Category Archives: Economics

Miscellaneous economy stuff

Europe Can Spend Its Way to Growth

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That’s the claim made by Hannes Swoboda, an Austrian MEP and President of the Progressive Alliance of Socialists and Democrats in that European Parliament, in a recent Wall Street Journal op-ed.

Mr Swoboda said about German reluctance to support continued excessive government borrowing:

Should companies that seek to grow not be allowed to take out loans anymore?  Should states, in order to fight recession and unemployment, not assume debt?

The first, of course, is little more than a disingenuous red herring.  Companies are not governments.  When a company (spends and) borrows too much and cannot repay, only the company’s investors and creditors, and in the most extreme cases the company’s employees, lose.  When governments (spend and) borrow too much, it is that polity’s taxpayers…well, we’re seeing the results of this sort of government irresponsibility play out today in Greece, California, Illinois, the United States as a whole.

…austerity politics and…their antisocial character, proven by record unemployment figures.  The collapse of some governments…notably in France and Greece…further demonstrate the political danger.

Of course generations of dependency on, and addiction to, government handouts don’t have anything to do with the pain of the forced withdrawal that results from these governments’ having run out of OPM.  Not a bit of it.  In fact, though, the only real, long-lasting political danger is to the political incumbents who find at risk their ability to keep the handouts coming and the capacity of the resulting dependency to preserve their power.

Then Swoboda (to coin a phrase) doubled down.

The fact that the current recession was preceded by a decrease of public investment in measures and policies that produce growth and employment clearly indicates that these must be the starting point of an alternative strategy.  In the evaluation of national budgets,…[e]xpenditures for these purposes should not be integrated in calculations of structural deficits….

Italian Prime Minister Mario Monti has already called for policies that favor targeted public investments in growth and employment.…

We actually need to go a step even further. … The European institutions should enact legislation that requires all members to make public investments in growth and employment.

Those public investment measures are nothing more than the repeatedly failed Keynesian policy of “stimulus” spending at the expense of necessary fiscal discipline.  In fact, the current European recession also was not preceded by an increase in private investment—because the money wasn’t available due to excessive taxes and high government spending and borrowing for those dysfunctional spending and borrowing efforts.

Moreover, any remaining government expenditures, including any Keynesian “stimulus” (is there any serious economist who still thinks stuff is sound economics?), must strictly be on the books and in the public’s view.  If Swoboda thinks his policies are so wonderful, why does he demand to hide them behind locked doors and in the secrecy of off the books crony deals?

Finally, Mr Swoboda, not trusting the people to make their own personal and business decisions, demanded to codify in international law a permanent government interference with the market place.

No.  The answer to Europe’s—and the United States’—problems are for government to get out of the way of the private economy.  To get out of the way of the flower of individual ingenuity and out of the way of the collective wisdom of private citizens.

Mr Swoboda had more fanciful claptrap, but you get the idea.  One can only hope that we get the idea this fall.

Progressives Didn’t Get It then, Either

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[I]n a free enterprise economy, increased production increases the number of jobs.  It might be said that one job creates another, which is true as far as it goes, but open to misinterpretation; for only productive employment does that.  If a man were paid to pick up pebbles on a beach and throw them into the ocean, it would be just the same as if he were in a “government job,” or on the dole; the producers have to supply his subsistence with no return, thus preventing the normal increase of jobs.  Putting the unemployed on the dole does not increase “purchasing power.”  The dole divides up what is already in production.

Isabel Paterson understood this in 1943 in her The God of the Machine [the emphasis is hers], and FDR’s Secretary of the Treasury, Walter Morgenthau, had come to understand it as early as 1939.  But the Progressives then didn’t get it, and the Progressives today still don’t.

Keynesian economics simply does not work in the real world.  Government spending, whether on “jobs” programs or on other goals, is not stimulative; it is depressive of an economy, in no small part by crowding out private demand and private spending for products—and here by increasing the cost of private labor.  The taxes and the borrowing—which are future taxes—which must occur in order to pay for the spending are even more depressive.  The taxes take money out straight out of the hands of the people who have the most interest in its value and the clearest understanding their purpose for their money, and they give it to government bureaucrats for spending on government purposes, whose loftier goals are handed down from on high by fiat.  Meanwhile, the government’s borrowing drives up the cost of debt for private borrowers, who have more carefully thought out purposes for the loans and more carefully thought out plans for repaying those loans.

Paterson’s remarks about jobs and productive jobs, in particular, also were clear then, as she wrote in the era of FDR’s Civilian Conservation Corps.  The distinction is just as clear today, with the added fillip that at least the CCC laborers were doing something.  The present administration’s “jobs” programs have done nothing.  They haven’t even produced jobs, as this note illustrates.

These things were apparent in the latter stages of the New Deal, and they’re apparent today.  This fall, we will have an opportunity to confirm our choice of two years ago and to strengthen it, or to repudiate it.  This fall, we must choose wisely.

