Free Trade, the Corn Laws and The Economist

Posted by PITHOCRATES - September 8th, 2013

Week in Review

Today the political left attacks capitalism as being unfair.  And mean.  Whereas they laud government intervention into the free market.  To level the playing field.  And to redistribute income.  To help those who can’t be as successful as others.  They support unions.  And oppose free trade.  Because free trade lowers prices for consumers.  By breaking up monopolies.  And giving them choice.  Free trade is an essential element of capitalism.  But the fight to make people’s lives better with free trade wasn’t easy.  As people who got rich with government-protected high prices opposed free trade (see Why did The Economist favour free trade? by C.R. posted 9/6/2013 on The Economist).

IN NINETEENTH century Europe and America, debates over whether tariffs or free trade produced the most economic growth dominated the political scene. Up until the early 1840s, protection appeared to be winning the argument. In Britain, high tariffs were imposed on agricultural imports in 1819, by legislation known as the Corn Laws. The ideas of Friedrich List, a German economist who argued that tariffs boosted industrial development through the protection of infant industries, were gaining ground, particularly in the United States. One Pennsylvanian legislator even joked in 1833 that the dictionary definition of man should be changed to “an animal that makes tariff speeches” so frequently were they heard.

Against this atmosphere, James Wilson founded The Economist in 1843 to campaign for free trade. His first target was to repeal the Corns Laws in Britain. He argued:

They are, in fact, laws passed by the seller to compel the buyer to give him more for his article than it is worth. They are laws enacted by the noble shopkeepers who rule us, to compel the nation to deal at their shop alone.”

The UAW got very generous contracts with the Big Three during the Fifties and the Sixties.  Raising the price of cars.  Which wasn’t a problem when they were the only ones making cars.  But then came the imports.  Which told the people how much more they were paying than these articles were worth.  And started buying the imports.  As they did those generous pay and benefit packages became more difficult to pay.  So the Big Three lobbied for tariffs on those less costly imports.  And got them.  Raising the price of the imports.  Forcing Americans to deal with the Big Three alone.  And buy their more costly cars.

More people bought cars than made them, though.  And the people who made the cars were better paid than most Americans.  So these tariffs forced poorer people to spend more on a car leaving them less for their families.  So richer people could have more.  This is what tariffs do.  They allow fewer people to have more.  While more people have to do with less.  So fewer buy more.  While more buy less.  Because there are more people who buy cars than make them these tariffs, then, reduce economic activity.  And because the Big Three didn’t have to figure out how to give more for less to their customers they didn’t.  Giving their customers ‘rust buckets’ in the Seventies.  Something else that tariffs do.  Lead to inferior goods.  Because if the government forces people to buy from you then the quality of what you sell doesn’t matter.

Wilson believed that protectionism caused “war among the material interests of the world”, in other words, war between nations and classes. A high tariff regime was no longer economically “productive”; Britain was stuck in an economic depression in the early 1840s. In contrast, free trade produced “abundance and employment”. It was appropriate for Britain’s economy where “a large proportion of the population and property depended on commerce and industry alone”. On the other hand, List’s ideas about protection were dismissed as unnecessary “swaddling clothes” for a mature economy, such as Britain’s.

The Economist’s early views on free trade were strongly influenced by the classical economists Adam Smith and David Ricardo, as Ruth Dudley Edwards, a historian, has pointed out. Wilson, like Smith, realised that trade was a two way exchange. Countries needed to “increase imports to increase exports” to boost economic growth. Consumers, Smith argued in the Wealth of Nations, should buy products from where they were cheapest. All protection did was create monopolies, which were “a great enemy to good management”. Ricardo took Smith’s ideas further, arguing that all countries benefit from free trade by producing what they were best at relative to other countries.

That’s what the Big Three wanted.  A monopoly on cars sold in America.  And there is only one way to get one.  The government has to create them.  Hence the Big Three’s request for tariff protection.

