It Refuses To Go Away

Reality, stated Phillip K. Dick, is that which refuses to go away when I stop believing in it. In this day of Keynesian re-emergence we are getting a healthy dose of the reality of economics.

The markets are reacting to a new world order built on the fantasy that we will tax and redistribute our way into properity. An article entitled "The Age of Prosperity Is Over", by Arthur Laffer in today's Wall Street Journal deals with this phenomenon. After a discussion about how there are hardships in the redistribution that happens when markets deal with foolish decisions- and that's not all bad- Laffer makes this statement-

But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.
That is $30 billion to care for and feed people who didn't really create anything. We get the priviledge of supporting them as they put our money where they want it to go. Laffer here argues that these palliatives (the fruit of "compassionate conservatism") are not merely not helping, they are actively devastating the economy and, ironically, encouraging a political switch to the party of palliatives.
Laffer goes through a laundry list of panicked economic desisions from Nixon price controls through Carter "windfall" profits and luxury taxes and their disastrous results and closes with the following paragraph-
There are many more examples, but none hold a candle to what's happening right now. Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.

The favored response of the liberal commenters on this site is to speak of the dangers of concentration of resources in the hands of the "rich" and of disparities of rich and poor. Property MUST be redistributed for fairness sake. In answer to that bit of fairy dust we have an article by Robert Higgs debunking Keynesian explanations of the end of the Great Depression.

The Keynesians had failed completely to understand that the prewar depression had persisted in large part because during the Second New Deal (1935–38) the Roosevelt administration had created extreme apprehension in the minds of investors and businessmen about the security of private property rights, and hence had discouraged these parties from making the large volume of long-term investments necessary for the economy’s full recovery and for its sustained long-run growth. During the war, investor-friendly businessmen in temporary government service had administered the command economy for the most part, but concentration on winning the war had kept the civilian economy starved for resources.
Higgs then goes on to explain how the death of Roosevelt and the reduced influence of his closest economic advisors made the environment more auspicious for the prospects for property rights and return on investment-
...a change in outlook sufficient to induce a great deal of long-term private investment for the first time since 1929. Because “regime uncertainty,” which had dominated the later 1930s, no longer cast such a dark shadow over business and investment, the economy finally recovered from the Great Depression and the economic hardships of the war years, even as it simultaneously reallocated about 40 percent of the labor force from war-related uses to civilian uses.
The year 1946, when civilian output increased by about 30 percent, was the most glorious single year in the entire history of the U.S. economy. By 1948, real output was back on its long-run growth trend, and during the decades that followed, the economy was spared the sort of deep and long debacle that a congeries of wrongheaded government policies had caused during the 1930s.
The assurance that investment would be protected from the predations of redistributive government created a burst of economic activity that made for a more equal distribution of resources than had existed in the overtly redistributive days of the Depression.

Finally, in support of this idea I present an article by Stephen Moore in this weekend's Wall Street Journal based on an interview of Fred Smith, the CEO of Fed Ex. From the article-

He attributes the financial crisis to "the intersection of four long-term developments." Reckless mortgage lending policies; high energy prices; mark-to-market accounting rules; and national policies that favor what he calls "the financial sector over the industrial sector."
Here are just a smattering of very important points in this information-rich article-
"...Our national policies actively encouraged all this debt." (in which we are currently drowning)
How so? "The United States has a completely uncompetitive tax structure in general and it has a particularly onerous tax structure for firms that are asset-intensive. If you run an industrial company like FedEx, which employs 290,000 folks, most of whom are blue-collar people, the way we have to run this business is to equip those workers with billions of dollars of assets that allow them to pick up and deliver millions of things around the world."--
--So how do we fix this problem and retool our industrial sector in a pro-competitive fashion? "We've got to reduce the taxes on equity. Let companies expense their capital purchases."
He uses an example from FedEx. "Look, our capital budget as we went into this year was about $3 billion. We went out to Boeing in July for our board meeting to see the new triple seven, [the Boeing 777] which we have bought. If we had a lower corporate tax rate with the ability to expense capital expenditures, guess what? We'd buy more triple sevens. We absolutely have to cut the corporate tax. Our current tax rate is about 38%. Even Germany has a 25% rate."
(But wait! Don't the anti-capitalists claim there was an extreme low tax regime under conservatives?)
Smith anwers the anti-capitalists thus-
Next I ask Mr. Smith about the class warfare theme of the political debate. "The politicians deplore the fact that we have a disparity of income," he says, but "the only way to make a blue-collar person earn more is to invest in capital, training and infrastructure. So the more you tax capital, the more you hurt workers." He estimates that about 70% of the return from FedEx capital expenditures is captured by workers in the form of higher wages as their productivity rises.
Simply following up on Smith's insights from the interview (there are many others) would make a long article of this. Ignoring them at a time when the U.S. is concentrating more and more of its economy in areas where no real production happens will lead to a worldwide economic disaster.

This is what the markets all over the world see.

