Argentina adds 15% Tax on all Out of Country Credit Purchases

Posted by PITHOCRATES - September 2nd, 2012

Week in Review

Argentina has a problem.  They have depreciated their currency so much that no one wants to hold on to it.  And they are taking aggressive measures to that end (see Argentine tax agents to track all credit card buys by MICHAEL WARREN, Associated Press, posted 8/31/2012 on Yahoo! News).

Argentina just made it more expensive for its people to use credit cards outside the country, and more dangerous for cardholders who aren’t paying all the taxes they should.

One measure published in Friday’s official bulletin adds a 15 percent tax every time people make a purchase outside the country using a card issued by an Argentine bank. Another requires the banks to report every credit card purchase, home or abroad, to the tax agency.

The moves target Argentines who have discovered that by using credit cards outside the country, they can get around increasingly tight currency controls and shelter their money from soaring inflation. Purchases outside Argentina using peso-denominated cards soared 48 percent in June compared to the year before, obligating the central bank to send $289 million out of the country in just one month. Overall capital flight soared to $23 billion in 2011.

Argentina likes to print money.  Which means Argentine pesos don’t hold their value.  If you don’t spend them this week they will buy less next week.  So Argentines don’t want to hold on to them for long.  They’d rather buy stuff while the buying is good (before their pesos loose too much of their purchasing power).  Or quickly exchange their pesos for a currency that holds its value longer.  Like U.S. dollars.  And out of country credit purchases help Argentines minimize the effects of runaway inflation on their earnings.   But when Argentine banks have to settle these international accounts it takes a lot of a depreciated currency to do that.  Hence the soaring capital flight.

If printing so much money causes so many problems why do they print so much money?  Because Argentina governments like to use class warfare.  They like to tax the rich.  And give to the poor.  As well as pay for a lot of big government projects to employ highly compensated union workers.  All to help their shirtless.  Their descamisados.  The poor laborers who work so hard that they must remove their shirts.  But they have so little because of the evil rich people running companies.  And their foreign investors.  So the Argentines gear their whole economic system to favor the unions. And the descamisados.

Argentines don’t have to declare their income unless they are salaried and make more than $20,000 a year or are self-employed and make more than $30,000, so many register with the tax authorities as if they make less than the limit, dealing in cash and trying to keep their income and purchases off the books.

But Argentina also taxes accumulated wealth, giving the government license to scrutinize people’s private property to an extent that foreigners are ill-accustomed to. People whose incomes don’t match their lifestyles can find themselves closed out of the financial system until they come clean.

Since November 2011, Argentina’s government has sought to stem capital flight by closing down nearly every avenue people have to legally trade their inflationary pesos for U.S. dollars. The black-market peso price has spiked as a result, trading now at 6.37 pesos to the dollar, compared to the official rate of 4.65. That 37 percent gap represents what people with undeclared pesos have to lose in order to convert their cash to dollars inside Argentina.

Credit cards, meanwhile, are paid at the official rate, and many cardholders have figured out ways to use them to avoid this loss. The 15 percent tax raises the effective cost of purchases to 5.35, reducing the gap by nearly half.

Of course if you try to implement massive transfers of wealth those with wealth will do everything within their power to keep what is theirs.  So the government has to do everything within their power to let as few as possible to escape their wealth-destroying policies.  Hence the clampdown on out of country credit card purchases.  While the government clamps down it’s the simple workers who ultimate suffer.  The descamisados.  For it is their savings that are made worthless over time.  Making their retirement more difficult.  And less enjoyable.

Argentina has pursued the same polices since Juan Peron in the Forties and Fifties.  And little has changed over time.  Other than a great debt default.  Meanwhile their neighbor, Chile, is doing quite well.  Thanks to a different set of economic policies implemented by a dictator.  Who had help from a great economist.  Milton Friedman.  Who worked with the brilliant Chilean economists known as the Chicago Boys.  Who did things very un-Argentina-like.  And how did that work out for their retirees?  Suffice it to say their pension plan is a better model than the U.S. Social Security program.

