Peace through Strength

Posted by PITHOCRATES - March 6th, 2014

Politics 101

Bad Guys won’t open their Can of Whoop-Ass if there is a Chance they’ll get their Ass Kicked

Bullies generally pick on smaller and weaker people.  Smaller and weaker people don’t pick on tough guys.  They don’t walk up to a bully and give him a wedgie.  They’d like to.  But they don’t.  Why?  Because if a small and weak person did they’d get their ass kicked.  That’s why.  And people don’t like getting their ass kicked.  But sometimes it’s the tough guys that save the day.

In the opening scene of V for Vendetta Evey was about to get raped by some government thugs.  Then tough guy V came along and kicked their asses.  Saving Eve from a brutal rape.  In Die Hard the evil Hans Gruber was going to kill everyone in that building until tough guy John McClane happened on the scene.  And started killing the bad guys.  Saving the day.  In the movie Patton everyone wanted him thrown out of the Army after he slapped that crying soldier.  But when the Allies’ drive stalled in the Normandy hedgerow country who did they turn to?  That’s right.  Tough guy General Patton.  Who started kicking Nazi ass big time.  Breaking through their lines and advancing in every compass direction while British General Bernard Montgomery was still struggling o take his D-Day objective.  Caen.

People don’t like getting their ass kicked.  But if they are in danger of a good ass-kicking they’d want someone on their side who can kick ass as good as the next guy.  For even bad guys don’t want to get their ass kicked.  And if there is a chance of that happening they’re going to think long and hard before opening their can of whoop-ass.  Especially when someone else’s can of whoop-ass is bigger.

Only the Military Might of the United States could contain Soviet Expansion

The Roman Empire had one mighty can of whoop-ass.  Something her potential enemies understood.  And feared.  So they didn’t cause any trouble.  Because they didn’t want to get their ass kicked.  Which is why from approximately 27 BC to 180 AD there was relative peace in the world.  Pax Romana.  For the Romans had the mightiest military force in the world.  And if you went up against them you were most likely going to lose.  So they didn’t.  Instead, choosing to live in peace.

The British Empire was even larger than the Roman Empire.  And had an even larger can of whoop-ass.  Not only did they have armies throughout their empire which was so large that the sun never set on it.  The Royal Navy ruled the seas.  Which meant if you caused any trouble in the world you could expect an ass-kicking.  Either from her mighty military power.  Or her aid to a smaller and weaker country under threat from an aggressive neighbor.  The bad guys learned.  It wasn’t worth it.  If you tried to break the peace you were going to get your ass kicked.  Which is why from 1815 through 1914 when the British Empire ruled the world there was relative peace.  Pax Britannica.

The United States of America had come of age during the 20th century.  Growing even bigger and stronger than the empire that sired her.  The British Empire.  Who went into decline during the 20th century.  But just as Pax Britannica drew to a close and the world became a more dangerous place the United States stepped in.  Allowing the Allies to defeat Nazi Germany.  And Imperial Japan.  She grew to have the biggest can of whoop-ass in history.  And became the world’s policeman.  Pushing back against Soviet expansion.  In Europe.  The Balkans.  The Middle East.  And Southeast Asia.  The Soviets wanted to conquer the world.  And would have if not for America’s mighty military to counter their threat.  Leading to a period of relative peace following World War II.  Pax Americana.  As only the military might of the United States could contain Soviet expansion.

Vladimir Putin feels that he can put the old Soviet Union back together during the Obama Administration

During a sound check before a radio address President Reagan made a joke.  He said, “My fellow Americans, I’m pleased to tell you today that I’ve signed legislation that will outlaw Russia forever.  We begin bombing in five minutes.”  Reagan had a sense of humor and those present laughed.  The joke leaked.  The Soviets heard it.  And they put their Soviet Far East Army on alert.  You see, they had great respect for the awesome military power of the United States.  And they respected Reagan.  They did not like him.  But they respected him.  And if he said he was going to open a can of whoop-ass on them they got nervous.  For President Reagan may have spoken softly.  But he was not afraid to kick ass.

The Soviets had no such respect for Reagan’s predecessor.  Jimmy Carter.  In fact, they had so little respect for him that they developed a nuclear first-strike plan.  For Carter was gutting the military.  And wasn’t a tough guy when it came to foreign policy.  He was a president who wanted to focus on domestic policy.  A sign of weakness the Soviets could smell.   Anyone who gutted the military to pay for more domestic spending would never pull the nuclear trigger.  At least that’s what the Soviets thought.  Which is why they prepared a nuclear first-strike plan during the Carter administration.  Sure they could win a nuclear war against him.  The Soviets thought no such thing during the Reagan administration.  So instead of a nuclear war (which may have happened in a Carter second term) we had peace.  Because of our strength.

Peace through strength.  If you’re a bad-ass people will leave you alone.  Because no one wants to get their ass kicked.  If you’re hell-bent on beating the crap out of your neighbor so you can take her resources and there is a bad-ass in the world that can bring a world of hurt down on you it will make you think.  And pause.  This is why there was a Pax Romana.  A Pax Britannica.  And a Pax Americana.  Because people respect a bad-ass.  And will not incite it.  They may hate the bad-ass.  But they will respect it.  And not piss it off.

President Obama has a strong domestic agenda.  Like Jimmy Carter.  He doesn’t want to deal with foreign policy.  Like Jimmy Carter.  And he is not respected or feared by the world’s bad guys.  Like Jimmy Carter.  Who is far more inclined to make a speech and threaten action.  But is far less likely to open a can of whoop-ass.  Like Ronald Reagan.  Which is why Vladimir Putin feels that he can put the old Soviet Union back together during the Obama administration.  Because he doesn’t fear the wrath of President Obama.  As no one does.  For he is all bark and no bite.  At least, so far.  Apart from killing a bunch of people that can’t fight back.  Drone strikes.  Bombing Libya (that was no threat to American interests).  And killing Osama bin Laden with a SEAL team.  More of an imperial use of force than acting as the world’s policeman to safeguard liberty and democracy.  So Vladimir Putin has little to worry about during an Obama presidency.  Unlike conservatives in America.

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Debt, Jobs and Criticism—Carter, Reagan, Clinton, Bush and Obama

Posted by PITHOCRATES - November 19th, 2013

History 101

The Democrats used the Power of the Purse to oppose the Reagan Agenda wherever they Could

The left hated President Reagan.  They called him just a “B” movie actor.  With many references to Bedtime for Bonzo.   With the implication that Reagan was a chimpanzee.  He was called stupid.  Senile.  And they said he hated the poor.  The usual stuff when it comes to Democrats calling the opposition names.  But as about as demeaning as it gets.  For the Democrats hated Ronald Reagan with a passion.  They may have hated him even more than George W. Bush.  Another president they called stupid.  Even making similar chimpanzee references.