David Ricardo’s comparative advantage said nations should make what they can make best and trade for those things they can’t.  For example, if two countries can both make one thing but one can do so at lower costs they can make more of them for the same costs.  Giving them a larger surplus to trade for other things.  While the other nation will consume more resources to build the same quantity leaving less to make the other things they need.  While having fewer things available for export.  So if you try to make things you can’t make efficiently you end up consuming more resources to have less.  Whereas the nation that makes only what it can make best ends up consuming fewer resources that are then available to make other things.  And they have more things to trade.  Leading to a higher standard of living.  And if their trading partners do likewise they, too, experience a higher standard of living.

Free trade leads to greater economic activity.  Which made Britain wealthy.  Allowing them to extend their empire for another 70 years or so.  Despite the warnings of the rich landowners who said repealing the Corn Laws would cause harm.  Instead, repealing the Corn Laws led to greater economic activity.  And less costly food. Allowing people to feed their families more easily.  The only harm suffered was to the profits of the big landowners.  Who lost their monopoly.  And could no longer charge more than their food was worth.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , ,

Social Security Receipts, Outlays and Surplus 1940-2012

Posted by PITHOCRATES - February 19th, 2013

History 101

Social Security is going Bankrupt because of an Aging Population, Inflation and Untrustworthy Politicians

Social Security introduced the era of Big Government.  When the Roosevelt administration passed it into law it faced fierce opposition.  For it wasn’t the job of the federal government to provide a pension.  If it was the Founding Fathers would have included it in the Constitution.  But they didn’t.  Thanks to the Great Depression, though, a serious crisis FDR didn’t let go to waste, FDR was able to change America.  By taking the federal government beyond the limits of the Constitution.

The fear was that it would grow into a massive program requiring more and more taxes to support it.  Which the FDR administration refuted in a 1936 pamphlet (see The 1936 Government Pamphlet on Social Security).

…beginning in 1949, twelve years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.

Of course, that wasn’t true.  It was either a lie.  Or a disbelief that anyone would ever decouple the dollar from gold.  Or wishful thinking that we can trust politicians.  Whatever the reason the Social Security tax rate is a long way from that 3% today.  And the maximum earnings amount is a lot higher than $3,000.  But despite the tax rate and the maximum earnings amount soaring from these promised lows it’s still not enough.  For Social Security is struggling to avoid bankruptcy in the near future.  Because it has become a massive program requiring more and more taxes to support it.

Social Security is suffering from three major problems.  The first is an aging population (fewer people entering the work force to pay for the greater number of people leaving the workforce).  The second is inflation.  And the third is that politicians manage it.  Who just can’t control themselves around big piles of money.

The Social Security Surplus increased in the Nineties thanks to the Peace Dividend, Japan’s Lost Decade and the Dot-Com Boom

Social Security is off-budget.  Employers and employees pay into the program to provide for the program’s benefits.  These are dedicated taxes.  They are only to pay for Social Security benefits.  That is why it is off-budget.  They don’t mingle Social Security taxes with all the other taxes the government collects.  To pay for all the things in the federal budget.  Technically, those taxes are supposed to go into a retirement account that grows with interest.  And this big, growing pile of money is supposed to pay the benefits.  But in reality it doesn’t work this way.  The government collects taxes.  From these taxes they pay current benefits.  And anything left over, the Social Security surplus, goes into the Social Security Trust Fund.  We can see this graphically if we plot receipts, outlays and the surplus (see Table 2.1—RECEIPTS BY SOURCE: 1934–2017 and Table 3.1—OUTLAYS BY SUPERFUNCTION AND FUNCTION: 1940–2017 at FISCAL YEAR 2013 HISTORICAL TABLES).

