Recently in Economics Category

I remember reading Jude Wanniski's influential book, The Way the World Works. I was wowed. George Gilder and I go way back. Gilder's book is probably the most influential for supply-siders, Wealth and Poverty. Richard Rahn--whom I've linked to recently--is very good. He demonstrated to me in a Cato publication that lowering taxes during the Reagan years increased revenue. And I enjoy Arthur Laffer a great deal.

Well, there are real-world examples showing the truth that humans respond to incentives/disincentives, the great insight of this economic thought.

#1. Western Europe and the US have the same tax revenues despite Europe's higher tax rates. Liberal economists eat their words."Whose Laffing Now?"

#2 Amity Shlaes compares Maine and New Hampshire. This is what Warren T. Brookes used to do in showing how NH would bounce back sooner than her New England neighbors from a recession (and have a less severe shock to boot). Shlaes could also compare the US and Argentina, where the latter had a slightly larger economy per capita about 70 years ago before embarking on ruinous socialist policies that impoverished her vis-a-via the US.

My wife's school suddenly had the need to hire a Kindergarten teacher for only a one-year position. It was posted in the papers in the middle of last week--and school starts in exactly one week for the teachers.

And forty-five people applied for it. Forty-five.

One of the great living economists is Richard Rahn. He explains that "juveniles" are in charge of the economy. (He has a great story about Sir Anthony Fisher and sea turtles, well known in libertarian circles.) So a double-dipper (or worse) recession, here we come. It sucks, but that's what we get with Carter Redux:

Most clear-thinking adults, even without formal training in economics, can understand that if the government greatly increases regulations on business (not justified by serious cost-benefit analysis) and increases taxes on labor and capital, the cost of doing business will rise; hence, businesses will have to hire fewer workers. Obviously, these basic concepts have eluded a majority of the members of Congress and many in the administration because this is precisely what they have been doing.

As the various state primaries are held and incumbents from both parties are finding themselves being seriously challenged by newcomers, the question we must ask ourselves is will the voters back tough steps to reduce the deficits? So far the answer appears to be yes.

Despite the disdain that many in Congress feel for the American electorate, more of them are feeling the heat back home. Some have already lost their primary bids to run for re-election, becoming victims of hubris after they decided it was just a dandy idea to spend the nation into debt to a level never seen before with little hope of ever being able to pay it off. And should the Republicans manage to take back one or both houses of Congress, there's another question all of us have to ask them, that being do they "have the stones" to take the measures necessary to bring our government's fiscal house into order?

Reading comments to the two posts linked above it appears that a substantial number of people on the left cannot conceive of the actual size of the deficit or what it will take to fix it. More than one of those commenting wrote something along the lines of "All we need to do is slash defense spending and we'll have enough to pay for everything." All that phrase did was prove to me and others commenting that they really have no idea how much money we're talking about. As one commenter put it in response to the clueless:

If we cut defense spending to zero, we'd still have almost a trillion dollar deficit to deal with every year. Better to cut things that really do nothing more than suck up tax dollars with little, if anything to show for it.

This same commenter also brought up the point that defense is one of the duties of our federal government as defined in the Constitution. ObamaCare, Cap and Trade, corporate bailouts, union bribery, and government departments like the Department of Education, the Department of Energy, and a number of others are not. Yet we waste billions on them with little return for that 'investment' of our tax dollars except more needless regulation, more costs associated with complying with those needless regulations, and tighter restrictions on our economy's ability to function. How does any of this help anyone...except those in Washington wishing to exercise more power over our lives?

I have a feeling those in power are in for a rude awakening come this November and November 2012. A lot of them will be hitting the unemployment lines.

He only made it worse.

Check this out: In May 1939 the unemployment rate was over twenty percent. Source: Burt Folsom in the WSJ. Amazing datum.

In Europe the rate was a lower twelve percent.

If you haven't read up on the concept of "The Forgotten Man" as first propounded by the great American sociologist William Graham Sumner, you can do so here by a recent Rich Lowery piece.

