FT122: “Japan’s Lost Decade helped the Clinton economy by reducing imports while the global slowdown does nothing for the Obama economy.” -Old Pithy

Posted by PITHOCRATES - June 15th, 2012

Fundamental Truth

The Japanese Government made Money Cheap and Plentiful to Borrow creating a Keynesian Dream but an Austrian Nightmare

Once upon a time Americans feared the Japanese.  Their awesome might.  And their relentless advances.  One by one the Japanese added new properties to their international portfolio.  They appeared unstoppable.  Throughout the Eighties everything was made in Japan.  Government partnered with business and formed Japan Inc.  And they dominated the world economy in the Eighties.  A U.S. Democrat nominee for president held up Japan Inc. as the model to follow.  For they had clearly shown how government can make the free market better.  Or so this candidate said.

But it didn’t last.  Why?  Because in the end the Japanese just interfered too much with market forces.  Businesses invested in each other.  Insulating themselves from the capital markets.  Allowing them to make bad investments to sustain bad business planning.  All facilitated with cheap credit.  Government made money cheap and plentiful to borrow.  And they borrowed.  A Keynesian dream.  But an Austrian nightmare.  Because they used that money to make even more bad investments (or ‘malinvestments’ in the vernacular of the Austrian school of economics).  Creating a real estate bubble.  And a stock market bubble.  Bubbles are never good, though.  Because they can’t last.  They must pop.  And when they do it isn’t pretty.

The U.S. just went through real estate bubble that peaked in 2006.  Money was so cheap to borrow that people were buying $300,000+ McMansions.  Anyone could walk in and get a no-documentation loan with nothing down.  People were buying houses and flipping them.  And people who couldn’t qualify for a mortgage could get a subprime mortgage.  Further pushing house prices higher.  Not because of real demand.  But because of this artificial tweaking of the free market by the government.  Making that money so cheap to borrow.  And when all that cheap credit caused inflation elsewhere in the economy the Fed finally tapped the brakes.  And increased interest rates.  Raising monthly payments on all those subprime mortgages.  Leading to a wave of defaults.  The subprime mortgage crisis.  And the Great Recession.

Japan’s Deflationary Spiral gave American Domestic Manufacturers a Huge Advantage

This is basically what happened in Japan during the Nineties.  The government had juiced the economy so much that they grew great big bubbles.  Ran up asset prices to incredible heights.  But then the bubble burst.  And those prices all fell.  They fell for so long and so far that Japan suffered a deflationary spiral.  Throughout the Nineties (and counting).  The Nineties were a painful economic time.  After a decade or so of inflation the market corrected that with a decade of recession.  And deflation.  A decade of economic activity the Japanese just lost.  The Lost Decade.  But it wasn’t all bad.

At least, in America.  There was still some Reaganomics in the American economy.  Producing real economic growth.  But there was also a bubble.  In the stock market.  The dot-com bubble.  The Internet was brand new and everybody was hoping to be in on the next big thing.  The next Microsoft.  Or the next Apple.  Also, unable (or unwilling) to learn from the mistakes of the Japanese real estate bubble the Clinton administration was making it very uncomfortable for banks to NOT approve mortgage applications for people who were unqualified.  Putting more people into houses who couldn’t afford them.

So while the Clinton administration was trying to change America (during the first 2 years they tried to nationalize health care against the will of the people) the economy did well.  For awhile.  Irrational exuberance was pushing the stock market to new heights as investors poured money into companies that didn’t have a dime of revenue yet.  And never would.  Clinton had to renege on his promise on the middle class tax cut because things were worse than he thought when he promised to make that middle class tax cut.  (Isn’t it always the way that when it comes to tax cuts some politicians can’t keep their promise because they were too stupid to know how bad things really were?)  Added into this mix was Japan’s Lost Decade.  Their deflationary spiral increased the value of the Yen.  And made their exports more expensive.  Giving the American domestic manufacturers a huge advantage.  The economy boomed during the Nineties.  For a mix of reasons.  They even projected a budget surplus thanks to the economic woe of the Japanese.  But then the dot-com bubble burst.  Giving Bill Clinton’s successor a nasty recession.

When a Recession ails you the Best Medicine has been and always will be Reaganomics

The Left always talks about fair trade.  And about the unfair practice of foreign manufacturers giving Americans inexpensive goods that they want to buy.  So their answer to make these unfair trade practices fair is to slap an import tariff on those inexpensive foreign goods.  To protect the domestic manufacturers.  For they believe it’s that simple.  And plug their ears and sing “la la la” when you discuss David Ricardo’s Comparative Advantage.  Ricardo says countries should specialize in the things they’re good at.  And import the things others are better at.  When everyone does this we use our resources most efficiently.  And the overall wealth in the international economy increases.  Making the world a better place.  And increases our standard of living.  But the rent-seekers disagree with this.  They want high tariffs.  And obstacles for foreign imports.  To protect the domestic businesses that can’t sell as inexpensively or at such high levels of quality.

Some would point to Japan’s Lost Decade as proof.  Where their deflationary spiral removed a lot of foreign competition to American manufacturing.  Allowing them to sell at higher prices and lower quality.  All the while protecting American jobs.  And, yes, Japan’s woes did help the American domestic manufacturers during the Nineties.  But it wasn’t because they could raise prices and lower quality in the face of low foreign competition.  It was because there was still enough Reaganomics in the country to produce some vibrant economic activity.  That encouraged entrepreneurs to take chances and bring new things to market.  Which is a huge difference from the current economic picture.

The Eurozone sovereign debt crisis has plunged Europe into a recessionary freefall.  Much like the Japanese suffered in the Nineties.  Yet the American domestic manufacturers aren’t benefiting from this huge decline in foreign competition.  Why?  Because the Obama administration has excised any remaining vestiges of Reaganomics out of the economy.  Everything the rent-seekers could ever hope for they have.  Only without tariffs.  And yet the Obama economy still lingers in recession.  Because irrational exuberance and barriers to free trade don’t create real economic growth.  And an administration hostile to capitalism doesn’t inspire entrepreneurs to take chances.  No.  What encourages them to take chances are low taxes.  And less costly and less punishing regulations.  For programs like Obamacare just scare businesses from hiring any new employees.  Because they have no idea the ultimate costs of those new employees. 

Now contrast that to the low taxation and relaxed regulatory climate of Reaganomics.  That produced solid economic growth.  And this growth was BEFORE Japan’s Lost Decade.  Which just goes to show you how solid that growth was.  And proved David Ricardo’s Comparative Advantage.  For both Japan and the United States did well during the Eighties.  Unlike Clinton’s economy in the Nineties that only did well because Japan did not.  But the good times only lasted until the irrational exuberance of the dot-com bubble brought on an American recession.  Which George W. Bush pulled us out of with a little Reaganomics.  Tax cuts.  Proving yet again that higher taxes and higher regulations don’t create economic activity. Tax cuts do.  And fewer regulations.  In other words, when a recession ails you the best medicine has been and always will be Reaganomics.

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When Democrat Policies Fail and they Fall in the Polls they Scramble to Endorse Reaganomics

Posted by PITHOCRATES - October 5th, 2011

Democrats have Blamed every ill known to Mankind on Reaganomics

The Left hates Ronald Reagan.  Proclaimed the era of Reagan was over.  No more were these Reagan Republicans going to screw over the poor so the rich can live a better life.  Yes, they hated this man with a passion.  And everything he stood for.  This supply-sider of the Austrian School.  He and is unfunny Laffer Curve.  This cold-hearted tax cutter.  But now they love him.  Why?  Because he supported taxing the rich.

I’ll pause a moment for those of you who have fallen out of your chairs.  Ready?  Good.

You know Congressional Democrats are grasping at straws to promote their policies when they claim their archenemy would have supported them, too.  You know why they’re trying, though, don’t you?  If you listened to the protesters on Wall Street you should know.  With their control of public school teachers and college professors (both dependent on taxpayer money for generous pay and benefit packages), they can revise history.  And keep kids ignorant.  Hopefully keeping them oblivious of things they don’t want them to know.  Such as the true legacy of Ronald Reagan (see MILLER: Ripping off the Gipper by Emily Miller posted 10/4/2011 on The Washington Times).

Liberals are trying to twist Ronald Reagan’s words to muster support for raising taxes. House Minority Leader Nancy Pelosi’s press office sent a memo on Monday to congressional Republicans claiming they’d found evidence proving that President Reagan was the real inspiration for President Obama’s tax-the-rich “Buffett Rule.” The California Democrat posed the question: “What would Reagan do?”

The correct answer is: He would cut taxes. Mrs. Pelosi’s memo sends people over to the liberal Think Progress website, where a video montage interweaves clips of Mr. Obama and Reagan saying apparently similar things about tax rates. “We’re going to close the unproductive tax loopholes that allow some of the truly wealthy to avoid paying their fair share,” said the Gipper.

You’re supposed to think that’s just what Mr. Obama is doing, but the liberals edited out the context of the 40th president’s remarks. In a June 1985 speech at an Atlanta high school, he called for a total overhaul of the tax system. He wanted loopholes closed to lower the tax rates for everyone, for a net reduction in the tax burden. Congressional Republicans point out that’s precisely the opposite of what the Democrats are now trying to do.

You see, the Democrats can’t rely on telling the truth to pass their policies.  Because their policies only benefit those in government.  And those who live like parasites on the wealth creators.  Such as those protestors on Wall Street.  Who want the wealth of the wealth creators.  But want no part of capitalism which created that wealth.  And are too ignorant to understand that you can’t have one without the other.

Thank you public school teachers and college professors.

So they must lie.  Revise history.  To try and fool people into believing that their policies are just like Ronald Reagan’s.  And apparently hoping people don’t remember that Democrats have blamed every ill known to mankind on these very same policies.  ReaganomicsTrickledown economics.  The scourge of mankind.  But the majority of Americans apparently love the big lug so they’ll swallow back their bile and say, hey, we love him, too.  And hope that the grimace on their face doesn’t look as bad or as painful as it feels.

Fannie Mae and Freddie Mac created America’s Financial Mess, not Wall Street

So where did these Wall Street protests come from?  Where did the primary impetus come from?  Apparently Canada.  Thanks, Canada.  As if the corrupting influence of Terrance and Phillip wasn’t enough already.  So I guess we have to Blame Canada (Warning:  Blame Canada contains adult content) for this, too (see Occupy Toronto leaderless, unfocused but hopeful by Dana Flavelle posted 10/4/2011 on the Toronto Star).

