Saturday, October 18, 2014

Solving Inequality the Venezuela Way

The constant drumbeat about inequality coming from the Obama Administration and, more recently, echoed by Hillary Clinton and Janet Yellen will produce more calls for direct government intervention to redistribute income and wealth.  They have a blueprint to follow -- Venezuela.

To see how that's working out, just stayed glued to your armchair.  Venezuela is self destructing as an economy. Once the pride of South America, helped by a booming oil industry, Venezuela is now degenerating into economic chaos.

Venezuela's Hugo Chavez was "democratically" elected to deal with inequality.  His message was, in most respects, the same message that we hear from Obama, Clinton, Yellen and others who find capitalism and free markets unseemly.  Chavez followed the earlier examples of Cuba, the Soviet Union and other enemies of "inequality."  The leaders of these countries lived in luxury while the average citizen descended into a political prison and a life of economic deprivation.

Under Chavez, Venezuela embarked upon an expanded version of the Obama agenda -- increasing government control of the economy, massive subsidies to large (politically friendly) sections of the population and an unceasing, unrelenting war of words (and arbitrary new rules) against the business community.  The rule of law became a thing of the past and civil liberties disappeared in the interest of reducing economic inequality (as always happens).

In some measure, Chavez succeeded.  If you ignore the extreme wealth of the political class in Venezuela, the rest of the country is showing less and less inequality, as gradually the entire populace moves in the direction of poverty.  This follows both the Soviet model and the Cuban model closely.

The big government approach to reducing inequality always and in every case leads to reducing the vast bulk of the citizenry to penury, while the political leaders bask in their palaces and pat themselves on the back for their anti-inequality accomplishments.

Meanwhile, what does capitalism do for you.  Check out modern China to see.  Today, the only place on the globe that shows economic growth is China and its periphery.  Capitalism is the order of the day along the eastern seaboard in China and result is over 300 million people have moved from dire poverty to middle class economic status.  Not bad.

There are no examples in the history of the globe where waging war on inequality and abandoning capitalism has succeeded in improving the lives of the average person. But, there are plenty of examples of the Hugo Chavez experiment in Venezuela.  Obama, Clinton and Yellen would like to bring the Venezuela experiment to the US.

Wednesday, October 15, 2014

The Return of the Luddites

William Galston's editorial in the Wall Street Journal exhibits ever-more confusion about why the middle class has lost so much ground in the US in the last five decades.  Galston, like the Luddites of 19th century fame, blames the plight of the middle class on technology.  Here is the ultimate statement of Galston's confusion:

"It is easy to conclude total compensation has been rising briskly even if wages have stalled.  But the facts don't bear out this conjecture.

Between 1981 aand 2014, according to calculations based on the Bureau of Labor Statistics, wages corrected for inflation rose at the anemic rate of 0.3% a year.  But total compensation -- wages plus benefits - hasn't done much better, rising at only 0.6 % a year."

First, it is worth noting that the "total compensation" that Galston cites is rising twice as fast as wages, even if both growth rates are small.  The absolute difference between wages and total compensation over time is huge, given these growth rates.

Second, the issue is not "total compensation," but the price of labor.  It's what employers have to pay, not what employees get that determines the price of labor.  The price of labor has gone through the roof, even if total compensation has risen more slowly (albeit twice as fast as the employee wage).

Why?  There are so many reasons, it's hard to know where to begin.  Think about lawsuits concerning workplace issues -- discrimination, pay equity, family leave, safety issues (real and imagined) and on and on.  These things cost and they cost a lot.  Unfortunately, the brunt of these costs often fall most heavily on those who these kinds of lawsuits are intended to help.  Regardless, such things all raise the cost of labor, but do not show up in "total compensation."

If you passed a law saying that an employer must throw $ 50,000 per year in the ocean for every employee they have, that would be an addition to the price of labor, but it would not show up in Galston's "total compensation."

It is surprising that the idea that increases in the price of labor lower the demand for labor is so hard for economists to fathom.  Equally surprising is the failure to understand that so-called "benefits" and mandates inevitably fall back on employees and serve to directly reduce wages for any given level of the price of labor. 

How can the middle class improve their lot in this situation?  Banning technological growth is not the answer.  How about letting free markets work and eliminate all the government-imposed costs that are added to the price of labor.

