Monday, November 10, 2008

Why the Command (Government-run) Economy DOESN'T Work...

A friend, Pela, from Sweden recently noted, "The state owned postal office has decided to "be more effective" here; which means that I will get my mail two hours later." (Pela)
To which, I responded, “Oh yeah! That's called "increased efficiency" in government speak.

“The reason for that?

“Well, the government is worker-centric, as opposed to the market, which is consumer-centric.

“When you put the focus on the consumer, your goals tend to be delivering the highest quality at the lowest price for all....when you put the focus on the worker, you tend to get deliver the least amount of work/productivity for the highest pay/price.

“That's why the government-run economy DOESN'T work - it consistently delivers fewer goods and services, at lower and lower quality and at higher and higher prices.

“That’s why the customer really IS always right...while the worker, rarely is.”

Need PROOF that this is right?

Look no further the average annual Misery Indexes of the most recent Keynesian and Supply Side periods;

Misery Indexes: The Keynesian Years (1970 – 1980) Vs. Supply Side Years (1995 – 2006)

LBJ, like G W Bush, found himself involved in an increasingly unpopular, while over-burdening the domestic economy with all kinds of Keynesian (Big-government social spending). Ironically enough, the height of Keynesianism came during the Republican administration of Richard M. Nixon, with the closing of the gold window, wage and price controls and numerous other Keynesian programs. The U.S. continued on with a Keynesian path until the economy imploded under Jimmy Carter.

Looking back at some of those incredibly high Misery Indexes, especially through a prism of fifteen straight years of single digit Misery Indexes, it seems doubtful that America would accept that kind of economy today.

1970: 10.82
1971: 10.25
1973: 11.02
1975: 17.68
1979: 17.07
1980: 20.76
1970 – 1981 = 14.2

While Ronald Reagan ushered in the Supply Side era, by replacing Paul Volcker with Alan Greenspan, a Democratic House still spent $2 for every $1 they cut back in taxes. Reagan’s successor, George Bush-41, moved away from strict Supply Side tenets and cooperated with Ted Kennedy in breaking his “Read my lips, no new taxes,” pledge. As a result, Bush-41 was only the second post-WW II American President to preside over four straight years of double digit Misery Indexes. It wasn’t until 1995 that the Supply Siders, with Newt Gingrich, took over Congress and, in the process, cut federal spending, along with the Capital Gains rate to deliver some of the lowest Misery Indexes in over four decades, along with the first budget surpluses in decades.

Since Speaker Gingrich left Congress, Congressional Republicans largely abandoned Gingrich’s small government policies and America has turned slowly and inexorably back toward Keynesianism over G W Bush’s tenure.
Still, due to the Supply Side across the board tax rate cuts early in G W Bush’s first term, the increased tax revenues from those cuts masked many of the spending increases incurred during the Bush administration.

The Misery Indexes over this largely Supply Side period were;

1995: 8.40
1996: 8.34
1997: 7.28
1998: 6.05
1999: 6.41
2000: 7.35
2001: 7.59
2002: 7.37
2003: 8.26
2004: 8.21
2005: 8.48
2006: 7.87

1995 – 2006 = 7.6

This pretty much says it all!

As you can see, if you take the most recent Keynesian period and compare it to the most recent Supply Side period, the differences are stark. The Keynesian period had an average annual Misery Index of 14.2, while the Supply Side period had a Misery Index nearly half that – 7.6!

How come the past two years have been so bad?

Why has the Misery Index creeped upwards since 2003?

The post-Gingrich Republican Congress abandoned the small government, low tax principles that Gingrich used to deliver some of the lowest Misery Indexes in over four decades!

G W Bush’s ONLY Supply Side action was his across the board tax cuts early on in his administration. Along with that he embarked on one of the largest federal spending programs in history!

The NCLB Act, the prescription drug boondoggle, the massive Homeland Security apparatus that sucked in huge amounts of federal spending all helped to increase government spending and balloon the national debt, although NONE of those nearly as much as his signing onto last spring’s “stimulus package and the current bank bailout!

