Archive for the ‘economics’ Category

A Third Choice in a Binary System   Leave a comment

Link to Medium Article

We’re at a pivotal point in society.


The Situation

In some ways, I think I know what my parents’ generation (born 1910–1924) felt when their kids (Early Baby Boomers) didn’t see communism as an existential threat to the United States. The differences are:

  1. communism wasn’t knocking on the door of the White House, and
  2. my brother’s half of our generation were (rightfully) protesting dying in a war against an ideology most of them didn’t embrace anyway.

My brother’s generation were not communists. Like many young people of every generation, they didn’t understand much about economics and they tended to let their “feels” make their decisions for them, but most of them liked the perks of capitalism and most of them had at least an inkling that they didn’t want to live in a Soviet-Marxist society. Exceptions existed, of course — hence, Bernie Sanders.

The situation today is very different from 1972.

History

In the 1972 election, George McGovern’s platform advocated:

  1. withdrawal from the Vietnam War in exchange for the return of American prisoners of war
  2. amnesty for draft evaders who had left the country
  3. an anti-war platform (although he didn’t rule out military action if the Vietnamese refused to release American POWs)
  4. an across-the-board 37% reduction in defense spending over three years
  5. a “demogrant” program to replace the personal income tax exemption with a $1,000 tax credit as a minimum-income floor for every citizen in America to replace the welfare bureaucracy
  6. support ratification of the Equal Rights Amendment

As a libertarian, I don’t object to the first four points, I think the 6th is totally unnecessary, and there’s a now-former presidential candidate advocating for something similar to the 5th point. McGovern was an antiwar candidate who wanted to get rid of the welfare system by creating a universal basic income scheme that would have failed and by now, Andrew Yang would have nothing to talk about. I know it would have failed because I live in Alaska where it is currently failing and that’s even with it being supported by something more real than the federal income tax base (the mineral wealth of Alaska). That’s another topic I’ll discuss some other time.

2020

Now let’s look at what the frontrunner for the 2020 Democratic nomination is promising.

Bernie Sanders was the frontrunner in the Democratic 2020 primary polls until Super Tuesday when the Democratic leadership marshaled its forces to assure he won’t be the nominee. I wouldn’t be surprised if he runs as a third-party candidate, which will assure the Democrats lose in November. In the meantime, expect violence outside the Democratic convention and an attempt to put him on the ballot regardless of the primary polls. That he got so close to the nomination should concern us all.

Sanders promises a massive redistribution of income in this country through wealth transfers from the “wealthy” to the “poor”. Sanders advocates for:

  1. Medicare for all, a government single-payer system and demands lower prescription drug prices (pegged to the median drug price of Canada, the UK, France, Germany and Japan.
  2. Cancellation of all medical debt (an estimated $81 billion in past-due medical debt).
  3. guaranteed “free” post-secondary education.
  4. raising the federal minimum wage to at least $15 an hour
  5. doubling union membership
  6. enacting a federal jobs guarantee with the aim of a full-employment economy.
  7. giving workers ownership stakes in the companies they work for and equal say on company boards (all publicly-traded companies would be required to have at least 20% employee ownership)
  8. a federal tax on “extreme wealth” (an annual tax on the total gross wealth of from 1–8% with the purpose of eliminating billionaires entirely).
  9. a progressive estate tax
  10. a progressive corporate tax rate increases
  11. a Wall Street tax
  12. Wall Street reform
  13. create a Bureau of Corporate Governance in the Department of Commerce that would force corporations into a federal charter system that would require them to consider the interest of all stakeholders, not just shareholders.
  14. ban large-scale stock buybacks
  15. free child care and pre-K for all
  16. he’s signed onto a version of the Green New Deal, promising to reach 100% renewable energy for electricity and transportation by 2030 and complete decarbonization by 2050.

Wholesale Economic Takeovers Are Usually Bad for Individualism

Bernie Sanders’ platform amounts to a Wholesale takeover of the American economy at almost every level. It all adds up to a whole lot of taxes and taxes have a way of rolling down from the “wealthy” to the middle class and even the working poor. That was the lesson we all should have learned from the federal income tax, which started in 1917 at 1% on income of $0–20,000 up to 7% on income of $500,000 and up. By World War 2, taxes peaked at 94% on income over $200,000 (about $2.5 million in today’s dollars). Those making $0-2,000 paid a tax rate of 23%. Today, those in the $0-$9,700 bracket pay 10% (but are usually eligible for all of that back in a refund), while top ratepayers making $510,301 or more pay 37%.

Moreover, what Sanders is promising is the suppression of investment and deep mining of investment income in the US. Naturally, investors are terrified of a Bernie Sanders president and ordinary people should be also.

His proposals all represent major hits to the earnings of almost every large company in the United States. Don’t think that matters to you? Do you enjoy low consumer good prices? Would you like to go back to the days of paying $1000 for an I-Phone? Do you have a retirement account that is invested in the stock market? Are you enjoying good growth there currently? That goes away under a Sanders presidency because investors will be forced to hide their income or off-shore it and those of us who are small-potatoes will pay the price when the big-players exit the market.

Sanders Appeal

So why is Sanders doing so well in the Democratic primaries?

Because unlike the Greatest Generation, who didn’t understand the temporary view of their children on the Vietnam War, we raised Gen Y and Millennials as economic illiterates and spoiled rotten brats. How did we do that?

We raised them to believe that college was 100% necessary and then we made college unaffordable with a raft of government programs designed as tuition supports that produce unintended (and completely predictable) consequences. The cost of college tuition has risen by six times more than the rate of inflation since the 1980s, strangling millions of young Americans with college loans that seem impossible to repay. (“Seem” because a lot of people have figured out that continuing to live as though you’re in college after you’re employed pays those loans down quickly).

We raised our kids to believe they were special and worth listening to from birth. I know. I love my kids too, but I also taught them college should be a debt-free enterprise and that they would learn wisdom as they grew older (a fact that at 27 and 21, they both admit to, the 27-year-old more than the 21-year-old). Meanwhile, the establishment in both political parties ignored young voters, who were raised to believe they were the most important people on the planet. To be told they need to cough up the Social Security payments of their (to their eyes) wealthy grandparents flew in the face of their belief in their own superiority. To also have the ACA’s mandates fall most heavily on them right when they needed an income to pay down their loans was frankly unfair. Since they don’t know how economics works and the Obama administration didn’t either, they ended up feeling put upon, which warmed them up for socialism’s empty promises.

