Eating the Seed Corn

Readers of my book reviews may recall my unflattering reference to the Letters page of the New York Times (see JournalisticFraud) , a page that is almost uniformly dull, populated mostly by the grievances of earnest and sanctimonious ‘progressives’. What appears to unite such correspondents is a plea that more money should be spent on their favorite campaigns, a desire that is accompanied by a distaste for the capitalist free-market system from which source such revenue must ultimately derive.

A recent letter caught my eye for its earnest outrageousness. It should be viewable at, but, since the Times has recently made its site fee-based, and the letter may not be available to readers of this article, I reproduce the letter in question here:

To the Editor:

Our taxes represent that portion of our wealth that our elected government has decided to spend on its programs. The problem is that our taxes are, in fact, not extracted from our wealth; rather, they are taken almost entirely from our income.

Bill Gates is not extremely wealthy because he has a very high income; he is wealthy because he owns assets of a wealth-creating company, and that stock wealth is not taxed until he sells it.

We have been able to pay for our government’s expenses in the past because our national wealth has grown fast enough to raise our incomes enough to pay the rising costs. In the long run, incomes can never rise enough to provide the wealth that we will need for taxes, even if we tax high incomes at a very high rate.

The only fair way to tax is to tax net wealth, with no deductions, and no corporate taxes.                                                                                 Charles Freifeld
AlphaMetrics Capital Management
Brookline, Mass., April 18, 2011

Now, it probably doesn’t take a professional economist to conclude that such a recipe would be disastrous for the US economy. (On the other hand, it might appear that only a professional economist would express such an opinion.) I believe that the expression ‘eating the seed corn’ might have been invented precisely with the intent of warning people off from such behavior. Mr Freifeld’s belief appears to be the recognizable progressive one that the country ‘needs’ a certain amount of money for its ever-growing programs, but that the wealth-producing sector of the economy is not going to be able to deliver the goods. (He doesn’t actually state the other often-articulated belief that the profits gained from commercial activity actually belong to the government, which, in its infinite goodness, it sometimes gives back to the entities that accumulated them. Nor does he seem aware of the fact – admittedly presented in a letter that the Times did also print recently – that the top 40% of all income earners paid 99.2% of all federal income taxes.) And thus, since the well has dried up, his opinion is that we must go back and tax the assets that helped create the wealth.

I believe the views of Mr Freifeld reflect two common misapprehensions. The first is classifying ‘the rich’ as one group, including those whose income is high in any given year as well as those who possess substantial wealth, often in illiquid assets. The frequent pleas to be found in the New York Timesletter pages for imposing higher taxes on ‘the rich’ fail to distinguish between such groups. The second is a lack of understanding that wealth is something that has to be created day-in, day-out, year-in, year-out. Funding government programs at any level has to come out of renewable wealth. (Admittedly, many smaller-scale taxes are based on asset values, not income, but market sensitivity, and balanced budgets, are essential in non-federal government.) What Mr Freifeld ignores, however, is the fact that, if taxes are to be levied on non-cash assets, such assets will have to be sold in order for payments to be made to the government. And if they are to be sold, there will have to be a buyer – with cash. The proliferation of such transactions will have a debilitating affect on asset values, and would steer dollars to non-wealth creating functions like government bureaucracy, healthcare subsidies, or entitlement programs instead of investing in future businesses.

One of the challenges in looking to professional economists for guidance in government policy is that they never agree. Economics is not a science: what it tries to model is too complex, and the role of human behavior can never be accounted for. But the resistance to cutting back runaway government spending, expressed by many professional economists, from Nobelist Paul Krugman in particular, draws heavily on respected figures in economic thought. The most common reference is to ‘Keynesian’ deficit spending, namely that, at a period of high unemployment, during a  recession (no matter how much in debt it is already), a government should introduce more cash into the economy to stimulate spending. I see multiple problems in this analysis. First, Maynard Keynes would have been very skeptical of such action. He himself had doubts, was not sure whether he was really a ‘Keynesian’, and was advising the UK government at a time of very different conditions. No globalized economy existed: the national economy was based largely on established (and not very entrepreneurial) manufacturers. Slight prods to demand were encouraged at a time when the national debt was a far smaller proportion of GNP than it is in the case of the USA today. ‘Quantitative easing’ attempts to lower unemployment by encouraging  consumption of primarily imported goods. Correcting back to balanced budgets as unemployment fell was the Keynesian order of the day – not adding to the massive deficits which would eventually debauch the currency (as Keynes warned).

One of Keynes’s major insights was after the Paris Peace Conference in 1919, when he wrote ‘The Economic Consequences of the Peace’, drawing attention to the fact that you can only go so far in exacting reparations (i.e. transferring wealth) from a hard-pressed population, which, if effectively bound into slavery, will simply stop creating wealth – for itself, or for anyone else. This was a lesson lost on the post-war planners, who wanted to exact heavy demands to satisfy their constituents back home. Such strategies helped to pave the path for Hitler. Stalin forgot the same lesson (not that he ever learned it, of course) when exterminating the kulaks from whom he wanted to expropriate grain. And there is an echo of the same delusion in the demands of central bankers to impose austerity on Greece, and Portugal, and Ireland, and appropriate more profit from the fruits of the labors of the populace. No matter how ‘guilty’ their own politicians or bankers were, there will come a time when those who work will say: ‘Enough!’ Why should I toil in creating wealth when so much of it has to pay off the mistakes of others?’ For all her excesses, this was essentially the same highly relevant message of Ayn Rand, as expressed vividly in her unwieldy novel ‘Atlas Shrugged’, which has energized so many libertarians and members of the Tea Party in the USA. That message is that government should never take the creativity and entrepreneurialism of the private wealth-creating sector of the country for granted, and its spending plans should be adjusted to what that sector will be able to bear, not vice versa, which is what Mr Freifeld and other ‘progressive’ spenders appear to believe.


Tony Percy,   April 30, 2011


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