America's 'Free' Falling Economy

Competitiveness: The latest index of economic freedom shows America falling fast, being ranked for the first time as "mostly free." We've fallen behind Canada, and it's look out below.

Our accelerating descent into a command-and-control economy with government pulling the strings is taking its toll.

The Heritage Foundation's 2010 index of leading economic indicators shows that the land of the free is only mostly free, falling to eighth in the world from sixth last year, now sandwiched between Canada and Denmark.

That Canada, long considered a bastion of socialized medicine, is ranked as economically freer may surprise some. But our neighbor to the north has at least been trying to develop its domestic energy reserves, from hydroelectric to natural gas to oil extracted from its tar sands. Energy is the lifeblood of a free economy.

We have shackled our domestic energy producers with environmental regulations, leaving vast pools of energy lying offshore and in the ground. We regulate what you can build, where you can build it, even how. Endangered critters rank above equally endangered entrepreneurs. Climate change is more important than the business climate.

No one is advocating communism. You are being utterly silly, and arguing against a straw man. Transfers from market allocations involve at second order some marginal utility loss and effect on incentives. But they do not destroy the whole sum moved, and pretending they do is called lying.

You are apparently reading but not understanding. Stop thinking like a government economist and start thinking like a private citizen. Forcibly tranferring money from me is almost ALWAYS a total loss to me.

If social security and medicare and medicaid were abolished tomorrow, would the net worth of the US population change in any way thereby? No.

But my net worth would drastically improve as the loss caused by these programs would end. It would be a huge gain.

Does either add a scrap of value to anything? No.

Ending those programs would add much value to my life as I would get my money back (which is now forcibly transferred from me).

Do both at the margin and in the long run, involve some loss of efficiency and incentive? Sure. But nothing like the destruction of $1.35 trillion a year, which is the amount spent on them.

100% of the money forcibly taken from me to pay for these programs is loss.

Does the prospect of spending that sum every year and the amount rising every year with inflation plus, mean that the American people are bankrupt? No, because they aren't paying that sum to Martians.

It does however mean that many productive Americans are worth far less than they should be because the fruit of their labor is stolen from them and returns no value to them.

Social entitlement programs ALWAYS cost more than they are worth. They always result in a net negative to society. Subsidize lazy, worthless poor people and you get more lazy, worthless poor people. They are sinks to society, not sources. They do not contribute a penny but they suck up loads of capital.

Stop deliberately confusing people about the differences between the effects of transfer and transfer accounting, and outright expense or immediate loss.

All economics is local. When you finally realize that you will understand what I am saying.

Transfer is the same exact thing as loss. If I no longer have it, and receive no value for it, it's a loss to me. Understand?

You in fact have no idea what the actual incidence of transfers is on your own income. One entry accounting is the root of all economic fallacy.

Do you have any income, receipts of any kind? Yes. Do you know what exact portion of them you would or would not receive, if no one else received any income in transfers? No, you haven't the foggiest notion and can't. The entire state of demand that determines your own income rests on the transfers that actually occur. Perhaps you would receive twice the income without any loss to taxes if those transfers did not exist. Perhaps you would receive half the income you do now. You have no idea. Perhaps you would reap less or more in externalities of the production of others. You have no idea.

The probability is that you lose marginally (half, a third of the nominal sums owed, who knows?) on all transfers. That is the most that can be said about the matter. But all one entry conclusions about it, which is all you have ever shown here, are hopelessly wrong from start to finish, knowably so.

The same thing happens when people pretend that inflation reduces their standard of living because goods cost 3% more than the prior year, while just assuming their 3% higher wages are their birthright... It's a crock.

The government has engaged in progressive taxation and large annual gross transfers for decades. It has set top marginal tax rates as low as 28% and as high as 94%, and corporate taxes from 28% to 55%. Inflation has run 14% a year and near zero. And through all of it, the income distribution has remained largely unchanged, gradually skewing slightly toward high earned incomes. And through all of it, the government has received a stable portion of GDP in total revenues, varying less than 3% of GDP and only in response to the cycle, not policy.

