The Archdruid Report - Archive

Longtime readers of this blog may not be surprised to find that, after three posts explaining in detail why significant reforms are impossible in the current American political system, I propose to spend several more posts talking about significant reforms that might be part of a functional response to the crisis of our time. I freely grant that there’s irony involved, but proposing useful changes that won’t be enacted right away is by no means as pointless as it may seem in an age of just-in-time ordering and instant gratification.

It’s a safe bet that if something can’t last, it won’t, and the political situation in the United States today may just turn into a poster child for that old but by no means outworn maxim. Most of the world’s nations have replaced one political system with another at least once in the course of the last century; the process can certainly be traumatic, and it doesn’t always solve the problems that forced the change in the first place, but it isn’t the end of the world. Whatever crises drive the existing order into its final implosion, and whatever national traumas supervene until some degree of stability returns, there will be a place for new policies when the future government of the United States, or the regional governments that succeed it, get to work picking up the pieces. Nor, of course, is this blog only read by Americans; and for all I know, some of the ideas I plan on discussing here might strike a responsive chord elsewhere.

One word of caution, though: readers expecting me to offer them a ticket to Utopia are going to be disappointed. There’s a common notion that everything that’s wrong in the world is the fault of the institutions or personalities officially in charge, and can be fixed by replacing them with some other set of institutions or personalities. That notion has been tested more thoroughly by history than any other hypothesis I can think of in the social sciences, and it’s failed abjectly every time. Maybe we should finally get around to admitting that people will not behave like angels no matter how (or whether) they are governed, or who (if anyone) does the governing; and, in the process, admit that human beings are incurably human – that is, capable of the full spectrum of good and evil all by themselves – rather than moral puppets who can be expected to dance on command to the tune of a good or evil system.

It’s easy to come up with a perfect system of human society, so long as it doesn’t have to work in the real world, and it’s very easy to compare a perfect system on paper to the failings of a system in the real world, to the latter’s detriment. Nearly always, though, what John Kenneth Galbraith said about innovation in finance is just as true of innovation in political and social institutions: what gets ballyhooed as new and revolutionary thinking is normally the repetition of a fairly small set of fallacies that worked very poorly the last dozen or so times they were tried, and will work just as poorly this time, too. Those systems that function at all are fairly few in number, though there are a lot of minor variations on the basic themes, and the ones we’ve got now – representative democracy in politics, a market system in economics – have certain advantages. Though the current examples are troubled, corrupt, and at very high risk of being overwhelmed by the consequences of some very bad decisions made over the last few decades, the basic systems are noticeably less dysfunctional most of the time than most of the alternatives.

Thus I’m not going to present a grandiose plan for the complete transformation of everything, of the sort that have been in vogue among social reformers for so many years. Instead, I’m going to suggest a handful of limited, tightly focused changes that I think have a real chance, if they were to be implemented, of canceling out some of the self-defeating habits of the current system and replacing them with effective incentives toward the sort of habits our society needs to establish. I could start in any number of places, but the one I’ve chosen for this week is the seemingly unpromising field of tax policy.

That’s a subject on which a great deal of nonsense abounds just now. While at the public library here in Cumberland the other day, I found a book titled The End of Prosperity. This – I was about to describe it as meretricious, but that would be unfair to honest prostitutes – this pointless waste of inoffensive trees, then, claims that if the US government raised taxes to a level that might just actually pay for the services it provides, the result would be, well, the end of prosperity. Somehow the authors managed to ignore the fact that in the 1950s, when American prosperity was by many measures at its all-time peak, people in the upper tax brackets paid well over 2/3 of their income to Uncle Sam, and that the country has by most measures become less prosperous, not more, as those tax rates have been lowered.

There’s a reason for that, and it ties back into the distinction I made in several earlier posts about the differences among the primary, secondary, and tertiary economies. The primary economy, which is nature, and the secondary economy, which is the production of goods and services by human labor, are subject to negative feedback loops that tend to hold them in balance. The tertiary economy, which is the exchange of money and other forms of abstract wealth, is subject to positive feedback loops that drive it out of balance in ways that unbalance the other two economies as well.

The core of those feedback loops is the way that accumulations of paper wealth multiply in value, and so anything that drains those accumulations and puts them in the pockets of people who spend their money on groceries, instead of more paper, tends to stabilize the economy. That’s what the high tax rates of the Fifties did, and it’s not accidental that the more drastically tax rates have been cut in the last three decades, and the more tertiary wealth has been shielded from taxes by special capital-gains tax rates and the like, the more drastically the tertiary economy has manifested its usual tendency to run to extremes and blow itself up in the process.

Still, there are arguably less scattershot ways to drain off excesses from the tertiary economy, and the tax code also meshes very poorly with the primary economy, with its emerging reality of scarce resources and overburdened natural cycles. In a world where the accelerating exploitation of natural resources and the accumulation of paper wealth are major sources of problems, while the human labor at the core of the secondary economy is the most renewable resource we’ve got, we arguably tax the wrong things.

