FT161: “Only in government can rank amateurs be put in charge of industries.” —Old Pithy

Posted by PITHOCRATES - March 15th, 2013

Fundamental Truth

Politicians love Keynesian Economics because it’s a Pathway to European Social Democracy

For years now we’ve been hearing about President Obama’s efforts to create jobs.  Going all the way back to that laser-like focus he was putting on job creation.  And there was that $800 billion stimulus bill.  That stimulated little but Democrat campaign contributors.  The president has been talking about job creation for a long time.  Yes, he can talk the talk.  But he sure can’t walk the walk.

A big reason why the economy is still so anemic is in large part due to Obamacare.  The onerous requirements of the new health care law have frozen new hiring.  And dampened business growth.  For all those small businesses that are just starting up and trying to gain some traction see massive new costs coming their way.  On top of the massive costs they’re paying already.  From taxes.  To regulatory costs.  Increasing the cost of doing business.  And leaving less and less to reinvest into their business.  So they can grow and hire new people.  Creating jobs.  Which is something the president claims he’s all for.  Yet it is his policies that are preventing these job creators from creating jobs.  And there is a reason for that.

The president and the Democrat Party (and many in the Old Guard of the Republican Party) are Keynesians.  And they believe in the economic policies of John Maynard Keynes.  Which ushered in the era of Big Government.  And massive interventions into the private economy.  A substitution for socialism.  Providing a pathway to socialism.  As in the European variety.  Those social democracies that are all wallowing in the European sovereign debt crisis.  Because their governments grew too large.  Intervened too much into the private economy.  And spent far too much money they didn’t have.

Nixon, Ford and Carter tried Keynesian Economics on a Grand Scale once Nixon Decoupled the Dollar from Gold

All government economists are Keynesian economists.  The Keynesians tell their friends in government to keep interest rates artificially low to stimulate the economy.  Because they believe that even though consumer demand isn’t there businesses will borrow this cheap money and expand production.  And hire more people.  Also, if the economy is not performing as it should be the government needs to spend money.  With make-work programs. Paying people to do things like dig ditches.  And fill them back in.  Because they will take their earnings and spend it.  Creating economic activity.  And the government should do this with deficit spending.  Spending money they don’t have.  Either by printing it.  Or borrowing it.

They have been trying this since World War I or so.  In fact, Keynes met with FDR.  Telling him about his economic theories.  Some of which FDR took to heart.  For he did increase the size of government.  And he spent money on a lot of make-work programs.  None of which pulled the economy out of the Great Depression.  And he tried for over ten years.  Nixon, Ford and Carter tried Keynesian economics on a grand scale.  Once Nixon decoupled the dollar from gold.  Stopping the gold flow out of the country due to Nixon’s inflationary policies (foreign governments said if you want to make the U.S. dollar worthless we’ll take the gold instead at the promised exchange rate of $35/ounce).  Once they no longer had to honor that promise they were able to print even more money. Unleashing an inflation that reached double digits in the Seventies.  And caused massive unemployment and stagnant economic growth.  Stagflation.

This was a failure of Keynesian economics.  For the theory went if you have a recession you used inflation to end it.  And you did that by printing money.  But instead of an improved economy all they got was inflation (and higher prices) to go with an already bad economy.  Which just made everything worse.  Had they continued the classical economic policies that made America the number one economic power in the world (thrift, low taxes, low regulations, the gold standard, savings, etc.) there would have been no inflation.  And there would have been a lot of new economic activity.  Because this is what happened in the past with these policies.  While every time Keynesians tried to spend their way out of a recession it has never worked.  As the historical record clearly documents.

Obamacare will do to Health Care what Government has done to Businesses in our Big Metropolitan Cities

Now either those in government don’t understand this.  Or they do.  And just don’t care about the economic damage they cause as they are more interested in expanding their control over the private economy than they are about the American people.  Which means they’re either not very smart.  Or they’re devious.  Lying to the American people just to advance their agenda.  A larger and more powerful federal government.  Compounding this problem is that most of our politicians don’t understand the first thing about business.  Most are lawyers who think businesses are little more than cash piñatas.  Good for suing.  Or taxing.  But they have no idea how they work.  Which builds the case for our politicians not being very smart.  As well as being devious.

Worse, it’s these same people who are regulating the hell out of our businesses.  These people who don’t understand the first thing about running a business.  But are killing small businesses with costly regulations.  Especially in the big cities.  Where there is so much costly red tape to cut through to open a business.  And to run a business.  Especially if you want to hire employees.  A regulatory nightmare few business owners ever expected.  And so complex and costly that a lot of businesses fail because they don’t charge enough to cover all of their costs.  But these politicians don’t care.  As evidenced by the amount of business they drive out of large metropolitan cities.  Detroit once was the automotive capital of the world.  But the city government grew so large and costly that the costs of doing business in Detroit soared to pay for it.  Making it just too costly to do business in Detroit.  So businesses left.  First the jobs left.  Then the people.  The two greatest employers in Detroit these days are the City of Detroit.  And the Detroit Public Schools.  Both paid with tax dollars.  Generated by businesses.  That are no longer there.  So facing bankruptcy due to the crushing costs of government (primarily pensions and health care benefits), the governor declared an emergency.  And assigned an emergency manager to fix Detroit’s finances.

