money and adding to the national debt.

This Democrat position reveals a profound difference in fundamental beliefs between liberals and conservatives. For liberals, the basic premise is that all wealth is, or should be, the property of government or the collective. That’s their starting point.

The basic conservative belief is that wealth belongs to those who created it. Conservatives believe tax increases damage the economy. Conservatives are much more concerned about the health of the overall economy than they are about the well-being of the government.

The Democrats desperately need to believe that all wealth rightfully belongs to the government. They have a bottomless pit of wonderful things they want to spend the money on. Their avarice defines their ethic. Big-government Democrats have a desperate need for money. Wealthy people have money. Ergo, go get it!

The Democrats implicitly assumed that, for those earning more than $250,000, the Clinton era tax rates are “the way it’s spozed to be.” They projected federal tax receipts under the assumption that those rates would be reinstated. In anticipation of that revenue, they spent the money. In fact, they spent a lot more than that. As usual, the Democrats created their own problem by spending revenue before it existed. They literally could not wait to get their hands on your money. Republicans, of course, were not innocent bystanders in this shameful behavior.

One interesting inconsistency the Democrats maneuvered themselves into was their less than total rejection of the Bush tax rates. The rate structure they wanted was a Bush/Clinton hybrid, what you could call a political Prius, or maybe a genetically modified rate structure. They wanted the Bush rates for incomes up to $250,000, and the Clinton rates thereafter.

The Democrats have maintained for years that there was absolutely nothing good about anything George W. Bush did while he was in office. We were told that the only people he cared about were his rich cronies. Apparently that was not the whole story.

Something else revealed in the tax rate debate is that many on the left, including some in Congress and the administration, despise anyone earning high incomes. You can almost see their eyes bulging when they say “tax cuts for millionaires and billionaires.” The left want these people not just to provide additional revenue, they want them punished. They apparently consider upper income tax rates as more of a fine than a tax. Exactly what millionaires and billionaires are guilty of is never specified.

Democrat politicians will rarely admit what they really want top income tax to be. It would be great if they could be up front about how much progressivity they want in their heart of hearts. They don’t want to tell us that, of course, because they are well aware of how politically devastating it would be.

One exception is Robert Reich, the former Secretary of Labor under President Clinton. In a recent column he advocated a top rate of 70 percent. He did not specify how much it’s costing the government not to have a 70 percent top rate.

The expiration or retention of the Bush tax rates has not been permanently resolved. The rates have been extended for two years only. This brief extension adds to the climate of uncertainty that is one of the biggest obstacles to economic recovery. Furthermore, in two years or less we will again be treated to a new round of class warfare.

Republicans were able to buy time for the full range of the Bush tax rates, but they had to hold the country’s entire middle class hostage to do so (according to President Obama). They need to be well prepared for what we know will happen two years from now. If the economy is recovering by then, they will not be able to use the argument that you can’t increase taxes in a recession. There are numerous reasons why raising taxes is a bad idea and the Republicans better be ready to articulate them.

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Lessons From the Lame-Duck Tax Rates Battle January 6, 2011

Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at rossecon@gmail.com.

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