Tag Archives: capitalism

Another trailer for The Path to Tyranny

The Path to Tyranny book trailer

Second freest country in the world grows 14.7 percent. We need more freedom!

In economic news today:

Singapore’s economy expanded at a record 14.7 percent in 2010, Prime Minister Lee Hsien Loong said Friday, in a sharp recovery from last year’s recession for the city-state.

It was the best performance ever for Singapore’s trade-led economy, surpassing the previous record 13.8 percent growth achieved in 1970.

The annual 14.7 percent surge announced by Lee is also at the top end of the government’s growth forecast of 13-15 percent.

For next year, growth will moderate to 4.0-6.0 percent, Lee said.

How does Singapore do it? According to Heritage’s Freedom Index, Singapore is the second most economically free nation in the world behind Hong Kong and well ahead of the United States.

According to Wikipedia, Singapore’s government spending is just 10 percent of GDP, compared to 44 percent in the United States. Their debt level is a high 118 percent of GDP, but they have foreign reserves of 80 percent of GDP offsetting that.

Singapore‘s corporate tax rate maxes out at 17 percent of profit and personal tax rates top out at 20 percent of income for incomes over 320,000 SGD (308,000 US Dollars). In fact, they pay no tax on income up to 20,000 SGD (26,000 US Dollars) and only 8.5 percent on income above 40,000 SGD (51,000 US Dollars) but below 80,000 SGD (102,000 US Dollars). While the average American pays an income tax rate of more than 30 percent, the average worker in Singapore pays about 10 percent.

Small government, low taxes, and economic freedom has turned Singapore into an economic powerhouse. Singapore’s economy is now 12 times larger than it was 30 years ago. Compared to the United States, Singapore per capita income has more than doubled in the last 30 years.

We should learn from foreign countries. We can avoid their mistakes and copy their successes. While we cannot copy everything Singapore has done, nor would we want to, we can copy the success they’ve had with small government, low taxes, and economic freedom.

EU falling apart as Ireland refuses its money and Austria refuses to help Greece.

Marketwatch reports:

Irish officials resisted intensifying calls for the nation to accept a bailout as euro-zone finance ministers prepared to meet Tuesday, insisting the government is capable of fulfilling its debt obligations until the middle of next year.

But that misses the point, economists said. The debate centers on worries about the state of the nation’s troubled banks rather than Dublin’s sovereign-debt obligations for the near term.

European officials are reportedly cranking up pressure on Ireland to accept a bailout in an effort to keep Dublin’s fiscal woes from driving up borrowing costs in Spain, Portugal and other so-called peripheral countries in the euro zone.

Meanwhile, the cost of insuring Irish debt against default rose after declining from record levels Friday and Monday. The spread on five-year Irish credit default swaps widened to 515 basis points Tuesday morning from 497 points on Monday, according to data provider Markit.

The Portuguese CDS spread widened 12 basis points to 425, while the Spanish CDS spread widened to 255 basis points from 250 and the Greek spread widened to 900 basis points from 853.

The EU is basically begging Ireland to take its money. Ireland says it doesn’t need it, at least not now. But the EU is not really trying to help Ireland here. It is trying to show the world that it stands behind the EU nations. The EU is trying to help Spain, Portugal, and Greece by lending to Ireland. But why should Ireland hurt its reputation for those countries?

This “selfishness” is spreading across Europe:

According to Dow Jones (via ForexLive) Austria has decided to withhold its contribution to the Greek bailout, citing failure to make progress on finances.

This is obviously a pretty big problem, since that will spur others to wonder why they’re still contributing to the bailout fund.

So, debtors are refusing to borrow from the EU and creditors are refusing to support the debtors. The European Union is not looking very unified right now.

Anybody who studied basic economics learned that cartels cannot survive forever. From wikipedia:

Game theory suggests that cartels are inherently unstable, as the behaviour of members of a cartel is an example of a prisoner’s dilemma. Each member of a cartel would be able to make more profit by breaking the agreement (producing a greater quantity or selling at a lower price than that agreed) than it could make by abiding by it. However, if all members break the agreement, all will be worse off.

The incentive to cheat explains why cartels are generally difficult to sustain in the long run. Empirical studies of 20th century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years. However, one private cartel operated peacefully for 134 years before disbanding.[7] There is a danger that once a cartel is broken, the incentives to form the cartel return and the cartel may be re-formed.

We are now seeing the EU cartel fall apart. While it is unlikely the EU will disappear entirely, it appears to losing power as individual countries restore their economic sovereignty.

