Tag Archives: economics

Common Sense Economics: Spain

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The Real Madrid vs Barcelona rivalry is about to heat up…

One of the most ambitious, and successful, efforts of the academic Left has been a war on common sense.  True economics is a science governed by very intuitive rules.  Extremely complicated monetary theories have arisen to confuse the subject and contradict common sense conclusions any high school graduate can come to with minimal effort.  The confusion puts up a veil behind which leftist social engineers can operate with reduced risk that someone empowered with simple intuition can identify that the King, in fact, has no clothes…

On of the most intuitive rules is the following: The more you punish success and take the fruit of people’s labor, the less productive they will be.  Spain has ignored this rule for many decades.  Years of anemic growth and re-distribution of capital from productive hands to the lazy regions of the country have created a fragile economy unable to weather the global downturn.  More importantly (here comes one of those intuitive laws economics/human nature), the productive parts of the country are starting to resent supporting the dead weight. The Catalan region of eastern Spain has long been the industrious part of the country.  As per a recent article in Reuters, a significant part of the economic output of the region (8% or $21 billion) is redistributed from Catalonia to the remainder of the country every year…

Which brings us to our second super-simple economic lesson:  People grow entitled to charity quickly.  Give someone a dollar one day and they say “thank you”.  Give that same person a dollar for seven days and then try to walk by on the eighth day.  He will angrily ask where ”his” dollar is.  Appreciation turns quickly to entitlement.  When I lived in Spain eighteen years ago, I don’t recall a “Catalonia appreciation day” for supporting the rest of the country.   I am guessing that it hasn’t started since.

Liberals will argue that there has always been a separatist movement in Catalonia, and they would be right.  However, it didn’t gain any political power until the economy tanked and the country raised taxes to meet the bills.  Since tax burdens weigh disproportionately on the most productive parts of society, Catalonia was hit especially hard.  Rather than continue to support an entitled country incapable of balancing the checkbook, the people of Catalonia are looking to shrug off the oppressive weight.  Just recently, the local government gained a majority capable and willing to vote for separation.  Who can blame them?

How much worse does it have to get before we see the same thing in the US?  Secession petitions have been submitted by people in more than 30 sates in the US, but there is no real political will behind them.  However, what happens when the people of Texas and Florida see their taxes going to bail out the entitlement groups of California and Illinois.  Like in Spain, England, and France the increased taxes in those states will not bring in nearly as much revenue as their predictions and certainly not enough to meet their debt obligations.  Eventually, like with Greece and Spain, the other states will have to come to their rescue, but the constituencies of the bailed out states will not allow any fiscal restraint. We will see riots and paralyzed liberal politicians who, like a child whose gambling debt comes due, will be backed into a very uncomfortable corner.  At some point Texas and other productive states will not want to pick up the tab for California.  Secession risk will become real.

The road we are on and where it leads has never been so clear. You don’t need a crystal ball to figure it out, just pick up the paper.  Only a nation that has lost its ability to exercise common sense will be caught by surprise.

The Broken Window Fallacy

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Economic illiteracy may be the primary cause of two problems:

  •  bad legislation by politicians and,
  • the willing acceptance of the bad legislation by the citizens.

An understanding of basic economic concepts by the voters would stop many foolish politicians from successfully selling their harmful plans.

Maybe the reason that public education fails to teach basic economic principles is because politicians prefer malleable voters.  Whatever the reason, one of our goals here at realitybatslast.com is to contribute to  the economic literacy of voters.

The bad news is that most people view economics as a dry and boring and very complicated subject.  The good news is that basic economics, the kind that will make us smarter voters, is readily accessible to any thinking person.  And it’s our responsiblity as voters to make the effort to educate ourselves.

One economic fallacy that is everywhere in politics is the Broken Window Fallacy.  See the brief explanation here:

It doesn’t take a genius to realize that property destruction does not increase the wealth of a society.  Property destruction constitutes a net loss of wealth.   It may take a real “expert”, like a Harvard Professor or Nobel Laureate to be foolish enough to think otherwise.

You saw in the video that Paul Krugman said this after the 9/11 attack on New York:

“Ghastly as it may seem to say this, the terror attack — like the original day of infamy, which brought an end to the Great Depression — could do some economic good.”

Harvard Professor and former Obama economic adviser Larry Summers said that the terrible destruction of the recent Japanese earthquake and tsunami, “may lead to some temporary increments, ironically, to GDP as a process of rebuilding takes place. In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength.”

It’s too bad the earthquake didn’t destroy Tokyo, too.  Think of how much that would have helped.

19th century French economist Frederic Bastiat explained that there are two types of economists:

 ”There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

We are surrounded by bad economists who tout the visible effects of their actions and think nothing about the less visible consequences.  So called stimulus spending and government job creation schemes fit this pattern.  There is much hoopla about the wonderful spending and little concern about what those dollars would have accomplished if they had not been taken by the government.

