The Benefits of Tax Policy

Mark Thoma always presents good material, and here is real debate between advocates of the Real Business Cycle and the New Keynesians. I personally possess no faith in Monetary Policy, or find actual relationship between economic performance and any macroeconomic policy. It is my belief that Fed Lending rates should be pegged permanently around 3.75%, but this accomplished in slow stages of .05% at a time. Prescott stands in error in the thought ‘that the sky is not falling’. The trouble lay in the fact it is falling so slowly. We have transformed from a real Capital economy to a Paper economy.

Ed Prescott makes the same basic mistake as did all Economists before the Great Depression, thinking conditions will remain as they were. Does this mean I think there will be another gigantic recession? The Answer is definitely No! What We will see is the vast retreat in the value of the Dollar, and actually, all other World Currencies. The dedication of the Real Business Cycle Economists to Paper Instrument Investment starting circa 1965, with accelerations of Dollar devaluation in the 1980s and 2000-2006. (Short analysis: The multiplication of Paper to actual Capital disintegrates the Profitability of actual Production, scattering the Proceeds, denying actual real Capital investment funds, and lowering Fund returns overall). This means that no matter the magnitude of Investment flow into the Paper Instruments, attempts to Cash in these Instruments will lower the market for these Instruments faster than the amounts taken out. It is an illusion that such Investment can finance the Retirement plans for any significant number of Retirees.

Paul Krugman is quite right in his article linked in the Thoma Post, but both he and Mark think Government intervention has Value. Even if it were effective (something almost never actually seen statistically), all Government policy adopts a Partisan face where actual economic value is lost in the pursuit of Special Class privileges. The only effective arena where Government finds effective operation is in Tax Policy, and this only where real percentage Tax rates are uniform across all Taxpayers. lgl