We raised them to believe America is a horrible place and in crisis. For the last 12 years, the Democratic establishment has insisted that the Republicans were plotting to bring down the “free world”. The “tea party” (a loosely-affiliated grassroots movement of mostly middle-class people) was demagogued as white supremacists in league with the KKK. Every little phrase or action from people concerned about the increasing size and cost of government became a dog-whistle for “racism”. For the last three years, the Democrats have insisted Trump supports white supremacy and is controlled by Russia’s President Vladimir Putin.

Clearly, the world is ending and moderate Democratic candidates just won’t do in such a crisis.

To Be Fair

Meanwhile, the Republican establishment during the Obama administration told their partisans that the growing national debt was going to eat the economy (which it will, eventually), but then stopped talking about it when Trump became president and continued spending at Obama-era rates.

That hypocrisy did not go unnoticed by younger voters. There appears to be a step toward the libertarian section among young people of a more fiscally-conservative bent. They’re not buying Bernie’s socialist claims, but they’re also not buying Republican claims any longer. (I predict a major reshuffling of both major parties either in 2024, but that’s another post as well.)

Comparing Two Ideologies

It currently looks like Sanders will not be the Democratic frontrunner going into the convention, but the Bernie faction is either going to demand a Biden running mate with a Marxist bent or they’ll vote third-party. Will the Democrats give them what they want?

Biden shows clear signs of dementia and he’s a year younger than Bernie (who recently had a heart attack), so don’t expect him to be the actual nominee. Or if he is the nominee, he’ll have a running mate who is younger and healthier. The Democratic Party establishment doesn’t want to kill the goose that lays golden eggs and installing an out-Marxist in the White House wouldn’t really feed the goose. They want someone who sounds just socialist enough to prevent Bernie supporters from voting for Trump or the Libertarian candidate, but they want someone they can control.

I’m kind of sad that Bernie won’t be in the race in November, but I was looking forward to the comparison between two economic systems with widespread political fallout.

Socialism

Socialism to the extent Bernie Sanders proposes is not possible without restrictions on democratic liberties.

Socialist planning cannot coexist with individual rights. Under socialism, culture must produce “some form of commitment to the idea of a morally conscious collectivity, antagonistic to a bourgeois culture which encourages the primary importance of the individual”, which naturally asserts the rights of individuals to speak their minds freely and act as they wish within reasonable grounds.

Economic centralization requires authoritarian control over the lives of every individual in the country.

Medical care centralization will require rationing and care dictates throughout the country (these have already increased under the ACA).

Education “reform” means more centralization and the elimination of diversity of ideas because a central office will have to make decisions for everyone on a one-size-fits-all basis.

And it all adds up to about $42.5 trillion over 10 years (or $4.25 trillion a year).

Current federal estimates for tax revenue are $44 trillion over the same period with a deficit of roughly $12.4 trillion. THAT’S ON TOP OF ALL THE SPENDING WE’RE ALREADY DOING. We’d go from the government being about 18–22% of GDP to between 40–50% of GDP. Include state and local governments, and the total government spend works out to around 60% of GDP.

Even with massive cuts to defense, you’d still come out with a $34 trillion shortfall over 10 years. You’d need to seize 100% of all corporate profits, plus 100% of all income above $90,000 (per individual) or impose a VAT tax around 87% on all consumer transactions to cover all that spending.

History also shows that the vast power necessary to establish and maintain socialism naturally attracts unscrupulous people who prioritize their own interests over those of society. Moreover, socialism typically destroys the production incentives of ordinary people. They used to joke in the USSR and Eastern-bloc countries — “They pretend to pay us, so we pretend to work.”

Oh, I know. That wasn’t REAL socialism. The communism regimes of the past were dictatorships. If they’d been “democratic socialism”, the leaders would have made the system work for the benefit of the people because the voters would have “thrown the bastards out” at the next election.

I call shenanigans on that. How many socialist societies have to be tried before we accept that what they became was REAL socialism? It’s highly unlikely these mythical “democratic” communist-socialist states would remain democratic for long. Democracy requires effective opposition parties that are able to put out their messages and mobilize voters. That requires extensive resources. In an economic system in which nearly all valuable resources are controlled by the state, the incumbent government easily stranges opposition by denying them access to those resources. Under socialism, the opposition can’t function if they’re not allowed to spread their message. It may not start out that way for President Bernie Sanders, but it will end that way for the American people if we elect him because Sanders advocates for a wholesale takeover of the journalism as well as medical care, education, and the economy.

Mercantilism

I’m not a Trump supporter so I’m not uncomfortable pointing out that Trump is NOT a capitalist. He may be a capitalist in his business dealings, but as president, he has conducted himself as a mercantilist. This makes sense if you recognize the US hasn’t been a free-market economy since the 1860s and has become an increasingly mixed-economy since World War 2. We are already socialism-lite and most of the economic issues we have currently can be traced to the mercantilist/socialist/fascist features of our economy. Capitalism can only succeed in the US if it cozies up to the government in a crony-capitalism system, no better explained than by the Wall Street bailouts of 2008 and 2009. Economically, we have far more in common with Scandinavian big-welfare countries than we do more free-market Hong Kong or Estonia.

Mercentilism isn’t often thought of these days. We tend to think of it as something from the 17th century, but the concept of mercantilism is “the economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which a government should encourage by means of protectionism.” That’s Trump. That’s crony capitalism. That’s not capitalism.

We’ve Reached a Pivot

So the real argument we will face this election cycle is —

  1. Do we want to remain in this quasi-free-market or
  2. Do we want to go fully socialist and become the American European Union just as the European Union is waking up to the damage it is doing to the European economy and the natural rights of individuals?
  3. Do we throw caution to the wind and elect a third-party candidate who takes us toward a more capitalist and individual-liberty-based system.

As I said at the beginning, we are at a pivot point for our society. We’re either going left toward socialism, which requires authoritarian central planning and probable eventual totalitarianism or we’re holding steady with a mercantilist mixed-economy that’s not working for most people and will eventually lead us to Door #1 anyway. But the pivot point gives us an opportunity to consider a third option — if we’re willing to think outside the two-party box that has defined us forever.

Vote third party in 2020 because doing the same thing over and over again expecting different results hasn’t worked so far.