Now the people who destroyed the business environment in our big metropolitan cities are taking over health care.  Who know even less about health care than they do about running a business.  There are some doctors in Congress.  But only approximately 3.7% are doctors.  And only 16 of the 20 are Republicans.  So they will have little say with the Democrat-passed Obamacare.  While Obamacare will do to health care what government has done to businesses in our big metropolitan cities.  It will destroy it.  Because health care is very complex.  Doctors spent some 8 years of schooling to become a doctor.  And spend their career in continuing education to stay current in their fields.  But who will be managing these professionals now?  Rank amateurs.  For only in government can rank amateurs be put in charge of industries.

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Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - November 6th, 2012

History 101

(Originally published March 20, 2012)

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth.

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends.

So much for super smart government bureaucrats.

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Tax Cuts, Roaring Twenties, Farm Prices, Smoot-Hawley Tariff, Stock Market Crash, New Deal, Great Depression and the Great Recession

Posted by PITHOCRATES - March 20th, 2012

History 101

Tax Cuts and the Small Government Policies of Harding and Coolidge gave us the Roaring Twenties

Keynesians blame the long duration of the Great Depression (1929-1939) on the government clinging to the gold standard.  Even renowned monetarist economist Milton Friedman agrees.  Though that’s about the only agreement between Keynesians and Friedman.   Their arguments are that the US could have reduced the length and severity of the Great Depression if they had only abandoned the gold standard.  And adopted Keynesian policies.  Deficit spending.  Just like they did in the Seventies.  The decade where we had both high unemployment and high inflation.  Stagflation.  Something that’s not supposed to happen under Keynesian economics.  So when it did they blamed the oil shocks of the Seventies.  Not their orgy of spending.  Or their high taxes.  And they feel the same way about the Great Depression.

Funny.  How one price shock (oil) can devastate all businesses in the US economy.  So much so that it stalled job creation.  And caused high unemployment.  Despite the government printing and spending money to create jobs.  And to provide government benefits so recipients could use those benefits to stimulate economic activity.  All of that government spending failed to pull the country out of one bad recession.  Because of that one price shock on the cost of doing business.  Yet no one talks about the all out assault on business starting in the Hoover administration that continued and expanded through the Roosevelt administration.

Herbert Hoover may have been a Republican.  But he was no conservative.  He was a big government progressive.  And believed that the federal government should interfere into the free market.  To make things better.  Unlike Warren Harding.  And Calvin Coolidge.  Who believed in a small government, hands-off policy when it came to the economy.  They passed tax cuts.  Following the advice of their treasury secretary.  Andrew Mellon.  Which gave business confidence of what the future would hold.  So they invested.  Expanded production.  And created jobs.  It was these small government policies that gave us the Roaring Twenties.  An economic boom that electrified and modernized the world.  With real economic growth. 

If an Oil Shock can prevent Businesses from Responding to Keynesian Policies then so can FDR’s all out War on Business

The Roaring Twenties was a great time to live if you wanted a job.  And wanted to live in the modern era.  Electric power was spreading across the country.  People had electric appliances in their homes.  Radios.  They went to the movies.  Drove cars.  Flew in airplanes.  The Roaring Twenties was a giant leap forward in the standard of living.  Factories with electric power driving electric motors increased productivity.  And reduced air pollution as they replaced coal-fired steam boilers that up to then powered the Industrial Revolution.  This modernization even made it to the farm.  Farmers borrowed heavily to mechanize their farms.  Allowing them to grow more food than ever.  Bumper crops caused farm prices to fall.  Good for consumers.  But not those farmers who borrowed heavily.

Enter Herbert Hoover.  Who wanted to use the power of government to help the farmers.  By forcing Americans to pay higher food prices.  Meanwhile, the Federal Reserve raised interest rates.  Thinking that a boom in the stock market was from speculation and not the real economic growth of the Twenties.  So they contracted the money supply.  Cooling that real economic growth.  And making it very hard to borrow money.  Causing farmers to default on their loans.  Small rural banks that loaned to these farmers failed.  These bank failures spread to other banks.  Weakening the banking system.  Then came the Smoot-Hawley Tariff.  Passed in 1930.  But it was causing business uncertainty as early as 1928.  As the Smoot-Hawley Tariff was going to increase tariffs on just about everything by 30%.  Basically adding a 30% tax on the cost of doing business.  That the businesses would, of course, pass on to consumers.  By raising prices.  Because consumers weren’t getting a corresponding 30% pay hike they, of course, could not buy as much after the Smoot-Hawley Tariff.  Putting a big cramp in sales revenue.  Perhaps even starting an international trade war.  Further cramping sales.  Something investors no doubt took notice of.  Seeing that real economic growth would soon come to a screeching halt.  And when the bill moved through committees in the autumn of 1929 the die was cast.  Investors began the massive selloff on Wall Street.  The Stock Market Crash of 1929.  The so-called starting point of the Great Depression.  Then the Smoot-Hawley Tariff became law.  And the trade war began.  As anticipated.

