Recently, Chris Shelton located a previously unknown letter from Scientology founder L. Ron Hubbard to Ronald Reagan, who had been elected to President a few weeks earlier. The letter offers Reagan laughably bad advice on how to fix the US economy, which at the time of the vote in late 1980, had been wracked with soaring inflation and even higher interest rates for over a decade.
According to Chris, the letter was circulated among Sea Org members in the late 1980s as part of efforts to keep key people in the organization motivated to keep up the war against the IRS. So this letter was clearly intended for internal consumption, to burnish Hubbard’s reputation for brilliance, and to support the IRS campaign.
Dr. Jeff Wasel and John P. appeared as a guest on Chris Shelton’s podcast discussing the letter (also published today) and we’re presenting our analysis of the letter here. We’re writing after the podcast was recorded so our commentary here contains analysis and discussion that doesn’t appear in the podcast.
The Podcast
Here’s Chris Shelton’s podcast, featuring John P. and Dr. Jeff:
The Letter
Blow-by-Blow Deconstruction
I am writing you because I very much want to see you make it. Inflation was apparently the key issue which swept you in.
John P: For those who didn’t live through the 1970s, inflation was a major problem. At the time Reagan took office, inflation was running around 13% per year and the “prime” interest rate was 21%. Inflation grinds on people and on nations, as the uncertainty over whether people will have enough money to buy essentials hobbles spending and thus economic growth. Hubbard was indeed correct that inflation was probably the most important reason for Reagan’s election, though some foreign policy issues including the Iran Hostage Crisis, where then-incumbent President Carter was seen as ineffectual.
There IS a way to handle it and [unreadable].
John P: Hubbard is doing his usual: there’s a way to handle inflation that nobody has thought of, and he alone has the answer.
When I studied economics at Princeton decades ago, they still knew basic economics. But the economic scene has been muddied by two foreign importations: Lord Keynes and Karl Marx. You can trace the economic tragedy of today to them. Their think was dedicated to plausible destruction.
John P: According to Chris Owen’s “Ron the War Hero” expose, Hubbard was sent to a Navy training class on the campus of Princeton University during the war. Universities had a surplus of classrooms and dormitories, but Hubbard was never actually a student of the University. Hubbard somewhat carefully chooses the words so he doesn’t actually claim to have been a student of the university; he was merely physically located there. Of course, most people would assume that he was a student.
Hubbard is tapping into his own anti-Communist obsession by saying that Karl Marx, inventor of communism, has influence on economic policy in the US. That’s laughable on its face. But he tries here to yoke John Maynard Keynes, a towering figure in the field as a communist hell-bent on destroying America. That’s simply nonsense; Keynes was a capitalist through and through.
Keynes worked in the 1930s, in the aftermath of the Great Depression, and proposed what was then a radical idea: when the economy slowed, lower taxes, boost government spending and increase welfare benefits, even if you needed to rack up temporary budget deficits to do it. In other words, the government has the unique ability to stimulate the economy to a great degree when it needs it most. That ran counter to conventional economic policies, which were to cut spending even if that actually increased unemployment, failed businesses, etc. Keynesian economics have become a bugaboo for political conservatives who think the government shouldn’t lift a finger to help the poor under any circumstances.
If you were to forthrightly abolish income tax and substitute for it a ten percent Federal sales tax, percentage adjustable for commodities like stocks and bonds which have repeated sales, the Federal Government would have MORE money than it has now. The “rich” who buy things would bear a lot of the tax and this could be used as an argument for the plan. The XVI Amendment does not require Congress to tax incomes, it only authorizes it to do so, and can cancel its own laws. It could also make it attractive to states to abolish theirs.
John P: This is a ludicrously bad idea, something that an 8-year-old learning the basics of economics would consider, but no actual economist would seriously propose it. The problem is that, in reality, a sales tax on goods and services is disproportionately shouldered by those who can least afford to pay for it. Poor people are largely exempt from income taxes in the US (though they do have to pay Social Security and Medicare). They already have to spend virtually everything they make on food, energy, etc. So a 10% national sales tax would be a new tax for them, and a sudden 10% tax raise would likely push many of them over the financial brink. Adding increased state sales taxes would be even more onerous.
The richer you are, the more you typically would save as a percentage of your income. A hedge fund manager bringing home a $20 million bonus usually doesn’t spend even a small fraction of that on a new boat, a new house, new cars, etc. They invest most of it. They’d get a huge tax break, from 73%, the top rate in place at the time of this letter, or around 40% today, to zero for income taxes, but might only have to cough up a fraction of a percent of their total income in added sales taxes.
