Whether his interests center round his own physical needs, or whether his he takes a warm interest in the welfare of every human being he knows (altruism), the ends about which he can be concerned will always be only an infinitesimal fraction of the needs of all men.

This is the fundamental fact on which the whole philosophy of individualism is based.  It does not assume, as is often asserted, that man is egoistic or selfish or ought to be.  It merely starts from the indisputable fact that the limits of our powers of imagination make it impossible to include in our scale of values more than a sector of the needs of a whole society, and that, since strictly speaking, scales of values can only exist in individual minds, nothing but partial scales of values exist- scales which are inevitably different and often inconsistent with each other.

From chapter 5, “Planning and Democracy” from  The Road to Serfdom by F.A. Hayek.  Originally written  in 1944.

HKO Comment:

The presumption that greed or even the productive channeling of greed is the essence of capitalism is the greatest misunderstanding of its opponents. Capitalism is about the competition of ideas.  Capitalism is not about channeling greed productively; it is about  removing limits to human imagination. Whenever central planning replaces the market mechanism, unknown options with endless potential are replaced with the limitations of an elitist few.  The brightest leaders we have can never know a tiny fraction of what the universe of individuals can imagine.  Belief  in the ideas and imagination of the many individuals is the most important quality of an American leader.

This clip of Milton Friedman is a great insight into the ancient tradition of surviving is spite of governmental authority vs those who seek protection from that authority.

tips to Bob Cain

The default belief  of our economic history of the last 100 years has been an acceptance of the dynamic growth of capitalism punctuated by excesses of market greed that have to be corrected by the singular wisdom of government regulation.

On closer examination many of those moments of market greed and excess look more like incompetent government meddling caused the problem.

During the Depression of 1929 we saw 10,000 banks collapse in the United States. Yet during that same period the number of bank failures in Canada were zero.  Was Canada spared the depression that engulfed the United States? No, but Canada was spared a regulation that prevented banks from crossing state lines.

Bending to pressure to protect local banks from encountering big business center banks, they got relief and protection from the Federal government in the restriction of interstate competition.  But that also severely limited their flexibility in dealing with a crisis, a limit that did not exist in Canada where risks were spread over larger areas and underutilized assets could be easily relocated.

Yet to respond to the bank failures that the government largely caused they created the FDIC (Federal Deposit Insurance Corporation).  FDR opposed the FDIC because he saw it would create a sanction for reckless behavior and penalize prudently run banks.  FDR capitulated in a compromise and the FDIC began by insuring deposits for $2500 in 1934. It was raised to $5,000 in 1935, $10,000 in 1950 (Truman), $15,000 in 1966 (Johnson), $20,000 in 1968 (LBJ again), $40,000 in 1974 (Nixon), and then $100,000 under Jimmy Carter in 1980.  Bush raised it to $250,000 before he left office, but it is due to revert back to $100,000 in 2013.

Ten years after Carter raised the limit we experienced the Savings and Loans meltdown, caused by the excessive risk taking in that industry. The government again intervened and created the Resolution Trust Corporation (RTC) to dispose of failed thrift institutions taken over by regulators after January 1, 1989 in an orderly manner.

The FDIC created the moral hazard FDR feared. It privatized the profits and socialized the risks.  This behavior was repeated, but on steroids, with the implicit assumption of risk by Fannie Mae and Freddie Mac.

Housing was deemed a federal priority, and helping the poorer people get into housing has been a priority since Fannie Mae was created again by FDR in 1938.  But housing prices were highest and least affordable in select areas where local ordinances had restricted supply and raised prices far more than in areas were market forces prevailed.

Tax policies such as mortgage interest deductions and preferred capital gains treatment increased the demand for housing. The Community Reinvestment Act, passed under Carter but exploited under Clinton and Bush, pressured banks to make mortgage loans to less and less qualified buyers. Fannie Mae guaranteed loans, clearing the ratings agencies which had a government protected franchise; to give higher ratings than these mortgage backed securities could have conceivably obtained on the merits of their assets. This widened the market for these securities and caused even more money to be driven into the housing market from all over the world creating the bubble that had to burst.

To compound the damage the government required a mark to market rule for valuing these mortgage loans at the worst possible time; when no market existed.  The market to market rule causes valuations to go to extremes, high and low.  This caused capital to dry up and regulations required banks to rebuild capital reserves instead of making loans. Then at a time when information was critical to valuing these securities, the government suspended short selling, a critical source of such information.

During the recent financial disaster, Canada did not exhibit near the real estate collapse we did in the United States.  In Canada they had far less exposure to sub prime loans, large down payments were still required while we all but eliminated down payments for the poorest home buyers in the name of ‘compassionate conservatism’, and mortgage borrowers in Canada were still held personally liable for their loans. Canada had tougher and more prudent lending standards, but they avoided the fiasco foisted on us by well intentioned but misguided moral supremacists on the government payroll.

The government in the U.S. inflated this bubble as eagerly as any on Wall Street, but our government “had a much bigger pump”.

Seventy five years ago we could have looked to our northern neighbor and learned better behavior instead of demonizing capitalism. Today we can learn the same lesson, but again we seek to demonize the private sector for conditions created by incompetent government regulation. Wall Street clearly has its demons to account for, but its greed was enabled and often encouraged by incompetent regulations and policy that has a long history.

As we crave more government oversight we should ask who will oversee the government that has demonstrated such spectacular failure.

More from  Roy Fickling in response to a debate that centers on promoting economic growth verses a more fair and even distribution of wealth.  For a bit about Roy’s experience see The Great Debate  Part I

You ask, “By the way, how long does it take for the trickle to trickle down to the point where millions of jobs are created or brought back home (HA!HA!).”

