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Category: Economics


Another Study Shows How Far the U.S. Has Fallen

Forbes magazine released its ranking of the best countries in which to do business.  The U.S. fell a spot to tenth on the list.  Canada jumped three spots to first place.  This is another list confirming that the U.S. is slipping economically because of the policies that it is pursuing.  Another recent list ranked the U.S. tenth in economic freedom.  The answers to our economic problems are not too complex to understand, it is easy to define which policies further economic freedom and individual rights and which do not.  The Obama and Bush administrations both moved us away from freedom and toward socialism (more accurately Fascism).  Both administrations introduced the largest, most expensive entitlement programs during their administration since Lyndon Johnson and Medicare.  They did this at a time when both knew that Medicare and Social Security were bankrupt actuarially.  Even Obama knew it was a LIE that Obamacare would save money – that was never his intention.  His intention was to move the U.S. towards his socialist vision and he stated this clearly if you listened to what he has said throughout his life,  not just the sound bites when he was pushing Obamacare.

Here are specific policies that we need to enact in order to avoid a financial collapse of the West.

 

1) Rationalize our tax system

We need a tax system designed to raise revenue as efficiently as possible.  A flat tax or a sales tax both fit the bill.  Any tax system should only be on earnings or spending and not on capital gains and estate taxes.  Our tax system is a national disgrace

2) Regulatory Bill of Rights

Our Bill of Rights has been completely circumvented by the regulatory state.  It is not enough to just roll back regulations, we need a real check and balance on the Regulatory state.  I have proposed such a system in my post Regulatory Bill of Rights.

 

3) Cut Government Spending and limit total government spending to no more that 15% of GDP.

The evidence is overwhelming that government spending destroys both the economy and our individual rights.  See Austerity: Why it is Key to Both Our Short Term and Long Term Economic Growth.  This means that we have to reform Social Security and Medicare and turn them into a private saving program.  Obviously, this will take time and the transition has to be fair to today’s seniors and in the long term should phase out these unconstitutional programs.

 

4) Strengthen Our Patent Rights and All Property Rights

Patents are the most important property right for economic growth.  We need patent offices that issues patents in under a year, courts that understand patent laws and protect the property rights of inventors, and we need patent rights to extend across national borders like copyrights do.  It goes without saying we need to repeal the AIA and the publication rule.

It is no coincidence that when patent rights are under attack then so are all other property rights.  This was true in 1970s, the 1930s and in every country that has limited property rights.

 

 
Economic Freedom on the Decline: U.S. Falls Four Slots

According to the Frasier Institute economic freedom around the world is the lowest it has been in three decades.  The U.S. has fallen from number three in 2000 to number ten, in 2010  the US was sixth and has fallen to tenth this year.  Is it any wonder that we are in the worst economic downturn since the Great Depression?  The three decade low matches the malaise of the Carter years.  Lack of economic freedom is  traditionally associated with death, bone crushing poverty, violation of civil rights, and every anti-human condition.  The evidence is overwhelming:  if you are pro-human then you have to be pro-freedom, meaning pro individual rights.  If you are anti-human then you will advocate more government spending, more government control, and more government manipulation of the money supply.  If the Obama Administration and the Socialists and il-Liberals were truly interested in creating jobs and human happiness, they would support pro-freedom, pro-individual rights policies.  But since they continue hate-speech claiming that everyone needs to pay their fair share and we need more government, rather than actually pursuing pro-human policies, the only conclusion is they hate human happiness and want to destroy it.

Now is not the time to elect more timid leaders, we need leaders who would make Reagan and Thatch seem timid.  Failure to do so we lead to economic collapse.  Unfortunately, some of the so-called pro-freedom organizations are pushing weakening the most fundamental of all property rights – patents.  Property rights correlate almost perfectly with economic growth, the beginning of real per capita increases in income correlates exactly with modern patent systems.  Yet, detractors expect us to see the connection between economic freedom and human happiness, but deny the obvious correlation with patent rights.  Increases in our level of technology are the only way to provide sustained long term economic growth.  See the Source of Economic Growth.

Here are specific policies that we need to enact in order to avoid a financial collapse of the West.

 

1) Rationalize our tax system

We need a tax system designed to raise revenue as efficiently as possible.  A flat tax or a sale tax both fit the bill.  Any tax system should only be on earnings or spending and not on capital gains and estate taxes.  Our tax system is a national disgrace

2) Regulatory Bill of Rights

Our Bill of Rights has been completely circumvented by the regulatory state.  It is not enough to just roll back regulations, we need a real check and balance on the Regulatory state.  I have proposed such a system in my post Regulatory Bill of Rights.

 

3) Cut Government Spending and limit total government spending to no more that 15% of GDP.

The evidence is overwhelming that government spending destroys both the economy and our individual rights.  See Austerity: Why it is Key to Both Our Short Term and Long Term Economic Growth.  This means that we have to reform Social Security and Medicare and turn them into a private saving program.  Obviously, this will take time and the transition has to be fair to today’s seniors and in the long term should phase out these unconstitutional programs.

 

4) Strengthen Our Patent Rights and All Property Rights

Patents are the most important property right for economic growth.  We need patent office’s that issues patents in under a year, courts that understand patent laws and protect the property rights of inventors, and we need patent rights to extend across national borders like copyrights do.  It goes without saying we need to repeal the AIA and the publication rule.