Social Security Receipts Outlays Surplus 1940-2012

For the first 30 years or so of this program it hardly made a dent in our lives.  Small amounts were going in.  Small amounts were going out.  And small amounts were going into the trust fund.  Then a lot of people started retiring.  Just as birth control and abortion changed the family size.  And President Nixon decoupled the dollar from gold.  Allowing them to print money like never before.  Which, of course, depreciated the dollar.  This is why receipts and outlays started trending up after 1971 (when Nixon decoupled the dollar from gold).  To get a better look let’s zoom in and look at the years from 1970-2012.

Social Security Receipts Outlays Surplus 1970-2012

The Seventies were a horrible time economically.  As the government went all in with Keynesian economics.  Which resulted with high inflation and high unemployment.  And stagnant economic growth.  Stagflation.  And Social Security was in trouble.  Receipts were greater than outlays.  But not by very much.  Receipts and outlays may have been trending up but the surplus was pretty flat.  Until President Reagan and the Democrat Congress fixed Social Security to avoid bankruptcy.  After 1983 receipts trended up greater than outlays.  Which caused the surplus to trend up.  Thus saving Social Security.  For awhile.  Now let’s zoom in further to the years 1990-2012 to see what happened in the last two decades.

Social Security Receipts Outlays Surplus 1990-2012

President Reagan won the Cold War by spending more on defense than the Soviets could ever match.  At least not without starving her people to death.  And the Strategic Defense Initiative (aka Star Wars) was the straw that broke the camel’s back.  In 1991 the Soviet Union was no more.  Creating a huge peace dividend for President Clinton.  Which coincided with the dot-com boom.  And Japan’s Lost Decade (Japan’s economic woes were America’s prosperity).  Making the Nineties a very good time economically.  And that healthy economic activity translated into a nice uptrend in the Social Security surplus.  However, low interest rates and irrational exuberance fed the dot-com boom.  It was not real economic growth.  It was a bubble.  And when it burst it gave George W. Bush one painful recession at the start of his presidency.  Which was compounded by the tragedy of 9/11.  Causing a fall in economic activity.  Which caused Social Security receipts to fall.  While outlays continued to grow.  Causing a decline in the Social Security surplus.  Once again cuts in tax rates restored economic activity.  And the Social Security surplus.  Which continued until another bubble burst.  This one was a housing bubble.  Caused by President Clinton with his Policy Statement on Discrimination in Lending.  Where his justice department pressured lenders to qualify the unqualified.  And when the housing bubble burst into the Subprime Mortgage Crisis giving us the Great Recession receipts fell while outlays increased.  Sending the surplus into a freefall.

Social Security is Doomed to Fail because you just can’t Trust Politicians around Great Big Piles of Money

There is both a Social Security tax rate.  And a maximum amount of income to tax.  Both of which they have had to increase to keep up with inflation.  To make up for that aging population.  And to offset the corrupting influence of politicians around big piles of money.  And contrary to that 1936 pamphlet those tax rates started rising early.  And often (see Historical Social Security Tax Rates).

Social Security Surplus and Tax Rate

The Social Security tax rate rose as high as 12.4%.  Which is a 313% increase from the maximum amount guaranteed in that 1936 pamphlet.  And this great upward trend began in the Fifties.  Continuing through the Sixties.  In fact most of the increases came before Nixon decoupled the dollar from gold.  Showing what a horrible job the government actuaries did in crunching the numbers for this program.  As it turned into exactly what the opponents said it would.  A massive program requiring more and more taxes to support it.  And President Obama reducing the tax rate from 12.4% to 10.4% didn’t help the surplus any.  Or the solvency of Social Security.

Social Security Surplus and Maximum Earnings

While the tax rate began rising in the Fifties the maximum taxable earnings amount didn’t.  This amount was pretty flat and able to produce a surplus until 1971.  When President Nixon unleashed the inflation monster by decoupling the dollar from gold.  And the only way to produce a surplus after that was by continuously increasing the maximum earnings amount.  Further proving what a horrible job the government actuaries did in crunching the numbers for this program.  But why are they projecting Social Security will go bankrupt after raising both the tax rate and the maximum taxable earnings amount?  For despite all of the ups and downs there has been a surplus throughout the life of the program.  Some seventy years of a surplus and the miracle of compound interest should have built up quite a nest egg in the Social Security Trust Fund.  But it hasn’t.  Why?  Well, we can see what it could have been.  If we take each year’s surplus (starting in 1940) and add it to an account earning interest compounded annually at an interest rate of 3% through 1971 and 6% after 1971 (to account for inflation) it would look something like this.

