Sunday, February 22, 2009

Our Share The Wealth Charlatans

I just finished re-reading Henry Hazlitt's "Economics in One Lesson". The book is timeless, and except for the style of writing, one would think that it was written as a commentary on the many problems we face today. Have a look, and you'll find the real solutions to our economic woes aren't the ones that are being offered today.

It exposes our politicians as the "Share the Wealth Charlatans" they truly are. Their latest endeavor to conjure up greater demand in the economy with wasteful spending, under the guise of stimulus, is a prime example. A massive, yet ineffective spending bill produced in haste at a critical point in our economy, when what we truly need are economic policies that are Pro-Growth. Governments don't create jobs, only expanding economies do.

According to the author, politicians don't understand that Supply and Demand are two sides of the same coin, and that it is Supply that creates Demand! The author correctly states, "The supply of the thing they make is all that people have, in fact, to offer in exchange for the things they want".

What our economy needs to do now is expand. In order for that to happen we need to provide incentives for existing businesses to increase production, and for entrepreneurs to start and grow new enterprises. The benefits of Employment always beat unemployment benefits hands down. Sadly, there is next to nothing in this largest ever government plan that could possibly be seen as encouraging business to expand production and hire additional employees. The key to this economic recovery, as all others before it, will only be found on the Supply Side of the equation.

Are we supposed to believe that in a trillion dollar stimulus bill there was no room at all to reduce marginal tax rates on individuals and corporations in order to reward their hard work and efforts? The same folks who scream that wages for the middle class have not risen fail to make the connection that it is greater capital investment driving productivity that allows wages to rise. These class warriors see the capital gains tax as a club with which to pummel the employer class for it's success. Yet it is the very workers they claim to represent who take a beating when investors refuse to risk their capital, because the rules have been stacked against them. Less capital equals lower productivity, stifling both job creation and wage increases. No Pro Growth policies allowed, just isn't a winning slogan!

Another theme developed in the book is the propensity of politicians to speak to only one side of an argument. They speak only of the positive effects their legislation will have on the group that they are currying favor with. Never do they address the effects their program will have on the rest of us. We have been told over and over again how the stimulus package will save jobs for teachers, firemen, police officers and state workers, yet I don't recall the President ever mentioning the CBO's warning that the spending bill would negatively impact the economy and the rest of us for years to come. The cost side is what you never hear about. Yes, we all know what the price of the stimulus bill is, a $1 trillion dollars give or take. There is precious little discussion, however, about the real cost to our economy that diverting this enormous amount of capital, which otherwise would have been allocated towards profitable endeavors by the free market. Instead, it will now be directed by politicians with an eye on reelection.

We now have another new program to bailout people who are not in foreclosure, but who soon might be? The same one- sided scare tactics are being used to help try and sell it. We are now being told that if even one home in your neighborhood goes into foreclosure, it will reduce the value of every other home in that neighborhood. With the failure rate of these types of programs near 60%, what is their point? Better yet, what is the other side of the argument that we are not hearing? Person A lent money to Person B , who freely entered into a transaction to benefit himself. Person B now is unhappy with the outcome of his transaction, and wants to renegotiate. It's a little late, don't ya think? The government wants to enable judges to cram down mortgages, which simply means that person B pays Person A back less than what he borrowed and at a reduced rate of interest. If this wasn't sad it would be funny, because it is being done at the same time banks are being excoriated for not lending! Can you blame them?

A very elementary idea that our politicians have forgotten, or more likely never learned is the following: One occupation can expand only at the expense of all the others! They never reflect on the idea that their government directed spending plans can only occur by denying existing industries and start up enterprises the capital and labor needed for them to expand or begin production.

We have come through a period of time characterized by the love of one's house, but has McMansion mania increased prosperity? Apparently not, or the problems we face today would not be joblessness and foreclosure. Why then does the government continue to direct additional resources to a sector of the economy that has already seen massive over- investment? If "investing" in our houses were truly the path to prosperity, we should be in economic nirvana considering the vast resources that have been poured into creating more and bigger homes over this past decade. I think rather than additional programs to aid housing in the hopes that it will lead us out of this recession, it's time to toss in the towel and admit what a terrible failure the government subsidization of home ownership has been.

The government cannot change the laws of economics. Home prices will continue to fall until they reach a market clearing level, with or without these unworkable government handouts. If we let the market work, we will be out of this mess sooner rather than later, and without the massive amounts of additional debt these programs will entail.