Of course, the Keynesians ignore this lead up to the Great Depression.  This massive government intrusion into the free market.  And the next president would build on this intrusion into the free market.  Ignoring the success of the small-government and tax cuts of Harding and Coolidge.  As well as ignoring the big-government free-market-intrusion failures of Herbert Hoover.  The New Deal programs of FDR were going to explode government spending to heights never before seen in peace time.  Causing uncertainty like never seen before in the business community.  It was an all out assault on business.  Taxes and regulation that increased the cost of business.  And massive government spending for new benefits and make-work programs.  All paid for by the people who normally create jobs.  Which there wasn’t a lot of during the great Depression.  Thanks to programs like Reconstruction Finance Corporation, Federal Emergency Relief Administration, Civilian Conservation Corps, Homeowners Loan Corporation, Tennessee Valley Authority, Agricultural Adjustment Act, National Industrial Recovery Act, Public Works Administration, Federal Deposit Insurance Corporation, Glass–Steagall Act, Securities Act of 1933, Civil Works Administration, Indian Reorganization Act, Social Security Act, Works Progress Administration, National Labor Relations Act, Federal Crop Insurance Corporation, Surplus Commodities Program, Fair Labor Standards Act, Rural Electrification Administration, Resettlement Administration and Farm Security Administration, etc.  Oil shocks of the Seventies?  If an oil shock can prevent businesses from responding to Keynesian policies then an all out war on business in the Thirties could do the same.  And worse.  Far, far worse.  Which is why the Great Depression lasted 10 years.  Because the government turned what would have been a normal recession into a world-wide calamity.  By trying to interfere with market forces.

Only Real Economic Growth creates Jobs, not Government Programs

The unemployment rate in 1929 was 3.1%.  In 1933 it was 24.9%.  It stayed above 20% until 1936.  Where it fell as low as 14.3% in 1937.  It then went to 19.0%, 17.2% and 14.6% in the next three years.  These numbers stayed horrible throughout the Thirties because the government wouldn’t stop meddling.  Or spending money.  None of the New Deal programs had a significant effect on unemployment.  The New Deal failed to fix the economy the way the New Dealers said it would.  Despite the massive price tag.  So much for super smart government bureaucrats.

What finally pulled us out of the Great Depression?  Adolf Hitler’s conquering of France in 1940.  When American industry received great orders for real economic growth.  From foreign countries.  To build the war material they needed to fight Adolf Hitler.  And the New Deal programs be damned.  There was no time for any more of that nonsense.  So during World War II businesses had a little less uncertainty.  And a backlog of orders.  All the incentive they needed to ramp up American industry.  To make it hum like it once did under Harding and Coolidge.  And they won World War II.  For there was no way Adolf Hitler could match that economic output.  Which made all the difference on the battlefield.

Still there are those who want to blame the gold standard for the Great Depression.  And still support Keynesian policies to tax and spend.  Even today.  Even after 8 years of Ronald Reagan that proved the policies of Harding and Coolidge.  We’re right back to those failed policies of the past.  Massive government spending to stimulate economic activity.  To pull us out of the Great Recession.  And utterly failing.  Where the unemployment rate struggles to get below 9%.  The U-3 unemployment rate, that is.  The rate that doesn’t count everyone who wants full time work.  The rate that counts everyone, the U-6 unemployment rate, currently stands at 14.9%.  Which is above the lowest unemployment rate during the Great Depression.  Proving once again only real economic growth creates jobs.  Not government programs.  No matter how many trillions of dollars the government spends. 

So much for super smart government bureaucrats.

www.PITHOCRATES.com

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LESSONS LEARNED # 50: “What do the great entrepreneurs have in common with politicians? Not a whole hell of a lot.” -Old Pithy

Posted by PITHOCRATES - January 27th, 2011

Cigarettes may be Bad for You, but they’re Good for Government

Government services cost money.  A lot of money.  And there are only a few ways government can get money.  They can tax their citizens.  Borrow money.  Or print money (if they’re the federal government).  When the government provides only the bare essentials for its populace, they can usually pay for those services with the taxes they collect.  This is the best way to pay for things.  It has the least adverse affect on our money.  And our credit rating.  But you have to be careful not to dampen economic activity.  Because taxes are a function of that activity.  And that activity can be a function of taxes.  There is a general inverse relationship between the two.  High taxes often gets you low economic activity.  Low taxes tend to give you high activity.  Other things being equal, of course.

But government spending tends to grow.  For various reasons.  And sometimes when it does, the spending is greater than the amount collected in taxes.  Especially during recessionary times.  So, to cover the deficit between revenue and spending they borrow money.  Or print it.  Lots of governments do this.  You can see record debt levels and record deficit spending throughout the world.  Greece was in the news recently.  Argentina suffered some bad times a few decades ago.  And now the United States is reeling a bit from their crushing deficits and debt.  And there are more.  Few nations are immune from this problem.

