Why 'No New Taxes' and Cut, Cap and Balance are Horrible Ideas (from a Conservative Perspective)

Conservatives should be ashamed of themselves with their insistence on Cut, Cap and Balance, for a balanced budget and a pledge of no new taxes (as it is currently envisioned) will lead to the rise of the regulatory state and even more tax expenditures, ultimately ushering in a new socialistic entitlement state the likes of which have never been seen before.  Remember to beware getting that which you wish for as there are always unintended consequences.

Let's take each of these concepts in isolation and see why they are such bad ideas.  The idea of cutting government expenditure itself isn't a faulty one but how do you define government expenditure?  For example, suppose that we look at the Earned Income Tax Credit.  Is that an expenditure or merely a tax cut?  Does it only become an expenditure when it results in a refundable credit?  If not, what about things like the mortgage interest deduction?

What is the difference between a charitable contribution deduction or tax credit and simply giving the charity the money out of government coffers?  In the end, very little.  The charity has more money.  The individual who gave to the charity has less.  The government is merely the pass-through agent.  Now, some would say that the difference is that when an individual gives to charity, they are directing the money to that purpose, whereas when government does the same, they are robbing everyone to accomplish the same goal.  That is one way of looking at things.  However, at the same time, if money goes to charities through private giving, there is less of a "need" for government redirection of funds.  As such, government expenditure goes down but it is merely replaced with private expenditure.  The biggest difference is that individuals, rather than the voters, are making the decisions as to the allocation of funds.  Thus, it is equivalent to giving more votes to those with more money rather than based on 'one person, one vote.'

At first, this seems like a good conservative principle.  After all, what could be better than having each individual decide what is best to do with his or her own money. Yet, by giving a tax credit or deduction, what really happens is that everyone else is forced to pay for the charitable contribution. Think about it for a second.  If we reduce government spending to what conservatives believe it should be: national defense, maybe the department of state, a few public works projects, and that's about it, tax credits and deductions represent a regulatory state gone amok.  It basically favors certain types of behavior over others and, by creating these incentives to reduce your taxes, those of us who do not believe in such activity are left holding the bill for the things that we all truly do need (national defense, etc.). However, this all begs the question: why is government regulating through an incentive mechanism private behavior at all?  Furthermore, why should you get to pay less for national defense because you are giving to your church, while I don't?

In addition, the truly insidious and onerous aspect of government isn't that it taxes, but that it regulates--and regulation can occur even if the government doesn't tax at all!  Why bother giving subsidies for 'green energy', just ban 'non-green energy'!  Why worry about redistribution of income through the tax system if you require everyone to tithe or go to jail?  These may be extreme examples but the government can get almost anything it wants done through regulation, including things that it could not accomplish through taxation.

Now what about cap and balance?  Sounds like a good idea, doesn't it?  We need to balance our family budget, so why not the government?  Shouldn't we cap government expenditures?

Actually, the answer is 'no'!  We should instead cap government revenues but let government expenditures rise and fall with the business cycle.  Furthermore, we should not cap at 18% but rather during good times we should be saving about 20% of GDP (and if the public won't do it, the government should)--and that doesn't even include government expenditure on the military and public works (which should be no more than about 10% of GDP or so)!  Where did I get this idea?

Well, God told me.

Even God himself has dictated that 'cut, cap, and balance' is a bad idea (and, if conservatives believe in anything, it is God). Indeed Keynesianism, if properly practiced, is conservative thought and anything different is, well, sinful.  So sayeth the Lord in the story of Pharaoh and Joseph:

Genesis 41:17-40 (New International Version):

¹⁷ Then Pharaoh said to Joseph, “In my dream I was standing on the bank of the Nile, ¹⁸ when out of the river there came up seven cows, fat and sleek, and they grazed among the reeds. ¹⁹ After them, seven other cows came up—scrawny and very ugly and lean. I had never seen such ugly cows in all the land of Egypt. ²⁰ The lean, ugly cows ate up the seven fat cows that came up first. ²¹ But even after they ate them, no one could tell that they had done so; they looked just as ugly as before. Then I woke up.
²² “In my dream I saw seven heads of grain, full and good, growing on a single stalk. ²³ After them, seven other heads sprouted—withered and thin and scorched by the east wind. ²⁴ The thin heads of grain swallowed up the seven good heads. I told this to the magicians, but none of them could explain it to me.”
²⁵ Then Joseph said to Pharaoh, “The dreams of Pharaoh are one and the same. God has revealed to Pharaoh what he is about to do. ²⁶ The seven good cows are seven years, and the seven good heads of grain are seven years; it is one and the same dream. ²⁷ The seven lean, ugly cows that came up afterward are seven years, and so are the seven worthless heads of grain scorched by the east wind: They are seven years of famine.
²⁸ “It is just as I said to Pharaoh: God has shown Pharaoh what he is about to do. ²⁹ Seven years of great abundance are coming throughout the land of Egypt, ³⁰ but seven years of famine will follow them. Then all the abundance in Egypt will be forgotten, and the famine will ravage the land. ³¹ The abundance in the land will not be remembered, because the famine that follows it will be so severe. ³² The reason the dream was given to Pharaoh in two forms is that the matter has been firmly decided by God, and God will do it soon.
³³ “And now let Pharaoh look for a discerning and wise man and put him in charge of the land of Egypt. ³⁴ Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. ³⁵ They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. ³⁶ This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.”
³⁷ The plan seemed good to Pharaoh and to all his officials. ³⁸ So Pharaoh asked them, “Can we find anyone like this man, one in whom is the spirit of God^[a]?”
³⁹ Then Pharaoh said to Joseph, “Since God has made all this known to you, there is no one so discerning and wise as you. ⁴⁰ You shall be in charge of my palace, and all my people are to submit to your orders. Only with respect to the throne will I be greater than you.”