Should we return to the Clinton years? Hell yes!

I often hear from those on the left about how much better the Clinton years were than the Bush years and today. Well, let’s compare the size of government during the Clinton years (1993-2000) to the Bush years and today.

First, my favorite chart again to get a general idea of where we are now versus the Clinton years. Clearly, government spending is much higher now:

Total government spending (federal, state, and local) during the Clinton years averaged 34.3% of GDP. During the Bush years, it averaged 35.0%. During the fiscal year just completed (2010) it was 43.9%. Are those on the left really arguing for a 9.6 percentage point reduction in government spending? And what 21.9% (9.6 divided by 43.9) of government will the cut?

Let’s look at the tax side of the equation. Total government revenue (federal, state, and local) averaged 35.2% of GDP during the Clinton years. It was 34.4% during the Bush years. Today (FY 2010), due to the recession, it stands at 30.4%.

What is remarkable is the similarity between the Clinton years and the Bush years, on average. The Bush years saw total government spending 0.7 percentage points higher than during the Clinton years, but total government revenue 0.8 percentage points lower. However, not all this credit and/or blame can be assigned to these Presidents or even to the Congresses because these figures include state and local government, as well. On the balance though, these periods were remarkably similar.

Another interesting factor is that government spending fell 4.5 percentage points during the Clinton years, yet rose 4.4 percentage during the Bush years. Government revenue saw the reverse, up 3.9 percentage points under Clinton but down 4.2 percentage points under Bush. Much of this is simply the result of economic cycles. Clinton started after a recession and ended with a bubble. Bush started with that bubble and ended with a recession.

But the most notable thing is what is occurring today. Under President Obama, government spending as a percentage of GDP has risen 6.9 points while revenue has fallen 2.6 point. Again, President Obama and Congress cannot take all the credit/blame because most of this change has been due to the recession. However, government spending has risen more under Barack Obama in just two years than it did under Bush in eight. In fact, government spending as a percentage of GDP in 2009 alone rose more than it had in the previous 36 years. During the previous recession (2000-2003), total government spending rose 2.7 percentage points and we recovered from that recession just fine. In this recession (2007-2010 so far), government spending as a percentage of GDP has risen 8.9 points and the recession continues.

All this raises a few questions:

  • What have we to show for this 8.9 percentage point increase in the size of government?
  • Do the liberals really want to return to the Clinton day? Are the liberals willing to reduce government spending by 21.9% (9.6% of GDP)?
  • Will conservatives trade a tax increase equal to 4.8% of GDP in exchange for cuts to government equal to 9.6%?

As for me, I’d gladly trade the tax increase for smaller government because we are already paying for the tax increase. To fund our budget deficit, government is issuing debt and printing money. Instead of charging us taxes, they are devaluing the Dollar. Instead of paying for our large government through taxation, we are paying for it with reduced value of our wealth and increasing foreign ownership of our country. Therefore, taxes are much less important than government spending. So yes, I’d certainly support an increase in taxes equivalent to 4.8% of GDP IF AND ONLY IF we reduce government spending by 9.6%, returning us to those much hallowed days of the Clinton Presidency and Contract With America Congress.

* This does not reflect my opinion of Clinton as a person or his policies. Likewise, much of the above talk of “Clinton years” was the result of general economic trends and the Republican Congress. As always, I am a firm believer that history moves in trends and our leaders reflect those trends. (See my book, The Path to Tyranny. Additionally, I plan to write an entire book on this subject in the future.)

The Causes of the Greatness of the Ancient Greeks and their Decline

Ireland bails out banks. Deficit 32% this year. Sovereign debt crisis continues.

The debt crisis finally forced Ireland into making a decision. Ireland had to choose whether to let its banks fail or bail them out. Neither choice was pleasant and both would have had severe repercussions. Not surprising, Ireland took the easier way out. Marketwatch reports:

The cost of bailing out nationalized lender Anglo Irish Bank could soar to as much as 34.3 billion euros ($46.6 billion), the country’s central bank said Thursday, as it also unexpectedly told Allied Irish Banks to raise a further €3 billion.

The new figures, along with the money already injected into other banks and a possible further capital increase for Irish Nationwide Building Society, could see the total cost of the industry bailout hit as much as €50 billion.

In a highly-anticipated assessment of the cost of the financial crisis, the Central Bank of Ireland said it expects Anglo Irish to need €29.3 billion in total, but added the figure could rise by another €5 billion under a “stress scenario.”

