Some know this already by heart and others will deny this to the bitter end. Others realize this on some level, but cannot really put it in words. That there is something awfully wrong with how we perceive economic growth, how we measure it and how we use these ancient ways to justify means that seem counter-intuitive at best.
To wit, those in the establishment can come out and say things like this:
If we discovered that space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better.
Aside from promoting intergalactic wars and alien-invasions, these same people continue to claim that World War II took the world out of depression. That it took that amount of destruction and the lost lives of tens of millions to make the economy grow. How is destruction of infrastructure and workforce beneficial to the increased output of workforce and infrastructure remains a mystery – to me at least. Further they claim that we just need to borrow more from the future generations and throw it everywhere in order to generate growth. They never bother to explain how are we going to pay back all that debt. According to them no stimulus package is too big and we should just spend more to create growth. And what do these people do when questioned? If they are on good mood they will just prepare white papers saying that economics is really hard and that only properly vetted Ivy League PhDs can understand it.
GDP by definition
There is another pretty important angle to this that I am not covering this time and that is all the faults of GDP growth as a measure of better times. It does not measure happiness nor does it care about equality. The faults of the measure go a long way, but to get back to the subject, please consider the formula for Gross Domestic Product:
GDP = C + I + G + (X – M), where C is consumer spending, I is investments, G is government spending, X is exports and M is imports
It is pretty simple. The more people and government spend, the larger is the GDP. With tax cuts you take 1 unit out of G and it will increase C by a factor of x (x<1), which is the marginal propensity to consume (the short-term effects). Similar additions can be done until the model becomes completely incomprehensible, but the key finding is that spending immediately increases GDP and thus economic growth.
Let’s further add government budget deficits and debt to the equations. Now additional spending does not have to come from reduction in C as a results of taxes. Just borrow from future generations and you get 1 for 1 increases in economic growth. Sweet right? Looking at history, this is very tempting for governments to do. Herein lies a huge problem. Spending has somehow become equivalent to growth. Moreover, and to the worse direction, throwing money at everything has become equivalent to growth and progress. We ought to realize that spending is just how standard of living manifests itself, while it really derives from savings, investments and production.
Now we come back to the question from the title of this post. How much value do tax consultants really create? This is really not just about the tax code, but it just happens to be awfully good example. There are million other similar issues, but I will cover just couple of them.
Modern economics sees tax consultants as men and women who wear suits and provide professional services to those who can benefit from buying these expensive services. Tax consultants are seen as high-productivity highly educated labor. They must add a lot of value to society. Unfortunately, nothing could be further from the truth and this is not even about complaining that the tax code is full of loop holes for those with enough income and assets to take advantage of (though a valid concern in itself). The reason for the existence of tax consultants is the complexity of the tax code, but is there really any reason for the tax code to be complicated? The simple answer would be no. The complicated one would be no. First we use immense amount of resources to discuss, debate, legislate, analyze and revise multiple times a tax code that is not needed and then we use immense amount of resources to employ tax consultants to explain it to us. Does that strike as stupid or what? Here is the kicker: according to modern economics, all of this adds to GDP and thus, is considered economic growth and progress. Remember the formula: GDP = C + I + G + (X – M).
In reality none of the above added to economic growth or progress of any kind. We just wasted precious resources to create something that forces us to use further resources. Let’s expand the same thinking to wars. Remember, Keynesian witchcraft practitioners like Krugman grave for more war and enemies even if it they were complete work of fiction. They themselves openly and proudly admit this.
GDP by definition includes capital formation, but does not exclude capital depletion or destruction of any kind. This allows us to build weapons and infrastructure, then use the said weapons to destroy the said infrastructure and behold, GDP goes way up and so does economic growth, progress and so forth. Combine this with borrowing from future generations, thus forcing higher income taxes upon your children, and it really gets to you. Modern economics likes to see us dramatically ramp up “defense” budgets so that we can buy a lot of useless stuff from a lot of companies so that they can hire a lot of people to do useless work (by definition), while the government creates a lot of useless procedures and pushes around a lot of useless papers to accommodate this useless process. We desperately need to stop wasting resources on things that do not create any value and especially on things that destroy true value. These problems exist in every country, though USA is in it’s own league when it comes to creating imaginary enemies to bloat the defense budget and pay off special interests.
The best way to cut deficits?
Simplifying all legislation, but especially the tax code should be a corner stone in every stimulus package and deficit cutting package, because it is immediately agreeable by everyone except those who serve someone else than the people. Simplifying legislation does not cut entitlements. It does not weaken defense nor national security in any way. It does not even remotely touch gun rights, abortion, stem-cell research or any other non-issue. It leaves more money on the table for all households(except for tax consultants) and it makes starting up and running businesses much easier. There are plenty of other similar issues, but this is a good place to start as there are no costs, but there are massive benefits over time.
Unfortunately, people are so dumbed down that they will continue to vote for let’s give Raytheon 10 billion to build weapons and let’s amend the tax code with additional 10,000 pages so that when conditions x,y,z,c and w hold, I don’t have to work. And if you think I am kidding, remember what Pelosi said about passing the health care bill: We must pass it so that we can find out what is in it.