As this progresses, governments begin looking for additional tax revenue.  Such as sin taxes.  Cigarettes may be bad for your health.  But they’re still legal.  Why?  Taxes.  Few things do we tax so heavily.  And they’re one of the few things that we can heavily tax.  Because they’re addictive.  Cigarettes are a windfall for the government coffers.  But it doesn’t stop with taxes.  The government even sued Big  Tobacco.  To help pay for the medical costs the government incurs treating people (via Medicare and Medicaid) with smoking related diseases.

Which came First?  The Politician or the Entrepreneur?

Cigarettes may be bad for you.  But this country owes a lot to tobacco.  Back before it was bad for us (well, at least before we knew it was bad for us.  Then again, it wasn’t really all that bad for us back then.  For few were living long enough for it to become a health problem.  But I digress) it was a pretty big cash crop.  Even used for money because it was so valuable.  So an industry grew.  And that industry became a very lucrative one.  With deep pockets.  Producing an addictive product.  A veritable gold mine for a high-spending government.

Now, the government didn’t do a thing to make a single cigarette.  But it profited handsomely off of cigarettes.  It’s sort of like that chicken and egg riddle.  Which came first?  Well, speaking about business and government, it’s not much of a riddle.  Business came first.  For without business, there would be no government.  Because someone has to create wealth first before they could tax it away.  Or sue it away.

You see, that’s the difference between entrepreneurs and politicians.  Government needs entrepreneurs.  But entrepreneurs don’t need government.  Because entrepreneurs create things.  While government takes from people that create things.

Dirty, Sexy Energy is Destroying the Planet

Entrepreneurs have invented some pretty impressive things.  James Watt gave us a pretty efficient steam engine.  Henry Ford gave us a pretty affordable car.  Watt helped to launch the Industrial Revolution.  Ford just took it to new heights.  With his mass production.

The steam engine was the big first motor of the world.  It pulled us forward.  In steam locomotives.  And coal-fired power plants.  It was a giant leap forward for mankind.  Then came the internal combustion engine.  More compact.  And more powerful.  The first diesel-electric locomotive outclassed the state of the art steam locomotive in every way.  This little power plant was smaller.  More powerful.  And cleaner.  (Steam locomotives belched huge plumes of smoke and ash wherever they went.)

It may have been cleaner.  But it was still dirty.  For both the steam engine and the internal combustion engine produced carbon dioxide.  And the environmentalists were saying that this carbon dioxide was warming the world.  They called it global warming.  And it was bad.  Mostly theory.  But the theory pointed to nothing less than apocalypse.  Someone had to do something.  To save the planet.  And, guess what?  Someone was ready.  And willing.

Just give me something to Tax, Entrepreneur

A high-spending government just embraced these environmentalists with wet, slobbering kisses.  Because they knew what to do.  Not about cleaner energy sources.  But about taxing the dirty ones.  And they needed more taxes.  For their high spending.  So the environmentalists and government were rather simpatico.  To say the least.

Their idea?  Carbon taxes.  And carbon trading (i.e., Cap and Trade).  Let’s face it, modern civilization is addicted to energy.  We can’t do without it.  So we’ll never stop using it.  Sort of like cigarettes.  So they would tax carbon.  Or make polluters buy permits to pollute.  Either way they make big money.  All in the name of saving the planet.

Sure, it all sounds nice.  In a touchy feely way.  But taxing energy will kill economic activity.  With the cost of doing business going up, there will be less business.  The carbon taxes/polluting permits may not even offset the loss of tax revenue resulting from this decline in economic activity.  But when times are desperate, they often will try desperate measures.  And when you have deficits and debt at record levels, these are desperate times.  So they’ll try to push carbon taxes.  And pollution permits.  Not to save the planet.  But for the revenue.  And they will thank God for the entrepreneur who was able to make something that people wanted.  That they couldn’t do without.  Because without the entrepreneur, there would be nothing to tax.

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A Liberal Opines on things Economic, Confirms why they Suck at Creating Jobs

Posted by PITHOCRATES - January 16th, 2011

Liberals don’t know Business or Jobs but they have their Big Keynesian Words

If you want to know why liberals are so bad at stimulating economic activity just read Paul Krugman’s Wages and Employment, Again (Wonkish) posted 1/16/2011 on The New York Times.  He pontificates with an erudite air of all-knowing condescension.  He’s smart.  And he wants to make sure you get this.  So he writes with big words and references big demand-side macroeconomic theories that he and his kind accept as undisputed fact.  Despite what the lessons of history say. 

Krugman is a Keynesian.  So, as a Keynesian, he knows nothing about business.  But, like a Keynesian, that doesn’t stop him from opining on the subject of business.

Here’s a fundamental truth (FT) about business.  FT 1:  If you make the cost of doing business high, you will reduce the amount of business a business does.  Here’s another.  FT 2:  If the people are NOT buying whatever they’re selling, this will also reduce the amount of business a business does.  A couple of key things a business needs here.  To have the cost of doing business kept low enough so they can sell at a price that makes them competitive in the market place.  And they need people to have jobs so they can buy their competitively priced goods or services they place into the market place.

Liberals never seem to get either of these points.