The Bush administration has spend like Keynesians and were fortunate that the across the board tax cuts increased tax revenues to such an extent that until 2006, they’d actually halved the deficit over the previous three years!

The credit crisis itself was caused by over-regulation – the re-tooled or turbo-charged CRA (Community Reinvestment Act) that actually forced banks to make subprime loans to high-risk borrowers. In 1994 Barack Obama helped Calvin Robeson (an ACORN volunteer) sue CitiBank in Chicago for “not making enough subprime loans available to poor and low income borrowers.

That lawsuit against CitiBank was won and that’s because the turbo-charged CRA did exactly what I just said it did – forced banks to make subprime loans available to high-risk borrowers. This “creating credit out of thin air” (or “credit socialism”, as I call it) is as dangerous as to allow banks to simply print U.S. currency in their back rooms, thereby inflating the money supply and devaluing the currency.

That’s what this “credit-creation” did, it hyper-inflated the real estate market.

At any rate, the irony is that a heavily Liberal, Democratic media, with few people at all versed in economics, reported the credit crisis as a “failure of de-regulation,” when in FACT, it was exactly the reverse!

As a result, we’ve turned toward some of the people most responsible for the current crisis (Barack Obama, Barney Frank and Chris Dodd) for relief from the problem they helped create!

We’re about to embark on MORE regulation, MORE government spending, MORE misguided government intervention and HIGHER taxes, when the credit crisis we’re reeling from was CAUSED BY over-regulation, outrageous government spending, misguided government intervention and the ONLY thing that had helped stabilize the economy previous to 2008 was the INCREASED tax revenues that resulted from those across the board tax cuts!

How important successful have Supply Side policies been?

Well, when Ronald Reagan took office, and helped a GOP Senate usher in the Supply Side era, the Misery Index dropped from America’s post-WW II high of 20.7, in Carter’s last year, to 17.97 in 1981, Reagan’s first! Those Misery Indexes continued downward each year to a low of 8.91 in 1986 and they stayed under double digits for the remainder of the Reagan administration’s tenure.

That makes it all the more remarkable that when George Bush Sr. flirted with Keynesian Democrats, like Ted Kennedy, the Misery Index rose to double digits AGAIN! In fact, Bush-41 became only the second post-WW II American President to preside over four straight years of double digit Misery Indexes.

But the heart of each era makes the case even more starkly.

There were two periods that marked the heart of the most recent Supply Side period and the most recent Keynesian period.

The “Gingrich years,” marked the most recent Supply Side period and that period would certainly include 2001, G W Bush’s first year, in which he outlined a very Supply Side (tax-cutting) agenda.

The period from 1974, the end of the Nixon administration (during which Nixon infamously intoned, “We are all Keynesians now”) through the end of the Carter administration, the last dedicated Keynesian administration, which served along with a decidedly Liberal-Democratic (Keynesian) Congress that America suffered under.

The difference in the Misery Indexes those periods delivered is astounding;

The prime Supply Side years:

1995: 8.40
1996: 8.34
1997: 7.28
1998: 6.05 *(LOWEST Misery Index since 1956)
1999: 6.41
2000: 7.35

SEVEN YEAR Supply-Side AVERAGE ANNUAL Misery Index = 7.34

The prime Keynesian years:

1974: 16.67
1975: 17.68
1976: 13.45
1977: 13.55
1978: 13.69
1979: 17.07
1980: 20.76

SEVEN YEAR Keynesian AVERAGE ANNUAL Misery Index = 16.12

With the second straight year of our new Keynesian age, 2008's, Misery Index creeping toward double digits (it looks certain to top 10.0 by year's end, the above results from these periods could very well give us a prelude as to where we seem to be heading, economically.


Beyond-The-Spectrum said...

The problem is that conservatives want to privatize profits, and nationalize losses for banks and large corporations.


JMK said...

Actually that's UNTRUE.

The Moderate (Liberal) wing of the GOP, the Bush-Dole-Whitman wing of that Party AGREES with the Liberal/Keynesian Democrats!

