FT167: “When we lived more austerely there was no need for painful austerity to cure a bloated government.” —Old Pithy

Posted by PITHOCRATES - April 26th, 2013

Fundamental Truth

Wise Men in Governments can Do Anything but Pay for their Nanny States

Economics changed in the early Twentieth Century.  America once again had a central bank.  Progressives were expanding the role of government.  And a new economist entered the scene that the progressives just loved.  For he was a macroeconomist who said government should have an active role in the economy.  A role where government tweaked the economy to make it better.  Stronger.  While avoiding the painful corrections on the downside of a business cycle.  Something laissez-faire capitalism caused.  And could not prevent.  But if wise men in government had the power to tweak the private sector economy they could.  At least this is what the progressives and Keynesian economists thought.

That economist was, of course, John Maynard Keynes.  Who rewrote the book on economics.  And what really excited the progressives was the chapter on spending an economy out of a recession.  Now there were two ways to increase spending in an economy.  You can cut tax rates so consumers have bigger paychecks.  Or the government can spend money that they borrow or print.  The former doesn’t need any government intervention into the private sector economy.  While the latter requires those wise men in government to reach deep into that economy.  Guess which way governments choose to increase spending.  Here’s a hint.  It ain’t the one where they just sit on the sidelines.

Governments changed in the Twentieth Century.  Socialism swept through Europe.  And left social democracies in its wake.  Not quite socialism.  But pretty close.  It was the rise of the nanny state.  Cradle to grave government benefits.  A lot of free stuff.  Including pensions.  Health care.  College educations.  And a lot of government jobs in ever expanding government bureaucracies.  Where wise men in government made everything better for the people living in these nanny states.  And armed with their new Keynesian economic policies there was nothing they couldn’t do.  Except pay for their nanny states.

According to John Maynard Keynes raising Tax Rates reduces New Economic Activity

The problem with a nanny state is things change.  People have fewer babies.  Health care and medicines improve.  Increasing lifespans.  You put this together and you get an aging population.  The death knell of a nanny state.  For when those wise men in government set up all of those generous government benefits they assumed things would continue the way they were.  People would continue to have the same amount of babies.  And we would continue to die just about the time we retired.  Giving us an expanding population of new workers entering the workforce.  While fewer people left the workforce and quickly died.  So the tax base would grow.  And always be larger than those consuming those taxes.  In other words, a Ponzi scheme.

But then change came.  With the Sixties came birth control and abortion.  And we all of a sudden started having fewer babies.  While at the same time advances in medicine was increasing our lifespans.  Which flipped the pyramid upside down.  Fewer people were entering the workforce than were leaving it.  And those leaving it were living a lot longer into retirement.  Consuming record amounts of tax money.  More than the tax base could provide.  Leading to deficit spending.  And growing national debt.

Now remember those two ways to increase spending in the economy?  You either cut tax rates.  Or the government borrows and spends.  So if cutting tax rates will generate new economic activity (i.e., new spending in the economy) what will a tax increase do?  It will decrease spending in the economy.  And reduce new economic activity.  Which caused a problem for these nanny states with aging populations.  As the price tag on their nanny state benefits eventually grew greater than their tax revenue’s ability to pay for it.  So they increased tax rates.  Which reduced economic activity.  And with less economic activity to tax their increase in tax rates actually decreased tax revenue.  Forcing them to run greater deficits.  Which added to their national debts.  Increasing the interest they paid on their debt.  Which left less money to pay for those generous benefits.

President Obama’s Non-Defense Spending caused a Huge Spike in the National Debt not seen since World War II

It’s a vicious cycle.  And eventually you reach a tipping point.  As debts grow larger some start to question the ability of a government to ever repay their debt.  Making it risky to loan them any more money.  Which forces these countries with huge debts to pay higher interest rates on their government bonds.  Which leaves less money to pay for those generous benefits.  While their populations continue to age.  Taking you to that tipping point.  Like many countries in the Eurozone who could no longer borrow money to pay for their nanny states.  Who had to turn to the European Union, the European Central Bank and the International Monetary Fund for emergency loans.  Which did provide those emergency loans.  Under the condition that they cut spending.  Money in exchange for austerity.  Something that just galls those Keynesian economists.  For despite all of their financial woes coming from having too much debt they still believe these governments should spend their way out of their recessions.  And never mind about the deficits.  Or their burgeoning debts.

But these Keynesians are missing a very important and obvious point.  The problem these nations have is due to their inability to borrow money.  Which means they would NOT have a problem if they didn’t need to borrow money.  So austerity will work.  Because it will decrease the amount of money they need to borrow.  Allowing their tax revenue to pay for their spending needs.  Without excessive tax rates that reduce economic activity.  Making the nanny state the source of all their problems.  For had these nations never became social democracies in the first place they never would have had crushing debt levels that cause sovereign debt crises.  But they did.  And their populations aged.  Making it a matter of time before their Ponzi schemes failed.  Something no nation with a growing nanny state and an aging population can avoid.  Even the United States.  Who kept true to their limited government roots for about 100 years.   Then came the progressives.  The central bank.  And Keynesian economics.  Putting the Americans on the same path as the Europeans (see US Federal Debt As Percent Of GDP).

Debt as Percent of GDP and Wars R2

With the end of the Revolutionary War they diligently paid down their war debt.  Which was pretty much the entire federal debt then.  As the federal government was as limited as it could get.  Then came the War of 1812 and the debt grew.  After the war it fell to virtually nothing.  Then it soared to pay for the Civil War.  Which changed the country.  The country was bigger.  Connected by a transcontinental railroad.  And other internal improvements.  Which prevented the debt from falling back down to pre-war levels.  Then it shot up to pay for World War I.  After WWI the Roaring Twenties replaced progressivism and quickly brought the debt down again.  Then Herbert Hoover brought back progressivism and killed the Roaring Twenties.  FDR turned a bad recession into the Great Depression.  By following all of that Keynesian advice to spend the nation out of recession.  From the man himself.  Keynes.  The massive deficit spending of the New Deal raised the debt higher than it was during World War I.  Changing the country again.  Introducing a state pension.  Social Security.  A Ponzi scheme that would struggle once the population started aging.

