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

Posted by PITHOCRATES - July 29th, 2012

Week in Review

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

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

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

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

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

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

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

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

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Mary O’Grady cites the Problems of Latin America as too Much Socialism and not Enough Economic Liberty

Posted by PITHOCRATES - April 28th, 2012

Week in Review

Latin America has the will and the way for prosperity.  If only they give up on oppressive equality (see Destroying Latin America: Journalist Mary O’Grady on Populism, Protectionism, and Prohibition by Zach Weissmueller posted 4/28/2012 on Reason).

“The inequality produced by liberty: This, for the socialist, is the soft underbelly of pro-market rationale and the best place to attack,” says Mary O’Grady, a columnist who covers Latin America for the Wall Street Journal. “I would argue that it’s the intellectual stream that prevails in Latin America, and it’s the reason the region can not hope to reach its potential any time soon.”

O’Grady made a presentation at Reason Weekend 2012, Reason Foundation’s annual donor event. [Sh]e talked about why Latin American countries are so susceptible to socialism and identified the “three P’s” of “Populism, Protectionism, and Prohibition” as the primary sources of the region’s biggest problems.

To briefly summarize the ruling elite in Latin America are anti-capitalistic.  Because capitalism leads to income inequality.  So they discourage any capitalistic activity.  The politicians and rulers.  Intellectuals.  And academia.  Which squashes the entrepreneurial spirit.  Because entrepreneurs could become rich.  And that wouldn’t be fair.  So they nationalized industries.  And forced equality on the masses.  Which has kept the masses mired in poverty.  Yet when these same people leave their forced equality and move into capitalistic countries their lives improve.  They become entrepreneurs.  Further expanding the middle class.  Adding more to the vibrant economies they’ve joined.  All of which they could have in Latin America.  If only they stop oppressing the people in the name of equality.

Good presentation by Mary O’Grady.  Watching this video is 32 minutes well spent.

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UK Budget Cuts Ignite Riots, Gives Glimpse of USA Future

Posted by PITHOCRATES - March 26th, 2011

Unruly Mobs Attack the Police…in London

The riots in the Middle East were ignited by high unemployment, high food prices and little government relief for either.  Some countries have all but degenerated into civil war.  But violent unrest is not limited to the Middle East.  Even some of the most advanced Western economies are having their problems (see TUC protest march: anarchists on the rampage in London by Patrick Sawer and David Barrett posted 3/26/2011 The Telegraph).

Police fought mobs of masked thugs who pelted officers with ammonia and fireworks loaded with coins.

The anti-capitalists started fires, smashed their way into banks, hotels and shops, bringing chaos to Britain’s busiest shopping street.

The violence began as Ed Miliband, the Labour leader, addressed a TUC rally of at least 250,000 peaceful protesters in Hyde Park who had marched from Westminster to demonstrate against government spending cuts.

Yeah, you read that right.  London, England.  Unbelievable, isn’t it?  The violence against the police?  And property?  Wow.  And look who’s doing it.  Bloody anti-capitalist anarchist thugs. 

After five hours of running battles, there were 75 arrests. At least 30 people, including five police officers, were injured. Police said the anti-capitalists threw lightbulbs filled with ammonia at them…

They ordered limited use of “kettling” to contain the rioters but admitted that such was the scale of the violence, they could not protect property.

The UK has big time budget problems.  High taxes are hurting the economy.  Ever increasing public benefits require more and more tax revenue.  And increases the debt.  They cannot sustain this spending without crashing the economy.  Or bankrupting the nation.  But the anarchists don’t care.  Because they’re anti-capitalists.  And simply don’t understand rudimentary economics.  Or numbers with a ‘£’ in front of them.

From Rich Empire to Bankrupt Nanny State

So just how bad are things in the UK?  Bad.  The country is at a crossroads.  It may forever change if it doesn’t change course.  During World War II it was the Nazis threatening their survival.  Today it’s their own spending (see Britain’s leaders should come clean on the true depth of the fiscal crisis by Liam Halligan posted 3/26/2011 on The Telegraph).