If we were to implement a national sales tax today, in order to be “revenue neutral” (i.e., not increase the budget deficit), my back-of-the-envelope estimate suggests the rate would probably have to be around 14%, with very few exceptions. You’d have to tax home sales, apartment rents, groceries, and other items not currently subject to state sales taxes to keep the rate that low. Otherwise, taxes would be substantially higher on those items subject to the tax.
Hubbard also makes politics sound easy: all you have to do to abolish the income tax is to vote on it. If it were that easy, the income tax would never have been created in the first place. Yet another example of Hubbard’s naïve fantasies about how the world works in action.
Income tax removes the money from the society in the wrong place — before it is spent. Substituting a sales tax for it would put the money out into the marketplace.
John P: Utter nonsense. Hubbard makes it sound like a worker comes home with his full paycheck and the immediately has to turn around and write a check to the government, which in turn stops people from spending. This is nonsense. Withholding means you never had the money in the first place. You know what your paycheck will be and you’ll budget accordingly. There are tons of economic studies that show that consumers only see the real number of their net pay and don’t really think of the gross pay and the taxes; few people can accurately state their state and federal tax percentages.
And it is utter rubbish that withholding taxes from a paycheck has anything to do with keeping money out of the market. The reality is that consumers are always looking at the cost of items to see if they can afford them. The extra 10% applied to an item at the point of purchase changes the buy/don’t buy equation, and that has a far bigger damper on economic activity than Hubbard’s fantasy about how taxes taken out when people get paid decreases spending. He doesn’t even claim to have “research” on this one.
The banks would not like it at first glance as it would become possible for companies and individuals to work hard to make money, save it up and use it, bypassing loans. But banks cannot prosper at double-digit inflation and their survival would depend upon such a change. It would remove some of their excess paper from the market.
John P: Here, Hubbard appears to be fantasizing that the banks would be out of business, and would be unable to drown the nation in debt, if income tax rates were reduced. People would suddenly be able to buy things without the need to borrow. If you were a middle-class person in 1980 making $40,000 a year, and you lived in an urban area where the average house price was around $120,000 a year, and if you paid 30% in taxes, taking the income tax to zero would save you $12,000 a year in taxes, pretending for the moment that you don’t see an increase in sales tax contributions. That’s barely enough to buy a car with a year’s worth of tax savings, and it’s inconceivable that people would be able to pile up the cash to buy a house without a loan, given the math here.
Also, if everyone got essentially a 30% raise from having income tax abolished, what would happen? If you guessed inflation, you’d be right. Prices would quickly rise to soak up much, if not all, of the raise. That would be true to an extent today, but it certainly would have been true when Hubbard penned this turd of an economic stratagem nearly 40 years ago.
The socialist inheritance taxes often punish firms who have to find the money for estates. They can wreck a lot of people and do. The have-not vengeance against the successful should be abolished.
John P: The first two sentences of this paragraph are essentially gibberish. The last one is vintage Hubbard, and are very reminiscent of Ayn Rand type philosophy. Rich people are virtuous, and those who aren’t rich are hell-bent on confiscating the wealth because they’re too lazy to go out and earn their own. And of course, that comports nicely with Scientology’s doctrine of “exchange.” Nothing for free, no charity, no compassion and no kindness in Hubbard’s world.
Social Security is really a farce. FDR put it in because he needed money right then which he would not have to repay until much later. The big insurance companies would be utterly delighted to have it phased over to them and off the government’s back.
John P: Yet again, Hubbard comes up with something utterly detached from reality. Social Security is not a savings plan. The government collects social security taxes from workers today and immediately pays them out as benefits to current retirees. There’s no pension account with trillions of dollars in it. So there was nothing for FDR to borrow against. This sounds like a bad idea, but there’s a lot of work that goes into making sure that Social Security is solvent; politicians either intentionally or ignorantly misstate the financial condition of the program. Yes, there are issues, but the notion that collapse is imminent or that it could happen anytime relatively soon are nonsense.
Hubbard also talks about the idea that the insurance companies would be interested in privatizing Social Security. This is a remarkably bad idea because it would expose tons of people who don’t have the education or training necessary to make even simple decisions about fund types to invest in. It would be an unmitigated disaster for most Americans to be exposed to market risk through privatized Social Security accounts, not just for the account holders, but for the economy as a whole, since money lost today in the markets won’t be spent on real economic growth in the future.