Lela Markham is an Alaska-based novelist and blogger interested in a variety of topics, mostly from a libertarian perspective.

Posted March 13, 2020 by aurorawatcherak in economics

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Free Is A Delusion   2 comments

I read an article recently in which the writer asserted we could have “free” stuff because a country of 340 million people can afford it. She further asserted that it was ridiculous and self-serving to think otherwise.

Courtesy of Washington State Highway Patrol

Sigh! This shows a profound lack of economic understanding.

In the physical world, there will always be scarcity. Capitalism has done a really good job of reducing scarcity around the world because it innovates more efficient use of resources and devises new ways to distribute it, as well as offering wanted items at lower prices through economies of scale, but it continues to struggle against the headwind of centralized government planning that insists that a board of bureaucrats can eliminate the resource scarcity simply by declaring it “free”.

Human wants are limitless. Resources are scarce.

Yes, we could have “free” almost everything. Except “free” doesn’t exist. There’s a cost to everything. If you don’t realize that, you haven’t thought seriously about the world around you. Look about and ask yourself “What is the cost of that?” Sunshine? To have sunshine requires blue skies which isn’t really available in countries like China. Sunshine, therefore, is not free because, among other things, air scrubbers on factory smokestacks cost money. Water isn’t free because it must be pumped to your location and filtered to remove contaminants. My daughter once informed me that the aurora borealis is free and I agree with her. I tried that same experiment with my son and he pointed out that the solar storms that cause the aurora borealis fry electronics that aren’t properly shielded, therefore there is a cost to the aurora borealis. Literally, just look around and consider what something costs.

College could be “free” if only the professors and staff were willing to work without pay, but then it wouldn’t be “free” because they’d be bearing the costs that the students rightfully should pay. Professors and staff are performing a service and ought to be paid by those who value that service.

We could have “free” medical care if only doctors, nurses, etc. didn’t expect to be paid. They do actually need to be paid because, like the professors, they need to eat and have roofs over their heads. We could argue whether doctors and nurses should get paid so much for the valuable service they provide, but rather than you and I arguing, why don’t we get the government and the government-created insurance companies out of the way so the patient and the medical providers can negotiate face to face? It would solve a whole host of problems that “free” created in the first place. Patients would come to realize that the true cost of their medical care is at least 80% higher than they currently pay and medical providers would learn that their patients can’t afford them. If they want to keep a roof over their heads, they might need to lower their rates once there’s no insurance industry to play “Hide the Facts” on their behalf. And patients, freed from $1000 a month premiums would go to their providers and say “I can afford this much, but not this much — let’s make a deal.” The quality of medical care would not be reduced and might even improve because providers would not want to lose patients to someone who is doing it better for the same or lower price. Yes, competition improves quality and lowers price in any market where the government isn’t intervening, even the medical profession.

No amount of wishing will make that truck safe.

There is no such thing as a free lunch (or dinner or breakfast) and when offering all this “free” stuff, the propagandists neglect to admit that it means you’re going to have to live on a whole lot less of your income. Yeah, yeah, yeah — we’ll mine the rich — until they move to a country that doesn’t while they can still afford to do it. Don’t believe that? Look at the outmigration rate from Massachusetts (which requires universal insurance coverage) to states that don’t require that (like Texas). If “free” is so great, why are people opting to live where “free” isn’t available?

Yeah, yeah, yeah, we’ll run deficits because “deficits don’t matter” … until the economy collapses under the weight of them and we’re all living in a Greater Depression. That’s a pretty high cost and if you study classical economics you learn such collapses often come from deficit spending.

Yeah, yeah, yeah — we’ll make the middle class pay their “fair share” and — on and on and on until there’s nothing left of what was until the 1970s the most vibrant nation in the world. You see, we’ve been collectivizing for about 100 years — it really picked up speed with the New Deal and the Great Society. And with every new buy of “nice things,” we’ve seen our economy shed vitality. By the 1970s, the economy started sending signals that “free” (government-provided) is hurting us. Some of us noticed it and argued for a return to what made our economy vital in the first place — the relatively free market of the 19th century when the US government wasn’t large enough to interfere. While some of our politicians pay lip-service to that, they continue to grow government and its cost and now we have an election that has been all about the “free” stuff.

The economy is running out of steam and it’s not going to get better until we get a load of bricks off its drive train. Not even “free” jobs will take care of that because there is a cost of offering people jobs and the government has to take that from us — you and me, the taxpayers. It’s never enough because the government strips the vitality out of the economic activity and teaches us that we shouldn’t strive to make a better widget. We should instead strive to make a government auditor happy by making the same widget we made last year.

The last thing we need is more “free stuff”. In fact, what we really need is a major purge of all propagandist nonsense. No country in the world can afford “free” because free doesn’t exist. Yes, we should take care of those who legitimately cannot take care of themselves, but when 50% of the adult working population is on some form of “free” (government benefits) and the other 50% are paying the bill for what isn’t “free” something is wrong and it’s time to dump the apple cart, toss out what hasn’t worked and return to what did. History can teach us a lot if we’ll only study it.


Lela Markham is an Alaska-based novelist and blogger interested in a wide variety of subjects, often from a libertarian perspective.

Posted February 13, 2020 by aurorawatcherak in economics, Uncategorized

$3000 more income per year   Leave a comment

Regulation under the Last Six Presidents

That last figure represents reduced regulatory costs of $23 BILLION by eliminated hundreds of burdensome regulations.

This represents a fundamental change in the direction of the administrative state after decades of unchecked growth.

For contrast, the Obama administration imposed more than $245 billion in regulatory costs on American businesses and families during its first two years.

The benefits are lower consumer prices and more jobs.

But is it safe to reduce regulation like that?

The questions we should be asking are:

What is the problem this regulation is trying to fix?

The answer to that question should be

Unless otherwise required by law, we move forward with regulation only when we can identify a serious problem or market failure that would be best addressed by federal regulation. President Bill Clinton recognized that “the private sector and private markets are the best engine for economic growth.”

Let’s look at some new research from the Council of Economic Advisers, which estimates the added growth and the impact of that growth on household income.

  • Before 2017, the regulatory norm was the perennial addition of new regulations.
  • Between 2001 and 2016, the Federal government added an average of 53 economically-significant regulations each year.
  • During the Trump Administration, the average has been only 4.