The UK’s fiscal crisis is of monumental historic importance. The future of the free world may not be at stake as it was in Churchill’s day. What is in the balance, though, is the prosperity of the British people for at least the next few decades and our status as a top-ranking nation.

This is a common theme among great nations that fall from greatness.  Out of control government spending.  It brought down the Roman Empire.  And the British Empire.  But the great nation that built it remains.  For now, at least.  But the government spending is burdening Britain more than her empire ever did.

Over the last 12 months, then, this country’s “on-balance-sheet” liabilities have risen by £147bn. That’s roughly what we spent on the NHS and defence combined in 2010 – and that was merely, during this last year of “austerity”, the incremental increase in what Britain has put “on tick”.

That’s my point – and I will keep making it until it fully enters the public discourse. It is the total debt numbers that Osborne, the Tories and our politicians in general should focus on, not the size of the annual deficit.

This is another common theme with great nations.  They have big military forces.  To protect what is theirs.  And to maintain the peace.  The Royal Navy built the British Empire.  And maintained world peace.  As did the Roman Legions.  That’s why there was a Pax Romana.  And a Pax Britannica.  These empires ushered in great periods of peace.  And their rule of law and free markets provided great prosperity.  But the prosperity led to entitlement.  And state benefits.  Such as the NHS (National Health Service).  State spending increases to meet the desires of voters.  And that spending is now unsustainable.  They have to cut something.  Because they just can’t borrow anymore.

In 2009, the UK spent £31bn – around 6pc of total tax receipts – on debt interest payments. That’s money down the drain. By 2015, we won’t have reached, in Churchill’s words, some “broad sunlit upland”. After four more years of deficits, debt services costs, according to last week’s Budget, will by then be £67bn a year – or almost 10pc of total tax receipts. These shocking numbers are also likely to be under-estimates, given the UK’s massive “off-balance-sheet” liabilities and the Treasury’s benign assumption of future gilt rates.

These interest costs are staggering.  Any meaningful cuts will have to be greater than the annual debt cost if they have any hope of bringing down deficits.  Or the debt.  And they were trying to make some meaningful cuts.  Almost £100bn.  And we saw what happened.  People took to the streets in violent protest.

All of us – politicians, commentators and voters – should compare the quality of our current national debate, its utter detachment from reality, with the statesmanship and candour of Churchill’s “blood, toil, tears and sweat“. For such hard truths inspired a nation, while winning Churchill untold respect.

Of course, during Churchill’s time, there wasn’t a nanny state.  After enduring World War I and the Great Depression, austerity was an all too familiar way of life.  It isn’t like that today.  Today students protest if they don’t get a free college education.  It is questionable even if Winston Churchill himself could inspire today’s entitlement culture.  They’re just too spoiled, lazy and greedy.

A Look into America’s Future

All right, so that’s what’s happening in the UK.  How about the USA?  We have our problems.  But we’re not as bad off.  Obamacare is not quite the NHS.  Yet.  But we have the same entitlement culture.  Out of control state spending is plunging us into record deficits and debt.  High taxes and regulatory compliance has drawn out the Great Recession.  And when some governors start cutting their budgets to balance their budgets, the people protested.  Our day of reckoning is coming.  And N. Gregory Mankiw wrote how a future president might inspire the American people ala Churchill in 2026.  It’s an interesting look at what could very well be our future (see It’s 2026, and the Debt Is Due by N. Gregory Mankiw posted 3/26/2011 on The New York Times).

The seeds of this crisis were planted long ago, by previous generations. Our parents and grandparents had noble aims. They saw poverty among the elderly and created Social Security. They saw sickness and created Medicare and Medicaid. They saw Americans struggle to afford health insurance and embraced health care reform with subsidies for middle-class families.

But this expansion in government did not come cheap. Government spending has taken up an increasing share of our national income.

Today, most of the large baby-boom generation is retired. They are no longer working and paying taxes, but they are eligible for the many government benefits we offer the elderly.

