Larry's Lectern by Larry Gilbert Issue #1
Larry's Lectern
by Larry Gilbert
Past Issues


One Senate faction wants to subsidize businesses. One faction wants to lower personal taxes. One faction wants to increase unemployment and welfare subsidies. So they refuse to agree. In the meantime, the country is in a worsening recession. The illustration below attempts to use basic principles to define the scope of an effective stimulus package. Write your Senator.


An investor invests $2.00 in a company hse judges to be worthy. The company buys $1.00 worth of coal and $1.00 worth of iron and makes a can opener it sells for $3.00. What has happened? The net worth of the country is increased by $1.00. This is an important lesson. If a country has no marketable product, it is destined to be poor forever. An extreme example of that principle is seen by looking at almost any non-Dutch Caribbean island. You will find extreme poverty, with no relief in sight. Even the governor's "mansion" in Bahamas is a minimal house, with iron bars on the windows. The poor are despondent, as there are no jobs and little left to steal. Similarly, almost any African nation, notably excepting Egypt and South Africa, has an annual per capita income of $500 or so. Why? They have no products to sell.

Clearly, standard of living is tied to productivity. With high productivity, workers will have more money to spend, and businesses will have more products to sell. Furthermore, an ever-increasing standard of living, as we have in the US, is the direct result of an ever-increasing per capita productivity. What are some examples of ever-increasing per capita productivity in the USA that has given us our ever-increasing standard of living?
Example 1: The most obvious is farming. In 1954, the US had 50% of its people on the farm. Those farmers were able to feed the country and have some left over for export. Today, the percentage of people on the farm in the US is 1.4%. Those few farmers feed the country and have a lot left over for export. By comparison, Switzerland still has 50% of its citizens on the farm.
Example 2: A small portion of the people who left the farm ended up in blue-collar productivity jobs. That is seen by this statistic. In 1954, 26% of the people were blue collar. Today, 26% of the people are blue collar. These workers are now so productive, due to automation, that they are able to satisfy the entire country's need for wealth creation. They serve the needs of all consumers, with an ever-increasing array of new products, at an affordable price.
Example 3: Where are all the other workers? They are in the service industry. Over 72% of our workers are in the service industry: hairdressers, cancer researchers, teachers, bureaucrats, etc. The productivity of 28% or our citizens is ample to keep this 72% in an ever-increasing purchasing power situation, and the wealth of our nation growing.

Next point. What happened to that $3.00 of income made by selling a can opener? $2.00 is used to buy the next shipment of coal and iron. $0.25 is paid in taxes. $0.55 is paid to the blue-collar workers. $0.10 pays management. $0.05 is set aside for research, product improvement, and new equipment. $0.05 is paid to the investor as a reward for his bravery and risk-taking in putting up the original $2.00 investment.

Now, what happens in a recession? Fewer people buy can openers. So the company lays off workers. Those workers have less money, so they buy fewer can openers, so more people are laid off. The company lowers the price of can openers to sell off the inventory. So there is no money for the investor. Which results in reduced investment. There is less money for R&D, so the pipeline of new products dries up, and the usual increase in standard of living is interrupted. There is less money to buy raw materials, so the providers of those raw materials also see their sales, profits, and stock value go in the tank.

How to fix a recession with a stimulus package? Well, I will get to that, but first, the Subsidy Theorem must be reviewed, as it is at the core of the solution.


This Theorem has two Principles.

Principle 1: Whatever you subsidize, you will get more of. Examples from real life:
a. If you subsidize milk production, you get more milk production.
b. If you subsidize people on welfare, you get more people on welfare.
c. If you subsidize those farmers who promise not to plant crops, you get more empty fields.
d. If you subsidize illegal immigration (by not prosecuting illegal immigrants, and, in addition, providing them free education and health care), you get more illegal immigration.

Clearly, you must be careful what you subsidize, as you may cause a severe dislocation in the economy.