Argentina is a great country.  Filled with people just waiting to exploit their human capital.  And the only thing in their way are the bad policies of their government.  Which must be so frustrating for Argentineans.  Because they could explode their economy if only they were allowed to.  And the only thing preventing them are the class warfare policies of their government.  As the class warfare polices of so many previous governments have denied previous generations lives of comfort and plenty.  Lives that were just out of reach.  Of the middle class.  And the descamisados.

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Poverty is Down in Chile thanks to Job-Creation and Subsidies paid for by those Newly Created Jobs

Posted by PITHOCRATES - July 29th, 2012

Week in Review

Job-creation reduces poverty in Chile.  And it goes back to the Seventies.  But you wouldn’t know it by reading this (see Poverty indicators decline posted 7/25/2012 on Economist Intelligence Unit).

Improvements in Chile’s poverty indicators in the past two decades are back on track after a setback in 2009. The proportion of the population living in poverty fell from 15.1% in 2009 to 14.4% in 2011, according to the latest Caracterización Socioeconómica Nacional (Casen) household survey. There was also a substantial drop in the proportion of people living in extreme poverty, from 3.7% in 2009 to 2.8% in 2011. The main factor explaining these trends was the strong level of job-creation recorded in Chile in the past two years, but well-targeted government subsidies also played an important role…

Within the IEF programme, the monthly bonuses under the “dignity” component, worth Ps6,000 (US$12.5) per person in the household, plus Ps13,000 per household, are targeted at those in extreme poverty, and will be unconditional. Beyond that, if the children in the household attend their mandatory healthcare check-ups and achieve a school attendance rate of at least 85%, the household will receive a monthly bonus of Ps8,000 per child. This yields Ps53,000 per month to a household with two adults and two children satisfying these conditions, or US$97 per month for one with one adult and two children.

Yes, job-creation was a strong factor.  Targeted government subsidies?  Not really.  First of all, you can’t do targeted subsidies if you don’t have a lot of jobs creating a lot of tax revenue.  You can have jobs without subsidies but you can’t have subsidies without jobs.  Because jobs pay for subsidies.

Paying people to have children?  Where have I heard this before?  Oh, yes.  LBJ’s Great Society.  That gave us AFDC.  Aid to Families with Dependent Children.  That destroyed poor families by encouraging single mothers to have more babies to collect more benefits.  Allowing men to father as many children as they pleased with as many women as they pleased because they don’t have to pay to raise their children.  The state became the father to these children (and husband to these women).  Raised them in crime-infested housing projects.  And sent them to broken, substandard schools.  Which these kids dropped out of and joined gangs.  Yeah, AFDC worked so well that Bill Clinton, a Democrat, reformed welfare to fix this ill-conceived policy.  Because even he knew you can’t fix problems by simply throwing money at them.  Jobs were better.  And families.  Where a child grew up with a mother and a father to nurture and discipline the child.  To put them on the right path.  Something the state just couldn’t do.

Missing from this piece is any mention of Milton Friedman.  The Chicago Boys.  El Ladrillo.  The economic plan put together by the Chilean economists who studied at the University of Chicago.  In the Chicago school of economics.  It was so thick they called it The Brick.  Or El Ladrillo.  Milton Friedman and these great Chilean economists, the Chicago Boys, turned the Chilean economy around.  The dictator Augusto Pinochet even invited Milton Friedman down to Chile to help.  Friedman went.  Gave some advice.  And Pinochet followed it.  Turning their horrible economy around (see Monetarism, Laissez-Faire Capitalism, Augusto Pinochet, Chile, Hyperinflation, El Ladrillo, Chicago Boys, Milton Friedman and Miracle of Chile).