It is no coincidence that when patent rights are under attack then so are all other property rights.  This was true in 1970s, the 1930s and in every country that has limited property rights.

 

 
Austerity: Why it is Key for Both Short Term and Long Term Economic Growth

Keynesians have continually argued that cutting government spending will kill economic growth.  They point to Great Britain as showing that austerity does not work.  The UK introduced an austerity package that included substantial cuts in government spending and tax increases in June of 2010.  Since then the UK’s growth rate has been anemic.  However, there are a number of flaws with the Keynesians argument.  First, the UK raised taxes, which is not austerity.  Second, the US and the West are already actuarially bankrupt so we have to cut our budgets.  See US Goes Bankrupt by 2019.

It is not an austerity program when you raise taxes.  This is like a family saying they were instituting an austerity program by demanding their boss give them a raise.  In addition, the UK raised capital gains taxes from 18% to 28%, which is the taxes that hit business formation the most.  Raising capital gains decreases the return on investing in new economic activities and investors can easily decide not to invest their capital so this tax reduces economic activity more quickly than other taxes.  If the UK had not raised taxes, they would most likely now be experiencing an economic boom.  The empirical data clearly shows that lower government spending results in greater economic activity.  As an example of one study that clearly shows this see “The Size and Functions of Government and Economic Growth”.  This study clearly shows that the lower government spending the greater subsequent growth of the economy.  (see Graph)

Logically, if a government absorbs 50% of a country’s GDP then the cost of goods and services on average have to be twice as much as they would otherwise be.  In order to pay the expenses of government, a private sector producer who would normally charge $1.00 for a good in the absences of any government costs will now have to charge $2 and pay $1 of it to the government.  If the government consumes 25% of the economy then the average cost of goods and services has to be 33% higher than they otherwise be.  The simple math to figure this out is to take the reciprocal of 1-government spending.  If you want to stimulate “demand” as the Keynesians are constantly suggesting, then the way to do it is to cut government spending not increase it.  Imagine the increase in demand if the US were to reduce its total government spending of about 50% of the economy down to 25% of the economy.  This means that the average cost of goods and services would fall 39%.  How many more cars, computers, software, etc would people purchase if they were 39% cheaper?  Austerity is one of the keys to both our short term and our long term economic health.

Note that the regulatory burden government imposes is not part of the government spending but it has the same effect as government spending on the economy so that should be taken into account.  For instance, the cost of complying with the federal tax system is estimated by the Heritage Foundation at $431 billion.  Simplifying our tax code to say a flat or fair tax could reduce this cost by more than 90%.  As a result, any intelligent austerity program would include simplifying our corrupt tax code.  This is the exact opposite of what the UK did.

This is not to suggest that we do not need a government.  However, ”The Size and Functions of Government and Economic Growth”  study showed that even at the very low level of 15% of GDP for total government spending countries continued to have increased growth rates.  People forget that it was common among Western countries for total government spending to be below 10% of GDP until around 1900.  If Keynesians and Socialists really cared about people they would focus on economic growth.  There is no way to make the average person wealthier without growing the economy.  Charity never increased the average wealth of anyone.  The only reason we ever escaped the Malthusian Trap was because of the increase in per capita wealth.

 

 
Lack of Demand – More Economic Stupidity from the Financial Press

The present economic doldrums (depression) are often blamed on lack of demand.  For instance, I heard a news report that suggested lower interest rates will not help the economy because there is “lack of demand” for loans and it was implied that there was a lack of demand in the economy as a whole.  The idea that there is ever a lack of demand, is economic stupidity.  One of the defining points of economics is that it examines how scarce resources are used to satisfy unlimited wants.  Did people stop wanting new cars, new cell phones, updated kitchens, to go on vacation, etc? – of course not.  What has happened is that government has raised the cost of production through excessive regulation and taxes to the point that people cannot afford these things.

 

 
Another Study Showing Economic Growth is Connected to Patents

This empirical study investigates the dynamic link between patent growth and GDP growth in G7 economies by Josheski, Dushko and Koteski, CaneGoce Delcev University-Stip, Goce Delcev University-Stip.  Here are some interesting quotes from the paper.

Technological change has been regarded as a major source of long-run productivity growth (Romer, 1990, Grossman and Helpman, 1991), with innovation no longer being treated as an exogenous process.

Johansen’s procedure for cointegration showed that long run multipliers are positive between the patent growth and GDP growth in G7 economies.  Granger causality test showed that patent growth Granger cause GDP growth in G7 countries.  Unrestricted VAR showed that there exists positive relationship between patent growth and GDP growth at two or three lags.

 

 
What do Keynesians and the Flat Earth Society Have in Common?

Both of them are impervious to facts – in others words, it is a religion.  The Flat Earth Society maintains that the Earth is flat instead of spherical despite overwhelming evidence, starting with Eratosthene’s measurement of the circumference of the Earth in 276 BC.  Keynesians continue to insist that government spending stimulates the economy.  If this were true, then  theft should also stimulate the economy.  For instance, Keynesians assert that “food stamps” (now the SNAP program) create economic growth.  If this were true,  why not just steal, since the recipient of the food stamps does not provide anything of value for the food they receive.

