This section starts by talking about the state of the US economy around the time President Obama took office. At that point, the economy was crashing because of a financial crisis. Banks had lent lots of money in mortgages to people who couldn’t afford to repay them. They had then packaged up the loans and sold them (or, technically, the income from them) on to other financial institutions. These investments had been certified as top quality by the credit ratings agencies. However, enough people had now started to default that that rating was clearly wrong. However, because it was impossible to tell which set of packaged loans contained the risky investments, that the entire system was in crisis. If nothing had been done, then the financial system would have completely collapsed, and the rest of the economy with it. Grudem doesn’t mention the selling on of the loans, but it’s a detail worth bearing in mind.

Grudem then gives a brief introduction to the two different approaches to dealing with recessions in a capitalist economy. The first is Keynsianism. This view recommends increasing government spending in order to keep the economy going. The second view, which Grudem calls the “free market” approach (but which is more commonly called monetarism) is to cut taxes and trust that the free market will sort everything out.

He notes that Obama’s approach was Keynsian, and claims that the spending programs in question were far beyond anything that any government has ever spent in the history of the world. Although this is probably true in terms of the absolute number of dollars spent, it may not be the case in real terms (i.e. adjusting for inflation), or in relative terms (measuring as a proportion of the nation’s economy). I haven’t done the sums, but I suspect that World War Two was significantly more expensive in both real terms and proportional terms. Either way, the US national debt increased significantly.

Grudem has two strands of criticism of this approach. The first is the question of where the money comes from. If it’s debt, he wonders what happens if the creditors see increasing deficits and then demand a higher interest rate. In such a case, he imagines that such a situation would require vastly higher tax rates to ensure the debt is repaid (even though he believes that lower tax rates bring in more revenue). He also worries that printing more money means that you are increasing the size of the economy without bringing in any extra value, hence causing inflation.

His second strand of criticism is that he believes that the specific programs funded by the stimulus are designed to promote the Democrat party’s ideal of society, rather than economic growth. He repeats his belief that the private sector is always better than the government when it comes to growing the economy, and that a permanent decrease in tax revenues would have been a better solution.

The Benefit of Hindsight

Because I’m writing this a couple of years later than Grudem, I have an unfair advantage – I can see some of the results of the policies that both the US and other nations have pursued to deal with this economic crisis. So let’s look at his analysis and see how well it has fared.

Governments around the world have taken different approaches to the financial crisis. The Western nations that have gone furthest down Grudem’s austerity route are Greece and Portugal. If you’ve been following economic news, you’ll be aware that their constantly increasing financial problems are dragging the Eurozone down with them. This has lead to some major demands from their creditors and several bail-outs. The US, which has taken a much more Keynsian approach than other countries, has weathered the storm a lot better. The main problems with the nation’s creditors have come not as a result of stimulus spending, but by the threat of the (Republican-controlled) congress refusing to raise the debt ceiling (the total amount borrowed), which would have amounted to a de facto default.

When it comes to the question of creating money out of nothing and causing inflation, this is arguably what the financial institutions whose actions caused the crash had been doing. Their growth had been a major part of the world economy (here in the UK, it was the main driver of our national economic growth). Most of this growth was as illusory as any growth caused by governments doing “quantitative easing”. It’s worth nothing here that Grudem blames the crisis on 1070s legislation which made American financial institutions lend in poor non-white neighbourhoods, rather than on the banks who repackaged those loans as dodgy securities, or on the relaxation of regulation that allowed them to do so.

On the question of what the purpose of the US government’s stimulus plan was, Grudem is – once again – guilty of drawing a dodgy picture of his opponents’ motivations. The initial spending was simply to keep the financial system from collapsing. Subsequent spending included projects that would create jobs in the middle of rising unemployment, and bailing out companies like General Motors (and, therefore, keeping an awful lot of people in jobs). Gordon Brown’s stimulus package in the UK was broadly similar. The aim was to keep the economy afloat, and to prevent as many job losses as possible.

As for the question of which approach (government spending or tax cuts) works better, it’s worth noting that the financial crisis is the worst since the Wall Street Crash in 1929, and the decade of depression which followed it. Whilst economics rarely provides provable results (it’s very difficult to isolate the effect of any one variable), it is generally accepted that the Depression was ended by massive government spending. Initially this was the likes of Roosevelt’s New Deal program, but eventually it was the massive spending on waging World War Two. Earlier responses to the Depression had been much more along the lines of monetarism, and are generally believed to have had little effect.

Whilst Grudem believes that lowering taxes (and, as a result, putting people in public sector jobs out of work) would lead to more jobs being created than were destroyed, there is no evidence to support this assertion. Since the 2010 election, this is the approach that has been tried in the UK. Unemployment has not fallen. This suggests that, whilst Grudem’s approach may be the better one in some circumstances, it would not have been a very effective approach in the current crisis.

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Taxes on inheritance

Grudem deals with the American estate tax (this is the same thing as Britain’s inheritance tax – and the points made apply to any similar tax), a tax on the estates of people who have died. He titles this section “The death tax (estate tax)”, which is a term often used by opponents of such taxes, because it makes it sound like it’s a tax on somebody dying, rather than what it actually is – a tax on the income and assets acquired from a dead person’s estate. Estates under a certain value (£325,000 in the UK, and $1,000,000 in the US – though this has currently been raised to $5,120,000 by laws that will expire in 2013) do not have to pay the tax. Estates over that value only have to pay tax on the amount over that value. The tax is levied before the estate is split, so that sometimes the executors might have to sell some of the assets (e.g. a house) in order to pay the tax.

Grudem’s first argument against the tax is that the money belongs to the deceased taxpayer and their descendants, rather than to the government or society, and that the government does not have the right to take it away. He justifies this by pointing to verses like Proverbs 13:22 and Proverbs 19:14, which show that inheritance was a normal practice in Biblical times, and Numbers 27:8-11, where God gives Moses instructions on how the money should be distributed. He claims that the fact that the Bible doesn’t mention taxes on inheritance is significant.

He also says that such taxes are a disincentive to entrepreneurship, because business owners will not work as hard if they can’t pass as much of their wealth to their families or the charity of their choice. He argues that large corporations benefit, as they often buy businesses that have to be sold off in order to pay the tax. He cites simulations run by the Tax Foundation (a right-wing think-tank) which showed that it has roughly the same effect as doubling the rate of income tax (which Grudem believes would reduce the size of the economy).

