Economic truths are hard to hear

We humans are not the rational animals Aristotle once said we were. We’re not even the ruthlessly efficient calculators of interest that almost all economic theory is based upon.

Instead what we turn out to be are story collectors, magpies searching out shiny objects, and rationalizers after the fact.

There’s nothing wrong with that: it’s precisely what we needed to be to be effective hunter-gatherers in the early days of the human race. It put more food in our bellies, and kept us from being food for predators better than anything else.

Now, do you remember the other thing about our nature?

Yes, we’re creatures of comfort. Hunter-gatherers worked far less than those that practised agriculture would, or those who would develop industry, or even the modern service-information-celebrity economy.

Is it any wonder, then, that when faced with a challenge the first response from most of the people around you “make it go away?”

It’s what led, for instance, to the notion that piling up the deficits was a good thing. They tax the future to pay for them, whereas raising taxes now would tax us, in the present. No comfort there.

Of course, when your predecessors have piled up mounds of debt from their unwillingness to pay their bills in their own time, you have a problem. And that, as they say, is the story of our times.

Now we could, of course, simply say “Oh, well, we’re not going to pay”. Eventually that’ll turn out to be part of the story, but do you remember what happened to Meep when big ugly Grog with the club looked at that last leg of mammoth and said “fork it over”?

Yep, he got clobbered (and no mammoth leg). We remember our stories, we do. So we’re unlikely to take that road until there’s no other option: when Grog is weak enough, or diverted enough, that we Meeps can do it and get away — or when, frankly, being hit by Grog is less painful than paying up.

So in the meantime what should we be doing?

Well, here’s the ugly little truth we don’t want to hear, because (remember, we’re magpies at heart!) low taxes and more deficits is shiny compared to the dull button of raise taxes and don’t add to the debt pile.

That deficit pile — because our money is really debt — adds more money to the pile without any more activity taking place to justify it. So the spill over effect is that asset prices climb (and become unaffordable by more) and food and energy prices rise (because they’re essential to everything else … there’s a reason they’re not in the consumer price indices any more!).

So everything ends up being taxed by the reduction in value of stored money. Capital loses, savings lose, replacing equipment costs more than depreciation set aside for it, as well as the higher nominal values driving taxes higher on profitable moves.

If we’d just raised taxes “as is”, the only people taxed are those subject to them. Existing savings, existing capital, all would have been free of burden. Innovation in an economy causes the natural state to be a slow deflation, so depreciation would cover replacements and maintenance needs. Only profits would feel the pinch.

Note that a billion of deficits and a billion in increased taxes hurt the present in precisely the same way. In other words, low taxes and high deficits are precisely the same (in terms of suppressing future economic activity) as high taxes and no deficits are. The only difference is whether everyone gets distorted, or only real activity gets to pay.

The lesson for today — tell it at story-time tonight around the fire — is “there ain’t no such thing as a free lunch” (TANSTAAFL). If you want to take it, you have to pay for it.

So the promises made that you can get away without paying are just the sound of a balloon being inflated to the point where it blows up.

And that’s where we’re at.


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