Tag Archives: political economy

Government Pensions

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Steve Malanga, in a Wall Street Journal op-ed, had some rather dismal things to say about the health care and pension obligations of various state and local governments.

Citing Chicago Mayor Rahm Emanuel, he wrote

Unless Illinois enacts reform quickly, [Emanuel] said, the costs of [pension and retiree health-care] programs will force taxes so high that, “You won’t recruit a business, you won’t recruit a family to live here.”

Indeed,

Early last year, [Illinois] imposed $7 billion in new taxes on residents and business, pledging to use the money to eliminate its deficit and pay down a backlog of unpaid bills (to Medicaid providers, state vendors, and delayed tax refunds to businesses).  But more than a year later, the state is in worse fiscal shape, with its total deficit expected to increase to $5 billion from $4.6 billion….

The result?  For one, Caterpillar, which makes heavy construction machinery, decided last February to build its next plant in Not-Illinois.

But Illinois isn’t alone.  California is acting just as…suboptimally.  In Oakland, property taxes are still being collected, to the tune of an additional $410 per year beyond “ordinary” property taxes, to pay off a municipal pension fund that went bankrupt over a generation ago—in 1976.  So is Massachusetts going broke.  The Massachusetts taxpayers Foundation found that, for 10 cities in the state, the average per person debt for unfunded retiree health-care government obligations was more than $13,500.

There is, though, no competition among the states for getting businesses to locate in them.  It’s a no brainer, as the difference between the neighbors, Illinois and Indiana, illustrate.  Indiana’s per capita debt for unfunded retiree health-care benefits is $81. For Illinois, it’s $3,399.

Hmm….

Big Government and Economic Recovery

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Via UCLA comes an analysis of the Great Depression and the failures of Big Government policies in alleviating what began as a sharp recession.  Harold L. Cole and Lee E. Ohanian, after studying Franklin Roosevelt’s performance, have reached a conclusion about the New Deal.

Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump.  We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.

These two lay the responsibility for the failure, in particular, on the anti-competition and pro-labor measures FDR signed into law in 1933.  Even though much of that first New Deal round was found unconstitutional, that outcome took a couple of years to reach, during which the damage was being done, and it was replaced by similar New Deal laws that a later, more submissive Supreme Court upheld.

Cole added

President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services.  So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies.

The Cole and Ohanian study went on:

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression.  By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt’s policies not gone into effect.  They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt’s policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate.  But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy.  With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

And with those carefully elevated prices—deliberately elevated through mandated price floors and, with agriculture, government-controlled production rates—food was so expensive that FDR forced food stamps—and the taxes to support them—through the Congress.

Ohanian added this, too:

High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns.  As we’ve seen in the past several years, salaries and prices fall when unemployment is high.  By artificially inflating both, the New Deal policies short-circuited the market’s self-correcting forces.

Does any of this sound familiar?  Under the present administration, with its Patient Protection and Affordable Care Act, its Dodd-Frank Act, its wholly unaccountable Consumer Financial Protection Bureau, it’s really not so unimaginable.  Under the present administration, that singles out private citizens and publicly castigates them for political donations to the wrong candidates, with its picking and choosing individual business—and whole industry—winners and losers, it’s entirely understandable.

Cole concludes,

The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes.  Ironically, our work shows that the recovery would have been very rapid had the government not intervened.

RTWT.

 

With a h/t to GayPatriot, who actually were writing about a different matter.

The Latest “Recovery” Numbers

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First, some numbers via The Wall Street Journal:

  • Commerce Department: 2.2% growth for the first quarter of 2012.
    • down from 3% at the end of last year.
    • close to the 1.7% that all of 2011 had.
  • Recession-created pent up demand for cars and trucks accounted for half of that increase in GDP—1.1%.
    • “Real” growth in GDP, then, was 1.1%.
  • Businesses building up inventories accounted for another 0.6 percentage points of GDP growth.
    • Now we’re down to 0.5% “real” growth.
  • Businesses, over the last six months, have added inventory by more than $120 billion.
    • foretells lower business spending in the nearby future as that expanded inventory needs to be sold off.

As backdrop for all that, our GDP grew on the year by $600 billion, but Federal debt climbed by $1.3 trillion—more than twice GDP growth—in the same period.

