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July 10, 2011

Economic Ignorance

Posted in: Economy

(photo: summerdisney)

Economic ignorance in the US is at an all-time high. If we take them at their words, the President of the United States, Senators and Representatives can’t see any difference between the government of a sovereign nation, the richest and most complex nation on earth, with control over its currency, and a household with an income of $50,000 and a few assets and debts. Of course, they may just be saying this to appeal to the common sense of the citizenry while they play out their real purposes, but if that only works because the average citizen believes it. And it is quite likely that a significant number of congressionals believe it too, in the same way they believe other impossible things.

Ignorance of basic economics is a systemic problem, and it isn’t just regular people who have this problem. Paul Krugman, among others, has pointed out that academic economists haven’t learned and don’t teach the lessons painfully learned in the Great Depression.

I first ran into economic ignorance in 1970, when I spent a glorious nine months in Fayetteville, NC, courtesy of Uncle Sam. I don’t recall the details, so the numbers may not be exact, but they give the picture. Shortly before I got there, the city had a referendum calling for an increase in the sales tax of 1% and a decrease in the property tax of 1%. The rationale was that the city could suck more money out of the soldiers at Fort Bragg, and reduce their own taxes. It passed easily.

I phoned a radio call-in show to ask why the locals bought that silliness. I pointed out that renters would face only tax increases with no corresponding reduction in rent, and that most homeowners would get little or nothing. The average home price was, let’s say, $30K. A 1% reduction in property taxes might have been worth $10. Suppose the income of average homeowners was $7,500 (as a First Lieutenant, I was making about $3,500), and that they spent $4,000 on goods and services subject to the sales tax. Their taxes went up $40.

The only people who profited were large landowners, the owner of the local lumberyard, who was on the city council, the owner of a bunch of dry cleaners and laundries, who was on the city council, owners of apartment complexes, one of whom was on the city council, and the mayor, who owned a couple of retail stores and a movie theater. I asked the host why anyone would vote for that? She told me that no one had explained it that way. That isn’t a surprise. The owner of the local paper, and the owners of the local broadcast channels had a large amount of real estate.

To me, the point of the story is that people didn’t think about how the tax change would affect them. All of the homeowners and many of the renters were so focused on the idea of raising taxes on those soldiers and lowering their own, that they couldn’t see that they were being screwed for the benefit of the rich.

Look at the housing collapse. The Tea Party got its start ranting about plans to try to help homeowners who were under water, or whose mortgages were going to reset to higher interest rates, or who had been cheated by mortgage brokers or who had themselves lied. No Democrat, and certainly not the President, spoke up to explain why that was a good idea. The people who were so afraid that someone else would benefit from cramdown or a real mortgage program won the day. The same people who were unable to recognize that they wouldn’t be helped by increasing taxes on soldiers were unable to see that helping their neighbors, regardless of whether they deserved it or even were at fault, would trash the value of their own homes. The only people who benefited are the rich.

Democracy only works if people can see things from two perspectives, how it affects them personally, and how it affects the society as a whole. We have to weigh out those things to make sure that we actually have shared benefits and shared costs, and that the sharing is fair. That won’t happen if we all focus jealously on benefits to other people, or greedily on the benefits to us. It won’t happen unless someone gets people to look up from their kitchen tables to see the bigger picture.

That sure as hell won’t be the economically ignorant Democrats in the White House and the Congress.


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