Perhaps this is just too theoretical for the true believers, such as Paul Krugman, who are mentally and reality challenged?  Perhaps the empirical results are ambiguous and I am just being too tough on them?  Well it turns out that a number of studies have looked at this issue.  For instance, the study The Size and Functions of Government and Economic Growth, shows that for ODEC countries the growth rate is inversely proportional to percentage of GDP spent by the government.[1] Below are pair of charts from this study.

This bar chart shows the average growth rate of a country versus its spending as a percentage of GDP.

This is a scatter plot that shows the growth rate over ten years of a country versus its spending as a percentage of GDP at the beginning of the decade.

Based on these two charts it appears that the United States’ growth rate is lower than the average for ODEC countries with similar amounts of spending.  My guess is that this is due to  the hidden tax of regulatory burdens and regulatory attacks on property rights.

Austerity Programs

These charts make it unambiguously clear that austerity programs do stimulate growth. However, raising taxes is not an austerity program.  Raising taxes is like a family tightening their budget by asking their boss for a raise or a company cutting expenses by raising prices.  A company that raises it prices as a way to meet its budget during an economic downturn, is likely to see less revenue overall.  In the case of taxes, the government is likely to see less revenue and less economic activity.  The source of economic growth are  increases in our levels of technology.  When people see less of a return or their ideas stolen when creating a new technology, or a business around a new technology, or just investing in new technology for their existing business, they are less likely to undertake this endeavour.

However, the TRUE BELIEVERS of Keynes and Socialism are not interested in evidence. As a result, you can expect President Obama to suggest that more government spending is necessary to grow the economy in his jobs summit/plan  speech in September.  See Biden Say U.S. Needs More Stimulus.


[1] Gwartney, James; Lawson, Robert; Holcombe, Randall, The Size and Functionsof

Government and Economic Growth, Joint Economic Committee, 1998, http://www.house.gov/jec/growth/function/function.pdf .

 
Welcome to the Global Financial Meltdown

With the roller coaster ride of the stock market as well as the S&P downgrade of U.S. government debt there are a variety of pundits weighing in on the direction of our economy and the stock market.  For instance, Steve Forbes on FOX news suggested that U.S. economy and stock market is poised to explode, especially after the 2012 elections.  There have been a number of pundits suggesting or speculating whether the present situation is analogous to the market crash in 1987.  Others have suggested that since the debt crisis of 2008 we have just kicked the can down the line.  They use the analogy of a hurricane and suggest 2008 was the leading edge of the storm and that we have been in the eye of the storm recently, but we are about to enter the trailing edge of the storm.  Most of these pessimists see this trailing edge of the storm as likely being worse than the leading edge.  So who is right, the bulls or the bears?

First, it is clear that we have not dealt with our debt problems.  The initial solution to the 2008 debt crisis in most countries was to nationalize the debts of major banks and provide no cost loans to multinational companies from the central bank.  The follow up solution in the U.S. was to increase government spending by 50% in a single year and use this as the new baseline.  As the debt crisis spread to the PIGS of Europe, the solution has been to provide more debt to struggling countries.  This debt has really been used to shore up German and French banks that loaned money to the PIGS.  So far all this spending has failed to result in meaningful economic growth or job creation.             Second, it is clear that the U.S. does not have the political will to cut spending or entitlements that are driving spending.  Optimists point to the fact that the U.S. had a similar debt to GDP ratio in 1946.  However, in 1946 we did not have eight decades of increasing entitlement programs and unfunded liabilities.  Our unfunded liabilities exceed our assets.  Total U.S. government spending as a percentage of GDP has grown from around 21% at the end of World War II to almost 40% today.  No country has been able to spend this much of their GDP and have sustained, vigorous growth.

Third, the proposed solutions by the present political leaders is based on Keynesian ideas of spending more government money and additional loans to prop up failing governments/banks.  These ideas have been tried not only for the last three years in the U.S., they have been tried around the world at least since the 1930s and they have failed every time they are tried.  Keynesians point to World War II, but the reality is that Roosevelt changed course on his economic policies when he saw WWII coming.  He appointed pro-business advisors and quit attacking businesses.

In order to achieve sustained growth, we need to not only cut government spending, but we need serious regulatory reform.  The present regulatory structure is completely biased towards more regulation and more intrusive regulation.  We need a mechanism that changes this bias if we are going to have sustained growth.  One potential solution would be a Regulatory Bill of Rights.

All real per capita growth is the result of increases in our level of technology.  In the U.S. this means we have to create new technologies.  There are a number of things inhibiting start-ups that created new technologies.  First Sarbanes Oxley and Dodd Frank make it almost impossible to go public today.  It is easier to gamble away your money in Vegas than invest in a technology start-up company.  Second, we have consistently weakened our patent laws, which are property rights in technology.  As a result, it takes years to obtain a patent and then your rights are much less secure than 15 years ago.  As a result, the major asset of technology start-ups has been weakened.  Third, we have one of the highest marginal and effective corporate tax rates in the world.

Last, we have a completely dysfunctional tax system.  The total federal revenues being collected from all sources at the federal level is about 14% of GDP.  We have over 3000 pages of tax laws with mind numbing complexity to collect this small percentage of GDP.  Clearly, a number of politically favored people pay almost nothing, while the rest of us are taxed at exorbitant rates.  Arthur Laffer has proposed that a 12.1% flat tax would bring in the same revenue as all our federal taxes.  This would save trillions in compliance costs.

 

1987 or 1930?