However, note what the story says: we must save during the good years to spend during the bad years. We must balance the budget, not yearly, but rather over the business cycle (in the days of Pharoah, the business cycle followed the grain cycle).  And how much should government take?  Look at Genesis 41:34: "Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt."   So "cut, cap, and balance" is a horrible idea and so is the balanced budget amendment.  It would lead to us squander our treasure during our feast years, only to starve during our famine years.

So ideally, from a conservative perspective in good times, government should take 30% of our GDP and be required to SAVE 20% of GDP (so that would mean a $2.8 trillion budget surplus).  In bad times, 0% (yes, cut all taxes to zero during recessions--I mean they are recessions, right?) and run a budget deficit of whatever it takes to generate full employment during recessions.  Now that's a good conservative prescription for success.

Only one potential problem (and it is a big problem -- probably fatal to this plan): how do we know we are in good times or bad times?  Unfortunately, too many people think it is the famine time even when it is the feast time.  Oh well.

More on Corporate Personhood

By dispensing with corporate personhood, we simultaneously get rid of two important things: limited liability and the corporate income tax.

After all, if the corporation is not a legal separate person, funds flow directly to the shareholder (similar to a partnership or sole proprietorship).  Now we could create a legal structure to allow these funds to be held at the corporate level by arguing that each person really simply owns a certain percentage (share) of the corporation and can only realize gains or losses by selling.  This would treat corporations as what they really are: assets of the owners.

While many conservatives would like to rid themselves of the corporate income tax, they simultaneously do not understand that if they do this, they lose the rationale for limited liability.  Limited liability is a benefit but not as great as it might at first appear.  What it really does is help not the common stockholder (who can always sell before his or her stock value goes to zero) but rather the last stockholders who is left holding the proverbial bag.  Yet what limited liability does is exaccerbate the asymmetry between short sellers and long buyers.  Short sellers already have unlimited liability (theoretically) and limited potential benefit (when the stock price goes to zero).  Long buyers have limited liability and unlimited potential benefit.  Eliminating corporate personhoood will reduce this asymmetry.

Here are a few questions that I have received concerning this proposal:

Couldn't companies simply get limited liability through contract?

The answer is no.  While a company can negotiate limited liability with suppliers and customers, third parties who are injured cannot be so casually dismissed.

Couldn't executives simply find a way around these restrictions?

Well, they could purchase insurance but who would insure them?  Since they are the ones making the decision that would lead to the corporation's demise, it would be foolish to provide insurance.  After all, you would be stepping directly into moral hazard.  They, of course, could also reduce their exposure below the 1% threshold provided they resign their office immediately.  However, they cannot keep their office and their benefits without incurring the costs.  Receiving reward without risk is immoral and must not be allowed to continue.

The point is that those who want the rewards should take the risks.  No risk = no reward.  It works for shareholders.  Why not corporate executives?

The Evils of Corporate Personhood (and the legal solution)

The fact that corporations have personhood and not limited liability is the root of the problems with respect to modern capitalism.  Limited liability actually emanates from this idiotic idea because one person cannot be responsible for the debts of another unless that person co-signs on the loan application.  Yet, while limited liability leads itself to the problem of excessive risk-taking (because you gain all of the upside and limit your downside), it is corporate personhood that is actually even more problematic.

As I sit here in the Wyhdham Resort and Casino in The Bahamas typing this blog, I am reminded of something I tell my students in my classes about the problems of corporate CEOs receiving stock options.  Since they receive only upside (stock prices can only go to zero in the extreme on the downside), it would be like handing $50,000 to each of them and telling them to go to the casino and whatever they win with my money we will split but if they lose the money, they are not liable for my losses.

I would want them to play Blackjack -- they will go for Roulette and the Slot Machines. By going for the riskiest games, they increase their chances of large scale gain.  After all, it isn't their money.

What personhood does for the corporation is allow it to declare bankruptcy even before it destroys its common stock.  Thus, corporate stockholders get effectively two bites of the apples -- no, actually three, for they can always turn around and sell to another sucker in the market (only the last one holding the stock has a 100% loss).  Of course, eliminating limited liability entirely might prove too drastic a step for those who wish to be market participants but who have little in the way of actual assets.  We can solve this problem by limiting limited liability only to shareholders who hold less than 1% of the overall common stock and who do not hold a senior management position at the C-level (CEO, CFO, CIO, etc.) or above (e.g., President, Chairman).   Such di minimus participation is incompatible with being able to fundamentally alter the overall course of the business.

Furthermore, do not allow senior managers to be senior managers unless they have at least 1% of the overall common stock (make them have "skin in the game", so to speak) and then apportion the excess of limited liability to those senior managers.  Sell so that you drop to less than 1% and you have to immediately resign your senior leadership position.

Now the personhood issue can actually be put to bed quite easily.  After all, the US Constitution prohibits slavery and involuntary servitude (13th Amendment).  If corporations are persons and they are owned by other persons (stockholders), isn't the corporation by definition a slave to the stockholders?  Wasn't that outlawed by the 13th Amendment except in cases of punishment for a crime?  I think that you cannot make a case that corporations are slaves because of such punishment, ergo, corporations are illegal in the United States.  I rest my case (at least in the US case).