Then came World War II and the federal debt soared to its highest levels.  After the war a long decline in the debt followed.  At the end of that decline was the Vietnam War.  And LBJ’s Great Society.  Which arrested the fall in the debt.  Its lowest point since the Great Depression.  Which was about as large as the debt during the Civil War and World War I.  Showing the growth in non-defense spending.  Then came Reagan’s surge in defense spending to win the Cold War.  Once the Americans won the Cold War the debt began to fall again.  Until the Islamist terrorist attacks on 9/11.  Halting the fall in the debt as the War on Terror replaced the Cold War.  Then came the Great Recession.  And President Obama.  Whose non-defense spending caused a huge spike in the national debt.  Taking it to a level not seen since World War II.  When an entire world was at war.  But this debt is not from defense spending.  It’s from an expanded nanny state.  As President Obama takes America into the direction of European socialism.  And unsustainable spending.  Which can end in only but one way.  Austerity.  Painful austerity.  Not like the discomfort of the sequester cuts that only were cuts in the rate of future growth.  But real cuts.  Like in Greece.

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Keynesians blame Austerity not Anti-Business Policies for Poor Economic Growth

Posted by PITHOCRATES - March 24th, 2013

Week in Review

Keynesian economics puts the government into the economy.  This is why politicians love Keynesian economics.  It sanctions government spending.  And government investments to help stimulate economic activity.  No matter how bad the investment is.  For Keynesians have argued that paying people to dig a ditch and to fill it back in with the dirt they just removed will have a positive effect on the economy.  Because these ditch-diggers will spend their earnings in the private sector economy.  Thus stimulating economic activity.  So pulling money out of the economy to pay people to dig worthless ditches has only a positive effect on the economy.

But it doesn’t.  For they don’t see the money in the private sector that people can no longer spend because it was taxed away from them to pay people to dig worthless ditches.  So at best it’s a wash.  But it is never ‘at best’.  Because before people spend their ditch-digging earnings it passes through many hands and many government departments.  All of which take a little off the top to cover their overhead costs.  So government spending is always less than what the private sector would have spent.  But Keynesians conveniently ignore this fact.  Because they like the validation they receive from the government.  And they know they will continue to receive that as long as they tell the government what they want to hear.  The government should spend more money (see WBI: More on the Chicken-and-Egg Deficit-and-Jobs Issue by Michael Tomasky posted 3/22/2013 on The Daily Beast).

Our first WBI [Wonky But Important] is built around a March 8 CBO report brought to my attention this morning by Congressman Chris van Hollen–my very own Mongtomery County Md. representative, I am happy to say–finding that half of this year’s expected budget deficit of around $800 billion–half!–can be laid at the door of the struggling economy.

In other words: When the economy is revved up, it reduces the deficit, because there are more tax revenues from all those employed people and businesses working to capacity (and, concomitantly, fewer government expenditures–there’s no need for stimulus spending or lots of unemployment benefits during a humming economy)…

CBO expects that the budgetary effects of automatic stabilizers will remain large because of the continued weakness in the economy, which is caused in part by the fiscal tightening that is occurring in calendar year 2013 under current law. That tightening includes the reduction in federal spending resulting from the sequestration that went into effect on March 1; the expiration of the payroll tax cut that was in place in 2011 and 2012; and the increase in tax rates on income above certain thresholds starting in 2013.

Can’t get much clearer than that. Austerity. Increases. The. Deficit. Asuterity. Increases. The. Deficit.

This relates to and supports the post I wrote Tuesday about that poll showing a horrifying percentage of Americans thinking balanced budgets lead to jobs. No. It’s the other way around. Now you have the CBO saying it, not just me. The Democrats, as van Hollen made clear at this breakfast I attended at Third Way, are banking on people to grasp this. I hope so.

It is amazing how Keynesians can filter through facts and figures and come to conclusions that always support their position.  Everything is always better when the government spends more money.  And nothing bad happens when government spends more money.  In fact only bad things happen when governments spend less money.  And they still believe this despite the European sovereign debt crisis.  Caused by governments spending too much money.

No Keynesian ever supported this position that prosperous economic times caused by government spending money during the Eighties would reduce the deficit.  That defense spending was nothing but bad.  Giving the government dangerous levels of debt.  But that was then.  Now that the Democrats are spending far greater sums than Ronald Reagan did and are running greater deficits than Reagan ever did deficits are now nothing to worry about.  Funny how that changed.

If today’s deficit spending is good than Reagan’s deficit spending was good.  If Reagan’s deficit spending was bad than today’s deficit spending is bad.  You can’t have it both ways.

If we can grow ourselves out of these deficits with expanding economic activity the question is how do we increase economic activity?  We need to let businesses do what they do without hindering them.  And how do we hinder business?  By increasing the cost of business.  And lowering the rate of return on investment.  Higher regulatory costs increase the cost of business.  Higher taxes lower rates of return on investment capital.  They pass these higher costs on to consumers via higher prices.  Which consumes more of their disposable income.  Reducing the amount of stuff they can buy.  Thus lowering business revenues.  All of which reduces economic activity.  It doesn’t increase it.

The reason why we are in the worse economic recovery since that following the Great Depression is the president’s economic policies.  More government spending won’t change that.  It’s not austerity that is increasing the deficit.  It’s the foolhardy policies of Keynesians who believe that government spending generates real economic activity.  It doesn’t.  It didn’t pull us out of the Great Depression.  It didn’t pull us out of the stagflation of the Seventies.  And it didn’t pull us out of the Great Recession.  But reversing anti-business policies did pull us out of the Great Depression.  It pulled us out of the stagflation of the Seventies.  And it would pull us out of the Great Recession.  If we would only try them.