Is the better analogy for today 1987 or 1930?  Well our fate is not foreordained, but we have huge number of problems to overcome.  In 1987 the U.S. was following basically sound economic policies.  Warren Buffet made a fortune buying stocks in companies in the late 70’s and early 80’s, but if Reagan and the country had not changed course, Buffet might have just as easily looked to be the biggest sucker instead of a brilliant investor.

The odds are much more likely that 1930 is the better analogy for where we are today.  A global financial meltdown is likely to start in Europe or Japan and spread to the U.S.  The U.S. is in no position to weather this storm and is unlikely to take serious measures to withstand the meltdown even if fiscal conservatives were to have majorities in all branches of the federal government.  The most likely situation is a global financial meltdown before the U.S. can get its act together.

Welcome to Global Financial Meltdown!

 

 
Did Midas Mulligan Run a Fractional Reserve Bank?

Was Midas Mulligan, the hero banker in Atlas Shrugged, running a fractional reserve bank?  There has been much criticism of the Federal Reserves’ handling of our money supply and its effect on the economy.  Much of this criticism has been led by Ron Paul and the Austrian school of economics.  Some critics, including Ron Paul and Thomas E. Woods, author of Meltdown, have further argued that fractional reserve banking should be outlawed.  Fractional reserve banking is how all modern banks (since at least 1750s) operate.  Wikipedia defines a Fractional-reserve banking as a type of banking whereby the bank does not retain all of a customer’s deposits within the bank. Funds received by the bank are generally on-loan to other customers. This means that available funds (called bank reserves) are only a fraction (called the reserve ratio) of the quantity of deposits at the bank. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money.

Ayn Rand clearly would have been against the Federal Reserve system, which her protégé Alan Greenspan headed for over a decade.  The Federal Reserve is a government institution that prints money at will and manipulate the money supply for the benefit of government looters and Wall Street looters.  In Atlas Shrugged, Rand rails against paper money and in Galt’s Gulch they use gold for their currency.  However, to the best of my knowledge she never addressed the issue of fractional reserve banking directly.  The history of fractional reserve banking starts with the concept of an exchange bank.  I explain in my book, The Decline and Fall of the America Entrepreneur: How Little Known Laws and Regulations are Killing Innovation:

Modern banking started in the early 1600s with the Bank of Amsterdam.  Merchants could deposit coins with the Bank of Amsterdam and use this account to pay for transactions.  Using checks, a merchant’s account was debited and another merchant’s account was credited.  This meant that coins did not have to be transported from one merchant to another with the attendant risk of theft and loss or the cost of transportation.  The Bank of Amsterdam was just an exchange bank that facilitated transactions between merchants.  Next came the Swedish Riksbank established in 1656.  The Riksbank was not only an exchange bank, it also lent money making it the first modern fractional reserve bank.  Fractional reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.  Commonly, loans are made against collateral such as land or jewelry.  … Some people believe fractional reserve banking creates money out of thin air, but what really happens was the money for these loans were backed by some collateral other than coins or bullion.  The downside of other types of collateral is they are not as liquid as species (coins, bullion).  As a result, if large numbers of customers of a fractional reserve bank wanted species (currency) at the same time, the bank would not able to fulfill all its customer’s demands.  This is a classic run on a bank.  A run on a bank is a cash flow issue.  A sound bank may have plenty of collateral and performing loans, but if most of its customers demand species at the same time it will not be able to fulfill these requests.  Fractional reserve banks free up capital from low performing assets so that they can be invested in higher performing assets.  For example, if you owned a large tract of ranching land that was not highly profitable but represented a large amount of capital and you want to invest in an oil well, without fractional reserve banking you would have to sell some of the land in order to invest.  With fractional reserve banking you could convert your land into a generally accepted form of money, by pledging your land as collateral to a bank for a loan.  In the modern world, the loan to you is just a computer entry in your bank account.

It is clear from history that fractional reserve banks are not some sort of government institution, like the Federal Reserve.  Rand’s philosophy was that people are free to contract with each other for anything that does not involve fraud or the use of force.  A fractional reserve bank meets this requirement, with the one possible caveat that a bank should disclose this information to depositors so that the customer understands and assents to the use of his money this way.  Since most people do not know what a fractional reserve bank is, including many bank employees, I am not sure that this caveat is met.  I assume that when you open a new account banks provide you with information that they are a fractional reserve bank, but I have not been able to prove this.  Without fractional reserve banking it is would be very difficult to securitize (Collateralize) many assets, such as houses and land.  This would significantly impede the economic growth of a country.

 

 
COICA: Double Standard

The Combating Online Infringement and Counterfeits Act  S. 3804 [111th], is designed to reduce the online theft of copyrighted and trademarked materials.  It is clear that this theft is costing the United States billions of dollars annually.  Reducing the economic damage caused by IP (Intellectual Property) theft is important.  The Bill would allow “in rem jurisdiction” against infringing websites.  I believe this would be very helpful in combating piracy online.  Despite this, there are numerous problems with this bill and I am against its passage.

My first complaint is that this is another law that protects the copyright industry, which has been highly successful in getting laws passed to help their industry.  In the meantime, Congress has been gutting our patent laws.  This double standard between inventors and artists is illogical.  (For more information see Source of Economic Growth)  Inventors are vital to our long term economic success as a country.  While artists deserve to have their property rights protected, they do not have the same economic significance.  This double standard shows that Congress is much more concerned about campaign donations than the economic welfare of the people of theUnited States.