Property Rights are All Important: The Economics of The Lorax

While there have been lesson plans written around Dr. Suess's The Lorax, they have tended to centre around what liberals see as the fundamental tension between capitalism and the environment.  However, I think that they are mistaken here.  The issue is actually all about property rights and thus what is needed is more capitalism, not less.

Yes, it is true that Dr. Suess saw this story as such a parable, buried within its text is the evidence for the opposite.  Consider this quote at the end (emphasis added in boldface and italics), which is what is supposed to be the true lesson:

"You're in charge of the last of the Truffula Seeds. And Truffula Trees are what everyone needs.Plant a new Truffula. Treat it with care. Give it clean water. And feed it fresh air. Grow a forest. Protect it from axes that hack. Then the Lorax and all of his friends may come back."

The only way that someone can "protect it from axes that hack" is by property rights.  Unless you own something you have no right to tell everyone else that they cannot use it.

We note that at first the Lorax attempted to exert property rights (emphasis added in boldface and italics), "What's that THING you've made out of my Truffula tuft?"

The problem is that the Lorax makes two critical errors.  First, he failed to emphasize that the Truffula tuft was owned by the Lorax.  Instead, he concentrated on the Thnead that the Once-Ler made.  Second, the Lorax attempted to appeal to the Once-Ler's altruism by showcasing the damage caused by Thnead production.  But why should the Once-Ler care about this?  Let's showcase what Adam Smith says about altruism versus self-interest in The Wealth of Nations:

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

The Lorax has this reversed.  He attempts repeatedly to address the Once-Ler's humanity, not his self-love.  So, naturally, the Once-Ler would not listen.

What The Lorax should have done was sue the Once-Ler for theft or, in the absence of responsible government, he should have shot the Once-Ler (never brings a knife/ax to a gun fight!).  However, he apparently did not have a property deed nor a gun (believe me, however, launching a lawsuit is far more preferable to taking matters in your own hands). 

Of course, the Lorax does make several property claims.  He talks about "my trees", "my poor Bar-ba-loots", and "my poor Swammie Swams." But he makes no attempt to enforce those claims besides blistering talk. Yet without enforcement of property rights, the rights mean virtually nothing.

Indeed, by not enforcing his property rights, he allowed the Once-Ler to argue as follows:

"All you do is yap-yap and say, Bad! Bad! Bad! Bad! Well, I have my rights, sir, and I'm telling you I intend to go on doing just what I do!"

You see, folks, it is important to have property rights but it is equally important to enforce those property rights-- and that is the true lesson we should take from The Lorax, not the feel-good environmentalism about what we should do.  After all, even the environmental movement requires that force be applied against those who would seek to cause harm to the environment but how do we know how to balance the needs of the environment and the needs of the economy?  You can argue until you are blue in the face that the environment should take precedence but you would end up only being blue in the face.  What matters is whether you have the authority to force others to respect your decision and that can only come from one of two sources: authoritarian command and control (i.e., Communism) or freedom with property rights (i.e., Capitalism).  I'll take Capitalism every time.

Of course, those on the Left will argue that it is "unfair" that those with so much will be able to run roughshod over those with so little but they are mistaken in their critique.  For those with so much always run roughshod over those with so little whether under Communism or Capitalism.  The difference is that if you can acquire wealth under capitalism, the capitalists will freely respect and uphold your right to do with your property as you wish.  However, no one will respect your rights under communism -- you must uphold them by force.

Why the Chances for a Double Dip Recession Are Close to 100%

The global supply chain is broken and the falacy of "just-in-time" inventory control has revealed itself.  Welcome to the Recession of 2011.  Historians will date the cause of this to the earthquake and tsunami in Japan a couple of weeks ago but it will be dated by the economists as starting in the April-June quarter of 2011.

When one piece of a global supply chain goes down, it takes down the rest of the chain and it is all because of a really stupid idea called "just-in-time" inventory, a concept trumpeted by neoclassical economists as being the ultimate in allocative efficiency but which should cause them to go back and reevaluate their theories in light of this calamity.

The problem is that neoclassical economics has no proper conception of time.  Oh, for certain, there is a conception of time but it is a logical time that concerns itself with sequencing rather than the temporal distance between sequences.  It is one that allows for the "short-run" and the "long-run" and which treats technology as a non-stochastic process that marches on from one "period" to the next without defining how long a period actually is.

It is a theory that explains how competitive industries (perfectly or otherwise) operate and how monopolies operate but cannot explain how competitive industries turn into monopolies or vice versa.

Yet the world is wrought with stochastic processes, such as the earthquake in Japan and those stochastic processes end up wrecking havoc with the models.  After all, whenever you introduce a random shock into a model, it is important to determine how long that shock will last, the 'persistence' of it, if you will.

The problem is that since random shocks are just that - random - companies that use economic theory to help decide on how to maximize profit tend to ignore them.  Yet the random shock may reverb for a longer period of time with some decisions than with others.  This earthquake is just one such example.

By attempting to excise all "inefficiency" from the system, we create inefficiency.  Engineers fundamentally understand that, as do systems designers.  Neoclassical economists often do not.  Redundancy in engineering is not inefficient; it is a mechanism to reduce overall failure.  Tolerance is not efficient; it is a mechanism to ensure reliability.  Yet the global supply chain exhibits neither of these two important characteristics and it is especially problematic when we are dealing with high-value parts that take a long time to fabricate (in some cases, months--and even a brief interruption in power can send you back to step 1).