Production has to be raised to absorb excess paper. The fast way to do it is simply abolish income tax, shifting the buying power over to the marketplace; abolish inheritance and withholding taxes and get the money into people’s pockets to be spent.
John P: This reiterates much of the above argument. Reiterating it doesn’t make it right. But Hubbard can’t leave it alone and makes one other obvious error: Companies don’t control production, and the government can’t order companies to raise production. That’s what communist economies do — not the sort of economic remedy you would expect from a frothing anti-communist. And companies wouldn’t change production in the wake of a change to individual income tax laws, unless it were to cut demand as the economy spiraled into recession.
I realize that with your floods of mail, this letter will probably never reach your eyes. But I would feel bad, knowing what would bail you out, if I did not send it in your direction.
John P: This is an odd bit of humility from Hubbard, who seemed to think he had such brilliant ideas that people would fall all over themselves to bring him on as an adviser. Check out the story about Hubbard’s trip to Rhodesia, where he offered to write them a constitution in exchange for their making him prime minister. The Rhodesian power structure was not idiots, and, instead of gratefully accepting Hubbard’s brilliant ideas, gave him a week to leave the country.
I am an old fan of yours. We were high up in Hollywood at the same time. I really quite desperately want you to succeed. I want to see you break the presidential tradition and leave office far more popular than you went in.
John P: Remember that President-Elect Reagan was the head of the Screen Actor’s Guild, and as a result, knew pretty much everyone of consequence in Hollywood. If he had actually read this letter from Hubbard, he would have tossed it at this point. Even if he didn’t know of Scientology, he would have known that Hubbard was a nobody in his business, trying to cozy up. Hubbard’s cinematic achievements were so ludicrously bad that he couldn’t even get Scientologists to fund production of his movies — and any studio who looked at the dozens of insipid training films would have died laughing at the ineptitude of Hubbard the Director.
Well, there. I have sent your way. It’s good, straight economics. The move is bold but you will have to be bold to handle the awful mess Marx and Keynes got us in.
John P: Yeah, it’s “good, straight economics” if you’re an 8-year-old. Reagan did have some pretty capable cabinet members on the economics front, and this letter would have read like thousands of letters from uneducated cranks who thought they had the secrets of unlimited prosperity, the Fountain of Youth and world peace.
Jeff W: Hubbard’s extremely poor grasp of basic economics also belies his misanthropic, “me, me, me” attitude about society in general, specifically a rank disdain for the maintenance of the public good such as infrastructure, public works and social welfare programs that are funded by taxes. Taxation is one of the key components of the social contract between government and its citizens, in that by paying a percentage of income to government, citizens expect a reasonable investment in the public good. While one can debate usurious rates or officious enforcement within a given taxation regime, taxation still represents the most common source of funding for government services in a way that is relatively proportionate, as well as providing an unmistakable quid pro quo for citizens at both local and national levels. I’m sure the irony is lost on Hubbard regarding advocating for the abolishment of state income tax, as without this source of localized revenue, his orgs would lack sewers, power, appropriate zoning, building permits, etc. – in short, the gamut of services provided by local tax revenues that in turn provide for the physical presence of Scientology in a given community.
His laughable observations on banks and the “by-passing of loans” demonstrates woeful ignorance of how the financial ecosystem really operates. Government and central banks set monetary and fiscal policy using a variety of analysis techniques and hard and soft interventions to shape behavior in the economy, rather than any one element being allowed to operate in a vacuum; hence consumer loan behavior or market leverage in all its permutations are but two of the many considerations in a bank’s business portfolio. He doesn’t get the scale nor the network effects of modern finance. The financial markets are highly efficient despite the occasional hiccup such as the 2008 mortgage crisis and represent the best means of access to liquidity with relatively low barriers to entry. While the downside can be indeed catastrophic, Keynesian concepts such as government intervention, deficit spending, and other corrective measures usually mitigate some of the immediate risk, and normally result in a degree of economic stability after the fact.
Contrast this with the punitive effects of Hubbard’s ideas on Flat taxes or a set tax rate of 10%, the negative impact of which would be greatest on lower and middle-class earners, which has the potential to inhibit any potential for savings or discretionary spending for the duration of one’s working life, let alone the negative effects on business of reduced consumer spending, and suddenly, progressive taxation or the occasional market correction doesn’t seem so bad. But for Hubbard, none of that matters, as any scenario he offers has to simplify or reshape a highly complex environment just so he can get his way, the little guy be damned. His whole argument is specious, self-serving, and typically myopic.
