Economic Myths and Irrelevancy

Walter E. Williams:

There is no more reliable rule than the 95 percent rule: 95 percent of what you read about economics and finance is either wrong or irrelevant.

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[T]he most repeated statement about the cause of the U.S. Great Depression is that it was caused by the October 1929 stock market crash. How could that be? By April 1930, the stock market had recovered to its pre-crash level. What is not taught in history books is the Great Depression was caused by a massive government failure. The most important part of that failure were the actions by the Federal Reserve Bank that led to the contraction of the money supply by 25 percent. Then, in the name of saving jobs, Congress enacted the Smoot-Hawley Act in June 1930, which increased U.S. tariffs by more than 50 percent. Other nations retaliated and world trade collapsed. U.S. unemployment rose from 8 percent in 1930 to 25 percent in 1933. In 1932, the Herbert Hoover administration and a Democratic Congress imposed the largest tax increase in U.S. history, raising the top tax rate on income from 25 percent to 63 percent. The Roosevelt administration followed these destructive policies with New Deal legislation that massively regulated the economy and extended the Great Depression to after World War II.

Have today's politicians and their economic advisers learned anything from yesteryear's policy that turned what would have been a short, sharp downturn in the economy into a 16-year affair? The answer is very little.


The facts of life are conservative

Mark Steyn:

In its boundless ambition, the Left understands that the character of a people can be transformed: British, Canadian and European elections are now about which party can deliver "better services," as if the nation is a hotel, and the government could use some spritelier bellhops. Socialized health care in particular changes the nature of the relationship between citizen and state into something closer to junkie and pusher. On one of the many Obama Web sites the national impresario feels the need to maintain -- "Foundation for Change" -- the president is certainly laying the foundation for something. Among the many subjects expressing their gratitude to Good King Barack the Hopeychanger is "Phil from Cathedral City, Ca.":

"I was laid off in mid-January from a job I had for 12 years. It's really getting hard to make ends meet, but this month I got some great news. This week I received in the mail official notification that my COBRA monthly payments for medical, dental and vision insurance will decrease from $468 to only $163, all due to the American Recovery and Reinvestment Act. This is a $305 in savings a month!

"I can't tell you how much of a weight off my shoulders this is. I am living proof of how the president's bold initiatives are beginning to work!"

But just exactly how do these "bold initiatives" work? Well, hey, simple folk like you and I and Phil from Cathedral City don't need to worry about the details. Once these "bold initiatives" really hit their stride maybe the cost of everything over four hundred bucks can be brought down to $163. Wouldn't that be great?

The problem in the Western world is that governments are spending money faster than their citizenry or economies can generate it. As Gerald Ford liked to say, "A government big enough to give you everything you want is big enough to take away everything you have." And that's true. But there's an intermediate stage: A government big enough to give Phil from Cathedral City everything he wants isn't big enough to get Phil to give any of it back. That's the stage the Europeans are at: Their electorates are hooked on unsustainable levels of "services," but no longer can conceive of life without them.


Legalized larceny

"The collection of taxes which are not absolutely required, which do not beyond reasonable doubt contribute to the public welfare, is only a species of legalized larceny. The wise and correct course to follow in taxation is not to destroy those who have already secured success, but to create conditions under which everyone will have a better chance to be successful." --President Calvin Coolidge (1873-1933)


Calling it what it is

"What [Obama calls] tax reductions in this bill are really transfer payments, particularly redistribution of income from the rich to the poor. The economy did very well [after the Bush] tax cuts of 2003. Obama has blamed [the Bush tax cuts] for part of the current financial collapse. There's really no linkage between the tax cuts of 2003 and the financial and housing collapse we've seen in recent months. Abolishing the corporate income tax at the federal level I think would be very positive. It's a very poor form of taxation. I would make permanent the kinds of changes that were in the 2003 tax reform, including the marginal tax rate structure." --Harvard Economist Robert Barro on Obama's "terrible piece of legislation" [Emphasis added. --R]


2009 Index of Economic Freedom

From The Patriot Post, Friday Digest, Vol. 09 No. 02:

In alarming conjunction with recent headlines reporting that the global influence of the United States has slipped dramatically due to the dereliction of government regulators largely responsible for triggering the current recession, the 15th annual Index of Economic Freedom published jointly by The Wall Street Journal and The Heritage Foundation reveals the U.S. saw a corresponding slip in its rankings to sixth place. Hong Kong is tops again, followed by Singapore, Australia, Ireland and New Zealand to round out the top five.