They fought Reagan tooth and nail.  The Democrats held the House and they used the power of the purse to oppose the Reagan agenda wherever they could.  So Reagan had to compromise on some things.  Especially tax hikes.  But for the most part he kept his word to the American people.  And maintained high approval ratings.  Making it harder for the Democrats to block all of the Reagan agenda.  Which just made the left hate him more.

It’s funny the short memories Democrats have.  For any criticism of President Obama is met with charges of racism.  And because of that few criticize him.  Because no one wants to be called a racist.  Giving President Obama a free pass for most if his presidency.  Something neither George W. Bush nor Ronald Reagan ever enjoyed.  Yet the left says the right says the most vile things about President Obama.  Unprecedented things.  Like calling him a liar when he lied during the State of the Union Address.  Which must be different from saying ‘Bush lied people died’ over and over again.

President Obama is on Pace to add more Debt than Ronald Reagan

Among the terrible things the left said Ronald Reagan was doing was running up the debt to unsustainable levels.  And he did run up the debt.  About 99.4% during his 8 years.  Or about 12.4% a year.  Much of that spending, though, was to reverse the damage Jimmy Carter did to national defense.  He had gutted defense spending so much (cancelling bombers and missile programs) that the Soviet Union thought for the first time that they could win a nuclear war against the United States.  At least with Jimmy Carter as president.  They actually started drafting nuclear first-strike plans to replace the deterrence of mutually assured destruction (MAD).  Anyway, that spending led to the collapse of the Soviet Union.  Allowing the U.S. to win the Cold War.  Giving Bill Clinton a huge peace dividend during his presidency.

Bill Clinton wanted to nationalize health care.  And it didn’t go over well.  His big spending liberal agenda got neutered at the midterm elections.  As he angered the people so much the Republicans won both the House and Senate.  Forcing Clinton to the center.  Dropping any thoughts of national health care.  With Republicans even forcing welfare reform on him.  The Republican Revolution kept spending down.  And the debt only grew 13.6% during Clinton’s 8 years.  Or about 1.7% a year.

After the 9/11 terrorist attacks George W. Bush ramped up military spending.  For national security.  And two wars.  He also ramped up domestic spending.  Giving us Medicare Part D.  A program to subsidize the prescription drugs for Medicare recipients.  In the 8 years of the Bush presidency he added about 41.4% to the national debt.  About 5.2% a year.  Which sounded like a lot until President Obama came along.  A near trillion dollar stimulus bill that stimulated little.  Investments into failed solar power companies and electric car companies.  Automotive (i.e., union pension fund) bailouts.  In his 5 years in office Obama has raised the debt by 53.8%.  Or 10.8% each of his 5 years.  A little more than twice the rate of George W. Bush.  At this pace he will even add more debt than Ronald Reagan.  Adding up to 18.3% per year (over 8 years) if no one stops his spending.

Under President Obama the Gap between Black and White Unemployment grew Greater

President Obama said those ‘wise’ investments and higher taxes on those who could afford to pay a little more would generate economic activity.  His income redistribution would balance the playing field.  And raise the poor out of poverty.  While people everywhere celebrated the first black president.  For it would bring the races together.  This is why some on the right joked that President Obama was the messiah.  Because he was going to do all of that.  As well as make the ocean levels fall.  Black America especially loved the nation’s first black president.  As 95% of the black vote went to Obama in 2008.  Though the enthusiasm waned a bit in 2012.  As only 93% of the black vote went to Obama.  And how has black American done under the Obama economic policies.  Well, not as good as they did under the Bush economic policies (see archived data from Table A-2. Employment status of the civilian population by race, sex, and age in the Employment Situation Archived News Releases by the Bureau of Labor Statistics).

Unemplyment Rates by Race Age Sex 2003-2013 R2

The Great Recession officially ran from December 2007 to June 2009.  Which corresponds to the transition from George W. Bush to Barack Obama.  People often call the Great Recession the worst recession since the Great Depression.  Of course they say that primarily because the current economic recovery is the worst since that following the Great Depression.  And the reason for that is President Obama’s economic policies.

Unemployment was lower for everyone under Bush.  On average the unemployment rate for white/black men, women and 16-19 year olds under Bush was 4.2%/9.3%, 4.0%/8.2% and 14.7%/31.1%, respectively.  Under President Obama these numbers jumped to 7.8%/15.7%, 6.7%/12.2% and 21.8%/40.3%.  Which should give black America cause for concern.  For under President Obama the gap between black and white unemployment grew greater.  The gap between black and white men went from 5.1 to 7.9.  An increase of 55.6%.  The gap between black and white women went from 4.2 to 5.5.  An increase of 32.9%.  And the gap between black and white 16 to 19 year olds went from 16.5 to 18.5.  An increase of 12.7%.  So whatever President Obama is doing it isn’t helping America find work.  Especially black America.

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The Soviet Union created Anti-American and Anti-Israeli Sentiment in the Muslim World

Posted by PITHOCRATES - June 29th, 2013

Week in Review

Jimmy Carter was a very weak president.  When he took over fighting the Cold War he stopped fighting it.  Choosing détente instead.  Making nice with our enemies.  And weakened the U.S. military.  It got so bad that the Soviets didn’t believe he had the guts to launch his nuclear weapons.  Thinking that perhaps MAD (mutually assured destruction) wasn’t so assured anymore.  And began formulating a nuclear first-strike plan.  Bringing the United States close to nuclear war.  Because our enemies viewed him as weak.

Then came Ronald Reagan.  Who reversed the Carter decline.  And made our enemies fear and respect us once again.  Choosing to win the Cold War instead of making nice with our enemies.  As communism was a wretched system that enslaved her people who yearned to breathe free.  Exporting its oppression wherever it could throughout the world.  Where we’re feeling the fallout to this day.  Thanks to Jimmy Carter making nice to our enemy (see EXCLUSIVE: New book reveals how KGB operation seeded Muslim countries with anti-American, anti-Jewish propaganda during the 1970s, laying the groundwork for Islamist terrorism against U.S. and Israel by David Martosko posted 6/25/2013 on the Daily Mail).

The highest-ranking Soviet-bloc intelligence officer ever to defect to the West claims in a new book that anti-American Islamic terrorism had its roots in a secret 1970s-era KGB plot to harm but the United States and Israel by seeding Muslim countries with carefully targeted propaganda.

Yuri Andropov, the KGB chief for 15 years before he became the Soviet premier, sent hundreds of agents and thousands of copies of propaganda literature to Muslim countries.

‘By 1972,’ according to the book, ‘Andropov’s disinformation machinery was working around the clock to persuade the Islamic world that Israel and the United States intended to transform the rest of the world into a Zionist fiefdom…’

Andropov began his leadership of the KGB just months before the 1967 Six-Day War between Arabs and Israelis, in which Israel humiliated the key Soviet allies Syria and Egypt. And he decided to settle the score by training Palestinian militants to hijack El Al airplanes and bomb sites in Jerusalem.

