Friday, 12 August 2011

Guest Post: The Credit Downgrade That Didn't Happen

Following is a post by Dr. Burt Folsom, author of New Deal or Raw Deal?* and professor of history at Hillsdale College. It is reprinted in its entirety from Prof. Folsom's blog by his kind permission.
The Credit Downgrade That Didn’t Happen

by Dr. Burt Folsom

Ninety years ago, in 1921, the U. S. was poised for a recession, high unemployment, and a possible credit downgrade.


Because World War I had ended, the troops had come home, but 11.7% unemployment darkened the country. Our veterans could not find work. To solve these problems, some leaders recommended, in effect, a stimulus package–give the veterans jobs to build roads, bridges, and some buildings.

But President Harding (who died in office) and President Coolidge said no. Instead, these two presidents recommended cutting federal spending and cutting tax rates.

The cutting of federal spending was critical because the U. S. national debt had increased from $1.2 billion to $24.3 billion from 1916 to 1920.

We complain today about 9.1% unemployment and a doubling of our national debt in the last eight years; from 1916 to 1920, however, we had a 20-fold increase in the national debt and 11.7% unemployment.

But in early 1920s, the U.S. never had a credit downgrade or a prolonged recession because the cutting of federal spending and of tax rates jump-started the economy and produced budget surpluses every year during the 1920s.

During that decade we slashed more than one-fourth of our entire national debt, and increased GDP by almost 25%. American entrepreneurs eagerly began producing radios, talking movies, and air conditioning–three inventions, among others, that changed our nation and the world.

What is encouraging here is that Americans can still chart their own future. We did that in 1921, and we can do so today. We are not pre-destined to be a declining nation–we have a choice in that and we will help make that choice as a nation when we vote next year for the leaders who will shape public policy.

If we select someone with Coolidge’s free-market philosophy, then the freedom that comes with that will allow Americans to invent and create more goods and services to provide the jobs and prosperity to get America moving again.

Woodrow Wilson, the president who Harding and Coolidge replaced, promoted the first income tax and under Wilson the top rates went from 7% to 15% to 65%, and finally to 73%.

Under those rates, we were making the decision to chase wealth out of the country and stagnate as a nation. Harding and Coolidge reversed that decision and sent tax rates tumbling to 25% on top incomes.

American entrepreneurs arose and dominated the world. Revenue actually increased and budget surpluses became the hallmark of the 1920s. What choices will we make ninety years later?

*Dr. Folsom is also the author of The Myth of the Robber Barons and has a new book on FDR during WWII coming out in October!

Posted by Jeff Perren

Monday, 8 August 2011

ECONOMICS FOR REAL PEOPLE: Reserve Bank, cause or cure … ?


Here’s the note from our friends at the UoA Economics Group for their talk tomorrow evening:

Hello Everyone
This week we have Rodney Dickens coming to speak to us further about the role the Central Bank plays in the Business Cycle.  Rodney Dickens is the former head of Research at ASB Bank and has been a member of the RBNZs Monetary Policy Committee.  He is now the Managing Director of Strategic Research Analysis and brings a unique perspective on how the market operates from his 25 years experience working as as an Economist. 
In a recent media release he showed how lowering the OCR during the early 2000's created the boom bust property cycle.  [Some reaction to his media release here.] While this created short-term employment for those in the building industry, it ultimately left many people out of pocket, as over 50 different finance companies collapsed and billions of dollars in investments were lost.  As markets around the world continue to struggle, come and hear an interesting perspective on how this story began.

    Date: Tuesday 9th August
    Time: 7pm
    Location: Case Room One, Level 0, UOA Business School

Please note the change of time for this week to 7pm.  Look forward to seeing you there

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DOWN TO THE DOCTOR’S: Why Labour should support tax cuts for the rich

_richardmcgrathLibertarianz leader Dr Richard McGrath invites you down to his surgery for an inoculation against this week’s stories and headlines on issues affecting our freedom.
This week: Why Labour should support tax cuts for the rich

DOMPOST: “Inequality report ignores tax cuts for the rich: Goff” - John Key appears to think income inequality is a bad thing. Phil Goff slaps him with a wet bus ticket for not taking into account the cuts to income tax enacted by National since their election in 2008…

This is much ado about nothing, a phony war over a non-issue. Apparently the gap between top and bottom incomes hasn't widened recently. That's probably not a good sign, as it means industrialists and entrepreneurs possibly aren't making bigger profits, and therefore are less likely to employ more people.