Saturday, October 11, 2014

The Alternative to Big Government

The only environment that has ever produced real economic growth is an environment of free markets.  The most recent historical example is that taking place in China in their easternmost provinces.  True, China is far from a free market economy overall, but in the few spots where free markets have been permitted to do their thing, an economic revolution has occurred.  While there have been a growing number of billionaires sprouting up during the economic boom, the real change is the movement of hundreds of millions of Chinese from dire poverty into the middle class.  Government cannot accomplish a change like this, but free markets can and have.

During the heyday of the old Soviet Union, Americans were constantly regaled by stories of successful five year economic plans in the Soviet Union, while economic growth in the US, then about 3 percent, was seen as pitifully low.  That was then, this is now.  Now, we know that over more than six decades of Soviet rule, there was no economic growth at all in the Soviet Union and agricultural output, in particular, declined for the first five decades of Soviet rule.  So much for the glories of centrally planned economies.  Meanwhile, 3 percent growth seems an elusive goal in modern America, beset by central planner dominance of government.

The difference between government planning and free markets lies in the unleashing of human initiative and effort.  Academic equations cannot capture this.  Academic economics assumes a robotic world that only government policy can impact.  But, the real world is not like that.  Ideas and human beings, left free to do their thing, do their thing and the world is a better place for it.  Idealistic reformers pave the way for the Stalins, the Hugo Chavez's, the Fidel Castro's and, yes, the Ayatollah's. 

When has a radical reform movement, centering upon the concept of improving the lot of poor people, ever led to an outcome that is anything but abhorrent?  There are no historical examples.  All of these movements end up with a Hitler or a Stalin or a Hugo Chavez, no matter how well meaning the activists that began this trail to disaster. (Note that the American revolution was not a radical reform movement centered upon improving the lot of the poor, though the revolution certainly had that effect; ditto for the British and their Glorious Revolution).

If you want to help poor people, give them economic freedom.  Then they can help themselves.  Government policies simply create an ever strangling prison that the poor, eventually, can never escape.

If you really want to help poor people, then give them the right to choose where their children go to school, the right to work whereever they want to work and for whatever wage or other arrangement they choose.  Let people provide the health care they need in whatever way they wish. Allow people to provide for their own retirement, assuming they have any interest in retiring.  In short, break the chains that bind poor people to an economic life with little promise or hope.

It's worth noting that "activist" leaders that promote big government are almost, without exception, individuals that are drawn from the wealthiest economic backgrounds of society.  Folks like George Clooney, Sean Penn, Warren Buffett, George Soros, Mark Warner, Bill Gates, and, yes Gwyneth Paltrow have no ties whatever to the poor. These wealthy elitists are in the Vanguard of strangling the hopes and dreams of the folks at the bottom of the economic pile and thereby promote their own sense of personal nobility.  They can smile knowingly and check themselves out in the mirror, while the poor struggle in the prison that these folks continue to promote.

Friday, October 10, 2014

So How is Draghi Doing So Far?

Mario Draghi, who heads up the European Central Bank(ECB), has been following the Bernanke lead and expanding, dramatically, the role of the ECB.  Over the mild and muted objections of German finance officials, Draghi has gradually but ominously pushed Germany increasingly into the role of backstopping the profligate economies of Greece, Spain, Italy, and, yes, France.

The Ukraine sanctions are probably the trigger that has turned the once-strong German economy in a downward direction.

Europe is an economic basket case because of taxes and regulations. That's not changing.

Today's WSJ article by Giada Zampona and Marcus Walker had this to say about what ails the Eurozone:

"Rigid market regulations, onerous taxes on jobs, and other long-standing labor practices have contributed to a long-term decline in economic dynamism in many parts of Europe, a trend exacerbated by the long financial crisis.

A lack of demand in Europe's economy, which shows up in stubbornly high unemployment and very weak inflation, is compounding the region's supply-side problems.

A feeble economic recovery since 2013 is at risk of petering out, economic data in recent weeks have shown, putting increasing pressure on euro-zone governments to act."

Note that commentators always look to government to lead the way out.  Perhaps a less active government with fewer regulations, lower taxes, and more reliance on free markets might help.  After all, the highest economic growth in the history of Europe and the US occurred when governments were relatively small and unobtrusive.