There are many counter-arguments that Grudem doesn’t address. On the question of whether the government has the right to tax a dead person’s estate, we’ve already seen that the Bible endorses the right of governments to levy taxes. When we looked at the question of private property, I said that the land in Biblical Israel was not to be treated as an individual’s property (as Grudem seems to think), but as property belonging to the tribe and family. Also, if we take Grudem’s view that the passages he cites are prescriptive, then there’s a good argument to be made against the practice of allowing people to write legally binding wills. On their death, their property should be split amongst their family, rather than them having any say in what happens to it.

Also, when we looked at the issue of economic equality, we saw that there were limits on any person or family accumulating too large a share of the ability to create wealth. In short, there’s nothing in the Bible that prohibits governments from levying inheritance taxes, and several things that seem to be in harmony with the idea.

The question of whether inheritance taxes act as an incentive to entrepreneurship is more hotly disputed. Firstly, under current UK and US laws, the vast majority of the estates will not pay a penny/cent in tax, so it shouldn’t play any part in the average person’s thinking. Secondly, those rich enough to pay it can almost certainly afford to pay an accountant to find loopholes that allow them to pass assets on before they die. Whilst the tax may have a disincentive on some kinds of work, any disincentive effect is not particularly rational – you still get to pass the vast majority of the fruits of your labour when you pass on, and if you want to ensure that your next of kin get at least a certain amount, inheritance tax might even encourage you to be that little bit more productive.

As to the research, Grudem cites, I hadn’t heard of the Tax Foundation before reading his book. but a quick look at Wikipedia shows that they have been accused of using poor methods in many of their published findings. As predictions in economics very strongly depend on the assumptions you make, I would have to have a lot more information about their model before I assume that it is correct.

Transaction Taxes

Grudem looks at proposals that some have made to replace the US Federal tax system with a sales tax (the equivalent to VAT in the UK), adding a certain percentage to the cost of every item. Grudem dislikes this for a number of reasons. Firstly, that it would require a very high tax rate. Secondly, he worries about the possibility of tax creep from adding a new type of tax, and the possibility that the other taxes would creep back in. He also expresses concern that this would place a much higher tax burden on poor people. He mentions the effect of abolishing existing tax exemptions for charities, worries that it would cause a black market in order to avoid the tax (and, hence,make society less likely to obey the law in general), and finally thinks that the revenue generated might not be as much as suggested (a good argument to ensure that any radical changes to the tax system are made gradually).

On this, I am pretty much in agreement with Grudem on the effects. I think he vastly overstates the potential of such a system to create a black market economy to avoid tax. The 20% rate of VAT in the UK hasn’t produced such problems on any large scale, but then it wasn’t introduced overnight.

Other Taxes

There are a whole range of other taxes that could be enacted, but which Grudem doesn’t comment on. Poll taxes (everybody pays a set amount), “sin taxes” (taxes designed to discourage certain activity – e.g. a tax on cigarettes), land/property taxes (like council tax in the UK) and carbon taxes are probably the most commonly used and/or proposed. There are, of course, an almost infinite variety of other taxes that could be enacted. Britain famously used to have a tax on the number of windows on a house.

Grudem doesn’t say anything that addresses these kinds of taxes. Hiss approach is to take some of the taxes currently in place at the federal level of the USA and comment on them. He doesn’t attempt to establish a coherent framework for his theology of taxation, and doesn’t really provide any guidelines for his readers to work out whether a particular tax (or proposed tax) is morally justified. That, combined with the tension between his agreement that the government has the right to levy taxes and his clear disapproval of every single tax he mentions are the real weaknesses in his treatment of the issue.

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Income tax: who should pay what?

Grudem begins his look at income tax by explaining how the US system is set up. Like most (and probably all) Western nations, it has what’s called a progressive tax system, which means that the more you earn, the higher the rate of tax you pay. Tax systems where everybody pays the same proportion of their income, or where the poor pay more are called regressive tax systems. Both terms can be applied to an individual tax, or the tax system as a whole.

Anyway, he points out that income tax is calculated by tax bands. In 2009 single Americans paid 10% on the first $8,350 they earned, 15% on anything between $8,351-33,950 and so on. The UK system works in the same way, and I presume that every income tax system on the planet follows the same basic structure. As an incidental note, Grudem says that the marginal rate (the amount you’ll be actually be paying on any increased income) affects peoples’ decision-making. Which, given how few people actually plan their finances, seems somewhat optimistic.

He then says that the fundamental question is whether such a system is fair. He starts looking at this question by pointing to the Old Testament law, and its demand that everybody pays a tithe (10%) to God (Deuteronomy 14:22-23 and Leviticus 27:30-32). He also points out that there was a point (Exodus 30:13-15) where there was a census tax that was the same for everybody. The thing Grudem doesn’t mention here is that none of these examples are of the regular taxes that pay for the continued running of government. They can’t reasonably be used as evidence for or against a progressive tax system.

Grudem then argues about the question of fairness by using a string of examples of various income levels at a flat rate of tax. In short, he argues that notions of fairness are, in practice, often a relative concept – everybody judges it relative to themselves and their situation. He then suggests that the truly fair position is that everybody deserves what they have legally earned in a year – citing Luke 10:7, 1 Corinthians 3:8, and Luke 19:17. He dismisses the idea that what is fair depends on what somebody has left after paying taxes. He then insists that, even if somebody’s wages are thought to be unfair – or just too high – that they have come across because society as a whole has “voted” with their money for these wages – market demands are, in Grudem’s view, a fair way to decide these things, because people choose to pay for the product that ultimately pays for the wages. If we don’t like it, his view is that we should change the habits of society.

There are, of course, several problems with this view. Firstly, if we deserve to take home what we have legally earned in a year, then either nobody deserves to pay any taxes at all, or everybody deserves their post-tax income rather than their pre-tax income. As we’ve already established (see the previous post in this series) that the government has a right to levy taxes, then we have to take the second option. And that means that this principle is irrelevant to the question of what tax levels should be.