The Wall Street protests were inspired by Canadian anti-consumer magazine Adbusters.

Editor in chief and co-founder Kalle Lasn said he’s been calling for this kind of protest movement for 20 years.

It’s finally happening because people are angry with the financial fraudsters on Wall Street who created America’s economic mess and largely went unpunished, he said in a telephone interview from Vancouver.

But that isn’t who created America’s financial mess.  It was government.  Specifically the government sponsored enterprises (GSE) Fannie Mae and Freddie Mac.  If it wasn’t for them buying and/or guaranteeing risky subprime mortgages there would have been no subprime mortgage crisis.

That was government policy.  Putting as many people into houses as possible.  Even if they couldn’t afford them.  That wasn’t Wall Street.  Wall Street was merely an accessory after the fact.  Aiding and abetting Fannie Mae and Freddie Mac.  By selling those toxic subprime mortgages in collateralized debt obligations (CDOs).  Promoting them as high yield yet low risk.  Because they were backed by mortgages, historically the safest loans in all of America.  So investors bought these.  Not knowing how risky they were.  But you know who knew how risky they were?  The GSEs Fanny and Freddie.  Because they bought them.  And remember what the ‘G’ stands for in GSE.  Government.

If you removed government from this equation mortgage bankers would not have approved these risky subprime mortgages.  Because that risk would have been on their books.  But when government said ‘don’t worry  we’ll take that risk off of your books’ what did they have to lose in approving risky subprime mortgages?  Less harassment from the government for not approving mortgages for the poor and minorities who didn’t qualify?  Yeah, like they were going to miss that harassment.

If these protestors want to protest those responsible they should protest government.  Not Wall Street.

Damn Canadians.  If it’s not making our kids fart and curse they’re getting them to protest the wrong people.  (Editor’s note:  We like Canada and Canadians.  And mean them no disrespect.  We’re just having a little fun with the movie South Park: Bigger, Longer & Uncut.  In which incidents lead to war between Canada and the U.S.  A premise so ridiculous that it’s funny.  For Canada and the U.S. have been the best of friends.  And will always be the best of friends.)

The more Public Sector Union Employees paying Dues the more Money is collected for Democrat Coffers

Perhaps that’s the problem.  Too much government.  The federal government has grown into a behemoth.  On top of thousands and thousands of local governments throughout the country (see Infographic: Local government by the numbers by Mary Mahling and Carla Uriona posted 10/4/2011 on Stateline).

There are 89,476 local governments in the United States. They include counties, cities, villages, towns and townships, as well as special districts that handle utilities, fire, police and library services.

That’s a lot of government.  And there’s only one way to pay for a lot of government.  With a lot of taxes.

So we have government upon government upon government.  Surely with all that government we must be getting some value for all of these taxes.

More than two centuries of American democracy have resulted in a profusion of governments at the local level, not only cities and counties but villages and townships, park districts and sanitary districts and a host of others. To those trying desperately to bring a state’s budget into balance, many of these are useless anachronisms incapable of providing any service that could not be provided higher up the governmental chain. But to the tens of thousands of people who hold office in these local entities — and to millions of citizens who live within them — multiple local governments are a crucial piece of evidence that American democracy reaches down to the grassroots level.

Apparently not.  And don’t call me Shirley.

They just provide a lot of jobs for the unemployable.  By taxing the wealth creators.  And redistributing it to people whose job is a duplicate of one at another level of government.

They do serve a purpose, though.  Being totally funded by taxpayers, they have a vested interest to keep raising taxes on the taxpayers.  Which is, of course, helpful to Democrats.  So the more local governments the better.  The more public sector union employees paying dues the more money finds its way into Democrat coffers.

Any Attempt to Quantify Human Behavior will Ultimately Fail

And then you have academe.  And Keynesian economists.  Furthering the growth of government with their government-spending Keynesian economics (see Tis The Gift To Be Simple by Paul Krugman posted 10/5/2011 on The New York Times).

To be sure, IS-LM is an attempt to squeeze a dynamic economy into a static model, which is why people like me usually cross-check our conclusions with something intertemporal. But it’s actually a pretty darn sophisticated approach — as demonstrated by the fact that economists who dismiss or attack IS-LM as too simplistic or something almost always end up making assertions that are much more simplistic than IS-LM, if not falling into outright logical fallacies. In fact, I can’t think of a single exception to this rule: every attack on IS-LM I’ve ever seen (as opposed to suggestions that we should also look at more complex models) was followed by some kind of empirical or logical howler.

I have a criticism.  Any attempt to quantify human behavior will ultimately fail.  Because you can’t quantify human behavior.

Economics belong to the branch of science we call social sciences.  That is, it’s not real science.  Because the wildcard is that human behavior can always produce some unintended consequence to government action.  Such as Prohibition giving us organized crime.  Whereas the equations of science typically don’t.  We can use science to build bridges, buildings and airplanes.  And they work pretty much as planned.  Without any unintended consequences.

You can’t represent human behavior by mathematical formulas.  We know some behavioral responses.  Such as sex in advertising gets men’s attention.  But that’s a base primeval instinct.  There’s not a whole lot of thinking going on.  Not so in a complex economy.  Where there is a lot of thinking going on.  Keynesians like to think the economy is as simple as impulse buying at the point of sale checkout aisle.  Put more candy on display and you sell more candy.  Not so with buying a house.

Everyone will like to own a beautiful home.  But people won’t buy a house on impulse.  Not when there’s record unemployment.  And talk of a double-dip recession.  Because if you learned anything from the subprime mortgage crisis it’s this.  Too much debt is bad.  And there is no such thing as a guaranteed job.  Playing with interest rates won’t change that.  Only time will.  When enough time has passed to let people feel secure in their jobs again.  Then and only then will they consider taking on debt again.  No matter what the IS-LM model predicts.  Because you can’t quantify human behavior.

The Wall Street Protestors with Student Loan Debt Probably don’t have Science or Engineering Degrees

All government policy is social science.  It’s not an exact science.  That’s why strange things happen.  Unintended things.  Whenever government tries to influence behavior.  And when government tries they have a track record of failure.  Which is why they don’t run for reelection on the success of their policies.  They run on the success of someone else’s (Ronald Reagan’s) policies.  And say that their policies are the same.  And they are except with a few minor changes.  And by ‘few’ I mean they couldn’t be any more different.  So they lie.  Or they just demonize their opponents.

But our kids are blissfully ignorant.  Thanks to public school teachers.  And college professors.  Who care more about improving their taxpayer funded pay and benefits than education.  That’s why government grows.  And why we have degrees like women’s studies.  And poetry.  Degrees that offer no hope for employment in a capitalistic economy.  For what business that relies on pleasing their customers (like Apple does consistently) need people with these skills?

No.  They need people with science and engineering degrees.  You know, the hard ones.  So the kids who took the easy route in college must depend on teaching others their worthless knowledge.  Or get a government job.  Which has a lot to do with the anger of these protestors who have huge student loan debt.  And no job.  Because if they hate capitalism you can guess what their degrees are in.

(Editor’s note:  This was written before news of Steve Jobs’ passing broke.  Our condolences go out to his family.  We decided to leave the Apple reference in as a tribute to Steve Jobs.  He was one of America’s greatest entrepreneurs.  The world is a better place because of him.  For the gifts he gave us.  And the inspiration he gave to the next generation of great entrepreneurs.)

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First the Obama Misery Tour, then on to Martha’s Vineyard with the other Millionaires and Billionaires

Posted by PITHOCRATES - August 15th, 2011

Raising Taxes on the ‘Rich’ to Close the Deficit will put the Country into a Depression

Roll up, roll up for the misery tour.  Roll up, roll up for the misery tour.  The Obama Misery Tour is waiting to take you away.  Waiting to take you away (see Obama kicks off Midwest bus tour with harsh words on the economy by Zachary A. Goldfarb posted 8/15/2011 on The Washington Post).

Obama, who kicked off a three-day Midwest bus tour Monday focused on the economy, cited comments made by Republican presidential hopefuls at a GOP debate last week.

“I know it’s not election season yet, but I just have to mention the debate,” where Republicans said they would not increase taxes under virtually any circumstance, Obama said at a town hall. “Think about that. That’s just not common sense.”

Neither did raising the deficit from $455 billion to $1.65 trillion, Mr. President.  In fact this spending was downright irresponsible.  Your administration spent an additional $1.195 trillion we didn’t have.  And you’re planning to spend more.  We have a deficit problem because we have a spending problem.  Not because people aren’t paying enough taxes.

“You’ve got to send a message to Washington that it’s time for the games to stop. It’s time to put country first,” Obama said, his voice rising. “Some folks in Congress … would rather see their opponents lose, than America win.”

Mr. President, you increased the deficit by 263%.  That is not good for the country.  In fact, one could say that you are the ‘some folks’ you refer to who would rather see their opponents lose than America win.

He called on Congress to pass measures to hire construction workers, a trio of trade bills, an overhaul of patent laws and new tax credits to spur new jobs for veterans.

You had supermajorities during your first two years in office.  You could have passed any legislation you wanted to spur new jobs.  Instead, you made your priority the passing of Obamacare.  Something that did not spur any jobs.  And only will increase the deficit. 

And hire construction workers?  Wasn’t your Keynesian stimulus bill supposed to do that?  Create some $800 billion in shovel-ready projects?  Of course that’s hard to do when 88% of that bill was pork and earmarks.  Sort of a Democrat wish list to satisfy some 40 years of wants and desires. 

Speaking about the national debt, Obama called for an overhaul of the tax code that would force the wealthy to pay more taxes and an overhaul of entitlement programs…

“I’d like to see the ultra-rich pay their fair share,” said…a nurse from Rochester. “He’s got to be a politician, but I’d like to see a bit more push.”

“I think he’s doing a good job. He inherited a very big deficit,” said…a financial planner from Rochester. “He and Michelle are the first residents of the White House to be familiar with both organic food and leftovers.”

The wealthy just aren’t wealthy enough to pay down the deficit.  If you crunch the numbers, and define anyone who earns $159,619 or more as wealthy, you’ll have to raise the federal income tax to an effective rate of 87.6% (see You can’t Reduce the Debt $4 Trillion by Raising Taxes, at least not Mathematically).  That means the government would have to take 87.6% of everything they earn.  That includes the billionaires and the millionaires.  And everyone earning $159,619 or more. 