I'm pimping Doug Bandow. He's good. He explains why what he says is true:

The Obama administration is committed to job creation.  For lawyers and bureaucrats.

Promoting pay "equity" is a great deal for our overlords. However, there's an economic penalty to engage in discrimination in the labor market--shrinking the pool of one's applicant pool means leaving out potentially productive employees--and the lies about the pay of women vis-a-vis men is bogus. Has been for nearly twenty years. Yet it's repeated as gospel.

Barkley, the black Labrador retriever, a breed I'm partial to having a neighbor's chocolate lab over here about eight to ten hours a day (at least), lays the wood to socialism.

Hey, it's your choice, Henry Hazlitt or Barley. Either way socialism sucks.

It's just the opposite, Nancy Pelosi. With such mediocre people in charge in DC, I'm tempted to lead a secessionist movement. Like there is in Vermont.

Omigawd. I've seen Mr. Davidowitz four times now on Yahoo Finance. Do yourself a favor and get depressed. (Here's the permanent link.)

There is no recovery; we're headed for rough seas for years to come.

Martin Gross said many of the same things in 2009 on the Dennis Prager Show. These two guys together are a devastating one-two punch against the current administration.

African free-marketers? First there was George Ayittey. Now there's Dambisa Moyo. Where are you staying tonight, Dambisa? I found out about you from Andrew Cusack.

As a conservative libertarian who supports the decriminalization of drugs--here's a touching report from Maine about Montel Williams fighting multiple sclerosis and needing marijuana to cope with the pain--and the abolishment of the IRS and the regressive "progressive" income tax, I've read more than a handful of economic books.

Full disclosure: I smoked pot about a dozen or two times my senior year of high school, 1985-6. Since then, no, not in over twenty years, that's for sure. I've grown to dislike marijuana on ideological grounds. But that doesn't mean I can mandate my disapproval to others through intrusive legislation. I wish the same could be said of NH legislators who a year or two ago saw fit to ban smoking from all bars and restaurants. Damn busy bodies!

The best book on economics has been Henry Hazlitt's Economics in One Lesson. I remember the blurb on the back by the great journalist H.L. Mencken saying Hazlitt, who used to be a mainstream American editorialist and journalist way back when, is one of the few economists who could actually write lucid English. I think the book is absolutely mandatory reading for the Skip Murphy Brethren.

It turns out the left doesn't really have as good a grasp on economics. Thanks, Doug Bandow, my ole Cato buddy from the summer of 1990, for the link.

Having been a superannuated college student, count me as supremely unsurprised. I saw it every day.

Also, while we're on the Left's intellectual deficiencies--their moral ones are legion--I also recommend a book by Thomas Fleming, The Politics of Human Nature,  I found extremely enlightening.

So says Doug Bandow. Twenty-seven percent of likely voters, according to Rasmussen, are reasonably confident that Congress has a good handle on the economy. He's right--esp. in questioning the prudence of letting them vote.

On the other hand, the same polling group has found out there's much more rationality in people's view of Social Security. Fuhgehdaboutit!

"The 'Greecing' of America"--we're almost there, too. Some reports put it at 2013 when our numbers are the same as Greece's, debt as a proportion of the economy.

Days later, I'm still in a state of shock about the facts and figures I've learned from Gretchen Hamel--who best can be accessed at bankruptingamerica.org--in a segment from the May 12, 2010, G. Gordon Liddy Show (13-minute podcast here):

New Jersey teachers retire with an average personal contribution of $62k into their pensions while receiving back an average of $1.4 million. Additionally, they also receive an average health cost spending averaging $250,000.

Simply unsustainable, folks. Down with the public sector unions bleeding us dry!

Richard Russel, a DOW analyst, goes Rambo:

Do your friends a favor. Tell them to "batten down the hatches" because there's a HARD RAIN coming. Tell them to get out of debt and sell anything they can sell (and don't need) in order to get liquid. Tell them that Richard Russell says that by the end of this year they won't recognize the country. They'll retort, "How the dickens does Russell know - who told him?" Tell them the stock market told him.