He ditched the mercantilist policies.  Embraced laissez-faire capitalism.  Privatized the state industries.  Established free trade.  Cut government spending.  And stopped printing money.  Ending the hyperinflation.  Replacing it with a strict monetary policy… Friedman’s monetarism turned the Chilean economy around.  Creating a prosperous market economy.  With a growing middle class.  The strong economic growth led to some healthy tax revenue.  Which in later years funded antipoverty programs.  The Miracle of Chile even replaced the military junta with a democratic government.  Chile now has one of the healthiest and freest economies in the world.

It was these sound economic policies that created the Miracle of Chile in the Eighties.  Not targeted subsidies.  Real economic growth provides prosperity.  People with jobs.  Who earn money to spend in the economy.  And pay taxes.  That’s the way it always works.  Jobs first.  Then prosperity.  And then the tax revenue that funds government spending.  It just doesn’t work the other way around.  If it did Greece wouldn’t be in the trouble it’s in.  The United States wouldn’t still be lingering in the Great Recession.  And President Clinton wouldn’t have reformed welfare to end the family killer AFDC.  No.  Excessive government spending only creates great debt.  High inflation.  And a permanently impoverished underclass.  At least this is what history has shown us.

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Energy Absorption and Conversion, Vibration Isolation, Dampening, Oscillation, Advanced Building Technologies, Building Codes and Code Enforcement

Posted by PITHOCRATES - March 7th, 2012

Technology 101

Springs and Shock Absorbers on a Car provides Vibration Isolation from the Shocks of the Road

Roads aren’t perfect.  They have their bumps.  And their potholes.  Especially in the north.  Where they use salt to melt snow and ice.  Which get to the reinforcing steel within the concrete.  Causing it to corrode.  Further stressing and cracking the concrete.  Allowing water to get underneath the concrete.  Where it expands as it freezes, heaving and cracking the road.  Then there’s the normal heating and cooling.  That can buckle and crack blacktop.  Heavy truck traffic that stresses and hammers our roads.  Even sinking slightly into our asphalt roads making tire ruts.  And then there are railroad crossings.  Sewers and manholes that aren’t flush with the surface.  There’s a lot out there to make for a rough ride.  Yet in a new car you barely feel any of this.  And you can drink a cup of coffee while driving without it splashing out of the cup.  Why?

Because the shocks from the rode are isolated from the passenger compartment.  Air-inflated rubber tires smooth out much of that rough ride.  By compressing to absorb some bumps.  Then expanding back to their original shape.  Springs handle the larger bumps.  Which compress underneath the car as the tires hit a large bump.  Absorbing the energy from that impact before it reaches the passenger compartment.  By using it to compress a spring.  Then the energy in that compressed spring releases and the spring expands until it can expand no longer.  Placing the stretched spring into tension.  The stored energy in the tensioned spring compresses it again.  And this continues back and forth until the energy fully dissipates.  Or is absorbed in a shock absorber.  That dampens the oscillation of the spring.  Bringing it back to a steady-state quickly.  Further smoothing out the ride.

A car is a magnificent piece of engineering.  From converting a fuel into motive power.  To brakes slowing a car down by converting kinetic energy into heat via the friction of brake pads or shoes on rotors or drums.  To the isolation and dampening of the road forces imparted to the car.  It’s a remarkable control and conversion of energy.  That provides for a comfortable ride.  And a smooth ride.  Smooth enough to enjoy a cup of coffee while driving.  Without being too distracted from the business of driving.

Tuned Mass Dampers prevent Dangerous Oscillations in Buildings that can lead to Structural Failures

But a car moving over a road is not the only way energy transfers between the earth and something manmade.  Sometimes the earth moves.  And energy is transferred into something stationary.  Manmade structures like buildings and bridges.  During earthquakes.  And some of these stationary things get damaged.  Some even collapse.  Depending on how we constructed them.  And how similar they are to a car.