Social Security Surplus Earning Compound Interest

Note that these amounts are in millions of dollars.  So at the end of 2012 the ending balance in the trust fund would be $16.5 trillion.  Which is large enough to wipe out the entire federal debt.  From 1980 through 2008 the surplus grew on average 8% each year.  If we assume this growth through 2050 that would take the trust fund to $184.5 trillion.  In 2075 it would be $960.9 trillion.  In 2076 it would be $1.03 quadrillion.  Or $1,027.3 trillion.  With this phenomenal growth based on a realistic 6% interest rate why is Social Security going bankrupt?

Because there isn’t a big pile of money in the Social Security Trust Fund earning compound interest.  The money goes in.  And the government takes it out.  Leaving behind treasury securities.  IOUs.  They raid the Social Security trust fund to pay for other on-budget government expenditures.  With the off-budget surplus.  Hiding the true size of the federal deficit.  And putting Social Security on the path to bankruptcy.  Because you can’t loan money to yourself.  You can only take money meant for one thing and spend it on another.  Leaving that first thing unpaid.  This is Social Security.  And why it was doomed to fail from the beginning.  Because you just can’t trust politicians around great big piles of money.

 www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , ,

Scott Walker turns Deficit into Surplus without any Layoffs while Los Angeles Furloughs Teachers

Posted by PITHOCRATES - June 10th, 2012

Week in Review

Los Angeles turns to furloughs to delay layoffs.  Betting everything on yet another tax increase this November (see Los Angeles teachers and school district reach pact to spare jobs by Howard Blume posted 6/9/2012 on the Los Angeles Times).

The Los Angeles school district and the teachers union reached a tentative agreement Friday that would prevent thousands of layoffs in exchange for 10 furlough days, which would shorten the school year by a week.

Under the accord, teachers would lose pay for five instructional days plus four holidays and one training day, equivalent to about a 5% salary cut…

If voters turn down a tax increase for schools, L.A. Unified’s budget woes would worsen considerably, the superintendent said. The equivalent of three additional weeks of school would have to be sacrificed, Deasy said. A typical school year is 180 days…

If the governor’s tax initiative passes, union officials said any additional money must go toward reducing the number of furlough days. And if teachers take the furlough days and the district ends up with a year-end surplus, teachers would be reimbursed for the pay cut, the union said.

More than 9,000 teachers had faced being laid off as of June 30…

This year’s crisis followed a familiar recession-era pattern. In 2008, the district closed a $427-million deficit; in 2009, $838 million; in 2010, $620 million; in 2011, $408 million. In all nearly 8,000 employees were laid off over the last four years; many teachers have since been rehired or used as substitutes.

Scott Walker didn’t furlough or lay off any teachers in Wisconsin.  They all kept their jobs by pitching in a little more for their benefits.  Amazing how just that can turn a deficit into a surplus.

This brings us to what’s missing in this article.  Pensions and health care benefits.  Which have to be the reason for all of those deficits.  Because public sector pensions and health care benefits are busting budgets in cities and states throughout the nation.  Especially for those retirees.  Which is why in the private sector people don’t get pensions anymore.  They save for their retirement in a 401(k).  And pay a large portion of their health care benefits.  An alien concept to those in the public sector.  But one they will soon learn.  Because the people are tired of sacrificing their lives to pay more taxes to support a privileged class who can retire earlier.  And enjoy more generous benefits in their retirement while they work well into their 60s to pay for it.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , ,