Businesses and Jobs tend to move from Countries with High Regulatory Costs to ones with Low Regulatory Costs

Posted by PITHOCRATES - February 23rd, 2014

Week in Review

A business is an investment.  Business owners invest capital and labor to make money.  Just like people buy government bonds to make money.  Of course, investing in government bonds is safe but it doesn’t create any jobs.  So we prefer when investors invest in a business.  Because a business will create jobs.

So where would investors prefer to risk their money?   That depends on the expected return on investment.  Historically there was always more money to be made in a business.  But higher regulatory costs have reduced that return on investment.  Leading a lot of investors to turn to government bonds.  Or to move their businesses to another country.  One with a less costly regulatory environment (see The rich world needs to cut red tape to encourage business posted 2/22/2014 on The Economist).

Singapore has come out on top as the least burdensome for the past eight years (see chart 3), whereas many EU countries are bumping along near the bottom. Of the 148 countries surveyed in 2013, Spain was ranked 125th, France 130th, Portugal 132nd, Greece 144th and Italy 146th.

Americans who complain about the Obama administration’s unhelpfulness towards business will also note ruefully that over the past seven years their country has slipped from 23rd to 80th place…

Broadly speaking, in recent years emerging markets seem to have been cutting their red tape whereas the rich world has been strengthening its regulatory regime…

But not all labour laws are equally useful. In much of Europe the problem is that regulations designed to protect existing workers from unfair dismissal often make employers reluctant to take on new ones. One international executive recounts the tale of a French worker who had been with his employer for just three years but was entitled to five years’ compensation for dismissal. “We wouldn’t put anyone in France if we can possibly avoid it,” the executive said…

The danger is that, once European companies come to expand capacity again, they may do so outside the euro zone, where employment contracts are more flexible and wages and social costs are lower…

The EU not only has inflexible labour markets and high costs; it has slower growth prospects than most emerging markets. That will tempt many businesses to move elsewhere. “Western Europe is at a severe disadvantage because of the costs when you have to restructure your operations,” says Martin Sorrell, the boss of WPP. By contrast, Singapore has a low tax rate, a light regulatory regime and an enviable location at the heart of Asia. Sir Martin thinks some multinationals will eventually move their headquarters to the city-state.

The best way to protect workers is with a robust economy.  Not regulations.  If you lower the tax burden and regulatory costs the return on investment on businesses will soar past the return on investment from government bonds.  And investors would put their money into businesses to make more money.  This is how you help workers get better pay and benefits.  You create such economic activity that there are more jobs than people to fill them.  Forcing employers to offer higher wages and better benefits.  The way it was when the United States became the number one economy in the world.  Not the way it is currently in the EU.  Or the United States.  Where the Great Recession lingers on.  Thanks to an anti-business economic climate.  And the mother of all costly regulatory policies.  Obamacare.

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Post Office, Telegraph, Telephone, Cell Phones, Texting, Technology, Productivity, Savings, Investment, Japan Inc. and Eurozone Crisis

Posted by PITHOCRATES - August 13th, 2013

History 101

(Originally published August 28th, 2012)

Ben Franklin’s Post Office struggles to Stay Relevant in a World where Technology offers a Better Alternative

Once upon a time people stayed in touch with each other by mailing letters to each other.  Benjamin Franklin helped make this possible when he was America’s first Postmaster General of the United States.  And it’s in large part due to his Post Office that the American Revolutionary War became a united stand against Great Britain.  As news of what happened in Massachusetts spread throughout the colonies via Franklin’s Post Office.

In America Samuel Morse created a faster way to communicate.  (While others created this technology independently elsewhere.)  Through ‘dots’ and ‘dashes’ sent over a telegraph wire.  Speeding up communications from days to seconds.  It was fast.  But you needed people who understood Morse code.  Those dots and dashes that represented letters.  At both ends of that telegraph wire.  So the telegraph was a bit too complicated for the family home.  Who still relied on the Post Office to stay in touch

Then along came a guy by the name of Alexander Graham Bell.  Who gave us a telephone in the house.  Which gave people the speed of the telegraph.  But with the simplicity of having a conversation.  Bringing many a teenage girl into the kitchen in the evenings to talk to her friends.  Until she got her own telephone in her bedroom.  Then came cell phones.  Email.  Smartphones.  And Texting.   Communication had become so instantaneous today that no one writes letters anymore.  And Ben Franklin’s Post Office struggles to stay relevant in a world where technology offers a better alternative.

As Keynesian Monetary Policy played a Larger Role in Japan Personal Savings Fell

These technological advances happened because people saved money that allowed entrepreneurs, investors and businesses to borrow it.  They borrowed money and invested it into their businesses.  To bring their ideas to the market place.  And the more they invested the more they advanced technology.  Allowing them to create more incredible things.  And to make them more efficiently.  Thus giving us a variety of new things at low prices.  Thanks to innovation.  Risk-taking entrepreneurs.  And people’s savings.  Which give us an advanced economy.  High productivity.  And growing GDP.

Following World War II Japan rebuilt her industry and became an advanced economy.  As the U.S. auto industry faltered during the Seventies they left the door open for Japan.  Who entered.  In a big way.  They built cars so well that one day they would sell more of them than General Motors.  Which is incredible considering the B-29 bomber.  That laid waste to Japanese industry during World War II.  So how did they recover so fast?  A high savings rate.  During the Seventies the Japanese people saved over 15% of their income with it peaking in the mid-Seventies close to 25%.