Even if no old regulations were removed, freezing costly regulation would allow real incomes to grow more than they did in the past, when regulations were perennially added. The amount of extra income from a regulatory freeze depends on (1) the length of time that the freeze lasts and (2) the average annual cost of the new regulations that would have been added along the previous growth path.

…In other words, by the fifth year of a regulatory freeze, real incomes would be 0.8 percent (about $1,200 per household in the fifth year) above the previous growth path.

As shown by the red line, removing costly regulations allows for even more growth than freezing them. As explained above, the effect, relative to a regulatory freeze, of removing 20 costly Federal regulations has been to increase real incomes by 1.3 percent. In total, this is 2.1 percent more income—about $3,100 per household per year—relative to the previous growth path.

Even modest improvements in growth lead to meaningful income gains over time.

Posted July 5, 2019 by aurorawatcherak in economics

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Whatever Happened to the Telephone Operators?   Leave a comment

I am seriously tired of the 2020 election and it’s still 18 months away. It’s going to be hard to stay focused on principles when drowning in politics.

But some of these candidates are — well, worthy of a laugh or two. Take Andrew Yang, a former lawyer and entrepreneur, who is advocating for a Universal Basic Income to be implemented for all 18-64 year-olds. It’s pretty much his entire platform. His argument for this, per his website, is “a third of all working Americans will lose their job to automation in the next 12 years. Our current policies are not equipped to handle this crisis.”

There is a growing list of vocal people insisting technology advancements will result in massive unemployment, and so they advocate for the UBI as necessary to keep society afloat. The idea that technology destroys jobs and will cause massive unemployment prevails despite being a disproven myth.

Take a look at history before you argue.

If technology had been destroying jobs for the hundreds of years people have been arguing about automation and machines, there would be hardly any jobs left. Bulldozers took the place of men with shovels. Cars put railroad workers out of business. Elevator operators, typists, blacksmiths, and manual telephone operators jobs all vanished over the 20th century.

Official unemployment in September of 2018 was the lowest in nearly 50 years. The labor force participation rate has actually increased due to women entering the workforce. We have more jobs now than ever.

In other words, predictions of technology harming the workforce have constantly failed since the dawn of technology. Despite this, Yang says automation will create a crisis within the next 12 years and that a UBI will handle that crisis.

Sigh ….

Technology helps to make the economy stronger as machines and tools make humans more productive. The entire goal of economic progress is to make us more productive, more efficient, have more consumer goods available, more leisure time, and higher standards of living. This is achieved by higher productivity and efficiency. We are better off not needing twelve people with shovels to do the same thing as a bulldozer.

Yang worries about what the 3.5 million truck drivers in the US will do if their jobs are automated away in 12 years. THis is assuming that all companies can afford and will buy self-driving 18-wheelers in that time frame.

Well, what happened to all the video store workers who lost their jobs when streaming overwhelmed Blockbuster? What happened to the 1.5 million railroad workers who lost their jobs as people moved to their own cars? They didn’t all starve to death. They found new work and that’s already occurring in many industries. Job hopping has already increased as people learn new skills and get new jobs. They do it constantly. Society creates and destroys different kinds of jobs through technology. Markets adjust and people find new work. It’s been going on since the Industrial Revolution.

Job displacement does occur because of technological advancement and people must adjust. Some people may need help when finding new jobs and new careers and that’s a worthy discussion to have. However, technology should not be avoided and feared because it replaces currently existing jobs. It makes our lives better and leads to the liberation of labor for newer, better jobs.

The next generation of technological development and automation won’t result in a joblessness crisis. It will simply result in a change in occupations that might feel chaotic for a while, but will not be the end of the world.

Whatever happened to the weavers displaced by the Jacquard looms, for example? If you don’t know, you should study some history.

Posted March 26, 2019 by aurorawatcherak in economics

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Andrew Yang’s Math Doesn’t Add Up on Universal Basic Income | Jacob Dowell   Leave a comment

The UBI rests on the assumption that consumption spending grows the economy and drives production. Transferring money from savers to consumers, as Yang’s UBI hopes to do, does not grow the economy in the long run—it has the opposite effect.

Source: Andrew Yang’s Math Doesn’t Add Up on Universal Basic Income | Jacob Dowell

Andrew Yang, 2020 Democratic presidential candidate, has revived the debate on Universal Basic Income (UBI) with his proposed “Freedom Dividend.” His plan is to offer an alternative to the modern means-tested welfare state with one simple program to pay $1,000 per month, or $12,000 per year, to every American adult over the age of 18.

Yang has already received a thorough response from Gonzalo Schwarz. Though Schwarz’s response contributes important insights—such as the insignificance of technology replacing jobs, the self-worth that work brings, and the likelihood of a UBI supplementing rather than replacing welfare—I would like to contribute some further insights that more directly address the economic errors of Yang’s arguments.

First, let’s look at the funding. Yang says his 10 percent Value Added Tax (VAT) would raise $800 billion per year, save $600 billion per year from the costs of other welfare programs, save $200 billion per year from reducing the demand on health care services and incarceration, and eventually raise $600 billion extra per year from economic growth.

There is an even deeper flaw in the argument that the UBI would expand the economy.

Before the economic growth (which would not actually happen as I explain below), he has only $1.6 trillion of funds. Even after his expected economic growth, he will have only $2.2 trillion of funds per year, still far from the $2.8 trillionrequired excluding bureaucracy (234 million people 18+ at $12,000 per year). Yang never mentions debt as a means for payment, but his own math doesn’t add up.

Yang is also deceiving in his argument about the program’s impact on the economy. He cites a paper by the Roosevelt Institute that finds, at $12,000 per year, UBI would expand the economy by 12.56 percent over eight years. However, the 12.56 percent growth is under a scenario of a completely debt-financed program. The study admits that a completely tax-funded program would result in a 6.5 percent growth over eight years. Since Yang’s program is mostly tax-funded, it is highly deceiving to claim economic growth of 12.56 percent.

However, there is an even deeper flaw in the argument that the UBI would expand the economy. It rests on the assumption that consumption spending grows the economy and drives production.

The argument goes like this: By transferring money from those who save money to those who have a higher propensity to consume, there will be more spending on consumption goods such as food and clothing. This, in turn, will give an income to the shop owners who will spend their new profits on other consumption goods. And the circulating money creates more economic activity for the macroeconomy.

Transferring money from savers to consumers, as Yang’s UBI hopes to do, does not grow the economy in the long run—it has the opposite effect.