Principle 2: Whatever you tax, you will get less of. Examples from real life:
a. If you tax the sale of luxury yachts, you get fewer sales of luxury yachts. Yacht builders lose their jobs.
b. If you tax business investments, you get fewer business investments. (Capital Gains Tax)
c. If you tax people on welfare, you get fewer people on welfare. This may need some explanation. Remember that time is money. When, several years ago, Oregon passed a law that any able-bodied person on welfare must earn the welfare check by picking up trash on the highway, the number of able-bodied people on welfare plunged.

Clearly, you also must be careful what you tax, as you may cause a severe dislocation in the economy.


What do you want to accomplish with the subsidy called a stimulus package. (Other than get votes!) You want companies to make more can openers. You want people to buy more can openers. You want companies to invest in R&D to improve the standard of living with new and better products. You want investors to open their wallets again.

If you subsidize workers, without subsidizing companies, the workers will want to buy can openers, and there will not be enough can openers available. Supply and demand pressures will raise the price of can openers to suck up all the extra money. We will have inflation.

If you subsidize companies to build more can openers, and the workers don't have money to buy them, you have wasted resources, and will deepen the recession as the excess inventory must be worked through. (Evidence Central Planning and the 5-year plans of the planned economy of the old Soviet Union.) Even more workers must be laid off. The places where that investment could have produced a positive result will languish.

Clearly a balance is needed in the stimulus package. A subsidy must be given for investors (lower capital gains tax). A subsidy must be given to companies (lower tariffs, lower B&O tax, or accelerated depreciation on investments in capital equipment). A subsidy must be given to the workers (this can take the form of negative income tax, tax credits for working families, and even across the board tax reductions.)

It is equally clear that pumping more money into medical benefits, the homeless, the cancer researchers, and anyone else not involved in creating a product, is nearly wasted money FOR THE PURPOSE OF ECONOMIC STIMULATION. (For political, emotional, or humanitarian reasons, one may want to subsidize those activities. That is fine. We must just remember the goal and expected result of each and every subsidy before it is granted. The result of such subsidies will not be economic stimulation.)

Always use the Subsidy Theorem to analyze what your elected officials are really accomplishing.


Also, note, a good stimulus package need not be temporary. You may not remember the good old days when, for decades in a row, if not a couple hundred years, annual growth in Gross Domestic Product was rarely below 5%. Now we feel good if it is above 2%. What is the difference? Taxes have jumped at all government levels. This tax burden is anti-stimulus.

Add up the total overt and hidden taxes paid to the several levels of government, from the federal, down to the local sewer district: Personal income tax, social security tax, Medicare tax, Medicaid tax, B&O tax, sales tax, property tax, school tax, fire district tax, sewer district tax. Disability tax, Special district taxes, Library tax, lodging tax, rental car tax, utility tax, capital gains tax, alternative minimum tax, state income tax. highway tax, license plates for your car, license plates for your boat, gas tax, estate tax at federal and state levels, airport tax, entertainment tax, Corporate income tax, Luxury tax, etc.

The sum of all bureaucracies is taking about 50% of the income (profit) of all citizens and corporations. Back in those days it was closer to 25%. An example: when Kennedy lowered the highest income tax bracket from 91% to 77%, the governments' tax collections went up!!! What happened? The extra money was invested and created additional wealth for the country, additional revenue streams, and additional taxes. I can personally attest to the fact that standard of living jumped enormously after KennedyâÄ™s huge tax reduction. We will likely never experience such growth again as long as we tax productivity and subsidize sloth.

Now, consider the can opener. Lets pretend that the entire array of taxes is imposed in a different and very efficient manner, as a value-added tax on the sale of the can opener. Now the price is $4.00 instead of $3.00. Would the volume of can opener sales go down? Sure. Would that put people out of work? Sure. Could that cause a recession? Sure. QED. Taxes stifle the economy. Tax breaks stimulate the economy.

In summary, the stimulus package must include lower capital gains tax for the investor, lower income tax rates for the worker, and accelerated depreciation for capital investments made by companies. In addition, investment in company research is needed to create the new products that inspire buyers and workers.

Reference: Adams, "Good and Evil. The History of Taxation on Civilization", 1996

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