This high savings rate provided enormous amounts of investment capital.  Which the Japanese used not only to rebuild their industry but to increase their productivity.  Producing one of the world’s greatest export economies.  The ‘Made in Japan’ label became increasingly common in the United States.  And the world.  Their economic clot grew in the Eighties.  They began buying U.S. properties.  Americans feared they would one day become a wholly owned subsidiary of some Japanese corporation.  Then government intervened.  With their Keynesian economics.  This booming economic juggernaut became Japan Inc.  But as Keynesian monetary policy played a larger role personal savings fell.  During the Eighties they fell below 15%.  And they would continue to fall.  As did her economic activity.  When monetary credit replaced personal savings for investment capital it only created large asset bubbles.  Which popped in the Nineties.  Giving the Japanese their Lost Decade.  A painful deflationary decade as asset prices returned to market prices.

Because the Germans have been so Responsible in their Economic Policies only they can Save the Eurozone

As the world reels from the fallout of the Great Recession the US, UK and Japan share a lot in common.  Depressed economies.  Deficit spending.  High debt.  And a low savings rate.  Two countries in the European Union suffer similar economic problems.  With one notable exception.  They have a higher savings rate.  Those two countries are France and Germany.  Two of the strongest countries in the Eurozone.  And the two that are expected to bail out the Eurozone.

Savings Rate

While the French and the Germans are saving their money the Japanese have lost their way when it comes to saving.  Their savings rate plummeted following their Lost Decade.  As Keynesian economics sat in the driver seat.  Replacing personal savings with cheap state credit.  Much like it has in the US and the UK.  Nations with weak economies and low savings rates.  While the French and the Germans are keeping the Euro alive.  Especially the Germans.  Who are much less Keynesian in their economics.  And prefer a more Benjamin Franklin frugality when it comes to cheap state credit.  As well as state spending.  Who are trying to impose some austerity on the spendthrifts in the Eurozone.  Which the spendthrifts resent.  But they need money.  And the most responsible country in the Eurozone has it.  And there is a reason they have it.  Because their economic policies have been proven to be the best policies.

And others agree.  In fact there are some who want the German taxpayer to save the Euro by taking on the debt of the more irresponsible members in the Eurozone.  Because they have been so responsible in their economic policies they’re the only ones who can.  But if the Germans are the strongest economy shouldn’t others adopt their policies?  Instead of Germany enabling further irresponsible government spending by transferring the debt of the spendthrifts to the German taxpayer?  I think the German taxpayer would agree.  As would Benjamin Franklin.  Who said, “Industry, Perseverance, & Frugality, make Fortune yield.”  Which worked in early America.  In Japan before Japan Inc.  And is currently working in Germany.  It’s only when state spending becomes less frugal that states have sovereign debt crises.  Or subprime mortgage crisis.  Or Lost Decades.

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Saving, Investing and the Paradox of Thrift

Posted by PITHOCRATES - August 12th, 2013

Economics 101

(Originally published August 27th, 2012)

Healthy Sales can Support just about any Bad Decision a Business Owner Makes

“Industry, Perseverance, & Frugality, make Fortune yield.”  Benjamin Franklin (1744).  He also said, “A penny saved is a penny earned.”  Franklin was a self-made man.  He started with little.  And through industry, perseverance and frugality he became rich and successful.  He lived the American dream.  Which was having the liberty to work hard and succeed.  And to keep the proceeds of his labors.  Which he saved.  And all those pennies he saved up allowed him to invest in his business.  Which grew and created more wealth.

Frugality.  And saving.  Two keys to success.  Especially in business.  For the business that starts out by renting a large office in a prestigious building with new furniture is typically the business that fails.  Healthy sales can support just about any bad decision a business owner makes.  While falling sales quickly show the folly of not being frugal.  Most businesses fail because of poor sales revenue.  The less frugal you’ve been the greater the bills you have to pay with those falling sales. Which speeds up the failing process.  Insolvency.  And bankruptcy.  Teaching the important lesson that you should never take sales for granted.  The importance of being frugal.  And the value of saving your pennies.

Saving and frugality also hold true in our personal lives.  Especially when we start buying things.  Like big houses.  And expensive cars.  As a new household starting out with husband and wife gainfully employed the money is good.  The money is plentiful.  And the money can be intoxicating.  Because it can buy nice things.  And if we are not frugal and we do not save for a rainy day we are in for a rude awakening when that rainy day comes.  For if that two income household suddenly becomes a one income household it will become very difficult to pay the bills.  Giving them a quick lesson in the wisdom of being frugal.  And of saving your pennies.

The Money People borrow to Invest is the Same Money that Others have Saved

Being frugal lets us save money.  The less we spend the more we can put in the bank.  What we’re doing is this.  We’re sacrificing short-term consumption for long-term consumption.  Instead of blowing our money on going to the movies, eating out and taking a lot of vacations, we’re putting that money into the bank.  To use as a down payment on a house later.  To save for a dream vacation later.  To put in an in-the-ground pool later.  What we’re doing is pushing our consumption out later in time.  So when we do spend these savings later they won’t make it difficult to pay our bills.  Even if the two incomes become only one.

Sound advice.  Then again, Benjamin Franklin was a wise man.  And a lot of people took his advice.  For America grew into a wealthy nation.  Where entrepreneurs saved their money to build their businesses.  Large savings allowed them to borrow large sums of money.  As bank loans often required a sizeable down payment.  So being frugal and saving money allowed these entrepreneurs to borrow large sums of money from banks.  Money that was in the bank available to loan thanks to other people being frugal.  And saving their money.