Is this possible?  Well, if you earn $159,619 annually, that’s $13,301.58 gross pay each month.  After your federal income taxes are withheld, that leaves a whopping $1,649.40 to pay your state taxes, your mortgage, your car payment, your groceries, health insurance, car insurance, gasoline for your car, etc.  Of course, they won’t be able to have these things at this high tax rate.  In fact, they won’t have any money left to spend.  Consumer spending over all would nosedive us into a full blown depression.  Making things even worse than they are now. 

So what is Obama going to do next?

Obama is scheduled to go on a 10-day family vacation to Martha’s Vineyard on Thursday after completing the economic tour.

While many Americans can no longer afford to take the family on a vacation, he will be spending 10 days in the very swanky Martha’s Vineyards.  Where billionaires and millionaires like to vacation.  And get away from the rabble.  Us.

Politicians are Whores who sell themselves to the Highest Bidder 

The johns threaten to withhold their money from the prostitutes in Washington (see Starbucks CEO urges halt to U.S. political donations by Lisa Baertlein posted 8/15/2011 on Reuters).

In his letter on Monday, Schultz [Starbucks Corp. CEO] invited executives to join him in a “pledge to withhold any further campaign contributions to the President and all members of Congress until a fair, bipartisan deal is reached that sets our nation on stronger long-term fiscal footing.”

Men are interested in one thing.  According to all the stereotypes.  And when women want something, they can simply withhold this one thing.  Again, according to the stereotypes.  Eventually the man caves because he can’t live without that one thing.  What a great analogy.  Because all politicians are whores who sell themselves to the highest bidder.  And those buying political favors can simply withhold their money to get what they want.  Which is how government works.  Sadly.

Schultz also urged fellow CEOs to invest in projects or new products that will perk up the economy at a time when fear and uncertainty have made businesses unwilling to invest, consumers unwilling to spend and banks unwilling to lend.

Expand supply in the face of a shrinking demand?  Not a good idea.  Austrian economists call this malinvestment.  This kind of thinking didn’t help ward off the Great Depression.  And it won’t work here.  You create real demand by cutting taxes.  Giving people more money to spend now.  Next week.  Next month.  And next year.  This creates confidence.  Not a one-time stimulus that provides consumers with money to spend one time.  A tax cut will increase demand.  And once consumers are demanding more business will start hiring more. 

I guess a guy who has convinced people to buy over-priced coffee just assumes businesses can make consumers do anything.  But would he open a new Starbucks next to an existing one?  No.  Why?  Because what would probably happen is that each store will have half the business of the first store.  While doubling the overall costs for that business.  So that would be a malinvestment.  So he wouldn’t do it.  Yet he is asking his fellow CEOs to do just that.

Obamanomics has Failed so let’s Return to the Successful Policies of Reaganomics

It’s been about three years.  Record government spending hasn’t done anything but increased the deficit.  And get U.S. credit downgraded.  You can make all the excuses you want.  But eventually you have to answer for your policies.  Obama’s policies have failed.  And left us worse off than we were.

The Keynesian way has once again failed.  Perhaps we should give the Austrian way another try.  Because when Reagan did, those policies worked. 

We tried Obamanomics.  It failed.  So let’s go back to Reaganomics.  At least it has a track record of success.

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Ronald Reagan’s Reaganomics Increased GDP and Tax Revenue, Decreased Unemployment and Tamed Inflation

Posted by PITHOCRATES - August 8th, 2011

Ronald Reagan’s Supply-Side Reaganomics caused an Economic Boom

Politics is a struggle.  Between those on the Left.  And those on the Right.  And nowhere is it more partisan than when it is about one subject.  ReaganomicsRonald Reagan‘s supply-side economics.  Of the Austrian School.  That the Left belittles as trickle-down economics. 

His tax cuts during the Eighties sparked an economic boom.  No one denies this.  In fact, life was very good during the Eighties.  So good that the Left denounce those years as the Decade of Greed.  “Yes, a lot of people got rich,” the Left says.  “But at what cost?”  And then they point to those ‘soaring’ Reagan deficits.  Peaking at about $221.2 billion in 1986.  Or about $358.3 billion adjusted for inflation.  (Pretty tame by today’s standards.  Barack Obama has one in the $1.6 trillion neighborhood.)  But did Reagan cause them with his tax cuts?

To answer this question we look at historical GDP (gross domestic product).  And tax receipts.  From the Seventies and the Eighties.  From the heyday of Keynesian economics.  After the Nixon Shock in 1971. That ended the ‘gold standard‘.  When Nixon said, “I am now a Keynesian in economics.”  And through Reaganomics.  All dollar amounts are constant 2005 dollars (shown in billions).  These are graphed along with the top marginal tax rate, inflation and the unemployment rate.

(Sources: GDP, tax revenue, top marginal tax rate, inflation, unemployment)

Inflation Eroded GDP and Raised Unemployment in the Seventies

There are two relatively flat plateaus on the GDP graph.  Flat or falling GDP growth indicates a recession.  One starting sometime after 1972.  The other one around 1979. 

Both of these correspond to a spike in the inflation rate.  This happens because inflation erodes GDP.  By raising prices.  Higher prices mean we buy less.  Which means less GDP.  And higher prices tend to inflate business profits.  Where profit gains are from inflation.  Not from selling more stuff.  Which means less GDP.

Inflation is one half of the business cycle.  Which is a boom-bust cycle.  A booming economy.  And a busting recession.  Inflation.  And deflation.  Growth.  And recession. 

During growth there’s inflation.  Prices go up as more people want to buy the same things.  Bidding up prices.  The unemployment rate falls.  Because businesses are hiring more people.  To expand.  To meet this demand. 

When they expand too much there’s too much stuff on the market.  People can’t buy it all.  So prices go down.  To encourage people to buy.  And businesses cut back.  Lay people off.  With fewer people working there’s fewer people to buy that excess supply.  So prices fall more.  And businesses lay more people off.  To reflect the falling demand.  Which increases the unemployment rate.

The business cycle, then, corrects prices.  And readjusts supply to demand.  Keynesian economics was going to change this, though.  By removing the recession part.   Through permanent inflation.  At least, that was the plan.  The two plateaus in the GDP graph shows that the business cycle is still here despite their best efforts.   

And the Keynesians only made things worse.  By causing double-digit inflation.  By creating more demand than existed in the market.  People used that easy money.  To buy things they wouldn’t have otherwise bought.  Creating ‘bubbles’ of inflated prices.  Which are corrected by recessions.  And the greater the bubble, the greater the recession.

Easy Monetary Policy (i.e., Printing Money) made Inflation Worse in the Seventies

Government spent a lot during the Seventies.  A lot of that was Keynesian spending paid for with easy monetary policy (i.e., printing money).  Something governments can only do.  They are the only ones that can say, “Use these paper bills as legal tender.  We guarantee it.”

Making fiat money is easy.  But there is a cost.  The more you make the more you devalue your currency.  That’s the cost of inflation.  Money loses some of its purchasing power.  The greater the inflation the greater loss of purchasing power. 

They printed a lot of money during the late Seventies.  So much that the dollar lost a lot of its purchasing power.  Hence the double-digit inflation.

Paul Volcker was a Federal Reserve chairman.  He started in the last year of Jimmy Carter‘s presidency.  And remained chairman for about 8 years.  He raised interest rates severely.  To constrict the money supply.  To pull a lot of those excess dollars out of circulation.  This caused a bad recession for Reagan.  But it killed the double-digit inflation beast.  This sound money policy was a tenet of Reaganomics.  Which was an integral part of the Eighties boom.

Reagan’s Tax Cuts Increased both GDP and Tax Revenue

The hallmark of Reaganomics, of course, is low taxes.  Reagan cut the top marginal tax rate.  He dropped it from 70% to 28% in four cuts.  After the first cut GDP took off.   Because rich people reentered the economy. 

They weren’t parking their money in investments that helped them avoid paying the top marginal tax rate.  They were starting up businesses.  Or buying business.  Creating jobs.  Because the lower tax rates provided an incentive to earn business profits.  And not settle for lower interest income.  Or capital gains. 

For business profits can be far greater than interest earned on ‘income tax avoiding’ investments.  Such as government bonds.  And if we don’t penalize rich people for risk-taking they will take risks.  Create another Microsoft.  Or Apple.  But they are less likely to do that if they know we will penalize them for it.  And that’s what a high marginal tax rate is.  A penalty.  Remove this penalty and they will choose risky profits over safe interest every time.  And make a lot of jobs along the way.

And this is what they did during the Eighties.  Their ‘greed’ created a boom in employment.  A rising GDP.  Accompanied with a falling unemployment rate.  Rich people were pulling their money out of tax shelters.  And putting it into businesses.  Where they could make fat profits.  And making fat profits in business requires employees.  Jobs.  Unlike making money with safe tax-sheltered investments. 

Tax revenue increased.  There were more business profits.  And more business income taxes on those profits.  There were more jobs.  More employees in the workforce.  Paying more payroll taxes.  And more personal income taxes

Successful businesses made more rich people.  And more rich people pay more income taxes than fewer rich people.  A lot more.  The top marginal tax rate was lower.  But there were more businesses and people paying taxes.   Because the lower rates created more taxpayers.  And richer taxpayers to tax.  Which increased overall tax revenue.

Tax Revenue Increased under Reaganomics but Government Spending simply Increased More

So to summarize the data during Reaganomics, GDP grew, tax revenue grew, unemployment fell and inflation was tame.  All the things you want in a healthy economy.  And this all happened when the top marginal tax rate was cut from 70% to 28%. 

So, no, the Reagan deficits were NOT caused by the Reagan tax cuts.  That’s a myth created by the Left to revise history.  To recast the successful policies of Ronald Reagan as failures.  So they can continue in their tax and spend ways.

Those deficits were a spending problem.  Not a revenue problem.  For tax revenue increased after the tax cuts.  So why the deficits?  Because government spending simply increased more.

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Insufficient Spending Cuts triggers S&P Downgrade, not Insufficient Taxes

Posted by PITHOCRATES - August 6th, 2011

Ah, the Good Old Days when Communists didn’t school Americans in Capitalism

It happened.  S&P downgraded the U.S.  Just like they said they would if we didn’t make $4 trillion in spending cuts.  And our patron is not pleased (see China attacks US debt ‘addiction’ after America loses AAA credit rating by Richard Blackden posted 8/6/2011 on The Telegraph).

“The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” China said in a commentary carried by the Xinhua News Agency.

Ouch.  Strong words from a communist.  The Soviet Union never gave us lessons in capitalism when there was a Soviet Union.  Then again, we always had a AAA bond rating back then.  And their GDP growth wasn’t greater than ours.  Ah, the good old days.  When communists didn’t school Americans in capitalism.

