Home/BlogWARNING: This is not a climate or weather post. It is my quasi-annual rant on basic economics.
A conversation overheard many years ago…
Business Owner: Hey! Wanna buy this cool gadget? It allows you to make phone calls from just about anywhere. We call it a “self phone”.
Consumer: Hmm. Why would I want that? I can make calls from my office, or my home, or a gas station if I’m out and about.
Business Owner: Well, wouldn’t you like to be able to call from your car? Or not miss a call just because you are driving? What if your car breaks down and you are stuck on the highway? Or, you are at the grocery store and you forgot what your wife asked you to pick up? And what if I told you that long-distance calls on these things will eventually be free? AND…you will be able to send pictures you take with it to friends, instantly!
Consumer: Say, that does sound pretty good! What’s the catch?
Business Owner: No catch. It won’t cost much more than that Pong video game you just bought, and is way more useful. But…if the billions of dollars we are investing in this new technology pays off, some of us who have devoted our careers to developing it might get rich, since a few percent of the cost will be paid to us.
Consumer: Well, that’s ok with me! I’ll take a self phone!
Business Owner: Are you sure?
Consumer: SELF PHONE! SELF PHONE!
One of the great epiphanies of my life was finally understanding basic economics. It holds a fascination for me because so many people believe just the opposite of what is, in fact, true.
As I discuss in my book Fundanomics: The Free Market Simplified, prosperity is achieved though people having the freedom to provide as many goods and services to each other as are wanted and needed…and being rewarded for it when they succeed.
It’s really no more complicated than that.
After 30 years of studying and thinking about the continuing desire by about half of the population to achieve things like “income equality”, “wealth redistribution”, a “living wage”, etc., I’ve become convinced that the faulty thinking underlying these seemingly noble goals stems, more than anything else, from one basic misconception: that the stuff we all want and need will always get produced anyway.
If there was always the same amount of stuff being produced, no matter what tax policies and regulations we had, then redistribution of wealth would actually make some sense to me. But the modern economy requires efficiency, which in turn requires rewarding good ideas, punishing bad ideas, and inherently risky investments of large amounts of money in order to achieve economies of scale.
Even today’s poor now own cars, TVs, microwave ovens, cell phones, etc. These things do not happen by accident, and I am old enough to remember when most of the products we now take for granted were luxuries. These products only become affordable to the masses when people with the good ideas and money to invest have some hope of being rewarded if they succeed.
After all, most ideas for new products fail, and investors routinely lose large sums of money they have invested in trying to bring the new product to market. We usually only see the small fraction of people who are the winners. They have the fancy cars and the big houses. They are the ones who some are now so eager to see punished for their success.
But we usually don’t notice the far greater number of losers, those who tried to succeed with some new product, but who failed. Who is willing to step up and share in (redistribute) those failures to the rest of society, the way they want to redistribute the wealth of those who succeeded?
The only way the newest and most affordable products ever have a hope of reaching consumers is if those who develop them and risk their investment have some hope of being rewarded if they succeed.
We should celebrate the rich, not demonize them. They take the risks. They have the great ideas. They bring prosperity to the masses.
Which brings me to another truth which is not mentioned often enough: The prosperity which the rich have created for all of society in the form of better products at lower prices far exceeds the relatively small profit they get to keep as a reward for their success.
If we threaten to take those profits away from them, the energizing force that generates prosperity for all — including the poor’s cars, TVs, microwave ovens, and cell phones — will stop.
Some have called business-friendly policies “trickle-down economics”, a term which I really dislike. First, it’s not a “trickle”. The vast majority of prosperity generated by the success of business owners is literally in the hands of millions of consumers, in the form of goods which the consumers now own. The business owners and corporate executives get to keep only a tiny fraction of that wealth.