Think of it this way.  Imagine a boastful doctor who is giving a man a blood transfusion.  You can see the blood going into the patient and you can hear the Dr. explaining how he is helping.  What a great guy.  What you can’t see is that the blood tube is coming out of the patients other arm, and half the blood is being spilled and wasted in the process.  A patient could die from that kind of help.

Taxes, Lies and Marxism

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Kerry Pickett has a short must-read column in the Washington Times.  There are so many lies about taxes that it is nice to see a concise statement of the facts.  It is a fact that top earners in the U.S. pay a larger share of the tax burden than in any industrialized nation.  It is a fact that cutting tax rates on the wealthy has often resulted in them paying more tax and a larger share of the tax burden.

From the article:

Consider what happened each time the U.S. reduced the tax rate  significantly:

1920s: The top tax rate fell from 73 percent to 25 percent,  yet the rich (in those days, those earning $50,000 and up) went from paying 44.2  percent of the tax burden in 1921 to paying more than 78 percent in 1928.

1960s: President John F. Kennedy slashed the top tax rate  from 91 percent to 70 percent. In the ensuing three years, those making more  than $50,000 annually saw their tax payments rise by 57 percent, and their share  of the tax burden climbed from 11.6 percent to 15.1 percent.

1980s: The Reagan years saw the top rate fall from 70  percent in 1980 to 28 percent in 1988. What happened to the rich? The top 1  percent went from shouldering 17.6 percent of the income tax burden in 1981 to  paying 27.5 percent of the total in 1988. The top 10 percent saw their share of  the burden climb from 48 percent in 1981 to over 57 percent in  1988.

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In the Marxist world, power comes from stirring up class envy.  No matter what share of the burden is carried by the most productive people, the Marxist cry will always be,  “The rich are not paying their fair share.  Stick with me and we will take more of their property”.

Obama made it clear that the important thing to him was to bring down the rich, when, in an interview, he was confronted with the fact that raising the capital gains tax may decrease the amount of revenue for the government.  He said he would raise the tax burden anyway, “for purposes of fairness”.

Obama is much more ideological than practical.  Even if he understood, as Kennedy and Reagan understood, that cutting taxes increases economic activity and increases government revenue, he would still propose punishing the evil rich.

 

5 Claims…… All False

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Obama’s campaign speeches regularly contain the claims that:

  1. Bush’s tax cuts and de-regulation caused the recession,
  2. Obama stopped the second Great Depression,
  3. His policies are working,
  4. A very slow recovery was inevitable, and
  5. No one could have done any better.

Investor’s Business Daily columnist, John Merline, shows that these claims are false.  The chart below is from the column.

The housing bubble, created primarily by government mandated easy loans for people who had little prospect of making payments, created the collapse.  Actually, a community agitator in Chicago, named Obama, had worked to increase the number of these loans.  Banks were threatened.  Later, regulators for President Bush, made many attempts to rein in the insane lending practices, warning of the disaster ahead.  They were rebuffed and even ridiculed by Democrats like Barney Frank.  The party who now blames lack of regulation, actually fought the regulators.

Yes, they are shameless.  And with the help of a media that never holds them to account, Mr. Frank and Mr. Dodd went on to create more economic damage with Dodd-Frank.

I wish Mr. Merline’s column had address one more big economic lie that is a regular part of Obama’s repertoire of lies.  That is the lie that wealthy people have paid an ever-decreasing share of government, while the burden has been shifted by evil Republicans onto the backs of the poor.  The facts clearly refute this absurd claim.

At a deeper level, there is a way that big spending politicians are increasing the burden on the poor and middle class.  It’s just not very visible    ….yet.   Romney and Ryan should be talking about this hidden tax.

There are two parts to government spending, that which is paid for and that which is borrowed.  The borrowed portion is more massive than the world has ever seen, and is growing fast.  The debt problem is so enormous, and politicians are so unwilling to face it, that there are probably only two possible outcomes, both bad.  One is to default on the debt and one is to pay the debt with inflated, relatively worthless money.

In the past, big-spending governments have chosen the inflationary route.  They do pay their debts, but with worthless money.  Think of this as the inflation tax.  Your savings accounts, your investments, all of your dollar denominated assets will be worth less.  You didn’t write the government a check for the inflation tax; they just took the value of your money.  You may have a hundred-dollar bill in your pocket, but  you may only be able to buy a loaf of bread with it.   People with limited means will be harmed the most.

In September, the Federal Reserve, the European Central Bank and the Bank of Japan all announced plans to inflate their currencies. We should see this as a big announcement of the coming inflation tax.  It’s full speed ahead on irresponsible printing of paper money.  It is unavoidable that the money will be worth less. The Fed plans to expand our money supply by at least 85 billion per month, and they explicitly stated that they could do this indefinitely.  They are kicking the can down the road.  We know where the road leads, and so do they.