The irony is that many of the actual plants where these parts are made have redundancy and tolerance build in to them -- it is the global supply chain itself that lacks these characteristics.  That is because the plants were build by engineers, while the global supply chain was created by neoclassical economists.

When we ignore redundancy and tolerance, we end up maximizing returns in the short-period, but end up sacrificing the long-run.  Of course, as Keynes said, in the long-run, we are all dead.  However, I would add that we all live in the long-run, not the short-run and that should be the lesson that the great Japan earthquake and tsunami of 2011 teaches us.

Unfortunately, what it will take for us to learn is another recession and that is exactly what will happen.  This will be the first "made in Japan" global recession for two critical reasons.

First, all because that country is the hub of activity for the world's high-tech needs and because everything is high-tech these days.  Automobiles will be the first to drop in terms of their productive capacity but the ramifications will be felt in other industries as well: computers, video game consoles, televisions, kitchen appliances--if it has a Japanese part in it, it is affected.

Second, and perhaps more importantly for the US, Japan's need for funds to rebuild will cause pressure on US interest rates as Japanese savers stop investing in our bonds and start repatriating funds home.  It will also cause a large exodus by insurance companies from various investments as they must liquidate positions to pay claims.  To the extent that these investments are in US treasuries, it will also cause a rise in US interest rates.

Third, although US construction companies are salivating at the prospect of rebuiling, much of the expenditure will be in Japan and, to the extent that they must delay or scrap building projects in the United States, this activity will lower construction spending in this country.

We have met the enemy -- and it is us.  Just as I urged back in 1995 when the Great Hanshin earthquake hit Kobe and first exposed cracks in the global supply chain, I am going to urge this again: we must build in redundancy and tolerance into our supply chains before it is too late.

The Miracle of Compounding Interest (and Economic Growth)

Mitch McConnell tried to put $1 trillion into perspective when he told a crowd that if you spent $1 million a day every day starting on the day that Jesus was born, you would not reach $1 trillion. That seems like a lot, doesn't it? However, if you invested just $1 on the day that Jesus was born and received only 1.4% per year (less than what I earn on my certificate of deposit even in these low-inflation/low-interest times), you would reach, are you ready for this? $1.368 trillion. 

That is the miracle of compounding interest. However, reduce the interest rate by only 0.4% down to a mere 1% per year and your total take would drop to -- are you ready for this? $485 million. Still not a bad take but notice that a difference of only 0.4% compounded over 2,010 years and you end up more than an order of magnitude away.

This insight has important implications for economic growth. Notice that if we increase our growth rate by a mere 0.4% (or reduce it by the same), over two millenium we reach of level that is over 2800 TIMES greater. To put that in perspective, it is the difference between someone making $84.6 million a year and someone making $30,000. Since no economic system, even capitalism, has such large disparaties in wealth for more than a few outliers in society, any economic system that can increase economic growth by even an infintessimal amount is automatically superior to all others regardless of the wealth disparaties within it.

Yet, the only way to do this is to protect and extend private property rights.  Why would I produce if I did not gain (most of) the fruits of my labors?  Everyone understands this and yet too many are tempted by the evils of those who would take these rights away.  Communism seems easy: from each according to their ability, to each according to their need.  But it fails in practice.  It really becomes: from each according to their ability to do as little as possible, to each according to their ability to convince the powers that be that they have "need".

I teach at a university. If I graded by the Communist mantra, everyone would automatically pass even if they did not deserve to do so.  Each would work to their ability without being motivated by grades.  How realistic is that?

No, people act not out of kindness but out of regard to their own self-interest -- and we have a better society because of it.  From Adam Smith: "It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."

And that, boys and girls, is why even small inefficiencies must be excised from our economy and why proposals for abolishing private property, such as those made by Communists, are nothing more than the purest form of evil.

Is Being a Libertarian and Working for the Government Hypocritical?

Hypocrisy is the act of saying one thing while doing the opposite. So, is being a libertarian at a public university hypocritical? The answer is no. Just because one does not believe that government should be involved in some activity does not mean that working for the government is hypocritical. It would be hypocritical if a libertarian urged others not to work for the government and then did but the mere act of being employed by the government is not a hypocritical act for the following reasons:

(1) Everyone is working for the government. You read that right. Everyone works for the government. We all are required to follow government mandates and pay taxes, so while some people are more directly working for the government, everyone works for the government in some fashion.

(2) Corporations are (almost as) every bit as much creatures of the state as are government agencies. After all, they get their charters from the government. The only difference is that they are not completely controlled in their actions by politicians: instead, private companies have limited flexibility to craft independent policies.

(3) There is a difference between advocating for a change in a rule and advocating actual breaking of a rule. I believe that we should eliminate the state income tax (income taxation is notoriously volatile so I want it eliminated on both efficiency and volitility grounds) but I still pay my state income taxes and urge all of my fellow state residents to do the same. This is not hypocritical because I do not believe that we should ever break the rules of a legitimiately formed government, even if I do not agree with the rules in the first place.

(4) I work for a state university but although I might prefer the university were privatized, I am not adverse to the state running a public university system because I do believe that there are significant positive externalities and that it is important to provide opportunities for all concerned. However, even if I worked at a private university, that university would be receiving a cash infusion from the state government. I oppose vehemently the Legislative Tuition Grant to private universities. After all, this only serves as a subsidy for private enterprise, which distorts the pricing mechanism that (still) exists in this country.