Our efforts to control health care costs have failed. We must now acknowledge that rising costs are driven largely by technological advances in saving lives. These advances are welcome, but they are expensive nonetheless.

If we had chosen to tax ourselves to pay for this spending, our current problems could have been avoided. But no one likes paying taxes. Taxes not only take money out of our pockets, but they also distort incentives and reduce economic growth. So, instead, we borrowed increasing amounts to pay for these programs.

This part of the story we know.  It’s how we got here.  Or there, as it were, in this tale from the future.  Now comes the debt spiral.  Which will force us to act.  And make decisions no one wants to, or is willing to, now.  Which will be even more painful hence.

For years, the United States government borrowed on good terms. Investors both at home and abroad were confident that we would honor our debts. They were sure that when the time came, we would do the right thing and bring spending and taxes into line.

But over the last several years, as the ratio of our debt to gross domestic product reached ever-higher levels, investors started getting nervous. They demanded higher interest rates to compensate for the perceived risk. Higher interest rates increased the cost of servicing our debt, adding to the upward pressure on spending. We found ourselves in a vicious circle of rising budget deficits and falling investor confidence.

When the treasury tried to auction off some bonds in this tale there were few takers.  So this future president secured a loan from the International Monetary Fund (IMF) with some draconian strings.  The IMF required big cuts in spending (Social Security, Medicare, Medicaid, Obamacare and subsidies – farming, ethanol production, public broadcasting, energy conservation and trade promotion).  And big tax increases. 

We will raise taxes on all but the poorest Americans. We will do this primarily by broadening the tax base, eliminating deductions for mortgage interest and state and local taxes. Employer-provided health insurance will hereafter be taxable compensation.

We will increase the gasoline tax by $2 a gallon. This will not only increase revenue, but will also address various social ills, from global climate change to local traffic congestion.

AS I have said, these changes are repellant to me. When you elected me, I promised to preserve the social safety net. I assured you that the budget deficit could be fixed by eliminating waste, fraud and abuse, and by increasing taxes on only the richest Americans. But now we have little choice in the matter.

If only we had faced up to this problem a generation ago. The choices then would not have been easy, but they would have been less draconian than the sudden, nonnegotiable demands we now face. Americans would have come to rely less on government and more on themselves, and so would be better prepared today.

Even in the future presidents will be making the same promises that they cannot keep.  And make the same lament.  If only we continued the policies of Ronald Reagan.  Kept government small.  And relied on ourselves.  Had we, we’d never be in this financial mess now.  Or hence.

Dead People haven’t a Care in the World

Our own greed will do us in.  Insatiable want of government benefits kills great nations.  Even the UK and the USA are not immune from this.  But the easy political road is to pander to the people.  Give them what they want.  To get their votes.  They do this knowing full well they are destroying the future.  So why do they do it?  Because most of those in government are old.  And when it comes time to pay the piper, it will be a moot point.  Because they will be dead.  And dead people haven’t a care in the world.

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Deficits, Debt and Inflation Concern Everyone in the World but the Obama Administration

Posted by PITHOCRATES - March 7th, 2011

Chicago Cuts their Public Sector Budget

Scott Walker in Wisconsin is taking a lot of heat for trying to cut the costs of the public sector.  But he’s not alone.  Even Chicago is trying to cut the cost of its public sector.  By buying bigger, high-tech, trash cans for the central business district (see Chicago trash cans go solar-powered posted 3/7/2011 on UPI).  They’re going to spend $2.5 million for this capital investment to reduce their operating costs (i.e., the cost of people). 

If you use some of the numbers bandied about for public sector pay and benefits in the news today, that $2.5 million could pay for some 25 public sector workers (or more) per year (including health care and pensions).  Now here’s the punch line.  Chicago will uses some federal stimulus funds for this investment.  In other words, money sent to Chicago by Washington to create jobs is being used to cut jobs.  Funny, isn’t it?

This is what you do during bad economic times.  Replace people with technology.  Because people are so expensive.  It’s because of people, after all, that all these states and cities are facing budget crises due to the crushing costs of their public sector health care and pension benefits.  So when times are bad, you make capital investments to increase productivity.  You don’t hire more people.  Even Chicago understands this.