Vince Cable, the British Business Secretary, said the downgrade was an “entirely predictable consequence of the mess that the Congress created a few weeks ago when they couldn’t agree on lifting the debt ceiling.”

Francois Baroin, France’s finance minister, said his country had total confidence in the US economy, while India called the “situation was grave” and Russia said it would keep the level of dollar investments in its national reserve funds, adding: “There is not a great difference between AAA and AA+.”

Those are some very supportive words from the Russians.  Which differ slightly from previous remarks when Putin said, “They are living like parasites off the global economy and their monopoly of the dollar.”  It’s subtle but it’s there.  On the one hand the downgrade is no big deal.  On the other we’re the scum of the earth.  It’s subtle but there is a distinct difference in these statements.  They resent us.  But they can’t live without us.  Kind of sweet.  In a bitter way.

In an explanation of the decision, S&P said that despite last week’s agreement, which raised the $14.3trillion debt ceiling and promised cuts of $2.5 trillion to the deficit over the next decade, the ratio of America’s public debt to the size of its economy may climb to 79pc in 2015 and 85pc by 2021. It is understood that an agreement that had delivered a $4 trillion reduction in the debt pile would have preserved the AAA rating.

S&P downgraded us, of course, for having too much debt.  Now debt grows from having annual deficits.  And deficits are caused by either taxing too little.  Or by spending too much.  S&P wanted to see the debt reduced by $4 trillion.  They only got $2.5 trillion.  Hence the downgrade. 

You can’t Reduce the Debt $4 Trillion by Raising Taxes, at least not Mathematically

Reducing the debt by $4 trillion won’t be easy.  That’s a lot of money.  About $333 billion each month.  Current tax revenue into Washington is about $200 billion each month.  So, to get this $4 trillion in deficit reduction with new taxes only would require raising monthly tax revenue from $200 billion to $533 billion (an increase of 166%).  Increasing taxes by 166% (income taxes, payroll taxes, capital gains taxes, etc.) is going to do some devastating economic damage.  The kind the economy is not going to get up and walk away from.  So it’s a non-solution.

But what about a balanced approach?  In addition to that $2.5 trillion in cuts we throw in $1.5 trillion in new taxes for a total $4 trillion in debt reduction.  $1.5 trillion is about $125 billion each month.  This would increase monthly tax revenue from $200 billion to $325 billion (an increase of 65%).  This will also do some serious economic damage.  So it’s a non-solution, too.

And sticking it to the ‘rich’ won’t work either.  For they can’t afford it.  Let’s look at the numbers.  The total adjusted gross income reported in 2009 was $7.626 trillion.  The percent of that total earned by the top 5% earners (earning $159,619 or more) is 31%.  So the total income of the top 5% in 2009 is $2.36 trillion.  Total federal income taxes paid in 2009 was $1.05 trillion.  The top 5% of earners pay 59% of all federal income taxes.  So the total they paid in income taxes in 2009 is $570 billion.  This leaves a balance of $1.79 trillion of their earnings they didn’t pay in federal income taxes, or about $150 billion each month.  Which is not enough to pay an additional $333 billion each month.  But it is enough to pay an additional $125 billion each month.  As long as these people are willing to pay an effective federal income tax rate of 87.6%.  Which I doubt.  For another 12.4% in taxes (state, country, local, property, gas, sales, etc.) and they’re working for free.  Like a slave.  Only without the free room and board.

You can’t reduce the debt enough by raising taxes a lot.  Or a little.  The rich people (those earning $159,619 or more) will run out of earnings before they can pay the $4 trillion in debt reduction.  It’s just mathematically impossible.  The only way you can do this is by cutting spending.  And they didn’t.  Hence the downgrade.

Paul Krugman ‘defends’ Ronald Reagan’s and George W. Bush’s Deficits

Meanwhile, while the S&P tragedy unfolds, Paul Krugman ‘defends’ Ronald Reagan‘s and George W. Bush‘s deficits.  Saying that big deficits aren’t a big deal.  And we don’t have to knock ourselves out trying to pay down the debt they create.  For depreciation of the dollar makes those once large numbers become trivial (see The Arithmetic of Near-term Deficits and Debt by Paul Krugman posted 8/6/2011 on The New York Times).

What matters for debt sustainability is the real interest rate, since what matters is keeping real debt, not nominal debt, from growing. (World War II debt never got paid off, it just eroded in real terms to the point where it was trivial). As of yesterday, the US government could lock in 30-year bonds at a real interest rate of 1.25%. That means that a trillion dollars in extra debt would mean $12.5 billion a year in additional real interest payments.

Meanwhile, the CBO estimates potential real GDP in 2021 at about $18 trillion in 2005 dollars, or around $19 trillion in 2011 dollars.

Put these together, and they say that an extra trillion in borrowing adds something like 0.07% of GDP in future debt service costs. Yes, that zero belongs there. The $4 trillion S&P said it needed to see clocks in at less than 0.3% of GDP.

Of course I’m extrapolating his remarks to apply them to the Reagan and Bush deficits.  For if they hold for a $1.6 trillion dollar deficit then they surely hold for a $200 billion (Reagan) and a $400 billion deficit (Bush).  The key is to make that old debt worth less by making the dollar worth less.  The more you devalue the dollar the less that debt held by the Chinese is worth.  As well as the debt held by pension funds and retirement accounts.  And our personal savings.  For inflation is a killer of dollar-denominated assets.  Which is good for the debtor (the seller of treasuries).  But bad for the creditor (the buyer of treasuries).

Further extrapolating Krugman’s remarks one must conclude that with the deficit being trivial he would endorse the economic boom of the Eighties.  And agree that Reaganomics was a success.  For the argument has always been that Reaganomics traded exceptional GDP growth for deficits.  But with deficits being trivial, there is no tradeoff for that exceptional GDP growth.

To Live within our Means we will have to Cut Spending 

True, inflation will make bonds easier to redeem 30 years later.  But too much inflation causes a lot of damage.  Especially to those living on fixed incomes.  No, a better solution would be to live within our means.  And that doesn’t mean raising taxes.  Besides, the rich don’t have much left to give.  No, if we’re going to live within our means we will have to cut spending.  As painful as that may be.  And the longer we wait to make those cuts the more painful those cuts will be.

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LESSONS LEARNED #75: “Lower income tax rates generate more tax revenue by making more rich people who pay more income taxes.” -Old Pithy

Posted by PITHOCRATES - July 21st, 2011

Inflation is a Bitch

The top marginal tax rate during the Eisenhower administration peaked at 92%.  When it wasn’t at 92% it was at 91%.  This was post-war America.  A happy time.  They even named a TV series after this time.  Happy Days.  Life was good.  There were jobs aplenty.  And lots of baby making.  Everyone lived happily ever after.  Until the war-devastated economies rebuilt themselves and didn’t need American manufacturing anymore.

Things started to change in the Sixties.  Sure, a top marginal tax rate of 92% was high.  But few paid it.  Creative accounting and useful tax shelters avoided that punishing rate.  But government was still fat and happy with the money it was collecting.  Until the Vietnam War came along.  Johnson‘s Great Society.  And let’s not forget the Apollo moon program.  With renewed competition for American manufacturing, trouble in the oil-rich Middle East and rising inflation, the Seventies weren’t going to be happy.

And they weren’t.  Oil shockNixon shockStagflationMiseryKeynesian economics says to tax and spend to tweak the economy back to health.  When you can’t tax enough, you borrow.  When you can’t borrow, you print.  Nothing is more important than creating demand where no demand exists.  Give consumers more money to spend and ignore the debt, deficit and inflation.  The problem is, inflation is a bitch.

Reaganomics increased GDP 82.9%

Ronald Reagan routed Jimmy Carter in the 1980 presidential election.  Carter’s economic numbers were some of the worst in history.  Double digit interest rates, unemployment and inflation.  All being flamed by an expansionary Keynesian monetary policy.  Until Paul Volcker took over the Fed during Carter’s last year or so in office.  And there really is only one way to cure a bad inflation.  With a bad recession.  And the Reagan recession of the early 1980s was one of the more severe ones.

Reagan was from the Austrian school of economics.  Supply-side.  His Reaganomics embraced the following tenets: cut spending, cut taxes, cut regulation and cut inflation.  In 1980 the top marginal tax rate was 70%.  When he left office it was 28%.  During his 8 years in office he took GDP from $2,788.1 billion to $5,100.4 billion (an increase of 82.9%).

The Reagan critics will note this explosive economic growth and say, “Yeah, but at what cost?  Record deficits.”  True, Reagan had some of the highest deficits up to his time.  But those deficits had nothing to do with his tax cuts.  For Reagan increased tax revenue from $798.7 billion to $1,502.4 billion (an increase of 88.1%).  Those deficits weren’t from a lack of revenue.  They were from an excess of spending.  And, therefore, not the fault of the Reagan tax cuts.

A Downward Trend in Prices is like an Upward Trend in Wages

And the Reagan critic will counter this with, “Sure, the economy grew.  But the rich got richer and the poor got poorer.”  Yes, his income and capital gains tax cuts made a lot of rich people.  But they also transferred the tax burden from the poor to the rich.  In 1980, the top 1% of earners paid 19.1% of all federal income taxes.  By the time he left office that number grew to 27.6% (an increase of 44.8%).  Meanwhile the bottom 50% of earners paid less.  Their share fell from 7.1% to 5.7% (a decrease of 18.9%).

Of course, the Reagan critic will then note that Reagan slashed domestic spending to pay for his military spending.  Well, yes, Reagan did spend a lot.  He increased spending from $846.5 billion to $1,623.6 billion (or an increase of 91.8%).  But he made a tax deal with Congress.  For every new $1 in taxes Congress would cut $3 in spending.  Those spending cuts never came.  Hence Reagan’s monstrous $200 billion deficits.  That’s a lot of money for both guns and butter.

But the greatest thing he did for low-income people was curbing inflation.  High inflation makes everything cost more, leaving low-income people with less to live on.  In 1980, inflation was at 13.5%.  When Reagan left office he had lowered it to 4.1% (a decrease of 69.6%).  No one benefited more from this reduction in inflation than low-income people.  A downward trend in prices is like an upward trend in wages.

The Reagan Economy was Better than the Clinton Economy

The Reagan critic likes to point to the Clinton years as a better economic period with better economic (and fairer) policies.  The Nineties were a period of economic growth.  But even with the dot-com bubble near the end of that period the Clinton GDP growth of 56.9% was less than Reagan’s 82.9%.   