Two Economies

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We are at a cross-roads in our country and it’s time to force the issue.  We face a generational decision on the kind of economy we want for ourselves—and so the degree of individual freedom we want for ourselves.  We made a choice in the 2010 elections, and it’s time to confirm or repudiate that choice this fall and in the election cycles to come.

There are two basic types of economies available to us: wealth redistribution by government fiat or wealth redistribution by individual choice in a free market.  In this post, I’ll write a little about each type.

Wealth redistribution by government fiat:

When redistribution occurs by fiat, it occurs by taking wealth from some and giving it to others.  I won’t go into the class warfare that this sort of thing can engender, regardless of good intentions.  I’ll write, instead about the outcomes of such redistributions.

This taking of wealth from some necessarily caps the wealth of that some.  Indeed, reducing income inequality often is the explicit goal of this sort of wealth redistribution as that transferred wealth represents “income” to the recipients.

Reducing income inequality, though, ignores a fundamental aspect of human endeavor: we are not endowed with the same degree of talent, of work ethic, of luck.  We do not even have the same desires for what we want out of life.  Thus, income inequality is an inevitable outcome of the application of men to their own efforts and goals.  Capping this—which wealth redistribution necessarily does—in the name of “fairness,” then, prevents those with greater talent or ethic, or even luck, from enjoying to the fullest the fruits of their labors.  By this, it denies those men the equality of opportunity promised them by our social compact.

Worse, this prevents those men even from achieving their fullest potential, because knowing they will have some portion of the results of their efforts taken from them, there is no incentive to excel, to do their best.  Their reach will no longer exceed their grasp.

At least as bad, this also saps the morality of those men: they lose both the incentive and a portion of the means to satisfy their obligation to their fellows.  Government has taken this obligation and the responsibility for its satisfaction away from them and arrogated these to itself.

But what of the recipients of the redistribution: are they not enough better off (the other major purpose of government-forced redistribution) to offset the loss to the successful?  No.  In fact, they’re not any better off at all; they’re worse off.

At this end of the spectrum, incentive to do better is lost: they’ll receive a measure of wealth regardless of their effort.  They lose their sense of obligation to do their best and thereby to not be (or to be as much less of as they can) a burden on the duty (or wealth) of others.  Government as arrogated this responsibility to itself.

These men, also, are denied their promised equal opportunity; they are denied their chance to show the best that is in them—morally as well as economically.

Wealth redistribution by free market individual choice:

The case concerning this is quite straightforward.  First, the answer to an obvious question: how is this redistribution, at all?  The rich get richer, with the seller collecting his price for his good or service, and the poor get poorer for having had to pay those prices.  Actually, not.  That description looks, too narrowly, only at the pecuniary aspect of an exchange of money for a good or service; there is, though, a much broader picture.

Economically, it’s simple.  The desire for those goods and services is demand that stimulates production.  That increased production represents both increased hiring and lower prices.  Those lower prices and higher employment increase demand.  Which generates jobs….  Obviously this won’t go on forever; there will reach a point where the price of labor, which has been increasing as its supply becomes scarcer, makes it uneconomical to continue hiring and producing.  However, that level of full employment is a far higher level of employment than that which obtains in an economy where the wealth passed on to people is as relatively independent of effort as it is in an economy driven by government-forced redistribution.

Thus, wealth is redistributed as a result of the free—voluntary—exchange that exists in a free market.  Those exchanges ultimately create additional jobs, which is increased wealth for all participants.

This voluntary wealth redistribution is short and direct on a personal level, also: rather tautologically, both parties to a (voluntary) transaction are made wealthier by that transaction: each party has obtained something of value to him that he didn’t have before.  After all, if it wasn’t of value, neither party would have been interested in the exchange.  And by completing that exchange, each party now has that thing.

All participants in a régime of free market redistribution are enriched morally, also.  It is in this environment that equality of opportunity is preserved.  It is in this environment that everyone, rich and poor, is able to work to his fullest potential.  It is in this environment that everyone is able to enjoy all of the fruits of his labor.  It is in this environment that everyone retains his moral obligations, the ability to satisfy them (including the obligation of each to help his less fortunate fellows), and by doing so improving themselves.

These men, then, are guaranteed their promised equal opportunity; they are guaranteed their chance to show the best that is in them—morally as well as economically.

Forms of Subsidy

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I’ve disparaged the concept of federal government subsidies in other writings, so I thought I’d take a post and identify some types of government subsidy to illustrate the range of handouts for which our pocketbooks are impressed.  Most of the forms below are Federal subsidies; although I do mention a few state-level subsidies, also.

One form of subsidy is direct money transfers.  These can take the forms of block grants to states, and they usually come with federal strings attached governing the use of the money, or the amount of money the states must put up in order to get the grant, or the state laws that must be enacted (vis., speed limits) in order for all of the grant to be delivered.

