Wednesday, April 18, 2012

A Better Way to Save, II: Keynesian Looking Glass Land

Yesterday being "Tax Day," the vast bulk of "Human Interest Stories" centered on the personal income tax. Typically these stories have focused on how much of each year an average person has to work before he or she stops working for the government and starts working for him- or herself — "Tax Freedom Day."

This year something new has been added: How people are being stupid to use the tax system to "force savings" by overpaying to get a big refund. According to a flurry of articles that appeared in newspapers and on the internet, there is a big push on to nip this sort of thing in the bud. Without even bothering to google the subject, we've seen "IRS Uses Tax Day to Push Consumers to Save" which despite the title argues against using the tax system to accomplish the desired end. Then there was the condescending "Admit It — It Feels Good."

The bottom line here is that we have to overcome a national savings dearth . . . but ordinary people shouldn't use the tax system to save. As one of the articles concluded,

"None of this is going to solve the national savings dearth. Most personal saving in the U.S. will continue to be done by people with lots of money to spare. These experiments, instead, are aimed at making individuals a bit more financially secure, a creative attempt to promote a culture of saving in a country with too little of it."

Why? This doesn't make sense. If the tax system has been distorted to encourage saving, why is the IRS upset when people use the tax system to save?

Actually, it makes perfect sense. Under the currency principle illusion that the only way to finance new capital formation is to cut consumption and save, the more or less logical conclusion is that only the rich have the capacity to save in the amounts required by increasingly expensive advanced technology. If the poor or non-owning classes save, this reduces consumption, and makes the new capital financed by the rich less feasible.

In the Looking Glass Land of Keynesian economics, the tax system and the monetary system are combined in the joint endeavor to reach full employment — of labor, not of all resources. The primary task of private industry (under government control, if necessary) is not to produce marketable goods and services that, in accordance with Say's Law of Markets as applied in the real bills doctrine, can be exchanged through the medium of money for what others produce. Rather, private industry's job is to create jobs in order to sustain effective demand to absorb what technology produces.

This requires a little sleight-of-hand in a number of areas. Okay, a lot of sleight-of-hand. This is relatively easy to do when you base science on faith, or vice versa. Contradictions can be explained away by accusing anyone who raises a question of being either a knave or a fool, probably (and illogically) both at the same time.

For starters, because no normal person wants to admit that what he or she does is useless, "productivity" is always measured in terms of labor hours. Always. It doesn't matter that technology (capital) is responsible for the bulk of production. The belief that "productivity" can be measured by dividing output by labor hours leads to the ludicrous conclusion that human labor is infinitely productive when it isn't even there. This would be the case in a fully automated factory: (Total Output)/0 = Infinity . . . an irrational number (except in Keynesian Looking Glass Land).

Then there's the assumption that the job of the non-owning masses is . . . to have a job. If "the masses" own, they'll just do something stupid with their capital incomes, like spend the money on food, clothing and shelter. This is why Keynes called for the "euthanasia" of the small "functionless" (his words) investor who doesn't reinvest his or her capital income. If they spend, there won't be enough savings to finance new capital formation to provide jobs for everybody.

Given the assumption that the only way to finance new capital formation is to cut consumption and accumulate money savings (and we're not taking the time right now to prove just how false and damaging this assumption is), economic growth relies on having a small class of rich people, the smaller, the better, who cannot possibly consume all the income their capital produces. Being logical, such people reinvest their excess consumption income in new capital, thereby creating jobs.

Alas — the effect of technology is to replace human labor in the production process. The government is forced to step in and either mandate or subsidize job creation somehow, or there won't be enough effective demand to allow the new capital to pay for itself out of future profits, and then provide more savings to finance new capital formation and create jobs. Thus, in the Keynesian Looking Glass universe, useless jobs are created so that there will be more useless jobs created. The goal of job creation is the redistribution of income/effective demand from the technology that produces marketable goods and services away from the human beings who own the capital and who have a right to the "fruits of ownership," to the human beings who don't own capital, but who consume the marketable goods and services produced by capital.

This creates another problem. If income is redistributed through job creation, then the rich don't have enough savings to finance new capital formation and create jobs. Adding to this Catch-22 is the fact that if non-owners consume the income from their "jobs," then they, ipso facto, aren't saving either. If owners aren't saving, and non-owners aren't saving, then there aren't any savings to finance new capital formation and create the jobs that inhibit or prevent saving.

Houston, we have a problem.

This seems an insoluble paradox, but Keynesian economics is equal to the task . . . if we don't look too closely at the system or ask too many questions. Tune in tomorrow for the next exciting episode in our examination of the magic of Keynesian economics.

In the meantime, consider joining CESJ and the Coalition for Capital Homesteading this Friday, April 20, 2012, for a rally in front of the Federal Reserve Board of Governors building on Constitution Avenue from 11:30 am to 1:30 pm to demand a little tax sanity and monetary justice.


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