The bank has already received €22.9 billion of that total after suffering massive losses as the country’s housing market and construction industry collapsed, dragging the whole economy down with it.

Here’s the key section for those watching the debt crisis and the increasing socialism and economic fascism occurring around the world:

The extra cash for the banking system means the deficit in 2010 will soar to around 32% of gross domestic product, compared to a previous estimate of 12%. The government will announce a new four-year budget plan in November to ensure it can meet this commitment.

A 32 percent deficit!!! That has to be some kind of record.

But what choice did Ireland have? It could have let the banks fail, which would have sent the country to economic turmoil. Instead, it chose to socialize the banks’ debts and is risking the creation of a huge moral hazard. Ireland chose to trade short-term chaos for long-term chaos.

In reality, Ireland is hoping for an economic recovery that will lift its economy and help it reduce its deficit and pay off some of the debt. But will that recovery come soon enough? Will it be strong enough? Will the Irish government and Irish banks suddenly develop the fiscal discipline that it has lacked so far?

I don’t blame Ireland for the choice it made. The problem was not the choice it had to make last week, it was the choices it and other governments, including the United States, have made over the previous decades of loose money, free spending, and debt accumulation.

But we must remember, this story is far from over. It has simply shifted from one of a gushing flesh wound to a slow and festering wound that has not yet been repaired. I repeat: The sovereign debt crisis is far from over. In fact, it is just beginning.

Second Fed official opposes Quantitative Easing.

In a follow-up to my previous blog post Fed planning trillion dollar Quantitative Easing. Fed official admits it won’t work, another Fed official announced his opposition to the planned trillion Dollar quantitative easing:

Dallas Fed President Richard Fisher, who will get a vote on the policy setting Federal Open Market Committee next year, on Friday made his case against a new round of bond purchases, saying it is not clear the benefits of further quantitative easing outweigh the costs. Fisher, according to a copy of prepared remarks he’s due to deliver in Vancouver, made the case that removing or reducing the tax and regulatory uncertainties is the best way to promote business spending and have firms “release the liquidity they are hoarding and invest it robustly in hiring and training a workforce that will propel the American economy to new levels of prosperity, rendering moot the argument for QE2,” he said. “I consider this to be a far more desirable outcome than being saddled with a bloated Fed balance sheet.”

The key words are IT IS NOT CLEAR THE BENEFITS OF FURTHER QUANTITATIVE EASING OUTWEIGH THE COSTS.

Doesn’t this seem to the motto of our current government? Purchase mortgages, expand the Fed’s balance sheet, and print more money even if there is no evidence that this helps the economy. Enact a trillion Dollar stimulus bill, pass a TARP bill, extend unemployment benefits to two-years and drop the requirement to look for work, and raise taxes on the rich even though logic and history prove that this things also do nothing for the economy.

Fed planning trillion dollar Quantitative Easing. Fed official admits it won’t work.

The Fed is currently planning a one trillion dollar quantitative easing program. As Jonathon Trugman of the NY Post reports:

The Fed will likely undertake a very large quantitative easing program sooner rather than later, if the economic data doesn’t get markedly better in the very near future.

This QE2 will need to be far more aggressive than most expect, for there is not going to be a QE3. It is essentially the last chance the Fed has. It will want to eradicate any doubt about its ability to work; it is, in essence, the nuclear option.

The measure could be as much as $750 billion to $1.5 trillion. And expect far more aggressive purchases than in QE1.

Mortgage-backed securities, the root cause of the economic collapse, will be the cornerstone of the purchases, thereby allowing a possible 10 percent to 15 percent increase in home prices, which would do wonders for the flat-lined economy.

Credit card-backed paper will be on the tab as well as some auto loans to keep the administration happy.

Sadly, with credit still unavailable to the “middle class” due primarily to poor fiscal policy and economic leadership, the Fed will have to dramatically increase the money supply in order to spur spending. It will work, but it’s going to be complicated.

So Mr. Trugman believes this quantitative easing will work, but that it has to be huge to spur spending. He fails to ask the simple question: will such an aggressive program be worth the benefit?

But others are arguing that the quantitative easing will have no effect at all. Marketwatch reports:

A new round of Federal Reserve purchases of bonds would have little impact on markets or the economy, Minneapolis Fed President Narayana Kocherlakota said in a speech on Wednesday.

Speaking in London, Kocherlakota on Wednesday outlined several reasons why buying government bonds wouldn’t make a major impact. For one, banks already have nearly $1 trillion in excess reserves. “QE gives them new licenses to create money, but I do not see why they would suddenly start to use the new ones if they weren’t using the old ones,” he said, according to a copy of the text he was due to deliver.

