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Libertarianism won't work any better than Bailoutism

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January 13, 2009 – Comments (0)

Here is my response to DaretothRedux on the Prove it blog. 

DaretothRedux,

Now, all of this sounds good in theory. The only trouble is Libertarianism will not work. Here's why.

Let's say, the Libertarians have their way, and we abolish all government interference. No taxes, no redistribution of income. There will of course still be a tax to fund the army, the police, and the court system, which even the Libertarians don't want to abolish (after all, they are Libertarians and not Anarchists). But of course it will be a much smaller tax. Consider who wins and who loses under such a system.  First, the middle class doesn't gain or lose much. What it pays in Social Security tax now, it must still set aside in one form or another. What it pays in taxes to support schools, roads, and fire departments, it will still have to pay in some other form. There may (or may not) be some efficiency gains as the Libertarians point out, but in the first crude approximation, the middle class either breaks even or gets the equivalent of a $2000 stimulus check at best. The second group is recipients of Social Security/ Medicare/ Medicaid / SSI/ Welfare/ Unemployment benefits (this also includes government clerks who are now unemployed). This group clearly loses no matter what Libertarians like to say about Voluntarism and Christian charity. Finally, you have the very rich. They clearly win. No more corporate taxes, AMTs, capital gains taxes, etc. So far so good. This may or may not be the most desirable social outcome (that depends on your tastes, I guess), but in pure economic terms, we have just achieved a different distribution of purchasing power. If we could now apply your "broken glass" reasoning, it would be all good and well. However, this is precisely where you have a problem. Because ...

Here comes the rub. 

--- 

The Warren Buffett types don't spend their money at all. They can't go shopping with all that extra windfall, because they already have all material objects they ever wanted. Once their ambitions as consumers have been satisfied, all they now want is simply more money. So the only way they can contribute to the economy is not as consumers, but as investors. So in order for the "broken glass" theory to work, all the money that is now spent by the government for social programs will have to be invested, and not just invested but invested in a meaningful way that translates into new jobs (if Buffett purchases, say, a chunk of BRK-A from Munger and then Munger buys it back from Buffett, both deals will count as "investments" but will not really  change anything for anyone except Mr. Buffett and Mr. Munger themselves). If the very rich fail to invest all their tax gain, you can't offset the loss of purchasing power in the lower stratum, and you have a depression. And now, here comes the question. Where will you find ADDITIONAL profitable investments to the tune of 1.5-2 trillion dollars a year when the already existing supermarkets are shutting down for lack of customers, when rental rates are collapsing because former Section 8 tenants are now sleeping under bridges, and when wages are going to collapse next as former government clerks look for any job and can't find any? Before you answer my question, consider that we already have several trillion dollars parked into Treasuries for lack of better use and even Buffett's BRK-A is still sitting on its cash hoard, for all his optimism about the economy. Consider the absurdity of the situation: we are in a recession becuase the rich ALREADY can't find any reasonable way to invest the trillions that they have, and the Libertarians tell us how we're going to thrive if only we could reduce social programs to free up more money for investment. What we'll have is just another Africa where a dozen oligarchs get all the country's resources, they just deposit the money in a Swiss bank becuase they find no reason to put it to work at home when the locals can't buy anything anyway. 

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