The “propensity to consume” as the cause of economic growth is a common Keynesian notion. But it’s dreadfully wrong. First, it is important to recognize that economic growth is not when everyone gets more money. Economic growth occurs when an economy produces more valuable goods. And what causes this? Capital goods.

Capital goods are the previously-produced goods that are used in the production process and that improve the productivity of workers and the general economy. The use of hammers and nails, for example, greatly improves a construction worker’s ability to build a house. Capital goods are created through savings and investment—the opposite of consumption. Without investment funded by savings, the production of capital goods will slow, causing economic growth to slow.

It may be argued that no one argues for 100 percent consumption spending and that since an individual business will be getting more money, they will be better able to afford more capital goods. But this argument still ignores how the capital goods were produced in the first place.

To create capital goods, someone in the past must have put aside resources to use for a line of production that would not create immediate value. To create a hammer, someone has to save and invest resources into mining iron ore, which then requires resources to smelt into steel. Someone must also have invested resources into tree-cutting for the wood to create the handle. Each of these projects, in turn, required resources for its production process.

In order to have economic growth, there must be a sacrifice of current consumption in order to fund the creation of capital goods.

All of these steps required the production of goods that did not serve any immediate consumption value. The steel and the wood are only a means of creating a hammer, which is itself a means of creating houses and other consumer goods.

The final consumption good, however, would not be possible without someone in the past saving resources to be used for a line of production that was not immediately serviceable but used for the production of capital goods.

In order to have economic growth—to expand production—there must be a sacrifice of current consumption in order to fund the creation of capital goods. Transferring money from savers to consumers, as Yang’s UBI hopes to do, does not grow the economy in the long run—it has the opposite effect.

A common argument against UBI is that it will incentivize people not to look for work. Yang answers this criticism, saying that $12,000 per year will still not be a good enough living for most people, so people will still be incentivized to get jobs and contribute to production.

However, there are still marginal effects at play that can add up to huge changes: 1) It decreases the incentive for workers to quickly find new employment once they’re out of a job, and 2) it decreases their sensitivity to income differences between jobs.

A UBI would skew choices towards enjoyable work rather than efficient or productive work.

The increased time between jobs means there will be lower employment at any given time and, therefore, less production. And the decreased sensitivity to higher incomes means people will be more likely to do less productive work for the sake of enjoyment. While it may be desirable for workers to balance their income needs and their work preferences, a UBI would skew choices towards enjoyable work rather than efficient or productive work. Yang even admits this: “UBI increases art production, nonprofit work and caring for loved ones.”

While these may be admirable activities, Yang is forgetting to consider the opportunity costs associated with them. While people will be more inclined to make art, write novels, and work less, the amount of needed goods in society will decline. This may be a worthwhile tradeoff to some, but when the main stated goal is to help those in poverty, producing less clothing and food is not going to achieve the desired ends.

Andrew Yang does bring up some admirable points about a UBI avoiding the welfare cliff and reducing bureaucracy. However, the overall greater expansion of the government, the even more massive resource transfer from savers to consumers, and the productivity-reducing effects on labor all toll to a huge loss for the economy in the long run.

Posted March 16, 2019 by aurorawatcherak in economics

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Unseen Benefits of Brexit   Leave a comment

Madeline Grant

https://fee.org/articles/the-unseen-economic-benefits-of-brexit/

In a now-famous essay, “What is Seen and What Is Not Seen,” the great economist Frederic Bastiat warned against judging the value of any activity in a vacuum.

Brexit.pngBastiat’s “broken window fallacy” brilliantly exposes a common tendency to focus on the visible, tangible benefits of an action—the “seen”—while neglecting the “unseen” penalties and long-term drawbacks associated with the same activity—the invisible cost of opportunities foregone.

Though he wrote the essay in 19th-century France, Bastiat’s insights have a timeless wisdom. We live with the consequences of reductive “broken window” thinking every day, especially where public money is concerned. Politicians often praise the visible benefits of public spending, e.g. the number of jobs “created,” without considering whether the funds could have been spent more wisely elsewhere or even how the taxpayer might have spent the cash had it remained in his or her pocket.

For my money, the fraught Brexit debate badly needs a dose of Bastiat.

So far, discussions of the gains and losses of Brexit have understandably tended to focus on the most obvious costs, like the amount Britain may pay in any “Divorce Bill,” the potential “Brexit hit” to companies exporting to the EU, and so on. Of course, these concerns are vitally important, but our focus on the immediate costs of EU departure risks blinding us to the very real costs of maintaining the status quo.

Membership in the European Union carries huge unseen penalties whose implications may not be immediately apparent. The EU’s Common External Tariff, for example, raises prices and so reduces the quantities of goods and services available to ordinary consumers. Since shoppers in the EU lack the counterfactual experience of trading at world prices, this penalty goes unnoticed, but it involves a misallocation of resources on a vast scale.

In adopting the government’s proposed model for close customs cooperation and a common rulebook, we run the risk of finding ourselves with little scope to diverge from EU regulations on goods and unable in practice to strike new trade deals with the rest of the world.

Negotiating the terms of our departure also comes with huge hidden dangers. In adopting the government’s proposed model for close customs cooperation and a common rulebook, we run the risk of finding ourselves with little scope to diverge from EU regulations on goods and unable in practice to strike new trade deals with the rest of the world. It is often pointed out that the UK’s interests in trade agreements are primarily in services, but this makes it even more vital to maintain flexibility over what we can concede in goods to incentivize potential trading partners to strike a deal. The status quo, or anything close to it, carries huge opportunity costs of its own.

Due to a combination of the precautionary principle enshrined in the Lisbon Treaty and the difficulties of getting 28 countries to agree on anything, the EU, intentionally or not, often stands in the way of innovation.

In particular, the precautionary principle, the preferred risk management strategy of EU regulators, places the onus on creators of new technologies to prove their invention is safe where some risk may exist—even if there’s no scientific consensus to suggest any actual harm will occur.

In particular, the precautionary principle, the preferred risk management strategy of EU regulators, places the onus on creators of new technologies to prove their invention is safe where some risk may exist—even if there’s no scientific consensus to suggest any actual harm will occur.

The result? It’s often too much bother to innovate.