India has a Booming Economy, high Inflation and plans to Increase Social Spending

Once again prosperity leads a nation into dangerous economic waters (see Calling on the gods posted 3/3/2011 on The Economist).

It is tempting to expect the gods to keep smiling. Only China, among big economies, has pipped India’s 8.6% growth in the past year. Mr Mukherjee foresees a rosy period of easing inflation, reviving foreign investment and robust public finances. He may be in for a shock.

Inflation is still a pressing problem. High food prices hurt the urban poor. In December street protests over the price of onions led the government to ban their export. Onion prices have since collapsed, but other causes of inflation remain.

First there’s robust economic growth.  Then inflation.  Then the food riots.  It’s what triggered the French Revolution.  As well as the recent uprisings in the Middle East.  Economic growth is like a drug.  And it’s a good high.  While it lasts.  People are working.  The government is collecting lots of money.  And they can spend it on social programs.  Keeps everyone happy.  And voting for those in power.  Again, for awhile.  It’s when things become rights the trouble starts.  Because people don’t give up their ‘rights’ easily.  Even when the state can’t afford them anymore.  (Incidentally, a true right has no cost.  Freedom of speech is a right.  And no one has to pay for it.  Fat government benefits aren’t rights.  They’re just ways to make people vote for you).

Social spending is set to leap by 17% next year, as the government attempts to encourage “inclusive” growth. Congress’s chief, Sonia Gandhi, next wants a law embodying a universal “right” to food. How this might work (if at all) is unclear. Again, technocrats favour transfers of cash or vouchers over dishing out food through a vast and corrupt state bureaucracy. Either way, the subsidies mean demand for food will soar.

No matter, says Mr Mukherjee breezily. By spending on agriculture, giving farmers credit, easing transport bottlenecks and getting better cold-storage distribution, supply will rise, too. As for other causes of inflation, seven interest-rate rises by the central bank have removed monetary excess, he says. Little can be done about painful world prices for oil and other commodities, but, barring a big shock, Mr Mukherjee guesses annualised inflation will drift down to about 6% in a year’s time, from nearly 10% today.

Chicago as well as other states and cities may be cutting their social spending (i.e., public sector spending), but not India.  Even with 10% inflation.  That’s pretty gutsy.  Or delusional.  And those painful world oil prices?  I think they’re being a little optimistic about peace returning to the Middle East any time soon.  It may very well get worse before it gets better.  However, India has raised interest rates seven times to rein in inflation.  Other than that increase in social spending, India is doing a lot of the right things.  And her economic growth shows it.

China trying to curb Inflation to keep their Economy Booming

Even the IMF think the rise in oil prices is only temporary (see IMF: Signs of overheating in emerging markets by Lesley Wroughton and Chrystia Freeland posted 3/7/2011 on Reuters).

After the global economic slump of 2008 and 2009, the recovery took divergent paths, with emerging markets powering ahead while advanced economies merely trudged along. With growth and interest rates remaining unusually low across the developed world, investors have flocked to emerging markets, bringing much-needed capital but also a risk of inflation.

Rising oil prices have compounded the inflation problem, but Lipsky [the Fund’s first deputy managing director] said the IMF has not cut its growth forecast because it thinks the oil price spike will prove temporary.

All right, let’s say that peace does indeed break out throughout the Middle East.  Will that keep oil prices down?  Well, it didn’t during the last years of the Bush presidency.  The only reason why they fell was due to the worst recession since the Great Depression.  China and India are building cars.  Cars that run on gasoline.  This is what pushed up gas prices before.  And it will push them up again.  Because more and more people are driving cars in those countries.  Even when there was peace in the Middle East.  And when gas goes up everything goes up.  Even food.  Because food has to be transported.

China has made curbing inflation its top policy priority this year. Its finance minister said earlier on Monday China will ensure that spending on social priorities does not fan inflationary fires.