Secondly, the consumers are usually the first — not the last — to see the rewards of great new products. Businesses usually have to make sure their employees are taken care of before they can turn a profit. Furthermore, we consumers routinely get great deals on products from businesses that fail because the business spent more on developing, manufacturing, and bringing the product to market than they got in return from the sales price.
These are really simple, basic concepts. At the heart of economic prosperity is freedom. Freedom to pursue happiness, if you will. Concepts which have been understood and successfully put into practice for centuries in many countries.
Unfortunately, our government has been moving in the wrong direction, increasing the tax and regulatory burdens on businesses, killing the lifeblood of our economy.
Pandering politicians use vague and misleading arguments to claim that the economy is suffering because the rich are not sharing their wealth, or some such thing. This resonates with the low information voter. But money has no value without people actually doing things for each other. This is what a successful business enables.
You could take away all of the wealth of the rich tomorrow and put a few thousand dollars in everyone’s pockets. But then what will you do next year, when those business owners decide they will no longer risk staying in business, and all move to Coast Rica or Belize?
The truth is that the government is gradually encroaching on the freedoms businesses have traditionally enjoyed, reducing their ability to hire people and bring new, better, or less expensive products to market so that prosperity might be increased for all of society.
The government continues to prop up the stock market, giving the illusion that investors are “bullish” on American business. But they are only bullish on the government’s temporary meddling in the economy, which must eventually end as we continue to print money (which has the same effect as raising taxes) and borrow from future generations.
Unless those with the means to grow businesses are given some hope of being rewarded for risking their investments, they will not invest. That hurts everyone, in all economic classes.
It’s not rocket science, people. The government doesn’t create prosperity…it doesn’t make cell phones or cars or even pizzas. And when it has tried, it does so inefficiently because government is not punished for its failures, the way free and open competition punishes bad ideas and inefficiencies.
The main role of government in the economy should be to make sure people play fair…and then get out of the way.
Gotta go…my self phone is ringing.
“If there was always the same amount of stuff being produced, no matter what tax policies and regulations we had, then redistribution of wealth would actually make some sense to me.”
Wealth is constantly being created, each time something is improved and becomes more than its raw components. If there was not new wealth being created, we’d all still be living in the same cave which our ancestors discovered. Not the cabin first built in the forest when we arrived in America, not the house which our parents bought with their wages.
That why it is not called trickle-down economics but supply-side economics.
Social/economic observations also noted by Ayn Rand in Atlas Shrugged
yup, none of it is new.
Dr. S, do you really think businesses would close up shop (or move to belize) if we just let the economy grow to full strength therebye “putting a few thousand dollars in everybody’s pockets”?
“… if we just let the economy grow to full strength therebye “putting a few thousand dollars in everybody’s pockets”?”
You would have to take those few thousand dollars (for a few million people) from somebody, wouldn’t you? Tax money comes to mind …. If “we” (the state) try to get tax money from the money that “we” (the state) put in everybody’s pockets, “we will pretty soon run out of money …
The premise is that the “few thousand dollars” taken by force from the wealthy is what every American would get if the Government confiscated EVERY DOLLAR from the wealthy. And yes if the Government attempted that the rich would flee and/or cease producing (there are not many willing slaves around). You probably don’t realize how many people there are vs. rich people. If you took all of Bill Gates wealth and gave it to everyone in America it would be about $100.00 per person. You also probably don’t realize that there are a substantial number of people who are poorer than you and will finger you as one of the “Rich” to have his wealth confiscated.
benpal and scott… i think you missed my point. if we let the economy grow to way passed the usual 4% unemployment the poor will get their living wage. we don’t have truely free markets as long as the federal reserve is stepping on those markets. let it grow !!! the rising tide can’t raise all ships if we don’t let the tide roll in… thanx for your responses
what always gets lost in this whole mess is the basic fact that federal reserve creates poverty by holding the economy back to 95% strength… richer people buy more stuff which causes prices to go up. we can’t have that so let’s keep everybody poor!!! (at least poorer then they would be…) “demand inflation” can by definition NEVER be a problem because it requires higher demand which in turn requires that people are actually wealthier (in spite of inflation)
Capitalism builds an economy organically. So therefore the left should love it because they love all things organic.