My second complaint about this Bill is that it is duplicative, with the exception of the in rem jurisdiction.  There are already civil and criminal penalties for infringement of copyrights and trademarks.  (Note there are no criminal penalties for patent infringement – another double standard without justification)  This law is unlikely to reduce the overall theft of copyrighted material.  What is need is vigorous enforcement of the laws we have and Congress needs to expand the number of judges/courts in the federal court system or reduce their caseload by not federalizing crimes that should be dealt with at the state court level.

My third compliant is that the Bill is poorly drafted.  For instance, it states the defendant can get an injunction vacated if “the interests of justice require that the order be modified, suspended, or vacated.”  Is it ever in “the interests of justice” to vacate an injunction where there is infringement?  How does the judge decided if it is in “the interest of justice” to vacate or suspend an injunction?  Does it depend on who the defendant is or what their political connections are?  Does it depend on who the plaintiff is or what their political connects are?  This sort of vague wording is not law, it is the arbitrary decree of the judge in charge of the case.  In other words, it is tyranny.

My fourth complaint is that the Bill is unconstitutional.  There is no constitutional authority for this law to require the Attorney General to create a list of websites alleged to be in the business of online infringement of copyrights or trademarks.  First of all, this violates the separation of powers.  The Attorney General is part of the Executive branch.  The Legislative branch cannot require the Executive branch to undertake activities that are not part of its Constitutional duties.  Where does the Constitution give Congress the right to require the Executive branch to create a public list of suspected infringers of copyrights?  The Commerce Clause?  While any rational interpretation of the Commerce Clauses cases shows that there is absolutely no limits to what Congress can consider covered by this clause.  Any rational interpretation of the framers intent of the Commerce Clause, would not include delegating power to the Attorney General to create a list of suspected infringers.  It might be a rational interpretation of the Commerce Clause to suggest a law that prohibits infringement of IP rights across interstate boundaries, but this would be redundant with federal preemption of copyrights (although not trademarks).  This still does not allow the delegation to the Attorney General to keep a list of suspected infringers.

From a practical point of view, this list is likely to hurt legitimate websites that are not infringing and have little effect on blatant counterfeiters.  Legitimate websites will most likely be selling to legitimate companies and people that are concerned about the list.  If a website is incorrectly identified that is a legitimate website then their business is likely to be significantly disrupted.  However, if it is a counterfeit selling website, its customers are likely to be unconcerned with the implicit counterfeit charge of being on the Attorney General’s list.  Thus, the law is likely to hurt innocent, incorrectly charged businesses and have little effect on counterfeiters.

Note the Bill requires the Attorney General to create the rules for people on the list to petition the Attorney General to be removed from the list.  This violates the due process clause of the Fifth Amendment.  It is a per se violation of the Due Process clause to have the same entity in charge of prosecuting a law also in charge of deciding the procedural rules of the prosecution.  The fact that judicial review of the case is provided, does not overcome this issue.

The Combating Online Infringement and Counterfeits Act is directed to a real problem, but is the wrong solution.

 
Keynesian Economics: Theft Creates Wealth

Keynesians believe that you can create economic growth by spending government money.  The goal of government spending is to increase aggregate demand.  If just increasing demand was the way to increase economic growth, then stealing would also create economic growth.  Now you make object that government spending is not like theft.  The recipient of the government money did not break any laws when receiving government money, but from an economic point of view the recipient did not provide any economic value for the goods or services they received from the government money and the same is true of the thief.  The thief may have expended effort to obtain the money to buy various goods and services, but they did not exchange anything of economic value.  Thus, neither the thief nor the recipient of government money provide any economic value for the items they receive because of their theft/welfare.  As a result, theft should provide the same economic benefits as government stimulus programs.  Since increasing aggregate demand is the goal, thieves perform this function admirably.  Most thieves do not save their money and they do not invest, they spend their money – this is part of what makes them thieves.  This ensures that the stolen wealth is immediately converted into demand (spent), which is good according to Keynesians.  Money that is saved or invested does not immediately increase aggregate demand, which is the cause of economic slowdowns according to Keynesians.

Economic growth or wealth is not created by spending, but by increasing the technological level of the country.  If spending (consumption) created wealth, then a farmer could get rich by eating their seed corn.  This is complete non-sense.  Only by creating inventions or by investing in other people’s inventions can a country increase its per capita wealth.

There are three ways that the government can take money from productive people and give it to non-producers to spend.  The most straight forward is to (immediately) tax it from producers.  In this case, it is clear that the government is taking money (productive effort) from productive people and giving it to non-producers of the wealth.  This is exactly what a thief does.  We know that this is not a 100% efficient process, since there is the cost of collecting (stealing) the wealth of the productive people and giving it to non-producers.  This requires numerous government bureaucrats and effort on the part of honest taxpayers.  However, this is not the only loss in the transfer of wealth.  The government has substituted its judgment or worse the judgment of non-producers for producers in how to allocate wealth (productive energy).  This means we are substituting the judgment of people who have not proven the ability to create wealth for wealth producers.  We know that most of the recipients will not invest in creating new technologies or diffusing new technologies, as result we know that this money will not result in an increase in economic growth.  Note that government statistics will not show the whole result of this decrease of economic output, since government statistics of economic output measure consumption, not production.  The Gross Domestic Product is calculated as GDP = private consumption + gross investment + government spending + (exports − imports).  At first this formula would appear to balance out government spending and gross investment, but the government can only measure spending, even for gross investment.  As a result, when government steals from producers this does not show up as a decrease in gross investment if the producers do not believe that the present climate is not conducive to investment.  This is like the government forcing a farmer to eat or give away their seed corn, it does not show up as a net reduction in planting (investment) until later, but it does show up as private consumption.[1] As a result, government stimulus numbers inflate the GDP incorrectly during a stimulus program and under estimate the GDP in times of private sector growth.