Now, about President Obama’s enormous tax increase scheduled to take effect next January.  A worker’s Social Security tax bill will go up by nearly 50% as the payroll tax holiday expires, and his income tax bill will go up drastically: a lower income worker will see his first marginal tax go from 10% to 15% as Obama simply erases that 10% bracket, while a high-income worker will see his top marginal rate run up from 35% to 39.6%.

And this doesn’t include Obama’s tax increases on capital gains and dividends—levied on those rich investors like retired grandma for whom dividend income plays such a major role, and on those middle class investors—the ones whose 401(k)s or whose company-provided pensions invest for dividend and cap gain income.

Imagine the impact on GDP—and on the practical economy in which we must live—of these tax explosions.

A Thought on Taxes

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With a tip of the hat to The Wall Street Journal, and a caution to those who insist on raising our taxes—including doing so only to certain governmentally disfavored groups.

Henry Hazlitt in “Economics in One Lesson,” 1946:

When a corporation loses a hundred cents of every dollar it loses, and is permitted to keep only 60 cents of every dollar it gains, and when it cannot offset its years of losses against its years of gains, or cannot do so adequately, its policies are affected. It does not expand its operations, or it expands only those attended with a minimum of risk. . . .

There is a similar effect when personal incomes are taxed 50, 60, 75 and 90 per cent. People begin to ask themselves why they should work six, eight or ten months of the entire year for the government, and only six, four or two months for themselves and their families. If they lose the whole dollar when they lose, but can keep only a dime of it when they win, they decide that it is foolish to take risks with their capital. In addition, the capital available for risk-taking itself shrinks enormously. It is being taxed away before it can be accumulated. In brief, capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.

What he said.

Sound Currency Policy

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A Sound Dollar Act was introduced in the House of Representatives last month by the Vice Chairman of the House Joint Economic Committee, Congressman Kevin Brady (R, TX), and a companion bill was offered in the Senate by Senator Mike Lee (R, UT), who sits on, among other committees, the Senate Joint Economic Committee.

This bill has a couple of interesting aspects.  For one thing, it would limit the Federal Reserve Bank system  to a single mandate—to maintain price stability, i.e., control inflation.  It would eliminate the Fed’s current other mandate, that of maintaining full employment.

This simplified requirement would both eliminate the conflict inherent between those two requirements and reduce the government’s involvement in what is essentially a private economy imperative—the decision to expand a business, or not, and to employ more or fewer personnel (with a free market economy’s inherent bias toward more employment stemming from a prior inherent bias in favor of growth).

The bill also would reduce the Executive Branch’s political dominance of the Fed.  Currently, the Federal Open Market Committee, the instrument of the Fed that sets monetary policy, has as voting members seven men and women who are appointed by the President, the president of the New York Federal Reserve Bank (these eight are permanent voting members), and four presidents of the Fed system’s remaining eleven regional Federal Reserve Banks (the four rotate among the remaining eleven).  Thus, monetary policy is set by Presidential appointees.  Certainly, those appointees are nearly as independent as a President-appointed Supreme Court Justice, but still.  Under the bill, all 12 presidents of the individual Fed banks would become permanent FOMC voting members, so the regions collectively would outnumber the President’s appointees.  The advantage here is that the individual bank presidents are appointed by boards of directors made up of bankers and business leaders local to each of the Federal Reserve System’s regions.  In this way, the regions, which better understand their situations than can a remote government, would gain significant influence over FOMC decisions that impact those regions.

The Sound Dollar Act also would limit the Fed to purchases of Treasury securities.  This would reduce the ability of the Fed to make credit allocation decisions—to pick and choose which banks, for instance, it will “save” by buying from them the toxic asset du jour.  Bailout or bankruptcy is a free market decision; no government instrumentality, other than a bankruptcy court, has any legitimate role in the matter.

I’m not sure allowing the Fed even to buy Treasuries is a good idea, though, unless it’s done after the free market has bought what it wants, and then only at that just demonstrated set of prices.  If the Federal government is such a poor credit risk that it has trouble peddling its debt to private investors, or other governments, why should the American taxpayer be Dragooned into taking on that risk?

With some tweaks, this is a bill that would serve well.  We just need to get the Big Government types out of government and so out of the way.

Incidentally, the WSJ‘s op-ed also has some words on the Fed’s success rate with that other mandate, maintaining “full employment,” and why it’s useful to take that DOC away from the Fed.  RTWT.