To invest requires money.  But few have that kind of money available.  So they use what they have as a down payment and borrow the balance of what they need.  The balance of what they need comes from other people’s savings.  Via a bank loan.  This is very important.  The money people borrow to invest is the same money that others have saved.  Which means that investments are savings.  And that people can only invest as much as people save.  So for businesses to expand and for the economy to grow we need people to save their money.  To be frugal.  The more they save instead of spending the greater amount of investment capital is available.  And the greater the economy can grow.

The Paradox of Thrift states that Being Frugal and Saving Money Destroys the Economy

Once upon a time this was widely accepted economics.  And countries grew wealthy that had high savings rates.  Then along came a man named John Maynard Keynes.  Who gave the world a whole new kind of economic thought.   That said spending was everything.  Consumption was key.  Not savings.  Renouncing centuries of capitalism.  And the wise advice of Benjamin Franklin.  In a consumption-centered economy people saving their money is bad.  Because money people saved isn’t out there generating economic activity by buying stuff.  Keynes said savings were nothing more than a leak of economic activity.  Wasted money that leaks out of the economy and does nothing beneficial.  Even when people and/or businesses are being frugal and saving money to avoid bankruptcy.

In the Keynesian world when people save they don’t spend.  And when they don’t spend then businesses can’t sell.  If businesses aren’t selling as much as they once were they will cut back.  Lay people off.  As more businesses suffer these reductions in their sales revenue overall GDP falls.  Giving us recessions.  This is the paradox of thrift.  Which states that by doing the seemingly right thing (being frugal and saving money) you are actually destroying the economy.  Of course this is nonsense.  For it ignores the other half of saving.  Investing.  As a business does to increase productivity.  To make more for less.  So they can sell more for less.  Allowing people to buy more for less.  And it assumes that a higher savings rate can only come with a corresponding reduction in consumption.  Which is not always the case.  A person can get a raise.  And if they are satisfied by their current level of consumption they may save their additional income rather than increasing their consumption further.

Many people get a raise every year.  Which allows them to more easily pay their bills.  Pay down their credit cards.  Even to save for a large purchase later.  Which is good responsible behavior.  The kind that Benjamin Franklin would approve of.  But not Keynesian economists.  Or governments.  Who embrace Keynesian economics with a passion.  Because it gives them a leading role.  When people aren’t spending enough money guess who should step in and pick up that spending slack?  Government.  So is it any wonder why governments embrace this new kind of economic thought?  It justifies excessive government spending.  Which is just the kind of thing people go into government for.  Sadly, though, their government spending rarely (if ever) pulls a nation out of a recession.  For government spending doesn’t replicate what has historically created strong economic growth.  A high savings rate.  That encourages investment higher up in the stages of production.  Where that investment creates jobs.  Not at the end of the stages of production.  Where government spending creates only inflation.  Deficits.  And higher debt.  All things that are a drag on economic activity.

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Post Office, Telegraph, Telephone, Cell Phones, Texting, Technology, Productivity, Savings, Investment, Japan Inc. and Eurozone Crisis

Posted by PITHOCRATES - August 28th, 2012

History 101

Ben Franklin’s Post Office struggles to Stay Relevant in a World where Technology offers a Better Alternative

Once upon a time people stayed in touch with each other by mailing letters to each other.  Benjamin Franklin helped make this possible when he was America’s first Postmaster General of the United States.  And it’s in large part due to his Post Office that the American Revolutionary War became a united stand against Great Britain.  As news of what happened in Massachusetts spread throughout the colonies via Franklin’s Post Office.

In America Samuel Morse created a faster way to communicate.  (While others created this technology independently elsewhere.)  Through ‘dots’ and ‘dashes’ sent over a telegraph wire.  Speeding up communications from days to seconds.  It was fast.  But you needed people who understood Morse code.  Those dots and dashes that represented letters.  At both ends of that telegraph wire.  So the telegraph was a bit too complicated for the family home.  Who still relied on the Post Office to stay in touch

Then along came a guy by the name of Alexander Graham Bell.  Who gave us a telephone in the house.  Which gave people the speed of the telegraph.  But with the simplicity of having a conversation.  Bringing many a teenage girl into the kitchen in the evenings to talk to her friends.  Until she got her own telephone in her bedroom.  Then came cell phones.  Email.  Smartphones.  And Texting.   Communication had become so instantaneous today that no one writes letters anymore.  And Ben Franklin’s Post Office struggles to stay relevant in a world where technology offers a better alternative.

As Keynesian Monetary Policy played a Larger Role in Japan Personal Savings Fell

These technological advances happened because people saved money that allowed entrepreneurs, investors and businesses to borrow it.  They borrowed money and invested it into their businesses.  To bring their ideas to the market place.  And the more they invested the more they advanced technology.  Allowing them to create more incredible things.  And to make them more efficiently.  Thus giving us a variety of new things at low prices.  Thanks to innovation.  Risk-taking entrepreneurs.  And people’s savings.  Which give us an advanced economy.  High productivity.  And growing GDP.

Following World War II Japan rebuilt her industry and became an advanced economy.  As the U.S. auto industry faltered during the Seventies they left the door open for Japan.  Who entered.  In a big way.  They built cars so well that one day they would sell more of them than General Motors.  Which is incredible considering the B-29 bomber.  That laid waste to Japanese industry during World War II.  So how did they recover so fast?  A high savings rate.  During the Seventies the Japanese people saved over 15% of their income with it peaking in the mid-Seventies close to 25%.