Last spring's ill-conceived "stimulus package" was supported by Bush-Pelosi-Reid, just like the current bailout abomination was devised and supported and pushed forward by Bush-Pelosi-Reid.

The Conservatives (both Blue Dog Democrats and the Gingrich-wing of the GOP opposed both those abortions. In fact, Conservative Republicans called on McCain to help re-write the current bailout. One of their demands was that ALL bailout money be used for LENDING ONLY. The Democratic, Bush-supported Bill made no such restrictions on that bailout money and now banks are using it to buy out other banks and for executive bonuses, etc.

Conservatives see bankruptcies and business failures as part of the natural business cycle.

Of course, in the current cycle, GOVERNMENT over-regulation, in the form of the "turbo-charged CRA," forced banks to make tons of high-risk, subprime loans, with Fannie Mae and Freddie Mac "backing" those loans.

That bit of federal malfeasance is what's caused the current credit crisis.

Anonymous said...

And we may get those WONDERFUL years again. Volcker is on Obama's staff, or at least a supporter :P

JMK said...

I've seen that Rachel.

Here's the problem, as I see it; the Moderate-wing (the Bush-Dole-Whitman-McCain-Kean) wing of that Party are indeed wealthy, Country Club patricians who are far more at home with Keynesian Democrats than with the Conservative base of their own Party - "the rabble," as they call them.

Bush Sr (Bush-41) came to office throwing Reagan under the bus - "I won't be taking all those afternoon naps my predecessor did," and then proceeded to cooperate with Ted Kennedy in undoing his "No new taxes" pledge, resulting in Bush-41 being only the 2nd post-WW II American President to preside over 4 years of double-digit Misery Indexes.

Bush-43 began his tenure with some classic Supply Side tax rate cuts, which increased revenues each year after, BUT his every other action was Keynesian!

He supported some incredible amounts of federal spending and supported the excessive expenditures of the NCLB Act, the prescription drug boondoggle and over the last two years cooperated easily with the very Keynesian Pelosi-Reid Congress, on the McCain-Kennedy "SHAMnesty Bill, the spring "stimulus package" and the current $1 TRILLION bank bailout.

Even the current credit crisis was caused by Keynesian OVER-regulation - the turbo-charged CRA that forced banks to make tons of high-risk, subprime loans!

This year's Misery Index is inching over 10. If it stays there, we'll have the first double digit Misery Index since 1992, ironically enough, hsi Dad's last year in office.

If Obama is true to his stated positions, I'd expect 2009's Misery Index to climb to 11 or 12, and it would probably be higher if not for the added revenues of those Bush across the board tax rate cuts.

I'd fully expect tax revenues to fall in 2010 when those tax rate cuts expire and coupled with the Carter-styled spending Obama's promised, I wouldn't be surprised to see Misery Indexes over 15 or 16 by then.

The key for Conservatives going forward is to recognize that they have no friends in Moderate Republicans, who've proven to be far more comfortable with Keynesian Democrats than with Conservatives of any stripe.

I think it's going to be a very painful lesson.

Anonymous said...

You're right about conservatives, but I was thinking about everyday schmoes like you and me. Stagflation hurts, but it will especially hurt Americans brought up on Starbucks, ipods and Coach purses. We have a very disposable lifestyle and worse of all, we are accustomed to it.

JMK said...

"Stagflation hurts, but it will especially hurt Americans brought up on Starbucks, ipods and Coach purses. We have a very disposable lifestyle and worse of all, we are accustomed to it." (Rachel)
On that front I AM worried too Rachel.

I don't think most people have any idea of how bad things could and very possibly will get!

I see (at least I WANT to see) Barack Obama as a well-meaning Left-of-Center idealist, who just also happens to be the best advocate for a failed ideology in over a quarter century. I know that's not saying all that much, except that at least he's not a knuckle-drugging mouth-breather, like Al-Gore and he's not a patrician dolt, like John Kerry.

Carter was smart and idealistic and well-meaning too....and Carter had a warm-folksy style as well.

