Why Clintonomics Can No More Generate
Full Employment Without Inflation
Than Any of its Predecessors

Edward J. Dodson

[An unpublished essay written in 1994]

One of the lessons learned over the last few decades by those who believe strongly in the use of governmental programs to mitigate societal problems is that wealth must first be produced before being redistributed. The analysis of supply-siders suggested that beyond some point the aggregate effect of high tax rates on income or gains on the sale of securities or other assets would impose a heavy burden on competitiveness and end up causing the government a loss in revenue. Supply-siders also made a good case for the elimination of overlapping and bureaucratic regulations that could not demonstrate a real positive benefit/cost outcome to society. So far so good.

Unfortunately, politics and privilege triumphed over principle and sound economics. Proposals to put our monetary system on a sound basis and constitutionally limit the fiscal powers of our government were discarded. Other proposals to dramatically simplify and make more equitable our system of taxation were also buried by mainstream Republicans and Democrats because they threatened the basis on which power and privilege has been distributed in this country for at least a century.

The time has finally come for the citizens of the United States to demand that our problems be solved rather than mitigated. There is no reason why the earth and the natural resources available to us (even within our own territorial boundaries) cannot provide all the basics of a decent human existence. The boom to bust periods most economists and policy analysts like to call business cycles have little to do with markets and a lot to do with the structure of government, the absence of appropriate but minimal regulation of commerce and a system of taxation that rewards failure and speculation while penalizing productive activity. Our entire system of government programs is based on a division of spoils and the distribution of subsidies and privileges. Under these conditions, what is amazing is that markets operate competitively at all.

To be sure, the global marketplace is a complex and amorphous system of exchange. Every day, literally billions of individual transactions occur. To the extent this activity occurs voluntarily (i.e., without the coercive interference of the State or private monopolies) the results are win/win; each participant receives what they construe as equal value in exchange for goods or services. Price is the market-clearing device to which economists attach tremendous faith. At the right price, an equilibrium point is reached between those who are willing to bring goods and/or services to the market and those who are willing and able to purchase them. There are, however, very great exceptions to this economic law.

Price works very well to clear markets for goods because most things we produce have very limited shelf lives. Food items spoil quickly; clothing goes out of style; computers are obsolete within a year or two after introduction; automobiles lose value the closer the time comes for new models to hit showrooms; and, even buildings and machinery begin to depreciate in physical condition almost the minute they are completed. When the things we produce do not sell right away or as anticipated, prices are lowered to induce demand. Goods that are poorly designed or have other serious problems may have to be given away or scrapped.

Price also works very well for many of the services we offer as individuals, for the simple reason that most of us need to continuously offer our services in the marketplace in order to earn enough income to live. Only a relatively small minority have skills, knowledge or talents so special that they are able to earn far more each year than is necessary to obtain in exchange the goods and services we might all agree constituted a reasonable minimum (i.e., food, clothing, shelter, medical care, education and leisure). Those who have inherited vast personal fortunes from earlier generations may also live ostentatiously without providing services to others; and, ironically, they have long been among the very rich. The way many of us try to gain some advantage in our negotiations is to acquire additional or advanced skills. This tends to improve our ability to command a higher price from those who desire to use our services. Sometimes we are successful; other times (when the demand for services falls) we may experience unemployment.

Price does not work very well where locations and natural resources are concerned. Unlike the goods that are produced (by the application of human labor and capital goods to land), time is generally an ally rather than an enemy to those who own and control locations or natural resource lands. As what classical economists used to call a factor of production, the supply of land is relatively inelastic; its supply cannot be easily increased in response to demand. And, because land generally does not lose its functional utility over time, there is a major temptation on the part of owners and investors to gain control of land, do nothing productive with it, and hold it for speculative gain over a long period. That temptation is increased when land is inherited or was acquired many years ago at nominal cost, increasing in value as communities expanded all around. As the natural supply of land is reduced by hoarding and speculation, the equilibrium price tends to rise dramatically. Other owners of land are then strongly influenced to also hold their land out of the market to take advantage of such high potential returns. This speculative value is then capitalized by sellers into current selling prices. The result is land prices that tend to spiral upward to the point where no one can profitably make use of the land or afford to purchase housing built on lots that by themselves are priced at what housing cost less than a decade ago. Under these conditions, workers demand higher wages, businesses attempt to pass on costs to customers (or reduce the labor component of their cost of doing business), the demand for newly-constructed office space plummets, and the lending institutions who advanced the construction financing to developers are hit with a chain of defaults and the threat of insolvency.