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Guns vs. Butter

Posted by PITHOCRATES - February 11th, 2013

Economics 101

When Children get their Allowance their Faces light up as they Think of all that Spending they’ll Do

Parents try to teach their kids to be responsible.  And to understand that they are not rock stars.  They can’t have “everything all the time.”  Because if you can you get bored.  And look for new ways to kill that boredom.  Like developing a coke habit.  (“There were lines on the mirror, lines on her face.”  Life in the Fast Lane.  The Eagles.)  Which is bad.  Very, very bad.  So this is where a weekly allowance comes in.  It teaches kids to be responsible.  And to budget their wants.  To make choices.  If they want more of one thing they learn they have to have less of another.  This is economic reality.  And the sooner they learn it the better off they will be.

So what does a kid want?  Food, candy, games, toys, comic books, going to the movies and consuming a lot of concession food and drinks.  And other stuff.  What does a parent want?  Their kids not to want so much of these things.  And not to whine.  Especially that.  They also want them to learn the importance of saving money.  To spend less and save more.  So later in life should they lose their job they will have savings to live on while they look for another job.  Without having to move back home.  So they may give a child an allowance of $100 a week.  Telling that child it’s for those things they want.  And for putting a little in the bank every week.  So they can have some money for later.  During a time they really need it.  And when the child gets that $100 his face lights up.  Thinking of all that spending he’s going to do.  While thinking nothing about saving.

Kids Allowance and Budget

The parent watches with proud satisfaction as their child budgets his wants.  For 5 weeks he pays for his school lunch.  Spends a fixed weekly amount on candy.  When he wanted to spend more on games, toys and comic books he cut back spending on movie night.  Even not going to the movies at all in Week 4 because he chose instead to buy an expensive game.  The parents are happy to see their child live within his budget.  But are disappointed that he spent all of his allowance without putting any of it in the bank.

With this Easy Credit he soon realizes that he can have Everything all the Time

Then the parents divorce.  The mother remarries.  The new stepdad really wants his stepson to like him.  While he is bitter about his parents’ divorce.  The stepdad keeps the same allowance structure in place.  But in a desperate attempt to get him to like him he is more than willing to make advances on his allowance.  Loaning money easily.  But charging interest.  To continue the lesson of responsibility.

Kids Allowance and Budget with Deficits

With easy credit and wanting more toys the stepson borrows money in Week 2.  $10.  And buys more games and toys.  Paying $1.10 for the allowance advance.  Liking the ability to buy more at the toy store he goes back for another loan in Week 3.  This time $20.  Paying $3.42 in total interest charges at the end of the week.  Losing the lesson of living on an allowance he goes back to borrow more.  This time $30.  Paying $7.10 in total interest.  With this easy credit he soon realizes that he can have everything all of the time.  And in Week 5 he borrows $40.  With his interest on the outstanding balance adding up to $12.28.  Which is almost enough to buy his school lunches for a week.

At the end of Week 5 he owes $100 in allowance advances.  Which he will have to eventually pay back.  Seeing how irresponsible the child got the stepdad refuses future allowance advances.  Upset the kid starts whining.  A lot.  Annoyed the stepdad calls in the loan.  He gives the child his $100 weekly allowance.  And then takes it back.  The child whines more.  For he can’t buy anything that week.  Not even school lunch.  Having to brown-bag it.  A peanut butter sandwich and an apple.  Making pizza day a living hell.  For he has no savings to live on during this difficult time.  As he was a spendthrift with his money.  Ignoring the sage advice of his parents to save for a rainy day.  So he suffers the most painful time of his life.  Extreme austerity for a week.

When they can’t reduce Defense Spending anymore they simply Borrow Money to keep Spending

This example is similar to how the federal government works.  The taxpayers are the kids.  And the stepdad are the politicians in the federal government trying to make taxpayers like them.  So they keep voting for them.  Only the politicians don’t want the people to learn to be responsible.  To budget their wants.  To understand that if they want more of one thing that they have to have less of another.  No.  They want them to believe they can have everything all of the time.  If only they vote for them.  How can they do this?  Unlike a parent the federal government can print money.  Making it the best stepdad in the world.

One of the reasons the Founding Fathers created the federal government was to provide for a common defense.  After winning their Independence they couldn’t get the British to leave our soil.  Or prevent the Barbary pirates from capturing our merchant ships and selling our sailors into slavery.  The new federal government was to provide a military force to protect Americans.  The Founding Fathers wrote this into the Constitution.  What they didn’t write into it was all the social spending we see today.  Often at the expense of defense spending.  The great political debate of how to divvy up spending between defense and the social stuff we see today is the guns vs. butter debate.  Where strict constructionists wanting to keep spending per the intent of the Founding Fathers.  All guns and no butter.  The ‘butter’ being an issue for state governments.  While progressives and liberals want all butter and no guns.  Because they hate the military.  And think they can talk to our enemies and make them like us.  Most other people want something in between.  As shown by  this graph.

Gunds vs Butter

If you spend 80% on guns that only leaves 20% for butter.  If you spend 50% on guns that leaves 50% for butter.  If you only spend 20% on guns that leaves 80% for butter.  And so on.  Progressives and liberals want to move as far to the left on this graph as possible.  Because the farther left they go the more they please their stepchildren.  Who become accustomed to all that spending.  And show their appreciation by continuing to vote for their stepdad.  Of course they can’t reduce defense spending to 0% because there are people out there who hate us and want to hurt us.  So when they can’t reduce defense spending anymore they simply borrow money to keep spending.  So they can keep spoiling their stepchildren.  Whose faces light up when they think about all the spending they are going to do.  With the added benefit that they will never have to repay that spending.  Or learn economic reality.  Until, that is, the government gets so overextended they have to implement a little austerity of their own.  Only it won’t last a week like it did for that spoiled child.  Instead it will be more like it was in Greece.  It will last years.  And include some rioting.

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Bad Keynesian Policies cause influx of Romanian and Bulgarian Migration into Germany

Posted by PITHOCRATES - February 10th, 2013

Week in Review

It is interesting that countries that get into trouble using Keynesian economic policies tend to go to countries that relied on Keynesian policies less for help.  States with high government spending and bloated public sectors turn to countries with less government spending and less bloated public sectors for help.  Yet Keynesian economic policies are still the dominant polices of many nations.  Including the US, the UK, China, countries within the Eurozone, Bulgaria and Romania (see German warning over Romanian and Bulgarian migration by Rosa Silverman posted 2/6/2013 on The Telegraph).