The Four Fundamental Errors of People Who Advocate for Steady-State Economics and the One Fundamental Error of Economists

Neo-Malthusians/Steady Staters are forever attacking economists for absolutely no good reason, mostly because they misunderstand the terms that are used in economics. I tried to educate several of them recently and was met with attack after attack simply because they are so ill-informed about our profession.

FUNDAMENTAL ERROR #1: MISUNDERSTANDING ECONOMIC GROWTH

Let us begin with a very simple definition, that of economic growth. Well, economic growth is simply an increase over time in Gross Domestic Product. Gross Domestic Product is a constant-dollar measurement of the monetary value of all final goods and services produced within the borders of a country. But what does that mean?

Well, final goods and services are goods and services that are sold to firms, consumers, or the government for any reason other than as a part of another good or service. Thus, goods and services that you and I consume or that companies use to produce goods and services are final goods but goods or services that are part of another good or service are not. Thus, my book, Modern State Intervention in the Era of Globalization, is a final good but the paper that makes up the book is not. This distinction is necessary to avoid double counting.

So far, so good. But doesn't that mean that the total amount of stuff has to increase for us to have economic growth? Not at all. This is why ecologists are simply wrong about economists and wrong to argue against economic growth.

What is necessary is that the value of goods and services increases, not necessarily the quantity. Higher quality goods are an example of an increase in the value of goods and services without increasing the quantity.

So long as we can figure out a better way of doing things, we can do this forever, even with the same amount of inputs and this is even part of their own admission! From the website of the Center for the Advancement of the Steady State Economy (CASSE):

"Myth

Technology and progress will grind to a halt in a steady state economy.

Reality

A strong incentive for technological progress exists in a steady state economy because of the drive for better goods and services. With stabilized material and energy inputs (as would occur in a steady state economy), technological progress becomes the main source of higher quality outputs."

Okay, wait a minute. Read the definition of economic growth as given by economists. "Higher quality output" with the same amount of output is economic growth because it represents higher valued output. Remember, you get economic growth either by growing the amount of "stuff" or the quality of "stuff" or both. If their argument is simply that there is a limit on the physical amount of "stuff" that we have, they will have absolutely no argument from anyone in the economics profession because economic growth is not about the sum total of physical goods, it is about the value of those goods (and also our services, which the steady-staters tend to ignore).

Yet, we can also theoretically grow the amount of "stuff" too, which brings me to their next error:

FUNDAMENTAL ERROR #2: NOT UNDERSTANDING INFINITE GROWTH DOES NOT NEGATE A CEILING ON GROWTH

Zeno's paradox of motion states that we cannot move because to move from location A to location B would require us to pass through the midpoint (C) but to pass through the midpoint would require us to pass through the midpoint between A and C (which will we call D) and to pass through that midpoint would require us to pass through the midpoint between A and D, etc. ad infinitum. Since we would be crossing an infinite number of midpoints, we cannot move. But, we can. Thus, the paradox.

This is similar to what steady-staters argue. They cannot understand that infinite growth can have a finite sum. I will state that again: infinite growth can have a finite sum.

Let us illustate how this works: What is the sum of 1 + 1/2 + 1/4 + 1/8 + 1/16 + 1/32 + 1/64 + . . .?

The answer is 2.

Each time, we grow the sum closer and closer to the final point. Now if steady-staters want to argue that there is a theoretical limit, I have no issue with them. However, they are arguing for a practical limit to growth and that is just plain wrong.

Why they are wrong is instructive.

From the website of the Center for the Advancement of the Steady State Economy: "Some economists think that, because a particular production process can become more efficient (more output per unit of natural capital), there is no limit to economic growth."

No, we don't think that. We know that. However, bear with me for a second and we will see the steady-state error.

Let's continue with their argument: "These economists and 'technology optimists' are disregarding the second law of thermodynamics, the entropy law, which tells us that we cannot achieve 100% efficiency in the economic production process."

Can't any of these steady-staters see the inherent contradiction in their position? Economists are not disregarding the second law of thermodynamics -- steady-staters are! Of course, we cannot achieve 100% efficiency in the economic production process. We can only get closer and closer to it. The irony is that we are dealing with the infinite sum problem. We approach the limit of growth but we do not reach it. Thus, by definition, we are still growing, even though they think we are in a steady state.

Yet, steady-staters persist in not understanding this basic concept. Here is their error in focus (from the CASSE website): "Thermodynamic laws also tell us that we cannot reach 100% efficiency. When the limits to efficiency have been reached, the only remaining way to grow the economy is by using more natural capital (including energy), which is limited in quantity." How exactly will we reach "the limits to efficiency"? I maintain that we cannot because efficiency will naturally not be reached due to human imperfection. Instead, what we can do is systematically keep reducing the waste that is due to human imperfection but we can only approach the limit, never actually reach it. There is always some more efficient way of doing everything. Indeed, not a single day goes by that I have not been able to find ways to reduce the amount of time that it takes for me to do various tasks. This increase in efficiency is a technical sort of efficient that can continue forever simply because there is no way for me to eliminate my imperfections. The problem that steady staters do not understand is that these imperfections are what is standing in the way of their nirvana of a limit to efficiency.

