Wednesday, May 14, 2014

Taxation, GDP Potential and The Right To Produce

How do these elements "play" into one another?  Restrictions which affect supply and demand potential, can also mean restrictions in GDP potential. This is especially true when limitations on the right to produce, leave us with few means for productive interaction with others. Limitations on the right to produce, consequently mean a smaller marketplace which holds less taxation potential. While some realize additional rents (and higher taxes) from high time use valuations, the process nonetheless takes place in a limited marketplace.

Granted, not all forms of limitation negatively affect potential supply and demand, especially when economies of scale are capable of leading to substantial product formation. For a substantial part of the 20th century, much of the business/government relationship was fairly stable, in both taxation terms and GDP potential. After all, economies of scale meant a massive degree of product potential. What's more, the wealth of standard manufacturing production was easy to measure. Not only did it provide reliable returns for the producer, it also provided ample remainder for governmental redistribution.

As a result, there once existed a reasonable trade-off between taxation, and the privileges which developed between government and special interests. However, the taxation which resulted from mass production, has declined in relative terms for mature economies, This has forced them to rely more on the taxation that is a result of artificial limitations on knowledge use and the consumption potential of the consumer in terms of traditional housing. Neither of these forms of taxation are capable of sustaining complete economic formations, in a long term sense.

It's one thing to grant special privileges to resource production which otherwise might not materialize in the economy. Sometimes, doing so also allows government to assist in infrastructure which these large interests need to operate efficiently. These are the government and business relationships which make sense to people, so long as they flourish alongside populations which are also allowed to flourish.

However it's altogether a different matter, when government/business privileges exist for those who gain profits through limiting aggregate supply and demand in time use terms. Housing and building requirements lead to the same time use choice restrictions, as knowledge use restrictions. What's more, this form of asset building - which is practically forced on many with discretionary income - also serves as a primary means to pay for the same limitations in knowledge use. A caveat: while "arbitrary" restrictions in supply and demand occur for resources other than time (such as diamonds or oil), these restrictions generally mean that markets will continue to remain viable in recognizable form, into the future.

Unfortunately, a prolonged marketplace does not generally hold true for wasted knowledge, education and time use potential. Just as time use is arbitrarily restricted in the present, the implicit acknowledgement of these restrictions exists in central bank thinking. As a result, their finance centric focus scrutinizes what the consumer "can" or "can't" do - instead of seeking to monetarily represent the individual as producer of one's own destiny.

Indeed, the economic "punishment" in this regard can exist across entire generations. The recent pullback on nominal spending capacity which created the Great Recession, was exactly this. The fact that many across the political spectrum are willing to give up on GDP potential, attests to the degree that few are willing to consider production reforms. Some also question the discussion of "unmet" GDP potential. In a recent post, for instance, Arnold Kling noted that GDP potential is his "least favorite" macroeconomic statistic.

But think about it. No one can afford to forget that taxation has been the trade-off, for government to business relations which are gradually limiting knowledge use as part of the transaction. If taxation does not remain viable in full market (i.e. consumer) terms, what really exists to preserve the relationship? Or how can a special interest presume to think their right to produce might not be revoked or otherwise lost? How can they keep claiming "maker" status if no one else needs to be hired? Ah, there lies the now some readers know that I'm a "lost cause" because I would like to follow this line of reasoning to its logical conclusion. No taxation on medical devices in spite of their costs, for instance? Okay fine, let anyone make them. Anyone.

Why should it matter? Consider the vast array of medical product - from complex to vastly simple. It is the "simple" end of the product spectrum especially, where healthcare providers are held hostage to an anti-competition environment which strangely resembles their own. Probably, no one needs to give this much thought until they are trying to buy (on a disability income, say) supplies for a chronic condition which need to be purchased regularly. Some of those supplies consist of really simple inventions which are nonetheless treated as though made of gold.

Don't like taxation? Fine. I don't either. Sometimes we can do a better job of producing or procuring for one another, what taxation never even gets the chance to do. Get rid of a lot of taxation that rewards suppliers for a limited marketplace, and give people back their right to produce innovative and helpful products for one another. Often the simplest is the best, but give people a chance and they will go a long way beyond the basics. Give people a chance to return to the GDP potential and growth trajectory which was followed for well over a century. The fact that people need to be allowed to help one another directly, is something that can no longer be safely ignored.

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