stevek, ironically liberals are actually pro growth. they don’t believe that low unemployment even causes inflation, so an unemplyment rate down around 0% doesn’t bother them at all. (try pushing that on a conservtive)i personally believe a growing economy does cause inflation but at a slower rate than the growth of wealth. so everybody comes out ahead…
“The main role of government in the economy should be to make sure people play fair…and then get out of the way.”
Dr. Spencer, IMHO the only proper and morally justifiable purpose and function of any government is the protection of individual rights – properly understood. Implicit in this idea of individual rights is the right to hold and keep property, i.e. the fruits of one’s labor (both the work of their hands, and the work of their mind).
Thus, we need equitable laws, enforcement thereof, and impartial judges, police and military, and a clear understanding of the rule of law. Government has a very important and particular purpose, it is a necessary feature unless we desire (which I do not) anarchy (anarcho-capitalism included). Isabel Paterson was a great defender of liberty, and a very bright mind. She stated: “Government is a marginal requirement, necessary only in so far as the individual inhibitory faculty is not exercised according to agreement and natural right. Beyond that deferential, government is an enthronement of paralysis and death. . . . Thus government is secondary, instituted by agreement; life, which pertains to the individual, is primary. Government is an agent, not an entity.” While I may lean a bit more heavily on Mises’ and Rand’s view on the proper role of government, Ms Paterson made a valid and enlightening point.
Bottom line, without a principal recognition that our system is premised upon the subordination of all forms of government to the individual (and not, as we see all too often now, vice versa) we will see a marked degradation in our standards of living and our freedoms.
Enjoyed your essay, well said – thanks and happy new year!!
By George, I think he’s got it! 😊
for anyone who is interested, ben bernanke gave a lecture on the post war role of the federal reserve to students at gwu dated march 22,2012.(try youtube) it’s the clearest explanation of the fed’s obsession with inflation that i’ve been able to find…
Roy Spencer wrote:
“Unfortunately, our government has been moving in the wrong direction, increasing the tax and regulatory burdens on businesses, killing the lifeblood of our economy.”
Have you ever thought to check your ideas with actual data?
Because corporate taxes are near record lows:
http://research.stlouisfed.org/fredgraph.png?g=qy5
and corporate profits have soaring:
http://research.stlouisfed.org/fred2/graph/?id=CP
Businesses in America are doing extremely well. The middle class, not so much.
And here are corporate profits as a share of GDP:
http://research.stlouisfed.org/fredgraph.png?g=qya
Our corps are paying 40% now and because they are making money you would like to charge them more?
http://www.kpmg.com/global/en/services/tax/tax-tools-and-resources/pages/corporate-tax-rates-table.aspx
I would love to do away with poverty and let all people have plenty of money but taxing corps till they leave your country is foolish no matter how you look at it.
bbould… the effective tax rate is only 17% which is as low as it’s ever been. (it’s probably up a bit since the tax deal was passed but not by much)
Our corps are certainly not paying 40% in taxes, as the data I provided shows.
The difference between money in the pockets of individuals and corporations and money in the pockets of the state is who decides when and how the money is spent. If I spend my money, I get the goods and services I like or need, if the state spends my money, there’s nothing in it for me.
There is plenty in the state’s spending for you — or do you not depend on roads, bridges, public transportation, fire departments, police departments, judicial courts, and on and on?
(I’m sure you do depend on all of these.)
First, nicely said Dr. Spencer.
David A: Not being sure of your point, I will go my own way. Corporate taxes are indirect taxes on the final consumer, the people. So, no matter the tax rate on corporations, the cost of the taxes, as any cost, must be included in the selling price of the product. So when you point out the level of taxes on corporations, you’re only pointing out the level of hidden taxes on the consumer. The people. Still, I understand the reason many people refer to low taxes on corporations. It is because they either don’t understand pricing or they want a larger government using the corporate tax rate a method to hide the taxes required for such government, from the people.