This high savings rate provided enormous amounts of investment capital.  Which the Japanese used not only to rebuild their industry but to increase their productivity.  Producing one of the world’s greatest export economies.  The ‘Made in Japan’ label became increasingly common in the United States.  And the world.  Their economic clot grew in the Eighties.  They began buying U.S. properties.  Americans feared they would one day become a wholly owned subsidiary of some Japanese corporation.  Then government intervened.  With their Keynesian economics.  This booming economic juggernaut became Japan Inc.  But as Keynesian monetary policy played a larger role personal savings fell.  During the Eighties they fell below 15%.  And they would continue to fall.  As did her economic activity.  When monetary credit replaced personal savings for investment capital it only created large asset bubbles.  Which popped in the Nineties.  Giving the Japanese their Lost Decade.  A painful deflationary decade as asset prices returned to market prices.

Because the Germans have been so Responsible in their Economic Policies only they can Save the Eurozone

As the world reels from the fallout of the Great Recession the US, UK and Japan share a lot in common.  Depressed economies.  Deficit spending.  High debt.  And a low savings rate.  Two countries in the European Union suffer similar economic problems.  With one notable exception.  They have a higher savings rate.  Those two countries are France and Germany.  Two of the strongest countries in the Eurozone.  And the two that are expected to bail out the Eurozone.

While the French and the Germans are saving their money the Japanese have lost their way when it comes to saving.  Their savings rate plummeted following their Lost Decade.  As Keynesian economics sat in the driver seat.  Replacing personal savings with cheap state credit.  Much like it has in the US and the UK.  Nations with weak economies and low savings rates.  While the French and the Germans are keeping the Euro alive.  Especially the Germans.  Who are much less Keynesian in their economics.  And prefer a more Benjamin Franklin frugality when it comes to cheap state credit.  As well as state spending.  Who are trying to impose some austerity on the spendthrifts in the Eurozone.  Which the spendthrifts resent.  But they need money.  And the most responsible country in the Eurozone has it.  And there is a reason they have it.  Because their economic policies have been proven to be the best policies.

And others agree.  In fact there are some who want the German taxpayer to save the Euro by taking on the debt of the more irresponsible members in the Eurozone.  Because they have been so responsible in their economic policies they’re the only ones who can.  But if the Germans are the strongest economy shouldn’t others adopt their policies?  Instead of Germany enabling further irresponsible government spending by transferring the debt of the spendthrifts to the German taxpayer?  I think the German taxpayer would agree.  As would Benjamin Franklin.  Who said, “Industry, Perseverance, & Frugality, make Fortune yield.”  Which worked in early America.  In Japan before Japan Inc.  And is currently working in Germany.  It’s only when state spending becomes less frugal that states have sovereign debt crises.  Or subprime mortgage crisis.  Or Lost Decades.

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Saving, Investing and the Paradox of Thrift

Posted by PITHOCRATES - August 27th, 2012

Economics 101

Healthy Sales can Support just about any Bad Decision a Business Owner Makes

“Industry, Perseverance, & Frugality, make Fortune yield.”  Benjamin Franklin (1744).  He also said, “A penny saved is a penny earned.”  Franklin was a self-made man.  He started with little.  And through industry, perseverance and frugality he became rich and successful.  He lived the American dream.  Which was having the liberty to work hard and succeed.  And to keep the proceeds of his labors.  Which he saved.  And all those pennies he saved up allowed him to invest in his business.  Which grew and created more wealth.

Frugality.  And saving.  Two keys to success.  Especially in business.  For the business that starts out by renting a large office in a prestigious building with new furniture is typically the business that fails.  Healthy sales can support just about any bad decision a business owner makes.  While falling sales quickly show the folly of not being frugal.  Most businesses fail because of poor sales revenue.  The less frugal you’ve been the greater the bills you have to pay with those falling sales. Which speeds up the failing process.  Insolvency.  And bankruptcy.  Teaching the important lesson that you should never take sales for granted.  The importance of being frugal.  And the value of saving your pennies.

Saving and frugality also hold true in our personal lives.  Especially when we start buying things.  Like big houses.  And expensive cars.  As a new household starting out with husband and wife gainfully employed the money is good.  The money is plentiful.  And the money can be intoxicating.  Because it can buy nice things.  And if we are not frugal and we do not save for a rainy day we are in for a rude awakening when that rainy day comes.  For if that two income household suddenly becomes a one income household it will become very difficult to pay the bills.  Giving them a quick lesson in the wisdom of being frugal.  And of saving your pennies.

The Money People borrow to Invest is the Same Money that Others have Saved

Being frugal lets us save money.  The less we spend the more we can put in the bank.  What we’re doing is this.  We’re sacrificing short-term consumption for long-term consumption.  Instead of blowing our money on going to the movies, eating out and taking a lot of vacations, we’re putting that money into the bank.  To use as a down payment on a house later.  To save for a dream vacation later.  To put in an in-the-ground pool later.  What we’re doing is pushing our consumption out later in time.  So when we do spend these savings later they won’t make it difficult to pay our bills.  Even if the two incomes become only one.

Sound advice.  Then again, Benjamin Franklin was a wise man.  And a lot of people took his advice.  For America grew into a wealthy nation.  Where entrepreneurs saved their money to build their businesses.  Large savings allowed them to borrow large sums of money.  As bank loans often required a sizeable down payment.  So being frugal and saving money allowed these entrepreneurs to borrow large sums of money from banks.  Money that was in the bank available to loan thanks to other people being frugal.  And saving their money.

