American Elephants

The Antidote to Pessimism: The Free Market Works! by The Elephant's Child

Over the weekend, 230,000 unemployed people lost their benefits, they just ran out. The recession continues, prices climb  at the grocery store, crisis in Europe, class warfare; this seems like a time of unrelenting pessimism. In his book The Rational Optimist: How Prosperity Evolves, Matt Ridley took a comprehensive look at all of human history through the lens of the awesome power of trade: trade in goods, resources, services, and above all in ideas.

Mr.Ridley says as he writes (in 2010) “it is nine o’clock in the morning. In the two hours since I got out of bed I have showered in water heated by North Sea gas, shaved using an American razor running on electricity made from British coal, eaten a slice of bread made from French wheat, spread with New Zealand butter and Spanish marmalade, then brewed a cup of tea using leaves grown in Sri Lanka, dressed myself in clothes of Indian cotton and Australian wool, with shoes of Chinese leather and Malaysian rubber, and read a newspaper made from Finnish wood pulp and Chinese ink.” He continues, but the point is the worldwide trade that is part of every object we use. Free trade.

For from the earliest man, a trade involved a willing purchaser and a willing seller who agreed on the exchange. The Occupy people are in the streets carrying signs objecting in (often) vile language to capitalism and the free market. Socialism, they are sure, would be much better — then somebody else would pay their college bills. But socialism too has a history. And it has been a disastrous failure everywhere it has been tried. And this time will not be different — it never is. and they are sure, always, that they can fix things with more central planning, more regulation by wise government experts.

Last April 27, one of the worst tornadoes in American history ripped through Tuscaloosa Ala., killing 52 people and wrecking or destroying  2,000 buildings. It took only 6 minutes to put almost one tenth of the city’s population into the unemployment line.  Only a month later, Joplin, Mo., suffered an even more devastating blow— in a city with half the population of Tuscaloosa, a tornado killed 161 people and damaged or destroyed more than 6,000 buildings.

More than 100,000 volunteers mobilized to help the stricken cities. A year later, that spirit lives on in Joplin, where eight of 10 affected businesses have reopened, while fewer than half in Tuscaloosa have even applied for building permits, and vacant lots abound. In Tuscaloosa, officials sought to remake the urban landscape top-down, imposing a redevelopment plan on business, while Joplin took a bottom-up approach, allowing businesses to take the lead in their own recovery. Evidence.

From Small Dead Animals: Wells Fargo Bank is taking steps toward repossessing Stockton, California’s new City Hall, a eight-story high-rise. City government has never moved into the $40.7 million building. City officials in America’s most miserable city still take in over $50,000 in processing and other fees on each new home built, and has been fining homeowners for not painting their yellowing lawns green. Ninety-four retired city union employees receive pensions of over $100,000 a year and free healthcare for life. Big spenders, bankrupt city. Evidence.

Well, that’s California. Governor Brown is raising taxes on the wealthy, who are moving out of the state in droves, as are businesses. Governor Jerry Brown also says that California is facing a higher-than-expected $16 billion budget shortfall, but they are still not ready to call a halt to their ambitious high-speed rail programs. They get lots of Obama money for rail, but California will bear the brunt of the escalating cost, and the shortfall when nobody rides. California has had a net loss of four million residents to other states, and yes, this is evidence as well.

Economist Daniel Mitchell notes that:

President Obama’s fiscal policy is a dismal mixture. On spending, he wants a European-style welfare state. On taxes, he is fixated on class-warfare tax policy.

If we want to know the consequences of that approach, we can look at the ongoing collapse of Greece. Or, if we don’t like overseas examples, we can look at California. If the (formerly) Golden State is any example, it turns out that having high tax rates doesn’t necessarily translate into high tax revenues.

It seems that across the nation, the states with the greatest outflow of citizens and businesses are the states that are trying to recoup their financial standing by raising taxes and increasing regulation — after California, there is Illinois, New York, Connecticut, Massachusetts, and their businesses and their people  are moving to low tax states, with less regulation and even right-to-work rules as governors cut costs and regulations, and rein in out of control benefits. Evidence.

As California is a bad example in the United States, so it is with the ongoing crisis in Greece. Obama wants us to be more like the European welfare states, but Europe is in crisis, and the big questions are whether the European Union can survive at all. The political left has long wanted America to be more like a Scandinavian nation. But while we weren’t paying attention, Sweden has changed with the election of Fredrik Reinfeldt as prime minister in 2006.

