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)

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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
1972: 8.97
1973: 11.02
1974: 16.67
1975: 17.68
1976: 13.45
1977: 13.55
1978: 13.69
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
2001: 7.59

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.