Ironically, appropriate public policy could remedy the uncompetitive nature of land markets and much of the underlying cause for inflations, recessions and business cycles. The answer lies in the restructuring of our tax system to accomplish the essential objective of rewarding the production of goods and services and removing impediments to exchange, while penalizing hoarding and speculation and simultaneously preventing the monopolization of locations and natural resources. There is considerable restructuring needed at all levels of taxing authority. At the Federal level, we desperately need to introduce simplification as well as equity and economic soundness. A comprehensive approach to tax reform should include the following measures:

• Taxation of businesses at a low rate based on gross receipts. Doing so would encourage the application of sound management to control expenses that would otherwise be used to reduce taxable income. Companies that are highly productive would, as ought to occur under market conditions, gain a competitive advantage over firms that fail to control costs and innovate. The tax system would then be neutral and no longer penalize success.
  
  
• Taxation of individuals at an initial low rate beginning at incomes above the median earned, with no deductions of any kind permitted. The tax law could, however, provide for a petition process based on hardship that would allow the tax due to accrue as a lien against the person's property or estate. Using a beginning taxable income of, say, $25,000, the rate would increase gradually on marginal dollars earned. For purposes of discussion, I suggest rates that increase from 10% on incomes of $25,000 to $50,000; 15% on earnings above $50,000 up to $150,000; 20% on earnings above $150,000 up to $500,000; and, 25% on earning above $500,000.
  
  
• Gradual reduction of the Federal tax on the sale of any personal or business asset (including securities) to 1%. This will eliminate the need by sellers to attempt to pass on the tax to purchasers in the form of higher prices and will significantly improve our competitiveness with foreign producers.
  
  
• Gradual reduction of tariffs and excise taxes to a level sufficient to pay for the expenses incurred in the inspection of goods upon entry for compliance with Federal environmental and health regulations.
  
  

Legislation should also be immediately adopted requiring that any and all leases granted by the Federal government to private interests for the purposes of mining, tree harvesting, oil and gas exploration, grazing, or other use be issued under a sealed auction bid system. Leases should be drafted to encourage the largest number of bidders possible, have laddered expiration terms and provide for periodic adjustment of leasing fees based on the results of ongoing auctions. This would go a long way toward ending the tremendous subsidies now enjoyed by a few businesses at the expense of the general public.

The same recommendations (or underlying principles) as detailed above also apply to taxation at the state level. Added to the list is the sales tax, which ought to be reduced to a nominal level in order to make more items affordable to moderate and lower income consumers and eliminate the circumstance of people who live near state boundaries crossing the border to shop because of the tax differential. In the worst instances, high sales taxes encourage smuggling and the involvement of organized crime.

Municipal and county governments generally do about everything wrong that can be done wrong when it comes to tax policies. Activities that create jobs and contribute to the development of physical and cultural infrastructure are (unless specifically exempted by some political process) heavily penalized with taxation. Housing and business structures are often taxed separately by the county, township or municipality and the school district. Effective rates are often as much as 3-4% of actual value. At the same time, land hoarding and speculation are greatly encouraged by infrequent reassessment of vacant or underutilized land. Strong arguments on behalf of equality of opportunity have been put forward against relying on the real estate tax as the basis for financing schools. However, even very poor areas would benefit by shifting the burden of the real estate tax from improvements and land together to land alone. By placing a higher carrying cost on those who speculate in land while rewarding new construction and rehabilitation of housing and other types of buildings by an absence of taxation, those who own land will be encouraged to develop the land they hold (creating jobs and economic activity) or sell it to someone who will. As more land comes onto the market, the clearing price for land will fall, lowering the entry level cost of doing business or of achieving home ownership. There are also secondary ripple effects that equate to creating an enterprise zone out of an entire community. With increased economic activity, the tax rates on individual and business income can be greatly reduced. Also, as full employment is approached the social welfare and law enforcement expenses incurred will fall. Government can then begin to really add value by providing high quality services to the general public, making the community even more attractive to new businesses and new residents.

These measures are not cure-alls, but they get the dominoes falling in the right direction. With some of our most pressing problems greatly diminished, perhaps we can then come to grips with the challenge of retiring our national debt and reducing the size and expense of the Federal bureaucracy.

The door is open. The question is whether we have the resolve and the objectivity to do what is really necessary.