I'm out of debt except the house. But I'm in single digits (in years) on that. I'm worried about our financial future. I learned from Gretchen Hamel of ThePublicNotice.org that the average teacher in New Jersey retires with a total of $62,000 directed to her retirement, while collecting $1.4 million in pension benefits and $250,000 in medical benefits. Is it any reason NJ has the highest property taxes in the country? This can't stand, this excessive spending and over indulgent packages given to public sector employees with greedy unions doing their bidding.

The axiom goes, "If you tax it, you get less of it. If you subsidize it, you get more of it." A number of times throughout our history we have seen that axiom proven true. Starting prior to the Great Depression, and running the gamut from FDR's numerous 'recovery' programs in the 1930's, LBJ's Great Society programs in the mid 60's, and extensions of those programs that placed ever greater burdens on the taxpayers supposedly for the benefit of the poor, we've seen the government providing all kinds of incentives for people to remain poor and unemployed.

The welfare programs as envisioned by Woodrow Wilson and FDR and attempted by LBJ did more to subject otherwise productive Americans to abject poverty than any economic or natural disaster. Of course I would expect proponents and recipients to claim otherwise. But history shows many of the programs designed to 'help' the poor did nothing more than trap them into government subsidized poverty with little hope of getting out from under the government thumb.

One of the more insidious programs that has been turned into a political football recently has been unemployment compensation.

While in and of itself unemployment isn't necessarily a bad thing, the extension of benefits that have been piled on one after another have been used for political gain and not for the benefit of those receiving them.

All these serially extended benefits have done is work as an incentive not to work. That isn't supposed to be the way unemployment works. They were supposed to be a short term temporary bridge between jobs. But they are in danger of becoming more long term and, if some in Congress had their way, to become permanent. That would be a disaster for the American economy, just as a similar program devastated the the British economy as increasing numbers of unemployed ended up staying 'on the dole' rather than actively seeking work.

Democrats seem to think that extending jobless benefits for another 20 weeks is a big political winner. Iowa Senator Tom Harkin recently roared, "Is there any compassion at all left with Republicans for people whose checks are going to run out?" New York's Chuck Schumer calls Republicans "inhumane."

But do these Senators really think it's compassionate to give people an additional incentive to stay out of the job market, losing crucial skills and contacts? And how politically smart is it for Democrats to embrace policies that keep the jobless rate higher than it would otherwise be? How many Democrats share Mr. Harkin's apparent desire to defend a jobless rate near 9% (today it is 9.7%) in the fall election campaign.

Yeah, that ought to be a real winning campaign strategy. "If you vote for me I'll make sure the likelihood of you actually getting a job remains small because we'll do what we can to discourage you from looking for one."

Whenever jobless benefits have been extended in the past, any recovery in the jobs market has slowed because the unemployed won't start looking for jobs in earnest until just before their benefits run out. All extending the benefits does is move that time out by weeks or months and add to the cost of providing those benefits.

If Republicans were really cynical, they'd let the new benefits pass and run against the higher jobless rate in the fall. In any case, no one should be surprised that when you subsidize people for not working, more people will choose not to work.

'Nuff said.

I love listening to the man. When he was alive and would come on the radio or TV, I'd stop whatever I was doing and listen to the man with intensity. Today's Milton Friedman is Thomas Sowell.

We have so few such public intellectuals who are actually worth the listening to. Thanks, Neal Boortz.

• "Government doesn't have any responsibility. People have responsibility."
• "There has never been a more effective machine for eliminating poverty than the free enterprise system and the free market."
• "If you look at the real problems of poverty and the denial of freedom to people in this country, almost every single one of them is the result of government action."
• "We have constructed a governmental welfare scheme, which has been a machine for producing poor people."

