As Mises was so fond of pointing out, every govt “solution” to a problem always makes the problem worse.
The latest example is Obama’s Tax the Rich scheme. To be honest, Obama is showing very original thinking by proposing this solution. No one, Keynesian or otherwise, has ever suggested taxing investments as a way of making people invest more. We’ll lead into this topic with a question from the Mises.org forums:
What do you say to people who argue that if there are not enough people consuming e.g. buying cars then there is no incentive for entrepeneurs to invest?
And Smiling Dave’s answer:
The Problem: Entrepeneurs have no incentive to invest.
Proposed Solution:Tax those entrepeneurs heavily if they do invest.
You get the idea. If you want entrepeneurs to invest, you have to make it worth their while. And I don’t mean give them other peoples money, as Obama is doing for his friends. I mean just letting them keep the profits of their investments.
At this point, our old pal Devil’s Advocate [=DA] feels he must intrude. Smiling Dave [=SD] will reply.
DA: You forgot the rest of the question from that mises.org forum. Allow me to quote it in full:
I was browsing through some blog posts from keynesians and they were arguing that there is not enough demand in the economy to get business’ to invest and to encourage growth. This is an argument that I encounter a lot. They argue that money should be redistributed from the wealthy to poorer people (i.e. taxes) who are more likely to spend it due to a higher marginal propensity to consume, raise demand in the economy and hence encourage investment. How would you respond to this argument? Is there not some truth in it?
SD: We’ll talk about the Keynesian version of the solution in this article, then about their version of the problem in a future article, and finally about what the problem really is and what the solution really is in an article after that.
This is the first time that Tax the Rich has ever been proposed as a way of stimulating the economy. Not even Keynes was stupid enough to think that taxing someone who invests will make him invest more.
His answer was to tax the poor, actually. Because in his day, there was no unemployment insurance and no welfare. He understood that if there is high unemployment, it is because workers are insisting on more pay than they are worth. His solution was to create inflation, thus reducing their wages. In other words, tax the poor.
Problem: Too many poor people.
Solution: Tax them.
Nowadays, it is impossible to tax the poor in any case, because they are living for free off the rich and the middle class. They have no jobs, and are not interested in getting any. It’s not their fault, of course. The govt just makes it very comfortable to be unemployed, and very uncomfortable to have a job. Naturally, all this leeching from the middle class and the rich will create new circles of poverty, as more and more of the middle class lose their jobs and the rich are punished for hiring them.
If we carry Obama’s new policy to it’s logical conclusion, there is only one avenue left, mainly tax the middle class.
Problem: More and more people are dropping from the middle class into poverty.
Solution: Tax the middle class.
Tax the rich. Duh. Tax the poor. Duh. Tax the middle class. Duh.
DA: If this idea is so stupid, why did Obama wait three years to come up with it?
SD: Until now he didn’t have to do any thinking. Ben Bernanke was taxing everyone secretly by printing money. But such a howl was raised that he decided to do the smart thing and lie low. His recent speeches have said, “Guys, I’ve done all I can to help you. It’s up to Congress now to stop bickering with the President. In other words, you’re on your own, Mr. Obama.”
What’s going to happen is that the Republicans, for reasons of their own, will prevent Obama from taxing anyone. But since most of them don’t understand what the problem really is, because they have not read Smiling Dave’s upcoming article, they certainly will not realize the solution.
The stock market is terrified of Bernanke’s inactivity. His Twist, they realized, while it may help the govt a little bit, delaying its inevitable day of reckoning, does not help the private sector in the least. “That’s all you’ve got, Bernanke? Then we see no future for the economy. We are selling out of everything and moving into dollars, which you have sworn not to devalue. And we believe you.”
Obama is totally freaking right now, which scheming Ben Bernanke knows. He is tired of being everyone’s punching bag, tired of looking foolish when Ron Paul questions him in Congressional hearings, tired of hearing End the Fed from those uppity college kids. “OK then, you don’t like QE’s? Then you won’t get any! So there! But don’t come crying to me afterwards.”
And he knows full well that the whole country, from Obama right on down to the average guy in the street, will come crying to him. There will be rallies, protests, television talking heads, all screaming, “We want QE! We want QE! Save us, oh Fed. Save us, Uncle Ben.”
And, like the kindly uncle who let the foolish child get himself into trouble to learn his lesson the hard way, Ben Bernanke will not bear a grudge. He will shower us with his munificence.