The government may borrow or use inflation to fund its stimulus programs.  When the government borrows money or causes inflation the overall result is the same, but the mechanism is different.  If the government borrows in order to pay for its stimulus program, then this reduces the amount of investment capital available and reduces private sector investment by crowding out investment dollars.  It also increases the cost of labor, goods, and services by creating artificial demand.  In addition, it results in higher tax rates than would otherwise be necessary in order to pay back the money borrowed reducing long term growth.  Inflation is just a way of taxing (stealing) from everyone’s paycheck, savings, and investment.[2] The net result is to transfer money from productive people to unproductive people.  Since inflation does not immediately show up in the Consumer Price Index, it artificially inflates the GDP during stimulus programs at the expense of future economic growth.  Inflation does not immediately show up in the CPI because the government measures the CPI at distinct intervals and because the CPI does not distinguish between changes in demand and inflation (an increase in the amount of money).  Much like the way the government measures GDP, the CPI understates the inflation during times of economic contraction and overestimates the CPI in time of economic growth.  Increased demand for products and services during a time of economic growth shows up as inflation in the CPI numbers, while decreases in demand during recessionary periods shows up as deflation or low inflation in the CPI numbers.

Now some people may complain that the people being taxed are not (necessarily) producers.  For instance, the banks that were bailed out by TARP or the carry trades[3] created by the Federal Reserve, or other corporations (GM, Chrysler, GE, etc.) bailed out by the government.  However, the government cannot fund itself except by taking money (wealth, productive effort) from producers ultimately.  Taxing government leaches results in a circular system that is negative sum game that would collapse very quickly, but for producers.  Taxing non-productive entities does not change the basic analysis above.

Now other people may complain that Keynes actual theory was for the government to store reserves during times of economic prosperity and then spend the reserves during economic downturns.  While this may be preferable to a spendthrift government, such as the U.S. presently, it does not change the overall analysis.  It just means that during times of economic prosperity, government is overcharging, has a higher tax rate than necessary.  This results in underinvestment in technological, which means a lower rate of economic growth rate in the future.  In economic downturns, Keynes still advocated spending on things that created immediate demand, not on investing in inventions.  Such as paying people to dig holes and then filling them up.  Thus, this also lowers long term economic growth.  Finally, Keynes did not take into account the large overhead (entropy) necessary to take this money away from productive citizens.

Stimulus programs overinflate the GDP while the stimulus money is being spent, by ignoring the decrease in investment capital.  This decrease in investment capital results in lower long term economic growth, since it means there is less money (wealth) to invest in new technologies in the future.

Not surprisingly, this also results in higher unemployment rates.  There was a recent study by Timothy Conley from the University of Western Ontario, Canada Economics Department and Bill Dupor of Ohio State University which showed that the U.S.’s recent stimulus program killed two private sector jobs for every job saved or created.  This is just one of many examples that shows Keynesian economic theory is truly VODOO ECONOMICS

IF KEYNESIAN THEORY WORKED, THEN THEFT WOULD INCREASE GDP AND WEALTH.


[1] For those engineers and people with a mathematical background saving is like a capacitor (integrator), draining the capacitor increases the short term current, but reducing the current in the future.

[2] Even if the money is borrowed from foreign investors, it reduces the amount of investment capital.  It also reduces the willingness of foreign investors to invest inU.S. companies.

[3] A carry trade is when the Federal Reserve allows banks to borrow money at a lower interest rate than they can loan it out  at (risk free).  The most egregious example is when political powerful banks (corporations) can borrow from the Federal Reserve at a lower rate than short term Treasury Bills are yielding.  This takes absolutely no intelligence to make huge amounts of money, as long as the Federal Reserve will loan out money.  This is how the TARP banks have been able to pay back their TARP loans.  However, it is just a fraud and the cost of this fraud is being paid for by the American taxpayer/worker.

 
Nothhaft Interviews: Startups Create All Jobs

Henry R. Nothhaft author of the book Great Again was interviewed on the Dylan Ratigan show on MSNBC and the Harvard Business Review blog radio.  The Dylan Ratigan show focused on job creation and how all new jobs are created by startups not by small business or large corporations.  Mr. Nothhaft argues thatWashington is forcing a once size fits all government on American businesses.  He wants an immediate freeze on new regulations on startup business and a carve out from Sarbanes Oxley and Dodd Frank for companies with a market capitalization less than $500M.  He explains that multinational companies have choices to create jobs in theUS or outside the US and suggests that large companies have decided to create jobs outside the US.  While I think it is important to point out the current business climate in the US is causing companies to move overseas, the reality is that large corporations never produce large numbers of net new jobs and they are not the engine of innovation.  The host attempts to argue that labor rates are the only reason that companies are relocating outside the US.  Mr. Nothhaft explains that for high technology companies labor costs only represent 3% of their total expenses and it is the US tax and regulatory structure that are killing startups.