The ongoing health care debacle in the Commonwealth of Massachusetts has been an object lesson for those opposed to ObamaCare as it exists now, showing the nation how not to do health care reform. Unfortunately ObamaCare is based heavily MassCare, using many of the same 'economics' and mandates. As we've been seeing over the past year or so, MassCare is coming apart. Between much higher than projected costs, lower than projected revenues, and health insurance companies taking a hit - higher payouts and rate hikes denied by the state - forcing them to stop accepting new policyholders. Of course Governor Deval Patrick has retaliated, taking the insurance companies to court.

Insurance companies are now claiming that the rejected rate increases mean they won't be able to operate at a profit, and arguing that no actuary would approve the sort of rates that state insurance regulators say they expect. Actuary sign-off is not only important for fiscal stability--it's a legal requirement in the state. (emphasis added)

Is this just insurance company posturing? It's entirely possible. Industries, entirely understandably, are bound to put up a fight when told they can't set their own prices. That means making the toughest claims they think they can get away with. But it's not unbelievable that the combination of rate caps and increased regulatory burdens is imposing what amounts to an impossible strain on private insurers.

One commenter to the linked piece has proven again that far too many people don't understand economics, and particularly the economics of health care and health insurance.

The answer is easy. Make all health insurance companies non-profit by law. They they'll be tripping over each other to provide us all with free health care, once that pesky profit motive is out of the way.

This comment shows complete ignorance of how insurance works and the razor thin margins health insurance companies have. Health insurance companies have a less than a 2% profit margin (even non-profits have to make money). As another commenter noted, just because an insurance company is non-profit doesn't mean they won't lose money if payouts are higher than the premiums they take in. Between state mandates and state control of rate hikes, insurance companies are being squeezed between a rock and a hard place. And like ObamaCare, Massachusetts health care does not allow insurance companies to deny coverage to those with pre-existing conditions, meaning the amount they'll pay out for medical claims will go up disproportionately to the number of new policyholders they'll gain. Unless premiums go up to compensate for the higher claim payouts, the insurance company will lose money and, under the worst circumstances, fail.

In order to help those of you out there who are economics knowledge-challenged to understand what I just said, here's a simple equation that explains it all:

Claims Paid + Overhead* ≤ Premiums Received

* personnel salary/benefits, utilities, rent/mortgage, office equipment, taxes, loan payments, etc.

Translation: the claims paid plus the costs of running the business must be equal to or less than the amount of money received for premiums paid by the policyholders. If the amount of money received from premiums is consistently less than claims paid and overhead, the insurance company goes broke, closes, and its policyholders will be left with no insurance. This is the direction MassCare is forcing the health insurance companies there to take. ObamaCare won't be any different, except that it will cause this problem nationwide.

Neither MassCare or ObamaCare have addressed the real issues with rising health care costs, nor are they likely to do so. Neither was designed to do so.

If only this had actually happened.

The testimony of Charles Prince, former CEO of Citigroup, a too-big-to-fail bank that received $45 billion in bailouts and $300 billion in taxpayer guarantees, was riveting. You've seen it on the news, but if you were watching it live on C-Span, the stark power of his brutal candor was breathtaking. This, as you know, is what he said:

"Let's be real. This is what happened the past 10 years. You, for political reasons, both Republicans and Democrats, finagled the mortgage system so that people who make, like, zero dollars a year were given mortgages for $600,000 houses. You got to run around and crow about how under your watch everyone became a homeowner. You shook down the taxpayer and hoped for the best."

"Democrats did it because they thought it would make everyone Democrats: 'Look what I give you!' Republicans did it because they thought it would make everyone Republicans: 'I'm a homeowner, I've got a stake, don't raise my property taxes, get off my lawn!' And Wall Street? We went to town, baby. We bundled the mortgages and sold them to fools, or we held them, called them assets, and made believe everyone would pay their mortgage. As if we cared. We invented financial instruments so complicated no one, even the people who sold them, understood what they were."

"You're finaglers and we're finaglers. I play for dollars, you play for votes. In our own ways we're all thieves. We would be called desperadoes if we weren't so boring, so utterly banal in our soft-jawed, full-jowled selfishness. If there were any justice, we'd be forced to duel, with the peasants of America holding our cloaks. Only we'd both make sure we missed, wouldn't we?"