Secondly, the idea that I’ve “voted” for the wage levels of high earners simply because I’ve watched their film, or brought goods from their company is somewhat laughable. Unless (unlike most people) I have the option of shopping exclusively from small businesses, and actually do so, I have no option but to buy products from large corporations. And in large corporations, pay levels at the very top are rising at a rate that bears no relationship to general wage levels, inflation levels, or even company performance. If I think such wages are unfair or unjust, then I cannot easily protest by spending my money elsewhere. And, in any case, voting with my spending means that the high earners automatically have a bigger say than I do.

For most people, the most effective way of protesting against excessive remuneration is, in fact, by pressuring politicians to enact laws which reign in the potential earnings of such people (whether by introducing maximum wage laws, or by increasing tax rates). And Grudem doesn’t offer any argument why changing things through the political process should not be an option. He seems to just assume that it should not be.

Grudem also looks at current tax receipts in the US. He says that the top 50% of earners paid 97% of taxes in 2006, with the richest 1% paying 40% of income tax. He compares it to 1990, when the richest 1% paid 25% of income tax and 2000, where they paid 37%. Unfortunately, he misses the key statistic that might give us any idea how fair this is – how much of the national income that top 1% got. If, for example, the richest 1% had 60% of the income, then that tax rate is unfair by anybody’s measure.

Capital Gains: fair or dangerous?

Grudem also argues against capital gains tax. When you buy something expensive (e.g. a house) and later sell it at a substantial profit, you pay capital gains tax, rather than income tax. In most countries, capital gains tax is set at a much lower level than the standard rate of income tax. Grudem emphasises that this is a tax on the increased value of something purchased as an investment. He argues that, because the owner pays taxes on the annual income from the investment, it is unfair to pay taxes on the increased value of it. He also says that it should be abolished to encourage investment in the economy. He also cites claims by the Heritage Foundation (a think-tank which promotes right-wing political viewpoints) that an increase in the US level of Capital Gains tax would damage the American economy.

There are, again, several problems with this approach. Firstly, many of the richest people in Western nations make their living from buying and selling assets. Warren Buffet (who is one of the richest men in the world) pays a lower proportion of his income in tax than his secretary because almost all of his income is from capital gains. If capital gains were abolished, then people like Buffet would pay virtually no tax.

Secondly, many investments are not (at least directly) investments in the economy. Whilst buying new shares in a company is investment, buying existing ones is simply buying somebody else’s share of the profits. Buying a plot of land is only investment if you then use it for something. Many financial products (such as derivatives or investments in the futures markets) are so far removed from real businesses that they are more like gambling than genuine investments.

Thirdly, many people who trade things that are subject to capital gains taxes don’t see annual returns on the investment – they sell it off at a profit (or, sometimes, a loss) before they see any regular returns on their investment.

Should companies pay tax?

Grudem also addresses the issue of corporation tax. He argues that, instead of being a tax on the rich, it has the effect of causing higher prices, and hence is a tax on everybody He claims that lowering the rate of corporation tax would stimulate the economy, bring in foreign investment, increase the incomes of corporate employees, and therefore result in higher overall tax revenue.

Again, there are a number of issues with this analysis. Firstly, the idea that lower rates of corporation tax will lead to lower prices, more jobs, or better pay for employees is simply wishful thinking. Companies don’t exist for the benefit of their customers or employees – they exist to make their owners money. When it comes to publicly limited companies, they are legally obliged to make as much money for their shareholders as they can. Therefore, the effect of cutting corporation tax will be to transfer money from public services to shareholders. Now, this might lead to productive investments in the economy, thus offsetting some of the lost revenue, but the chances that all of it would do so, and that it would do so to an extent that it creates greater tax revenue seems unlikely at best.

Secondly, there’s a related issue which makes corporation tax much fairer. Businesses (particularly big businesses) have been quite successful at what’s called externalising their costs. Basically this means passing on the costs and risks of business activities to somebody else – usually the governments of the places they operate. For example, a company might dump toxic substances knowing that it will be the government that pays for the clean-up, and the costs to the local people and environment. Insurance companies refuse to insure nuclear power plants against the risk of an accident, so power companies rely on government guarantees if something does go wrong. There are examples of this kind of practice for almost every industry. Governments also subsidise business training costs, and pay direct subsidies for companies that engage in a whole range of activities.

In the light of this, corporation tax can be viewed simply as the government making businesses pay for the handouts they get. If it were abolished, then it would only be fair to stop all government subsidies, and make companies pay for the costs they have externalised. And it’s far more likely that doing so would cause higher prices and damage large sectors of the economy than it is that cutting corporation tax would benefit the economy enough to make up for lost tax revenue.

Next Time

So far, in the section on tax, Grudem has argued for the principle of taxation, but argued that income tax should be lower (and fall less heavily on the rich than it does at present), and argued against two of the other three major taxes that are commonly levied (capital gains tax and corporation tax). Next time, we’ll finish up the issue of taxes by analysing what he says about smaller sources of tax revenue.

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Grudem starts with the most fundamental principle of taxation – whether it should happen or not. He points out that Jesus endorsed the principle of taxation in Matthew 22:17-21, and that Paul also upheld this principle in Romans 13:6-7. However, later in his treatment of taxation, he implies that taxation is incompatible with his conception of human freedom and implies, again that government spending is less useful for society than private sector spending.

Setting the right tax rates

Grudem begins by looking at the general question of whether tax rates should be high or low. He says that if taxes are too low governments won’t have enough money to function (though he doesn’t mention the possibility of governments being dependant on foreign aid or state-run businesses instead of taxes), and that a tax rate of 100% will mean complete government control of the economy – something he’s already strongly disagreed with. In this, he is correct, and points to something that is commonly called the “Laffer Curve”.

A Laffer Curve similar to Grudem's

Grudem spends some time trying to establish why a lower rate of tax might produce more tax revenue. He says that:

1. lower tax rates encourage businesses to invest and grow
2. that this produces more jobs and lower prices – which benefit the economy, and encourage greater economic growth
3. that the growth leads to higher incomes for businesses and individuals
4. that because there is greater economic growth, there will be greater tax revenues despite lower rates of taxation.

I think this theory does have some significant flaws. Firstly, there’s the inherent assumption that government spending does not contribute to the economy as much as the same money spent privately. Yes, this is true in some cases (the UK government buying new nuclear weapons moves a lot of money out of our economy and into the US economy), but not in others (spending on basic infrastructure that wouldn’t be commercially viable, but is essential for businesses to function effectively).