High Wages have never Stimulated Economic Activity

Keynesians believe if you give money to people that fixes everything.  When Krugman says:

…I’ve also argued a number of times that cutting wages now would probably make the slump worse, not better.

That’s Keynesian.  You cut wages and the people have less money spend.  So that’s why Keynesians are all about high wages.  Of course, they miss the other side of high wages.  High wages mean fewer jobs.  Because high wages limit the number of employees a business can hire and still sell at prices that are competitive in the market place.

High wages have never stimulated economic activity.  They just raise costs.  This let the Japanese take huge chunks of market share away from the Big Three.  And it’s bankrupting our big blue cities and states that are drowning in debt because of their public sector union contracts.  If Krugman was right, these cities would be booming in economic activity because of those fat public sector pay and benefits.  But they’re not.  The only thing those high wages are doing is bankrupting these cities and states.

Liberals never seem to get this point.  So they trade off economic activity for votes, blissfully unaware of the extent of economic damage they’re doing.  Or they’re aware and they just don’t care.

Easy Money begets Irrational Exuberance which begets Asset Bubbles which begets Recessions

Another favorite of the Keynesians is manipulating interest rates.

…a rise in the real money supply reduces interest rates, leading to a rise in demand.

Read ‘a rise in real money supply‘ as printing money.  The idea here is to make money cheap and plentiful so people will borrow it to buy things.  Like houses.  Like they did during Bill Clinton’s and George W Bush’s presidencies.  And, boy, did they.  Times were good.  Real good.  Only one problem.  Irrational exuberance.

Clinton and Bush thought they found the magical economic elixir.  Home ownership.  So they did everything in their power to extend homeownership.  Even to the people who couldn’t afford it.

Easy money.  Monetary policy that keeps money cheap and plentiful.  To entice people to borrow.  And they were.  Borrowing.  And buying houses.  So much so that they bid up the prices into a huge asset bubble.  Meanwhile, people who couldn’t afford to buy a house were buying houses, too.  The federal government pushed lenders to lend. Or face the consequences.  Be investigated for discriminatory lending.  Or, worse, suffer the public spectacle of having Jesse Jackson or an Al Sharpton publically calling them racist (a lot of the inner city poor were black).  So they came up with some creative ways to qualify unqualified people for mortgages.  We call them subprime mortgages.  And we know how those came back to bite us in the ass.

The problem with bubbles is that they burst.  And when they do, the life blows out of the economy like the air out of a popped balloon.  Deflationary spirals often follow.  And nasty, horrible and painfully long recessions.

Liberals never seem to get this point, either.  You’d think that they would as it has happened so often.

For Narcissists, it’s not the economy.  It’s their Egos, Stupid.

Krugman’s column really shows the problems with liberals.  They’re a bunch of narcissists.  Who love their superior minds.  They love to hear themselves talk.  And love to read what they write.  They write to impress.  And to stimulate themselves.  If you know what I mean.  Only those in his elite circle can understand what the hell he is writing about.  Not us.  The sloped-brow, knuckle-dragging, Neanderthals who didn’t go to the Ivy League schools.  We just work and live in the real world.  Raise our families.  And pay our taxes.

Liberals like to complicate things.  And to try to control the complex.  The economy will work fine on its own.  And when it does we experience some of the greatest economic expansions.   But when they tinker with their Ivy League knowledge, bad things typically happen.  Such as the subprime mortgage crisis.  The Great Recession.  Even the Great Depression.  All of which resulted from liberal tinkering.

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Obama Makes FDR Look Like a Conservative

Posted by PITHOCRATES - September 29th, 2010

Then

None of FDR’s New Deal programs pulled the economy out of the Great Depression.  Businesses sat on their cash.  Afraid of further liquidity problems.  Afraid of what anti-business policy the FDR administration would pass next.  And the depression had left them with so much excess capacity (because no one was buying anything) there was no need to hire anyone to expand capacity.  So they didn’t.

FDR tried to stimulate the economy with record government spending.  None of it helped.  There were some make-work projects for some people.  But public make-work projects don’t stimulate an economy.  Jobs in the private sector do.  And excessive government spending just makes the businesses in the private sector nervous.  The government has to pay for that spending eventually.  Through higher taxes.  Excessive borrowing.  Or simply by printing money.  None of these actions bode well for the private sector.  They will just increase the cost of doing business (via higher taxes, higher interest rates or a higher inflation rate which makes everything more expensive).

The Great Depression finally ended thanks to Adolf Hitler and Hideki Tojo.  With a world plunged in war, our allies needed war material.  Enter the Arsenal of Democracy.  The FDR administration suspended the New Deal policies and allowed the private industry to do what it did best.  Unfettered capitalism.  Unimpeded by government.  And the rest is history.

Now

We are trying the failed policies of the FDR administration again.  And they’re working just as well as they did for FDR.  Excessive government spending is making the businesses in the private sector nervous.  Because they know the government will have to pay for that spending eventually.  Through higher taxes.  Excessive borrowing.  Or simply by printing money.  So they’re battening down the hatches.  Preparing for a rough ride through stormy, economic seas.  Sitting on excess capacity.  And piles of cash.  Because they don’t know what anti-business policy the Obama administration will pass next.