Evaluating numerous criteria relating to economic freedom, the study again shows an affirmative correlation between economic freedom and national income. Freer countries enjoy per capita incomes more than 10 times higher than those in "repressed" countries occupying the bottom of the rankings. In a chilling highlight, it was repressed nations that turned to deficit spending, government seizure of land and resources, and government support of favored enterprises, eventually devastating their economies even further with government mismanagement. Not to suggest that our government's current bailout debacle bears a striking resemblance to government mismanagement that landed many of the repressed countries at the bottom of the rankings, but as Founding Father John Adams once said, "Facts are stubborn things." It's pretty bad when politically repressive places such as Hong Kong and Singapore are ranking higher on the list than the oldest surviving constitutional republic in the world.


"The current economic strategy is right out of <em>Atlas Shrugged</em>."

Stephen Moore, 'Atlas Shrugged': From Fiction to Fact in 52 Years:

For the uninitiated, the moral of the story is simply this: Politicians invariably respond to crises -- that in most cases they themselves created -- by spawning new government programs, laws and regulations. These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs...and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

In the book, these relentless wealth redistributionists and their programs are disparaged as "the looters and their laws." Every new act of government futility and stupidity carries with it a benevolent-sounding title. These include the "Anti-Greed Act" to redistribute income (sounds like Charlie Rangel's promises soak-the-rich tax bill) and the "Equalization of Opportunity Act" to prevent people from starting more than one business (to give other people a chance). My personal favorite, the "Anti Dog-Eat-Dog Act," aims to restrict cut-throat competition between firms and thus slow the wave of business bankruptcies. Why didn't Hank Paulson think of that?

These acts and edicts sound farcical, yes, but no more so than the actual events in Washington, circa 2008. We already have been served up the $700 billion "Emergency Economic Stabilization Act" and the "Auto Industry Financing and Restructuring Act." Now that Barack Obama is in town, he will soon sign into law with great urgency the "American Recovery and Reinvestment Plan." This latest Hail Mary pass will increase the federal budget (which has already expanded by $1.5 trillion in eight years under George Bush) by an additional $1 trillion -- in roughly his first 100 days in office.

The current economic strategy is right out of "Atlas Shrugged": The more incompetent you are in business, the more handouts the politicians will bestow on you. That's the justification for the $2 trillion of subsidies doled out already to keep afloat distressed insurance companies, banks, Wall Street investment houses, and auto companies -- while standing next in line for their share of the booty are real-estate developers, the steel industry, chemical companies, airlines, ethanol producers, construction firms and even catfish farmers. With each successive bailout to "calm the markets," another trillion of national wealth is subsequently lost. Yet, as "Atlas" grimly foretold, we now treat the incompetent who wreck their companies as victims, while those resourceful business owners who manage to make a profit are portrayed as recipients of illegitimate "windfalls." This. Must. STOP. [Registration may be necessary to read complete article on WSJ.com.] [Wave of the phin to Stephen for the link, via IM.]


Businesses don't pay taxes

Ronald Reagan:

"The most dangerous myth is the demagoguery that business can be made to pay a larger share, thus relieving the individual. Politicians preaching this are either deliberately dishonest, or economically illiterate, and either one should scare us. Business doesn't pay taxes, and who better than business to make this message known? "Only people pay taxes, and people pay as consumers every tax that is assessed against a business. Begin with the food and fiber raised in the farm, to the ore drilled in a mine, to the oil and gas from out of the ground, whatever it may be--through the processing, through the manufacturing, on out to the retailer's license. If the tax cannot be included in the price of the product, no one along that line can stay in business." [Emphasis added. --R]


Healthcare shouldn't be linked to employment

Jeff Jacoby:

An end to employer-based health insurance is exactly what the American healthcare market needs. Far from being a calamity, it would represent a giant step toward ending the current system's worst distortions: skyrocketing premiums, lack of insurance portability, widespread ignorance of medical prices, and overconsumption of health services.