Whereas Reagan achieved spectacular GDP growth while fighting inflation, the Clinton growth did not have to slay the inflation beast.  In fact, inflation rose from 3.0% to 3.4% during his two terms, indicting the GDP growth was not as real as Reagan’s.  Reagan’s was measured with a strengthening dollar.  Clinton’s was measured with a weakening dollar.  Also, real prices fell under Reagan.  While they rose under Clinton.  Making life more expensive for low-income people under Clinton than under Reagan.

Thanks to the dot-com boom, though, Clinton continued to transfer the tax burden to the rich.  He experienced a wind-fall of capital gains tax revenue when all those rich dot-com people cashed in their stock options.  In 1992, the top 1% of earners paid 27.4% of all federal income taxes.  By the time he left office that number grew to 37.4%.  This was an increase of 35.9% (compared to Reagan’s 44.8%).  Meanwhile the bottom 50% of earners paid less, too.  Their share fell from 5.1% to 3.9%.  This was a decrease of 22.7% (compared to Reagan’s 18.9%). 

Over all, though, Clinton’s policies increased tax revenue 69.8% compared to Reagan’s 88.1%.  And this was with the dot-com boom thrown in.  Had there been no dot-com bubble (that burst after he left office) no doubt his GDP and tax revenue would have been less.  Some of this economic dampening perhaps being caused by his increase of the top marginal tax rate from 31% to 39.6%. 

Both Reagan and Clinton made more Rich People

Reagan’s tax cuts led to an economic boom.  He cut inflation making life more affordable for lower-income people.  And he transferred the tax burden to the rich.

Clinton increased taxes.  His economic boom was good but not great.  A big part of his GDP growth and tax revenue was due more to irrational exuberance than real economic growth. 

But both Reagan and Clinton made more rich people.  And these rich people paid more taxes.  And because they did low-income people paid less.  Which would seem to prove that the best way to increase tax revenue (and make the tax system more progressive) would be to create more rich people.  And yet the very people who want to do this advance policies that work against these objectives.  Why?

Politics.  Sure, the Austrian school of economics has a proven track record over the Keynesian school.  But Austrian school economics has a terrible side affect.  It doesn’t grow government.  And all the economic growth and tax revenue doesn’t mean a thing if you lose your comfy federal job.  At least to a Big Government politician.

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LESSONS LEARNED #74: “When negotiating it’s important to understand the ‘time value’ of promises. The longer out in time something is promised the less likely that promise will be kept.” -Old Pithy

Posted by PITHOCRATES - July 14th, 2011

Slaying the Inflation Beast

In Washington promises would make a poor currency.  Because they’re very inflationary.  Politicians make a lot of promises.  And they break almost as many as they make.  Promises just don’t hold their value over time.  Especially when it comes to spending cuts.  Any promise for future spending cuts will be worthless by the time that ‘future’ arrives.  Because things change.  The economic picture may change.  And they’ll write new legislation to eliminate those spending cuts.  To adjust for these unforeseen changes in the economy.  Just as those promising those spending cuts knew they would.  That’s why politicians (i.e., Democrats) can be generous when offering future spending cuts in any budget debate.  Because they have no intention of ever keeping those promises.  So Democrats can be very generous in offering ‘future’ spending cuts.  In exchange for tax hikes in the here and now.  It’s a con.  And one of the biggest such cons was the Tax Equity and Fiscal Responsibility Act of 1982 that Ronald Reagan fell for.

Reagan’s poor economy had its roots in the Sixties and LBJ‘s Great Society.  LBJ was a tax, borrow, print and spend liberal.  And he spent.  He exploded government spending for his Great Society.  On top of the massive war spending for Vietnam.  The economy limped into the Seventies.  A bad economy and high taxes left few options to pay for that spending.  So the Fed just printed money.  Which devalued the dollar.  The dollar then was still convertible to gold at $35/ounce.  With the depreciation of their dollar assets, foreign nations converted their dollars to gold, depleting U.S. gold reserves.  To stem this loss of gold Nixon suspended the dollar’s convertibility into gold (the Nixon Shock).  Free from the restraint of a quasi gold standard, Nixon turned the printing presses on high.  Devaluing the U.S. dollar in the process, giving us high inflation. Then the 1973 oil embargo came and made everything worse.

Gerald Ford did little to change things.  Or Jimmy Carter.  They were little more than Keynesians themselves.  And believed in the power of government spending to stimulate the economy out of recession.  So their policies remained Keynesian.  Tax rates were high.  As was government spending.  And then another oil crisis came thanks to the Iranian Revolution.  Things just went from bad to worse for Carter.  Inflation was killing the economy.  Until Paul Volcker came on board after a cabinet shakeup.  He slew the beast.  Eventually.  Starting in the Carter administration.  And finishing the job in the Reagan administration.  For one of the tenants of Reaganomics was a sound currency.  Which Volcker gave him by slaying the inflation beast.

Reagan was not a Keynesian

Inflation is the great big bad side affect of Keynesian economics.  For it’s the only economics system that tells governments that counterfeiting money is a good thing.  So governments do.  And find justification for their actions by the sweet nothings Ivy League economists whisper in their ears.  But once the inflation beast is unleashed it is not easily subdued.  Because the only true antidote for runaway inflation is a good, deep recession.  And a bit of a deflationary spiral to put prices back to normal.  So this was where the economy was in 1982.  In deep recession.  With high unemployment.  And double digit interest rates (reaching as high as 20% on occasion).

Tax receipts fell.  As you would expect them to during a deep recession.  Which increased the deficit.  And this was just a calamity.  The country was facing economic ruin.  They just had to raise taxes.  For it was the only cure.  And the Democrats demanded that Reagan do just that.  Raise taxes.  But being that it went against another tenant of Reaganomics, Reagan refused.  He was not a Keynesian.  His Reaganomics was more of the Austrian School variety.  Low taxes.  Less regulation.  Sound money.  And little government spending.  He believed that the massive government spending was the problem.  And you didn’t fix that problem by giving the government more money to spend.  No, Reagan wasn’t going to abandon principles easily.  They needed something to sweeten the deal.  To make him abandon his principles more easily.  And they came up with a pretty sweet lie.

“Okay,” they said to Reagan.  “You’re right.  We need to cut spending.  We’re all in agreement here.  But the recession is hurting the people.  We can’t hit them with spending cuts now.  We’ll have to ease them in over time.  To make it easier on the people.  So we’ll give you your spending cuts.  A lot of them.  Just not right now.  In the future.  When the people are back on their feet.  You win.  All we ask for in return is that we increase taxes now before this deficit causes some damage that we won’t be able to walk away from.”

Democrats are Liars

And they made a deal.  Tax hikes now.  For spending cuts later.  And a lot of them.  For every new dollar in taxes they would cut $3 of spending.  It was some unprecedented spending cuts.  So Reagan accepted the deal.  Tax hikes now for spending cuts later.  He signed the Tax Equity and Fiscal Responsibility Act of 1982 into law.  He only made one mistake.  He trusted the Democrats.  And didn’t see them twisting their evil mustaches while they were making their deal.  Nor did he see them rub their hands together as they made a sinister laugh.

A Democrat’s promise to cut taxes isn’t worth the paper it’s written on.  For it starts to depreciate before the ink even dries.  And the numbers prove this.  According to CBO, tax revenue in 1982 (the year of the tax hikes) was $617.8 billion dollars.  At the end of Reagan’s second term in 1988, tax revenue rose to 909.1 billion.  For an increase of $291.5 billion.  Supply-siders (of the Austrian School) will say it was Reagan’s massive tax cuts in 1981 (Economic Recovery Tax Act of 1981) and 1986 (Tax Reform Act of 1986) that that generated this tax revenue by creating more taxpayers.  Keynesians will say it was the Tax Equity and Fiscal Responsibility Act of 1982 that generated this revenue by taking more from each taxpayer.  For the sake of argument, let’s say the Keynesians are right.  And all that new tax revenue is from the higher taxes.  So, according to the deal he made with Democrats to get this tax increase, government spending for the same period should have gone down by three times this amount, bringing total outlays at the end of that period to a negative $128.8 billion. 

Now we know that didn’t happen.  Government spending didn’t go to less than zero.  So if they didn’t honor their 3-1 pledge, how much did they cut spending?  Well, in 1982 government outlays were $745.7 billion.  In 1988 that increased to $1.06 trillion.  For an increase in spending of $318.8 billion.  Clearly something is amiss here.  For this is not spending reduction.  It’s a spending increase.  For every new tax dollar Congress collected they increased spending by $1.10.  That’s not the promised spending reduction.  It’s quite the opposite.  More spending.  A lot more spending.  That $3 gain in spending cuts turned out to be a $4.10 loss.  The Democrats lied.  And Reagan would never fall for this trick again.  For he learned the hard way that there are no such things as future spending cuts with Democrats.  And that Democrats are liars.

Don’t trust Democrats when they Promise to make Spending Cuts 

Of course, we could say that the supply-siders were right in regards to that increase in tax revenue.  The reason the Democrats failed to follow through on their promise was due to the success of Reagan’s tax cuts.  It just created so much money above and beyond what the tax hikes brought in.  They may have delivered their promised cuts but you can’t see them looking at the aggregate numbers.  Because Reaganomics created such great economic activity that it showered Washington with dollars.

It is an interesting choice.  Either the Democrats are liars and renege on their promises.  Or they are incompetent and follow failed Keynesian economic policies.  Perhaps it’s a little of both.  They’re both liars.  And incompetent.  For it would explain a lot.  Such as how their policies never make the economy any better.

Either way the lesson learned is for certain.  Don’t trust Democrats.  Especially when they promise to make spending cuts.  Because whatever may happen, one thing is clear.  What won’t happen are the spending cuts.

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Reaganomics beats Keynesian Stimulus Spending every Time

Posted by PITHOCRATES - July 6th, 2011

Obama’s Policies Failing because they’re too Ronald Reagan

So President Obama is a supply-sider.  Just like Ronald Reagan.  Who’s a thunk it?  Funny, he doesn’t appear to govern like Ronald Reagan.  In fact, I believe Obama has said that we can’t go back to the failed policies of the past.  I’m pretty sure that meant Reaganomics.  But I could be wrong.  Because apparently the faltering economy is faltering because of supply-side economics (see The final nail in the supply side coffin by Andrew Leonard posted 7/6/2011 on Salon).

Ever since Ronald Reagan first attempted to make supply-side economics a reality and proceeded to inaugurate an era of persistent government deficits and growing income inequality, it has become harder and harder to make the trickle-down argument with a straight face. But we’ve never seen anything quite like the disaster that’s playing out right now.