Mr. Reinfeldt took office in October of that year, and by January of 2007, tax cutting had begun. They cut welfare spending and began to deregulate the economy. These steps not only did not harm Sweden’s economy, but improved it. Sweden pulled strongly out of the decline of 2008 and 2009, posting GDP gains of 6.1% in 2010 and 3.9% last year, when it ranked at the top of Europe’s fastest growing economies.

While most European countries borrowed heavily, Finance Minister Anders Borg pared back government. His ‘stimulus’ was a permanent tax cut. Borg strongly opposed the Keynesian solution which the left has continued to advance while it rejects an austerity that has yet to be implemented.  Evidence.

These are just a few examples of the free market at work. The free market starts with an agreeable exchange between two people. It’s not all that different if it is an early man trading a bearskin for some shells or you plunking down the money for a new laptop. The exchange will take place only if each feels that they are getting a good deal. Multiply that exchange by the 330 million people in the United States, and attempt to explain how the heavy hand of government, high taxes and heavy regulation can improve upon that trade. Everywhere you look, you will see the free market at work,  — or not working because of government interference.

And do read Matt Ridley’s The Rational Optimist or John Steele Gordon’s An Empire of Wealth. Perfect antidotes for a pessimistic time.  They are not only an optimistic view of the world, but a clear and incisive portrayal of what works.  Beside that, they are just good reads.


Tax Hikes Don’t Mean More Revenue, or So the Evidence Says. by The Elephant's Child

Across the waters, the Labour government in its last days increased the marginal tax rate to 50%, in a tax-the-rich move, and the Tory-Liberal Democrat coalition kept it in place. The tax rate which kicked in at £150,000 a year was the first increase since then Chancellor Nigel Lawson cut it to 40% from 60% in the late 1980s.

The argument (does this sound familiar?) was that “rich bankers” were responsible for the economic crisis and should pay for the clean-up. Mr. Cameron preferred to say those with the “broadest shoulders” should bear the heaviest burden.

Well, once again, it didn’t work. Preliminary figures show that there has been ‘manoeuvering’ by well-off Britons to avoid the new higher rate. Revenue has dropped by around 5%. The Treasury had projected that monthly revenues would actually increase by more than a billion pounds.  When will they ever learn?

The state of Illinois, Obama’s home state, increased its corporate tax rate to 7.0% from 4.8% in January 2011. (Yes, if you want the economy to recover, raise taxes). That’s a 45% increase in the overall corporate rate. Caterpillar made it clear to Illinois officials that it chose to build its newest manufacturing plant outside of Illinois due to the “business climate and overall fiscal health” of the state. And took 1,000 jobs with it. They have also threatened to move their corporate headquarters. Modern Drop Forge and FatWallet have taken their jobs and moved. Canadian National Railway moved its locomotive repair shop and 250 jobs to Indiana. Other major corporations’ threat to move, with their 8,500 jobs, have gotten tax breaks over the next ten years to remain in Illinois.

High taxes and mandatory union membership participation have forced over 800,000 residents to leave Illinois for neighboring states over the past 15 years. But the most growth has occurred in no income tax, right-to-work states Texas and Florida. Illinois has led the country in job losses — over 100.000 — since the increase in taxes, and raised the unemployment rate to 10.1%.

U.S. taxes really are unusually progressive, and more progressive that almost every other rich country. And the rich have options. Steeper tax rates are a dumb way to try to improve fairness and raise revenue. The high-tax states are losing businesses and losing high income residents. California has a huge out-migration. Indiana has lowered rates and become a right-to-work state and is gaining businesses and driving the unemployment rate down.

Small business is not hiring because they are concerned about rising health care costs, government regulations, and the economic climate. Twenty-four percent are worried about being in business in 12 months. 85% say they are not hiring. 61% say they’re worried about economic conditions. But nobody listens.

Treasury Secretary Timothy Geithner says that “If you don’t try to generate more revenues through tax-reform, if you don’t ask, you know, the most fortunate Americans to bear a slightly larger burden of the privilege of being an American, then you have to —the only way to achieve fiscal sustainability is through unacceptably deep cuts in benefits for middle class seniors, or unacceptably deep cuts in national security.”(This is the throw Granny over the cliff gambit)

The Congressional Budget Office (CBO) rejects President Obama’s oft-repeated argument that in order to lower the deficit, it is mathematical certainty that taxes must go up. If President Obama and Congress set spending to match its historical level of 20 percent of GDP and keep it at or below that level, the deficit would be at its historical level in 2017, and the debt would fall as a share of the economy over time.  All that without raising taxes a dime.  Deficits are unsustainably high because the government is spending too much, not because it is collecting too little revenue.


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