How an Economy Works, Obama's New Buffet (Give Me Campaign Donations) Tax Works and Paul Volcker Calls Out Paul Krugman (Sort Of)

I couldn't help but notice this genius quote from commenter "doug" at Cafehayek the other day:

How the Economy Works:
Two parties freely enter into an agreement whereby one performs and action and the other renumerates. And they are both better off.

That is the true definition of a free market, plain and simple.  There is no worker exploration, no consumer profiteering, no Marxist chains to throw off.  Just social cooperation in the aggressive pursuit of a better standard of living.  The alphabet soup of regulatory agencies born out of Franklin D. Roosevelt’s fetish for power and control serve no real purpose but to bolster government payrolls and guarantee votes under the charade of “doing something.”  In turn, government sponsored enterprises are mere funnels of taxpayer money to mitigate private risk and preserve the cash flow of campaign contributions.  It's always inspiring to hear leftists wax on so eloquently about all the good government does when it comes to regulation yet when pressed on unintended consequences, you might as well be talking about quantum physics.

"What do you mean Fannie and Freddie sucked up the risk of subprime mortgages from the banking industry so that more money could be lent in the name of universal home ownership?  We need to house everyone, we live in a society!"  Yes yes, guns and badges in the name of universal harmony, the same tired, old argument.  Government money printing and financing never creates assets bubbles, it's those greedy capitalists trying to better their lives.

So in that spirit, we have President Obama come out today with a new proposal to screw with an already convoluted tax system:

Key features of Obama's plan:
$1.5 trillion in new revenue, which would include about $800 billion over 10 years from repealing the Bush-era tax rates for couples making more than $250,000. It also would place limits on deductions for wealthy filers and end certain corporate loopholes and subsidies for oil and gas companies.

Illustrating Obama's populist pitch on taxes, he also suggested that Congress establish a minimum tax on taxpayers making $1 million or more in income. The measure – the White House calls it the "Buffett Rule" for billionaire investor Warren Buffett – is designed to prevent millionaires from taking advantage of lower tax rates on investment earnings than what middle-income taxpayers pay on their wages.

Damn all those filthy rich earning over $250,000 a year!  How dare they try and make more money!  Obama claims this isn't class warfare and just simple math, well let's a closer look:

Adjusted Gross Income, 2009	Average Federal   Income Tax Rate (%)
$10,000 to $15,000	6.8%
$15,000 to $20,000	6.6%
$20,000 to $25,000	8.7%
$25,000 to $30,000	9.7%
$30,000 to $40,000	10.0%
$40,000 to $50,000	10.6%
$50,000 to $75,000	11.6%
$75,000 to $100,000	12.3%
$100,000 to $200,000	16.3%
$200,000 to $500,000	24.6%
$500,000 to $1,000,000	28.8%
$1,000,000 to $1,500,000	29.4%
$1,500,000 to $2,000,000	29.6%
$2,000,000 to $5,000,000	29.7%
$5,000,000 to $10,000,000	29.1%
$10,000,000 or more	26.3%
Average	17.8%

From Mark Perrry:

We now have a proposal for a tax policy - the "Buffett Rule" - based on Warren Buffett's anecdotal "evidence" of his and his employees' tax burdens.  But that "evidence" seems pretty far-fetched and not consistent with: a) average federal income tax rates available from the IRS, nor b) average tax rates for all federal taxes paid, from the CBO.  Buffett's anecdote has to be an outlier or exception, because under the current federal tax system, the average "super-rich" taxpayer pays taxes at a rate 2-3 times the average secretary.

The U.S. federal income tax system is highly progressive (as it's intended to be, and not regressive as Buffett wants us to believe from his "analysis" of his and his employees' tax rates) and higher income groups pay taxes at a higher rate on average, as a share of their taxable income, from a low of 6.8% on incomes between $10,000-$15,000 to a high of 29.7% for incomes between $2,000,000-$5,000,000. 

Here is the usually pretty good Charles Gasparino on the new tax hike scheme:

Thing is, taxing income won’t get squat from the president’s favorite limousine liberal, Warren Buffett -- the guy who supposedly inspired Obama’s plan. Buffett doesn’t collect most of his money as the normal income that the tax would hit. (His salary is just $100,000 a year.) 

OK, forget the hypocrisy that Buffett at 81 has already made his many billions so he couldn’t really care less how much he’s taxed. Forget, too, that since he makes most of his income through investments, this tax apparently won’t affect him or his Wall Street buddies much at all.

And let's not forget the most important consequence of taxing the rich.  The super rich are the ones who have enough income to put aside substantial amounts of money to be made available for capital investment and increased production.  I am not saying we should get down on our hands and knees and hail the super rich, but perhaps in the midst of a severe economic downturn we should think twice about taking more money out of the private sector and give it to the institution that brought us great successes such as Solyndra, cash for clunkers, Fannie Mae, Freddie Mac, and all those wonderful shovel ready projects that, according to Obama, weren't so "shovel ready."  You would be better off putting blue kool aid powder in a bottle of clear cleaning solution and handing it to a small child.

I hate to do this, but I gotta give praise to former Fed chairman Paul Volcker whose scathing New York Times editorial had the fantastic irony of being in the same issue as Paul Krugman's latest column.  Some excerpts:

So now we are beginning to hear murmurings about the possible invigorating effects of “just a little inflation.” Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the “animal spirits” of business, or so the argument goes.

It’s not yet a full-throated chorus. But remarkably, at least one member of the Fed’s policy making committee recently departed from the price-stability script.

The siren song is both alluring and predictable. Economic circumstances and the limitations on orthodox policies are indeed frustrating. After all, if 1 or 2 percent inflation is O.K. and has not raised inflationary expectations — as the Fed and most central banks believe — why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability.

Well, good luck.

Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970s. That’s when the word stagflation was invented to describe a truly ugly combination of rising inflation and stunted growth.

My point is not that we are on the edge today of serious inflation, which is unlikely if the Fed remains vigilant. Rather, the danger is that if, in desperation, we turn to deliberately seeking inflation to solve real problems — our economic imbalances, sluggish productivity, and excessive leverage — we would soon find that a little inflation doesn’t work. Then the instinct will be to do a little more — a seemingly temporary and “reasonable” 4 percent becomes 5, and then 6 and so on.

It's surprising that the NYT would even publish this given that the biggest cheerleader of inflation in the country writes a regular column for them.  While Volcker says we aren't on the edge of serious inflation, a 23% increase in M2 may beg to differ pretty soon.  And the latest CPI at 3.8% sure doesn't look like deflation to me.  Still, when a former Fed chairman, who has obvious experience taming inflation to begin with, comes out and issues a warning about the inflationary fetish Bernanke and Krugman have, it says something; especially with a guy this tall:

Update- Ever wonder where the term "American exceptionalism" comes from?  Here ya go:

Most politicians assume the term was coined by a Founding Father or some other traditional figure. In fact, it was coined by a communist. In 1927, a leader of the American Communist Party by the name of Jay Lovestone used the term "American exceptionalism" to describe the way in which our economic system differed from the systems in other countries.

It's comforting to see Rick Santorum citing a communist