But more shocking, Andropov commissioned the first Arabic translation of The Protocols of the Elders of Zion, a Russian-forged 1905 propaganda book that alleged Jews were plotting to take over Europe – and were being aided by the United States…

Kennedy-era Soviet premier Nikita Khrushchev’s disinformation campaigns ‘widened the gap between Christianity and Judaism,’ according to the authors. And ‘Andropov’s disinformation turned the Islamic world against the United States and ignited the international terrorism that threatens us today.’

This is the enemy that Jimmy Carter was trying to make nice to.  One that was widening the gap between Christianity and Judaism.  And one that was turning the Islamic world against the United States.  Which the Soviets did well.  Giving us the mess we have today.

The Soviet Union was officially an atheist state.  Who shut down the Russian Orthodox Church.  As they wanted no other powers or influences over their people’s lives.  Which is why they had no problem putting the major world religions at war with each other.  And explains why today the Russians always seem to fall on the side against the U.S. and Israel.  For they worked hard to foment that anti-American and anti-Israeli sentiment.  And Vladimir Putin was once KGB.  The machine that created this sentiment.  And apparently he still wants to collect the dividends from their old Soviet-era allies.

So it appears that the War on Terror is nothing more than the Cold War redux.  It’s not a rogue power that filled a vacuum left by the Soviet collapse.  But a power that the Soviets created maturing at the time of the Soviet collapse.  Too late to help them not lose the Cold War to Ronald Reagan and Margaret Thatcher.  But perhaps not too late to further expand Russian power over their Soviet-era allies.  Thanks to that anti-American and anti-Israeli sentiment inflaming the Islamic world.  The Soviets made them our enemy.  Not any YouTube video.  Or George W. Bush.  And no amount of making nice to them is going to change that.

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Figures don’t Lie but Liars Figure when it comes to the Economy and the Patriot Act

Posted by PITHOCRATES - June 6th, 2013

Politics 101

Politicians Lie because they don’t want you to see how Wrong their Economic Policies Are

If you’re objective you look at the facts to form an informed opinion.  If you’re subjective you form the facts to support your opinion.  If you’re objective the facts mean the same thing to you as the next guy.  If you’re subjective they don’t.  Water boils at 212 degrees Fahrenheit.  That’s an objective fact.  The post-impressionists (such as Vincent van Gogh) are better than the impressionists.  That’s a subjective opinion.  For not everyone will agree with that statement.  As a lot of people are wrong about art.

Politics is subjective.  Because politicians selectively take facts and ‘spin’ them.  Which means they take what supports their political views and hype them.  While downplaying or ignoring those things that do not.  For example, take the monthly reports on the economy.  They hype the new jobs the economy created.  And the fall in the unemployment rate.  But continually downplay the shrinking labor force.  Which is the only reason why the unemployment rate fell.  The government quits counting the unemployed once they quit looking for a job.

Do politicians lie?  Of course they do.  All of the time.  Because they want to deceive you.  When they are talking about the economic numbers they may not be technically lying.  But they are deceiving you.  Because they don’t want you to see how wrong their economic policies are.  So they spin the facts.  Like that expression many attribute to Mark Twain.  “Figures don’t lie but liars figure.”

Objectively Harding’s, Coolidge’s, JFK’s and Reagan’s Economic Policies were Very Successful

When it comes to economic policies Democrats and Republicans have very different beliefs.  Democrats believe in an activist government intervening in the private sector.  Like FDR did when he turned a recession into the Great Depression.  Like Jimmy Carter did when he gave us terms like economic malaise and the misery index.  And like President Obama did when he turned a recession into the Great Recession.  Whereas Republicans believe in a limited government that stays out of the private sector economy.  Like Warren Harding and Calvin Coolidge did when they gave us the Roaring Twenties.  Like JFK did when his policies gave LBJ a robust economy.  (Until his Great Society gave Jimmy Carter economic malaise and misery.)  And Ronald Reagan did when he gave us one of the longest and strongest economic expansions of all time.

Objectively Harding’s, Coolidge’s, JFK’s and Reagan’s economic policies were very successful.  Conservatives in the Republican Party want to implement similar policies today.  While Democrats want to continue the failed economic policies of FDR, Carter and Obama.  Because they prefer them for subjective reasons.  As they require an activist government intervening in the private sector.  And they don’t care that these policies have a long record of failure.  For they are more interested in growing the size of government than they are in the economy.

So the Democrats spin the economic news to deceive the American people.  And they spun their deception well.  For President Obama won reelection despite his policies giving us the worse economic recovery since that following the Great Depression.  Despite 4 years of failure the American people believe that he cares more than anyone else.  And continues to work harder than anyone else to fix the economy.   Despite his policies proving otherwise.

It was Wrong when George W. Bush used the Patriot Act but it is Perfectly Acceptable if President Obama uses It

So Democrats will ‘figure’ with the economic data to deceive the people so they can advance their agenda.  Making the federal government larger and more powerful.  Hyping the fall in the unemployment rate even though the labor force participation rate has fallen to Jimmy Carter lows.  They may deceive and they may destroy when it comes to the economy but one thing they are is consistent.  Which is more than you can say when it comes to national defense.  Or spying on Americans.

Following the 9/11 terrorist attacks the Bush administration passed the Patriot Act.  This law allowed warrantless wiretaps on international calls to people having suspected ties to terrorist activities.  The Democrats railed against the Patriot Act.  For it was turning the United States into a police state.  Where Big Brother was spying on our every movement.  If those movements were an international call to a person having a suspected tie to terrorist activities.  Even President Obama himself railed against the Patriot Act.  Saying in the 2008 presidential campaign that he would repeal this and every other Bush law that violated our Constitutional protections.  Of course, when he became president it was a different story.

Not only did the Obama administration keep the Patriot Act law they used it for far more than the Bush administration ever used it for.  The UK’s Guardian recently reported that the Obama administration was collecting and storing information on every Verizon phone call.  Not just people making international calls to people with suspected ties to terrorist activities.  But every man, woman and child that has a Verizon phone.  And probably every man, woman and child using every other cellular carrier.  You see, President Obama said it was wrong when George W. Bush used the Patriot Act.  But it is perfectly acceptable if he uses the Patriot Act.  As being able to spy on every American can go a long way in furthering the Democrat agenda.  Making the federal government larger and more powerful.  Showing how the Patriot Act is not an objective violation of our Constitutional rights.  But a subjective instrument of good.  As long as Democrats are wielding this awesome power over their political enemies.  And anyone who may become their political enemy.