In another graph you show us the level of corporate profits. I can only say ‘so’. There are reasons money is held as cash instead of being paid out as dividends, invested in new ventures or paid out in payroll. As these reasons vary according to each company, I will not attempt to explain, but as you note, there is a lot of it going on right now and if you would think about what all these companies have in common, it is only the general economy and the government. Draw whatever conclusions you will.
Historically it can be shown that the larger government grows relative to the size of the GDP, the smaller the growth in GDP will be. This is also true of debt, where our US debt is now close to 90% of GDP. This will cause problems yet, as Dr. Spencer has pointed out, those who believe in larger, more intrusive government, ignore the facts and continue on with more regulations, increased government payrolls and, your favorite bugaboo I’m sure, corporatism. The Federal Reserve inflates the money supply and guess what, the middle class gets taken to the cleaners.
So if you want to point fingers, see Washington DC and the DemoPublicans who have been in control since FDR. For your personal edification, I suggest you read Senator Tom Coburn’s “The Debt Bomb”. In it you will find much to gnash your teeth over.
To all,
Happy New Year
it”s hard to be happy after that !!!
And the products I sell include something extra for the taxes *I* must pay.
Your argument is completely circular.
Corporations need to pay taxes because they use services that are provided by the government. Just like anyone else.
Will you give me a tax break because all I’m going to do is pass on my tax costs in the costsof my product?
Of course not.
And neither should that be true for corportions. Those that uses services should pay for those services.
Good points David A. My late grandfather never paid a dime’s worth of income tax in his life, because he and his economic/political buddies wrote and got passed tax laws to their benefit. Certainly he was in the 80% tax bracket, but with so many write-offs, his tax bracket was zero.
As you state, it is our middle class which bears the burden of government financial policies.
I will agree with D. Roy on his main philosophy, however, it should be modified to reflect a nicely compensated working sector to bring prosperity to an entire nation, for otherwise we would be the same boat as some third world nations with their insanely rich minority and impoverished majority.
Thanks, Dr. Spencer, this needs to be repeated more often.
Again, thanks for your clarity Dr. Spencer.
“Fundanomics” is a great book, I wish more people would read it, specially those that believe socialism brings any kind of economic improvement to people.
But, they don’t have to take it from you. They could try Milton Friedman (1912-2006), Nobel Prize in Economics 1976.
“Free To Choose” (1980) a PBS TV Series by Milton Friedman, at http://miltonfriedman.blogspot.com
A better New Year for all!
Roy,
You’re trying to use logic in refuting a position or belief that was never based on logic to begin with. Of course, you’re right, but I’m fast losing hope for this country. Most people seem to have absolute no clue why the have what the have or what it would take the keep it for future generations (or have never even given it any thought). A by and large economically illiterate public and media spells doom for the prospects of future prosperity for this or any other country.
Dr Spencer, I respectfully part company with you on this essay. In idealistic form you may be right for actual physical products. Even there I question the validity. A fridge of 40 years ago would last at least 30 years; a fridge today can last two.
To be brief take the greatest scam in history which led to the global financial crisis. Wall street did not suffer in the process of making many nations and individuals bleed profusely. I did not see any CEO’s lined up against the wall and face execution. They still have their big payouts, drive their fancy cars and indulge in champagne and caviar while those crippled by their actions swelter.
Although I’m not in favour of excessive regulations, the predatory practices of large companies is legendary everywhere in the world. Pharmacy is one of the worst examples as it preys on the weak, sick and usually less affluent. Companies are not shy in holding their hand out.
I’m afraid that good Govt is indeed needed as long as it does not stray too far from the principles of safeguarding individuals in the dog eat dog business world. I would also suggest we look at the effects in third world countries of some of our company practices when talking about free markets.