Tectonic plates are trying to move.  But the friction between these plates as they jam into each other holds them in place.  Until the pressure builds so much that the plates shift.  Causing an earthquake.  Sending seismic waves through the earth.  In active seismic regions structures need to be like cars.  They need isolation and dampening from the shockwaves caused by shifting tectonic plates.  For during a seismic event these shockwaves ‘grab’ these structures by their foundations and shake them.  This energy applying great forces on these buildings.  Energy that needs to go somewhere.  Because of the conservation of energy principle.  We can’t create it.  Nor we can destroy it.  At best we can redirect it.  Absorb it.  Or convert it.  Like converting the forward movement of a car (kinetic energy) into heat (created during braking).  Or the conversion of kinetic and potential energy of moving springs into heat (via shock absorbers). 

Waves have an amplitude and a frequency.  They oscillate.  That is, they vibrate.  And have energy.  Which is why we build buildings and bridges to move.  To bend and sway.  To dissipate this energy.  For if they were too rigid the forces could instead lead to a structural failure.  However, if they move too much and the external force is in ‘resonance’ with the building’s natural frequency of movement, this oscillation can grow.  Producing great vibrations.  (Like a car driving without any shock absorbers.)  And great forces on the structural integrity of the building.  Itself leading to a structural failure.  That’s why high rises include dampening systems.  Such as tuned mass dampers.  A great mass suspended within a building and restrained by hydraulic cylinders.  Such as the tuned mass damper atop Taipei 101 in Taiwan.  So when the building sways in one direction the mass swings in the opposite direction.  Thus dampening the oscillation of the building.

Free Market Capitalism allows a Higher Standard of Living and Creates the Kind of Wealth that can build Safe Houses and Buildings

Smaller buildings may use springs-with-damper base isolators.  Which does the same thing springs and shocks do for a car.  Isolates the structure from vibrations.  But using the proper building materials to allow a building to move or withstand destructive forces without structural failure provides most seismic protection.  And this is nothing new.  The Machu Picchu Temple of the Sun in Peru is an early example of good seismic engineering.  Peru sits on the Ring of Fire.  A highly seismic region that circles the Pacific Ocean.  The Inca were highly skilled stone cutters.  They built the Machu Picchu Temple of the Sun without mortar.  Because of this the stone can move during seismic events.  Which has let it stand through the millennia.  Today we use mortar.  And reinforcing steel to strengthen our masonry construction (these blocks can’t move but when the walls they make crack the steel inside keeps them from collapsing).  As well as other advanced building technologies.  And ever evolving building codes and code enforcement to make sure builders meet the exacting standards of these technologies.  To keep these buildings from collapsing and killing hundreds of thousands of people.  Which is why in the most modern and advanced cities in seismic regions survive some of the worst seismic events with minimal loss of life.  Where they count deaths in the hundreds instead of the hundreds of thousands.  As they did before we used these advanced building technologies.

The countries and regions sitting on the Ring of Fire (New Zealand, Indonesia, the Philippines, Japan, Alaska, California, Mexico, Peru and Chile) use some of the most advanced building technologies.  And can withstand some of the most severe earthquakes.  With little loss of life.  Now compare that to the impoverished country of Haiti.  Their 2010 earthquake was devastating, claiming 230,000 lives.  Because they have no such building codes or code enforcement.  Or advanced building technology.  Because Haiti is not a nation of free market capitalism.  Or the rule of law.  But one of political corruption.  And abject poverty.  Are they predisposed to be impoverished?  No.  Because countries can change.  If they embrace free market capitalism.  And the rule of law.