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The Left Hate Margaret Thatcher and Ronald Reagan because they Restored their Countries to Greatness

Posted by PITHOCRATES - September 16th, 2012

Week in Review

The British Left hates Margaret Thatcher.  So much that they are already selling t-shirts celebrating her death.  Though she is still alive.  For she is the Ronald Reagan of Great Britain.  A singularly remarkable person who came along just in time to save a nation in decline.  And restore it to greatness (see The Left hates Margaret Thatcher because she reminds them they are wrong about everything by Daniel Hannan posted 9/12/2012 on the Daily Mail).

Now and again, we are reminded of the sheer nastiness of a certain kind of Leftie. Not, let me stress, all Lefties: I have Labour friends who are motivated by a more or less uncomplicated desire to help the disadvantaged.

But they march alongside some committed haters who define their politics not by what they like, but by what they loathe. They also define opponents not as human beings with whom they disagree, but as legitimate targets.

A lack of empathy, bordering almost on sociopathy sits behind their talk of caring and sharing.

Not much different from the American Left.  Who hate their political opponents.  And attack them personally.  With no understanding of the underlying policy in question.  For they never say they prefer tax, borrow and print (money) Keynesian economics over a more Austrian approach of sound money and low taxation.  The kind of policies that have made great economies great.  Instead they say their opponents hate women, hate poor people, hate children, hate seniors, etc.  And yet they are the tolerant people.  Who tolerate everyone that agrees with them.  And hates all those who disagree with them.  Making these tolerant some of the most intolerant of people.  Which is why they hate Ronald Reagan in America.  And they hate Margaret Thatcher in Britain.  Even though they both returned their countries to prosperity after a decade of decline and despair.

I am just old enough to remember the end of the Seventies: power cuts, three-day weeks, constant strikes, price and income controls, inflation.

Worst of all, I remember the sense of despair, the conviction that Britain was finished.

I don’t believe you can grasp Margaret Thatcher’s achievement without the context of what she displaced.

Throughout the Sixties and Seventies, this country had been outperformed by every European economy. ‘Britain is a tragedy — it has sunk to borrowing, begging, stealing until North Sea oil comes in,’ said Henry Kissinger.

The Wall Street Journal in 1975 was blunter: ‘Goodbye, Great Britain: it was nice knowing you.’

Margaret Thatcher’s victory in 1979 was like a thaw after the cruellest of winters. Inflation fell, strikes stopped, the latent enterprise of a free people was awakened.

Having lagged behind for a generation, we outgrew every European country in the Eighties except Spain (which was bouncing back from an even lower place). As revenues flowed in, taxes were cut and debt was repaid, while public spending — contrary to almost universal belief — rose.

In America we were mired in stagflation and a record high misery index of the Carter Seventies.  Much of which he inherited from LBJ’s Great Society and Richard Milhous Nixon’s abandoning of the quasi gold standard.  The Nixon Shock.  Because he refused to cut Great Society spending.  As did Gerald Ford.  As did Jimmy Carter.  No one wanted to cut back spending and continued to print money to pay for the Great Society spending causing the record high inflation during the Seventies.  Which added to the high unemployment that gave Jimmy Carter that horrible misery index.  And malaise.  Like Daniel Hannan I’m just old enough to remember how bad it was in the Seventies.  And how great Ronald Reagan’s Morning in America was.  We were better off after 4 years of Ronald Reagan than we were after 4 years of Jimmy Carter.  And the numbers proved it.  Lower tax rates increased tax revenue.  Allowing even greater government spending.  Which was the source of the Reagan deficits.  Not the tax cuts.

In the Falklands, Margaret Thatcher showed the world that a great country doesn’t retreat forever.

And by ending the wretched policy of one-sided detente that had allowed the Soviets to march into Europe, Korea and Afghanistan, she set in train the events that would free hundreds of millions of people from what, in crude mathematical terms, must be reckoned the most murderous ideology humanity has known.

Margaret Thatcher and Ronald Reagan stood together against communism.  While Jimmy Carter eroded America’s military power so much that the Soviets actually put together a nuclear first-strike doctrine.  For unlike the policy of Mutual Assured Destruction (MAD) of previous administrations the Soviets believed they could launch and win a nuclear war against Jimmy Carter.  Reagan and Thatcher rebuilt and deployed nuclear and regular military forces to reduce the threat of a Soviet first-strike.  And made the enemies of Great Britain and the United States fear and respect our military might.  It was peace through strength.  For all free and democratic countries.  Not the detente of Jimmy Carter that encouraged the Soviets to add a nuclear first-strike doctrine.  The beginning of the end of the Cold War began under Thatcher’s and Reagan’s watch.

Why, then, do Lefties loathe her so much..?

No, what Lefties (with honourable exceptions) find hard to forgive is the lady’s very success: the fact that she rescued a country that they had dishonoured and impoverished; that she inherited a Britain that was sclerotic, indebted and declining and left it proud, wealthy and free; that she never lost an election to them.

Their rage, in truth, can never be assuaged, for she reminds them of their own failure.

The same reasons the American Left hates Ronald Reagan.  Because he, too, returned his country to greatness.

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Jimmy Carter, Malaise, Ronald Reagan, Austrian Economics, Morning in America, Barack Obama, Keynesian Economics and Great Recession

Posted by PITHOCRATES - September 4th, 2012

History 101

It was Morning in America again because Ronald Reagan reduced the Misery Index by 42.7%

Ronald Reagan was a supply-sider when it came to economics.  Of the Austrian school variety.  In fact, one of his campaign promises was to bring back the gold standard.  A very Austrian thing.  The Austrian school predates the Keynesian school.  When the focus was on the stages of production.  Not on consumer spending.  These policies served the nation well.  They (and the gold standard) exploded American ingenuity and economic activity in the 19th century.  Making the U.S. the number one economy in the world.  Surpassing the nation that held the top spot for a century or more.  Perhaps the last great empire.  Great Britain.

Following the stagflation and misery (misery index = inflation rate + unemployment rate) of the Seventies Reagan promised to cut taxes and governmental regulations.  To make it easier for businesses to create economic activity.  Easier to create jobs.  And he did.  Among other things.  Such as rebuilding the military that the Carter administration severely weakened during the Seventies (it was so bad that the Soviet Union put together a first-strike nuclear option.  Because they thought they could win a nuclear war with Jimmy Carter as president).  During the 1980 campaign Reagan asked the people if they were better off after 4 years of Jimmy Carter.  The answer was no.  Four years later, though, they were.  Here’s why.  (Note:  We used so many sources that we didn’t source them here to save space.  The inflation rate and unemployment rates are for August of the respective years.  The dollar amounts are annual totals with some estimates added to take them to the end of 2012.  The debt and GDP are not adjusted for inflation as they are only 4 years apart.  Gas prices and median income are adjusted for inflation.  There may be some error in these numbers.  But overall we believe the information they provide fairly states the economic results of the presidents’ policies.  (This note applies to both tables.))