During the 19th century, many viewed the emerging railways with a great deal of suspicion. As recorded by cultural anthropologist Genevieve Bell, critics of early locomotives believed “that women’s bodies were not designed to go at 50 miles an hour” and worried that their “uteruses would fly out of [their] bodies as they were accelerated to that speed.” Had Victorian Britain followed some version of the precautionary principle, it’s hard to imagine a single track of rail being laid given the levels of contemporary railway fear.

Of course, moral panic over new technology is nothing new. Now, as in the 1850s, over-cautiousness risks hampering important drivers of future growth.

Given the EU’s structure, history, and current trajectory, the balance of probability suggests AI will be the latest in a long line of missed technological opportunities.

So far, the European Union has taken only tentative steps towards regulating artificial intelligence and robotics, though they are currently consulting on the issue. Yet given the EU’s structure, history, and current trajectory, the balance of probability suggests AI will be the latest in a long line of missed technological opportunities.

Take genetically modified crops. Since their commercialization in many parts of the world during the 1990s, GM crops have raised the quantity and quality of the global food supply while lowering fuel and energy usage, requiring fewer pesticides and reducing both soil erosion and carbon emissions—all with no scientifically-documented evidence of harm to human health. And yet, EU-wide precautionary thinking has meant a de facto ban on GM crops, only one variety of which has ever been approved and grown in Europe.

While farmers outside the EU continue to develop newer, better technologies, hysteria over man-made pesticides has kept European farming methods behind the times. Ironically, foregoing the GM revolution in insect-resistant plant breeding has left European farmers more reliant on pesticides than ever (as has the ECJ’s foolhardy ruling on genome editing earlier this year).

Just last week, the French Finance Minister claimed that EU member states are “very close” to agreeing on a counterproductive tax on the turnover of tech companies, a policy likely to discourage new entrants and inflate costs for consumers.

Given all the above, are the EU’s hyper-cautious regulators likely to pursue a different path when it comes to AI and robotics? Or will it be “business as usual”—namely, when in doubt, tax and over-regulate? Certainly, initial signs, including misguided calls for a “robot tax” from the likes of Guy Verhovstadt, don’t inspire confidence.

If you have to get a human to explain the logic, why bother investing in an AI solution in the first place?

The EU’s new General Data Protection Regulation (GDPR), implemented earlier this year, will almost certainly hinder the development of artificial intelligence by raising costs and limiting access to data. In particular, Article 22 creates a new requirement for humans to review certain algorithmic decisions, a restriction that will significantly raise labor costs, thereby creating a strong disincentive from using AI. After all, the whole point of developing AI is to automate functions that would otherwise be slower, costlier, and more difficult to complete if performed by humans. If you have to get a human to explain the logic, why bother investing in an AI solution in the first place?

These may seem like small concerns in the grand scheme of things, but taken as a whole—and the EU creates a whole lot of regulation—it adds up to an environment often hostile to innovation.

It’s no coincidence that Europe has lagged behind the US for decades when it comes to new inventions, innovations, and entrepreneurship. There are of course important cultural differences between these continents, but much relates to the US government’s comparatively light-touch regulatory approach. Not for nothing are there no tech giants in Europe to rival Facebook, Google, Apple, or Amazon.

Creating a competitive, innovation-friendly atmosphere is a huge potential hidden “win” of Brexit—with correspondingly huge opportunity costs from failing to do so.

Creating a competitive, innovation-friendly atmosphere is a huge potential hidden “win” of Brexit—with correspondingly huge opportunity costs from failing to do so. Indeed, with more leading universities than the rest of Europe put together and an already thriving tech sector, Britain has much to lose compared to many of its neighbors.

One can only imagine what Frederic Bastiat would have made of things like robotics, AI, and machine learning. But I suspect the spirit of his advice would be the same: consider the unseen, and don’t destroy the jobs of the future in a misguided attempt to protect the jobs of today.

Posted November 2, 2018 by aurorawatcherak in economics, Uncategorized

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Sea of Red Ink   Leave a comment

The federal budget deficit has jumped 17% in 2018, to $779 billion. Scary, huh? Not quite as scary as it was in 2012, when it topped $1 trillion, but still, the federal government will borrow $870 billion this coming year.

Why? Well, it’s not being done under the guise of economic stimulus. This has been a year of “relatively strong economic growth, low unemployment and continued historically low interest rates”. So, why is the federal government is on track to borrow nearly $7,000 for every household in America?

Drowning Red InkThe future is looking grim. Even if the “Trump boom” continues, current tax and spending patterns indicate that deficits will continue to increase, approaching $1 trillion in two years and steadily rising afterward, on and on into the future. On the current path, the outstanding public debt will rise by one third to $20 trillion just five years from now. That works out at nearly $250,000 for a family of four, more than twice the median household wealth.

Scared yet? The Trump administration is using interest rates of 3.5% for its projections. If they rose to 5%, the interest costs alone on the projected debt would total $1 trillion annually. As the Washington Post economists note, “More than half of all personal income taxes would be needed to pay bondholders.”

No, the tax cuts are not responsible for the red ink. The Budget and Economic Outlook for 2018 to 2028 released by the Congressional Budget Office in April reveals that, as a share of GDP, tax revenues are currently 17.3% of GDP and the CBO forecasts this to rise to 18.5% in 2028. The argument that the cut in federal corporate tax rates is a cause of the increased deficits and debt is absurd. According to the CBO, there is no difference between tax revenues as a percentage of GDP in 2017 compared to their forecasts for 2028 (both will be 1.5%).

The real answer is out-of-control spending. The CBO forecasts that spending will rise from 20.8 percent of GDP now to 23.6 percent in 2028. But it is not increased “discretionary” spending such as defense or education that are driving spending upward. In fact, from 2018 to 2028, the CBO forecasts that discretionary spending will fall from 6.4 percent of GDP to 5.4 percent. Defense spending, for example, is projected to fall from 3.1 percent of GDP in 2018 to 2.6 percent in 2028.

The CBO is unequivocal that this increase in spending is being driven by out-of-control entitlement outlays. Between 2018 and 2028, spending on Social Security, Medicaid, and Medicare is projected to rise from 12.7 percent of GDP to 15.2 percent. Social Security spending is expected to increase from 4.9 percent of GDP to 6.0 percent, Medicare from 3.5 percent of GDP to 5.1 percent, and Medicaid from 1.9 percent of GDP to 2.2 percent. This is what is driving America’s catastrophic indebtedness. In another words, Granny’s eating our lunch and she’ll be kicking our asses come 2028.