Secondly, it assumes that tax levels are a major factor in economic growth, when there are dozens of other factors that are likely to make a larger difference. Proving this theory to be true or false would be virtually impossible, due to the statistical noise. Especially if you only made fairly small changes – and taking a penny off the basic rate of income tax is far more likely than taking 10p off.

Thirdly, some of the consequences Grudem lists don’t necessarily follow. Economic growth doesn’t necessarily mean that companies will produce more jobs – my employer was consistently downsizing its UK workforce before the current economic problems started, and is continuing to do so now. And it has remained a highly profitable company for the entire period. And whilst the corporate executives may have seen higher incomes as a result, many of us doing the actual work have seen our real-terms incomes stagnate or even decline. Whether things like more jobs and higher wages follow from economic growth or not depends on a range of economic factors, and tax rates will only make a difference at the margins.

Grudem does list some examples of tax cuts which he says increased the tax take. He starts with Ronald Reagan’s tax cut in 1981, saying that economic growth and real incomes increased during this period. He ignores the fact that the US (and global) economy during the Carter years was dominated by the 1970s oil crisis – something that had cleared up by Reagan’s era. Whilst the tax cuts may or may not have contributed to the Reagan-era boom, there were clearly far bigger factors in play.

He also cites George W Bush’s tax cuts in 2001 and 2003. Now I had a brief look at the US revenue service website, and from what I can make out, tax revenues fell in the wake of the 2003 cuts, and Bush left office with a massive budget deficit (even if you ignore the effect of the bailout/stimulus right at the end of his second term), although he had inherited a budget surplus from Bill Clinton. Basically, it’s highly questionable whether these tax cuts actually boosted either the economy or tax revenue. And by portraying the case as clearly proved, Grudem is doing his readers a disservice.

Should everybody pay tax?

On Wednesday, I’m going to look at the balance of taxation between rich and poor (and companies and people). But Grudem raises a good point about taxation in general by saying that everybody who earns income should pay some taxes. His point is that if you pay taxes, then you have a greater stake in the way government spends it. He agrees that the poorest should pay lower taxes, citing Leviticus 12:8 as an example of such a provision, but strongly disagrees with the idea of anybody paying no tax at all.

Whilst I think it’s actually quite a good principle, Grudem’s arguments are very much ideological. Elsewhere in the sections on tax, he deplores the politics of envy, which he believes is solely responsible for the idea that rich people should pay higher taxes. Here he seems to be espousing the right-wing equivalent – a sense of envy that the government is spending his taxes in ways that he doesn’t approve of, and seems to think that this is a feeling that everybody should share.

Also, there is a big question about how such a policy is feasible. In many countries, working a full-time job on the minimum wage simply doesn’t pay the bills. Unless and until wages for those at the bottom of the system are at least high enough to cover basic living expenses for a family, you can’t expect to levy more than a token amount of income tax on the poorest. And in both the USA and many parts of the UK feeding, clothing, and housing a family on the minimum wage is impossible without help from either the state or charities. Unless minimum wage levels are raised, or there are radical changes that would result in the living wage being lower (something like citizens’ income, for example), then taxing the poorest will simply increase the poverty level.

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Should we tax the rich?

Grudem begins by arguing that it isn’t fair for governments to take more money from the rich simply because they are rich. In support of this, he quotes Exodus 23:3 and Exodus 23:6, which warn against showing bias towards or against the poor in a lawsuit. He then goes on to assume that progressive taxation (where the rich pay a higher proportion of their income than the poor) is there to punish the rich, and argues that punishing people for any reason other than them having done evil is wrong (quoting Proverbs 17:26). He then says that the government has no inherent right to take their wealth unless it can be shown that they got it through criminal activity (he doesn’t mention the possibility of it being from highly immoral actions that are within the law – something that is more common in big corporations than many of us think). He then portrays such taxation as stealing – in his view, the wealth is rightfully theirs, and the government has no right to tax them.

Hopefully, it should be clear from this summary that Grudem’s view on taxing the rich depends on assumptions about what taxation is, rather than being something drawn from Biblical principles. If taxation is theft, then he is right. If, however, the government has the right to levy taxes, then he offers no reason why it should not tax those who can afford it more heavily than those who cannot. We’ll go into the issue of taxation in a lot more detail next week, but for now we’ll just note that Grudem’s arguments about how government should interact with the rich show a clear hostility to the principle of taxation.

Should we strive for economic equality?

Grudem agrees that it is appropriate for government to run welfare programs to provide a safety net so that people don’t go without food, clothing, or shelter. That such programs should give people the opportunity to gain enough skills and education to earn a living. And that such programs can be funded from general taxation, as this is clearly something that fits with the government’s purpose to promote the general well-being of society. He does, however, disagree with the idea that reducing inequality is something the government should do.

He believes that policies to reduce inequality harm both the economy and society. In his view, they penalise hard work, productivity, and frugality whilst rewarding profligate spending, wastefulness, and frittering away time on unproductive activities. He insists that taking extensive action to reduce inequality would lead productive people to give up and that any society which tries it would spiral downwards into poverty and despair. He also claims that attempts to make people equal in their economic possessions, will necessarily mean that they become unequal in terms of political power, citing the Soviet Union as an example.

I could probably spend a whole series of posts dealing with this line of argument, but I’ll try to be brief.

Firstly, Grudem is clearly unaware of the very large body of research that links economic equality with better outcomes in terms of healthcare and a range of social problems (much of this research was summarised in the book The Spirit Level by Wilkinson and Pickett – which is pretty much essential reading if you want to contribute to the political debate around this issue). If this research is correct, then promoting economic equality is most definitely promoting the well-being of society.

Secondly, the Soviet Union is far from the only example of government heavily promoting economic equality. If Grudem’s arguments were correct, then the Scandinavian countries would be hopeless, despotic, poor countries rather than strongly democratic nations which routinely top league tables on quality of life issues.

Thirdly, there’s something of a paradox to Grudem’s views. The vices he lists are exactly the kind of things that today’s Western free-market economy not only encourages, but utterly depends on. If Grudem were consistent with his view of what constitutes a virtue and a vice, he would be advocating policies that put a curb on consumerism, rather than arguing forcefully for the economic system which created it, and depends on it.

Fourthly, economic inequality produces political inequality. Bill Gates has far more political power than any voter earning the average wage. Which pretty much destroys any argument about economic equality causing political inequality. At worst, you could argue for an Animal Farm situation, where normal people are relatively powerless either way.