To invest requires money.  But few have that kind of money available.  So they use what they have as a down payment and borrow the balance of what they need.  The balance of what they need comes from other people’s savings.  Via a bank loan.  This is very important.  The money people borrow to invest is the same money that others have saved.  Which means that investments are savings.  And that people can only invest as much as people save.  So for businesses to expand and for the economy to grow we need people to save their money.  To be frugal.  The more they save instead of spending the greater amount of investment capital is available.  And the greater the economy can grow.

The Paradox of Thrift states that Being Frugal and Saving Money Destroys the Economy

Once upon a time this was widely accepted economics.  And countries grew wealthy that had high savings rates.  Then along came a man named John Maynard Keynes.  Who gave the world a whole new kind of economic thought.   That said spending was everything.  Consumption was key.  Not savings.  Renouncing centuries of capitalism.  And the wise advice of Benjamin Franklin.  In a consumption-centered economy people saving their money is bad.  Because money people saved isn’t out there generating economic activity by buying stuff.  Keynes said savings were nothing more than a leak of economic activity.  Wasted money that leaks out of the economy and does nothing beneficial.  Even when people and/or businesses are being frugal and saving money to avoid bankruptcy.

In the Keynesian world when people save they don’t spend.  And when they don’t spend then businesses can’t sell.  If businesses aren’t selling as much as they once were they will cut back.  Lay people off.  As more businesses suffer these reductions in their sales revenue overall GDP falls.  Giving us recessions.  This is the paradox of thrift.  Which states that by doing the seemingly right thing (being frugal and saving money) you are actually destroying the economy.  Of course this is nonsense.  For it ignores the other half of saving.  Investing.  As a business does to increase productivity.  To make more for less.  So they can sell more for less.  Allowing people to buy more for less.  And it assumes that a higher savings rate can only come with a corresponding reduction in consumption.  Which is not always the case.  A person can get a raise.  And if they are satisfied by their current level of consumption they may save their additional income rather than increasing their consumption further.

Many people get a raise every year.  Which allows them to more easily pay their bills.  Pay down their credit cards.  Even to save for a large purchase later.  Which is good responsible behavior.  The kind that Benjamin Franklin would approve of.  But not Keynesian economists.  Or governments.  Who embrace Keynesian economics with a passion.  Because it gives them a leading role.  When people aren’t spending enough money guess who should step in and pick up that spending slack?  Government.  So is it any wonder why governments embrace this new kind of economic thought?  It justifies excessive government spending.  Which is just the kind of thing people go into government for.  Sadly, though, their government spending rarely (if ever) pulls a nation out of a recession.  For government spending doesn’t replicate what has historically created strong economic growth.  A high savings rate.  That encourages investment higher up in the stages of production.  Where that investment creates jobs.  Not at the end of the stages of production.  Where government spending creates only inflation.  Deficits.  And higher debt.  All things that are a drag on economic activity.

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Stages of Production

Posted by PITHOCRATES - July 16th, 2012

Economics 101

People used their Human Capital to Transform Raw Materials into Something Valuable

As we unleashed our human capital civilization advanced.  Our food needs taken care of thanks to advances in agriculture we used our new free time to think.  To think about transforming the world around us.  By exploring our world.  And the stuff that made it.  Great civilizations rose and fell throughout history.  But the ones that really advanced the world were those in northern Europe.  The people who conquered the oceans.  The Portuguese.  The Spanish.  The Dutch.  The French.  And the British.

As these great European powers set out to explore the world they established colonies in faraway lands.  To gather the raw materials available.  And to ship them back to their mother countries.  Where their advanced civilizations would transform those raw materials into higher value finished goods.  And then export them throughout the world.  Including their colonies.  This was mercantilism.  Establish colonies.  Ship raw materials to the mother country.  Export finished goods.  And Import bullion accepted in payment for those finished goods.

It’s not a good economic system.  Mercantilism.  But it did create the United States.  Which started out as a British colony.  But as a colony of a mercantilist country the Americans had to follow the rules of the mother country.  First of all they had to understand their place.  And purpose.  They were subordinate to the mother country.  And their only purpose was to procure raw materials and ship them to the mother country.  They couldn’t open trade with other countries.  Everything that left the colonies had to go on a British ship to a British port.  Where British manufacturers would transform those raw materials into finished goods for export.  The British did this because finished goods were more valuable than raw goods.  And sold for much higher prices than the raw materials sold for.  So Britain did the manufacturing.  While their colonies fed their manufacturers with raw material.

The Stages of Production is the Economic Activity that happens to bring Finished Goods to Market

The British eventually abandoned mercantilism and adopted free market capitalism and free trade.  And the British Empire went on to rule the world for a century or so.  This after losing the American colonies in the Revolutionary War, losing about half of their empire.  So free market capitalism is clearly superior to mercantilism.  But for a couple of centuries mercantilism built empires.  And provided an excellent example of the stages of production.

Raw materials mean little to consumers.  What we like are the things that people with human capital transform them into.  The things we go to the store to buy.  Such as a smartphone, for example.  Whenever a new model comes out we flock to our favorite retail store to buy it.  The retail store has it to sell because they bought a shipment from their wholesaler.  The wholesaler had it to sell because they bought it from the assembly plants that assembled them.  The assembly plants could build them because they bought the components (displays, hard cases, antennas, keys, circuit boards, etc.) from various manufacturers.  And the various manufactures bought raw materials from those who extracted them from the ground.  Interconnecting all of these is ship, rail and truck transportation.  Even planes.  Not to mention an extensive cellular network to make these smartphones work.  As well as all the software applications they run.  Adding value at every stage along the way.