The error is that we economists are like Zeno in that we are talking about the movement from location to another, while the steady staters are arguing that we have already arrived. While that works fine with the motion paradox, it doesn't work with infinite sums. You see, the dirty little secret is that you do not reach the infinite sum until . . . infinity. You approach the limit but never reach it and, therefore, you can always have growth.

This brings us to the third error of the Steady-Staters:

FUNDAMENTAL ERROR #3: THE PROBLEM OF SERVICES

Goods, obviously, have physical limits. There is a physical limit that is countable on the number of iPads. However, services cannot be counted in that manner. Of course, one could use "man-hours" (or the more politically correct "person-hours") but that doesn't really get at what services are. Economic growth is mostly found in the service sector, which does not have resource issues that steady-staters rail against.

Total energy use in 2009, according to Lawrence Livermore Laboratories was lower than it was in 1997, yet economic activity was 30% greater. What is the cause? The answer is, of course, better energy usage but also a shift to services. More than 60% of GDP is simply services. What are services? Well, my teaching is a service. My fitness coach provides a service. My doctor when he sees me provides a service. If my doctor improves the speed at which he makes a diagnosis (and assuming that his quality of diagnosis does not go down), he gets paid the same amount but his hourly compensation increases since he is seeing more patients (if the quality of diagnosis declines, however, he might make less because fewer patients will want him for a doctor). If my fitness coach can get me to my wait loss goal quicker, I am willing to pay more per hour for that service. These are increases in the value of the service and thus represent real economic growth and yet they have absolutely nothing to do with energy consumption or other resource factors. Simply figuring out how to do things better generates economic growth. Indeed, if my doctor can see twice as many patients and cuts back his hours by 25%, the "physical input" (man-hours) actually declines while growth occurs. This type of economic growth can be sustained ad infinitum by the mere fact that we will never reach 100% efficiency but can only approach it (and we will always continue to approach it because we are constantly improving our techniques).

Finally, we have their fourth error, which serves as a misapplication of economic theory:

FUNDAMENTAL ERROR #4: MISUSE OF JEVONS' PARADOX

Jevons' paradox is used by steady-staters as an argument for why economic growth is unsustainable. It is a fundamental misuse of the paradox. The paradox states that technological improvements in efficiency tend to increase consumption by more than the technological improvement in efficiency. This is completely true for all normal goods and it really isn't a paradox. Instead, it is simple application of price theory. As price drops, revenue increases for all normal goods (those with a price elasticity greater than 1). From economic theory, we know that cutting the price in half will more than double consumption (thus insuring that revenue increases) for all normal goods and a technical improvement in efficiency is equivalent to a price cut because it represents a reduction in the overall input cost. That increase in consumption means that we will have greater demand for the input than we had before. So increasing energy efficiency fuels increased demand which can overrides the efficiency. I say can override because the increase in demand for fuel depends crucially on the percentage of the overall input cost that is represented by energy. Thus, if energy is 5% of the overall cost and energy consumption is cut by 50%, this represents only a 2.5% reduction in costs and it is unlikely to spur increases in consumption that would ultimately increase energy usage.

On the other hand, if energy is 50% of the overall cost and energy consumption is cut by 50%, that represents a 25% reduction in costs and that very well might cause increases in energy usage that exceed the original levels.

It should also be noted that Jevons Paradox may appear to be present when it is not. After all, suppose that we did not conserve energy at all but we still had an increase in demand for energy because of a growing population. That would be an increase in usage that had nothing to do with the Paradox. Now combine the two and you will see that we might get an increase in demand for energy due to a growing population rather than because of price reductions triggered by technical efficiency improvements.

But what happens when we limit the input absolutely? The answer is that you cannot surpass the limit! For example, suppose that I am making widgets and that each widget requires 1 gallon of fuel. I figure out a way to cut my fuel use in half and thus drive down the cost of producing widgets but suppose that I face an absolute limit on the amount of fuel that I can acquire. At that point, technical barriers limit growth and there is nothing I can do about it. Thus, if there is only 100 gallons of fuel in the market, I can never exceed the 100 gallons of fuel no matter how efficient I become in terms of reducing its use in my widgets. Indeed, at that point, Jevons Paradox cannot apply and increases in technical efficiency automatically translate into increases in output with no increases in inputs. Voila! The steady-state economy produces economic growth!

Now that I have conclusively demonstrated the errors of steady-staters, I now turn to the big error of the economics profession:

FUNDAMENTAL ERROR #5: ECONOMISTS ARE SLOPPY

Instead of listening to our definitions and attempting to take us on in our world, steady-staters want to have their own world with their own definitions. That is fine but they cannot have it both ways. They cannot argue that we are wrong in our analysis but then use their definitions for their debating points. According to the Center for the Study of the Steady State Economy, economic growth is: "an increase in the production and consumption of goods and services." That simply is an incorrect definition. Economic growth is the increase in GDP and, as we have seen already, GDP is the constant-dollar monetary value of goods and services, which could imply simply that goods and services are increasing in quality or that we are approach the limit, the two cases that I have already shown are consistent with steady-state economics and which are also completely consistent with neoclassical growth theory.

The problem is that too often economists use the term "an increase in the production and consumption of goods and services" as well. The sloppiness is that economists are not necessarily referring to the physical amount of goods and services when they state this. Indeed, they really mean the value of goods and services but simply omit those terms.

There is an additional issue in that economists oftentimes refer to economic growth as being "per capita economic growth" and, of course, with a rising population, that does mean more "stuff" in most cases. Yet, we have reached the demographic transition in many countries and population is actually falling in some. As population falls, we can have increases in per capita economic growth while maintaining the same overall amount of goods and services or even cutting those goods and services.