Should Government help the poor?

When it comes to poverty, Grudem agrees that the Bible is crystal clear on the need to help the poor. However, he rejects the idea that government has the right to compel rich people to help the poor or to tax the rich to give to the poor – claiming that there are no Bible passages which justifies that idea. He rejects the idea that government handouts are the solution, as they have to be repeated forever. Instead, he believes that the solution is to encourage businesses to grow and thrive, and hence produce jobs. He again claims that a free-market solution is the way to do this, combined with punishing crime, enforcing contracts, enforcing patent and copyright laws (he doesn’t address the question of whether such laws are compatible with a free market), and protects private property. He also claims that relatively low taxation (we’ll address this next week), an effective education system, and a trustworthy banking system are needed.

There are, again, a number of problems with Grudem’s analysis. Firstly, growing businesses do not necessarily create more jobs. For example, the shift from local shops to supermarkets in an area increases the profits made by the retail sector at the same time as reducing the total number of retail jobs. Secondly, some of the things he says are necessary are somewhat at odds with each other. Patent laws, for example, are an artificial restriction on the free market

However, on the key principle of whether it is wrong for government to intervene directly on behalf of the poor, Grudem has clearly missed a large chunk of what the Bible has to say. If we look at the laws God gave to the nation of Israel in Exodus, Leviticus, Numbers, and Deuteronomy then we see a number of laws specifically designed to force the rich to help the poor, and to reduce the extent of inequality. Here are a few of them:

The Year of Jubilee

Leviticus 25:8-34 establishes a practice called the Year of Jubilee. Every 50th year, land was to be returned to the family who originally owned it. In an agricultural society, land is the ability to produce wealth. It’s worth nothing that, when this was written, individualism was thousands of years in the future – families mattered more than their members. Furthermore, the original distribution of land was pretty much equal – so every family should have had pretty much the same amount of land. In short, the law ensured that everybody had equal access to the means of production.

The 21st Century equivalent of this would be something along the lines of requiring that, every 50 years, stocks and shares would be taken off their owners and redistributed equally amongst the population. You could keep what you had gained from the investment, but not the investment itself. The principle here is more radical than any pro-equality measure that’s being seriously talked about today, and it seems somewhat surprising that Grudem missed it. No, it isn’t the communist ideal, but it’s far closer than anything capitalist societies have to offer.

The Sabbath Year

Whilst the Jubilee only came around every 50 years, there was a more frequent law to restore some measure of economic equality. According to Deuteronomy 15:1-18, every seven years all loans were to be cancelled and all slaves to be set free. To understand this, though, we need some historical context. In the Old Testament era, loans were not something you took out as an investment – they were something you did so you could get bread tomorrow. The equivalent of today’s payday loans. And slavery was something you sold yourself into because you needed to eat. Unless you were prepared to beg or steal, these were the only options open to the destitute in the cultures of the bronze age Middle East. And it’s worth noting that other laws ensured some level of protection and basic dignity for people forced into either option.

However, the important thing for our topic is that the Sabbath Year put people back on a more equal footing. Unlike with modern bankruptcy, there were no lasting consequences for the cancellation of debts. Nor were there any conditions. You didn’t have to deserve your freedom from debt or slavery, you simply got given it, and had a chance to start again. No, it’s not a law designed to bring everybody to the same level. But it does place limits on how far the effects of inequality could be felt.

Tithing

In Deuteronomy 14:28-29, every third year people were expected to give a tithe (10%) of the food that they grew (essentially their income) so that the alien, the widow, and the orphan (the socially disadvantaged who made up the bulk of the poor in that era) would be able to eat. When Grudem claims that there is no justification in the Bible for government taking money from the rich to give to the poor, I can’t help wonder who he thinks was supposed to enforce this law.

The modern equivalent of this is the welfare state – paying taxes to ensure that people can’t fall below the absolute poverty line. In a modern industrial (or post-industrial) society, the state is the only institution capable of doing this on a large enough scale. The equivalent arrangements should include adequate benefits for those out of work because our societies simply don’t create enough jobs for everybody. They should also ensure as a high priority that there are adequate benefits for those who cannot work due to illness or disability.

Gleaning

Finally, Leviticus 19:9-10 establishes that farmers were to deliberately leave some of their crops so that the poor could harvest them. The law specifically required those who owned the means of production to give a portion of that to the poor. Yes, the poor had to do some work to get the produce, rather than just being given it. But this is almost certainly the first (and possibly the only) example of a law which forced people to give to charity. The nearest equivalent today would be government programs which use tax money to fund charitable programs.

In Conclusion

Yes, Grudem is right to say that the Bible doesn’t teach that we should aim for the (impossible) ideal where everybody is economically equal (though nobody outside of the far left is advocating this). And that it doesn’t say that having some very rich people is a bad thing. But the Bible does very clearly show that society as a whole has a responsibility to prevent absolute poverty. And it provides examples of laws which require the rich to use at least some of their wealth for that end. And, of course, there is a fairly substantial (and increasing) body of empirical evidence that shows that the kind of extreme inequality we see in today’s world is not helpful in dealing with a wide range of health and social problems.

If government genuinely intends to serve the common good, then one of the things it does should be taking action to reduce poverty and decrease levels of inequality. In my opinion, the question should not be whether government does these things, but instead what is the best way of doing so.

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Grudem begins by marking out some fairly widely agreed common ground – there needs to be some level of government regulation of the economy, if only to ensure that we have a consistent system of weights and measures. He also agrees that it is good for government to provide some goods and services – he mentions roads, traffic regulation, the military, the police, the fire department, and possibly a postal service.

He then says that there are three main approaches to the rest of economics, the “free market” approach, the “socialist” approach (which he defines as the government owning most of the means of production), and the “communist” system (where the government owns all property). This is, at best, an oversimplification, and arguably a misuse of terms. Communists don’t aim for state ownership of property – Marxist theory views such an arrangement as a purely transitional one. A better term for what Grudem calls communism would be “state socialism”, and what he calls socialist is really just a lesser form of this. Also, his terms of reference leave no room for Social Democracy (government steps in to mitigate the human cost of free market policies – most notably in the form of a welfare state), which is the dominant approach taken in rich-world countries.

Does the Bible teach free market economics?