Why? Because economic realities dispose. If a class of men contribute enough economically to justify their earnings, and they do, then prices and terms of exchange move to reflect that. If government punishes one form, activity shifts to another form. If government won't pay for its spending in taxation, savers recoup what they were taxed, as interest on the government's own debts.

Large scale redistribution is largely pointless and self defeating. That is a fine reason to limit it and to want to see it reduced. But it is not a reason to pretend it successfully changes final incomes at will; it doesn't. Not remotely.

All of which remains a side show of an issue, that only came up to refute one particularly specious argument against my underlying proposition. Which is, the American people are wealthy and will remain so; we are not "broke" in any sense. And all the legions of doom mongers screaming otherwise, do not know enough economics or even basic accounting, to run a lemonade stand.

“And no, when a subsidy causes more to be spent on a category of goods or services than a free market would spend on them, the entire excess demand is not completely lost. That is the proposition you are maintaining and it is false, economically. There is a marginal reduction in total wealth that probably amounts to a few percent of the sum diverted, the marginal return to additional demand in the subsidized sector being lower than in other fields, but only by smidgens for the first excess dollar, and so on.”

1. I never claimed the ENTIRE excess demand is waste. But the marginal waste is far from trivial. The RAND Health Insurance Experiment, as one example, showed that when people with free care were compared with people with comparable coverage but subject to cost-sharing, THIRTY PERCENT of the former group’s care was “waste”—defined as the difference between their willingness-to-pay for the marginal care and the actual cost of delivering it. Thus, policies such as the employer tax exclusion and Medicare benefits for the likes of Warren Buffet are very wasteful since at the margin they encourage people to secure much more comprehensive coverage than they would otherwise.

2. Moreover, you’ve conveniently forgotten the marginal excess burden imposed by the tax system itself. On average, a typical dollar raised through coercion (read: taxation) induces an unseen economic loss of roughly 30 cents on the dollar: this 30 cents represents the lost output resulting from incentives to work less, consume less or save less (depending on which activity is taxed).

In short, there is a double-whammy: the efficiency loss associated with using taxes to raise the amounts needed for subsidies and the resultant inefficiency as these subsidies distort consumer spending relative to what would have happened in a free market. The combined distortions are measured in double-digit percentages and hence should be of great concern to all but the most well-to-do taxpayers.

Dismissing these effects as inconsequential “smidgeons” is grossly misleading. We live in a CONSTITUTIONAL republic—one in which the massive redistribution now embedded in U.S. social policy would have been view as abhorrent by the Founding Fathers. The looming insolvency of SS and Medicare illustrate precisely the dangers of deviating so far from their original conception of the legitimate boundaries of government.

The solution to this problem isn’t to throw up our hands and say “Oh, well, the people voted for this” but instead to educate the public about the pernicious consequences of crony capitalism and the welfare state. While many may not be able to articulate the intellectual case against the welfare state, a broad swath of the public does sense we are very much on the wrong path and that moving further down the path blazed by the European welfare states held in such high esteem by progressives is neither noble nor wise.

You in fact have no idea what the actual incidence of transfers is on your own income. One entry accounting is the root of all economic fallacy.

Oh really? Just for discussion lets assume I pay $10K in federal taxes. Of that 10K probably 7K goes to programs that provide no value to me. (welfare, NEA, NEH, Dept of Education, Housing and urban development etc)

This money is loss. My income does not increase or decrease if these transfers are stopped, BUT I do keep more of my income.

Do you have any income, receipts of any kind? Yes. Do you know what exact portion of them you would or would not receive, if no one else received any income in transfers?

See above. If the money is not being transferred from me and given to people who do not produce anything but more costs, I would gain the use of that money. It would no longer be lost to me.

The entire state of demand that determines your own income rests on the transfers that actually occur. Perhaps you would receive twice the income without any loss to taxes if those transfers did not exist. Perhaps you would receive half the income you do now. You have no idea.