It’s worse now than it was then.  The world is not at war.  Massed armies are not threatening our allies.  There are no customers for the Arsenal of Democracy.  World war can’t pull us out of this depression.  We are on our own.  We will pick up the tab for Obama’s spending.  Well, not us.  Our children will.  Or their children.  Or their children’s children.  And each day the Obama administration spends more, the worse that day of reckoning will be. 

It doesn’t have to be this way, though.  If we stop the spending we can mitigate the damages.  But we have to act soon.  For we are fast approaching the point of no return.

I Have this Strange Feeling of Déjà Vu                                                           

Command economies don’t work.  That is, if you go by the historical record.  The New Deal failed.  The Soviet Union failed.  And where they haven’t failed, life isn’t so good.  I mean, no one is trying to sneak into North Korea or Cuba.  Why?  Because it sucks in those countries.  And yet we keep trying to be like those countries.  Why?

How bad is it?  Well, here’s one opinion:  U.S. Economy “Close to a Destructive Tipping Point,” Glenn Hubbard Says (by Aaron Task on Yahoo! Finance).  It’s a discussion of a new book:  Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity by R. Glenn Hubbard and Peter Navarro.  Based on titles, I’d say it’s pretty bad.  You might want to add this book to your reading list.

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LESSONS LEARNED #3 “Inflation is just another name for irresponsible government.” -Old Pithy

Posted by PITHOCRATES - March 4th, 2010

PEOPLE LIKE TO hate banks.  And bankers.  Because they get rich with other people’s money.  And they don’t do anything.  People give them money.  They then loan it and charge interest.  What a scam.

Banking is a little more complex than that.  And it’s not a scam.  Countries without good banking systems are often impoverished, Third World nations.  If you have a brilliant entrepreneurial idea, a lot of good that will do if you can’t get any money to bring it to market.  That’s what banks do.  They collect small deposits from a lot of depositors and make big loans to people like brilliant entrepreneurs.

Fractional reserve banking multiplies this lending ability.  Because only a fraction of a bank’s total depositors will ask for their deposits back at any one time, only a fraction of all deposits are kept at the bank.  Banks loan the rest.  Money comes in.  They keep a running total of how much you deposited.  They then loan out your money and charge interest to the borrower.  And pay you interest on what they borrowed from you so they could make those loans to others.  Banks, then, can loan out more money than they actually have in their vaults.  This ‘creates’ money.  The more they lend the more money they create.  This increases the money supply.  The less they lend the less money they create.  If they don’t lend any money they don’t add to the money supply.  When banks fail they contract the money supply.

Bankers are capital middlemen.  They funnel money from those who have it to those who need it.  And they do it efficiently.  We take car loans and mortgages for granted.  For we have such confidence in our banking system.  But banking is a delicate job.  The economy depends on it.  If they don’t lend enough money, businesses and entrepreneurs may not be able to borrow money when they need it.  If they lend too much, they may not be able to meet the demands of their depositors.  And if they do something wrong or act in any way that makes their depositors nervous, the depositors may run to the bank and withdraw their money.  We call this a ‘run on the bank’ when it happens.  It’s not pretty.  It’s usually associated with panic.  And when depositors withdraw more money than is in the bank, the bank fails.

DURING GOOD ECONOMIC times, businesses expand.  Often they have to borrow money to pay for the costs of meeting growing demand.  They borrow and expand.  They hire more people.  People make more money.  They deposit some of this additional money in the bank.  This creates more money to lend.  Businesses borrow more.  And so it goes.  This saving and lending increases the money supply.  We call it inflation.  A little inflation is good.  It means the economy is growing.  When it grows too fast and creates too much money, though, prices go up. 

Sustained inflation can also create a ‘bubble’ in the economy.  This is due to higher profits than normal because of artificially high prices due to inflation.  Higher selling prices are not the result of the normal laws of supply and demand.  Inflation increases prices.  Higher prices increase a company’s profit.  They grow.  Add more jobs.  Hire more people.  Who make more money.  Who buy more stuff and save more money.  Banks loan more, further increasing the money supply.  Everyone is making more money and buying more stuff.  They are ‘bidding up’ the prices (house prices or dot-com stock prices, for example) with an inflated currency.  This can lead to overvalued markets (i.e., a bubble).  Alan Greenspan called it ‘irrational exuberance’ when testifying to Congress in the 1990s.  Now, a bubble can be pretty, but it takes very little to pop and destroy it.

Hyperinflation is inflation at its worse.  Bankers don’t create it by lending too much.  People don’t create it by bidding up prices.  Governments create it by printing money.  Literally.  Sometimes following a devastating, catastrophic event like war (like Weimar Germany after World War II).  But sometimes it doesn’t need a devastating, catastrophic event.  Just unrestrained government spending.  Like in Argentina throughout much of the 20th century.