As to the first round of quantitative easing by the Fed, Kocherlakota cited an academic study showing that the $1.5 trillion purchase of agency debt, agency mortgage-backed securities and Treasuries by the Fed between Jan. 2009 and March 2010 reduced the term premium on 10-year Treasurys relative to 2-year Treasurys by about 40 to 80 basis points, which in turn led to a slightly smaller fall in the term premia of corporate bonds.

Kocherlakota estimates a new round of QE would have a more muted effect, because financial markets are functioning much better than they were in early 2009. “As a result, the relevant spreads are lower, and I suspect that it will be somewhat more challenging for the Fed to impact them,” he said.

So Trugman says this aggressive quantitative easing will work, but Kocherlakota says it won’t. In reality, who knows? The real problem is that there is so little discussion of the risks and costs involed. Marketwatch explains the risk in one sentence:

Kocherlakota also said that the impact of quantitative easing is to shift the interest rate risk on bonds from investors to taxpayers.

So the real impact of this quantitative easing will be to socialize risk. The Fed risks creating further moral hazard. The Fed risks producing interest rates that are too low, which will create more bubbles. The Fed is going to create distortions in the market system. But despite these risks, there is no guarantee of success.

I applaud Minneapolis Fed President Narayana Kocherlakota’s efforts to restore reason and common sense to our ineffective and inefficient monetary policy.

Stimulus spending: the new perpetual motion machine.

Stimulus spending is like a perpetual motion machine. Sounds great in theory, but it doesn’t work. Just as machines must use up more power than they output, so too stimulus costs more than it produces.

If stimulus spending really creates jobs and improves the economy, the government could just stimulate the economy all the time and we’ll never have recessions or unemployment. We can achieve perpetual motion through big government! Or so they tell us.

Eighty years ago, Ludwig von Mises wrote:

It is obviously futile to attempt to eliminate unemployment by embarking upon a program of public works that would otherwise not have been undertaken. The necessary resources for such projects must be withdrawn by taxes or loans from the application they would otherwise have found. Unemployment in one industry can, in this way, be mitigated only to the extent that it is increased in another. From whichever side we consider interventionism, it becomes evident that this system leads to a result that its originators and advocates did not intend and that, even from their standpoint, it must appear as a senseless, self-defeating, absurd policy.

It is not just economists like Mises that predict the failure of stimulus projects. History predicts it as well.

Stimulus spending didn’t prevent the Great Depression. It didn’t prevent any recession since then. And I have yet to see proof that stimulus spending produced a net economic benefit when the costs of the government programs were weighed against the economic gains, if there were any at all. Which leads us to one of two conclusions: either (1) stimulus spending cannot work or (2) it can work in theory but government is simply incapable of applying the correct amount of stimulus at the correct time.

In reality, stimulus does have some short-term effect. The “cash for clunkers” program boosted auto sales briefly. The tax credit for home purchases boosted home sales briefly. Construction spending from the Recovery Act did help the economy slightly. The census lifted employment for a few months. But all these programs do is borrow from the future. In the case of “cash for clunkers” and home tax credit, it brought future sales into the present. In the cases of jobs programs and construction projects, the government takes money from the future (debt) and spends it today. That leaves the government with less money in the future and it will either need to reduce future spending or raise taxes, either way harming our economic future.

The Keynesian argument is that this stimulus spending during a recession and cutting back in the future will smooth out the volatility of the economy. First, the government is great at the spending during the recession part, but terrible at cutting back during the recovery. Keynes’ idea was to run a budget deficit during recessions and a surplus during booms. Instead, government runs a deficit during booms and an even larger deficit during recessions. Second, the government has no idea how much to spend on stimulus during a recession and when to cut back on that spending. The government can only guess at how deep the recession will be, when it will start, when it will end, and how strong the recovery will be.

But the government will not let economics or history stand in the way of its grandiose ideas. As Stalin used to say, “We are bound by no laws. There are no fortresses which Bolsheviks cannot storm.”

History has proven that stimulus spending does not work, just as the great economists explained. Yet, time and again voters fall for the same trick and beg our “benevolent leaders” in Washington to take our hard-earned money from us to spend for us.

God willing, voters this November will learn to say NO to Washington and the politicians. “Fool me once, shame on you. Fool me twice, shame on me!” As those great political thinkers from The Who sang, “Won’t Get Fooled Again.”