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Fooled by randomness

by Amity Shlaes
January 5, 2009

One reason the Obama stimulus package is less bad than many feared is that it is less random than expected. There’s lots to critique in an expansion of the Earned Income Tax Credit, one of the changes the plan will spend on.  But at least that forty percent of the stimulus package that is tax cuts will be identifiable and set.  That leaves only sixty percent of unknowables, outlays that can be truly random spending by Washington — those bridges to nowhere.

In articles lately I’ve been trying to emphasize the cost of arbitrary behavior by government.  For example, in the Washington Post I wrote about market concern about uncertainty. One reason for the rally late last week, we can suspect, is that President-Elect Obama has been acting so centrist.

Still, younger people really need more than the EITC, expanded, to do what they are supposed to do and serve as drivers of recovery. In thousands of little ways we are placing burdens on those younger people. The kiddie tax, one example, was the topic of a Bloomberg column I wrote. That tax forces not only teens but also college students to pay parental tax rates on investment income after they surpass a certain threshold, $1800 for tax year 2008. The obvious rebuttal is that “this won’t hurt” since most college students don’t make more than several thousands in profit from investment. But what about the one student who thinks the bonanza might be there for his investment? It’s perverse to penalize the most daring.

If college investors can’t take full advantage of bear prices, they may choose to become infrastructure engineers at the modern equivalent of the TVA, not entrepreneurs in the purer sense.   We’re going to produce a generation of Organization Men or “Mad Men.”


  • Posted by babar

    i don’t understand — you seem to be suggesting that young people should take financial risks more or less recklessly, and because they are young we should support this? huh?

    i also don’t understand — your fundamental premise seems to be that investment equals entrepreneurship. again — huh? entrepreneurship is investing in yourself and your own work, not investing in someone else’s work. investing in someone else’s work is going along for a free ride — it is the opposite of entrepreneurship.

  • Posted by Amity Shlaes

    Thank you for writing! Enterprise can be defined lots of different ways. The issue in the kiddie tax is that growth does demand risks. The economy won’t grow without someone taking risks, and sometimes the more risk taking that happens, the faster the real growth. If Herbert Hoover hadn’t dared go to Asia to rationalize obscure mines, he never would have had the spectacular success he did have. He also wouldn’t have helped the companies he did help (numerous)
    The group best designed to take those risks is young people. When we tax them this heavily on that very risk taking, we all lose a share of growth.