I will close with a couple of quotes from the site noted at the top of this article. First, from William James-

"A great many people think they are thinking when they are merely rearranging their prejudices."
Finally, from Alan Watts-
"Problems that remain persistently insolvable should always be suspected as questions asked in the wrong way."
Is it not possible, in a world where what we think of as wealth has to be made and made again on a daily basis, lest the people starve, the question of how to distribute wealth more fairly really is the wrong question?

Posted by Lee Emmerich Jamison at October 27, 2008 11:49 AM
Comment #268471

The more I thought about it the more I thought these two paragraphs in the Fred Smith article were really appropriate to the discussion of tax policy unintended consewuences

His theory is that the tax bias against capital explains why so much top U.S. talent got whisked off to become investment bankers. “Not too many young people coming out of school are studying to be production managers at General Motors.” He says that most of FedEx’s first line managers come not from the top flight universities, but out of community colleges and the military. “The top talent has wanted to go to Wall Street.”
He has come to hold the get-rich-quick Wall Street financiers in more than a little disdain. He views the heroes of the U.S. economy as the companies that actually produce real goods and services. He sees the Wall Street collapse as an inevitable byproduct of investment bankers building multitrillion dollar debt pyramid structures.
The “top talent” went where they thought the money would stick to them, and tax structures favored the financial industry (debt) over the industrial sector (equity).

Posted by: Lee Jamison at October 27, 2008 12:23 PM
Comment #268485

Umm, so where’s the reality?

Why did the depression end? Oh yeah, MASSIVE deficit spending to fund WWII. (i.e. for those in the back of the class throwing spitballs, increasing money supply)

Keynes wasn’t right about everything. Macroeconomics does explain macro economies, however. Trying to pick it apart by problems with other forecasts of Keynes, just shows a lack of real economics education, or pure charlatanism.

Money systems are fake. The real economy comes from production of value. Understanding the difference is important. For money systems to function, they must, to some degree, match reality. A massive public works program is what will be implemented if things continue to falter.

Will this work this time? To some degree, yes. Are there other problems with transparency? Yes. These issues must be addressed. Bush and his crooks haven’t figured this out yet, and are unwilling to expose their ongoing theftocracy.

Thanks for continuing the myth that this is a tax problem.

Will there be WWIII? If the economics get bad enough, yes.

Exchanging one form of sparkle dust for another isn’t my idea of reality.

Posted by: googlumpugus at October 27, 2008 3:12 PM
Comment #268486


Why did the depression end? Oh yeah, MASSIVE deficit spending to fund WWII. (i.e. for those in the back of the class throwing spitballs, increasing money supply)

Higgs has a two part answer for you. Of W.W.II expansion he says-

In truth, however, this apparent Keynesian “miracle of production,” during which the unemployment rate had been pushed to an all-time low of less than 2 percent, rested not on shrewd fiscal and monetary policy, but on massive military conscription, which had directly pulled more than 10 million men out of the labor force and indirectly induced millions of others to enlist in hopes of avoiding service in the dreaded infantry.
Then he follows this with a paragraph disputing the monetary roots of the expansion. (By the way, I’m not totally sold on part of what he says, because a portion of the massive new production after W.W.II was made possible by the investment in new capital necessary to expand industrial capacity for the war, but that was largely private investment.)
The standard interpretation of the transition after 1945 emphasizes that during the war people had accumulated enormous amounts of bonds and bank deposits, and afterward these financial holdings were “released” to finance consumer spending, especially for durable goods whose production had been prohibited or greatly diminished during the war. This interpretation, however, makes no sense: the bonds one man sold another bought, leaving the economy’s overall holdings unchanged. Similarly, the money one man spent by drawing down his bank account reappeared in the sellers’ bank accounts, leaving the economy’s overall bank deposits unchanged. In fact, holdings of liquid assets did not decline at all after the war. People financed their spending for consumer goods by reducing their saving rate.

Posted by: Lee Jamison at October 27, 2008 3:23 PM
Comment #268490

Exactly. The problem is, he is using microeconomics to explain a macro effect. Even Keynes got this wrong. He predicted a slump at the end of WWII. The macro effect was to expand the economy.

The problem with wars are they generally do not produce infrastructure or capital in the form of production capacity.

America suffered no bombing, thus no loss of productive abilities. American policies of rebuilding Europe and expanding US infrastructure continued past WWII along with GI credit expansion helped sustain the “boom”.

This is why a massive infrastructure program by the US is what is needed to reboot the economy.

Redirecting money toward investment instead of dead weight ideas like Roosevelt’s crop restrictions and buying up and goods to bolster price.

Monetary and fiscal programs have to make real world sense. Part of the problem we have is financial whiz’s who forget money represents real value.

Posted by: googlumpugus at October 27, 2008 4:01 PM
Comment #268491

I think we’re agreeing past each other.

If by infrastructure you mean the stuff that improves the efficiency of labor, the stuff Smith is talking about in- “…the only way to make a blue-collar person earn more is to invest in capital, training and infrastructure.” then we agree completely.

Where I am troubled is in the proposition that the GOVERNMENT knows where to target this spending, or that it even could spend it in the right places if it did know, given the need to massage constituencies.

What I am pointing to is that it is within the private sector that government is currently allocating, by tax policy, the targeting of capital.