Grudem argues that the Bible supports a broadly free-market approach. Based on his (highly flawed) view of private property and human liberty Grudem argues that the concept of government owning property is not Biblical, and that government control of the economy is an infringement on human liberty. What Grudem doesn’t offer here are any arguments based directly on scripture. He is building on conclusions he reached in other sections of the book (and ones which I have already argued are somewhat flawed). In particular, he bases his arguments on claims that state-owned property is not taught in the Bible (which he extends to cover businesses as well as property), and on an overstatement of the principle of human liberty.

Do free markets work?

Grudem argues that free markets have, historically, brought better results than systems where the government intervenes in economy. Let’s look at the claims he makes:

Are they better at producing goods and services?

This argument is that free market goods are of better quality and lower price than produced in alternative economic systems, and that they are goods that people actually want. As evidence, Grudem offers fairly subjective impressions he had from visits to Eastern bloc countries during the Cold War.

This argument has a couple of somewhat fatal flaws. Firstly, it assumes that any differences are due to differences in the economic system, rather than the political one – the Eastern bloc countries were repressive dictatorships, something that isn’t a necessary part of a state-run economy. Secondly, similar comparisons could be made in reverse – citizens of (communist) Cuba have a better standard of living, and are probably happier than those in nearby (capitalist) Haiti. Thirdly, and most importantly, it’s anecdotal evidence – and hence it’s somewhat risky to base important policy decisions on it.

So what does the evidence suggest? As far as I can tell, it’s fairly neutral. The state-controlled Chinese economy produces far cheaper goods than any of the rich-world Western nations, as does the South Korean economy, where the government intervenes heavily in the economy. Quality is somewhat more subjective, but there is an overwhelming amount of evidence that private businesses, if left to their own devices, will trade in quality (or ethics) for greater profit whenever they feel they can get away with it. There are, of course, exceptions to that rule, but it’s certainly true of the vast majority of large companies. There are a wide variety of factors that affect the price and quality of goods, but state control (or the lack of it) is unlikely to be at the top of any objective list.

Do they allow freedom to choose your job?

Grudem argues that free markets allow everybody to choose what job they work at, encourages better training for your job, and allows you to know you will be rewarded for better quality work. He contrasts this with the government picking you a job, which is at best a simplistic portrayal of how jobs are allocated in a state socialist system – by my understanding, people can still have an influence on their job in such systems.

My problem with this approach is that it is somewhat naive. Some people don’t get any choice of job in a free market system. Long-term unemployed people rarely choose to live that way – although they do sometimes give up on ever getting out of their situation. Other people have their careers railroaded by their company, or find themselves stuck in a dead-end job. There are plenty of careers where there are fewer jobs than there are people who want to do them. Other careers need lots of workers, but are things almost nobody would choose to do if they had a choice. And being rewarded for doing your job well in a free market system depends on you happening to have a good employer. In some companies good work does go unrewarded, and the way to advance your career is by being good at office politics, rather than by being good at your job. Finally, even if you want career-related training it may not be available.

In short, whilst the system might work that way for some, it doesn’t for everybody.

Do they allow companies to hire the best?

This argument directly conflicts with the previous argument in favour of free market systems. Freedom to choose your job is in direct conflict with freedom to choose who to employ. Because wanting to do a particular job is not the same thing as being good at it (or, more importantly, as being seen to be good at it), a system that does one well will necessarily do the other one poorly. Finally, there is research that shows that random promotions are more effective than promotions on perceived merit – which goes to show that employers are often very poor judges of who will be a good employee.

Do they produce goods that people actually want?

Grudem is almost right on this one. In a free market, a firm that produces things that nobody wants to buy goes out of business. The goods still get produced, but not for long. But it’s worth noting that this isn’t a zero-sum game. Many good companies thrive not on making things we want, but on convincing us to want the things that they make.

The most obvious example of this is Apple. Before they brought out the iPod, the iPhone, or the iPad, nobody particularly wanted those things. If these had been standard product launches from a generic company, maybe they would have sold and maybe not. But you wouldn’t have seen them become instant “must have” items. And once there are competing products on the market, Apple’s products tend to be the most expensive, but nowhere near the most capable, products on the market. And yet they usually still outsell their competitors by a massive margin. And this phenomenon can be found to some degree with almost every major brandname product. People buy it not because it serves their needs better than the competition (if at all), but because advertising has persuaded them that they need it.

Does a free market system accurately predict our economic wants?

This one is straying very firmly out of the realms of observable effects and into the realms of ideology. Grudem claims that, unlike government agencies, the free market is able to predict the economic wants of millions of people at any point in the future and then plan effectively to meet those wants. He claims that the system routinely provides each neighbourhood with just enough of a product to meet consumer demand for a day.

This is, of course, not true. Shops do run out of stock, shops do order too much – even a casual look at the amount of food UK Supermarkets throw away each day would prove that the free markets often get things wrong. There are cases where there are genuine demands that aren’t met (e.g. TV shows which fans would pay good money for but are not available to purchase), price fluctuations that are caused by gambling on commodity markets, and bear no relationship to the actual supply of or demand for a product, and overproduction of products which nobody actually wants. It’s perfectly possible that there is usually a better match between supply and demand in a free market system than in the alternatives, but the assertion has never been proven.

What happens when government runs a business?

Grudem claims that free market competition improves productivity, quality of products, and keeps prices low and that, therefore, it encourages economically beneficial activity. He disparages Christians who view economic competition as “unspiritual” or “unchristian”, but doesn’t attempt to engage with the reasoning behind such views. He contrasts this with government, claiming that because government is in a unique position it necessarily has a monopoly, and that it is, therefore, a poor creator of wealth.

This leads me to wonder whether Grudem has heard of “natural monopolies” – goods or services which naturally lend themselves to being run as a monopoly. Public transport, for example, is an industry where direct competition is pretty much nonsensical – two bus companies running the same route would be ludicrous. Other obvious examples include policing, the fire service, the postal service (what private company would offer same-day delivery to remote rural areas for the same price as urban ones?), basic utilities (the infrastructure for gas, electricity, and water is necessarily a local monopoly), and healthcare (which we’ll be devoting a whole post to in a couple of weeks time). He also ignores the fact that state-sponsored companies often have competition. For example, the existence of the NHS has not prevented BUPA from offering private healthcare and the Royal Mail exists alongside courier companies who compete for services.