It's no secret that Labour and Bill English like the idea of a capital gains tax. Labour also wants to reinstate the Cullen Envy Tax (i.e. raise the top tax rate back to 39%). But why would on earth would Goff want to decrease government revenue? Doesn't he realise that hiking income tax rates leads to less, not more, tax taken by govt?

Daniel Hannan, member of the European Parliament, points out in his blog that in order to make the rich pay more, governments should tax them less. He links to an interesting article by the Adam Smith Institute (whose publications I strongly recommend) that quotes example after example of how tax reductions for the wealthy encourages them to stick around, keep making profits and thus fall prey to tax collectors.

Even that darling of statists everywhere, John Maynard Keynes, stated: "[T]axation may be so high as to defeat its object, [and] a reduction of taxation will run a better chance than an increase of balancing the budget."

Don’t believe me? Here’s some examples:

  • UK, 1979: Chancellor Geoffrey Howe cuts marginal tax rate from 83% (!) to 60%. Before the cuts, the top 1% of taxpayers were paying 11% of total income tax received. Nine years later, despite the hefty cuts, they were paying 14% of total income tax.
  • UK, 1980s: Chancellor Nigel Lawson cuts marginal rate further, to 40%. By 1997, the top 1% of taxpayers are paying 21% of income tax received. Thus halving the marginal tax rate doubled the income tax receipts from the wealthiest 1%.
  • US, 1920s: Presidents Coolidge and Harding reduced the top tax rate from 73% to 25%. The share of tax paid by earners making over $100,000 nearly doubled between 1921 and 1925, from 28% to 51%.
  • US, 1961: The top tax rate under Eisenhower had crept up to a staggering 91%. The Democrats supported by Kennedy dropped this to 70%. He stated, a few months before a sniper removed the occipital lobes of his cerebral hemispheres: "[T]ax rates are too high today and tax revenues are too low, and the soundest way to riase revenues in the long run is to cut the tax rates..." As a result of the Kennedy tax cuts, those earning over $50,000 increased the amount of tax paid by 40%, and paid 15% of income tax received in 1966, as opposed to 12% in 1963. Total income tax received went up from $69b in 1964 to $96b in 1968.
  • US, 1981: Under President Reagan, Congress reduced the top tax rate from 70% to 50%. Between 1981 and 1988 the top 1% of tax earners increased their share of tax received from 18 to 28%, while the bottom 50% of taxpayers decreased their contribution to income tax received from 7.5% to 5.7% over this same period.
  • US, 1991: George H W Bush, elected on a platform of "no new taxes", supported the introduction of new taxes including raising the top tax rate from 21 to 31%. The net result was that the wealthiest Americans paid $6.5b less in 1991 than they had the previous year before the tax was introduced. Federal tax results as a proportion of GDP dropped too.  
  • US, 2003: George W Bush reduced the top tax rate from nearly 40% to 35%. Between 2004 and 2007 federal tax receipts increased by $785b, mainly from the wealthy.
  • In 2000, the top 60% of US taxpayers paid all the income tax. The bottom 40% paid no net tax.
  • Canada, 1990: Top federal tax rate cut from 45% to 29%; share of tax paid by top 10% of taxpayers increases from 29% to 45%.
  • France, 1996: Gradual decrease in top income tax rate from 48% to 40%; result: higher tax receipts.
  • Hong Kong: Low flat income tax rate of 16% (or choice of graduated rates up to 17% maximum). Result: purchasing power parity 7th highest in the world and closing in on the US.
  • India, 1985: Top tax rate reduced from 65% to 50%; tax revenue the following year rises by 20%.
  • India, 1997: Tax rates reduced across the board; result: no drop in revenues but increase in number of taxpayers over following year, with rise in tax revenue over following 6 years and 50% increase in compliance.
  • Russia, 2001: Flat tax of 13% introduced. Result: 25% increase in personal income tax receipts the following year.

