On Economics

The Wall Street Journal editorial page today had a great little paragraph that pithily summed up a key economic and political concept:

“Obama and their economic coterie really believe that government spending can stimulate growth by triggering private “demand”, that tax rates are irrelevant to investment decisions, that waves of new regulation can be absorbed by business with little impact on costs or hiring, and that politicians can assail capitalists without having any effect on the movement of capital.”

Then the article goes on to compare this ‘recovery’ with the one after 1982-3 when the Gipper was in charge.

“Now taxes are poised to rise sharply… and Federal agencies are hassling business at every turn… now companies are sitting on something like $2 trillion, reluctant to take risks when they don’t know what new costs government might next impose on them.”

It actually is a bit worse than even the article portrays.  Companies don’t just choose when to invest in the US (to use that $2 trillion in cash), they choose WHETHER to invest in the US at ALL.  Nowadays the US has the least favorable tax climate of the developed world, and there are many other opportunities overseas where you can actually get plants built and have governments happy to work with you and welcome your investments with open arms.  Multinationals can do anything from anywhere and they are not stupid.  It is one thing to determine whether or not it is time to “pull out” of the US due to an onerous regulatory and tax regime (that is a tough call) – but it is a much easier call just to decide to invest much less incremental capital in the US and ride operations here as a “cash cow” instead, for the indefinite future.  That is what is happening en-masse today.

6 thoughts on “On Economics”

  1. Larry Kudlow thinks they are waiting for the election to see what to do. I hope there is some truth there. The Republicans seem slow to learn that the tea party people are serious and will not settle for the old pap any more. There are 500,000 at the Lincoln Memorial today to show they mean business, even though lefties rigged Google maps yesterday to mislead them about where the rally was.

  2. Health care reform without mention of, or contemplation of actually providing better quality health care. That is, no plan to create more doctors, more hospitals, more medical schools, no no no, let’s just make sure we divy up what we have to all with status quo end product with increased clientele.

    Stimulus without an effort to produce something new or something to meet a real need; not a mention of industry or manufacturing that would not require government props. No, let’s prop up financial and industrial (automobile) failures while rewarding our friends in the unions with ownership; let’s act as though we are rich beyond imagining and build sources of energy three times more expensive that existing sources and build roads to haul things before we create things to haul. Ah, I start to burn just thinking about it.

    The whole situation brings brought about by fuzzy thinking citizens who elected this admin. brings to mind “The Walrus and the Carpenter”, from Lewis Carroll’s “Through the Looking Glass”.
    Guess who the oysters are.

    “The time has come,” the Walrus said,
    “To talk of many things:
    Of shoes–and ships–and sealing-wax–
    Of cabbages–and kings–
    And why the sea is boiling hot–
    And whether pigs have wings.”

    “But wait a bit,” the Oysters cried,
    “Before we have our chat;
    For some of us are out of breath,
    And all of us are fat!”
    “No hurry!” said the Carpenter.
    They thanked him much for that.

    “A loaf of bread,” the Walrus said,
    “Is what we chiefly need:
    Pepper and vinegar besides
    Are very good indeed–
    Now if you’re ready, Oysters dear,
    We can begin to feed.”

    “But not on us!” the Oysters cried,
    Turning a little blue.
    “After such kindness, that would be
    A dismal thing to do!”
    “The night is fine,” the Walrus said.
    “Do you admire the view?


  3. Ideas about “stimulus” come from a basic fallacy. Higher production (Gross Domestic Product or GDP) is associated with functioning economies and general prosperity. Good policy supports higher production. Politicians look at the truism that each dollar spent identifies part of GDP through buying some part of production. Then, they jump to the false conclusion that raising GDP by any means possible will produce more prosperity and a better functioning economy.

    So, they want to take money from some people, take their production, to transfer it to other people. They record this forced transfer as increased GDP, along with the smiles of the people receiving the transfer. This is terrible policy, because it harms the people who are forced to give up their income and investments. Government borrowing is almost always bad, because the resources are wasted or put into investments of low productivity (like sidewalks).Then, all are surprised when this “stimulus” doesn’t work, and the productive economy is harmed. Unemployment is one visible effect.

    People do not prosper because money moves around or stops moving around. The money is the result of an efficient management of resources and labor to produce what people want (can pay for). Building more houses did not make our society rich, because many people couldn’t pay for them. The government got us into a mess because they encouraged everyone to buy a house, no matter what.

