Tag: Economics

–How not to improve America

An alternative to popular faith

Much of the proposed cost to improve health care will be paid for by cuts in Medicare payments to doctors and hospitals. Clearly, that should improve health care.

Next, we can improve education by having our federal and local governments cut teachers’ salaries and support of schools.

Then, we can improve public safety by cutting police salaries.

And, we can strengthen our army by cutting military pay and investment in weapons research and production.

We can improve America’s brain power by deporting all those aliens, and not letting anyone new in.

And, we can increase medical drug research by restricting profits of those rich, greedy, pharmaceutical companies.

And, we can improve our infrastructure by spending less to repair roads and bridges, along with the electrical and communications grids.

And we can achieve energy independence if the government limits those rich, greedy, oil companies’ profits, while spending less on solar, wind, geothermal and atomic power.

Finally, we can increase economic and jobs growth by raising taxes, particularly on businesses and on the rich (people making more than $200,000 per year).

Taking all of the above steps will complete the anti-deficit, anti-government, xenophobic, Tea Party, class warfare, populist initiatives that seem so much in the news.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

–Prof. Barro and the cost of federal spending

An alternative to popular faith

The 1/22/10 Wall Street Journal published an opinion piece by Professor Robert Barro (Harvard University), who believes, “Much more focus should be on incentives for people and businesses to invest, produce and work. On the tax side, we should avoid programs that throw money at people and emphasize instead reductions in marginal income-tax rates — especially where these rates are already high and fall on capital income. Eliminating the federal corporate income tax would be brilliant. On the spending side, the main point is that we should not be considering massive public-works programs that do not pass muster from the perspective of cost-benefit analysis. Just as in the 1980s, when extreme supply-side views on tax cuts were unjustified, it is wrong now to think that added government spending is free.”

Mostly, I agree — with one huge exception. That last phrase, ” . . . it is wrong now to think that added government spending is free” is itself, wrong.

If federal government spending is not free, it must have a cost. So what is the cost? Not higher taxes, which have no historical relationship to deficit spending. (See item #9 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/.)
Taxes generally have been based on political, not economic, considerations. From a financial standpoint, taxes no longer (after 1971, the end of the gold standard) affect the federal government’s ability to spend. In fact, all federal taxes could be eliminated tomorrow, and the federal government’s ability to spend would not be reduced by even one penny.

Is the cost of federal government spending increased inflation. No, not that either. There is no historical relationship between federal deficits and inflation. The highest inflation since WWII came with the modest Carter deficits, and was cured during the robust Reagan spending years. A graph of deficit growth vs. inflation shows a zero cause/effect relationship. (See item #8 in https://rodgermmitchell.wordpress.com/2009/09/07/introduction/ )

Well then, does deficit spending cause high interest rates? The graph at https://rodgermmitchell.wordpress.com/2009/11/15/deficits-and-interest-rates-another-myth/ indicates no relationship between high deficits and high interest rates.

Even if deficit spending did cause interest rates to rise, there is no historical relationship between low rates and high GDP growth. See item #10 at https://rodgermmitchell.wordpress.com/2009/09/07/introduction/

In summary, there is no post-1971 cost to federal deficit spending, a strong argument for tax cuts and increased spending and a strong argument against deficit concerns.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

–The End of the Euro

An alternative to popular faith

Greece is criticized for secretly borrowing. The fault is not with Greece. The fault is with the euro.

The European Union wants Greece to cut its debt, either by raising taxes, reducing expenditures or both. If Greece does any of the above, it will dive into a depression and pull the other members down with it.

The current situation exposes the fundamental flaw with the euro: It is a gold standard in fancy clothes. Like the gold standard, the euro precludes any member nation from controlling its own finances. The solution to a recession, and indeed, the requirement for economic growth, is government deficit spending. Yet no member of the European Union has the unlimited power to do this. They are restricted by the covenants of the Union.

The grouping of countries under the euro banner is akin to a gold standard, whereby every country is required to peg its currency to a value over which it has no control.

The gold standard failed, and always must fail, because it prevents countries from taking the necessary steps toward economic growth. A growing economy requires a growing supply of money, and deficit spending is the system by which a government increases its money supply.

In 2005, noted economist Professor Randall Wray invited me to speak at the University of Missouri, Kansas City. In this speech I said, “Because of the Euro, no European nation can control its own money supply. The Euro is the worst economic idea since the recession-era, Smoot-Hawley Tariff. The economies of European nations are doomed by the Euro.”

The Euro will fail, just as the gold standard failed, and for the same reason. To attain the modest convenience of easier intra-European trade, the European countries surrendered control over their individual financial destinies. Only a total merger of national governments — a United States of Europe — could make the euro viable.