At the risk of veering off entirely into fantasy, then, let’s imagine a new tax code that taxes the right things instead. In this imaginary code there are no sales taxes, and no taxes on income from wages, salaries, dividends, and rents – that is, no taxes on the secondary economy at all. Instead, there are two classes of taxation. The first, affecting the primary economy, is on natural goods and services; the second, affecting the tertiary economy, is on interest income, capital gains, and all other forms of money made by money.

The taxes on natural goods and services follow the same rough line of logic as property taxes do at present. The federal government, as trustee for the American people, already effectively owns all the real estate within its borders – when you buy property, what you’re buying is the right to use that property within the limits of the laws and the national interest, which is why China can’t just contract with private landowners to buy a couple of disused fishing harbors on our west coast as bases for its navy. The same principle could reasonably apply to every other resource in the country. When you pump oil from the ground, you’re depleting part of the patrimony of the American people, and you should have to pay the government for that privilege. When you dump smoke out of a tailpipe, equally, you’re using the nation’s atmosphere as the gaseous equivalent of a landfill, and once again you should have to pay to do that. Every natural resource of every kind would be subject to the same sort of tax.

Now of course this would mean that the prices of many goods and services would go up considerably. Since everyone would have the money they wouldn’t have to spend on income and sales taxes, this may be a little less of a burden; but the crucial point is that people can avoid resource taxes by their personal choices. If you buy a hybrid car, you’re going to pay a lot less in petroleum tax, and a lot less in tailpipe tax as well – though the extraction taxes for the rare earth minerals in the batteries and electronics may set you back a bit, as they should. If you don’t own a car at all, you laugh all the way to the bank. Similarly, the price of a product made from metal mined from the earth includes the extraction tax for the mining, but the price of a product made from recycled material doesn’t; thus the manufacturer has a big incentive to use the recycled material and undercut the competition.

The second set of new taxes targets a different problem, one discussed already in this post. Right now, with the tax laws we have, it’s to the economic advantage of businesses to pull their money out of producing goods and services, and put it into blowing bubbles in the tertiary economy of paper wealth. That’s why General Motors manufactured more financial paperwork than cars for quite a few years, until it got into a head-on collision with bubble economics. From a broader perspective, that’s why America produces so few goods and services nowadays, and so much in the way of essentially hallucinatory paper wealth. Taxing financial income, but not earned income, does a fair amount to reverse that equation. If putting your money into bonds or derivatives means any profit you make suffers a significant tax bite, while putting your money into producing goods and services means you pocket the profits tax free, those derivatives and bonds will look a lot less inviting.

Notice also how these two kinds of tax work together to take an even larger bite out of one of the most mistaken economic priorities of our time, the replacement of human labor by machines. In case you haven’t noticed, the US has an unemployment problem; even before the most recent bubble burst, good working class jobs were very hard to come by. There are plenty of reasons why that happened, but tax policy that makes employers pay half again or more of the cost of a worker’s wages in order to hire that worker certainly haven’t helped. Eliminate those taxes, and place taxes on energy and natural raw materials instead, and in a good many cases a worker instead of a machine becomes the most cost-effective way to do the job.

Other arrangements could easily be devised to accomplish the same ends. The point I want to make with this extended exercise in nonfinancial speculation, though, is that some of the ways Americans do business, and pay (or don’t pay) for government services, simply don’t fit the realities of an age of ecological limits. A tax code that burdens the secondary economy – which is the economy that actually produces goods and services, remember – while encouraging the wasteful plundering of nature and the bubble-blowing antics of the tertiary economy is not going to help us weather the storms of the near future. A tax code, any tax code, that does the opposite – that makes it more profitable to employ human labor to meet human needs, and less profitable to disrupt the natural cycles that undergird our survival or to feed speculative excesses that pump imbalances into an already troubled economy – could be a very helpful asset in a time of crisis, and could be put in place tolerably easily, without having to tear an entire society to pieces and rebuild it from the ground up.

Would such a new tax code solve all our problems? Of course not. To my mind, though, it’s exactly the attitude that insists that we have to find a single solution that deals with all our problems that helps put any constructive response to those problems out of reach. If we’re to face the difficult future ahead of us with any sort of grace, that worthwhile achievement is much more likely to happen as a result of the tentative, uncertain coping mechanisms sketched out in Warren Johnson’s useful little book Muddling Toward Frugality than it is to unfold from some grandiose plan to reach a perfect world in a single leap. Monkeying with the tax code so that it rewards the economic behaviors that might help us get things of value through the approaching troubles, rather than rewarding the economic behaviors that will only make things worse, is one example of this sort of muddling; others will be brought up for discussion in the weeks to come.