One of the panel members suggests that Google, Facebook, Twitter, etc show thatSilicon Valleyand innovation in the US are doing just fine.  First of all, Google was started in the late 1990s before SOX, other regulatory burdens and before the patent system in this country was undermined.  SOX and the changes to our patent system have destroyed the venture capital market in theUS.  Second, social media companies have not driven the entire economy like the Internet did in the 1990s and the personal computer did in the 1980s.  These companies and the social media industry are isolated islands of success that have little significance to the broader economy.  If the panel member had any insight to the US economy he would known that the number of technology startups has declined precipitously.  The Information Technology and Innovation Foundation index ranked the US dead last among 40 countries in the change in our rate of innovation last decade and many other indicators show the US is falling behind technologically.

The host of the show and the panel seemed to have no idea what Mr. Nothhaft was talking about.  My guess is that the host and panel are all Wall Street experts who believe finance is the American economy.  They believe in Keynesian economics in which manipulating the money supply and increasing demand by increasing government spending are all that matters.  They have no idea what affects technology startups and they do not really believe they are important.  They do not understand that technology startups create the inventions that increase our real per capita income.

The Harvard Business Review interview again focused on how startups create jobs.  Mr. Nothhaft again argues for a two-tiered approach to SOX and other financial regulations.  He argues that technology startups do not use leverage and do not pose a threat to the financial system of the US.  He also points out that Lehman Brothers, AIG, Goldman Sacs, etc. were all SOX compliant going into the current financial crisis.

He later explains that the patent system has been undermined by the theft of user fees from the Patent Office by Congress to the tune of over $1B in the last two decades.  Congress just stole another $100M from the Patent Office in the continuing resolution bill – See Stealing From Inventors.

The HBR interviewer is also ignorant of the US’s lack of innovation in the last decade.  She does not understand that increases in technology are the only way to increase real per capita income.  The host ends the interview with the condescending comment that it’s clearly a very complex issue.  It is not complex!  When the government interferes with property rights (particularly patents) and imposes absurd regulatory burdens (SOX, Dodd Frank) and the US has the highest corporate tax rate in the World it is straight forward that the result will be fewer businesses, fewer jobs, and a lower standard of living for all.

I respectfully disagree with Mr. Nothhaft’s two-tier approach to SOX and other financial regulation.  First of all, Mr. Nothhaft points out that SOX failed to stop financial fraud and the 2008 financial meltdown.  He points out that the companies he believes should be subject to SOX were all SOX compliant, but they were also the ones that caused the financial meltdown.  So if SOX does not work, why have a two-tiered approach?  SOX should be repealed – period.  Second, laws that only apply to certain people or businesses are the essence of tyranny.  A good law should apply to all people equally, much like a law of physics/nature.  When Congress exempts itself from certain laws (e.g., antidiscrimination, Social Security, Obama Care, etc) and makes convoluted tax laws to help the politically connected at the expense of the rest of the country, you know that you are on the path to tyranny.  Adding another law that only applies to certain businesses will only accelerate the US’s decline into despotism.

 
The Birth of Plenty: Predictions

This book, The Birth of Plenty Predictions: How the Prosperity of the Modern World was Created, purports to explain the conditions necessary for a nation to escape the Malthusian Trap.  The author, William Bernstein, states that four conditions are necessary: 1) property rights (including intellectual property rights), 2) the scientific method, 3) efficient capital markets, and 4) transportation and communication infrastructure.  The first part of the book explains why each component is necessary.  The second part of the book applies this structure to the historical evidence associated with various countries to show that all four components are necessary.  The third part of the book attempts to make predictions based on the thesis.  This is an excellent book.  It is easy to read, full of interesting historical facts, and is well reasoned for the most part.

Unfortunately, the author attempts to defend the welfare state as created by Roosevelt in the USand the mixed economy of Great Britain.  This clearly departs from his thesis.  First of all, the welfare state under FDR was an attack against property rights.  Despite the author’s claim that regulation of capital markets is necessary for them to be efficient, all econometric studies show that they are at best ineffective and most likely damaging.  This means that the regulations FDR created to regulate the financial markets caused the capital markets in the USto be less efficient.  Sarbanes Oxley is present-day example of the damage caused by absurd regulation of capital markets.  The New Deal was not based on scientific method, it was based on emotion and the desire for political power.  (For more information see FDR’s Folly: How Roosevelt and His New Deal Prolonged the Great Depression).   So at least three of the four criteria were undermined by FDR and the “New Deal”, (AKA the bend over and take it deal).  The author’s defense of the New Deal is based on sociological studies that show income disparity between the wealthy and the poor causes social unrest.  These studies are clearly flawed.  Income disparity can occur because of political favoritism (crony capitalism) or because of the opportunities created in a free economy.  These studies do not differentiate between these two very different situations.  As a result the studies cited by the author are contradictory and therefore do not support his thesis.

How do the four factors apply to the UStoday?  Property rights have been under assault in the US., see Kelo v. City of New London .  Patent rights have been weakened since 2000, see Intellectual Property Socialism.  The scientific method has been under attack by both the political right and left, see creationism and global warming – climate gate.  Our capital markets have been significantly compromised by Sarbanes Oxley and now the Frank Dodd financial reform act.  For more information see Sarbanes Oxley the Medicine is Worse than the Disease.   The US transportation and communication infrastructure is slowly deteriorating because funds are appropriated in larger percentages to social welfare programs. The US is regressing in all of the four categories that Bernstein defines as necessary for sustained economic growth.  It is no wonder that the US is on the verge of bankruptcy.