Sadly, this was nothing more than wishful thinking on Peggy Noonan's part.

Still, it would be refreshing, wouldn't it?

People's ignorance of economics never ceases to amaze me.

Wait. That's not entirely true.

Liberals' ignorance of economics is something I take for granted. Mind you, not all liberals are economic morons. But far too many of them are, particularly many of those in government. That ignorance has also spread among far too many of the rank and file liberals. You know the ones I mean.

Rather than wasting time going trying to describe this in detail, let me show you how at least one of them thinks.

The comment below was in response to this Jonah Goldberg op-ed piece in USA Today that asked the question "How much taxation is too much?"

The problem is that that we liberals are SMARTER than conservatives and realize that in a society we HAVE to pay some sort of remuneration to the government for them to do things that private citizens cannot do or afford to do themselves.

Such as building roads, building bridges, fixing those two things, building numerous other things that I could go on for HOURS and not get them all, as well as fund an Army for our defense (though we don't need a STANDING army with nuclear weapons now).

Taxes do not 'choke growth'. If they did, the periods where taxes were the highest wouldn't be the periods of the most growth in our economy... guess what, THEY ARE!

Clinton: higher taxes, MUCH higher growth, people making sometimes 2 times what they used to make.
Bush the 1st: No growth.
Bush the 2nd: No growth.
Ronald Reagan: No growth really (yes, look at the FACTS, he didn't have any real growth except with what the GOVERNMENT was spending).

Need I keep going on?

Yes, taxes at too high of a level can 'choke growth'.... however, we are nowhere damned well NEAR that on businesses! Hell, most of them only pay about 5% in taxes a year after all their deductions.

No, the problem is not high taxes.... the problem is LACK of high minimum wage laws, LACK of job protection laws (no firing without a very good reason), LACK of numerous other things, including an extremely HIGH tax rate on people make over 10 million a year, even on 'investments'.

Right now, more and more money is being concentrated in the hands of the super-rich and businesses, to the detriment of the poor and middle class. It's time for that to stop, and for the Republicans and conservatives to realize that their 'capitalistic dream' has turned into a predatory capitalistic nightmare, and that we need to SWING THE BAR back towards some socialism and citizen protection.

At first I thought the commenter was being sarcastic. But then I realized he was serious. It also shows how much of a moron he is, at least when it comes to economics and who pays taxes and how much they pay. This guy has bought the "rich-are-bad/greedy/thieving-people-who-steal-from-the-poor-and-pay-no-taxes" canard hook, line, and sinker.

But the biggest clue this guy just doesn't get it it his pronouncements about minimum wage, job protection, and taxing the rich.

...the problem is LACK of high minimum wage laws, LACK of job protection laws (no firing without a very good reason), LACK of numerous other things, including an extremely HIGH tax rate on people make over 10 million a year, even on 'investments'.

First, I have to ask what he means by a lack of high minimum wage laws? Does he really think that if minimum wage is raised even higher than it is that it will somehow solve one of the problems of the working poor or those working entry level jobs? Obviously he does. But if he looks at what happened after the last three minimum wage boosts he'd see the number of minimum wage jobs went down as business owners found they couldn't justify hiring the same number of people as they might have otherwise. The very people the higher minimum wage was supposed to help had just the opposite effect. Strike one.

Second, what kind of 'job protection laws' is he thinking about? Does this moron think that laws like those in France will somehow solve unemployment? Perhaps he should ask the French how well it's worked out for them. With laws making it very difficult to lay off workers, particularly when there's no work, businesses are reluctant to hire. Instead, they try to make do with the employees they already have or outsource the work elsewhere. Unemployment remains high in general and is even higher for the younger members of French society. The very people the job protection laws were supposed to help had just the opposite effect. Strike two.