My income is essentially fixed and does not rely on state of demand. If these transfers did not happen I would merely retain more of my income.

Even if my income was more dependant on general state of demand, subsidizing people who do not produce is a loss. They only suck up resources and produce more people who only suck up resources. These payments to support them only decrease the general level of wealth.

(social and financial costs of welfare are pretty well known, increased crime, increased drug use, decreased educational achievement etc)

Perhaps you would reap less or more in externalities of the production of others. You have no idea.

I reap nothing for most of the tax dollars that are forcibly taken from me. I could only gain by retaining my money.

But all one entry conclusions about it, which is all you have ever shown here, are hopelessly wrong from start to finish, knowably so.

Obviously we disagree. But I'll give you a chance to edcuate me. Please define what value I receive from the taxes I pay that are applied to welfare and other social entitlement programs. (I see none whatsoever)

The government has engaged in progressive taxation and large annual gross transfers for decades. ...And through all of it, the government has received a stable portion of GDP in total revenues

As taxes go up people work less. The negative incentive applies. What you are missing is that the total GDP would increase far faster if the moneys were not transferred in the first place. Taxes (forcible transfers) destroy wealth by inhibiting it's creation.

the American people are wealthy and will remain so; we are not "broke" in any sense.

(Trying to switch into your macro-economic all one big happy family viewpoint)

OK. If we assume that the US is a closed system and that everyone owns everything (sounds like communism to me), and ignoring human nature (reaction to incentives) for the moment, then you are correct. Under those conditions transfers do nothing to increase or decrease the total amount of wealth.

However, the US is not a closed system. We transfer huge amounts of wealth outside our borders. China is becomming richer at our expense. Is the value of the chinese goods worth the money we send over there? I personally don't think so.

Secondly, humans will always react to incentives, tax us more and we work less. (Why bother earning the money if you can't keep it?)

Third, We are not one big happy family. If my money is being used to support others who do not produce value for me (and it is) then I have lost that money entirely. It provides no value to me. It is a loss.

Is the sum total of American wealth increasing? probably. Does that mean that Americans are not broke? No. Transfers are pushing more and more Americans into the "broke" status. Partly through their own stupidty (buying more than they can afford to pay for) and partly through government action (spending more than we or our children can pay for)

We have become a debtor nation. The definition of broke is owing more than you have.

A second issue arises here. Are we rich compared to the rest of the world. Yes we are. We should be, we've out produced them for years. Does that entitle them to our wealth? Absolutely not. If they want to be wealthy they can earn it themselves. International welfare works the same as domestic welfare, that is, it doesn't work at all

But again the status of the rest of the world is immaterial. Am I wealthier now than I would be if the forcible transfers stopped? Absolutely not. Most of that money transferred from me is a total loss

And all the legions of doom mongers screaming otherwise, do not know enough economics or even basic accounting, to run a lemonade stand.

Wonderful analogy!! Running a lemonade stand is easy. You transfer money to receive goods that have equal value to the money transferred (buying supplies). You add value to those goods (mix the lemonade) and sell them at a price greater than the cost of supplies and labor (making a profit). People transfer money to you in exchange for something of equal value to them of the money transferred (a glass of lemonade).

So far everyone has won. You have received a profit and they have received acceptable value in return for their money.

But then your uncle comes and steals some of the money you have earned and gives it to his children which did not work the stand. Suddenly your profit margin is minimal. The money stolen is a total loss to you as it provides no value to you whatsoever.

So you decide to close the stand and go play video games as it's just not worth the effort to work just to end up giving the money to your uncle's lazy, worthless kids.

Amazingly like our tax system and the welfare system (as an example). You receive no value for the money transferred away from you. It is a loss.

What is the lesson learned here? Voluntary transfers involving equal perceived value (free market) result in everyone winning and the creation of wealth. Forced transfers where only one party receives value (most taxes) result in the producers losing and less wealth created.

That's not too hard to understand now is it?

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