In conclusion

My arguments in this post should not be taken to mean that free markets are a system with no benefits. In some industries, free-market systems seem to work perfectly well. However, insisting that they are the best possible system for all industries is to veer into a form of economic fundamentalism. In his arguments, Grudem often appears to assume that government-run companies would necessarily get it wrong, even if they had the same people making the same decisions.

Finally, there is no indication in any of Grudem’s arguments that there are times when the pursuit of economic goals conflicts with social ones. The slave trade was a very profitable industry which helped grow British, American, and African economies. However, it was hugely destructive to both American and African society and was morally abhorrent. A truly free-market society would never have contemplated abolishing it, and yet we now agree that doing so was the only morally justifiable option.

In his defence of free-market economics, Grudem either forgets or marginalises such issues. If the state directly takes control of some areas of the economy it at least has the potential to put social issues front and centre. Which is something that private businesses, who are legally obliged to put shareholder profits first, are often unable to do.

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Economic Growth

Grudem believes that government should promote economic growth because is is something that promotes the general welfare of the nation, one of the aims of government. He rejects the idea that this approach constitutes materialism, because economic growth is something that is morally good. He cites Genesis 1:28, where God tells humanity to “subdue” the earth and “have dominion over” the life on it. He says that the hebrew word that translates as subdue means “to subdue, dominate, bring into servitude or bondage”, and that it implies that God wants us to “investigate, understand, use, and enjoy the resources of the earth”. He cites passages such as Deuteronomy 8:7-10, which promise material blessing (in terms of excess food) for those who follow God. Grudem also believes that passages like Galatians 2:10 and 1 John 3:17 – which remind us to help the poor imply that poverty is bad, and cites this as a reason for supporting economic growth.

Now, there is a caveat here – as Grudem notes, we cannot serve God and money (Matthew 6:24), but cautions that we shouldn’t think that material goods are evil in themselves. He says that the Bible never encourages people to seek to be poor, or to make others poor, but instead to seek to help and care for those who are poor. Grudem also says that there are also practical benefits to economic growth – a rich nation is better able to fulfil many of God’s other commands – mentioning raising children, caring for those in need, and building the church.

Now, Grudem is right that money and the things it can buy is not inherently evil, and that working to produce things is morally good. There are, however, some problems with his view. Firstly, this emphasis veers dangerously close to prosperity theology (God wants you to be rich and healthy) – which is almost certainly the most dangerous false teaching floating around Christianity (and particularly Western Christianity) today. Secondly, there is good reason to doubt that economic growth – in and of itself – will relieve poverty (an issue we’ll be covering that in the next two posts). Thirdly, there are cases in the Bible where God tells people to become poor. Jesus said precisely that to the rich young ruler in Luke 18:18-30 , following it up with a comment about camels going through the eye of a needle. No, it’s not a universal command – it was for a particular person – but it does show that poverty is not necessarily something for Christians to avoid. Fourthly, in a rich nation some of these other commands can be more difficult. Christianity in the Western world is, for the most part, dull and lethargic compared to Christianity in places like Latin America, Africa, China, or South Korea – nations which are nowhere near as rich as the West. In many senses, building the church is more difficult in a rich nation – overcoming the love of money that pervades a rich society is a big challenge.

Inflation

Grudem begins talking about inflation by using practical arguments that, whilst “the love of money is the root of all kinds of evils” (1 Timothy 6:10) money itself is a good thing. He says that money is a superior system to bartering, and that it is necessary because very few people are able to provide for themselves everything that they need in order to live. He says that the best way of providing a currency is for the government to do it – as this ensures that it is known, accepted, and has a standard value across a nation. He also says that, in order for the system to work, the value of a currency must remain stable over time. He cites examples of hyperinflation (when prices rise at a ridiculous rate – e.g. doubling every day) to show some of the problems increasing prices may cause – pointing out that, when this happens, the currency collapses as nobody uses it. He says that even at lower levels of inflation, it means that people are being robbed of their money. He then says that the cause of excessive inflation (note: this is the only time he suggests that inflation is sometimes acceptable) is always the printing of too much money, before spending a whole page lambasting the US government for bailing out the banking system in early 2009 because it would lead to increased inflation,

This view of inflation is, of course, somewhat simplistic. Other factors like supply and demand (especially for commodities like oil – the price of which affects almost every part of the economy) play a large part. And the actual effect of inflation can be very different across different social groups. In the UK, the current inflation rate on food, heating, and rent is higher than the official inflation rate, whilst the price of consumer goods has been dropping. This means that the poor suffer from a much higher inflation rate than the rich.

Also, in covering these two issues, Grudem neglects to mention that it is difficult for government to promote both low inflation and high economic growth. If the economy grows, then there is actually more money in the economy, and it becomes worth less – causing inflation. On the other hand, stepping in to prevent rising prices will inevitably deprive some sections of the economy from making more money.

Furthermore, Grudem’s criticisms of Obama’s attempts to deal with the recession, and save the banking sector from collapse, through increasing the theoretical money supply ignores the wider context. Yes, it may increase inflation (which, incidentally, will reduce the real-terms national debt – or at least the portion of it owed in the national currency) but saving the banks prevented the US economy from collapsing – remember, the vast majority of money exists in the form of numbers in a bank’s computer system, rather than in the form of coins and notes).

Finally, Grudem’s analysis ignores the fact that the vast majority of money created in the modern world is created by private banks, rather than by governments. The simplest way of explaining this is by looking at what happens when you put £1000 into a bank account. The banks are legally required to keep a small proportion of money in actual currency. For the purposes of this example, we’ll pretend that they have to keep 10% (the real figure varies from country to country, but is usually lower). Of your £1000, the bank has to keep £100, and can lend the rest out. When your neighbour borrows that £900, he puts it in a bank account (or spends it – and the shop puts it in their account). Either way, the new bank has £900, and has to keep £90. They lend the other £810 out, and the cycle continues until the banks have created several times more money than originally existed.

A note on government spending

In passing, Grudem describes US Government spending as “out of control”, despite the fact that the US has lower taxes and lower spending (relative to both the population and the size of the economy) than the vast majority of comparable countries. He cites one economist who appears to be blaming it on the Democrats, despite the fact that the current US debt and deficit was built up during the Bush administration.