 
The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention

This book has an extremely intriguing title.  The book’s goal is to explain why the Industrial Revolution happened and how it happened.  The book explains that there are over two hundred theories for why the Industrial Revolution occurred.  The author points out that most of these theories miss the most obvious point, “which is that the Industrial Revolution was, first and foremost, a revolution in invention.” (Italics in the original)  It further explains, “For a thousand centuries, the equation that represented humanity’s rate of invention could be plotted on an X-Y graph as a pretty straight line.  . . .  Then during a few decades of the eighteenth and nineteenth centuries, in an island nation with no special geographic resources” it changed.  Ultimately, the Industrial Revolution was a perpetual innovation machine.

The author explains that England’s patent laws democratized invention and this combined with the advent of limited liability companies and the new capital markets resulted in an explosion of new inventions that created unimaginable wealth.

“The best explanation for the preeminence of English speakers in lifting humanity out of its ten-thousand-year-long Malthusian trap is that the Anglophone world democratized the nature of invention.

In England, a unique combination of law and circumstances gave artisans the incentive to invent.  . . .  Human character (or at least behavior) was changed, and changed forever, by seventeenth-century Britain’s insistence that ideas were a kind of propertyThis notion is as consequential as any idea in history.” (emphasis added)

The United States went on to create the first modern (non-archaic) patent system that was considerably more democratic (this is small d democrat) than England’s.  This was a major reason why the U.S. became a world economic power in less than 100 years.  Unfortunately, the U.S. is presently considering legislation, the America Invents Act (aka Patent Reform), that will again make inventing undemocratic and the province of the wealthy.

The book explains the history of patent law, the history of the science of steam (thermodynamics) as well as the history of the technology and economics of steam engines.  The writing style is easy to read and very informative.  Despite the bold initial statements in the book, it really focuses on the story of the Industrial Revolution instead of supporting its thesis.

The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention, by William Rosen.

 

According to Reuters:

PIMCO has shifted to a short position in U.S. government-related debt in the world’s largest bond fund, while also raising cash holdings in a sign of the asset manager’s serious concerns about the U.S. fiscal outlook.  Read the full story.

 
Forbes Jumps on the Anti-Patent Anti-Intellectual Bandwagon

Steve Forbes, publisher of Forbes Magazine, was a strong defender of the US patent system.  He followed in the footsteps of one of his hero’s, Ronald Reagan, who made strengthening the US patent system a major part of his economic reform.  For more information see Reagan’s 100th Birthday.

Now Forbes (the magazine) pushes an anti-intellectual, anti-free market, anti-patent point of view as evidenced in the opinion piece Google’s Conundrum: Buy The Patents Or Pay The Lawyers? The author belongs to that Luddite group that wants to categorize patents as monopolies.  Patents are property rights.  Property rights derive from the act of creation or more specifically invention in the case of patents.  Monopolies are the result of political calculations and have nothing to do with creation.

The author then goes on to state:

When Prime Minister Tony Blair and President Clinton suggested imposing restrictions on patents in the field of genetics, publicly traded bio-tech firms experienced a predictable mini-crash. The impact of their recommendation would not have been as violent if the patents had shorter lives than twenty years.

Of course if the property rights in one’s invention was weaker before you suggested making it even weaker, it would have less impact on the value of the companies owning these assets.  This is like saying the value of a company will decrease less when nationalization is proposed if the tax rate were higher.  For instance, if the tax rate were 100% then it would not affect the value of company at all if politicians proposed nationalizing the company.  The author Reuven Brenner, is an economics professor at McGill University according to Wikipedia.  You would think that a professor would not make these obvious logical errors – the sort of errors that would make even an undergraduate paper on the topic receive a C or lower.

As if this gaff were not enough the professor then asks:

What would happen if the life of patents was shortened?

Prices of patented goods would decline and there would be less piracy

Yes and the price of all goods would decline if we would just get rid of property rights.  Of course, no one would produce anything and the same is true of weakening patents.  Innovation will come to a virtual standstill.  History shows that without secure property rights in inventions, innovation grows so slow that humans are stuck in the Malthusian Trap.  See The Source of Economic Growth.

As for there being less piracy that is like saying there would be less car theft if we did not give people title to their cars.  This is not Alice in Wonderland Mr. Brenner.  Words have meaning and even if there is not a law against piracy, it is still piracy.

Mr. Brenner continues with his Socialist line of reasoning by arguing, “Phillips’ initial success in Holland and throughout Western Europe was due to copying Edison’s lamps without paying any royalties to the Edison interests.”  Stealing always enriches the thief, but it does not create wealth it redistributes it and destroys it.  How many invention was Edison or some other inventor unable to fund because Phillips stole Edison’s inventions?

Mr. Brenner should be aware that since Robert Solow’s famous paper on economic growth it is clear that all per capita growth is due to increases in technology.  Most new technologies are created by start-ups that require property rights in their inventions (patents) in order to secure capital.  (See SBA Study).  In addition, all net new jobs in the US are created by start-ups according to the Kauffman Foundation.  If the US wants to create high quality, high paying jobs it needs strong property rights for inventions.

 

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