In the current political environment, governments are involved in every nook and cranny of American and European life.  No wonder there is a declining role for individual initiative and economic dynamism.  Europe and the US continue to move toward the old Soviet model.  That means, increasingly, stagnant economies that pit rich against poor, since the poor have few opportunities in a stagnant economic environment. 

Thursday, October 9, 2014

Russia is an Economic Mess

It is interesting that the Western countries have blinked in the face of Russian policy toward the Ukraine.  Fearing a shutdown of oil and gas from Russia to both the Ukraine and to Western Europe, the NATO alliance essentially backed down in the face of Russia's aggressive actions toward the Ukraine.

What would Russia do without it's oil and gas exports?  They have to sell it.  If not to Western Europe, then they would have to scramble to sell it elsewhere.  If that happens, since oil and gas is pretty much fungible globally, there would be plenty of oil and gas for Western Europe and for the Ukraine in time.  The "in time" is simply a reflection that temporarily oil and gas might have to be brought in from other sources.  These sources are available in abundance at the present time.  The world is overflowing with available oil and gas and the global market prices for oil and gas have been plunging for quite a while, reflective of that relative surplus.

Russia actually is an economic pigmy.  Capital imports into Russia have ground to a halt as Putin has, more or less, annihilated what little free-market activity occurs in Russia. Russia is gradually headed back to the old Soviet model -- the government dictates and the people suffer.   The winners are those in power and the oligarchs that Putin favors.  This is not a recipe for economic strength.  It is a recipe for weakness.

Anytime you see folks claiming to be fighting for the working classes, watch out.  The end result is, in every case, a pure dictatorship where the spoils are dished out to family and friends.  Think about that when you hear the current cries about inequality in the US.  Those who shout the loudest are likely hopeful that they and their allies will be able to decide who gets what.  Once you replace the free market, then it just becomes a power game and the winner puts his family and his friends in the drivers seat.  Putin probably laughs at our current concerns with inequality.  He knows where that is headed.

Wednesday, October 8, 2014

Europe Slips Into The Abyss

The data released on German manufacturing just adds to the gloom in the Eurozone.  No growth looks like it is turning into negative growth.  So much for aggressive actions by the European Central Bank over the past six years.

The answer to the horrendous debt problems of Greece, Italy, Spain, and France was more debt.  The politicians resisted dealing with the root cause of the problem -- the absurd, anti-free market regulatory and labor law environment prevalent almost everywhere in Europe.

Instead, the politicians, including conservative Angela Merkel, looked for big government solutions with dramatically higher levels of sovereign debt.  It's not working.  The US can't be far behind.

The Real Pricetag for Obamacare

Now the employer mandate kicks in.

Massive increases in health insurance are now hitting companies and employees thanks to Obamacare.  The Wall Street Journal story on WalMart lays out the truth as opposed to the Obama Administration fictions.  30,000 part time employees lost their health care coverage this week at WalMart and the remaining employees faced a 20 percent increase in premiums.

It will get worse, much worse.

Not only will Obamacare cost the vast majority of working Americans massive amounts of increased costs in increased health care insurance premiums and dramatically higher deductibles, but, for almost everyone (who is not wealthy), there will be very few doctors and hospitals available, especially for the millions of Americans pushed onto the exchanges as Obamacare implementation unfolds.

The result: dramatically higher costs for the average American and declining availability of actual health care.  Same old story -- now you have insurance, but you no longer have health care.

The worst part is: employees are footing the bill, not employers, even though employers appear to be the payers.  They aren't.  The employees pay in fewer jobs and lower wages.

Meanwhile, Warren Buffett has it made.  He will never be forced onto the exchanges, nor will Obama, Hillary, George Soros, Mark Warner, Bill deBlasio, Harry Reid, Nancy Pelosi, etc., etc.  These folks are wealthy and will never be forced to face the indignities that are being forced upon lower and middle income Americans by the implementation of Obamacare.

The wealthy liberals really don't care about the disaster that is Obamacare because they personally will never: (1) pay for it; (2) be subject to it.  They are destroying the finest health care system in the world, but preserving their little ocean of prosperity and excellent health care for themselves.  Meanwhile, they condemn the poor and the middle class to the nightmare that is Obamacare.