Separately, Zhu Min, special adviser to the IMF’s managing director, said China’s loan growth was too strong and addressing that was key to safely slowing down the economy…

Brazil and some other emerging markets have increased taxes on foreign investors or raised banks’ reserve requirements to try to slow inflows of investment money and ward off inflationary pressures.

China is worried about inflation.  So is Brazil.  And other emerging markets.  Because there is such a thing as too much of a good thing.  If their economies overheat they will create bubbles.  And when bubbles pop they become recessions.  So they’re concerned.  Besides, they have enough on their minds to worry about.  One of their biggest export markets, the United States, is having their own financial problems.  And if they lose their biggest customer, that bubble will come sooner rather than later.

The United States has no Booming Economy but Spends like it Does

So what’s the problem in America?  Well, right now, it’s social spending.  It is out of control.  And there appears little incentive to do anything about it because, unlike Chicago or the other states and cities with financial crises, the federal government can print money.  But when they do they inflate the money supply.  We call this inflation.  And they’re inflating the hell out of the money supply these days.  To pay for record deficits.

So how bad is it?  Pretty bad.  We’ve set a new record.  The largest monthly deficit in history.  A staggering figure of $223 billion (see U.S. sets $223B deficit record by Stephen Dinan posted 3/7/2011 on The Washington Times).  That’s in one month.   That’s about how much the annual deficits were under Ronald Reagan.  And the Democrats pilloried Reagan for his ‘irresponsible’ deficits.  But now?  $223 billion a month ain’t so bad.  Go figure.

Unlike India and China, America has high unemployment.  But like India and China, America has some inflation concerns.  Well, those outside the current administration do.  The Obama administration and the Federal Reserve aren’t all that worried about inflation.  Because they’re Keynesians.  Rational people, though, are very concerned.  And for good reason.  Because when you add unemployment and inflation together do you know what you get?  Stagflation.  And stagflation sucks.  People have less money and everything costs more.  Stagflation made Jimmy Carter a one-term president.  Yeah, it’s that bad.  So knowing our history we must be doing everything within our power to avoid a repeat of the malaise of the Jimmy Carter years, right?  Well, not exactly.

Have Printing Press will Ease

The Fed is planning to print more money (see Oil Shock=More Fed Shock by Douglas French posted 3/7/2011 on Ludwig von Mises Institute).

Atlanta Fed President Dennis Lockhart told a group at that National Association of Business Economics in Arlington, Va. that if the price of oil keeps climbing, the Fed will need to purchase more assets, or QE3.

Of course the men at the Fed don’t believe all of this new liquidity they are creating has anything to do with the prices of oil or food. Oil over a $100 a barrel is an external shock you see. A bolt of lightening out of nowhere. Those crazy kids in Cairo twittering and whatnot.

Ben Bernanke testified last week that inflation will remain tame. And when pressed about oil and food prices, he said “My sense is that the increases we’ve seen so far — while tough for many people — do not yet pose a significant risk to the overall recovery.”

Quantitative Easing 3.  As if QE 1 and 2 wasn’t bad enough.  Neither has helped.  And the inflation lurks out there.  Building.  Just waiting to explode oil and food prices.

The problem with Bernanke is he studied the Great Depression.  But the only thing he apparently learned from it is how the Fed caused the bank runs by tightening the money supply when they should have been helping the banks to stay solvent.  He does not grasp this fundamental: businesses don’t need to borrow money today.  They’re sitting on piles of it.  Why?  Because no one is buying anything.  So they’re not going to hire people and add capacity.  Even if they can borrow money at 0%.

Jimmy Carter’s Second Term

If you weren’t around for the Jimmy Carter years here’s your chance to live history.  While Chicago, India, China and other emerging markets are being responsible, the Obama administration is finally answering that age-old question.  What would a second term of Jimmy Carter have been like?  The answer?  As bad as the first.  Perhaps even worse.  Because we should know better now.  It’s no secret what happened during his presidency.  So there’s no excuse for repeating his mistakes.  And yet we seem to be hell-bent to do exactly that.  Amazing.

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