America’s politicians know this and they have acknowledged the vast problems this borrowing spry is creating, but they aren’t attempting to mitigate it. Why not?

Economist Pierre Yared seeks to address this question in a new paper titled “Rising Government Debt and What to Do About It”, in which he dismisses the idea that these elevated levels of government debt represent an “optimal” policy response to either foreseen or unforeseen fiscal shocks.

You’d think governments would reduce their debt in preparation for the increased expenditures an older population will require. But that’s exactly what isn’t happening. Governments across the developed world have increased their debts. The wars in the Middle East and the 2008 crash added unforeseen pressures, but increases in government indebtedness long predate 2008 and are present in countries that did not intervene in the Middle East.

Yared suggests political polarization produces something like a ‘tragedy of the commons’ where “political parties acting independently engage in excessive targeted government spending since they do not internalize the shared financing costs of government debt.” Yared asserts aging populations care less about the future, citing evidence that younger households place a larger value on fiscal responsibility than older households. As a result, “countries with a large number of constituencies or deep disagreements in spending priorities across constituencies will incur larger government deficits, resulting in faster government debt accumulation.” Finally, electoral uncertainty “causes the current government to be impatient, since the party holding power recognizes that it may not have the opportunity to benefit from spending in the future.” Yared presents evidence that this political uncertainty has increased in recent decades as government indebtedness has risen.

Image result for image of drowning in red inkIf Yared is right, America’s fiscal outlook isn’t encouraging. None of these factors are going away anytime soon. America’s population is projected to continue aging for the next couple of decades. By 2035, according to the Census Bureau, there will be 78 million people 65 years and older compared to 77 million under the age of 18.

And who doesn’t love a sugar daddy to keep picking up the tab for our favorite goodies? Yes, American seniors have come to rely on Social Security and Medicare, but let’s be honest here — the money to fund them doesn’t magically appear simply because politicians promise the funding.

And does anyone think political polarization in the US is going to decrease much anytime soon? I certainly don’t.

The promises government makes cannot be supported by any reasonable expectation of tax revenue. Printing the money to cover these liabilities will result in inflation, which would decimate private retirement accounts as well as family budgets. At some point, the irresistible force of insufficient government revenues is going to meet the immovable object of entitlement commitments.

And, so, we face year after year of yawning deficits and increasing floors of red inks. Are you scared yet?

So, now the question becomes — what happens to  all the people who rely on that red ink?

Posted November 1, 2018 by aurorawatcherak in economics, Uncategorized

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Benefits of International Tax Competition for US Workers   Leave a comment

Romina Boccia & Julia Howe

Found on FEE

The Tax Cuts and Jobs Act is continuing to produce tangible benefits for Americans, growing the U.S. economy and making it more competitive for business investment and job creation.

Wages are rising, unemployment rates are declining, and there is more money in taxpayers’ pockets.

The larger economy materializes as significantly higher take-home pay for the typical American. According to a recent Heritage Foundation report, the average American will be $26,000 richer over the next 10 years, thanks to tax cuts and a larger economy.

There is even more good news: Tax reform has not only encouraged investment domestically but has fostered a more attractive investment climate on an international scale.

The corporate tax rate cut (from 35 percent to 21 percent) significantly improves America’s position in global financial markets. Businesses are more inclined to conduct and expand their operations within U.S. borders and employ American workers.

These critics fear countries will attempt to undercut each other with lower and lower tax rates.

Yet some have condemned the tax cuts on this very basis, arguing that they contribute to “unhealthy” international tax competition. These critics fear countries will attempt to undercut each other with lower and lower tax rates.

New York Times op-ed called international tax competition a “collective action problem,” suggesting that countries would benefit more from higher corporate tax rates and that they fail to cooperate in imposing higher rates because of incentives to compete for businesses and high-skilled labor.

The article claimed that the U.S. business tax cuts contribute to this problem by reducing tax revenue, thereby harming America.

That argument is flawed both in economic theory and in practice.

A recent paper authored by Assaf Razin and Efraim Sadka, published by the National Bureau of Economic Research, examines the implications of financial globalization, where mobile capital can easily respond to tax and regulatory conditions by moving across borders.

The paper uses a simple model to demonstrate that there are benefits from tax competition, and it shows that countries are better off when their corporate taxes are lower.

The high capital tax rate results in a less productive economy and smaller tax base.

The model assumes that as financial globalization increases, businesses can relocate to more competitive economic environments at a lower cost.

When tax rates in one country are consistently elevated, mobile capital moves to other jurisdictions. New investments in factories and research are made in countries with lower taxes.

Because the capital can move to other countries, workers are left with the tab through lower wages and fewer jobs. The “corporate tax burden” is shifted to labor or consumption in places with high capital taxes.

The high capital tax rate results in a less productive economy and smaller tax base. This combination causes revenue to decrease as there is overall less economic wealth generated and, therefore, less to be taxed.

In contrast, a lower corporate tax burden attracts businesses, creating an environment of greater innovation and prosperity, with benefits for all residents.

The model finds that workers at all skill and income levels are better off with lower business taxes. A bigger economy provides opportunities for greater financial security and income mobility, decreasing the need for government-provided assistance.

The U.S. previously had the highest corporate tax rate, at 35 percent, among the 36 OEC) countries.

A new job or a higher wage help people in need more than a welfare check ever could. Less government intervention and a lower corporate tax rate help residents, providing them with valuable earning opportunities to become wealthier and more financially independent.

The tax burden is one of the 12 factors in The Heritage Foundation’s Index of Economic Freedom affecting the level of economic freedom that citizens can enjoy. Without accounting for the new tax law, the U.S. had a tax burden score of 65.1 in the index. The U.S. was nearly 12 points below the world average score of 76.6 and ranked as 153rd out of the 180 countries whose economic freedom the index assesses.

While the U.S. previously had the highest corporate tax rate, at 35 percent, among the 36 Organization for Economic Cooperation and Development (OECD) countries, the new 21 percent rate is below that of 19 OECD countries.

The U.S.’s index score is likely to improve with the next iteration and demonstrates that the U.S. was in need of tax reform to be more globally competitive.

In addition to the corporate tax rate, the base of what’s taxed matters as well.

The tax law’s changes to expensing rules have important economic effects. Full expensing allows businesses to deduct all investment expenses from taxable income at the time the investments are made. This change encourages more investment in productive capital.

