The Great Debate Part IV

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.

The Great Debate Part III

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.

The Great Debate Part II

This is a continuation of Roy Fickling’s response in 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

The human existence revolves around individuals pursuing their own selfish interests. Period.  That’s it. Sorry, it is coded into the human genome… and a leopard has spots whether you like it or not.

Like albino leopards, every now and then a Mother Teresa or some other saint comes along; but the overwhelming majority of people on this earth look out for themselves before looking out for others.   There is no divine intervention on R&D, no benevolent investing, and no personal consumption for the greater good.  People spend money to make their lives more comfortable.  Companies invest to make more money for shareholders (and in turn, management).  Companies spend money on R&D so they can make more stuff to sell, thus make more money.  One can argue how wrong this behavior is and that we need to change it.  One can preach from the mountaintop, the pulpit, or the lectern; but such protests yield no greater results than howling into the wind… and the leopard still has spots.

Some argue that government is the answer… some system of policing individuals’ behaviors for the benefit of the greater good. But if you believe that government can change the behavior of humans pursuing their own self interests, you might as well stop reading now. If the desired result is improvement of the human condition for the maximum number of people, the question becomes: “to benefit the greater good, how does a society direct the collective efforts of individuals pursuing their own self interests”?  There is little debate that some system of rules must be in place for a society to function effectively.  Even the most right wing conservative would agree that we can’t just get up in the morning and decide which side of the road to drive on.  Equally, I know no one who doesn’t believe that we should have some system to take care of those individuals who are either physically or mentally incapable of taking care of themselves.  The degree to which we as a society restrict activity (rules) and take care of the less fortunate (redistribution) is the only honest debate.

When it comes to choosing an economic system that is most effective in producing the desired results (improvement of the human condition for the maximum number of people), the record of history is crystal clear and unambiguous, with no exceptions.  To paraphrase Milton Friedman, “the only cases in recorded history where the masses have escaped grinding poverty are where they had Capitalism and largely free trade”.  By the way, he said that before Communist China was “infected” with the incredible power of individuals pursuing their own self interests, resulting in 1/4 of the world’s population moving from abject poverty into middle class… in a word, “capitalism”.

What are our other choices? Communism doesn’t  work.  Communism cast more individuals into deep poverty, serfdom and even mass genocide than any system yet devised.  Oops.  I don’t even need to mention Feudalism, Marxism, Dictatorships, etc.   Socialism, which is hard to define due to the varying intensities employed by modern societies, yields better results than Communism, but produces average unemployment rates more than double what we see in America today and more than quadruple what we enjoyed for twenty years preceding the great recession.  For the same 20 year period, socialist countries yielded about 1/4 the GDP/Capita growth rate on average compared to capitalistic economies.

The Great Debate – Part I

Guest Blogger-

Roy Fickling is a very intelligent and experienced young entrepreneur and investor.  Among his company’s holdings are automobile distributorships, banks, and real estate- the biggest victims of the recent  financial collapse. He is very well read and travelled and has a very real and experienced understanding of not just the business world but the underlying economy.

I had shared an articled I wrote and posted on the blog at American Thinker titled Elitist Help for Business.  I sent the link to several friends, including Roy. One reader who disagreed with the premise exposed a stereotypically leftist view of the   economy.  He basically ridiculed “trickle down” economics, said the poor would spend a tax cut on necessities and socially good things and the rich would just buy “yachts and 20,000 square foot Swiss Chalets.”

Roy’s response was a bit long but so well written that I had to share it (with his permission).  Part of it follows: (he address issues raised in the quotation marks.)

Higher tax rates on the rich create the very poverty and unemployment that is used to justify their presence.  It is a vicious cycle that most serious economists recognize, including Obama’s own advisory team.

“We know generally the bottom 97% will spend their tax cut…”  Actually, we don’t know that.  It is a popular catch phrase with the press these days, but there is no proof of that.  In fact, evidence points to the contrary.

The Permanent Income Hypothesis (which Friedman earned the Nobel Prize for) postulates that personal spending depends on the average income expected over one’s lifetime, not the income in one particular year. If a person has no expectation that he will continue to receive the new-found money over an extended period of time, he is more likely than not to save a portion of the money.  Oops.  There goes Keynes’ money multiplier.  It becomes a money “divider”. The same is true (in reverse) for top earners and corporations who are currently sitting on tens of trillions of dollars in cash and low risk securities. The point is not to convince the top 3% to go out and buy new rims for their cutlass.  The point is to alleviate the fear of the top 3% that their money will be confiscated and that it is OK to go out and take risks by investing their money in something other than T-bills. Even if you believe Demand Side theory and the rich do “buy another yacht, or spend more time on the Riviera, or build another 20,000 square foot ski chalet in the Alps or the Rockies, or buy another play-toy sports venue, etc., etc”, wouldn’t that create they Keynesian effect you are hoping for?

Companies don’t go out and spend money on R&D, new equipment or more important, employees, if they have an expectation that they will not be able to enjoy the profits (the fruits of their risk).  Likewise, if they cannot quantify their future government imposed burdens, they are more likely to hunker down to weather the storm. Last year, I could tell you how much an employee cost to hire.  It was about 128% of the base salary.  Today, neither I nor a fortune 500 company can tell you what it will cost to hire an employee after benefits and taxes. If the goal is to get companies hiring again, we can start by not doing any more harm with this erratic “fiscal policy de jure.”

More of Roy’s response will be forthcoming.