There is much economic activity that happens to bring that smartphone to your favorite retail store.  Throughout these stages of production.  Note how everything else has to happen before you buy that smartphone.  Going all the way back to the extraction of raw materials from the ground.  All of these stages have to happen before you buy that phone.  So the payment for the phone follows much later than all of these other stages.  Introducing a very important element in the stages of production.  Time.  It takes time to bring things to market.  And because it takes time it also takes money.  Everyone working from raw material extraction to the salesperson selling you the phone earns an income.  And their employers pay them before you buy your phone.  Some a lot earlier than others.  Also, all of these people either work in a building.  Or in the field with equipment.  Things that others have to build first before we can even begin our raw material extraction.  Requiring an enormous capital investment before anyone earns a dime of revenue on the sale of a smartphone.

The British Empire went on to Rule the World for a Century or More because they let the Market Manage their Economy

To bring a smartphone to a retailer near you requires people to risk their money by investing in something that may earn a profit.  Investors.  And bankers.  As people saved their money they created large pools of capital for businesses to borrow.  Venture capitalists bankrolled promising entrepreneurs.  And the big corporations turned to the equity and bond markets to raise their capital.  Individuals worked hard and saved money to put in their savings account.  Or to buy stocks and bonds.  Because they did there was money to borrow.  Or to invest.  And because there was money to borrow and invest the stages of production could begin.

In the days of mercantilism the government controlled much of this.  Even providing some of that early capital.  But as the economy grew more complex it was too complex for government to manage.  Which is why the British Empire went on to rule the world for a century or more.  Because they let the market manage their economy.  A myriad of people in the market place pursuing their own interests.  Pursuing profits.  Which is why free market capitalism works.  For no one person could know enough to manage all of the stages of productions to bring a smartphone to market.  And the beautiful thing is in free market capitalism no one person has to.  For when people throughout the stages of production pursue profits smartphones arrive at a retailer near you.  At reasonable prices to boot.

So the next time you pick up a smartphone at a retailer think of everything it took to bring it to your hands.  And everything it takes to operate it as you wish.  Hundreds of thousands of people pursuing profits.  Most of which have no idea what they’re doing will allow you to hold a smartphone at your favorite retailer.  Because in the stages of production everyone does their part.  Without any consideration of what their part is in the big picture.  Which is why it works so well.  Thanks to people thinking.  And unleashing their human capital to create great things throughout the stages of production.

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FT118: ” It’s better to have rich investors risk their wealth than having the government risk our taxes.” -Old Pithy

Posted by PITHOCRATES - May 18th, 2012

Fundamental Truth

It wasn’t the Private Investors who lost Half a Billion Dollars on Solyndra

It takes money to create jobs.  Some conveniently forget this fact when the politicians want to take money away from rich people who got rich by creating jobs.  But the politicians always remember this fact when they want to ‘invest’ our tax money into projects to create jobs.  When they want to spend our taxes they then fully understand the concept that it takes money to create jobs.  Funny how that works.

Also funny is that the projects the politicians want to invest in are not projects the rich investors want to invest in.  Because it’s their wealth they’re risking they are a little choosier in deciding where to invest it.  So they don’t invest in these losers the politicians champion.  For even though these politicians are Ivy League graduates who are smarter than everyone else they only like to risk other people’s money.  Unless they have inside information.  Such as pending legislation that will affect the market.  Then they’ll invest their own money.  But that’s the only time.  For as smart as these Ivy League graduates are they have little understanding of free market capitalism.  Or what it takes to be an entrepreneur.  And have no idea how to evaluate an investment opportunity without having inside information.

Still, politicians are so arrogant to believe that they are smarter than the market.  And that if they ‘wisely’ invest our tax money that they can do a better job than those who risk their own money.  People the politicians believe aren’t smart enough to make the best and wisest investments.  Despite their having gotten rich doing just that.  Making wise investments.  For example, it wasn’t the private investors who lost half a billion dollars on Solyndra.  For they saw the only thing keeping the solar industry afloat were government subsidies.  And any industry that requires government subsidies is not likely ever to earn a profit.  So they said ‘no’ to Solyndra and put their money in what they deemed wiser investments.  While the government invested in Solyndra.  Because they saw that as the ‘wiser’ investment.  Only to lose a half a billion of our tax dollars in the process.  Yup.  When it comes to making smart investments the politicians are regular ‘geniuses’.  And by that I mean they are actually the opposite of geniuses.  I was using sarcasm.

Politicians lose Hundreds of Billions of our Tax Dollars in Investment after Investment because they Care 

So the politicians are worse than the worst rank amateur investor.  We know it.  They know it.  At least they should know it what with their perfect record of failure.  So why do they do it?  Why do they continually take money away from the people who know how to better invest that money so they can make some of the worst investments of all time?  That’s a good question.  And we really need to think about it. 

To figure this out think about this one word.  Elections.  That’s the key.  You see, a majority of people wouldn’t vote for these politicians.  Because they want to spend our money.  They want to raise our taxes.  So they can spend it on more Solyndras.  How does that help them?  Here’s how.  People at these companies who receive this federal money are very grateful.  And to show their gratitude they make campaign contributions.  Often with some of the very money they received from the government.  Part of that ‘wise’ investment to create the ‘smart jobs’ of the future.  And why not?  There’ll be a little left over after paying some generous executive salaries and bonuses.  Why not give a little back to the people that made all of that possible?  Make a nice campaign contribution to help the politicians convince the people that they are smart and wise and deserve to win the next election.  So they can spend more of the people’s taxes.  Into other wise investments.  Like Solyndra. 