Finally, closer to home, climatology is also a service. Ask yourself how difficult it has been to break into the funds source to pursue a skeptical view – which has traditionally been the hallmark of science. The monopoly, free market has hijacked and safeguarded virtually all the funds.
Those too are market forces and only a strong Govt willing to take risks will bring back some normality in the science. I live in Oz and I am seeing this move at Govt level; hopefully they have the guts to proceed at least on the commercial front. If it does succeed will you still believe that Govt had no business here?
How does pharma prey on the sick and the weak and less affluent? Pharma companies compete with each other in a way that banks, energy companies don’t. Most of their income derives from products with active patents. They are always looking for better products and to take market share from competitors. It is very expensive to bring a product to the market so the prices are high. So pharma targets wealthy people in wealthy countries as do lots of other companies. The difficulty with pharma products is that they can be used to help or save lives in poor countries with poor inhabitants.But Pharma is not going to give away their product for the same reason that Porshe is not going to give me one of their cars.
So solving the health problems in poorer countries require political will and a larger tax bill for you.
Hi Peter,
Whilst your question is valid it would take books and not a simple response. From being admired to now “In stark contrast, today the industry is ranked barely above tobacco and oil companies in terms of its perceived trustworthiness.”
The rich will never really be affected no matter the cost of meds. But they do not represent the bulk of the sales and hence target market. There is no free lunch and one need go no further than look at their marketing practices and the success rates of experiments when they do the funding. Does it sound somewhat familiar; the confirmation bias is never too far from a gravy train.
There is a clear recent example where “China is in the midst of conducting a series of corruption investigations of pharmaceutical companies that have been operating in the country.” Who is the target; certainly not the rich who shower their kids with Lamborghinis for weekend burnouts.
Look these quotes up if you like. Better still do some research of your own.
It is notorious for manipulation of results from jumping the gun on trials to relaxing standards and making prescription drugs available over the counter. I’ll try to be brief with some personal examples. Statins are a group of drugs to lower cholesterol and they have succeeded in lowering the threshold dramatically. Now I ask you and any medico to show scientific evidence for the success of these drugs in extending life.
I will save you the trouble; there is none! I exclude people who have had a cardiac event already.
My doctor prescribed it for me a decade ago (40 mg Vastatin). I agreed to take them if he could show me even one study. He still has not come back to me. I can afford them; there are plenty who can’t. The companies push these as an imperative to life.
Take the Philippines. I cannot for the life of me figure out how such a poor country can have western drugs selling for more than I pay for them here. The bulk of people there barely have enough to subsist. The hospitals don’t even carry the meds. They prescribe and you go buy them from pharmacies. Too bad if you can’t afford them.
How does that happen when alternatives and generics are available from India for a fraction of the price which
would make them available to the poor. But it doesn’t happen and doctors routinely prescribe the most expensive brands (which could be substituted readily).
I don’t have proof but I will bet there is a gravy train that involves many subsets. I will also tell you that if there was a political will the cost of these meds would drop to a fraction of what is paid. Go look at India.
@TonyM
Right of the bat, you lost me with “A fridge of 40 years ago would last at least 30 years; a fridge today can last two.” In all my 65 years, I’ve never seen a fridge fail. I assume you were unlucky once.
You didn’t actually say what the greatest scam in history was, but surely you realize it was instilled by federal community reinvestment programs.
I can think of a few individuals whose illegal activities made their companies notorious, but the vast majority of companies can’t survive using predatory practices. If you don’t want their goods/services, don’t buy them.
Thinking government is going to bring back normality in science is just naïve. EPA, for example. Please divulge your sources and explain whose “guts” you are referring to when seeing this movement at the government level. Otherwise, just click your shoes together and come home to Kansas.
