• Tag Archives economics
  • How Easy Money Is Rotting America from the Inside-Out

    The Federal Reserve has been the main cause of business cycles in America since 1913. For several decades, it has tried to hide the consequences of its policies by enabling easy credit during each recession. As Jonathan Newman wrote yesterday, pouring trillions of dollars into the financial sector obscures the external signs of the recession such as low asset prices and high unemployment and promotes economic malinvestment.

    This malinvestment creates the conditions that cause the next recession. Some of the consequences of the Fed’s policies, such as stock market and housing bubbles can be directly attributed to its policies. In other cases, the artificially low interest rates and other “easy money” policies foster an “infrastructure rot” that erodes the efficiency of the American economy, the standard of living of consumers, and eats away at American infrastructure. These effects are difficult to trace back to the Fed’s policies, so let’s concretize some examples to understand how Federal Reserve policies affect America.

    At the city level, low interest rates allow cities to fund new public projects such as parks and bridges. While this may seem fine and dandy, all infrastructure projects have a maintenance cost. It’s not sufficient to build a park. One must also have the money to maintain it every year. If there is not enough revenue to pay for maintenance, the park will literally rot until the playgrounds fall apart, the lawns are overgrown, the lights fail, and the park becomes too dangerous for families to play in.

    The same thing will happen to streets, bridges, and plumbing. This is one of the ways urban decay happens: easy money policies fund unsustainable urban infrastructure projects which make politicians look good, but end up crumbling a few years or decades later. The Flint water crisis happened in large part because the Federal government funded infrastructure projects that were not sustainable by the incomes of the people of Michigan.

    Easy money from the Fed also rots the guts of American corporations. New money goes to the most politically-connected businesses first, and funds projects that would not be possible in a free market. Because private investors haven’t actually saved enough to see the projects through to completion, and consumers don’t value the product enough to cover production costs, the companies getting free money from the government either fail or receive endless bailouts. For example, easy money encouraged unsustainable commitments like high union wages and pensions, forcing US automakers to sell cars for prices that consumers could not pay given their actual savings rate. When sales dipped in 2009, the government was forced to bail out GM, Chrysler, and Ford in 2009.

    While small businesses are the last to get access to the Fed’s easy money taps, big banks received over $700 billion in TARP bailouts and even more selling U.S. Treasury bonds to the Fed under the QE program. Such subsidies signal to banks that their primary customer is the government, not consumers. As a result, financial services have stagnated, and banks have fought rather than embraced genuine innovations like the blockchain.

    The 2009 crisis made banks cautious of making mortgages to people who clearly could not afford them. But the Fed kept giving away free money and enabled a new phenomenon: zero-interest auto loans. While this may seem like a good deal for consumers, the Fed’s credit expansion has created an auto-credit bubble worth 9.2% of all household debt. Consumers are buying and leasing cars that they would not normally be able to afford.

    Instead of being taught to save, millennials are learning to have a negative savings rate (acquiring more debt than assets) and trust their future entirely to the government. If a recession happens, millions of people will suddenly find that they are unable to keep their cars and lack any emergency savings. When millions of unwanted cars are dumped back onto the market, automakers will again be unable to keep up with their inflated liabilities, requiring another bailout.

    Perhaps one of the most destructive products of easy money has been the War On Terror. The U.S. has spent about $5 trillion on this seemingly endless war, and most of the money has not come from higher taxes, but from selling bonds to institutions like pensions funds, and especially foreign countries such as China and Japan. American citizens have gained nothing of value, while our government has been spreading death, destruction, and revolution abroad.

    While the national economy has gotten away with federal deficits and a $20 trillion dollar debt for decades, this trend is only sustainable as long as the rest of the world keeps lending the U.S. money. When they decide to stop funding our wars and financial irresponsibility, Americans will suddenly be faced with paying trillions of dollars in liabilities. This overdue correction will likely come with dramatic reductions to Americans’ standard of living.

    My point in writing this to help you visualize the destructive effect of the U.S. government’s easy money policies from an abstract harm to the practical harm: collapsing bridges, kids poisoned from lead plumbing, millions of cars rotting in junkyards, scandalous bank services fees, bombs falling on innocent people all over the world, and widespread poverty once the easy-credit party ends.


    David L Veksler

    David Veksler is the Director of Marketing at FEE.

    This article was originally published on FEE.org. Read the original article.




  • Raising Millionaires’ Taxes Will Drive Them Away

     

    Thanks to a frenzied December on Capitol Hill, 2017 will be known as the year of tax reform. But political developments in several blue states may mean that tax relief is significantly clawed back. Massachusetts and New Jersey are currently considering “millionaires’ taxes,” which would significantly increase top rates and spark a “race to the top” for revenue at a time when the federal government is actively lowering rates.

    To states such as New Jersey and Massachusetts with red-hot liberal resentment over tax reform, a millionaires’ tax might seem like necessary progressive corrective action. Hidden behind the rhetoric, though, is a flimsy case for states trying to raise taxes on the wealthy. Instead of helping out the middle class, a millionaires’ tax will result in an exodus from the state, squeezing out opportunities for working Americans.

    Tax Migration

    State lawmakers with blue electorates often experience generous program funding promises that conflict with balanced-budget requirements. When faced with expanding spending and shrinking revenues, large tax increases are the go-to policy option. Prominent millionaires respond to these proposals by threatening to leave, and research shows that the well-to-do regularly follow through on these promises. Despite inter-state migration by upper-income groups being lower than average, nearly all of the migration that does happen in top brackets has to do with tax changes.

    Researchers at Stanford University and the Treasury Department estimate that a 10 percent increase in taxes causes a 1 percent bump in migration, assuming no change in any other policy. This implies that typical levels of tax migration would still result in a net increase of revenue for a state looking to raise taxes on top earners. But it does mean that the bounty is not as great as some state lawmakers would like to imagine. Shifts in executive compensation sources make the payoff to state governments even smaller.

