Sheppard Smith (and the White House) has Trouble Understanding Economics

Yesterday (12-2-2010) as I was receiving my daily dose of network television propaganda I heard Fox News anchor Sheppard Smith trying to explain why America needed tax hikes on the rich. He was putting in the context of the White House position to give the appearance of neutrality, but it is very clear he thinks and supports the Democrat position on taxes. Here was his argument for higher taxes on the rich.

The rich have a pot of money that they do not use. It just sits there and does nothing. Why not tax that money and give it to the unemployed who will spend it. The economics term would be a higher marginal propensity to consume. It makes perfect sense to an economic illiterate or a Democrat or both.

This philosophy dates back to the fairy tales of John Maynard Keynes and his infamous Gross Domestic Product = Consumption + Investment/Savings + Government Spending + Net exports minus imports equation (Y = C + I + G + NX). Keynes (and the White House) mistakenly assume consumption spending is the same as savings and investment. This is a fallacy.

Shepard Smith has trouble separating economic myth from reality like most Americans

Investment and savings are MORE important to the economy because it allows entrepreneurs to create jobs that employ people and create economic growth. Rich people normally invest their money in stocks, savings accounts, mutual funds, and a wide variety of financial instruments. When this happens they are not sitting on their cash as Smith and the White House assume. Other people are using the rich people’s money to create jobs and economic growth. The money does not just sit idle under a mattress. People are using the money and it is working to create jobs by financing the means of economic production and growth.

Contrast that with paying unemployment benefits with the money. First about 40 cents of every dollar spent at the federal level currently is borrowed. So to pay benefits the federal government will go into debt deeper. Is it safe to assume even Sheppard Smith and the White House do not look at this as a positive outcome?

Second when the unemployed receive their money what are they going to buy? Most likely goods from China or foreign countries. Why? Because the American manufacturing sector of the economy as been shrinking since 1979. Why? Draconian United States tax policies that penalize production here in America. End the 35% corporate tax rate and the 15% capital gains tax and there would be plenty of production coming back to America. As it stands the politicians demonize capitalism and our corporations that produce jobs.

So the unemployed will receive some money from the rich, 60 cents on the dollar with 40 cents borrowed, which otherwise would have gone into savings and investment into the economy producing jobs and economic growth. The unemployed will spend it on some domestic consumption but also a large share will go toward foreign goods. Sheppard Smith’s and the White House’s argument makes no economic sense if they want economic growth.

Paying unemployment benefits may be the humane thing to do. It may be the right thing to do but economically there is no valid argument for taxing the rich to pay unemployment benefits. It hurts the economy severely taking money out of private hands that will be used for investment and spending it on most likely imported goods enriching foreign companies’ and corporations.

This is the type of economic illiteracy that runs rampant throughout our culture. Politicians can get away with it because of our abysmal education system and unengaged electorate. As for Smith he is like most Democrats, who can be incapable of logical thinking and react to issues based on emotion.