Reagan entered office with some horrendous numbers.  The Carter administration was printing so much money that inflation was at 12.9% in 1980.  Added to the unemployment rate that brought the misery index to 20.6%.  A huge number.  To be fair Carter tapped Paul Volcker to be Fed Chairman and he began the policy of reigning in inflation.  But Carter did this far too late.  The only way to cure high inflation is with a nasty recession.  Which Volcker gave Ronald Reagan.  But it worked.  By 1984 inflation fell 8.8 points or 66.7%.  Even with this nasty recession the unemployment rate fell 0.2 points or 2.6%.  Which shaved 8.8 points off of the miserable index.  Or reducing it by 42.7%.  This is why it was morning in America again.  The Left to this day say “yeah, but at what cost?” and point to the record deficits of the Reagan administration.  Saying this is the price of tax cuts.  But they’re wrong.  Yes, the debt went up.  But it wasn’t because of the tax cuts.  Because those tax cuts stimulated economic activity.  GDP rose 12.6% by 1984.  And tax receipts even increased with those lower tax rates.  Because of the higher GDP.  By 1984 Reagan’s policies increased tax revenue by 28.9%.  And on a personal level the median income even increased 0.4%.  And this following a very bad recession a few years earlier.  Finally, gas prices fell 22.2%.  And the way Americans feel about rising gas prices this was truly morning in America again.

To Top off the General Malaise of the Obama Economy Gas Prices Soared while Median Income Fell

Barack Obama is a Keynesian through and through.  A believer in pure demand-side economics.  To that end his administration focused everything on increasing consumer spending.  Tax and spend policies.  Income redistribution.  Deficit spending.  Anything to make America ‘more fair.’  Raising taxes on the rich so the poor can spend more money.  With the Keynesian multiplier they believe this is the path to economic prosperity.  Just doing everything within their power to put more spending money into the hands of poorer people.  Increasing government regulation, fees and fines as well as taxes to bring more money in Washington so they can redistribute it.  Or spend it directly on things like roads and bridges.  Or solar power companies.  Even paying people to dig a hole and fill it back in.  Because these people will take their wages and spend them.  Creating economic activity.

So President Obama put Keynesian economics to work.  Beginning with a $787 billion stimulus bill.  Investments into green energy and the jobs of the future.  Like a Department of Energy loan of $528 million to the now bankrupt Solyndra.  Which was only one of many loans.  The bailout of the UAW pension fund (aka the auto bailout).  The government poured $528 million into GM.  And President Obama touted the Chevy Volt, boasting that GM would sell a million each year bringing his green goals to fruition (GM is struggling to sell 10,000 Volts a year).  A lot of malinvestment as the Austrians would say.  But a Keynesian sees any government expenditure as a good investment.  Because if all the people who receive this government money spends at least 80% of it (while saving only 20%) the Keynesian multiplier will be five.  Meaning that the net gain in GDP will be five times whatever the government spends.  So how has that worked for the president?  Well, here are his numbers:

The government spent so much money that the federal debt increased by $5.4 trillion.  Trillion with a ‘T’.  That’s over a trillion dollar deficit each of the president’s 4 years in office.  And his last year isn’t even a whole year.  Unprecedented until President Obama.  And what did all of that federal spending get us after about 4 years?  An unemployment rate 2.1 points higher.  Or 33.9% higher than when he took office.  Inflation fell but it did nothing to spur GDP growth which grew at an anemic 3.1%.  Which is less than a percentage point a year.  Which is why the Great Recession lingers still.  Meanwhile the Chinese are having a bad year with a GDP growth of 7.8%.  So all of that spending didn’t help at all.  In fact, it made things worse.  The economic activity is so bad that even tax receipts fell 2.2% after four years of President Obama.  Which has many in his party saying that we need to raise tax rates.  Contrary to what Ronald Reagan did.  And to top off the general malaise of the Obama economy gas prices soared 107.6% under his presidency.  While the median income fell 7.3%.  One has to look hard to find any positive news from the Obama economy.  And there is one.  Inflation did fall.  But even that really isn’t good.  As it may be an indicator of a looming deflationary spiral.  Giving America a lost decade.  Like Japan’s Lost Decade.

The Flaw in Keynesian Thinking is that it Ignores the Layers of Economic Activity above the Consumer Level

So there you have an Austrian and a Keynesian.  Both entered office during bad economic times.  Although things were much worse when President Reagan took office than when President Obama took office.  The misery index was 20.6% in 1980.  It was only 11.6% in 2008.  About half as bad for President Obama than it was for President Reagan.  It came down 16.4% under Obama.  But it came down 42.7% under Reagan.  Which is why it isn’t morning in America under President Obama.  Reagan increased tax receipts by 28.9 % by the end of his first term.  They fell 2.2% under Obama.  Adjusted for inflation Reagan averaged annual deficits of $348 billion.  That’s billion with a ‘B’.  Obama averaged $1.324 trillion.  That’s trillion with a ‘T’.  Or 280% higher than Ronald Reagan.  Gas prices fell 22.2% under Reagan.  They rose 107.6% under Obama.  Median income barely rose 0.4% under Reagan.  But it fell 7.3% under Obama.  In short there is nothing in the Obama economic record that is better than the Reagan economic record.

And why is this?  Because Obama’s policies are Keynesian.  While Reagan’s policies were Austrian.  Reagan focused on the stages of production to improve economic activity.  Cutting taxes.  Reducing regulatory compliance costs.  Creating a business-friendly environment.  A system that rewarded success.  Whereas Obama focused on consumer spending.  Tax, borrow and print (i.e., quantitative easing).  So the government could spend.  Putting more money into the pockets of consumers.  Which stimulated only the last stage in the stages of production.  So while some consumers had more money it was still a business-unfriendly environment.  Where tax, regulatory and environmental policies (as well as the uncertainty of Obamacare) hindered business growth everywhere upstream from retail sales.  From raw material extraction to industrial processing to construction to manufactured goods.  Where these Obama’s policies punish success.  For the bigger you get the more you pay in taxes and regulatory compliance costs.

The greatest flaw with Keynesian economics is that it looks at aggregate supply and demand.  With a focus on consumer spending.  And ignores the layers of economic activity that happens before the consumer level.  The Austrian school understands this.  As did the British when she became one of the greatest empires of all times.  As did America during the 19th century.  No nation became an economic superpower using Keynesian economics.  Japan grew to be a great economic power during the Fifties and Sixties.  Then went Keynesian in the Eighties and suffered their Lost Decade in the Nineties.  Some Keynesians like to point to China as an example of the success of Keynesian economics.  But they still have a fairly restrictive police state.  And their economic policies are hauntingly similar to Japan’s.  Some have even posited that it is very possible that China could suffer the same fate as Japan.  And suffer a deflationary spiral.  Resulting in a lost decade for China.  Which is very plausible considering the Chinese practice state-capitalism where the state partners closely with businesses.  Which is what the Japanese did in the Eighties.  And it hasn’t been great for them since.  As it hasn’t been great in America economically since the current administration.