It is important to have these discussion and for both economists and steady-staters to be open-minded in their approaches. We can reach out across the aisle if steady-staters give up their inaccurate portrayals of economics and actually listen to us instead of merely trying to score debating points through straw-man arguments. Unless they understand economics, they should stop with their silly attacks and come to understand why economic growth can occur even in their steady states.

Indeed, if they would focus on exclusively limiting inputs instead of attempting to limit outputs, steady-staters would find that economists have no quarrels with them. It is their focus on output rather than input that has earned them the universal scorn and disdain of the economics profession and for good reason. Their preoccupation with the output belies their political and economic liberal orientation and their disdain for capitalism.

Zagros Madjd-Sadjadi, Ph.D.
Associate Professor of Economics &
Chair, Department of Economics and Finance
Winston-Salem State University

Why Allen Hunt Is WRONG About Islamic Immigration to the United States

Allen Hunt, a radio talk show host who claims to have the only radio program in America that deals with right versus wrong rather than right versus left is simply factually wrong on the notion that Islamic immigration to the United States is a problem that can be ended legislatively, either practically or legally. Moreover, he is morally wrong on the notion that Islamic immigration to the United States should be ended legislatively.

Mr. Hunt believes that any Muslim who is not a US citizen should be removed from this country (at least he understands that one cannot remove US citizens who are Muslim but that is of little comfort to those here who are Muslim but who are not citizens). His position with regard to those currently in the United States is, by itself, unconstitutional. Even during the period of the odious Chinese Exclusionary Act, those Chinese currently in the United States could not be removed simply on the basis of being Chinese.

There are two sections of the United States Constitution that, when operating together, prohibit Allen Hunt's desired result of kicking non-citizen Muslims out. The Equal Protection Clause of the US Constitution prohibits states (and, according to more recent Supreme Court rulings, the federal government as well) from "denying to any person within its jurisdiction the equal protection of its laws." The problem for the Allen Hunts of this world is that such a policy would run afoul of the notion that "Congress shall make no law . . . prohibiting the free exercise thereof" of a religion. Obviously, any law that targets non-citizen Muslims who are currently present in the United States is a law that prohibits the free exercise thereof of Islam (since such free exercise would subject them to deportation). This is clearly unconstitutional.

But what about those who wish to immigrate? Can they not be prohibited if they are Muslim? Such a policy would be completely unwise from the standpoint of strengthening the economy even if it might pass constitutional muster. After all, the first reaction from Muslim oil states would be to stop selling the US oil and our economy would crash and burn as a result. Furthermore, what would prevent terrorist Muslims from simply lying about their religion? Once the US makes it clear that it is waging war against Muslims as opposed to radical Muslims, it will simply drive Muslims underground. Besides, the last time a government waged a war against a religion it didn't turn out well for anyone concerned (World War II -- Hitler v. the Jews). In addition, there is that pesky religion clause in the US Constitution again, which probably would prohibit the type of immigration law that Mr. Hunt advocates.

Instead, a return to the national origins system would be more likely to pass muster constitutionally, but that too carries with it serious problems: it is likely that Muslim nations would react in a hostile manner to such an implementation and we would see a repeat of the oil crisis of the 1970s. Hardly a plan that helps our economy. Your policy is one of knee jerk reaction and is poorly thought out, Mr. Hunt.

So why does Mr. Hunt persist in his quixotic quest to quash Islam in America?

It is for the same reason that people like Robert Spencer do: he is an unrepentant bigot and needs to be called out on it.

Such individuals love to question why American Muslims don't take forceful steps to condemn terrorism. But we do! However, individuals such as Robert Spencer want their cake and eat it to (and I presume, though I am unaware if it is in fact the case, that Mr. Hunt is similar) in that when American Muslims condemn terrorism, we are then accused of Al-Taqiyya, which means that we are permitted to do the impermissible under certain circumstances. Mr. Spencer has characterized this is allowing (or even requiring) Muslims to lie about Islam and conceal their status as Muslims. He further states that Islam if fundamentally in disharmony with other religions and requires Muslims to make war (Jihad) against those of other faiths. Indeed, according to Mr. Spencer, Muslims who reject the principles of dhimmitude and holy war are not good Muslims.

This is a deliberate misinterpretation of Islam. It is not up to Mr. Spencer to judge whether I am a good Muslim based on their flawed understanding of my religion. It is up to me to judge it for myself truth or errancy under Islamic jurisprudence and for Allah to determine if my judgment is sound and in accordance with the faith.

Instead, what is the solution is what Daniel Pipes refers to as moderate Islam, which rejects the radical Islamic jihadist agenda. Yet banning Muslims from the United States would only strengthen radicalism by making it appear as though the US in uninterested in engaging and promoting moderate elements. Is it any wonder that Muslims choose not to speak up when they find themselves being lambasted by both radical Muslims and critics such as Mr. Spencer as being un-Islamic? Furthermore, if we are going to be accused of being deceitful when we denounce terrorism, why should we bother to denounce it at all even when we do not agree with it? It does us no good and could attract unwanted attention from the radical elements within our own religion.

Indeed, moderate Muslims have much to hate and fear about individuals such as bin Ladin. The number of Muslims killed by radical Muslim insurgents is far greater than the number of Christians killed by these individuals. When Christians ask "why don't Muslims condemn terrorism against Christians by radical Muslims?", moderate Muslims may just as well argue "why don't Christians condemn terrorism against moderate Muslims by radical Muslims?"