Everyday Americans are enjoying greater wealth and freedom, thanks to the tax cuts. It’s time to make them permanent.

These expensing provisions, which begin to phase out after 2022, should be extended permanently for even greater economic growth.

According to sound economic theory, the tax cuts are benefiting our economy through encouraging investment by domestic and international businesses, and there is ample evidence this theory holds true in practice.

There has been rapid growth in capital spending, with many examples of both small and large businesses investing in expanded operations. This is increasing worker productivity and wages.

Everyday Americans are enjoying greater wealth and freedom, thanks to the tax cuts. It’s time to make them permanent.

Capitalism vs. Socialism   Leave a comment

Several recent polls, plus the popularity of Sen. Bernie Sanders, demonstrate that young people prefer socialism to free market capitalism. That, I believe, is a result of their ignorance and indoctrination during their school years, from kindergarten through college. For the most part, neither they nor many of their teachers and professors know what free market capitalism is.

Found on Lew Rockwell

Free market capitalism, wherein there is peaceful voluntary exchange, is morally superior to any other economic system. Why? Let’s start with my initial premise. All of us own ourselves. I am my private property, and you are yours. Murder, rape, theft and the initiation of violence are immoral because they violate self-ownership. Similarly, the forcible use of one person to serve the purposes of another person, for any reason, is immoral because it violates self-ownership.

Tragically, two-thirds to three-quarters of the federal budget can be described as Congress taking the rightful earnings of one American to give to another American — using one American to serve another. Such acts include farm subsidies, business bailouts, Social Security, Medicare, Medicaid, food stamps, welfare and many other programs.

Free market capitalism is disfavored by many Americans — and threatened — not because of its failure but, ironically, because of its success. Free market capitalism in America has been so successful in eliminating the traditional problems of mankind — such as disease, pestilence, hunger and gross poverty — that all other human problems appear both unbearable and inexcusable. The desire by many Americans to eliminate these so-called unbearable and inexcusable problems has led to the call for socialism. That call includes equality of income, sex and race balance, affordable housing and medical care, orderly markets, and many other socialistic ideas.

American Contempt for …Walter E. WilliamsBest Price: $11.23

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Let’s compare capitalism with socialism by answering the following questions:

In which areas of our lives do we find the greatest satisfaction, and in which do we find the greatest dissatisfaction? It turns out that we seldom find people upset with and in conflict with computer and clothing stores, supermarkets, and hardware stores. We do see people highly dissatisfied with and often in conflict with boards of education, motor vehicles departments, police and city sanitation services.

What are the differences? For one, the motivation for the provision of services of computer and clothing stores, supermarkets, and hardware stores is profit. Also, if you’re dissatisfied with their services, you can instantaneously fire them by taking your business elsewhere. It’s a different matter with public education, motor vehicles departments, police and city sanitation services. They are not motivated by profit at all. Plus, if you’re dissatisfied with their service, it is costly and in many cases even impossible to fire them.

A much larger and totally ignored question has to do with the brutality of socialism. In the 20th century, the one-party socialist states of the Union of Soviet Socialist Republics, Germany under the National Socialist German Workers’ Party and the People’s Republic of China were responsible for the murder of 118 million citizens, mostly their own. The tallies were:

No such record of brutality can be found in countries that tend toward free market capitalism.

Here’s an experiment for you. List countries according to whether they are closer to the free market capitalist or to the socialist/communist end of the economic spectrum. Then rank the countries according to per capita gross domestic product. Finally, rank the countries according to Freedom House’s “Freedom in the World” report. You will find that people who live in countries closer to the free market capitalist end of the economic spectrum not only have far greater wealth than people who live in countries toward the socialistic/communist end but also enjoy far greater human rights protections.

As Dr. Thomas Sowell says, “socialism sounds great. It has always sounded great. And it will probably always continue to sound great. It is only when you go beyond rhetoric, and start looking at hard facts, that socialism turns out to be a big disappointment, if not a disaster.”

Why Worry about Income Inequality?   1 comment

I’m not rich by Alaska standards. I make less than the median Alaska income. That means I’m wealthier than 99% of the world’s inhabitants.

Image result for image of a snap recipient indulgenceIs that unfair? Hmm ….

Well, I can tell you that living at less than the median Alaska income presents challenges for my family. We aren’t as rich as some of our neighbors. There’s a man in this town who makes millions of dollars a year.

Is that unfair? Hmm ….

If I were to make somewhat less … let’s say so I’m in the 1% worldwide, I couldn’t afford to live in Alaska. So if you took the income of the people who live here and distributed it to all the “poor” people in the world, what would happen? People in Alaska would starve and freeze without shelter or fuel.

Would that be fair? Hmm ….

I make a whole lot more money and live in a nicer home than my working class parents did.

Is that fair? Hmm ….

My parents were always able to feed me. My mother’s parents, at the height of the Depression, struggled with that.

Is it fair that I grew up without going hungry, but my mom got rickets as a child? Hmm ….

So, then I think about all the “poor” people in the US who own cars, live in nice apartments, are able to buy food with SNAP benefits, and afford $100 a month smart phones, but they don’t actually work for their living.

Is that fair? Hmm ….

We have to careful not to confuse income inequality and poverty. Standards of living are increasing, albeit unequally, in most of the world. Developing countries are particularly benefiting handsomely from declining barriers to trade and movement of capital. That’s why inequality between countries is actually shrinking. As for inequality within countries, enrichment at the top has not caused mass impoverishment.

The market economy is not a zero-sum game, where someone’s gain must come at someone else’s expense. “The rich get richer and the poor get poorer” is a synopsis of the socialist critique of the market system, implying the perceived inevitability of what Marx called the Law of Increasing Poverty.

But, guess what? It’s a myth unsupported by empirical evidence. Absent government interference in the marketplace, the poor in most developing nations are gaining ground even as those at the top end of the income spectrum are also amassing greater fortunes. Poverty is reducing all across the world.

So what difference does it make if  your neighbor has a million dollars he won’t share with you if you’re making a real income far in excess of your basic needs?

Oh, right, fairness …. It’s not fair. Why can’t he give up some of it so I can be even richer?

Maybe because I didn’t earn it, but also maybe because he’s going to take that money and provide a job that will someday make my kid far wealthier than I ever hoped to be. But if I rob him of that money he earned, he won’t create that job because: a) without resources nobody can create jobs, and b) why should the victim feel beholden to the one who robbed him?

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