German cities have warned that an influx of Romanian and Bulgarian economic migrants will cost them dear and put the “social peace” at risk…

Berlin, Hamburg, Dortmund and Hanover have seen a six-fold increase in economic migration from the two countries since 2006, which they say has left them struggling to cope…

The warning comes amid fears in Britain that tens of thousands more Romanians and Bulgarians will come here each year after formal restrictions on the numbers of low-skilled workers from the two countries end next year.

A report by the campaign group Migration Watch UK warned last month that up to 70,000 migrants could arrive annually from then.

Of course the question that just begs to be asked is why are Romanians and Bulgarians leaving their countries in the first place?  The Cold War is over.  The communists are gone.  These are beautiful countries.  Blessed with farm land.  And natural resources.  With some great people.  And a lot of history.  So why leave?  Because they caught the Keynesian contagion during the Nineties.  Their central banks kept interest rates artificially low to stimulate economic activity.  Which they did.  But a lot of that economic activity was artificial.  A bubble.  Times were good.  They expanded government employment.  And government pay and benefits.  And then the 2007-2008 financial crisis came along.  Bursting that bubble.  Leaving these nations with budget deficits.

Both nations were on track to join the Eurozone.  Working hard to meet the Maastricht criteria.  Conditional for entry into the common currency of the Eurozone.  After the financial collapse meeting the Maastricht criteria became more difficult.  As the fall in economic activity and the rise in the unemployment rates of these countries caused tax revenue to fall.  Creating deficits that approached or exceeded those permitted under the Maastricht criteria.  And the Keynesian cure for a recession, easy credit and more government spending, just made those deficits worse.  And it caused inflation to rise to or above that permissible under the Maastricht criteria.  They had to borrow money to meet their spending obligations.   And a condition of those loans was to bring their spending down to acceptable levels.  Like that to meet the Maastricht criteria.

Long story short the damage these Keynesian policies caused required very painful austerity to fix.  High unemployment and austerity makes people want to leave home for sunnier economic climes.  As Germany has been the bedrock of the Eurozone because of their more responsible governing and restraint in government spending these people went to Germany.  And to the UK.  Who didn’t join the Eurozone.  And aren’t mired in the Eurozone sovereign debt crisis.  Though they are implementing a little austerity of their own to bring down their budget deficits.

High government spending and large deficits cause trouble.  The U.S. has numbers worse than both Bulgaria and Romania.  Which means there is trouble ahead.  But unlike other nations the United States’ population won’t be able to travel to sunnier economic climes.  For no country will be able to absorb that amount of migration.  Not even Germany.  Or the UK.  Combined.

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The UK is Holding off on Selling EU Carbon Permits as the EU is Holding off Taxing other Countries for their Spending

Posted by PITHOCRATES - November 17th, 2012

Week in Review

The Eurozone is wallowing in a sovereign debt crisis that just won’t end.  Caused by spending obligations made during good economic times.  On the assumption that those good economic times would last forever.  But they created a lot of that economic activity with expansionary monetary policy.  Keeping interest rates artificially low.  By expanding the money supply.  Encouraging consumers and businesses to borrow and spend.  Which they did.  Leaving them with massive amounts of debt.  And inflation.  Which they fought the only way you can fight inflation.  By raising interest rates.  And contracting the money supply.  Or, in other words, with a recession.  Which reduces tax revenues.  Forcing governments to borrow more to pay for these ever expanding spending obligations.  Which led to rising borrowing costs.  And debt crises.  Leaving these Eurozone countries starving for cash.

Enter the Emissions Trading Scheme.  Making high energy uses buy permits to exhaust carbon.  Ostensibly to reduce global warming.  But really just a massive wealth transfer from the private sector to the public sector.  To help those countries with debt crises to pay for their ever expanding spending obligations without having to govern responsibly.  So they can continue to pander and buy votes and advance their liberal agendas.  But there has been some push back.  In particular from other nations flying into the European Union (EU) airspace who don’t want to subsidize the irresponsible governing of the EU countries.  Because of possible retaliation (like China threatening to cancel their Airbus orders for new airplanes) the European Commission is delaying the implementation of their airline emissions law (see Britain says it may review carbon permit auctions for airlines by Nina Chestney posted 11/12/2012 on Reuters).

The UK government will review its forthcoming auctions of European Union carbon permits for the aviation sector when it gets more details from the European Commission about its plan to delay the bloc’s airline emissions law, a minister said.

The UK plans to hold two auctions of around 3.5 million EU carbon permits for the aviation sector on November 26 and December 10…

The EU Commission said on Monday it will conditionally put on hold its rule that all airlines must pay for their carbon emissions for flights to and from EU airports.

Why is the UK reviewing their auction of carbon permits?  Because these permits are basically new taxes for the airlines.  That the airlines will pass on to their passengers.  Raising the cost of flying.  Which, in turn, will make some people forgo flying.  Hurting the airline industry.  Further exasperating a weak economy.

Of course those in the Eurozone rioting against austerity would love to see the EU go ahead with taxing other nations for flying into their airspace.  Because they don’t like austerity.  And would love to pass on their costs to other nations’ taxpayers.  Something other nations’ taxpayers are none too keen on.  So it’s a mess.  And the Emissions Trading Scheme only compounds the problem.  As it does nothing to address the source of the problem.  Excessive spending obligations that these nations cannot afford.

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The French Socialists to Advance Policies that will drive the Wealth Creators out of France

Posted by PITHOCRATES - July 1st, 2012

Week in Review

No one likes austerity.  Even the nations who agreed to it to join the Eurozone.  Back when they were joining they all said they would keep their deficits and debt within Eurozone requirements.  But after a prolonged recession few are willing to cut back on government spending.  In fact, in France, they’re going to increase government spending by beating up on the rich (see Adieu, la France posted 6/23/2012 on The Economist).