Third, what does he mean by 'extremely high tax rate' on the rich? Does he mean 90%? 95%? 98%? In the end it doesn't matter because if the taxes are high enough the rich will leave, taking their money, and the jobs that money provides with them. All one needs to do is look at the UK during the 1970's, when the so-called 'wealth tax' was 98%. Those making enough to be taxed at that rate didn't stand for it. They pulled up stakes, took their money and their companies out of the UK, and the British economy collapsed. High tax rates are an effective incentive to stop the economic activity being taxed. As Chief Supreme Court Justice John Marshall warned us, "The power to tax is the power to destroy." The revenue extremely high taxes were supposed collect had just the opposite effect. Strike three.

This guy also has also got to start use Google considering he rewrote the economic history of the past 30 years, giving President Clinton credit for the work of Ronald Reagan and George H. W. Bush while downplaying the economic growth during most of George W. Bush's time in office. (He conveniently forgot the little disturbance on 9/11/2001 and the economic bubble created during the last couple of years of Clinton's time in office that burst in February 2001 - the so-called "dot-com" debacle - less than a month after Bush took office. Millions lost their jobs when the dot-com companies employing them collapsed. Millions saw their investments in Internet companies disappear overnight.)

What saved Clinton was the 1994 mid-term elections. The GOP took control of Congress and forced him to move to the right economically, allowing the economy to continue the growth started during the Reagan Administration.

Unfortunately the viewpoint expressed by the commenter reflect the beliefs of far too many rank-and-file liberals. And contrary to his beliefs, liberals are not smarter than conservatives. Both have their share of idiots. But fiscal conservatives don't suffer from the economic delusions afflicting liberals.

I could spend another few thousand words explaining why this guy is wrong and why he's an idiot, but I've got better things to do than trying to correct this economic mental defective.

It is quite obvious the one course University of California students protesting against tuition hikes have not taken but desperately need is Economics 101. The UC system-wide protests highlight the financial crisis facing California, a state verging on being forced into federal receivership because every effort to resolve the its financial problems has failed.

Taxes are sky high and getting higher. Revenues are falling off. Unemployment is over 12%. Taxpayers and businesses are leaving in growing numbers. Union compensation and pensions have reached unsustainable levels and are still climbing. Is it any wonder California has become a financial basket case? How can the students of the UC system expect the state to be able to fund the system when they don't have the money to do so? Do they really believe that just by making demands and throwing mass temper tantrums the state will somehow find a source of funding they haven't already taxed to death? Obviously they do. And by doing so they have displayed their economic ignorance. They don't understand: Their politicians have sold them a bill of goods and the time to 'settle up' has finally come.

I have to admit to feeling frustration with the "tax-'em-'til-they-bleed/leave" bunch. It has become quite apparent they lack two things: an understanding of economics and history.

It is this lack that drives the Obama Administration and a good portion of Congress. With history making budget deficits and plans to raise taxes to economy draining levels, it's quite clear they have unrealistic expectations of the revenues they'll collect, which in turn will drive them to raise taxes even higher, causing a further drop in revenues.

Whether it is a revolt of the kulaks, or mere tax avoidance, there is economic distortion from high rates of taxation.

The British are seeing this effect in their current budget, as wealthy Brits engage in tax avoidance (structuring their financial lives so as to legally avoid taxes) in anticipation of a rise from a 40% to a 50% rate.

Obviously the Brits are on a path to return to the bad old days of their 1970's economic malaise, when confiscatory tax rates drove the wealthy (and their wealth) out of the UK. The result was a moribund economy, high unemployment, falling tax revenues, and the failure of a number of long-standing British corporate icons (British Leyland, MG, and British Steel, just to name a few).

Two things to remember when it comes to taxes and government (from the comments):

The raising of T(axes) has the effect of decreasing I(nvestment) which in turn has the effect of decreasing Employment (N).

The larger the share of G(overnment) as a part of GDP, the worse off..the economy in the long run.

Turning this into an equation, we get the following: T=1/Ix → G=1/GPDy
(x and y are multipliers used to generate the correct ratio between the left and right side of the equation.)

But as we've already seen, those pushing for the ever higher taxes don't really understand math.