You just need one thing to make this all possible.  A bad investment.  An investment so bad that no rich people will risk their own money.  Because they know what a loser the investment is.  It has to be that bad.  So someone in the government can say rich people are evil and selfish.  That they only care about turning a profit.  That they are not interested in the jobs of the future.  Or high paying jobs with good benefits for the working man.  Like the politicians do.  They care about the people.  Instead of turning a profit.  And are willing to invest taxpayer money in the poorest of investments.  And lose hundreds of billions of our tax dollars in investment after investment.  Because they care.  More for their own self-interests but they care.  Unlike those evil rich people.  Who refuse to waste valuable investment capital.  And won’t let the people they’ve loaned it to waste it either.  Because they only care about the money.  Unlike our government.  Who has no problem throwing away trillions of our tax dollars.

Investors Invest Responsibly and know how to Pick a Winner that will Create Jobs 

Rich investors take risks when they invest their own money.  So they are very careful in how they invest it.  And when they invest it they are very interested in how that money is used.  They don’t need any oversight committees or legislation.  Because they are no one’s fool.  They are not rank amateurs.  And they appreciate the value of hard-earned money.  They have a vested interest to make sure that money is used in the most efficient manner possible.  Because it’s their money.  And they care.

Politicians invest taxpayer money.  They have no vested interest.  So they don’t care.  When they run out of money from all of their bad investments they don’t suffer any consequences.  All they do is malign rich people again to foster a little class warfare to make raising taxes on the ‘evil rich’ easier.  Then they keep on making bad investments.  Mostly to their political cronies.  Who will return some of that public money back to them in the form of a campaign contribution.

That’s why it’s better to have rich investors risk their wealth than having the government risk our taxes.  Investors will invest responsibly.  The politicians will not.  And the investors know how to pick a winner that will create jobs.  The politicians do not.  The only way they know how to make money is with inside information.  Or skimming a little off the top of the public purse.  Which is the only way to explain investments like Solyndra.  It’s either that or our politicians are just really stupid. 

What a choice.  Corrupt or stupid.  Or is it even worse?  Are they corrupt AND stupid?  If so it sure would help explain a lot.

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FUNDAMENTAL TRUTH #62: “The government’s great dilemma is that the middle class has both the money and the votes.” -Old Pithy

Posted by PITHOCRATES - April 19th, 2011

Figures don’t Lie but Liars Figure

Mark Twain said figures don’t lie but liars figure.  And there’s been a lot of that going around.  Lying.  Especially about taxes.  Where the rich just can’t catch a break.  They pay far more tax dollars than the poor/middle class.  Yet you wouldn’t know that based on the political rhetoric coming from the Left.  And the incessant drive to raise the top marginal tax rates.  To make the rich pay their ‘fair’ share.  Or punish them.  For being rich.  So we can lower the tax burden on the little guy.  The working class people struggling to put food on the table for their families.

Of course, anyone taking the time to crunch the numbers, or read a history book, will see something completely different.  And that the Left can only advance their agenda by lying.  Because people with a job want to keep their job.  And they see the Left’s agenda as anti-business.  And job killing.  Anytime you hear government talk about being ‘fair’ look out.  Chances are you are about to be screwed.  For their idea of fairness and equality is truly Orwellian.  The Left’s idea of equality is when they are more equal than everyone else.

So they champion the poor/middle class.  Say they are looking out for their interests.  But they’re not.  They just want their money.  And their votes.  So they’ll say whatever they think they want to hear.  Anything to maintain their positions in government.  The ruling elite.  And one of their most effective tools is class warfare.  At the heart of which is tax policy.

Taxing the Rich Transfers Tax Burden to the Middle Class

There is a fundamental misunderstanding about tax policy in America.  Everywhere, really.  You see, they’ve beaten it into our heads that the way to get the rich to pay their fair share is to increase their tax rates.  You do that and you transfer the tax burden from the poor/middle class to the rich.  The funny thing is, though, when you raise the tax rates on the rich the exact opposite happens.  You transfer the tax burden from the rich to the poor/middle class.  How can this be, you ask?  Well, let me explain.

Consider two income examples.  Someone who makes $50,000 per year.  And someone who makes $1,000,000 per year.  Based on the 2008 tax tables (with a top marginal rate of 35%), the federal income tax each pays is approximately $16,980 and $454,000, respectfully.  Now, what do you notice about these numbers?  That’s right.  The $454,000 is a lot bigger than the $16,980.  It’s over 26 times the amount of taxes the person earning $50,000 pays.  Now think about that.  If only one more person becomes a millionaire (let’s say an entrepreneur quits his day job and creates the next great invention), the government will collect the same amount in taxes it would take from 26 new $50,000/year jobs added to the economy.  Let’s say 2 venture capitalists strike it rich and both become millionaires.  They would add the same tax revenue it would take 52 new $50,000/jobs to generate.  Three new millionaires = 78 new $50,000 jobs worth of taxes.  See a pattern?  The more millionaires there are paying taxes the less the poor/middle class have to pay in taxes.  Or, conversely, the fewer millionaires are paying taxes the more the poor/middle class have to pay.  So the more millionaires there are paying taxes, the more the tax burden transfers from the poor/middle class to the rich.