AFTER the French Socialists last came to power in 1981, under François Mitterrand, the new government went on a spree of nationalisations, taking over 36 banks and several industrial groups, before quietly abandoning the policy and even reprivatising a few firms. Small wonder that French bosses greeted François Hollande’s election as president with more than a frisson of foreboding. What would the Socialists do this time…?

Even before the parliamentary elections on June 17th, at which the Socialists won a majority of seats, rhetoric against factory closures had been mounting…

Michel Sapin, the labour minister, has promised to make it so expensive for companies to lay off workers that it will no longer be worth their while. Firms that fire people while still paying dividends may be penalised. Another planned ruse is to force companies to sell factories, presumably along with the brands manufactured there, to competitors rather than close them down…

[The Socialist] party’s most popular campaign promises was to tax incomes of more than €1m at a marginal rate of 75%. The likely consequences will be much less admired. Some big companies will leave France or move management abroad in order to shield their executives from the tax. That will lead them to invest and hire more overseas rather than at home. Already, top foreign executives no longer want to join French firms. A new extra tax on dividends has further angered the business world…

But the most important consequence of stratospheric taxes will be less visible, at least at first. Marc Simoncini is one of France’s best-known entrepreneurs—and one of the few business leaders to denounce the new measures publicly. Why, he recently asked, would anyone want to start a business, invest and succeed in the most taxed country in the world?

Tax is not the only threat to executive pay. Last week Pierre Moscovici, the finance minister, announced that pay for bosses of companies in which the French state holds the majority of shares will be capped at a flat rate of €450,000, or roughly 20 times the wage of the lowest-paid worker… In some cases it will lead to a 70% pay cut… Measures to limit pay at fully private firms are expected before long.

Most French business leaders don’t think that the government is deliberately targeting them. They reckon that its motives are purely political—and that the Socialists are simply not aware of the damage their plans will do (most ministers have hardly any experience of business).

Behold class warfare on a grand scale.  This is socialism.  This is what being ‘fair’ is.  This is egalitarianism.  Everyone is equal.  Except the rich and successful.  Who the state enslaves.  To serve the people.  By forcing these executives to continue to do what so few people can do.  Run these big corporations profitably.  But they won’t reward them for their unique talents.  No.  Instead, they’ll enslave them.  Force them to keep producing wealth.  To keep creating jobs.  But to do so for a paycheck that’s less than most sports stars, movie stars, singers, writers, reality stars, etc., get.  Because these executives don’t earn their pay like these people who contribute so much to the world’s economies.

The Socialists believe these rich executives don’t do anything worthy for their pay.  That these corporations run themselves and only create wealth because of the workers in the trenches.  These are the important people.  Of course if they don’t need these rich executives why not just fire them?  Let these corporations spontaneously produce wealth and create jobs?  Because even the Socialists know that these rich executives are the only ones who can run these corporations and produce the wealth they so want to confiscate.  And if they fired these rich executives and tried to run these corporations themselves there would be no wealth to confiscate.  Because they have no business experience.  And they would only run these companies into the ground.  Just like the Soviet state planners did in the Soviet Union.

How did they get here?  Their social democracies.  Cradle to grave state welfare.  The people like it.  They love the free stuff.  The problem is it’s free only to them.  Someone has to pay for it.  Primarily those who work for the rich executives.  And the rich executives themselves.  Via confiscatory tax rates on the wealth they create.  But as they drive out these wealth creators from the country what will they tax?  As populations age there are more people consuming government benefits than there are paying for them.  Which means they need to raise tax rates ever higher.  Going so far as to nationalizing businesses.  Eventually there comes a point where even class warfare won’t work anymore.  Because there just won’t be enough wealth left in the country to tax.

These policies are not likely to make things better in France.  It may feel good for a little while to punish the rich.  But punishing the rich won’t reduce your taxes.  Or improve the economy so you can advance into a better and higher paying job.  But it makes good politics.  Which is why these politicians can win elections.  In Europe.  And in the United States. 

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The Solution to Europe’s Debt Crisis may be as ‘simple’ as the Eurozone Nations surrendering their Sovereignty

Posted by PITHOCRATES - June 24th, 2012

Week in Review

The solution to the Eurozone debt crisis is easy.  All the European nations have to do is surrender their sovereignty (see The eurozone’s long reform wishlist by Laurence Knight posted 6/24/2012 on BBC News Business).

A US-style federal budget may be needed to cover the cost of recessions, so that individual governments don’t risk going bust when their national economies get into trouble. For example, the cost of a minimum level of social security – especially unemployment benefits – could be permanently shared across the eurozone, paid for by a common income tax.

Welcome to the new world order.  At least the new country of Europe.  Made up from the former European nations.  And, unsurprisingly, the answer to all their problems is a new tax.  Not just any tax.  But a European income tax paid to a distant central power.  The kind of thing that embroiled Europe in wars to prevent going as far back as the Roman Empire.  And beyond.

The European Central Bank may need to have its mandate changed so that it has an explicit dual target to support employment as well as price stability, just like the US Federal Reserve does, as proposed by the new French President Francois Hollande.

Because it has worked so well in the United States.  The Fed was in charge during the Great Depression.  The Fed was in charge during the stagflation of the Seventies.  The Fed was in charge during the irrational exuberance of the Nineties.  And the Fed was in charge during the great housing bubble that gave us the subprime mortgage crisis.  Few people in the US think the Fed should be supporting anything these days.  For they feel they’ve done enough damage.

All Europeans (and especially southerners) are having to implement structural reforms that will increase their long-term growth and strengthen government finances, including removing restrictions on market competition, raising the retirement age, laying off (over many years) a lot of state employees, and making it much easier to hire and fire employees.

Really?  Something the individual European nations couldn’t do (cut back generous state benefits) a European country can?  Students in France took to the streets when they added a year or so to the retirement age.  Students took to the streets in Britain when they tried to make students pay for a part of their college education.  And Greece’s answer to austerity?  Riots.  It is easy to say what they must do.  Getting them to do it is another thing.  And they’ve clearly shown they don’t like doing it.  And so far have chosen not to.