With more than 90 percent of private healthcare plans in the United States obtained through employers, it might seem unnatural to get health insurance any other way. But what's unnatural is the link between healthcare and employment. After all, we don't rely on employers for auto, homeowners, or life insurance. Those policies we buy in an open market, where numerous insurers and agents compete for our business. Health insurance is different only because of an idiosyncrasy in the tax code dating back 60 years - a good example, to quote Milton Friedman, of how one bad government policy leads to another.

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Americans who would never think of using auto insurance to cover tune-ups and oil changes grew accustomed to having their medical insurer pay for yearly physicals, prescriptions, and other routine expenses.

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When patients think someone else is paying most of their healthcare costs, they feel little pressure to learn what those costs actually are - and providers feel little pressure to compete on price. So prices keep rising, which makes insurance more expensive, which makes Americans ever-more worried about losing their insurance - and ever-more dependent on the benefits provided by their employer.

De-linking medical insurance from employment is the key to reforming healthcare in the United States. [Emphasis added. --R]


The only constant is change

Philip Terzian:

When asked what the market would do, J. Pierpont Morgan is supposed to have replied, "It will fluctuate." And so it has always done. For the time being, capital will be tighter than before, restricting credit--which is not always a bad thing--and businessmen will be reminded (as legislators, state and federal, seem never to learn) that neither bull markets nor recessions last indefinitely.

This is a fundamental reality of capitalism that seems never to penetrate the minds of journalists or politicians: Markets expand, contract a bit, and expand again, revenue streams are not always smooth, and for economic enterprise, the cost of overconfidence can be the same as the price of inertia: swift self-immolation. What appears to be huge, venerable, and financially indestructible today can be gone tomorrow.

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The financial markets are unsteady at the moment, and Wall Street is undergoing elective surgery. But change, not stasis, is the hallmark of the free market [...]


Guess which way we're going to go

Bruce Henderson:

One of the reasons that house prices got so high here is that people could get crazy financing for huge amounts without adequate resources to pay it back. So “dumb money” bid the price too high, and now no one can buy or sell because they can’t finance their homes.

So there are two ways to fix this - the healthy way would be to let the market forces bring the prices down to what people can reasonably pay. This is the best for everyone long term as it levels out who can live in California.

The second way would be to use the government backed entities, Fannie and Freddie, to prop up these insane prices. This is akin to providing an alcoholic with discount coupons for the corner liquor store.


A thought on taxes and wages

There's a movement afoot by the Democrats to get the minimum wage raised again. Despite historical financial evidence to the contrary, raising the minimum wage does not help those at the low end of the wage spectrum, as our nation's leftists would like us to think. Raising the minimum wage means businesses are less likely to hire more workers, due to their increased costs with the raise in the minimum wage. Contrast this with the fact that, according to today's Political Diary, Germany is set to cut its corporate tax rate to thirty percent, down from thirty-nine percent. Once it does so, the United States will have the highest corporate tax rate of the industrialized world. How does this affect the minimum wage? I'm glad you asked. It seems high corporate tax rates, according to a "new study by American Enterprise Institute scholars Kevin Hassett and Aparna Mathur...is for the most part paid by workers in the form of lower wages." Ergo: cut the corporate tax rate, workers' wages will rise. You can not get even odds in Vegas that the Democrats would sign on to such a policy.


More miscellany

Liechtenstein is 200. The total population of the nation is a little over half of that of my town.

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In the market for a new mortgage? Be sure to check out the Mortgage Professor, who has a list of "Upfront Mortgage Brokers". These brokers promise the transparency of disclosing "the loan's wholesale price (the interest rate and points), plus the markup, in writing and in advance." [Via Newsweek, June 26, 2006.]

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A thought on why Honda rocks: Last week, during swim lessons, I had a moron moment and forgot to take my Pilot's key and fob out of my swimsuit pocket. An hour later, after drying off the tyke (the lessons were for him, in case you were wondering), I went to change in to some dry clothes and had one of those Seinfeldian "Oooohhhhhh" moments. Just out of curiosity, I hit the lock button on the fob. Twice. I heard the Pilot's horn blast a single note. And I smiled. It's still working, with apparently no ill effects. So is the little keychain LED light my sister-in-law got as a stocking stuffer for me two Christmases ago.