    The ultimate destination for the remaining pool of money that does get into state coffers depends on the state. New York State’s experience offers a cautionary tale of what happens when transparency and accountability take a back seat to special interests. In 2009, then-Governor Paterson and state lawmakers urged a temporary 8.97 percent tax on individuals earning over $1 million (or couples earning over $2 million) to shore up funding through the end of the Great Recession of 2008 and 2009.

    This new rate proved to be anything but temporary and is still on the books (albeit slightly lowered to 8.82 percent), following a two-year extension signed into law last year. The $3.5 billion annual revenue pads wasteful spending in Albany, as costs balloon for expensive infrastructure projects and waste at Albany agencies. Meanwhile, lawmakers have proven incapable of clamping down on record shortfalls.

    Tried and Failed

    California’s experience with a millionaires’ tax is only slightly less terrible. A 1 percent surtax on incomes above $1 million, implemented in 2004, is specifically designated for the Mental Health Services Act (MHSA), which funds counseling and rehab services for at-risk, low-income populations. But despite transparency over the funding, per-person program costs have ballooned and the state has presented no data attesting to the efficacy of the program.

    This does not mean that there are no praiseworthy program results; some statistical findings suggest that increased mental health efforts have led to a decline in emergency room usage and decreases in other government spending. But if the program recoups around 85 percent of costs, as some studies suggest, then a millionaires’ tax is not necessary.

    If California clamped down on some of the rampant waste found in infrastructure line-items, payments for mental health would be possible and set the state up for long-run budgetary savings. Better yet, Sacramento could fund specific programs via “charitable donations” as a way for taxpayers to get around the new state and local deduction cap.

    If New Jersey and Massachusetts approve new millionaires’ taxes, it is difficult to predict how much will be raised and where these funds will ultimately wind up. But if New York and California are any guide, income surtaxes will be destructive. When it comes to higher taxation, interstate migration is just the tip of the iceberg. Higher-tax states, for instance, see less innovative activity and scientific research according to an analysis by economists at the Federal Reserve and UC Berkeley. Any benefits of millionaires’ taxes do not make up for the economic and social toll caused by fewer innovative activities and correspondingly lower job creation.

    In the midst of game-changing federal reforms and widespread blue resentment, scapegoating the rich is a proven political strategy. But millionaires’ taxes make for terrible governance and dubious benefits.

    Reprinted from Economics 21.


    Ross Marchand

    This article was originally published on FEE.org. Read the original article.




  • With the Minimum Wage, Who’s the Real Bully?

    What do economists predict employers of low-wage workers will do when a government raises the minimum wage by a large amount, say, $2.40 an hour?

    An increase in the minimum wage doesn’t magically make low-wage workers more productive. So we predict that employers will reduce other components of the compensation package: reduce paid breaks, reduce their contribution to benefits such as health and dental insurance, and reduce other components of the pay package.

    The Wisdom of the Coffee Shop

    That is exactly what two owners of Tim Hortons coffee shops in Cobourg, Ontario are doing in response to the $2.40 per hour increase in the minimum wage that became law in Ontario on January 1. This is from a Canadian Press news story published in The Globe and Mail, a major national publication based in Toronto:

    In a letter dated December 2017, Ron Joyce Jr., son of company co-founder Ron Joyce, and his wife, Jeri Horton-Joyce, who is Tim Hortons’ [sic] daughter, told employees at two Tim Hortons restaurants they own in Cobourg, Ont., that as of Jan. 1, they would no longer be entitled to paid breaks, and would have to pay at least half of the cost of their dental and health benefits

    The minimum wage in Ontario between October 1, 2017, and December 31, 2017, was $11.60 per hour. As of January 1, it is a whopping $14.00 per hour. In U.S. dollars, as of today, that is $11.20 an hour. (The average hourly wage of workers 15 years of age and over in Ontario in November 2107 was $26.82. So the new higher minimum wage is 52% of the average wage.)

    The Inevitable Backlash

    And what was Ontario premier Kathleen Wynne’s reaction? Was it: “Oops. I blew it. I should have realized that employers would adjust to make it worthwhile to keep hiring their lower-wage and lower-productivity workers?” No. Was it: “I should have also realized that employers and employees are better than me at coming up with the optimal mix of money wages and other benefits?” Again no.

    It couldn’t have been her fault. Instead, she attacked the employers. The news story continues:

    Premier Kathleen Wynne said if Joyce Jr. wants to challenge the Ontario government policy, he should come directly to her and not take it out on his workers

    But they didn’t challenge the Ontario government policy. Instead, they announced how they were going to comply with it. Ms. Wynne doesn’t even get the basic story right.

    And what is Wynne saying would have happened if they had “come directly to her?” Is she saying she would have reconsidered the policy? Probably not, given that she also said:

    When I read the reports about Ron Joyce, Jr., who is a man whose family founded Tim Hortons, the chain was sold for billions of dollars, and when I read how he was treating his employees, it just felt to me like this was a pretty clear act of bullying

    Kathleen Wynne was right to identify the fact of bullying. She was wrong, however, in identifying who engaged in bullying. To know who the bully is, she need only look in the mirror.

    H/T Janet Bufton.

    Reprinted from the Library of Economics and Liberty


    David R. Henderson

    David Henderson is a research fellow with the Hoover Institution and an economics professor at the Graduate School of Business and Public Policy, Naval Postgraduate School, Monterey, California. He is editor of The Concise Encyclopedia of Economics (Liberty Fund) and blogs at econlib.org.

    This article was originally published on FEE.org. Read the original article.