In the same way that Washington has helped out struggling US states, the southern European governments may need to be given money (given, not lent) by the rest of the eurozone via direct fiscal transfers, so that they can afford to prop up their economies until they have regained competitiveness. These transfers could end up taking the form of bailout loans that are never repaid.

The US government can’t afford to bailout any states.  The state of California is in trouble.  As are some of our big cities.  Such as Chicago.  And New York City.  They have the same problem Greece has.  They have far more spending obligations than they can afford to pay.  As did the state of Wisconsin.  Whose governor implemented the kind of structural reforms suggested for the new European country.  And the opposition party and the federal government attacked them for it.  Organized a recall drive to kick out the governor.  And undo those structural reforms.  But the recall failed.  The governor won the recall election by a large margin.  Showing the people are no longer going to pay for other people’s irresponsible spending.  As the European people probably won’t want to either.

To make a full banking, fiscal and monetary union work, the eurozone governments would need to hand power to a central authority (the European Commission) that can pay for and supervise all of the above, while national governments accept that in future they have to keep their own spending strictly within their limited means.

 As most of the above reforms involve Germany sharing its wealth with the rest of Europe (and all European nations handing power to Brussels), Berlin is insisting on the principle of no taxation without representation – in other words a move towards full federalism, with spending and regulation controlled by a directly elected presidency of the European Commission.

Few European governments like hearing Germany tell them to implement structural reforms.  They’re not going to like it any better coming from Brussels.  Federalism wasn’t easy in the US.  We had to fight a civil war.  Go through reconstruction.  To this day we’re still fighting regional conflicts.  The Midwest is strongly union while the southern states are not.  And the federal government recently intervened on the side of the unions when Boeing tried to build a new aircraft manufacturing plant in the South.  In fact, those in the federal government refer to those states as flyover country.  Which is all they want to see of that country.  Flying overhead as they go between the east and west coasts.  Where the big government people live.

The 13 original American states had only about 200 years of history before they joined the federal union.  The European people have over 2,000 years of history.  It is unlikely that they will willingly choose to become flyover country.  No, there isn’t any easy solution to their problem.  If there was they would have already done it.  A currency union without a political union may just prove to have been a bad idea.  A political union isn’t likely.  Unless the people of Europe are more willing to give up their 2,000 years or so of history than the Americans were willing to give up their 200 years or so of history.  And if they’re not they should really think long and hard about creating something even bigger than the Eurozone.  That may be even more difficult to fix.  Should it follow US history too closely.  Where that first hundred years proved to be a bitch.

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As the Financial Crisis deepens in Greece the Best and Brightest are choosing to Leave Greece

Posted by PITHOCRATES - June 23rd, 2012

Week in Review

Greece struggles to remain in the Euro.  But it may all be for naught.  For the damage is done.  The best and brightest have been leaving Greece for sunnier pastures (see Greece brain drain ‘wrecking my social life’ by Giorgos Christides posted 6/22/2012 on BBC News Magazine).

According to the latest national polls, more than seven out of 10 young Greeks aged 18 to 24 believe that emigration is the ideal – indeed the only – way out from the crisis. Two out of 10 have already applied for jobs and university places abroad.

For many Greek high school graduates, who are currently sitting for their university entrance examinations, studying in Greece is not a choice but an imperative dictated by their families’ lack of economic means to fund a university education abroad.

Those families who can afford it, don’t give the matter a second thought – they hide their tears and frustration as best they can, and wave their children goodbye, wishing them to go abroad and stay there for good…

Little did we know that a decade later, Greece would be considered an economic wasteland for ambitious young students and graduates, who are now suffering from unemployment rates in excess of 50%.

Workers’ and students’ mobility has been, of course, one of the landmarks and major achievements of European integration. But it is now evolving into a medium-term death sentence for the ageing Greek society and economy.

In an era characterised by intensified global competition for talented, innovative and highly-skilled workers, the brain drain afflicting Greece means the country is losing its best hope of revival.

Rather ironic, isn’t it?  The thing that brought Europe closer together, the Eurozone, may be the thing that makes the Greek tragedy so tragic.  As the politicians massaged the financial numbers to get Greece into the Eurozone, and to keep Greece in the Eurozone, the young people who were to pay for their financial chicanery saw no future and left.  Saying goodbye to that generous social democracy.  Walking away from the welfare state.  And all of that government spending that caused all of this trouble in the first place.  To get a good education.  So they can get a job.  Which they can do relatively easily thanks to the currency union and European integration.

Greece is in a world of hurt.  An unemployment rate of 50% for the young and ambitious is bad.  But it’s better than having the young and ambitious leave.  Because these are the people who get good jobs.  And make a lot of money.  Who pay a large share of the taxes.  These are the tax contributors.  Who barely consume any taxes.  As they leave the tax consumers will be the only ones left.  Which will only make the current financial crisis worse.

The austerity requirements for their financial bailout caused rioting in the street.  And the rioters were primarily tax consumers.  For who else would riot over these spending cuts?  The taxpayers?  Not likely.  The tax consumers are the ones panicking over proposed austerity measures.  Because they are wholly dependent on government spending.  But while they protest the tax contributors, like Elvis, have left the country.  Making the future indeed a dark one.

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Greek Debt Crisis, Social Democracy, Welfare State, Keynesians, Inflation, Tax Evasion, Common Currency and the Eurozone

Posted by PITHOCRATES - June 19th, 2012

History 101

Higher Debt Balances accrue Higher Interest Costs that Reduce Income

The Greek debt crisis has been in the news for a long time.  Which has contributed to the Eurozone sovereign debt crisis.  Most people understand that it’s bad.  But they may not understand how bad.  Or understand what exactly happened.  What caused it.  And why they can’t fix it.  For it’s been a crisis since 2009.  And all we hear is that it’ll be apocalyptic if we don’t bail out Greece and save the Euro.  Which would be bad.  As most apocalypses tend to be.