I don't see a spoiled nation like ours easily accepting an economic decline.

The current situation reminds me very much of the 1970s when a Keynesian Republican administration (Nixon-Ford) handed a declining economy over to a Keynesian Democratic Congress and an idealistic, maybe even a little naive, Washington outsider.

The other day a friend said, "I think Obama is going to luck out. I mean, how much worse can things get? It's only up from here."

I said, "What are you basing that on? I don't know how much worse it can get, but history indicates that it could get quite a bit worse."

I could see huge municipal pension systems defaulting, many Cities and even some states in receivership, the way New York was in the 1970s - not a single bit of policy passed until it was considered and approved by a board of governors (mostly bankers, etc.) appointed by the fed.

I am very worried going forward and the likes of Obama, Biden Pelosi and Reid don't inspire much confidence.

Anonymous said...

The other day a friend said, "I think Obama is going to luck out. I mean, how much worse can things get? It's only up from here."

OOOOO....WHY do people ask such questions -"how much worse can things get"? That just *guarantees* it's gonna get worse ;)

JMK said...

"WHY do people ask such questions -"how much worse can things get"? That just *guarantees* it's gonna get worse ;)" (Rachel)

Yeah it does lend itself to "jinxing" things.

I just find it astounding that there are people who "Can't believe it could get worse."

Are they kidding?

The Great Depression wasn't all that long ago....I've seen all the photos.

The way things look, with the collection of kooks we have in both business and government, I think we'll be incredibly lucky if all we see is a 1970s REDUX!

Kofi Bofah said...

You lost credibility with 'Fred' Volcker.

Do your research. That is not even the man's name.

Kofi Bofah said...

I suppose that the Republican party invented the Internet.

Improved Computing efficiency was a key driver behind the 1982-2000 boom.

Anonymous said...

So many of your facts in this post are wrong, I don't even know where to start.

JMK said...

"You lost credibility with 'Fred' Volcker." (Kofi Bofa)
Thanks for pointing out the typo Kofi, but the facts are that Carter's Keynesian policies resulted in disaster - four straight years of double digit Misery Indexes and a recod worst average, annual Misery Index of 16.5 over his four year tenure - "The WORST U.S. economy since the Great Depression."

None of that is refutable.

Paul was replaced by Reagan with Alan, after Volcker DID reverse some of G. William Miller's policies that actually encouraged inflation, believing that it would "prime the pump."

Volcker's Fed polices were blamed for contributing to the significant recession that devastated the U.S. in the early 1980s, which included the highest unemployment levels since the Great Depression, and Volcker's Fed also elicited the strongest political attacks and most wide-spread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street NW and blockading the Eccles Building.

THE key to the Supply Side boom that occured from 1981 to 2007 were those policiees that delivered low income taxes (that DID NOT punish productivity) and lower Capital gains rates (that spurred greater investment).

Higher income tax rates merely incentivize savings (deferring income in tax-deferred vehicles) ad result in lower income tax revenues - largely because the top 10% of income earners in America pay over 70% of the income taxes and since those people tend to have more discretionary income, they are more able to afford to defer more of their incomes when income tax rates rise.

The smae is true for the Capital Gains rate. When the Gingrich Congress got the Cap Gains tax rate slashed from 30% to 20% Cap Gains revenues skyrocketed.

Capital Gains revenues went UP again when GW Bush and a GOP Congress cut it back to 15%.

JMK said...

"So many of your facts in this post are wrong, I don't even know where to start." (Deb)
How come whenever someone states something like that they can NEVER refute even a single fact?

Carter did preside over "the WORST American economy since the Great Depression."

Reagan's Supply Side support did get us out of that Keynesian STAGFLATION - the Misery Index dropped in each of Reagan's first six years, dropping down to single digits by 198s and staying there until the end of his second term.

Bush Sr's flirtation with Keynesian policies resulted in him being only the 2nd post-WW II President to preside over four straight years of double digit Misery Indexes.

I figure the reason you "don't know where to begin," is that you don't have a single FACT on which to start.

Am I right, or am I right?

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