Chile was one such country at one time.  Corrupt.  And anti-capitalistic.  During the heyday of Keynesian economics.  Where nations said goodbye to the gold standard.  And ramped up their printing presses.  Igniting hyperinflation.  Including the Chileans.  But they changed.  Thanks to the Chicago Boys.  Chilean economists schooled in the Chicago school of economics.  With a little help from Milton Friedman.  Perhaps the most esteemed member of the Chicago school. Economic reforms produced solid economic growth.  A prosperous middle class.  And advanced building technologies, building codes and code enforcement.  So when Chile suffered a more powerful earthquake than Haiti did that same year Chile measured their death toll in the hundreds.  Not the hundreds of thousands as they did in Haiti.  And the major difference between these two nations?  Chile has a higher standard of living than Haiti.  And has less poverty.  Because Chile embraces free market capitalism.  Which creates the kind of wealth that can build safe houses.  And safe buildings.  For everyone.  Not just the ruling elite.

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Monetarism, Laissez-Faire Capitalism, Augusto Pinochet, Chile, Hyperinflation, El Ladrillo, Chicago Boys, Milton Friedman and Miracle of Chile

Posted by PITHOCRATES - March 6th, 2012

History 101

During the 19th Century Mercantilism gave way to Laissez-Faire Capitalism and Free Trade

Portugal and Spain were superpowers around the 16th and 17th centuries.  Great monarchies with mercantilist economic policies.  Which was all about trade.  Maximize exports.  Minimize imports.  Settle colonies to mine/harvest raw material.  To ship back to the mother country.  Where they manufactured goods from the raw materials.  And exported them to other countries.  Selling them for gold and silver.  Which was key.  Maximizing the trade surplus in the balance of trade.  Finished goods going out.  Gold and silver coming in.  For the nation that gathered the most gold and silver won in the zero-sum game of mercantilism.  Where the monarchy works with business.  Picking winners and losers.  And rewarding the winners who help enrich the monarchy.

Of course, these policies force a kingdom’s subjects to pay higher prices.  By keeping out lower-priced imports.  And with special deals favoring some domestic industries so they can sell at monopoly prices.  They nationalized their Industries.  Creating an aristocratic class.  Composed of government officials.  And their partners in the nationalized industries.  Living the good life on the backs of the poor.  Who paid high taxes.  And high prices.  To support those mercantilist policies.  And it was these policies that settled South America.  Taking all of their gold and silver (bullion).  Shipping it back to the mother country.  The surge in bullion in Europe made it less scarce.  And less valuable.  Meaning it took more of it to buy the same things it once did before this surge.  Resulting in higher prices.  And inflation.  Hurting the consumer more.  And leading to the development of the quantity theory of money.  And monetarism.  Which held that the amount of money in circulation had a direct impact on prices.  The more money the higher the prices.

With the rise of Parliament in Britain power shifted from the king to the people.  Via their representatives in Parliament.  Instead of rule by dictate there was rule by consent.  Which made the business of choosing winners and losers more difficult.  Parliament had the power.  But Parliament was more than one person.  It was full of special interests.  Which made it more and more difficult to choose any one special interest over another.  Unable to curry favor for one’s own interest one didn’t support another’s interest.  At least not when that support came at the expense of your interests.  So there was another power shift in addition from the king to parliament.  There was also one from the king to the markets.  So during the 19th century mercantilism gave way to laissez-faire capitalism.  And free trade.  An economic system that let the British Empire dominate the world during the 19th century.  Making it rich.  And powerful.  Thanks to that vigorous economic activity that could build the world’s most powerful navy.  And pay for an army to garrison an empire.  Meanwhile the old school mercantilist empires fell from superpower status.  And became shadows of their former selves.  Soon the Spanish and Portuguese colonies would gain their independence from these dying empires.

Milton Friedman’s Monetarism turned the Chilean Economy Around

The South American nations may have hated their European masters but they liked one thing about them.  Their mercantilist policies.  Which survived into the 20th century.  Where government partnered with business.  In the worst of crony capitalism.  Where special interests that favored the ruling powers received government favors in return.  Usually protected markets.  And favorable legislation.  That allowed them monopoly prices.  Giving them great profits.  Generous union wages and benefits.  And generous health care and pensions.  At least, for those politically connected.  So the government rigged the game for them.  And they made it worth the government’s while to rig the game.  All of this paid for on the backs of the poor.  Who paid high taxes.  As well as high prices.  And suffered abject poverty.  Which made for an unhappy people.  And a large amount of government turnover through revolution as dictatorships and military juntas overthrew other dictatorships and military juntas.