Well, based on that, the best thing we can do for the poor and middle class is to make as many millionaires as possible.  And how do you do that?  It’s pretty easy.  Sort of like a dog having puppies.  They already know how to do it.  They don’t need any special help.  All they need is for us to get out of their way.  And give them a business-friendly environment.  Where a small business owner will risk his or her life savings on that business to get rich.  Or a venture capitalist will risk his or her money on an untried entrepreneur with a really good idea to get rich.  And how do you get people to take risks and invest large sums of money?  By giving them a chance to get rich in the process.  And you don’t do that with high tax rates.  Because high tax rates increase the ‘cost’ of these investments.  And when the cost gets too high, they look for other things to do with their money.  If the return on investment is taxed to the point that they can make the same return without any risk, they won’t take any risk.  And just leave their money in the bank.

The more Millionaires we have the Less Taxes the Middle Class Pays

Of course this all makes good sense.  But bad politics.  Especially on the Left.  For they are all about fairness and redistribution of wealth on the Left.  And you can’t be fair and redistribute wealth unless you demonize the rich.  Because you have to take wealth from someone before you can redistribute it.  And who has wealth?  Why, the wealthy, of course.  Who are greedy.  Who don’t pay their fair share of taxes.  And profit by exploiting the poor/middle class.  Or so goes the liberal mantra.  So to show how much they care for the poor/middle class, they try to raise taxes on the rich.  By constantly trying to raise the top marginal rates.  Of course, as noted above, doing this actually hurts the poor/middle class.  By making them pay a much larger share of the total tax burden than the rich pays.  Let’s look at some numbers.

We keep hearing about this evil 1% who has the majority of the wealth in this country.  So let’s look at this by the numbers.  One percent is one in one hundred.  So let’s assume we have 100 taxpayers.  One millionaire who earns $1,000,000 per year.  Twenty ‘poor’ people earning $15,000 per year.  And 79 ‘middle class’ people earning $50,000 per year.  Based on the 2008 tax tables, the annual income tax each owes (going from poor to rich) is approximately $4,500, $17,000 and $454,000.  Their total tax contributions (in the same order) are approximately $91,000, $1,342,000 and $454,000.  Or, as a percent of the total, 4.8%, 71% and 24%.  Please note that it’s the middle class that pays the bulk of the tax burden (71%).  Even though they each pay only a fraction of what the millionaire pays.  Because one millionaire can pay only so much.  But the ‘fraction’ 79 middle class people pay adds up.  The sum total of their taxes equals approximately three times what that millionaire pays.  Which proves the point that the fewer millionaires there are the more the poor/middle class has to pay in taxes.

Now let’s say nine people prospered very well and moved from the middle class to the rich.  There are still 20 ‘poor’ people.  But with the 10 people that now earn $1,000,000 per year, there are now only 70 middle class people earning $50,000 per year.  This changes the total tax contributions (going from poor to rich) to approximately $91,000, $1,187,000 and $4,538,000.  Or, as a percent of the total, 1.6%, 20.4% and 78%.  Now the rich are paying the vast majority of all taxes (78%).  Which proves the point that the more millionaires there are the less the poor/middle class have to pay in taxes.

Figures don’t Lie but Liberals will Figure

Well, sure, you can use all your facts and figures to show things that make sense.  But making sense doesn’t necessarily apply in politics.  Because tax policy is a lot more than just funding the government.  It’s about winning elections.  And the one great dilemma in all of politics is this.  The people with the most money to tax are in the middle class.  Because of their numbers.  They may pay less per person than the rich but their numbers add up.  And they are the largest voting bloc.  Because of their numbers.  Which presents quite the problem.  Politicians want their money.  But if they take too much of it they may lose their votes.  So what to do?  You take their money.  While making it look like you’re punishing the rich.

The more government spends the greater this problem gets.  Deficits grow larger.  Which adds to the national debt.  Interest payments on that debt take up an ever larger part of the federal budget.  Add that to out of control growth of entitlement spending and what do you get?  A big problem.  And greater deficits.  Which are getting harder and harder to finance.  Soon you’re borrowing money to pay your borrowing costs.  You need cash.  Or you need to cut spending.  And you know you’re not going to do that.  Because cutting spending doesn’t help win elections.  So you look for more cash.  And you can’t go the easy route and just create more millionaires.  Not after demonizing them so much.  Doing that would be tantamount to saying you were wrong and/or lying all these years.  Besides, the anti-business environment currently in place doesn’t encourage any risk taking by the rich.  So they’re sitting on their money.  Which leaves the middle class.  So we start hearing code words.  Fair share sacrifice.  Tax the rich.  It’s not fair to give millionaires and billionaires tax breaks paid by the poor and middle class.  This means the poor/middle class is about to get screwed.  Either by higher taxes (or reduced tax breaks and credits).  Or they’re going to raise the top marginal tax rates which will transfer more of the tax burden from the rich to the poor/middle class.

Of course, screwing the poor/middle class is what it’s all about.  The Left uses them.  All of the time.  Through lies and deceit.  For our lives would be better if we had a lot more millionaires.  And less progressive tax rates.  That encouraged more economic activity.  And created more jobs.  But the liberal left could care less about that.  Based on the evidence.  And history.  When they run for office they run as moderates.  Because they know they can’t win elections running as liberals.  Barack Obama was the most liberal senator in the Senate.  Yet when he ran some were comparing him to Ronald Reagan.  And you only lie like that for one reason.  To hide who you really are.  Tax and spend liberals.  Who have made the middle class the bank for their tax and spend policies.

So while figures don’t lie, liberals will figure.

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