Peter Schiff’s role model is an incarcerated felon, his father. The crime? Tax evasion. Irwin Schiff is 84 years old, and has served nine years of a 13 year sentence. The elder Schiff played a prominent role in challenging the Constitutional support for income taxes.
Alexis de Tocqueville
The tax protest movement, as it is called, argues that income taxes (or in fact any taxes) are not supported by our country’s founding documents. The General Welfare Clause, the Tax and Spend Clause and the Origination Clause notwithstanding, tax protestors suggest such things as the filing of a tax return is a violation of the Fifth Amendment’s allowance of refusal to self-incriminate. In my view, the tax protest movement is more about how much is being levied and how it’s spent, rather than the actual fact of taxation.
Mentored by such a father, Peter went on to an illustrious career as an investor and frequent lecturer on economics. He is also an author, whose most recent book, “How Economies Grow” (Wiley & Sons, 2010) is a fascinating parable that does a wonderful job of demystifying economics through the exploration of a developing island economy where non-spoiling fish are the unit of currency.
It is easy to follow Schiff’s story, which tracks economic development from hand-to-mouth survival through the invention of tools and resultant productivity gains and then on to the more complex concepts like financing principles and how demand-supply equations create economic benefits for all participants in trade. Peter even tackles futures. But his continual message throughout is that politically-motivated governmental “intervention” in the natural flow of free markets is what creates the huge booms and busts, because a sovereign governing body is applying economic influence through the power of its ability to raise funds with taxes, print money and heavily influence interest rates for capital. This influence is amplified because the monies applied represent the current savings capacity of the taxed population as a whole. When the government votes to spend, it’s voting to spend what is in the pockets, or will be in the pockets, of its millions of citizens. As Peter says, the government has no skin in the game, nothing to lose by spending its constituents’ savings for generations to come. Schiff says the government gets elected by selling its influence on the economy to favored supporters. And he seems to cast blame on one party more than the other.
While I admire Schiff’s ability to simplify economics and get it mostly right, I was curious if there was evidence to support his assertion that Democrats caused increased deficits, reduced standard of living and bloated government. So I went to get some data.
The Creative Commons, a non-profit open forum for publishing works of educational merit has a body of research that takes a nonpartisan look at politics and economics. A study published on the Commons tracks the U.S. deficit as a percentage of GDP from 1901 to 2010. What it shows is that the ratio of deficit spending rises and falls independent of the party controlling the White House. Each administration inherits the trend that was occurring when they took office, and then affected that trend within the confines of a one or two-term Presidency. (There is some trending to indicate that Republican administrations are associated with debt increases, but I don’t think it’s a statistically valid conclusion given the sample set, and the fact that any actions by an administration take years to implement, and then years more to experience associated results, often exceeding the span of the Presidency significantly.)
However, another study using data from 1948 to 2005, also published on the Commons, shows that personal income under Democrat administrations rises higher, for all socio-economic classes, than for periods under Republican administration. The greatest differential performance by Democratic leadership occurs at the lower end of the economic scale, but even the 95th percentile earners experienced a greater increase in income than they did under Republicans.
So it’s disconcerting, when you look at the data. The party that seems to hold many of my capitalist ideals appears to be no better at deficit control than their counterparts, and performs worse on the individual metric of personal income, for everybody. If the data are indicative of what we might experience under a Republican President, then the “haves” will not have as much as they would if Obama were re-elected. The higher taxation rate on the highest income earners during Democrat leadership seems to have been accompanied by higher income for the top 5%, as compared to what Republicans were able to accomplish during their tenures. And even if Romney enacted all the free-market principles that Peter Schiff (and his Dad) espouse, it will take many years for us to work off the debt load both parties were a party to creating, from the end of the Clinton administration to today.
In his seminal book on the American experiment, Alexis de Tocqueville chronicled what he felt to be the noble experiment of Democracy, as he observed its being born. But Alexis also foresaw our fatal flaw and warned us:
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years.”
At 236 years old this last July, we are pushing our luck as a civilization, given the fulfillment of de Tocqueville’s prophesy and Schiff’s premise.