Sunday, February 8, 2009

The Heads You Lose Tails They Win Stimulus Plan

Even the people promoting this Massive Government spending spree don't have anything good to say about it. I watched "This Week with George Stephanopolus", and heard the former Secretary of Labor for the Clinton Administration and a proponent of the "Stimulus Bill", Robert Reich, say the following about the bill after chastising Republicans for their lack of bipartisanship in helping to pass it:

"They [ Republicans] realize in two years even with a Stimulus, even with a Big Bank bailout the economy is very unlikely to be better than it is today. If you don't have a stimulus it's going to be much worse."

My first thought was to wonder why the Democrats wouldn't want all the credit for this masterful legislation that is going to save us from the certain doom that they tell us is surely heading our way? I thought about what he said, and replayed the segment again just to make sure of what I had heard him say. The Democrats are telling us that we must pass the Stimulus, because if we do then things will stay about the same for the next two years and if we don't we are all doomed! So far I wasn't sold on his line of reasoning for passing this boondoggle of a bill. Maybe it would improve. I hoped so.

But then he said:

"We can not underestimate how bad the economy is right now, it is falling off a cliff, I mean if there is ever a time for bi-partisanship, people joining together and saying we don't know if we got the right answer but we got to do something and this looks like the right direction, it is absolutely now. When I said before that by midterm elections we are not going to see an economy that is better than now I mean not that the stimulus program will have failed but that even if the stimulus succeeds it will not actually kick in... it will not get the economy better than it is now... without the stimulus the economy could be far worse than it is now."

So Mr. Reich is saying that after borrowing a Trillion dollars to spend on a series of programs to stimulate the economy, the best we can hope for by the mid term elections in November of 2010 is for the economy to be falling off a cliff. Was that meant to reassure me ?

Here is where he tries to play economist trotting out his best "Keynesian Bond Illusion" speech:

"We know that the real problem right now on the demand side of the equation is that businesses and individual consumers are not buying. That is rational they are not buying because they don't have the money and they don't want to go deeper into debt. But if they don't buy, government is the purchaser of last resort. Now that is old fashioned Keynesianism, but it is correct for today."

Here he is saying that businesses and consumers are being rational by not borrowing money and going further into debt in order to support consumption. Evidently, when people act rationally it is time for the government not to! So now it's the governments turn to act irrationally, borrow money, go deeper into debt and spend it because consumers aren't. I'm still not persuaded by his line of logic . He continues on:

"I'll give you two reasons Because we tried a little bit of that last spring with that tax rebate and it turns out that people rationally paid down their debts and they saved and that's good for the individual but that doesn't get spending out there, that doesn't create jobs."

So again he says when the people are rational, rebates don't work and the government needs to step in and be irrational for them. If Jay Leno said this we'd all know he was joking, but when Robert Reich says this it is serious government policy. I guess it's all in the delivery! To me it sounds as though he is making an argument for removal of the rebates and credits from this bill.

Here is what the guy who is a heartbeat away from the Presidency had this to say about the Stimulus Bill. Notice it is chock full of escape routes in case it fails.
I wish he would just go into hiding somewhere, and I'm willing to bet you that Obama wishes the same too! Joe Biden, in a speech the other day, said the following:

" You know if we do everything right, if we do it with absolute certainty, if we stand up there and make really tough decisions, there is still a 30% chance that we are going to get it wrong."

What are the odds that the government is going to get everything right? When do they make any tough decisions? What surprises me the most is that politicians, who are usually so certain about everything, aren't the least bit sure about the effects that over a trillion dollars of additional spending will have on the economy. If they don't do everything right that means the odds that they are going to get it wrong will go up. Maybe there will be a 50-50 shot that they get it right? I think it's way past time for a reality check when our Leaders are telling us they must borrow and spend a $1,000,000,000,000.00, and the odds of them getting it right are only as good as a coin toss or worse. This sounds to me like heads I lose, tails they win !!!

Sunday, February 1, 2009

Truer Words Were Never Spoken

But it Takes More than Rhetoric to Lead a Country!

“Taxes are paid in the sweat of every man who labors because they are a burden on production and are paid through production. If those taxes are excessive, they are reflected in idle factories, in tax sold farms , in hordes of hungry people, tramping the streets and seeking jobs in vain. Our workers may never see a tax bill, but they pay. They pay in deductions from wages, in increased cost of what they buy, or as now in broad unemployment through out the land. There is not an unemployed man, there is not a struggling farmer, whose interest in this subject is not direct and vital. It comes home to everyone of us.”