In 1973 it was Augusto Pinochet’s turn in Chile.  Who came to power in a military coup.  At the time the country wasn’t doing so well.  And in full mercantilism.  The economy was in the toilet.  There was abject poverty.  And hyperinflation (peaking at 1000% or so) as the government printed money to pay for its out of control spending.  To try and bribe the angry mob and keep them from overthrowing the latest dictatorship.  Pinochet was the guy to fix that.  Like everybody that came before him.  And after his military junta failed as the previous military juntas failed, he tried something new.  Thanks to something called El Ladrillo.  And economic plan so thick and heavy they called it ‘the brick’.  A plan prepared by the Chicago Boys.  Chilean economists schooled in the Chicago school of economics.  Pinochet even met with Milton Friedman.  Prominent economist of the Chicago school.  And monetarist.  Who came down to give a speech.  (Interestingly, for the American left roundly criticized Friedman for giving a speech in a right-wing dictatorship.  Though he received no such criticism for giving the same speech in a left-wing dictatorship – communist China.  Showing that the political left was okay with human rights violations as long as they were committed in the left-wing dictatorships they so admired). 

Pinochet asked for some economic advice.  Friedman gave it.  And Pinochet followed it.  He ditched the mercantilist policies.  Embraced laissez-faire capitalism.  Privatized the state industries.  Established free trade.  Cut government spending.  And stopped printing money.  Ending the hyperinflation.  Replacing it with a strict monetary policy.  This didn’t please the politically connected as they lost their privilege.  But Friedman’s monetarism turned the Chilean economy around.  Creating a prosperous market economy.  With a growing middle class.  The strong economic growth led to some healthy tax revenue.  Which in later years funded antipoverty programs.  The Miracle of Chile even replaced the military junta with a democratic government.  Chile now has one of the healthiest and freest economies in the world.  An economy better and stronger than their former colonial master.  Spain.  Who maintained enough of their mercantilist policies to pull them into the Eurozone debt crisis.  And probably could learn a thing or two from their one-time colony.  Who is doing very well these days.  Thanks to the Miracle of Chile.  Milton Friedman.  And the Chicago Boys.  Those great Chilean economists given a chance by of all people a military dictator.

Everyone does Better under Free Market Capitalism, not just the Politically Connected

In 2010 a 7.0 earthquake hit Haiti.  A country rife with political corruption.  With little, if any, free market capitalism.  And even less rule of law.  Where most people live in abject poverty.  In ramshackle housing.  This earthquake claimed 230,000 lives.  A heart-wrenching loss of life.  Especially sad because the impoverished masses suffered the most.  As is often the case in countries with poor economic and political institutions. 

Later that same year, an 8.8 earthquake hit Chile.  Thanks to the economic reforms that rebuilt Chile into a healthy and prosperous democracy, Chileans did not live in ramshackle housing.  The higher standard of living created by the Chicago Boys’ economic reforms created better housing.  And safer cities.  Because of this the far stronger earthquake in Chile killed far fewer people than the lesser earthquake in Haiti.  The death toll in Chile was less than 1,000.  Which is impressive considering that was one of the most powerful earthquakes in recorded history.

Economics matter.  Say what you want about free market capitalism.  Malign it all you will.  But you can’t change some facts.  In particular, everyone does better under free market capitalism.  Including the poor.  For if this wasn’t the case Chile would have seen the loss of life Haiti saw.  But they didn’t.  Because there were no impoverished masses living in ramshackle housing in Chile.  Because those economic reforms improved the standard of living for all Chileans.  Not just the politically connected. 

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