Robert B. Reich, another Clueless Keynesian

CATO Scholar Alan Reynolds recently wrote in the Wall Street Journal (Memo to Robert Reich: Why 70% Tax Rates Won’t Work,” op-ed June 16) about how 70% tax rates would not work. Robert Reich wrote a rebuttal on 6-19-2011 in the WSJ to Reynolds and question his premise by pointing to economic growth in the United States from 1951 to 2008. Reynolds argues history shows more revenue is collected with lower tax rates.

CATO Scholar Alan Renolds

Reich counters that between 1951 to 1980, when the top rate was 70% to 91%, the average annual growth rate was 3.7%. Between 1983 and 2008 (?) (“the start of the “Great Recession,” to quote Reich) the annual growth rate was 3.0%. Laughable if he understood economics. But apparently he does not.

Coincidently I wrote almost the same examination of taxes on May 23, 2011. Even with Reich’s remarks aimed at Reynolds I am obliged to defend Mr. Reynolds, if for no other reason that it is fun to dissect these 16th century blood letting zombies.

The problem Reich and other Keynesians have comes down to their core believe that government consumption is a positive factor in the GDP formula. The holy of holiest formulas they hold dearly and cherish is the aggregate demand/GDP formula of Y = Consumption + Investment + Government Spending + (Exports minus Imports) or Y = C + I + G + NX.

The formula developed by Simon Kuznets, not Keynes, is completely false. The formula should read Y = C + (1.05) I + (-) G + NX.

If Reich used the correct formula it will come as no surprise that as the government’s share of the GDP grew from 1983 to 2008, economic growth slowed down. So simple when one understand economics and does not believe in English fairy tales.

The governments’ consumption during the years from 1951 to 1980 was 26.83%. This is what local, state, and the federal government consumed on average. In 1951 government consumed 23.17% of the GDP. In 1980 that had risen to 31.52%.

Clueless Keynesian Robert Reich believes in English Fairy tales and does not understand economics

Reich makes the mistake of assuming that having a 90% tax rate will collect more taxes. The opposite is true. Even on a personal level does anyone know anyone who would pay a 90% tax unless they were facing jail time? What happens is the government is better able to collect taxes from the unsophisticated and uneducated with tax rates of 20% instead of 0% like we have today. Sell the high tax rate using class warfare and sock it to the middle and lower classes.

From 1983 to 2008 the governments share of the GDP has grown from the 1951-80 average of 26.83% of the GDP to 33.38% of the GDP. A 6.5% shift in resources from the private sector to the public sector. Is it making any sense now?

In recent years this trend has accelerated dramatically changing from 32.56% in 2000 to 42.4% today. Is it any wonder we are experiencing inflation and slow growth? We are moving out of a socialist economy and towards fascism.

The government is consuming too much and private production of goods and services are “crowded out.” The living standards will suffer dramatically when Washington is no longer able to borrow and print money.

I am glad I could solve this little mystery for the Keynesian Robert Reich. Glad to be of service.

The following appeared in the Florida Political Press on 6-22-2011.