So, Mr Goff:

There is ample evidence that decreasing the top tax rates increases government revenue. So why are you advocating a rise in the marginal tax rate?

Are you so consumed by hatred of the successful for being successful that you would incur a drop in government revenues in order to drive these people offshore, which, of course, is what the wealthy do when grasping parasites like you try to steal larger amounts of their income than they are willing to hand over for redistribution?

Pray tell, Mr Goff.

See y'all next week!
Doc McGrath


Garden of Eden

I don’t know about you, but we had a ball at Eden Park on Saturday night. It wasn’t the MCG—we sat on scaffolding five miles in the air whose shaking quelled the staunchest stamping—and instead of built-in facilities we had portaloos and hot-dog caravans down several miles of stairs—but once installed up in the nosebleed section the atmosphere was fantastic. 

And if you had parking close (as some of us were lucky enough to enjoy) transport there and back was easy, and partying afterwards painless.

And there was a lot to celebrate, wasn’t there. Unless you are Australian. Or Robbie Deans.


This was pretty much our possie (above), which you might think would feel a little out of the atmosphere. But it wasn’t. Despite being behind the scoreboard at this end, the one at the other end was huge—and “spidercam” showed us anything we’d missed. And there was no chance of feeling out of it: with a crowd of 52,000, it was easy to feel part of it. I’d happily sit there again.  And might, in coming weeks.

Q: So how was your Eden Park experience?

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Reality strikes back [update 2]

Malinvestment is always the result of the inability of human beings to foresee
future conditions correctly. However, such human errors and the resulting
malinvestments are most frequently compounded by the illusions
created by undetected inflation or credit expansion.”
- Ludwig Von Mises, Human Action

The cause of the ‘bust’ is the same as the cause of the previous ‘boom’ – the
willy-nilly creation of credit out of thin air…  To understand the root cause of
this crisis you need to understand the root cause of ‘boom and bust.’”
– David McGregor, ‘The global financial/economic crisis: causes & solutions

For decades, economies have been built.on a formula of fractional reserve banking and counterfeit capital—money created by banks out of thin air—debt, organised into currency.

This was the "new economy" proclaimed the fakers, an economic model in which production of real things was replaced with production of bank-created credit. Credit created out of thin air propping up prosperity created by illusion.

That unstable gallimaufry collapsed in the malinvestments of 2007 and 2008. And ever since, the fakers have tried to prop up their collapsing model of bank-created credit with trillions of dollars of government paper.

Such fakery can only last so long. Reality will out. All that "stimulus" flooded into the markets served only to resuscitate bad positions that should have been extinguished, and to inflate a (paper-based) "recovery" which allowed the gullible to think that reality had been faked once again.

But it hasn't been.

It looks like this morning, with markets ready to open again, that reality will reassert itself again.

The economic chickens are coming home to roost. Watch out for the fallout therefrom.

UPDATES  from around the traps:

UPDATE 2:  More reaction":

  • Don’t worry about US Government debt says the man who blew up the US housing bubble. “This is not an issue of credit rating,” says Alan Greenspan, “the United States can pay any debt it has because we can always print money to do that. So, there is zero probability of default."
    Yes, folks, this man was Chairman of the US Government’s money-printing wing for nearly twenty years. And you wonder why we’re all now in the mess we’re in!
  • Meanwhile, there are alleged economists out there saying that even though the US Government’s debt situation was “abysmal,” even though they’re now struggling to pay for all the government paper they wasted,  they should have gone for way more than the multi-trillion-dollar stimulus they did.
    “What I want is more now," Christine Romer said about a bigger and better stimulus.
    Yes folks, this woman was Chairman of the Council of Economic Advisers under President Obama and chief architect of his stimulus bill. And you wonder, etc…

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Sunday, 7 August 2011

Happy Birthday, E-Type

Since it’s Sunday, here’s Jeremy Clarkson with the closest thing to a religious experience you’re likely to see here: a tribute to the best car ever made, on the occasion of its fiftieth birthday!

Top Gear Jaguar E-Type Tribute from Eric Huntington on Vimeo.