This guy or gal knew their stuff! They nailed it! They knew that higher taxes act as a wedge, increasing the price of goods and services. They saw that as this wedge increased, it pushed buyers and sellers further apart until transactions that normally would have been concluded, failed. They saw that the solution to unemployment and idle factories was to reduce the burden that government had placed on business by reducing taxes. They saw that this would inure to everyone's benefit.

Who was the great man or woman who spoke these words? Was it Ronald Reagan or Margaret Thatcher? No. You say it had to be someone with a much better grasp of how to solve the economic problems we are encountering. If you are guessing Barack Obama, you're still wrong. I'll give you all the guesses you want and you'll never guess who spoke these words and when, so I might as well tell you. First, lets talk a little bit about the idea behind these words .

This wasn't an original thought on his or her part, it was something he or she had learned from someone before him or her. People knew the burden that taxes and regulations placed on the individual, so who was it that imparted such wisdom on him? Was it the Chinese Philosopher Confucius who lived 2,400 years before him? When confronted with similar problems, Confucius had said nearly the same thing. A US President and a Chinese philosopher on the same economic page? I can't believe it, you say. Here is how Confucius did say it:

Duke Ai asked asked Yu Zo : It has been a year of famine and there are not enough revenues to run the state. What should I do ?

Zo said “ Why can't you use a 10 percent tax?

The Duke answered : I can't even get by on a 20 percent tax, how am I going to do it on 10 percent?

Zo said , “If the people have enough what Prince can be in want? If the people are in want how can the Prince be satisfied”

- Analects of Confucius (12:9)

Maybe it came from the works of the 14th Century Muslim philosopher, scholar and economist IBN-Khaldun, who wrote the following about taxes and regulations:

In the early stages of the state , taxes are light in their incidence , but fetch in a large revenue; in the later stages the incidence of taxation increases while the aggregate revenue falls off. Now where taxes and impost are light, private individuals are encouraged to engage actively in business: enterprise develops, because men feel it worth their while, in view of the small share of their profits which they have to give up in the form of taxation. And as business prospers ... the total yield of taxation grows. From this you must understand that the most important factor making for business prosperity is to lighten as much as possible the burden of taxation

Perhaps the writings of Jean-Baptiste Say,were the origin of his thinking :

A tax is not productive to the public exchequer in the proportion to it's ratio[rate] ... it had become sort of apothegm, that two and two do not make four in the arithmetic of finance. Excessive taxation is a kind of suicide, whether laid upon objects of necessity, or upon those of luxury.

Were it not almost self evident, this principle might be illustrated by abundant examples of the profit the state derives from a moderate scale of taxation, where it is sufficiently awake to it's own interests.

The idea may have been copied from another President, who saw it as a way to increase production after the end of the war. Here is what he said :

An expanding prosperity requires that the largest possible amount of surplus income should be invested in productive enterprise under the direction of the best personal ability. This will not be done if if the rewards of such action are very largely taken away by taxation. If we had a tax whereby on the 1st working day the government took 5 percent of your wages, on the second day 10 percent, on the third day 20 percent, on the fourth day 30 percent, on the fifth day 50 percent, and on the sixth day 60 percent, how many of you would continue to work on the last two days of the week?

No, it wasn't Richard Nixon. He was all about higher taxes and price controls (regulation). I was there and can tell you it didn't work. Those words were spoken by Calvin Coolidge as a way to reinvigorate the economy in 1924.

Okay, it must have been learned from Art Laffer, who along with Robert Mundell and Jude Wanniski resuscitated Classical Economics in the 1970's and provided the intellectual underpinnings of the Reagan Revolution, right? Wrong! Here is a hint: When these words were spoken Art Laffer hadn't been born yet. But here is what Arthur Laffer did say about taxes:

The theory is simply saying that at these higher tax rates (“in the prohibitive range”) there is a disincentive to make more money, which will result in lower revenues from taxes. In the end, it's really all about incentives to work, invest, take risks and earn money.

Sorry for dragging this out, but I wanted to show you what thousands of years of economic history have taught us: low taxes and moderate regulations are what enable economies to thrive. The person who espoused the ideas in the first quote that excessive taxes hurt the economy probably didn't learn them from anyone I have quoted. This idea was self evident worldwide until 1932, when the person who spoke these words betrayed their very ideals and went on to pursue the greatest expansion of government through increased taxation and regulation that this country had ever seen. That fellow, you might now have guessed, was Franklin D Roosevelt, who knew what to do, but didn't!