Those persistent government deficits of Ronald Reagan?  They were about $200 billion.  The deficits under the Obama administration have been in excess of $1,300 billion (or $1.3 trillion).  The current projection for 2012 is $1,600 billion (or $1.6 trillion).  So the Obama deficits are over 5.5 times the Reagan deficits.  Or an increase of approximately 550%.  So deficits are worse under Obama.  Far worse.

As far as income inequality, the gap has grown consistently from Richard Nixon through Barack Obama (see The United States of income inequality by Andrew Leonard posed 9/28/2010 on Salon).  That included the 4 years of Jimmy Carter, the 8 years of Bill Clinton and about a year of Barack Obama.  Three Democrat administrations.  So the gap between the rich and poor is greater under Obama.  Far greater.

During the six quarters since the recession technically ended in the second quarter of 2009, real national income in the U.S. increased by $528 billion. But the vast majority of that income was captured as profit by corporations that failed to pass on their happy fortunes to their workers.

First of all, that’s now how business works.  They are not in business to produce wealth for their employees.  They pay employees to help them create wealth.  And they pay them whatever it takes to keep their employees from quitting to find a higher paying job.  If you think that’s wrong let me ask you something.  When you choose a store to shop at, do you pick the one with the highest prices so that store can pay their employees more?

What makes this “recovery” so different? Perhaps the simplest answer is that labor has been broken as a force that can put pressure on management, so there’s little incentive for employers to turn profits into wage hikes or new jobs. Instead, employers are squeezing more out of the workers that they’ve got, and investing in equipment upgrades and new technology instead of human assets — labor productivity has risen sharply since the end of the recession.

GM and Chrysler did not break labor.  Labor broke them.  Those generous UAW contracts saddled these companies with legacy costs that left them uncompetitive.  And insolvent.  The auto bailout screwed the bond holders and rewarded labor.  By giving them seats on the board of directors and stock to fund their underfunded pension funds.  This is why employers prefer investments in productivity.  They’re less political.  And are less likely to come back and bite you in the ass.

Globalization also plays a potent role — and not just as a source of cheap labor to undermine the bargaining power of American workers. The Journal notes that many companies “are benefiting from demand from emerging markets, where they are deriving an increasing share of their sales.” Job creation is probably following the sources of new demand. If the Chinese and Brazilians and Indians are the ones buying American goods and services, then it makes sense to staff up overseas. But with American consumers still shellshocked by the economic crash and dutifully obsessed with paying down their debts while trying to hold on to their homes, domestic demand is hardly a force to be catered to.

Interestingly, the emerging markets noted are making great strides toward free market capitalism.  Countries that are moving towards supply-side economics.  While the U.S. moves away from it.  Those emerging economies are doing well.  The U.S. is not.  It would appear, then, that a move towards supply-side economics is a move in the right direction.  And yet the pundits on the left continue to belittle the success of Reaganomics.  So you be the judge.  Let’s summarize Reaganomics as follows:

1.  Reduce Growth of Government spending.
2.  Reduce Income Tax and Capital Gains Tax.
3.  Reduce Government regulation.
4.  Control the money supply to reduce inflation.

Which president would you say followed these policies more?  Ronald Reagan?  Or Barack Obama?  The one who did would be the supply-sider.  And the one who didn’t would not.

The answer is clear.  President Obama is neither a conservative nor a student of the Austrian School of Economics (i.e., supply-side).  He’s a Keynesian.  His policies are Keynesians.  And Keynesians spend.  As demonstrated by his massive stimulus spending.  That failed to stimulate.   This economic train-wreck in the U.S. is a lesson in Keynesian economics.  Not supply-side economics. 

Keynesian Stimulus Spending is Wasted Money

Let’s take a closer look at Keynesian economics.  The theory that government can spend the economy into prosperity.  By looking at the Obama’s 2009 Stimulus.  One part of which was to expand broadband Internet into rural areas (see How Effective Was The 2009 Stimulus Program? by Nick Schulz posted 7/5/2011 on Forbes).

In an important and eye-opening new paper, Jeffrey Eisenach and Kevin Caves of Navigant Economics, a consulting firm, recently examined ARRA’s subsidization of rural broadband. The ARRA stimulus funds for broadband constitute “the largest Federal subsidies ever provided for broadband construction in the U.S.” An explicit goal of the program was to extend broadband access to homes currently without it.

Eisenach and Caves looked at three areas that received stimulus funds, in the form of loans and direct grants, to expand broadband access in Southwestern Montana, Northwestern Kansas, and Northeastern Minnesota. The median household income in these areas is between $40,100 and $50,900.  The median home prices are between $94,400 and $189,000.

So how much did it cost per unserved household to get them broadband access?  A whopping $349,234, or many multiples of household income, and significantly more than the cost of a home itself.

That’s a lot of money.  It would have been cheaper to buy these people a satellite Internet connection at their homes.  I’m not sure what it would cost, but I’m guessing it wouldn’t have cost more than their house.   

Sadly, it’s actually worse than that. Take the Montana project. The area is not in any meaningful sense unserved or even underserved. As many as seven broadband providers, including wireless, operate in the area. Only 1.5% of all households in the region had no wireline access. And if you include 3G wireless, there were only seven households in the Montana region that could be considered without access. So the cost of extending access in the Montana case comes to about $7 million for each additional household served.

Back in the 1980s there was an uproar over wasteful Pentagon spending. The Air Force spent $7,622 on a coffee maker and the Navy spent $640 per toilet seat. That’s extremely wasteful, but at least the Pentagon arguably needed coffee makers and toilet seats. The seven households in Montana for whom taxpayers just spent $7 million each to extend broadband access probably don’t even want it.

It just goes to show you that government can’t do anything well.  From buying coffee makers to buying toilet seats to providing broadband Internet access.  It just seems like they spend a whole lot more money than necessary.  Pulling more money out of the private economy.  And saddling the American people with more debt.  And for what?  What exactly did that stimulus do?  Not much.  Except make some broad Internet contractors very wealthy.  Which they no doubt are if they’re charging $7 million per installation.

This is Keynesian economics.  Wasteful government spending.  And a jobless economic recovery.  Which is only a recovery by the greatest stretch of the imagination.

Barbara Boxer Lies about Clinton Economy and Budget Surplus

And yet they still argue for more of the same.  In fact, they even go further.  They rewrite history.  And say that Bill Clinton’s tax hikes stimulated the economy and produced budget surpluses (see Barbara Boxer’s blatant rewriting of history by Glenn Kessler posted 7/1/2011 on The Washington Post).

“I think we ought to go back to the people and the party that was the only party and the only people to balance the budget in 40 years. I hate to break it to my Republican friends, but that is the Democratic Party. We are the ones who did it. We did it when Bill Clinton came into office. We did it after hard work. We did it after painful cuts. We did it with smart investments.”

— Sen. Barbara Boxer (D-Calif.), June 29, 2011

‘Investments’ is code for ‘tax hikes’.  As important as they are they still have to lie about them.  You’d think if tax hikes did everything she said they did that they wouldn’t lie.  They’d call them what they are.  Tax hikes.  And not investments.

Actually, neither Bill Clinton nor the Democrats meant to balance the budget in his 1993 budget deal.  Because before the 1994 midterm elections, he was still a liberal Democrat.  Don’t forget, they were still working on HillaryCare (the plan to nationalize U.S. health care) in 1993.

But here’s the important point: the Clinton plan was never intended to achieve a balanced budget. After the bill’s passage, the Congressional Budget Office estimated that the deficit would decline modestly — from $290 billion in 1992 to $200 billion in 1998. In the phrase of the era, there were still “deficits as far as the eye could see.”

He was still a big time Keynesian at this point.  And Keynesians spend money.  That’s why his projected deficits were as big as the Reagan deficits.  But then came the 1994 midterm elections.

Fast forward to 1995. The Democrats lost control of the House and the Senate, largely because of bruising budget battle. Clinton’s fiscal year 1996 budget again proposes $200 billion deficits every year for the next five years. So, again, the target in 1998 (when surpluses later emerged) was a deficit of $196 billion.

But Republicans immediately set the goal of achieving a balanced budget within seven years. After resisting for a few months, Clinton shocked many fellow Democrats by announcing that he, too, would embrace the idea of a balanced budget.

As The Washington Post editorial page put it at the time, Republicans had forced Clinton’s hand: “Mr. Clinton’s new position on the budget is much better than the old one. He should have taken it six months ago. The Republicans have driven him to say that he too wants, if not to balance the budget, at least to get the deficit into the neutral zone.”

The 1994 midterm elections were a huge vote of no confidence.  Which was a problem with the presidential election only 2 years away.  Enter Dick Morris.  Who pulled Clinton to the center.  Away from Big Government Keynesian spending.  Of course he had little choice with the Republicans in charge of both houses of Congress.  And then something happened.  He fell ass-backwards into some very opportune economic developments.

…the government ended up with a gusher of revenue that had little to do with Clinton’s 1993 budget deal:  capital-gains taxes from the run-up in the stock market, as well as taxes paid on stock options earned by technology executives. 

Clinton, in essence, was lucky to become president just as a revolution in computer and information technologies was unleashed.

From 1992 to 1997, CBO estimated, revenue increased at an annual average of 7.7 percent in nominal terms, or about 2.4 percentage points faster than the growth of the gross domestic product, the broadest measure of the economy. CBO Deputy Director James L. Blum in 1998 attributed only 1 percentage point of that extra tax revenue to the 1993 budget deal. The rest, he said, came from capital gains.

This is a very important point.  Where did that tax revenue come from that produced those surpluses?  Well, 1% came from the Clinton 1993 budget deal.  About 99% came from luck.  And the good luck just kept coming.

There were other factors as well, such as lower than expected health costs that reduced an expected drain on the budget. Clinton’s predecessor also had kicked in motion a huge decline in defense spending (which Clinton accelerated) and also had overseen a painful restructuring of the banking industry. Even a potential shock, such as the Asian financial crisis in 1997, brought the silver lining of lower oil prices that bolstered the U.S. economy.

The stars must have really aligned during the Clinton administration.  Because a lot of things well out of his control happened, giving him an extraordinary economy.  He truly fell ass-backwards into good times.  Which is why the Fact Checker basically calls Barbara Boxer a liar. 

Boxer literally wipes away any Republican contribution to the process — and also claims credit for creating 23 million jobs while ignoring broad historical changes in the U.S. economy that had little to do with inside-the-Beltway sausage-making. This is more than just spin; it is a rewriting of history that borders on the absurd.

Absurd indeed.  So is she lying?  Or is she just stupid?  It has to be one or the other.  As it must be for all of the other Democrats repeating this lie.

Stimulus Spending doesn’t Stimulate

Reagan’s supply-side policies posted some great economic numbers.  Keynesians point to the Clinton years as vindication for their policies.  But his economy had a lot more to do with the Republicans in Congress and dumb luck.  Barack Obama has outspent all Keynesian presidents to date and has the worst economy since the Great Depression

Even though the Great Recession has officially ended, they’re calling the recovery a jobless recovery.   Which should be comforting to those who are still unemployed.  The question is, of course, where are the jobs?  If government stimulus spending creates jobs, where are the jobs?

You can’t find them because they’re not there.  Because stimulus spending doesn’t stimulate.  It just makes a few people rich (like broadband Internet contractors in Montana).  Tax cuts stimulate.  And reducing government regulation stimulates.  Every time it’s tried.  In other words, supply-side economics stimulates.  Every time it’s tried.  And Keynesian economics fails every time it’s tried.  Including its latest failure under Barack Obama.

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Liberals are Exasperated by Republicans and their Responsible Governing

Posted by PITHOCRATES - July 2nd, 2011

If we can’t Afford Tax Cuts we can’t Afford more Spending

They’re still arguing about the budget.  And trying to strike a deal that will allow them to raise the debt limit.  Republicans are trying to get spending cuts from the Democrats.  The Democrats want to get the Republicans to say ‘yes’ to increasing taxes.  And President Obama is trying to broker a bipartisan deal where the Democrats get what they want.  And the Republicans let them get what they want (see Obama says ‘nothing can be off-limits’ in budget debate; Republicans say tax increases are by Associated Press posted 7/2/2011 on The Washington Post).

President Barack Obama said Saturday that “nothing can be off-limits” in the budget debate — even though Republicans have said tax increases are. The president said every tax break and federal program must come under scrutiny…

He also renewed his call for Congress to eliminate some tax breaks for the well-off as part of any agreement. Republicans want deep spending cuts without any tax increases while Obama and Democrats call for what they term a “balanced” approach. That means one that also includes new revenue in the form of higher taxes for some, though Democrats steer clear of using phrases like “tax increases” or “higher taxes.”

“Now, it would be nice if we could keep every tax break, but we can’t afford them,” Obama said. “Because if we choose to keep those tax breaks for millionaires and billionaires, or for hedge fund managers and corporate jet owners, or for oil and gas companies pulling in huge profits without our help — then we’ll have to make even deeper cuts somewhere else.”

Obama has a point.  The government can’t afford a lot of things.  So he should listen to his own advice.  And STOP spending so much.  It has a proven track record to cut deficits.  And it works every time.  Spending too much?  Well stop spending too much.  And presto, spending problem goes away.  Problem solved.  Without having to raise the debt limit.  Which would only make a bad situation worse.  Because if you’re spending too much spending more will only make your ‘spending too much’ problem worse.  Duh.  You don’t have to be an Ivy League trained economist to understand this.

Ignore the Man behind the Curtain

President Obama has had about enough of the Republicans’ obstructionism.  And their trying to govern responsibly.  Can’t the Republicans understand that he’s right?  And they’re wrong?  This representative government would be a whole lot easier if the Republicans would just shut up and do what they’re told.  To be good and mind their president (see Obama’s Risky Belittling Tactic by Lee Siegel posted 7/1/2011 on The Daily Beast).

The story of The One, the Messianic Figure, the Soulful Black Man Come to Redeem a Fallen America, the Quintessential Stranger Who Was Thus the Quintessential Figure of American Democracy—the thrilling, universal tale of Obama’s rise through a torn family with a world-wandering mother and an absent father had become tired and irrelevant. It was all used up.

Instead, you were left with the off-putting image of the dry, arrogant law professor, with his superior intellectual airs, that had occasionally appeared during the last presidential campaign. Back then, that unlovely side of the candidate was quickly eclipsed by The One’s universal tale. Now it has emerged as the only storyline the president can muster. Which means that Obama and the Democrats could be in big trouble.

I guess we should ignore the man behind the curtain.  For the president is no different that the Great and Powerful Oz.  More silly old man than messianic.  For he can play the role of philosopher king.  But he can’t be one.  And he sure doesn’t like when these young whippersnappers in the Republican Party play on his ideological lawn.

Or to frame it another way, imagine Obama as the right sees him, as a substitute teacher from another town who has no legitimacy in their classroom. He lectures, he scolds, he wants everyone to stay after school. He has no idea what the lives of his students are like: their parents looking for work; their early marriages and pregnancies and all the attendant difficulties and mishaps; the way they pour their frustrated ambitions into love and hope for their children. He sees them as kids who need the guidance of a grown-up. They see him as refusing to understand their grown-up problems.

So it is hardly surprising that so many of the current crop of Republican presidential hopefuls, or potential hopefuls, strike liberals as the equivalent of problem children. How many times have we read that Palin “didn’t do her homework” before a debate or a public appearance? Gingrich is portrayed as a juvenile delinquent. Herman Cain, we learn, is popular for speaking out of turn. With all her adopted children and her tragic pregnancy, Bachmann comes across like that teenage girl who dreamily draws hearts (and daggers) in her textbook while the teacher is talking. Even the more polished, informed, self-possessed Romney seems cursed with an Eddie Haskell air of insincerity and deceitfulness. “Hi, Ms. Obama! Don’t you look swell in that pretty new dress.”

Arrogant.  Condescending.  Professorial.  Elitist.  Ladies and gentlemen, I give you the president of the United States.  And his liberal base.

Tax Cuts are Recurring Stimulus

True liberals in America are only about 20% of the population.  But they have big mouths.  Or big bully pulpits.  So their politics seems more universally accepted than they really are.  Who are they?  College professors who live in a mystical fairyland outside the realm of reality (the college campus).  The guilty rich who’ve inherited their wealth.  Big Government politicians (liberal Democrats and RINO Republicans).  The mainstream media who yearn for Walter Cronkite celebrity.  Celebrities who haven’t a clue about economics, history or geopolitics but yearn to be seen as smart and enlightened.  (Just like those in the mainstream media who yearn for Walter Cronkite celebrity).  And most economists who bow down and worship John Maynard Keynes.  And his activist government policies to control the free market.  Because they’re smarter than the common, stupid masses.  At least they think they are.  Nay, in their minds they know they are.

Paul Krugman is a Keynesian.  And he likes to throw up a chart or graph on The New York Times to show how right he and Keynes are.  And how wrong the Keynesian-deniers are.  But it’s guys like him that Mark Twain had in mind when he said “figures don’t lie, but liars figure.”  For that’s something Krugman likes to do.  Use facts and figures to his advantage whenever he can.  No matter how wrong he is (see Cash Is Not the Problem by Paul Krugman posted 7/2/2011 on The New York Times).

These aren’t abstruse points. On the contrary, the fact that corporations aren’t investing as much as they could has become a major right-wing talking point, with repeated claims that companies are holding back because of political uncertainty. Actually, they’re holding back because they don’t see enough consumer demand — but in any case, cash is not the problem.

So it’s truly remarkable — an impressive case of doublethink — that the same people who decry the fact that firms and banks are sitting on cash insist that it’s totally vital that we give those firms and banks more cash, so that they can invest and create jobs.

Not investing as much as they could?  Give those firms and banks more money (by cutting taxes)?  Krugman is as much an arrogant, condescending, professorial elitist as Obama is.  I mean, who are they to deign to allow people to keep their own money?

Krugman is right about why they’re sitting on all that cash.  There is a lack of demand.  Because of the high unemployment and the depressing economic outlook.  But he’s wrong about the tax cuts.  As he always is.  As his type (Big Government Keynesians) always are.  They prefer federal stimulus spending.  Which always fails to stimulate.  Because it isn’t recurring.  Whereas tax cuts are.  Because they make bigger paychecks.  Week after week.  Whereas stimulus spending is more like a bonus check.  Once spent it’s gone.  So why would businesses invest in new capacity and hire more people for a temporary increase in consumer spending?  For after that stimulus is spent, what are they supposed to do then with all that excess capacity?

That’s why they’re sitting on all that cash.  Political uncertainty.  Especially about the government’s fiscal and regulatory policies.  Which determines what their costs will be.  And how much disposable cash consumers will have.  Because high taxes and costly regulations raise costs for businesses.  And prices for consumers.  Who ultimately always pay for the high cost of government.

The Laffer Curve gets the Last Laugh

Ronald Reagan wasn’t a Keynesian.  And he understood the power of tax cuts (see IBD’s Editorial: A Laffer Curve For Liberals posted 7/1/2011 on Investors.com).

Remember the left’s contempt for the Laffer Curve — which posited that certain tax cuts will pay for themselves by accelerating economic growth? Well, now they’re pushing their own version of voodoo economics.

Largely overlooked in the coverage of President Obama’s latest press conference was his call for another round of deficit-fueled stimulus spending as part of a debt reduction package.

Wait, what?  We can’t afford tax cuts but we can afford another round of deficit-fueled stimulus?  What kind of asinine logic is that?

Ronald Reagan based his economic policies on the Laffer Curve.  His Reaganomics cut tax rates.  The economy grew.  Federal tax receipts almost doubled.  Proving the Laffer Curve.  But because Congress spent money faster than Washington collected it, the deficit grew (which was a spending problem, not a revenue problem).  Because Big Government Keynesians hated that it worked, they belittled the policies as ‘trickle-down’ and ‘voodoo economics’.

That’s what the left’s favorite economist — Paul Krugman — argued in late 2009: “Spending more on recovery will lead to a stronger economy, both now and in the future — and a stronger economy means more government revenue.”

Krugman later wrote that “people like me have been hesitant to make this argument loudly, for fear of being cast as the left equivalent of Arthur Laffer.”

By spending more Krugman means that the government should spend more.  Tax and spend.  Borrow and spend.  Print and spend.  Just spend.  Run up huge deficits in the short term.  Because it will unleash a tsunami of economic activity that will rain money down on Washington.  Much like Reaganomics did with tax cuts.  And how has this worked?

Of course, this is the same Krugman who said that “the notion that tax cuts pay for themselves has no empirical support.”

Except there’s more evidence to support Laffer than Krugman. Reagan’s tax cuts helped power the ’80s boom, which eventually pushed down deficits. The cut in capital gains taxes under Clinton helped spark a market rally and a huge surge in tax revenues from investors.