These transfers also often are based on the services being offered, as is the case with Federal Medicaid transfers, which depend on how many state citizens are eligible under the state’s rules.

Another direct transfer is unemployment insurance and food stamps.  In these programs, recipients have only to apply for the subsidy, and they begin receiving either money ( unemployment checks, for instance) or vouchers (food stamps are an example).

Another form of subsidy is preferential tax treatment for the favored group.  These can take the form of tax deductions or credits or exemptions from taxes.

Examples of tax credits include the Earned Income Tax Credit, tax credits to consumers for installing energy efficient items (e.g., geothermal heat pumps, residential-sized wind turbines, solar energy systems, and so on).  Other tax credits are aimed at the ethanol industry and renewable energy equipment manufacturers.

Tax deductions are available for oil and gas producers and for renewable energy producers and equipment manufacturers.  Other deductions exist for home (or business plant) mortgage interest, charitable contributions, age and disability on personal income taxes, and so on.

Individuals whose income is below a threshold are subsidized through being exempt from income taxes altogether.  The interest on some government borrowing (municipal bonds, for instance) can be exempt from taxes, and certain non-profit organizations are exempt from a variety of taxes.

Another form of subsidy is in the form of government loan guaranties, which enable the borrower to get loans at more favorable rates than they otherwise could.  These include, among others, student loan guarantees, home mortgage guarantees, and renewable energy company loan guarantees (recall Solyndra, et al.)

Another form of subsidy occurs through regulation.  A major example here is the protected monopoly status that utility companies and drug manufacturers get.  Such status protects the company from competitive pressures for a period of time (drug manufacturers and, not too distantly related, patent, copyright, license, and so on, holders) or for so long as government objectives are met (e.g., utility companies, who must comply with their (state) government rate requirements and criteria).

Other regulations are aimed explicitly at putting certain entities out of business.  The EPA’s clean air regulations aimed at coal-fired power plants are an example.

Another form of subsidy occurs through government mandates.  An example of these are mandates to buy (or sell) certain products (which can occur only at the expense of not having that money available to buy other products, even unrelated ones; or at the expense of not having that capital equipment or staff available to produce/sell other products, including unrelated ones).  The Patient Protection and Affordable Care Act’s Individual Mandate and the requirement to provide contraceptive services and abortifacients are illustrations.

Another type of mandate is a manufacturing one: producers must use fixed per centages of ethanol in gasoline manufactured for sale.  This mandate exists solely to create a market for ethanol that otherwise might not exist.

Another form of subsidy consists of government preferences.  These include preferential hiring requirements (military veterans, minorities, disabled, and so on) and preferential contract award requirements.  Preferential contracting includes preferences for minority-owned small businesses, and for small businesses, generally.

Another form of subsidy occurs primarily at the state level, particularly in those states that have union shop laws.  Such laws subsidize the unions either by requiring individuals to join a union as a condition of employment or by allowing the union to collect union dues from all employees in a company whether the employees are union members or not.  Such laws represent a large source of income for the unions in the form of dues they wouldn’t otherwise be able to collect.

Perhaps the most insidious subsidy is in the form of government-mandated affirmative action programs.  Such programs require the government to give greater weight to some citizens in its hiring (which weight can only come at the expense of other citizens trying to compete for the same job) and to give greater weight in its contracts to some entities—which again can come only at the expense of other entities bidding on the same contract.  Note that while these are closely related to the government preferences noted above, they differ in a critical way: affirmative action is based solely on race, gender, or ethnicity.

This is not an exhaustive list, either of type of subsidy or examples within each type presented, by any means, but you get the idea.  Nor have I offered any judgment concerning the legitimacy of any of the subsidies; that’s for another post.

Housing Foreclosures and Government Involvement

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Here are some interesting contrasts, courtesy of The Wall Street Journal.  Against a background of 4.4% of mortgages, generally, being in some stage of foreclosure as of March, which is down a tad from a year ago’s 4.5% and so still at historic highs, we have the following.

The foreclosure rate remains high largely because of states that require banks to process foreclosures by going to court. In those so-called judicial states, banks and their lawyers have moved to take back homes very slowly….

Thus,

…the foreclosure rate in judicial states stands near 6.9%, and it has been flat or rising over the past year.

On the other hand,

…nonjudicial states have a significantly lower foreclosure rate, at about 2.8%, which has been falling over the past year.

Another way of looking at the data:

Of the 11 states that have foreclosure rates above the national average, ten of them have judicial foreclosure processes. The top three are all judicial states: Florida had a foreclosure rate of 14.3% at the end of March, followed by New Jersey (8.4%) and Illinois (7.5%).

While

…nonjudicial states that had severe housing problems, such as California and Arizona, have seen their foreclosure rates drop below the national average.

Hmm….