During bad economic times, businesses often have more goods and services than people are purchasing.  Their sales will fall.  They may cut their prices to try and boost their sales.  They’ll stop expanding.  Because they don’t need as much supply for the current demand, they will cut back on their output.  Lay people off.  Some may have financial problems.  Their current revenue may not cover their costs.  Some may default on their loans.  This makes bankers nervous.  They become more hesitant in lending money.  A business in trouble, then, may find they cannot borrow money.  This may force some into bankruptcy.  They may default on more loans.  As these defaults add up, it threatens a bank’s ability to repay their depositors.  They further reduce their lending.  And so it goes.  These loan defaults and lack of lending decreases the money supply.  We call it deflation.  We call deflationary periods recessions.  It means the economy isn’t growing.  The money supply decreases.  Prices go down.

We call this the business cycle.  People like the inflation part.  They have jobs.  They’re not too keen on the deflation part.  Many don’t have jobs.  But too much inflation is not good.  Prices go up making everything more expensive.  We then lose purchasing power.  So a recession can be a good thing.  It stops high inflation.  It corrects it.  That’s why we often call a small recession a correction.  Inflation and deflation are normal parts of the business cycle.  But some thought they could fix the business cycle.  Get rid of the deflation part.  So they created the Federal Reserve System (the Fed) in 1913.

The Fed is a central bank.  It loans money to Federal Reserve regional banks who in turn lend it to banks you and I go to.  They control the money supply.  They raise and lower the rate they charge banks to borrow from them.  During inflationary times, they raise their rate to decrease lending which decreases the money supply.  This is to keep good inflation from becoming bad inflation.  During deflationary times, they lower their rate to increase lending which increases the money supply.  This keeps a correction from turning into a recession.  Or so goes the theory.

The first big test of the Fed came during the 1920s.  And it failed. 

THE TWO WORLD wars were good for the American economy.  With Europe consumed by war, their agricultural and industrial output decline.  But they still needed stuff.  And with the wars fought overseas, we fulfilled that need.  For our workers and farmers weren’t in uniform. 

The Industrial Revolution mechanized the farm.  Our farmers grew more than they ever did before.  They did well.  After the war, though, the Europeans returned to the farm.  The American farmer was still growing more than ever (due to the mechanization of the farm).  There were just a whole lot less people to sell their crops to.  Crop prices fell. 

The 1920s was a time America changed.  The Wilson administration had raised taxes due to the ‘demands of war’.  This resulted in a recession following the war.  The Harding administration cut taxes based on the recommendation of Andrew Mellon, his Secretary of the Treasury.  The economy recovered.  There was a housing boom.  Electric utilities were bringing electrical power to these houses.  Which had electrical appliances (refrigerators, washing machines, vacuum cleaners, irons, toasters, etc.) and the new radio.  People began talking on the new telephone.  Millions were driving the new automobile.  People were traveling in the new airplane.  Hollywood launched the motion picture industry and Walt Disney created Mickey Mouse.  The economy had some of the most solid growth it had ever had.  People had good jobs and were buying things.  There was ‘good’ inflation. 

This ‘good’ inflation increased prices everywhere.  Including in agriculture.  The farmers’ costs went up, then, as their incomes fell.  This stressed the farming regions.  Farmers struggled.  Some failed.  Some banks failed with them.  The money supply in these areas decreased.

Near the end of the 1920s, business tried to expand to meet rising demand.  They had trouble borrowing money, though.  The economy was booming but the money supply wasn’t growing with it.  This is where the Fed failed.  They were supposed to expand the money supply to keep pace with economic growth.  But they didn’t.  In fact, the Fed contracted the money supply during this period.  They thought investors were borrowing money to invest in the stock market.  (They were wrong).  So they raised the cost of borrowing money.  To ‘stop’ the speculators.  So the Fed took the nation from a period of ‘good’ inflation into recession.  Then came the Smoot-Hawley Tariff.

Congress passed the Smoot-Hawley Tariff in 1930.  But they were discussing it in committee in 1929.  Businesses knew about it in 1929.  And like any good business, they were looking at how it would impact them.  The bill took high tariffs higher.  That meant expensive imported things would become more expensive.  The idea is to protect your domestic industry by raising the prices of less expensive imports.  Normally, business likes surgical tariffs that raise the cost of their competitor’s imports.  But this was more of an across the board price increase that would raise the cost of every import, which was certain to increase the cost of doing business.  This made business nervous.  Add uncertainty to a tight credit market and business no doubt forecasted higher costs and lower revenues (i.e., a recession).  And to weather a recession, you need a lot of cash on hand to help pay the bills until the economy recovered.  So these businesses increased their liquidity.  They cut costs, laid off people and sold their investments (i.e., stocks) to build a huge cash cushion to weather these bad times to come.  This may have been a significant factor in the selloff in October of 1929 resulting in the stock market crash. 

HERBERT HOOVER WANTED to help the farmers.  By raising crop prices (which only made food more expensive for the unemployed).  But the Smoot-Hawley Tariff met retaliatory tariffs overseas.  Overseas agricultural and industrial markets started to close.  Sales fell.  The recession had come.  Business cut back.  Unemployment soared.  Farmers couldn’t sell their bumper crops at a profit and defaulted on their loans.  When some non-farming banks failed, panic ensued.  People rushed to get their money out of the banks before their bank, too, failed.  This caused a run on the banks.  They started to fail.  This further contracted the money supply.  Recession turned into the Great Depression. 