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JFK, Tax Cuts, Vietnam, LBJ, Great Society, Hippies, Race Riots, Keynesian Spending, Nixon, Carter and Ronald Reagan

Posted by PITHOCRATES - August 21st, 2012

History 101

Ronald Reagan would follow the Kennedy Example of Cutting Taxes to Grow the Economy

In 1961 West German Chancellor Ludwig Erhard gave John F. Kennedy (JFK) some good advice.  During JFK’s visit he told him not to make the same mistake the British had.  He told Kennedy NOT to follow their policy of high taxation.  Because it killed economic activity.  And economic growth.  England was suffering from her bad tax policy.  He urged the American president not to make the same mistake.

JFK heeded Erhard’s advice.  And cut tax rates.  This did not please liberals in his Democrat Party.  Who were all Keynesians.  And believed in large government interventions into the private sector.  Funded by large government expenditures.  Which in the Keynesian world you got in one of three ways.  Tax, borrow or print money.  You did not cut tax rates.  Which was blasphemous in Keynesian doctrine.  You never, ever, cut tax rates.  But Kennedy did.  Arguing that “an economy hampered by restrictive tax rates will never produce enough revenue to balance the budget—just as it will never produce enough jobs or enough profits.”

A message Ronald Reagan would give time and again some 20 years later.  And would follow the Kennedy example of cutting taxes to grow the economy.  Generating more tax revenue without having to cut spending.  The result of JFK’s ‘trickle-down’ economics were impressive.  He cut the top marginal tax rate from 91% to 70%.  And cut the 20% rate to 14% at the other end of the scale.  What did people do with these tax savings?  They saved.  And invested.  Savings rose from an annual growth rate of 2% to 9%.  Business investment from 2% to 8%.  New jobs grew at a rate of 100%.  And unemployment fell by one third.  With GDP rising some 40% in two years.  And despite cutting tax rates tax revenue rose.  The booming economy generating more tax revenue even at the lower rates.  Even more than the Keynesians said Kennedy was going to cost the government with his tax cuts.

The Social Upheavals of the Sixties, the Race Riots and his Unpopular Vietnam War all took their Toll on LBJ

Liberals love JFK.  But for none of these reasons.  They prefer to wax poetically about his fight to end economic and racial injustice.  Which were in reality low on his priority list.  Addressing civil rights only after trouble was escalating in the south.  But that’s the Left’s cherished memory of him.  And of Camelot.  The American royal family.  They don’t talk about JFK’s trickle-down economics.  His Bay of Pigs fiasco (the plan to oust Fidel Castro from Cuba that he withdrew support from after it met difficulty on the beaches).  His Cuban missile crisis (near nuclear war with the Soviet Union) which his indecision at the Bay of Pigs may have invited.   Or his war in Vietnam.  No.  They stay silent on the best part of his presidency.  As well as the worst parts.  And focus instead on the fairy tale that was Camelot.  Ignoring completely his excellent economic policies and the strong economy they gave us.  And all that tax revenue that poured into the treasury.  Yes, they may have liked having that money.  But they didn’t have to like how it got there.

Following JFK’s assassination Lyndon Baines Johnson (LBJ) ascended to the presidency.  An old school politician that knew how to make deals to advance legislation.  And boy did he.  He declared unconditional war on poverty.  And unleashed the Great Society to spend America out of poverty.  Keynesian to the core.  Pure demand-side economics.  Give poor people money which they will use to buy consumer goods.  That Keynesian consumption that was so crucial to a healthy economy.  So Johnson made good use of all that tax revenue JFK created with his tax cuts.  And LBJ’s Great Society consumed enormous amounts of that tax revenue.  As did JFK’s Vietnam War.  Now LBJ’s war.  Which LBJ escalated.  Government expenditures exploded during the Johnson administration.  And the spending obligations he put into place were only going to escalate future expenditures.  Oh, and we were also trying to land a man on the moon during this time.  All during a time when the world was changing.  When a bunch of filthy hippies began to protest anything that didn’t somehow gratify them (their rallying cry was sex, drugs and rock & roll).  And racial tensions simmered to the boiling point in our crowded cities.

The social upheavals of the Sixties.  The race riots.  The unpopular war on our living room televisions.  They all took their toll on LBJ.  The race riots especially hurt him as he had spent so much money on ending economic and racial injustice.  On a televised address he told the nation that he was through being the president.  He wasn’t going to run for another term.  And he wouldn’t accept a nomination for a second term.  He basically thanked an ungrateful nation.  And planned for his retirement.  Leaving a fiscal mess for the next president.  As well as a mess in Vietnam.  And the job for cleaning up these messes fell to Richard Milhous Nixon.

When Nixon entered the Presidency all those Spending Obligations of the Great Society were Coming Due

Nixon had a lot of liberal tendencies.  He was actually a member of the NAACP since 1950.  Long before JFK or LBJ talked of civil rights.  He believed in New Deal economics.  Of the good government could do.  He was also an environmentalist.  Giving us the Environmental Protection Agency (EPA).  And giving us emissions standards for our cars.  He gave us the Occupational and Safety Health Administration (OSHA).  And a flurry of other regulations.  Not what you would expect from a Republican these days.  Of course, few probably know this.  But they probably do know about Watergate.  At least the word ‘Watergate’.  Which was pretty tame by today’s standards.  Spying on the political opposition.  Then lying about it.

When Nixon entered the presidency all those spending obligations of the Great Society were coming due.  The cost of LBJ’s Great Society really hit the Nixon administration hard.  Enormous amounts of money were flowing out to poor people (so they could spend it and buy consumer goods).  To the war in Vietnam.  To the Cold War.  To the space program.  To the enlarged federal government.  Government spending was going off the chart.  But it wasn’t having the affect on the economy the Keynesians said it would.  They were taxing, borrowing and printing money like good little Keynesians.  But they were devaluing the dollar in the process.  And igniting inflation.  Worse, the U.S. dollar was the reserve currency of the world.  Foreign nations pegged their currency to the U.S. dollar.  The U.S. pegged the dollar to gold.  As the Americans devalued the dollar, though, the foreign countries traded their dollars for gold.  Gold began to fly out of the country.  So Nixon did what any responsible Keynesian would do.  Instead of playing by the rules of the game he changed the rules.  And decoupled the dollar from gold.  The Nixon Shock.  Ushering in the era of unfettered Keynesian economics.  Deficit spending.  Growing debt.  High inflation.  High unemployment.  Stagflation.  And malaise.