To get a general understanding we’ll use an analogy.  Let’s say you just got a new job and are now earning $80,000 annually.  Your future is bright.  And you’re very happy.  You buy a big house.  And you run up your credit cards furnishing it with lots of nice stuff.  Because you’re earning $80,000 a year and can easily afford it.  Well, perhaps not easily.  But you can still put food on the table.  And take a nice vacation with your better half.  But then a recession sets in.  They cut your bonus.  And some of your benefits (taking a large health care deduction out of your check).  But that house payment remains the same.  As do your credit card bills.  So you cut out the vacation.  And eat more hamburger and less steak.  To adjust to the lost income.  Then worse comes. 

You lose your job.  Go on unemployment.  Which doesn’t pay your bills.  So you desperately look for a new job.  In the bad economy the best job you can get pays only $50,000.  Which is a lot more than unemployment.  But a far cry from $80,000.  You can keep making your house payment.  But you have to slash nonessential spending.  And cut up your credit cards.  Because those high credit card balances require a payment that’s almost as big as your house payment.  Almost your entire paycheck goes to your creditors.  All because you started spending money you didn’t have because you thought that $80,000 job would never go away.  In fact you spent based on what your income would grow to.  Beyond that $80,000.  This is the Greek debt crisis.  Only without the spending cuts.

A Policy of Constant Inflation Monetizes Old Debt and Bumps People up into Higher Tax Brackets

Like the rest of Europe Greece became a social democracy.  Which is socialism-light.  The people learned they had the keys to the treasury.  All they had to do was to vote for people who liked using that key.  And they did.  Government spending soared beginning in the Seventies.  The public sector grew.  Creating a lot of government jobs.  With some generous pay and benefits.  But the country was also a welfare state.  Which meant everyone got a state pension.  State health care.  And other state social benefits.  You didn’t have to work for the government to enjoy the generosity of the state.  And the state was generous.

And the generous government spending just grew more generous.  Strong economic growth allowed more spending.  And more borrowing.  (From 2000 to 2007 Greece led the Eurozone in economic growth.  Which probably sealed their fate.  Because the increased spending during boom times they could never sustain during bad economic times.  And bad economic times were coming.)  Budget deficits became a part of the Greek government.  For they were also Keynesians.  Who believed in the value of running deficits.  And accruing debt.  They devalued their currency.  Which helped make their exports cheaper.  And it monetized their debt.  A policy of constant ‘but manageable’ inflation made old debt worth less.  And easier to pay off.  Just as inflation made people’s savings accounts worth less over time.  But running budget deficits year after year increased their outstanding debt.  Starting slowly at first.  Then growing greater.   Prior to 1984 Greek debt as a percentage of GDP was below 40%.  By 1998 it was above 60%.  By 1990 it was above 80%.  By 1994 it was above 100%.  By 2010 it was above 140%.  By 2011 it was above 160%. 

The Keynesians don’t see a problem with this.  Because they believe if you keep depreciating the currency the older debt just goes away.  It’s like redeeming a $100 savings bond from 1875.  Back then $100 was a lot of money to the government.  Today it’s the loose change they drop from their pockets that isn’t worth bending down to pick up.  Metaphorically, of course.  In time with steady inflation those old debts simply become chump change.  And there’s something else Keynesians love about inflation.  It’s a hidden tax.  Sometime it’s not possible politically to raise taxes.  So they can use inflation to bump people into higher tax brackets.  Making them pay a higher percentage of their income to the government.  Which brings us to another Greek problem.

At the Heart of the Greek Debt Crisis is the Welfare State

Greece is a welfare state.  Like other welfare states they have to fund that welfare with taxes.  So they have high tax rates.  Because it’s what the people want.  That welfare state.  Which requires those high tax rates.  But they have a problem.  People don’t like paying taxes.  Especially the Greeks.  Who have taken avoiding paying taxes to an art.  Which plays a big problem in the Greek debt crisis.  People demanding all of that government spending.  Yet refusing to pay the taxes to pay for it.  Causing great problems.  Especially when they joined the common currency.  The Euro.

The common currency changed things.  They could no longer depreciate their currency.  Because it wasn’t their currency anymore.  It was the Eurozone’s currency.  Joining the Euro was like giving a bunch of people credit cards and telling them they had to restrict their purchases so that their annual deficit and total debt fell below certain percentages of their income.  And those numbers to join the Euro were as follows.  Their deficit had to be below 3% of GDP.  And their debt had to be below 60% of GDP.  If all the members kept within these limits they would maintain their good credit rating.  And be able to use their ‘credit cards’ responsibly.  And not shock the European Central Bank when they opened the credit card statement at the end of the accounting period.

It appears that Greece massaged their numbers with some creative bookkeeping to meet the requirements to join the Euro.  And to stay within the currency union they may have misreported their economic numbers.  (When the crisis began the Greeks officially reported that their deficit was 5% of GDP.  Which exceeded the allowable 3% but was salvageable.  After some outside audits they revised their 2009 deficit up to 15.6% of GDP.  Making the crisis more of an apocalypse).  Why did they do this?  Because they wanted to keep spending.  But they couldn’t depreciate their currency anymore.  The economy was in recession which higher tax rates wouldn’t help.  Not to mention all of the tax evasion.  So that left borrowing as their only avenue to sustain that excessive government spending.  Sort of like trying to solve the problem of having your credit cards cancelled for nonpayment by getting new credit cards to use to accumulate even more debt that you can’t repay.  They’ve gotten one bailout package already.  And a second one is theirs if they commit to some austerity.  Which the people have rejected.  At least those rioting in the streets.  And considering how generous those benefits had been it’s hard to blame these people.  For life as they knew it is over for them.  Thanks to irresponsible government spending that made them dependent on the government.

So there are a lot of factors that caused the Greek debt crisis.  But at its heart is one thing.  The welfare state.  For if there was no excessive government spending they wouldn’t have had those large deficits.  Debt.  Or debt crisis.