Chic,
Reading your comments suggests very little interest in informing yourself. You say you “assume” but do so with paucity of evidence or research. Take a close look at the word “assume” and see what words it embodies. Perhaps if you got off your high horse in Kansas you might discover some truths even if it means a little research on your part.
As for my assumed “unlucky once,” I buy white goods for some town houses I own. So I have a fair idea of life span. Even US branded products made in OZ fail miserably. A Kelvinator failed after five years; I discover that the compressor is Chinese made and costs nearly as much to replace as to buy a new fridge. Surely Kelvinator here is trading on its past record of longevity.
But I don’t only rely on my experience; I study fora with other people’s experiences and read the notes by professionals in the game who fix these items for a living. They concur with the views I expressed.
These views differ from yours. Perhaps you have only ever bought one fridge; lucky you!
I feel you miss the whole point when you illustrate by example of the “few individuals” who operate by illegal practices. Something can be deemed legal but quite unconscionable when the details are uncovered. I don’t need to give examples as history is littered with these. Your own Sherman anti trust laws would not have been necessary were the world self correcting. We would be running on water for fuel if we had tried to avoid the seven sisters gasoline products. Be practical!
Look around the world at short cuts environmentally particularly third world countries; a plethora of disasters. Even your own Gulf BP oil blow out could be largely attributed to this, I suggest.
There is no possible mitigation of the onus of the financial scam simply because “it was instilled by federal community reinvestment programs.” The issue is the loans involved a bulk of people who could not afford to pay and should never have been given loans, the lack of due diligence by the ratings agencies and then passed off to the rest of the world as top quality paper based on those ratings.
The gravy train ran right through the system! It was a scam of the highest order. There are no free lunches. Ponzi schemes at least have checks in that no-one can claim quality ratings. Nor are they so pervasive.
Fortunately Oz bought little of that AAA graded junk paper.
Ctd below.
Tony,
My apologies if challenging your viewpoints offends you and for failing to realize Oz is short for Australia. But I now have to assume you have no data on the lifespan of a refrigerator other than a few anecdotal sources. My brief online search revealed an 8-10 year lifespan which is shorter than older models due to enhanced features made possible by solid-state circuitry and micro-processing control boards.
If I missed your whole point, then you didn’t make it well. You started by stating your disagreement with Dr. Spencer and then went on a seemingly unsubstantiated rant of your own demeaning corporations and extolling government. My allusion to a few corporate individuals engaged in illegal activities was to make a contrast with the vast majority of corporations running regulatory gauntlets to provide goods and services desirable enough to be profitable. If your position is that the majority of companies engage in unconscionable practices, you need to make that case with hard data not just examples.
Regarding the financial scam, you skirted the heart of the matter by focusing on the people providing the ill-advised loans rather than the governmental policies promoting the practice and failing to prevent the bundling of sub-prime with prime mortgages.
Chic:
Science is supposed to be self correcting; usually it takes a long time and the demise of the “old brigade” to achieve it. I suggested that in Oz we may achieve it sooner and qualified it by “hopefully they (the Govt) have the guts to proceed at least on the commercial front.”
You jump straight in leading with your chin and state I am naïve.
I try not to comment on other countries’ policies and politics as invariably one can end up with egg on face. I suggest you have been too long in Kansas to comment on my country. I should know it a little better than you but you are always welcome to research it before making the comments you made and spare yourself the embarrassment.
Maurice Newman, in a pay walled article (The Australian newspaper – Murdoch’s quality paper), is setting the scene. You can read the gist at JoNova. Briefly, few in Oz will be able to dismiss his views having been Chancellor of Macquarie University, chairman of the Australian Stock Exchange , Chairman of the ABC (our fully Govt funded national broadcaster) and NOW chairman of the Prime Minister’s Business Advisory Council.