Jimmy Carter would see the worse of LBJ’s Great Society.  As it left his economy in a mess.  Despite all of that government spending.  And Carter suffered because he, too, was a Keynesian.  He believed in that GDP formula where GDP equaled the sum of consumption, investment, government expenditures and net exports (exports – Imports).  And the formula clearly states that the way to increase GDP (and increase the number of jobs) was to increase government spending to give money to people so they could buy consumer goods (increasing government spending and consumption in the formula).  It was simple arithmetic.  But the formula left out about half of all economic activity.  The intermediate business spending that takes place before any consumer goods enter our stores.  Think of things consumers don’t buy.  Like railroad track, blast furnaces, construction front-end loaders, etc.  Economic activity that JFK encouraged with his tax cuts.  As Ronald Reagan did so, too, some 20 years later.  Which is why the JFK and the Reagan economies were far better than any Keynesian administration.

Even after more than a decade of unfettered Keynesian spending consumption was only 34% of all economic activity in 1982.  Even though official GDP figures reported it at 65%.  Why the discrepancy?  Intermediate business spending.  The stages of production before consumer goods.  Coming in at 54% of real economic activity in 1982.  Which is why the tax-cut policies of JFK and Ronald Reagan worked.  And the spending policies of JBJ, Nixon and Carter didn’t.  Trickle-down works.  Because it creates jobs.  And those lower tax rates generate higher tax revenues because more people are working and paying taxes.  All things a Keynesian wants.  But they will reject them because they resulted from the ‘wrong’ policies.  Because Keynesians want to tax, borrow and print.  Regardless of their effect on the economy.

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Argentina’s Keynesian Policies have given them the Weakest Economy in the Hemisphere

Posted by PITHOCRATES - July 22nd, 2012

Week in Review

The Argentines are strong advocates of Keynesian economics.  And they’ll embrace it till the bitter end.  Even as their economy goes into the crapper (see WRAPUP 3-Argentina economy shrinks in May for first time since 2009 by Hilary Burke posted 7/21/2012 on Reuters).

Latin America’s No. 3 economy is decelerating sharply after posting China-like growth rates for much of the past nine years. High inflation, a sluggish global economy, waning demand from neighboring Brazil, falling grains production as well as new trade and currency controls have prompted the slowdown.

“Stagflation arrived with a vengeance. Argentina now has the weakest economy and the highest inflation in the hemisphere,” wrote Alberto Ramos, a senior economist at Goldman Sachs, adding that private estimates put inflation at closer to 24 percent a year…

Argentina’s unorthodox economic approach centers on heavy state participation in the economy to foment high growth, job creation and domestic demand. The government does not publicly acknowledge the cost of this, which is double-digit inflation.

“We are taking active policies, using our own resources, to generate the virtuous cycle of spending, consumption, investment. You have more demand, more production and that feeds back into more spending, more production, more consumption.”

This is pure Keynesian economics.  Like in the Carter years.  But even Jimmy Carter didn’t have an inflation rate as high as 24%.  So the Argentine stagflation may outdo the Carter stagflation.  No doubt beating Carter on the misery index, too (the sum of the unemployment rate and the inflation rate).  Proving once again that Keynesian economics doesn’t work.

Still this is exactly what President Obama wants to do with the U.S. economy.  And it’s what the leading Keynesian economists are advising him to do.  Invest.  Spend.  To stimulate the economy the only way the federal government can.  By deficit spending.  Financed with more borrowing.  Taking the federal debt to new heights.  Or simply by printing money.  As in another round of quantitative easing.  Even though none of this has worked in the last three and half years under President Obama.  Or in the Seventies during the Carter years.  Or even in Argentina today.

So when will they learn?  When will they abandon Keynesian economics?  Never.  Because governments love to spend money.  And Keynesian economics is all about spending money.  Why, some even call this spending virtuous.  But there is a price in being virtuous.  Asset bubbles (as in Japan resulting in their Lost Decade or in America during their subprime mortgage crisis resulting in their Great Recession).  A sluggish economy.  And double digit-inflation.  Things that never end well.  Just ask the Japanese.  The Americans.  Or the Argentines.

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The Poles recognize Ronald Reagan and Pope John Paul II for their Role in Winning the Cold War

Posted by PITHOCRATES - July 14th, 2012

Week in Review

Jimmy Carter believed in detente.  He wanted to work with the communists in the Soviet Union.  Those living in Eastern Europe disagreed.  As they lived under the boot of Soviet oppression.  They wanted their liberty.  They didn’t want to hear Jimmy Carter talk about making nice with the Soviets.  Because they didn’t want to improve their relations with the Soviet Union.  They wanted the Soviet Union the hell out of their countries.  Others agreed with them.  Ronald Reagan.  Margaret Thatcher.  The dynamic duo.  A Polish Pope.  John Paul II.  A Polish union leader.  Lech Walesa.  Leader of the Solidarity movement.  And a great people.  The Poles (see Poles honor Reagan and John Paul II for their role in anti-communist struggle with new statue by Associated Press posted 7/14/2012 on The Washington Post).

Polish officials unveiled a statue of former President Ronald Reagan and Pope John Paul II on Saturday, honoring two men widely credited in this Eastern European country with helping to topple communism 23 years ago…

Reagan and John Paul shared a conviction that communism was a moral evil, not just a bad economic system. And Lech Walesa, founder of the Solidarity movement that led the anti-communist struggle in Poland, has often paid homage to both men and told the AP in a recent interview that he deeply respected Reagan…

Poles widely credit the Polish-born pontiff’s first visit to his homeland after becoming pope as the inspiration for Solidarity’s birth. During a Mass in Warsaw in 1979, he used subtle language to suggest that Poles should try to change their system, a message not lost on the receptive nation. Poles also remember that when the communist regime imposed the martial law crackdown in 1981, rounding up dissidents and imprisoning them, Reagan lit candles at the White House to show his solidarity with the Polish people…

Another member of the organization, Andrzej Michalowski, credited Reagan’s arms race with Moscow with leading to the unraveling of the Soviet Union and its inability to keep controlling Eastern Europe. He said the monument was designed on a small scale so visitors to the park would feel John Paul and Reagan are still with them.

Much to the horror of those on the Left Ronald Reagan did not follow Carter’s policy of detente.  He didn’t want to make nice with the Soviets.  He wanted to defeat the Soviets.  And free people everywhere from the boot of communist oppression.  And he did.  Thanks to John Paul, Lech Walesa and Margaret Thatcher.  The British and the Americans presented the Soviets a fearful military force to ponder.  And supported the poles as they dared to defy the great Soviet bear. 

Few even know this history today.  But back then these were transformative times.  For it was the beginning of the end of the Cold War.  A war we won by not trying to get along with the Soviets.  But by aggressively attacking communism.  Calling the Soviet Union the Evil Empire.  For it was.  As anyone living in Poland during the Cold War will attest to.  There was nothing good or redeeming about communism.  And Carter’s policy of detente only breathed life into a dying corpse.  And delayed the inevitable.  As Lech Walesa knew.  As John Paul knew.  As Ronald Reagan knew.  For it was only a matter of time before communism was left on the ash heap of history.  And thanks to these people that time did come.  The Soviet Union is no more.  And Eastern Europe is now free.

