Arthur Laffer — 1940-, American. He was teaching economics at the University of California, San Diego, when the Proposition 13 challenge to the California property tax regime was started by Howard Jarvis. Laffer was about the only economist to support the proposition, which passed. He became known to Governor Reagan of California, and later became a member of President Reagan’s Council of Economic Advisors. He popularized the concept of how to maximize federal tax revenues in saying it wasn’t extremely high, but someplace between 100% and 0%; the exact rate to be picked by an astute politician. Jude Wanniski and Robert Bartley at The Wall Street Journal came up with the name “Laffer Curve” to show that maximum federal revenues occurred someplace between 100% and 0% (i.e., midway and not at the top). Wanniski then spent a lot of time on the phone with Laffer, and in a sense, became a self-taught economist. He coined the phrase “Supply-Side Economics” to emphasized that this was opposed to the demand side emphasized by Keynesianism.
I leave out many notable economists, such as Nobel laureate Robert Mundell, who supported tax cuts and supply-side economics and worked on currency rates and international exchange rates. I also do not attribute credit to the brilliant writers such as Jude Wanniski and George Gilder, who elaborated on the works of those before them. I profiled the five thinkers previously listed to make a foundation for what we today base so many of our thoughts about politics and economic policies and beliefs on. For example, Adam Smith explained why it was important to everybody that production of goods could be greatly increased by letting the best makers of goods to specialize, and let others use their talents elsewhere; hence his writing on the division of labor. His “invisible hand” was a wonderful way to explain the intelligence of the marketplace in setting the price of goods. And what became known as “supply and demand” explained simply how the balance between what was produced and the settled price of the goods was determined.
Karl Marx’s idea not only spawned the rise of communism (which might have been ideal if not usurped by despots like Joseph Stalin and others who caused greater death and misery for millions than anything ever to arise out of capitalism), but also offered a basis for socialism and its government control of so much of a country’s production and wealth. It is known today as the progressive income tax, wealth redistribution policy, and political rhetoric such as “the rich must pay their fair share.”
John Maynard Keynes’s idea worked, but his ideas eventually got hijacked by certain politicians who used it to justify huge expansion of government at the expense of prosperity and economic growth. Today, it’s been used to justify needless throwing away of money for no good purpose but to spend, and to hell with the huge debts incurred.
Most his life, Milton Friedman said that inflation was a monetary phenomenon of too much money chasing too few goods. He advocated spending decreases by the government and promoted more economic freedom.
Laffer’s promotion of why excessive tax rates led to decreased revenues wasn’t an entirely new concept, as President John F. Kennedy asked for and got a major lowering of the income tax rate by saying “a rising tide lifts all boats.” But Laffer’s work effectively carried to both politicians and the masses the message that for the country to prosper, lower income tax rates were essential.
Some might argue that economics isn’t really a scientific pursuit of truth, as, say, the science of chemistry is. Once with staid and settled principles and rules, chemistry in “the old days” started in a rough and tumble way such as searching for a way to turn base metals into gold. The political discourse in economics in recent times sometimes goes beyond the pale. And if the president and secretary of the treasury have trouble understanding primary principles, it’s no wonder that most of the public can only be baffled by economics. If I can help in the understanding of what usually becomes the main deciding issue in national elections by emphasizing salient works from some truly gifted writers and take it to the mass markets, I will have done my job.
My list of economic giants is very short for the purpose of emphasizing the ones I’ve highlighted. This isn’t meant to discount the importance of many others who followed, especially the group of Austrian School thinkers like von Mises, Friedrich Hayek, Carl Menger, and Joseph Schumpeter. And many others that followed such as Robert Mundell. Mundell had much to do as the father of the euro, and for starting off the supply-side economics, and was a big influence on Arthur Laffer. And on the other side is Paul Samuelson, the Keynesian who wrote the text that so many of us studied in the early ‘60s.
Margaret Meade, the great American cultural anthropologist, got deep insight into our current culture by studying primitive people in the South Pacific. Similarly, a recent essay by Gary Kasparov gives deep insight into Western democracy, having risen as world chess master from the Soviet Union. He now lives in exile in New York City. From this essay: “The U.S.S.R. Fell—and the World Fell Asleep”, The Wall Street Journal, December 17-18, 2016, I take a few of his choice words.