The Prime Minister (PM) is our top political position in that he is the leader of the party in power. Couple that with our PM’s view that “climate science is crap” (he does not deny climate change) and you may start to see where my views fit.
http://joannenova.com.au/2013/12/skeptical-view-makes-australian-front-page-climate-madness-dishonesty-fraud-deception-lies-and-exploition-says-maurice-newman/
“Australia, too, has become hostage to climate change madness.”
“The scientific delusion, the religion behind the climate crusade, is crumbling.” He then references Dr. Spencer’s comments that 97 percent of linear trended models were wrong.
“Why are taxpayers promoting for-profit enterprises?
“From the UN down, the climate change delusion is a gigantic money tree. It is a tyranny that, despite its pretensions, favours the rich and politically powerful at the expense of the poor and powerless.”
“It is the unprecedented cost of energy, driven by the Renewable Energy Target and carbon tax, which, at the margin, has destroyed our competitiveness.”
Couple this with CSIRO being a fully Govt funded, world renowned scientific research organisation and the PM’s ability to influence board positions that allocate research funding Australia wide then I don’t think I am far off the mark (I do not mean that the PM will attempt to try to influence the science – just how it goes about doing its business like being prepared to listen to skeptics).
He may even hold a Royal Commission into the saga.
I’ll bet “London to a brick” that Maurice Newman will not be ignored! It is a matter of national security once our competitiveness is destroyed!
Have a nice day.
Knowing Oz is Australia clears up a lot. Thanks for setting me straight.
Dr. Spencer,
It would be interesting to have your views on why the Scandinavian countries have succeeded? These countries have strong governmental regulation, prospering and competitive businesses, a high Level of innovation and entrepreneurship, and universal welfare.
Its not entirely clear that these countries are the utopia you describe – and even less clear that the model is sustainable. Perhaps it is fine right now for the average person – but what if most of the above average people decide to leave? They take advantage of the cheap education and then move to take advantage of better tax rates elsewhere – and then head home when they are old and need the health system, where will that leave the country. The economic structure needs to be attractive for all stages of our lives.
Imagine if Steve Jobs and Steve Wozniak had decided the tax system in the US was punitive and moved somewhere else?
These types of people do deserve a big reward. I don’t hear employees offering to help with the debts of struggling companies, so why are they so quick to demand a share of the profits? It is greed – the very thing they pretend to condemn.
The current tax- and welfare regime has existed since WW2. In this period there hasn’t been an exodus of businesses nor people. This fact seems incompatible with fundanomics. The regime has simultainiously produced private wealth and numerous billionaires. When observations can’t be explained by current theory, it is time to adjust the theory.
Dr Spencer, while I agree with much of what you say regarding manufactured wealth, and the wealth associated with required service industries, you seem to be ignoring the very large amount of wealth accrued by those sectors that produce nothing of any use to anyone – and in fact cause a great deal of harm in the process.
I am of course thinking of the “financial service” sector which through lack of regulation and oversight was allowed to get away with blatant fraud for many years, and for which only a handful of the recipients of the stolen wealth were ever held to account.
The “trickle down” effect works both ways – the evil actions of some has resulted in a large section of society assuming that the anyone with significant wealth is probably a crook.
Australia was “lucky” to have had the collapse of some banks some time ago, so our banks survived the latest crash fairly well as regulation of the sector was improved.
Despite the regulation, the banking sector still makes pretty good profits, so good regulation does need to suffocate the financial sector.
A healthy banking system is central to any modern economy, and we shouldn’t knock an honest banking sector.
To my mind it was the agencies rating the various products that should have copped the blame and so far their punishment doesn’t seem to fit the crime. On the face of it there was already checks in place, but the checks were flawed.
Your analysis of how a capitalist economy works is correct. However minimal government interference that you desire will bring the the whole thing crashing down. Your desire for government to focus on fairness is meaningless because what is fair to me and what is fair to you are not the same.