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One thing that struck me about the marchers was the diversity of people there – in addition to strong representation from any union you can think of, and the various left-wing parties (Greens, various socialist parties, and local branches of Labour), there were a wide variety of community and campaign groups. There was ethnic diversity (I noticed whites, blacks asians, hispanics), and every age group from kids up to pensioners.

The speeches were fairly good, coming from unions and a wide variety campaign groups (I really wasn’t expecting Friends of the Earth on the platform, for example). I missed the one politician (Ed Milliband, selected on the basis of being the official leader of the opposition – presumably if Labour had won the last election and cut like they promised, the TUC would have asked David Cameron), but from the clip on the BBC website he was somewhat uninspired, and I’m told by people who were there that he was booed. From the speeches I heard, pretty much all the policy suggestions were things that were in the Green Party Manifesto – perhaps they should have asked Caroline Lucas to speak, as she’s clearly the MP most in tune with the anti-cuts movement.

There were also a number of interesting placards. There were several people offering “Free Hugs”, one telling a joke (Why did Nick Clegg Cross the Road? Because he said he wouldn’t), people wearing tabards labelling them as “economic advisor”, and the bizarre “eat the rich”. Sadly, no pictures of these because I’ve mislaid the cable to put them into my computer – all the pictures are somebody else’s.

Now all of this is, no doubt, at odds with what many of you would have heard in the news. From what I’ve seen, there was a small amount of property damage carried out by people wearing the uniform of the black bloc anarchists – which 99.99% of the marchers would happily condemn. There was also a peaceful occupation of Fortnum and Masons and other Oxford Street stores by UKUncut (I’m told that some of the demonstrators are still in police cells for this). There was also some kind of violent confrontation between the Police and some people occupying Trafalgar Square into the night. I wasn’t there for any of this, but here are a few reports by people who were, to put the other side of the story:

A quick note on police attacking unarmed protestors

a longer piece, which includes a report that the police initiated the Trafalgar Square violence

And, finally, some proof that violent extremism isn’t the preserve of the left, there’s a right-wing journalist who writes for the Times, the Telegraph, and the Spectator, who tweets that the government should use Ghaddafi-style tactics against the protestors

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Whilst most of the news coverage focuses on whether this will help tackle the problem or not, I think that this raises a couple of wider issues. Firstly, there’s the issue that this tax may well be regressive – the burden being passed on to the poorer people who are more likely to eat takeaway food. Secondly, there’s the danger that this will encourage giants like McDonalds and discourage local businesses, who usually contribute more to the local area.

However, the thing that the media has overlooked is that this kind of measure is a way for local councils to get around the cuts that are being imposed on them by the Coalition Government. The revenue raised will provide the funds for services that Oldham Council would otherwise have had to cut. On its own, this measure is small fry. However, it demonstrates that if councillors across the country were more innovative in finding ways to use their existing powers to get around the cuts, then we could avoid a lot of the damage that they will do.

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George Osborne apparently believes that the cuts he announced yesterday are the salvation of the economy, and of the government’s finances. However, in reality, they will seriously damage both our economy and our society. Lets look at some of the implications.

Unemployment
Osborne announced just under half a million job cuts. These jobs are people in the public sector whose jobs will go as part of the cuts. If you add in the jobs that will be lost by private sector contractors, charities whose state funding dries up, and jobs that depend on the personal spending of public sector employees (and others whose jobs are lost), then we’re probably looking at about a million job losses. Osborne’s free-market ideology believes that the private sector will pick up the slack. However, this would mean that the private sector starts creating far more jobs than it did during the last boom, and that’s just to keep the number of people in employment stable, not to supply jobs for the people who are already out of work due to the recession.

And this mass unemployment will have serious consequences for the economy, and the governments’ finances. Welfare costs will go up at the same time as tax revenue goes down. Therefore, the deficit will not come down as quickly as Osborne projects. In fact, there’s a chance that the deficit will actually increase as a result.

Deflation
Because there will be more people out of work, you would expect both prices and wages to go down. Prices because there is less demand for non-essentials, and wages because with even more people competing for every job the salaries on offer can be lowered, and people will be less willing to press for pay increases. When this happens in an economy, inflation tends to slow down, and often prices begin to lower. This means that people tend to put off purchases, which tends to lead to more deflation, and threatens jobs in retail, and in manufacturing.

Unfortunately for Osborne, high levels of inflation would actually help to pay off the national debt. Because government debt is owed in pounds sterling (rather than, say, US dollars), inflation would mean that we owe less in real terms. Deflation, however, would mean that we owe more in real terms.

Economic Slowdown and the Double Dip
A side effect of the mass unemployment, and of the government generally spending less money is that economic growth will reduce. Whilst I believe that, in the long term, economic growth is environmentally unsustainable, in the short term, this does threaten a very real chance of a double dip recession – a second recession following hot on the heels of the first. If we’re lucky, the slowdown caused by the cuts will be slightly less than the growth that’s happening already, and things will stay more-or-less the same. Otherwise, we’ll be seeing more companies going bust and more people out of work.

Growing Inequality
There is a group of people who will be almost entirely unaffected by the cuts. I like to call this group of people the rich. The more money you earn, the less you depend on the services the government supplies. The less money you have, the more you benefit from those services. Because the government is trying to deal with the deficit almost entirely through spending cuts, people who are already poor will suffer, and far more people will join them at the bottom of the ladder. At the other end of the scale, rich people will continue the trend of the last few decades, where they’ve accumulated an ever greater share of the nation’s wealth.

Social Costs
Finally, there are a whole range of social problems that will be caused by the cuts. Working out all of these costs would take a lot of research, as there are literally hundreds of services that are impacted by the cuts, and in many cases there will be several different social problems that are caused or made worse by the cuts. So let’s just take one area of spending as an example. Raising the rail fare cap and slashing bus subsidies is a major part of the savings in transport. This will force many people off public transport and into cars, increasing the number of car accidents, increasing air pollution, and increasing carbon emissions. Raised costs and decreased services will make It harder for those of us who cannot afford to run a car (or who choose not to). It will also make the benefits trap worse – if it costs you more to get to work, the job has to pay more in order to be worth taking.

So, in short, these cuts are likely to cause tremendous damage to the British economy and to British society. They mean that, in the next couple of years, the economy will either end up in a double-dip recession or in a jobless recovery. They will cause a whole range of social and environmental problems, and they may well make it more difficult to reduce the government’s deficit and repay the national debt.

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