Kasparov became world chess champion in 1985, and the fame that followed allowed for his visits to the West. These “visits confirmed my suspicions that it was in the U.S.S.R. where life was distorted.” “…I was sure that the Soviet Union would be forced to liberalize socially and economically to survive.” He was warned by one intellectual, Milos Forman, that loosening of state controls “will end up getting more hopeful people killed.” He then remembered the words of John F. Kennedy, “Freedom is indivisible, and when one man is enslaved, all are not free,” and Ronald Reagan’s warning that “freedom is never more than one generation away from extinction.” “…Instead of turning into a free market, the Russian economy became a rigged auction that created an elite of appointed billionaires and a population of resentful and confused citizens who wondered why nothing had improved for them. …we in Russia naively equated democracy with wealth, (and)…enjoyed the benefits of massive Western investment. With so few strings attached to the loans and credit Russia received, it was easy for the well-connected to game and profit from the system. ...Putin’s vulgar rhetoric of security and national pride would have worn thin quickly had the price of oil not begun to skyrocket in the new millennium. A rising cash flow enabled him to negotiate a Faustian bargain with the Russian people; your freedoms in return for stability. …To paraphrase Tolstoy, every repressive state is repressive in its own way—but socialism has proved uniquely toxic. The utopian communist idea competed directly with capitalism and lost. Instead of admitting failure, Soviet leaders squeezed the soul from their citizens by forcing them to perform in the macabre perversion of human nature that is totalitarian socialism. …The story of human progress is striving, dreaming and sacrificing for a better future. Instead of believing that happy successful individuals make for a successful society, socialism insists that a perfectly functioning system will produce happy individuals. When the system comes first, the individual becomes the afterthought. When the system fails, individuals are blamed for not surrendering to it enough. Recovering from a regime that restricts individual freedom is far easier than recovering from one that teaches that individual freedom is worthless.”
That last sentence “recovering from a regime that restricts individual freedom is far easier” gives me hope for the pendulum that always swings back and forth, that capitalism and freedom in the U.S. can be restored from the creeping socialism that currently is so prevalent throughout our government and society. Should you not worry about our creeping socialism, you may wish to reread the previous paragraph.
6 - ECONOMIC PRIMER
There are terms, words, and concepts frequently used in the subject of economics that, once understood, make a subject easier to understand. Please don’t take this statement as my looking down on anybody. Presidents and treasury secretaries have frequently made policy errors over terms, words, and concepts that they clearly didn’t understand. Thus, it’s important to acknowledge our general misconceptions before we can reach a clear understanding of the economic policies th
at promote our general welfare and prosperity. I can say this confidently, as I have studied certain subjects and discovered my own ignorance. Fortunately, the foundation of what I’ll write was laid down by great thinkers before me, and especially examined in detail by three writers whose work helped to form the intellectual foundation of my book: Jude Wanniski, George Gilder, and John Tamny. I take some concepts from these authors and add a group of terms with my definitions. I offer this to lead into a series of topics that I hope will be easier to understand following this chapter of names and definitions.
Barter — This is how our ancestors first started in commerce. Say a fisherman gave six fish to the baker for one loaf of bread. In other words, this is a trade in goods or services without the use of money. It would be of historical interest only if not for governments through greed, incompetence, or any of a number of schemes, raised taxes on the production of goods and services beyond the point that the workers were willing to pay. That is, the higher the tax, the greater the barter economy. For example, a potential seller of a manufactured product produces a given product in 4 hours, and he values his time at $20 per hour, so he would like to set the prices of this created object at $80, but he will have to pay a tax on the earnings. Let’s say the tax rate is 10%. So, instead of offering his creation at $80, he asks for $90. Along comes a buyer willing to pay the $90, but he first has to earn $100 to have $90 left after paying his tax. So, what in a barter transaction would be an $80 transfer, now becomes a $100 transfer. Instead of using government-issued currency, trackable by government tax collectors, both buyer and seller instead trade by barter. The producer has a greater chance of a sale at the lower price and the buyer has a greater incentive to buy at a lower price.
Bureaucracy — This is a government by many bureaus, administrators, and petty officials, with the excessive multiplication of, and concentration of power in, administrative bureaus, or administrators; administration characterized by excessive red tape and routine.
Capital — This is a word with multiple meanings. When the various companies of Berkshire Hathaway run by Warren Buffett earn a profit, the profit flows to Omaha, and is capital to be allocated by Buffett into new investments. When Buffett’s teacher, Ben Graham, the father of security analysis, studied a corporation, he started by defining the capital structure of the enterprise; that is, stock, bonds, and cash of the corporation. Economists use the word capital to refer to the sources that create and grow capital, which are factories and machines and people who operate them. When wars are fought, capitalis destroyed; bridges, buildings, and people for example. Wars are expensive, as they consume capital, but the expenses end when the war is over. War is also inflationary because the huge expenditures of capital required necessitates creating more money from the government to pay for the expenditures than tax revenues alone would permit and this becomes too many dollars chasing too few goods. This causes inflation. Entitlements are like wars, but are worse in consuming capital because they never end.
Capitalism — This is where capital is invested by individuals to further ideas and enterprises that the investor thinks will create a return on investment. If the enterprise in question is a good one, both investor and business owner win. If not, better luck next time. The sine qua non of capitalism is: The prosperity of our Western culture derives from its ability to buy and sell goods and services free from barriers to competition, resulting in the best of everything at the lowest cost, thereby benefitting all members of society.