Rodger Malcolm Mitchell
www.rodgermitchell.com

–Why the real estate collapse?

An alternative to popular faith
        Why did we endure a real estate collapse? (Some call it a bubble.) There is a difference between a boom and a bubble. A bubble is a boom that gets pricked. So first, why did we have the boom?
        The price of any commodity, including real estate, is based on supply and demand. The question is, why did demand for real estate rise faster than the supply for more than 60 years, then suddenly fall?
        Fed haters will tell you the reasons for the collapse were low interest rates and lack of federal credit supervision. I suggest this is somewhere between overly simplistic and just plain wrong. There were many reasons for the boom, and several for the collapse:
        As for the boom, one reason may be that too many people believed unaffordable housing was affordable. The ongoing idea was: Buy a house you really can’t support today, but rely on your future income growth to make it affordable tomorrow. The notion that tomorrow’s income increase will cover today’s unaffordable expenses might sound familiar. It’s a first cousin to a Ponzi scheme, and it’s what many young couples subscribed to.
        Add to that the “safe,” insured profits lenders made, and there was strong encouragement on the credit side.
        Add to that the ridiculous tax law that gave advantages to owners, but not to renters. This was part of the governments historical efforts to help everyone own a home and live the American dream.
        Add to that the history of home value growth since WWII. Experience said, owning real estate was a “sure” way to make money. Think tulip bulbs.
        Add to that the notion that poor minorities should not be prevented from buying houses (Remember Jesse Jackson’s criticisms of the banks for redlining certain neighborhoods). A bank that refused a loan could be accused of racism. This created an influx of “entitled” home owners who not only could not afford their houses today, but never would be able to afford those houses.
        Add to that population growth that in itself increased demand.
        Add to that foreign investors, who saw the U.S. real estate boom as a great place to invest money.
        Add to that the introduction of condominiums, which made renting financially less prudent than owning.
        So there were plenty of reasons for the 60+ years boom. But then, what turned this boom into a pricked bubble? The tipping point may have been the reduced federal deficit growth rate which exacerbated all of the above factors. Because the real estate boom was a long-running Ponzi scheme, it depended on continuing increases in money flow. Ask Bernie Madoff’s investors.
        Yes, low interest rates may have had some recent effect by making property seem more affordable, but this real estate boom had continued for 60+ years, through low rates and high rates.
        Yes, lax supervision of lenders and insurers made everyone feel “bullet proof” when it came to risk. But trying to point at interest rates and supervision as the only factors making for the housing bubble, seems to miss the point.
        If you’re looking for a one-word description of what could have burst the bubble after all these years, that word may be “leverage.” Real estate was purchased with mortgage leverage. These mortgages then were leveraged by being bundled with many mortgages, that leverage being a version of the law of large numbers. (The failure of a small and predictable number of mortgages is distributed harmlessly over a large number of mortgages.)
        The next layer of leverage came from the belief that such organizations as Fannie Mae and Freddie Mac really were government sponsored, and so were absolutely safe.
        An additional layer of leverage was insurance, which fundamentally is a leveraged product (A small number of failures is distributed harmlessly over a large number of insureds.)
        Still one more layer of leverage was added when massive futures trading of insurance was adding to the mix.
        Ultimately, the leverage became so great, that a few billion dollars of real estate supported many trillions of investment. Every change in real estate supply and demand became magnified exponentially.
        In 2004, Federal Debt held by private investors increased 14% from the previous year. Subsequent annual increases declined to about 4% in 2007. The government pumped money into the economy too slowly to support a real estate demand that depended on faster growth.
        Those whose investments relied on greater growth in real estate values, began to feel a pinch, and the massively leveraged house of cards swayed more and more until it tumbled down.
        Previous reductions in federal debt growth almost always had led to recessions, but now the leverage was too great for just a small recession. After a series of smaller economic earthquakes, each caused by reduced deficit growth, this was (as they say in California) the big one.
        In short, the real estate bubble didn’t grow and burst because of something that happened recently. It grew and burst because of many policies that, beginning with the end of WWII, built leverage higher and higher, until a cause that previously had warned us with a series of small recessions, now collapsed into a big recession.
        This leaves us with the question, what has the government now done to reduce the fundamental cause of the bubble burst, leverage? The government has added money. Adding money does provide a temporary solution, but to prevent future bubble bursts, the government also must reduce the various sources of leverage.
        Requiring larger down payments, eliminating the sale of bundled mortgages, eliminating underfunded insurance and eliminating futures trading of mortgages, might be worthwhile for discussion.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com