The Fed started the recession by not meeting its core expectation.  Maintain the money supply to meet the needs of the economy.  Then a whole series of bad government action (initiated by the Hoover administration and continued by the Roosevelt administration) drove business into the ground.  The ONLY lesson they learned from this whole period is ‘inflation good, deflation bad’.  Which was the wrong lesson to learn. 

The proper lesson to learn was that when people interfere with market forces or try to replace the market decision-making mechanisms, they often decide wrong.  It was wrong for the Fed to contract the money supply (to stop speculators that weren’t there) when there was good economic growth.  And it was wrong to increase the cost of doing business (raising interest rates, increasing regulations, raising taxes, raising tariffs, restricting imports, etc.) during a recession.  The natural market forces wouldn’t have made those wrong decisions.  The government created the recession.  Then, when they tried to ‘fix’ the recession they created, they created the Great Depression.

World War I created an economic boom that we couldn’t sustain long after the war.  The farmers because their mechanization just grew too much stuff.  Our industrial sector because of bad government policy.  World War II fixed our broken economy.  We threw away most of that bad government policy and business roared to meet the demands of war-torn Europe.  But, once again, we could not sustain our post-war economy because of bad government policy.

THE ECONOMY ROARED in the 1950s.  World War II devastated the world’s economies.  We stood all but alone to fill the void.  This changed in the 1960s.  Unions became more powerful, demanding more of the pie.  This increased the cost of doing business.  This corresponded with the reemergence of those once war-torn economies.  Export markets not only shrunk, but domestic markets had new competition.  Government spending exploded.  Kennedy poured money into NASA to beat the Soviets to the moon.  The costs of the nuclear arms race grew.  Vietnam became more and more costly with no end in sight.  And LBJ created the biggest government entitlement programs since FDR created Social Security.  The size of government swelled, adding more workers to the government payroll.  They raised taxes.  But even high taxes could not prevent huge deficits.

JFK cut taxes and the economy grew.  It was able to sustain his spending.  LBJ increased taxes and the economy contracted.  There wasn’t a chance in hell the economy would support his spending.  Unwilling to cut spending and with taxes already high, the government started to print more money to pay its bills.  Much like Weimar Germany did in the 1920s (which ultimately resulted in hyperinflation).  Inflation heated up. 

Nixon would continue the process saying “we are all Keynesians now.”  Keynesian economics believed in Big Government managing the business cycle.  It puts all faith on the demand side of the equation.  Do everything to increase the disposable money people have so they can buy stuff, thus stimulating the economy.  But most of those things (wage and price controls, government subsidies, tariffs, import restrictions, regulation, etc.) typically had the opposite effect on the supply side of the equation.  The job producing side.  Those policies increased the cost of doing business.  So businesses didn’t grow.  Higher costs and lower sales pushed them into recession.  This increased unemployment.  Which, of course, reduces tax receipts.  Falling ever shorter from meeting its costs via taxes, it printed more money.  This further stoked the fires of inflation.

When Nixon took office, the dollar was the world’s reserve currency and convertible into gold.  But our monetary policy was making the dollar weak.  As they depreciated the dollar, the cost of gold in dollars soared.  Nations were buying ‘cheap’ dollars and converting them into gold at much higher market exchange rate.  Gold was flying out of the country.  To stop the gold flight, Nixon suspended the convertibility of the dollar. 

Inflation soared.  As did interest rates.  Ford did nothing to address the core problem.  During the next presidential campaign, Carter asked the nation if they were better off than they were 4 years ago.  They weren’t.  Carter won.  By that time we had double digit inflation and interest rates.  The Carter presidency was identified by malaise and stagflation (inflation AND recession at the same time).  We measured our economic woes by the misery index (the unemployment rate plus the inflation rate).  Big Government spending was smothering the nation.  And Jimmy Carter did not address that problem.  He, too, was a Keynesian. 

During the 1980 presidential election, Reagan asked the American people if they were better off now than they were 4 years ago.  The answer was, again, ‘no’.  Reagan won the election.  He was not a Keynesian.  He cut taxes like Harding and JFK did.  He learned the proper lesson from the Great Depression.  And he didn’t repeat any of their (Hoover and FDR) mistakes.  The recession did not turn into depression.  The economy recovered.  And soared once again.

MONETARY POLICY IS crucial to a healthy and growing economy.  Businesses need to borrow to grow and create jobs.  However, monetary policy is not the be-all and end-all of economic growth.  Anti-business government policies will NOT make a business expand and add jobs no matter how cheap money is to borrow.  Three bursts of economic activity in the 20th century followed tax-cuts/deregulation (the Harding, JFK and Reagan administrations).  Tax increases/new regulation killed economic growth (the Hoover/FDR and LBJ/Nixon/Ford/Carter administrations).  Good monetary policies complimented the former.  Some of the worst monetary policies accompanied the latter.  This is historical record.  Some would do well to learn it.

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