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Government Spending

Posted by PITHOCRATES - June 18th, 2012

Economics 101

Money is a Temporary Storage of Wealth used to Reduce the Search Costs in the Barter System

What came first?  Money?  Or the things we buy with money?  Here’s a hint.  Once upon a time there was no money.  Yet we still had things.  We bought things without money, you ask?  Yes.  We did.  And we bought things the only way we could before there was money.  We traded.  We bartered.  We traded things.  Things we built.  Things we grew.  Things we dug out of the ground.  Things.

These things had value.  Value we created with our labors.  Either by digging something valuable out of the ground.  Growing something of value.  Or making something useful that people valued.  And something people were willing to trade something they produced that had value.  These people created value.  They created wealth.  They were wealth creators.  And when they come together to trade the valuable products of their labors they were trading wealth.  After their bartered trade all parties in that trade walked away believing they came out ahead in that trade.  For each walked away with something they valued more.

But the barter system proved to be inefficient.  As the economy became more complex there were so many things to trade for.  And people valued some things more than they valued others.  Which sometimes made it difficult to find someone to trade with.  Search costs increased.  People spent more time looking for people to trade with than they did producing wealth.  Which is why people created money.  A temporary storage of wealth.  Using money greatly reduced search costs.  Instead of finding someone to trade with that also wanted what you had to trade all you had to do was find what you wanted.  Then trade your money for it.  Then the seller could take that money and trade it for something he wanted.  Regardless if the person was interested in anything he produced.

Ultimately People don’t want Money, they want the Things they can Trade Money For

No one likes paying taxes.  They’re one of those necessary evils to live in a civilization.  Because they are the only way to pay for public goods.  Early public goods may have consisted of a granary to store food.  And an army.  To protect your civilization from the hostile environment around it.  Government could tax the grain producers by taking a portion of their crops for the public granary.  And to feed the army.  They could tax the shoemakers and take some shoes for the army to wear.  And so on.  The government would tax the producers by taking a small percentage of what they produced to provide the public goods.   

Money changed this a little.  Instead of shipping a portion of grain from all the grain producers to the public granary the grain producers paid their taxes in money.  For it was easier to collect money from all the grain producers than it was collecting grain.  Then the government would use that tax money to purchase grain to fill the public granary.  Even having the local grain producers compete with each other to fill that large public purchase of grain at the lowest price.  Just like buyers and sellers used money to make their trades easier so did government use money to make public spending easier.  But one thing didn’t change.  Money was only a temporary storage of wealth.  The buyers and sellers created wealth.  And the government took a portion of the wealth they created.

This is a crucial point in understanding government spending.  Money isn’t what’s important.  It’s those things of value the wealth producers create that is important.  Because ultimately people don’t want money.  They want the things they can trade that money for.  Those wonderful things creative wealth producers bring to market.  Things government does NOT produce.  Even though they can print money they cannot produce these things of value.  Other people do.  Other people who incur costs.  Who pay for supplies.  And provide pay and benefits to their employees.  Which is why they don’t like paying taxes.  Because it leaves them less to spend on their business.  Or on themselves.  And they don’t like the government printing money.  Because money is a temporary storage of wealth.  And when you arbitrarily increase the amount of money in circulation for the same amount of wealth in the economy you cause inflation.  More dollars chasing the same amount of goods.  So the dollar is worth less than it was before the inflation.  And because the dollar is worth less it takes more of them to buy what they once did.  Meaning prices increase.  Which is why people don’t like inflation.

A Country never went Bankrupt by Spending too Little

So even though the government has the power to print money responsible governments don’t.  Because inflation causes a lot of economic damage.  So governments rely on taxes to fund their public goods.  But excessive taxation also causes economic damage.  By pulling wealth out of the private sector.  Leaving business owners with less.  And increasing the cost of business.  Making it difficult to hire more people.  Which lowers economic activity.  For the more people who work and earn a paycheck the more people are in the market place buying things.  So it’s important for governments not to tax too much.  Which means they shouldn’t spend too much.

Of course that’s easier said than done.  Because people tend to vote for politicians that give them free stuff.  Which is why politicians love to spend.  And to tax.  Tax and spend.  And during good economic times when government coffers are flush with cash they tend to spend more.  And tax more.  Because they can.  But they all run into the same problem.  Government raises revenue on economic activity.  By applying tax rates on income, sales, value added, property, etc.  The government collects a small percentage on these items based on the tax rate.  When income, sales, value, etc., are large that tax rate generates a lot of revenue.  When income, sales, value, etc., are low that tax rate generates a lower amount of revenue.  And when governments spend too much during the good times they raise their spending obligations.  Based on that robust economic activity.  But when the economic activity becomes less robust there is a problem.  Tax revenues fall.  Because those tax rates are taking a percentage of a smaller income, sales, value, etc.  So tax revenue falls while those spending obligations remain the same.  Leading to a budget shortfall.  Which leaves them with two choices.  Cut spending.  Or borrow money.

Well, people rarely vote for people that take stuff away from them.  So the politicians borrow money.  And they keep borrowing money.  Because their spending obligations were based on the rosiest of projections of economic activity.  Which rarely happens in real life.  So they borrow.  And they borrow more.  Soon they have to borrow to pay the interest on what they’ve borrowed previously.  Soon the debt grows so great that the credit rating agencies lower their credit rating.  Making future borrowing more expensive as they have to pay a higher interest rate.  Some may turn to higher tax rates.  But that also lowers economic activity.  Which reduces overall tax revenue.  Some may turn to printing money. Which also lowers economic activity.  And overall tax revenues.  By causing inflation.  And raising prices.  Which eventually leads a country down the road to bankruptcy.  And on their knees begging for a bailout.  Which is the ultimate destination for all nations with excessive government spending.  To throw themselves on the mercy of those countries who have lived within their means.  Which rarely ends well.  Because they expect the bankrupt country to start living within their means.  Meaning austerity.  Which the people accustomed to generous government spending are not too keen on in the least.  And often reply to austerity demands with a little rioting in the streets.

There is one simple way to avoid all of these troubles, though.  All a nation has to do is NOT spend so much.  If they do then they will never have a financial crisis.  For a country never went bankrupt by spending too little.

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