Carried Interest — In finance, this is a share of the profits of an investment paid to the investment manager more than the amount that the manager contributes to the partnership. It is a performance fee rewarding the manager for enhancing performance. However, when looking at the list of wealthiest Americans, an overwhelming number ran so-called hedge funds or private equity firms where they contributed a small amount to the fund, and if successful, attracted many other investors, who put most the money into the fund. Periodically, the manager was paid a fee, in addition to a management fee of 1-2% of assets, then the remaining appreciation would be allocated to each investor per the amount of their investment. In addition to the management fee, the manager also would take a portion of the profit from the fund’s total appreciation as a reward for superior results. This is called the carried interest. Congress gave special tax treatment to this reward fee so that, if the fund had assets of a billion dollars and the fund for the year appreciated say 5%, (which would be a profit of $50 million for the entire fund), the manager might take another fee based on the total funds appreciation. This in relation to the amount of capital the manager originally contributed, would be a huge amount, and instead of paying ordinary income tax on this “reward,” paid the lesser capital gains tax rate. Over the years, successful managers might end up accumulating billions of dollars of net worth.
Comparative Advantage— Ricardian Epiphany — Countries tend to import goods and services that are more cheaply produced elsewhere, and tend to export goods and services that are more inexpensively produced domestically.
Credit — This gives us the means to pay for goods and services today, which are paid out of future earnings. Thisis not money, but the actual resources—tractors, cars, computers, buildings, labor—and is created in the real economy. When we borrow money, we borrowing resources, and this equals resource access. We’ve mistakenly come to accept that the Federal Government should have a role in setting the cost of access to everything we produce in the “economy.” More production causes credit to increase. We are credit, so the singular path to make credit abundant is to free individuals to pursue what animates their individual talents. “Cheap” credit cannot be decreed by the Federal Government announcing “low” interest rates.
Crony Capitalism — This is whenever the state gets involved as an investor or regulator, and is like a marriage between state and private investment. Then coercion and corruption rear their heads. It can take many forms, including regulatory capture (regulated interests using government power to squelch competition), zoning, licensing, in some cases even copyright, and hundreds of other ways. The one thing these tools have in common is that they are used by the politically connected few to extract money and power from the unconnected many. The government gives a veil of legitimacy to actions taken by individuals and groups that would be considered unethical without government permission. More often, the government uses its power to make everyone play along. If you break the law, you go to jail. (From Against Crony Capitalism.org)
Deflation — In economics, deflation is a decrease in the general price level of goods and services. It’s the contraction in the supply of circulating money. Deflation occurs when the inflation rate falls below 0% or negative. Deflation is always abhorred because people stop buying, expecting lower prices in the future, and is a quick way to take an economy into a depression. Japan provides a good example of deflation. Their stock market crashed in 1988, yet their stock market today is even lower than it was in 1988 in spite of huge government efforts to reverse this situation. The driver of deflation is a collapsing credit bubble; debt and credit are collapsing faster than the government can re-inflate the economy. It’s usually caused by increasing taxes and/or interest rates or by cutting down on government spending.
The Dollar — This is the U.S. economic unit of account, just as the unit of time is the hour, the unit of weight is the pound, and the unit of measure is the foot. The value of the dollar is variable unless it’s tethered to a constant, such as the price of gold. If the dollar is untethered, it can become “strong” or “weak” as influenced by factors such as the interest rate. The president and his treasury secretary always get the “dollar” they want; i.e., strong or weak, despite what the Federal Reserve advises. The strong or weak adjective comes from its position relative to the exchange rate with other country’s currencies.
Economic Growth (and Prosperity) — This happens when the four main barriers to production are removed. The barriers are: (1
) excessive taxes, (2) burdensome regulations, (3) tariffs that limit one’s ability to trade freely, and (4) when money is deprived of its sole purpose as a measure of value.
Economy — An economy is just a collection of individuals. We must supply a good or service first to fulfill our infinite wants, and a collection of people doing so becomes what we know as the real economy.
Employment Number — This is the percent of workers employed. The problem with looking at the percent is the number as compared to what group; what about retirees, housewives, or the young?
Entrepreneur(s) — An entrepreneur is a person who envisions and creates a cheaper, more advanced good or service with the potential to sell in greater numbers to more people for more profit. The greater the advancement, the greater the potential for greater profit. While Bill Gates comes to mind with his, and Paul Allen’s revolutionary and most useful computer software, the general process can occur right in front of us in our community. This can be recognized with talented contractors figuring out a better way to build a cheaper apartment house, to the radiologist with the foresight to acquire the just-invented CT scanner and put it into service. Typically, it starts with a revolutionary invention, starting as very expensive and rare, and an entrepreneur who conceives of a way to mass produce the gadget and make it very abundant and cheap for everyone to use.
Entitlements — Common usage of entitlements include Social Security, Medicare, and other similar programs.
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