Yet, by denying moderate Muslims safe haven in places such as the United States, they force moderate Muslims into closer quarters with their radical brethren and thus place moderate Muslims in an untenable situation: radicalize or die. Now how can that be the right position, Mr. Hunt?

No, the solution is not unilateral and total bans on Islamic immigration. It is not to argue that all terrorists are Muslims so we need to screen out all Muslims (a blatant lie--according to the most recent National Counterterrorism Center Terrorism report [covering all of 2009] found at of the 14,971 deaths due to terrorism worldwide in that year, approximately 62% of all such deaths were caused by Islamic Extremist terrorists (those who use Islam as a cover for their terrorist actions) but 7% of all such deaths were caused by Christian Extremist terrorists (those who use Christianity as a cover for their terrorist actions). Another 14% were due to secular/political/anarchist terrorists. At the same time, however, if we were to examine those killed by such terrorists, the disparity between Muslims victims and Christian victims would be far greater. Ironically, a Christian American in the United States is probably more likely to be the victim of a terrorist who happens to be Christian than a Muslim terrorist (provided we take out the obvious exception of 9/11), whereas a Muslim in a Muslim-dominated country is far more likely to be the victim of a Muslim extremist terrorist.

Furthermore, given that the total number of Muslims in the world exceeds 1 billion and that those within the United States is around 5 million, it is clear that there is no reason to fear that Islam itself is a threat to our way of life. By encouraging secular and moderate Muslims and rewarding behavior that is characteristic of the same, we promote this element within Islamic society.

A Pox On ALL Thy Houses

I am an agnostic theist. There, I said it. I am agnostic, as any well reasoned individual must be because I truly do not know if there is a God or not. I certainly hope that there is and believe that there is and that is why I am also a theist, which means that I believe that there exists at least one god (or, if you really want to pin me down, I am a believer in one God but I will not go any further in this article as to my actual religious affiliation since it is not germane to this argument).

Recently, militant atheists have attempted to disprove God (Dawkins, Smith, Hitchens, Harris, Dennett, etc.) and condemn religion. These attempts are doomed to failure for the same reasons that the various proofs of God are doomed to failure. God exists outside the system and thus cannot be proven from within it. While it may be possible to disprove a God that intercedes in the physical world at least in the here and now or who has left evidence of such tampering in the past (in the sense that He violates the laws of nature to cause action), it is logically impossible to disprove a God that does not.

Similarly, while it is possible to prove a God that intercedes in the physical world, no such proof has thus far been offered and, if it were offered and accepted, the very act of doing so would destroy faith. Since faith is necessary for the existence of religion, such an action would destroy religion as well.

More to the point, if there is a God (and if He has the attributes that we ascribe to Him), it is highly arrogant of us mere mortals to think that we will ever be able to find such proof at least in the sense that there is no other possible interpretation. Continuing with the assumption that God does exist, God may make Himself known but He has not done so in such a manner as to completely obviate all other possible conclusions. The skeptics will remains regardless of how many times and ways that we ascribe that we have found irrefutable proof.

Irrefutability, it seems, is in the eye of the beholder. Yet perhaps this too is all in God's plan (if God exists). The arrogance of man is to believe that God will show himself in such a manner. Yet while individual humans lack perfection and thus will eventually reveal their faults, if God is God as we have come to portray Him, then He has no such faults. As such, he can certainly cover any tracks that might be left to us. Since He is all-knowing and all-powerful, then He knows how to ensure that the Richard Dawkinses of the world will never find the "proof" that they seek.

So why would He do that? Why would He deny to the Richard Dawkinses of the world such a revelation. The answer lies in free will.

If God were to reveal Himself, there would be not only no faith but no free will either. Although free will is, to some extent, an illusion, it is a useful illusion only when there are those who do not believe. Since God knows what has happened and what will happen and since He is not bound by time, He knows what we will do in the future but since we are bound by time and do not know what will happen (or even completely what has happened), we make decisions using our free will that leads to our predestination.

Let me say that again: we make decisions using our free will that leads to our predestination.

We often think that these two concepts are polar opposites when, in fact, they are the logical outcome of all that exists. Our decision-making process is always and absolutely to do that which brings us what we believe at the time to be the course of actions that we most prefer to take. No one (except for those who like to be miserable) wakes up in the morning saying, "Gee, I want to mess up my life and make myself miserable. What can I do to mess up my life and make myself miserable?" Of course, in the case of those who like being miserable, well, since they like it, then they too make decisions that they most prefer to take!

Does this mean that we act always in ways that are in our best interests or that will lead to the conclusions that we desire? Of course not. People engage in all sorts of highly destructive behavior. Yet they engage in this behavior because they are trying to reach a result that they believe they will prefer (at the time of making the decision) over all other possible results that can foresee with other possible actions. Now that result might be very short-term (as in the person who wants to experience the "thrill" of a near-death action that could very possibly end their life) but it is still something that they prefer. Even the person who kills himself or herself has revealed a preference for death over the alternative.

By revealing Himself as God, God would take away this fiction. We would no longer be "free" to engage in our behavior because we would know that our lives are not our own. We would no longer have free will because we would be led in the course of our existence to a foregone conclusion. Thus, God requires faith, not because God needs it but because faith is fundamental to our ability to practice free will.