And what do we have to show from Obama’s historic “pay for itself” stimulus spending spree? A recovery weaker than any since the Great Depression. A jobless rate that — two years after the recession ended — remains above 9%.  Three years of $1 trillion-plus deficits. A debt burden that’s climbed more than 40%. And no hope in sight of any of this getting much better.

Not well.  In fact, their policies have a track record of dismal failure.  But it’s never the fault of the policies.  It always because of some other misbehaving force.  Like employers who sit on piles of money instead of hiring.  Or consumers who sit on money instead of spending it with abandon.  For if they only would do what they’re supposed to do their policies would work.  So it’s not their fault.  It’s all these people who are just too stupid.

Apparently the people were smarter during the Eighties.  And the Nineties.  When there were economic booms.

Liberals are Arrogant, Condescending, Professorial Elitists

The problem with liberals is that they are arrogant, condescending, professorial elitists.  Whose idea of bipartisanship is for the Republicans to shut up and be their bitch.  They cannot conceive that they or their policies are wrong.  And when they are they blame everyone else.  Scolding American business and the American consumer for misbehaving.  They have had it up to here (hand under chin) with our impertinence and are this close (thumb and index finger about an inch apart) to taking away our toys.  And by toys I mean our wealth.  And our liberty.

The height of this audacity is their lecturing us on the irresponsibility of tax cuts while they argue for more spending.  That’s what the budget debate is all about.  To get the debt limit raised so they can spend more.  Talk about doublethink.  But this is what happens when your government is full of Keynesians.  And they listen to Keynesian economists.  They throw all reason out the window.  And double-down on bad ideology that has a track record of failure.  Because to do otherwise would diminish their power.  And return the government to the limited one envisioned by the Founding Fathers.  Which is something they could never have.

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Demand-Side Slump or Government caused Supply-Side Recession?

Posted by PITHOCRATES - June 4th, 2011

The Arrogance and Condescension of Liberal Elite Academics

The problem with liberal academics running the country is that they think like liberal academics.  They have no business experience.  But they know how to run businesses better than business owners who’ve been running businesses for years.  It’s the height of arrogance and condescension.  But these liberal elite academics don’t see people.  They see charts and grafts.  Which are religious icons to them.  Holy.  They accept them on faith.  They never question them.  And always make excuses for them when the policies they beget fail.  While pointing at successful policies with successful track records and calling them failures.  Because these policies are heretical.  And conservative.

Here is a liberal academic talking down to the American people with all-knowing condescension.  And if you want to know how the current administration thinks, all you have to do is read this arrogance and condescension (see Fatal Fatalism by Paul Krugman posted 6/4/2011 on The New York Times).

We are not, after all, suffering from supply-side problems…This is a demand-side slump; all we need to do is create more demand.

So why is this slump, like most slumps following financial crises, so protracted? Because the usual tools for pumping up demand have reached their limits. Normally we respond to demand-side slumps by cutting short-term nominal interest rates, which the Fed can move through open-market operations. But we now have severely depressed private demand thanks to the housing bust and the overhang of consumer debt, so even a zero rate isn’t low enough…

The answer seems obvious. We should be using fiscal stimulus; we should be using unconventional monetary policy, including raising the inflation target; we should be pursuing aggressive measures to reduce mortgage debt. Not doing these things means accepting huge waste and hardship.

But, say the serious people, there are risks to doing any of these things. Well, life is full of risks. But it’s simply crazy to put a higher weight on the possibility that the invisible bond vigilantes might manifest themselves, or the inflation monster emerge from its secret cave, over the continuing reality of enormous human and economic damage from doing nothing.

The housing bubble was created by too much unconventional monetary policy.  Money was dirt cheap to borrow.  And people borrowed.  To buy houses they couldn’t afford.  With subprime mortgages.  That they defaulted on when interest rates went up.  Causing the subprime mortgage crisis.  Which happens when you stimulate demand beyond normal market demand.  Why?  Because you don’t create healthy economic growth with easy money.  You create bubbles.

The Fed has done too much.  All their easy monetary policy to stimulate the economy has only devalued the dollar.  Making an important and scarce commodity more costly.  Because the world prices this most important of all commodities in U.S. dollars.  Oil.  Which makes diesel and gasoline.  The energy we use to bring food to market.  Which is why prices are up.  Across the board.  Especially food and energy.  That hit consumers the hardest.  Because of inflation.  Caused by monetary policy.  Which has failed to produce jobs.  Lower the misery index.  Or end the recession.

Their answer?  More of the same.  It’s always more of the same.  Jimmy Carter‘s ‘more of the same’ did not end the malaise of his stagflationRonald Reagan‘s economic policies did.  His conservative, supply-side economic policies.  That created real economic growth.  And doubled tax receipts to boot.  But his policies were heretical.  They went against everything liberals hold sacred.  Their Keynesian charts and graphs.  That look at business activity as an aggregate thing.  And not as people.  So liberals attack the success of Reaganomics.  Despite its soaring success.

You see, Reaganomics created jobs.  It made a favorable business climate.  So business people could do what they know how to do.  Create business. Expand business.  Make more things.  And create jobs.  Which drives all consumer spending.  Which makes up over 70% of the economy.  Because a consumer needs a job to spend.  And this kind of spending will sustain itself.  Unlike Keynesian tweaking.  Which is by definition only temporary.  To fill the gap until the private market restores itself.  Which makes Keynesian economics itself a paradox.  Using policies that hinder the private market to stimulate the private market.

The Inflation Monster is out and Squeezing Consumers

And while some will mock conservatives about letting loose the inflation monster from its secret cave, the inflation monster is already out.  And wreaking consumer havoc (see Tightening our belts: Americans lower income expectations by John Melloy, CNBC, posted 6/4/2011 on USA Today).

With consumers squeezed on both sides by stagnant wages and rising prices, the number who believe they will bring home more money one year from now is at its lowest in 25 years, according to analysis of survey data by Goldman Sachs.

The inflation monster has devalued the dollar.  And when you devalue the dollar you need more of them to buy the same amount of things you did before.  Because, thanks to inflation, those things have higher prices.  Consumers have to pay these higher prices.  Leaving them less money to spend.  And their employers have to pay them.  Leaving them less money to spend on wages.  So few people think they will bring more money home next year.  Because things are so bad this year.

A typical recovery pattern goes like this: stock market bottoms, economic growth bottoms and then hiring and wage increases return. What’s unique and scary about this recovery is that the last piece of the recovery is not there.

For a simple reason.  Intervention.  It’s all that Keynesian tweaking.  Like that trillion dollar stimulus bill.  If it wasn’t for all that government spending the economy may have actually recovered by now.  Now we have recession and inflation.  Thanks, liberal elite academics.

In the 2001 recession, the country lost 2 percent of jobs from peak employment and then made that back in a 48- month cycle, according to data from money management firm Trutina Financial. In 1990, the jobs lost during the recession were recovered in 30 months.

Right now, about 38 months from peak employment during the housing boom, there are still six percent fewer jobs out there. Making up that amount of jobs in 10 months or less would be unprecedented, if not impossible.

“The crawl out of this economic ditch is going to be long and slow,” said Patty Edwards, chief investment officer at Trutina. “Even if they’re employed, many consumers aren’t earnings what they were two years ago, either because they’re in lower-paying jobs or not getting as many hours.”

Jobs are everything.  And to create jobs you have to understand people.  Not look at sacred charts and graphs.  You have to understand what motivates the individual.  Not hypothesize about what will move aggregate curves on a graph.  Of course, liberal elite academics chose not to do this.  Because they are gods.  Infallible.  Who live in a world where paradoxes exist.  And can deny reality at will.

Small Business sees the Government as Adversarial

If jobs are everything, then why won’t there just be more jobs?  You’d think the gods could make them.  And no doubt are wrathful and miffed that their policies haven’t made them.  All because of those dirty, greedy, little business owners.  Heretics.  Sitting on cash instead of using it to hire people. 

Of course, the greatest job creators out there are small business owners.  Who don’t have big legal staffs or legions of tax accountants.  And these Keynesian polices are just overwhelming them.  As related in a conversation on a plane with a Yale law professor.  Who asked point blank why this small business owner didn’t hire more people (see Carter: Economic Stagnation Explained, at 30,000 Feet by Stephen L. Carter posted 5/26/2011 on Bloomberg).

“Because I don’t know how much it will cost,” he explains. “How can I hire new workers today, when I don’t know how much they will cost me tomorrow?”

He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost.

It’s interesting listening to a person.  Because you learn something different than you do from moving a curve on a graph.

“I don’t understand why Washington does this to us,” he resumes. By “us,” he means people who run businesses of less- than-Fortune-500 size. He tells me that it doesn’t much matter which party is in office. Every change of power means a whole new set of rules to which he and those like him must respond. ‘‘I don’t understand,” he continues, “why Washington won’t just get out of our way and let us hire.”

Get out of our way?  And let us hire?  You mean they would be hiring more people if it wasn’t for all the policies encouraging them to hire more people?  Interesting.  So what should government do?  How should they be in this business-government relationship?

“Invisible,” he says. “I know there are things the government has to do. But they need to find a way to do them without people like me having to bump into a new regulation every time we turn a corner.” He reflects for a moment, then finds the analogy he seeks. “Government should act like my assistant, not my boss.”

In other words, government shouldn’t tell business owners how to better run their businesses.  Because few in government have ever run a business.  They need to stop acting as the authority on something when those they try to help know more than they do.  This conversation gave this Yale law professor some food for thought.

On the way to my connection, I ponder. As an academic with an interest in policy, I tend to see businesses as abstractions, fitting into a theory or a data set. Most policy makers do the same. We rarely encounter the simple human face of the less- than-giant businesses we constantly extol. And when they refuse to hire, we would often rather go on television and call them greedy than sit and talk to them about their challenges.

Recessions have complex causes, but, as the man on the aisle reminded me, we do nothing to make things better when the companies on which we rely see Washington as adversary rather than partner.

And there it is.  Small business sees the government as adversarial.  And there is only one reason why they do.  Because it’s true.

Fiscal Stimulus is the Problem

This is not a demand-side slump.  It’s a supply-side problem.  Caused by the adversarial relationship between business and government.  Otherwise a trillion dollar in stimulus spending would have done something.  Other than give us inflation. 

Fiscal stimulus isn’t the solution.  It’s the problem.  And we need to stop trying to fix this problem with what gave us the problem.  Because they aren’t gods.  And we are individuals.  Not an aggregate to hypothesize about for fun and games.    

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