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Recession and Depression

Posted by PITHOCRATES - June 25th, 2012

Economics 101

A Depression is an Exceptionally Bad Recession 

When campaigning for the presidency Ronald Reagan explained what a recession, a depression and a recovery were.  He said a recession is when your neighbor loses his job.  A depression is when you lose your job.  And a recovery is when Jimmy Carter loses his job.  This was during the 1980 presidential election.  Where Reagan included that famous question at the end of one of the debates.  “Are you better off now than you were four years ago?”  And the answer was “no.”  Ronald Reagan surged ahead of Jimmy Carter after that and won by a landslide.  And he won reelection by an even bigger landslide in 1984.

There are a couple of ways to define a recession.  Falling output and rising unemployment.  Two consecutive quarters of falling Gross Domestic Product (GDP).  A decline in new factory orders.  The National Bureau of Economic Research (NBER) in Cambridge, Massachusetts, officially marks the start and end dates of all U.S. recessions.  They consider a lot of economic data.   It’s not an exact science.  But they track the business cycle.  That normal economic cycle between economic expansion and economic contraction.  The business cycle has peaks (expansion) and troughs (contraction).  A recession is the time period between a peak and a trough.  From the time everyone is working and happy and buying a lot of stuff.  Through a period of layoffs where people stop buying much of anything.  Until the last layoff before the next economic expansion begins.

A depression has an even more vague science behind it.  We really don’t have a set of requirements that the economy has to meet to tell us we’re in a depression.  Since the Great Depression we haven’t really used the word anymore for a depression is just thought of as an exceptionally bad recession.  Some have called the current recession (kicked off by the subprime mortgage crisis) a depression.  Because it has a lot of the things the Great Depression had.  Bank failures.  Liquidity crises.  A long period of high unemployment.  In fact, current U.S unemployment is close to Great Depression unemployment if you measure more apples to apples and use the U-6 rate instead of the official U-3 rate that subtracts a lot of people from the equation (people who can’t find work and have given up looking, people working part-time because they can’t find a full-time job, people underemployed working well below their skill level, etc.).  For these reasons many call the current recession the Great Recession.  To connect it to the Great Depression.  Without calling the current recession a depression.

Whether Inventories sell or not Businesses have to Pay their People and their Payroll Taxes

So what causes a recession?  Good economic times.  Funny, isn’t it?  It’s the good times that cause the bad times.  Here’s how.  When everyone has a job who wants a job a lot of people are spending money in the economy.  Creating a lot of economic activity.  Businesses respond to this.  They increase production.  Even boost the inventories they carry so they don’t miss out on these good times.  For the last thing a business wants is to run out of their hot selling merchandise when people are buying like there is no tomorrow.  Businesses will ramp up production.  Add overtime such as running production an extra day of the week.  Perhaps extend the working day.  Businesses will do everything to max out their production with their current labor force.  Because expanding that labor force will cause big problems when the bloom is off of the economic rose.

But if the economic good times look like they will last businesses will hire new workers.  Driving up labor costs as businesses have to pay more to hire workers in a tight labor market.  These new workers will work a second shift.  A third shift.  They will fill a manufacturing plant expansion.  Or fill a new plant.  (Built by a booming construction industry.  Just as construction workers are building new houses in a booming home industry.)  Businesses will make these costly investments to meet the booming demand during an economic expansion.  Increasing their costs.  Which increases their prices.  And as businesses do this throughout the economy they begin to produce even more than the people are buying.  Inventories begin to build up until inventories are growing faster than sales.  The business cycle has peaked.  And the economic decline begins.

Inventories are costly.  They produce no revenue.  But incur cost to warehouse them.  Worse, businesses spent a lot of money producing these inventories.  Or I should say credit.  Typically manufacturers buy things and pay for them later.  Their accounts payable.  Which are someone else’s accounts receivable.  A lot of bills coming due.  And a lot of invoices going past due.  Because businesses have their money tied up in those inventories.  But one thing they can’t owe money on is payroll.  Whether those inventories sell or not they have to pay their people on time or face some harsh legal penalties.  And they have to pay their payroll taxes (Social Security, Medicare, unemployment insurance, withholding taxes, etc.) for the same reasons.  As well as their Workers’ Compensation insurance.  And they have to pay their health care insurance.  Labor is costly.  And there is no flexibility in paying it while you’re waiting for that inventory to sell.  This is why businesses are reluctant to add new labor and only do so when there is no other way to keep up with demand.

The Fed tries to Remove the Recessionary Side of the Business Cycle with Small but ‘Manageable’ Inflation

As sales dry up businesses reduce their prices to unload that inventory.  To convert that inventory into cash so they can pay their bills.  At the same time they are cutting back on production.  With sales down they are only losing money by building up inventories of stuff no one is buying.  Which means layoffs.  They idle their third shifts.  Their second shifts.  Their overtime.  They shut down plants.  A lot of people lose jobs.  Sales fall.  And prices fall.  As businesses try to reduce their inventories.  And stay in business by enticing the fewer people in the market place to buy their reduced production at lower prices.

During the economic expansion costs increased.  Labor costs increased.  And prices increased.  Because demand was greater than supply.  Businesses incurred these higher costs to meet that demand.  During the contraction these had to fall.  Because supply exceeded demand.  Buyers could and did shop around for the lowest price.  Without fear of anything running out of stock and not being there to buy the next day.  Or the next week.  And when prices stop falling it marks the end of the recession and the beginning of the next expansion.  When supply equals demand once again.  Prices, then, are key to the business cycle.  They rise during boom times.  And fall during contractions.  And when they stop falling the recession is over.  This is so important that I will say it again.  When prices stop falling a recession is over.

Jimmy Carter had such a bad economy because his administration still followed Keynesian economic policies.  Which tried to massage the business cycle by removing the contraction side of it.  By using monetary policy.  The Keynesians believed that whenever the economy starts to go into recession all the government has to do is to print money and spend it.  And the government printed a lot of money in the Seventies.  So much that there was double digit inflation.  But all this new money did was raise prices during a recession.  Which only made the recession worse.  This was the turning point in Keynesian economics.  And the end of highly inflationary policies.  But not the end of inflationary policies.

The Federal Reserve (the Fed) still tries to remove the recessionary side of the business cycle.  And they still use monetary policy to do it.  With a smaller but ‘manageable’ amount of inflation.  During the great housing bubble that preceded the subprime mortgage crisis and the Great Recession the Fed kept expanding the money supply to keep interest rates very low.  This kept mortgage rates low.  People borrowed money and bought big houses.  Housing prices soared.  These artificially low interest rates created a huge housing bubble that eventually popped.  And because the prices were so high the recession would be a long one to bring them back down.  Which is why many call the current recession the Great Recession.  Because we haven’t seen a price deflation like this since the Great Depression.

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