They have gotten even that targeting wrong.

Posted by: Lee Jamison at October 27, 2008 4:19 PM
Comment #268504

A New Welfare State
by Ken Blackwell

“Thanks to Joe the Plumber, we now know for sure that Barack Obama wants to “spread the wealth around.” But the Democratic candidate still hasn’t come clean on just how much of a European-style socialist he is.

Look at the “tax cut” he says he’ll give to 95 percent of Americans. In fact, this is simply a government check he’d hand out - including to millions who don’t pay income taxes, since each year 38 percent of Americans already get a full refund.

In other words, his “rebate” is a welfare plan, plain and simple.

When called on this, Obama’s answer is that those 38 percent still pay payroll taxes, so he’s rebating part of those payments. But that actually puts him deeper into the socialist hole. Here’s why.”

Full story;

Posted by: Jim M at October 27, 2008 7:27 PM
Comment #268509

Thanks Jim.

At some point the plan on the Democrat side simply has to be that they embrace the actual word for which the definition fits. Right now “socialism” looks to them like bad marketing.

Posted by: Lee Jamison at October 27, 2008 8:14 PM
Comment #268512

“This is why a massive infrastructure program by the US is what is needed to reboot the economy.”

Gee…now WHY didn’t the Republicans think about this instead of spending $10B/month on an illegal and unjust invasion of a country that posed NO clear and present danger to America?

Always looking out for America’s best interests, those Republicans…NOT.

Posted by: Glenn Contrarian at October 27, 2008 9:50 PM
Comment #268515

While I agreed in principle (with a boatload of caveat) the words were written by Googlumpugus, who is in, as I recall, your corner.

If you want to dwell in the past and flog dead horses, suit yourself. The fate of Iraq is in the voter’s hands.

For the future we must decide how we make ourselves a more prosperous people. I argue that we do it by building our capacity to produce the stuff that is wealth. In that area Googlumpugus and I seem to agree. In the area of how we engineer the infrastructure that will win us that productivity we probably disagree to some extent, but I’m not going to fight with him or with you just to insure that we do disagree.

Posted by: Lee Jamison at October 27, 2008 10:04 PM
Comment #268517

By Infrastructure I mean what is typically meant by that word, roads, bridges, ports, water and sewer treatment, electrical, phone and internet services.

Government doesn’t have to “know” where these are most needed. It is always known by and well established by engineers, irregardless of whether they work for government or private entities. That our infrastructure is deteriorating nationwide is also well known.

I think the word could extend to other technologies like wind or solar power and natural gas stations( T Boone Pickens idea). A private/ public partnership is how these projects have always been done, even in the times of the WPA and the TVA.

I personally feel that nuclear power should be a part of that, as well.

My point is that, assuming we need an economic boost, rather than looking for a war to bail us out, hoping the oceans will protect us, a massive infrastructure project could be used to rally the nation much like a war, and get America to think about it’s future by belt tightening moves that would balance budgets and increase savings rates, without the stupidity of special interest tax cuts and budget deficits designed to destroy entitlement programs. Rethinking the paradigm of the public/ private relationship ala FDR, rather than the Bush private profit/socialized loss paradigm.

Posted by: googlumpugus at October 27, 2008 11:04 PM
Comment #268540


Your topic is good and true. The problem is that it is not simple enough for the liberal mind to grasp.

If a neighbor needs $50 to survive the week there are two ways to handle the problem…
1) Give them $50 out of your own pocket. Result is that you feel good for helping a neighbor, your neighbor feels good that a friend was a friend, you get a tax break (which puts more money into the economy), your neighbor gets the $50 they need.
2) Give the government $50 more in taxes. The government gives $40 to your neighbor. Result is that you feel horrible that BIG BAD GOVERNMENT stole $50 from you, your neighbor feels cheated because BIG BAD GOVERNMENT didn’t give him what he needed (and that his friend didn’t help), you get no tax break (the economy suffers), your neighbor still needs $10 to survive.
Ultimately the community breaks down into the “haves” and the “have-nots”. Neither feels joy, neither enjoys friendship toward the other, because GOVERNMENT gets in the way.

Ironically it is usually the liberal who wants the government to get involved, yet it is the liberal who is usually more stingy with his personal charity. If liberals would stop being so stingy in giving to the needs of others maybe the government would have no need to get involved.

— Don

Posted by: Don at October 28, 2008 10:02 AM
Comment #268550

Since the election of Reagan, conservatives have had their way with the help of liberals. The conservatives with help from the liberals got corporate tax rates slashed by more than half. They got NAFTA, the China trade agreement and 30 million illegal immigrants. They got a 1.35 trillion tax cut for the wealthy in 2001 and additional tax cuts in 2003. They have gotten a huge redistribution of wealth from the bottom but, primarily the middle to the upper class.

Liberals deserve the blame for this economy but, not because of progressive policy. They deserve the blame because they sold out the working class for corporate bribes.

Welfare for the wealthy and welfare for the poor is indeed the problem and the more prevalent and persistent that it becomes, the closer we get to chaos.

Posted by: jlw at October 28, 2008 12:14 PM
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