    Then, the government soaked up (borrowed) resources to bail out the banks that implemented government policy to make sub-standard loans, the loans that couldn’t be paid back.

    The government sees spending and prosperity, and decides wrongly that spending causes prosperity. It then decides to increase spending by any and all means, even if it needs to take the money now or later from some people, to give it to others.

    I get it. People use umbrellas when it rains, so using umbrellas causes it to rain.

    Sad to say, this is a type of Cargo Cult centered around money. John Maynard Keynes is the shaman of this cult.

    Cargo Cult Economics

  4. Andrew_M_Garland ,

    Then, they jump to the false conclusion that raising GDP by any means possible will produce more prosperity and a better functioning economy.

    It’s the lamplight effect i.e. assigning causality to a part of a system purely because you can observe that part of the system while other parts remain invisible. In this case, the movement of money was pretty much all the 1930s error economist could observe about the economy so they concluded that the movement of money was what drove the economy in the first place.

    The government could produce the same rise in GDP by decreeing that each household hire their neighbor to the left to clean their house for $1,000/month while being hired in turn by their neighbor to the right to clean the right side house for $1000/month. This would increase the GDP by hundreds of billions a year without increasing the actual useful work being done at all.

  5. Andrew Garland..sidewalks..the county is building a new sidewalk along the road in from of my sister’s property in Georgia. This is a fairly rural area where few people walk, AND there is already a sidewalk on the other side of the road, which is easy to cross.

    They have stimulus money and they want to spend it.

  6. Finally, on This Week today, someone mentioned Germany. If even David Brooks can see the lesson, what moral blindness affects the governing party ?

    During the first half of this year, German and American political leaders engaged in an epic debate. American leaders argued that the economic crisis was so bad, governments should borrow billions to stimulate growth. German leaders argued that a little short-term stimulus was sensible, but anything more was near-sighted. What was needed was not more debt, but measures to balance budgets and restore confidence.

    The debate got pointed. American economists accused German policy makers of risking a long depression. The German finance minister, Wolfgang Schäuble, countered, “Governments should not become addicted to borrowing as a quick fix to stimulate demand.”

    The two countries followed different policy paths. According to Gary Becker of the University of Chicago, the Americans borrowed an amount equal to 6 percent of G.D.P. in an attempt to stimulate growth. The Germans spent about 1.5 percent of G.D.P. on their stimulus.

    This divergence created a natural experiment. Who was right?

    The early returns suggest the Germans were. The American stimulus package was supposed to create a “summer of recovery,” according to Obama administration officials. Job growth was supposed to be surging at up to 500,000 a month. Instead, the U.S. economy is scuffling along.

    The Germans learned some lessons from past mistakes.

    In the second quarter of 2010, the German economy grew by 2.2%, the fastest rate since the old West German economy was integrated with the poorer, less productive, formerly communist East Germany. Since Eurostat reports growth rates on a quarterly basis, there is some risk that the significance of this “2.2% economic growth rate” could be lost in translation. Were Eurostat to use annualized rates like the United States’ Bureau of Economic Analysis (BEA), the German growth rate would have been 9.1%, which means the German economy grew nearly four-times faster than the 2.4% annualized growth rate recorded by the U.S. economy in the second quarter (Eurostat quantifies the U.S. growth rate as 0.59%). Over the twelve months ending in June, the German economy grew by 3.7%, half a percent faster than the 3.2% rate recorded by that of the U.S. More significantly, German growth has accelerated at the same time as growth in the U.S. has slowed markedly (see graph). After a tepid recovery from a deeper recession, the German economy seems to have achieved an “escape velocity,” which – to borrow a term from Larry Summers – has thus far eluded the U.S.

    The Germans terribly botched the integration of the East German economy with their own. I remember it well because I invested heavily (for me) in the German economy at the time believing the East would become a low cost version, somewhat like the east European economies have become. The German unions prevented this and Germany spent a decade of slow growth (along with my investments). They seem to have learned their lesson.

    “Germany’s strong export orientation stems from the openness of its economy, its long-standing manufacturing traditions and its competitiveness in global markets.” After enduring nearly a decade of slow growth and low inflation, Germany has disinflated its way to an extremely competitive position thanks to painful labor market reforms. The cost of one hour of labor in Germany is now extremely low relative to the economic value added in that hour. Better coordination of public expenditures is not going to erase Germany’s huge competitive advantage in high-end manufacturing.

    This is what Obama DID NOT DO in the GM/ Chrysler bailout and why they will not work.

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