Answer:  In Reagan’s case, about 1 month before the recovery began in earnest after the 20% tax cut effectively on Jan 1, 1983.  GDP growth went from negative in Q4 1982 to about 5% in Q1 1983 and up to around 9% in Q2 1983, continuing an unprecedented pace until Bush 41’s tax increases.

A more important question:  “how long does it take before government stimulus programs begin producing jobs?”  Answer: No one knows, because it has never happened.  Never.  Ever.  You see, Keynes was absolutely correct that there is a money multiplier when the government spends money.  The actual multiplier is debatable.  Tabloid economists like Krugman claim it is somewhere north of 3.  Conservative economist agree that it is closer to 1.1.  The problem is that government spending works like a T account.  Sure, when Uncle Sam spends a buck (or drops it from a helicopter), some portion of that dollar is spent.  Depending on where the helicopter drops the money, it might be spent on the lottery, a new car, a house, a TV, etc.  When that dollar is spent, the business that sold the rims now has a portion of that dollar to spend on something himself, and so on, and so on. The problem is that the same buck is taken from someone else in the same economy with an inverse multiplier.  In a perfect world, every dollar spent by the government is netted out by the dollar it took from someone else in the same economy. When Uncle Sam took that dollar from Henry, that was a dollar less that he had to spend.  The difference is that we are fairly certain that the dollar Uncle Sam took was from a productive source.  After all, it was taken in the form of income taxes (a tax on production, not consumption).  What we don’t know with any certainty is whether the dollar that is given to someone is going to be spent on productive activity. It might be spent on a new computer, but it is equally likely to be spent on crack.  It is amazing to me that despite the fact that there has never ever ever been an example of Keynesian spending increasing GDP for more than 1 quarter, governments all over the world keep trying it.  The examples are endless.  Roosevelt tried it, Johnson tried it, Nixon tried it, Carter tried it, Bush tried it, Blair tried it, the Netherlands tried it, Greece tried it, Japan tried it for 10 years for heaven sakes. It hasn’t worked yet. Geez, even Europe has given up on government “stimulus”.

Henry is right.  Short term tax incentives don’t work.  I sit on the board of a biopharmaceutical company headquartered in SF.  I promise you that we will not spend an extra dime on R&D because of a short-term tax incentive.  We will spend money on R&D because we think it will produce profits in the future.  In my company, I will not hire a single new employee because of a “new hire tax incentive”.  Not one.  I will hire a new employee when I believe the marginal work product of that employee will produce enough revenue to justify the hire.  At our car dealership, we enjoyed an incredible two months during “cash for clunkers”  the following dismal months more than offset the temporary gain. By the way, do you know that for every $4,000 the government paid for the clunkers, it actually cost taxpayers $24,000?  Now that is government efficiency at its finest!  At my real estate company, we enjoyed nice sales increases during the “home buyers incentive program” only to be followed by the worst two months since records were kept.

More from  Roy Fickling in response to a debate that centers on promoting economic growth verses a more fair and even distribution of wealth.  For a bit about Roy’s experience see The Great Debate  Part I

Let’s take socialism to an extreme.  Let’s make sure everyone earns the same amount… that would be fair, right?  So, for everyone that makes above average, we will take the difference and give it to everyone that makes below the average.  That way, everyone makes the same.  What would happen?  Easy.  I would quit working because I know that I don’t need to work to make the average wage.  In short order, the average would drop to zero as soon as the last guy figured out he was the only one working.  Extreme, yes, but incentives work in the trivial as well as the extreme.

Even if it is “Just another tired old solution that looks good on paper”, no system yet devised by man has improved the lot of ordinary people more than the productive activities unleashed by a free enterprise system.

So, what assurances do you have that “the top 3% will be divinely led to use theirs for R&D, business improvement, hiring new workers and all those other wonderful things Adam Smith promised we would experience in capitalist economies?”  If history is any judge, the answer is pretty clear on this as well.  Since 1978, the U.S. has cut the highest marginal earned income tax rate from 50% to 35%, the highest capital gains tax rate from about 50% to 15% and the highest dividend tax rate from 70% to 15%.  During this time, income tax receipts from the top 1% of income earners rose from 1.5% of GDP to 3.3% of GDP… an increase of 120%.  A fluke?  Nope.  When Kennedy cut the highest income tax rate from 91% to 70%, income tax receipts from the top 1% of income earners rose from 1.3% of GDP to 1.9% of GDP… an increase of 46%.  What happened between Kennedy and Reagan, you say?  The answer is the four stooges, Johnson Nixon, Ford, Carter and their redistributionist, Keynesian policies during which time U.S. equity prices decreased 20% in real terms and tax receipts from the top 1% of income earners went from 1.9% of GDP to 1.5% despite a rise in the top tax rates. Just another fluke?  Nope.  When Harding and Coolidge cut tax rates in the 1920′ from 73% to 25%, tax receipts from the top 1% of income earners went from 0.6% of GDP to 1.1% of GDP… an 83% increase.  A prescient example is Roosevelt’s “Soak the Rich” tax increase in 1936, raising the top income tax rate from 63% to 79% along with a host of corporate tax increases arguably sending the slowly recovering economy into a double dip depression, with unemployment rates rising again to 20% in 1938.  What happened to the tax receipts from the top 1% after the tax increase you ask?  You got it, they decreased as a percentage of GDP, even as GDP fell.  These examples are not cherry picked. Throughout history when tax rates on the top earners were substantially raised, production (economic activity) fell.  So did tax receipts from the rich… a certainty in percentage of GDP terms and more often than not in gross terms. “The fall of Rome was fundamentally due to economic deterioration resulting from excessive taxation, inflation, and over-regulation. Higher and higher taxes failed to raise additional revenues while the taxpaying base was exterminated” – Bartlett.