Without regulation wages of the workers would drop and drop until most people were living in cardboard boxes and children were back in the mines. Then people would refuse to work for peanuts and we would have to reintroduce slavery. But then nobody would be able to afford cars and phones and TVs so big business would fail. One of the important roles of government is to take money from the rich and give it to the poor – let’s call it redistribution. It has to do this to keep the economy rolling. If it did not do this then nobody would be able to buy the cars, phones and so on. Government gives money to the poor in the form of unearned benefits, to the civil service, to defence contractors etc etc etc etc etc. It employs its personnel in the army, navy, police, postal workers etc etc. All of this money eventually ends up in pockets of individuals as some form of income. I would guess that 50% give or take of US adults derive their income from government spending the taxes take from you and me but also from the very rich. Try and imagine what would happen if the government (a) took the usual amount of tax next year but decided not to spend any of it or (b) government decided to take no tax.
In general people are not bothered by clever people who take risks and make a lot of money. They don’t want to deprive rich people of their riches. These are some of the things they don’t like:
1 Groups of similar companies that do not compete with each other but charge high fees/prices, provide a mediocre service but pay their executives massive salaries. Banks and energy companies would fall into this category.
2 Executives of failing companies who award themselves high salaries because “they have to pay competitive wages to attract the best executives”.
3,4,5 …. I could think of a lot more examples given time.
As to what regulations we should have, in a democracy in which each poor person as the same number of votes as each rich person the poor are going to have their say and the rich are not going to like it. The rich spend an awful lot of time and money (very successfully) persuading the poor to vote against their own interests, but there is a limit to what can be achieved. So, in a democracy there will always be left v. right battles that seem to frustrate you so much. So you should drop your rant, sit back and enjoy the spectacle. If you do really want to live in a regulation free environment you will have to move to China or maybe the Congo.
peter kudos !!! how do the obamas get elected in the first place? by promising to give people stuff. if you don’t take care of the poor now you will later. to the tune of cne trillion dollars a year and a $17 TRILLION DEBT…
“Try and imagine what would happen if the government (a) took the usual amount of tax next year but decided not to spend any of it or (b) government decided to take no tax.”
Your paradigm considers two of four possible cases resulting from a 2×2 factorial on taxing and spending.
a) Taxing, but no spending.
b) No taxing and no spending.
c) Taxing and spending no greater than the tax income received.
d) No taxing, but borrowing to spend anyway.
Notice that varying taxing and spending levels creates an infinite number of other possibilities. However, all possibilities can be reduced to these four. For example, deficit spending is an exacerbation of case d). Each case can be posited to result in a corresponding outcome. Case a) is arguably the worse case, shortest half-life scenario. Wealth is confiscated and not reinvested; revolution ensues. Case b) would likely end in anarchy and thus economical suicide. The deficit spending scenario that we have now must eventually reach an economic tipping point. Therefore the only reasonable plan is c) the Milton Friedman approach previously cited by Andres Valencia.
I think you miss the main point of Dr. Spencer’s rant. He is not lobbying for a regulation-free government which, BTW, he won’t find in China or the DRC. Are Chinese families still limited to one child each? What he wants are regulations enhancing economic growth making more of us rich and the rich richer. It’s the only way to bring in enough tax revenue to offset the inevitable government waste side-effect.
Fraud is already illegal. No need to build fences around existing laws.
“These products only become affordable to the masses when people with the good ideas and money to invest have some hope of being rewarded if they succeed”.
Typical capitalist dogma, Roy.
The products are cheap because they are built with cheap labour in Third World countries. That’s the dark side of capitalism whereby people paid pathetic wages working in pathetic conditions produce products which are sold for large profits.
Even customer support for major products is being relocated to countries like India and Mexico, where so-called technical support personnel read from scripts. If your problem is not on the script you are out of luck.
gordon i think your spot on… i would say though that capitalism is still the “least worst” way to go. recall the bush years when people all over the world were being lifted out of poverty. the key i think is to end the reign of the recession maker, that is the federal reserve. they’re worried about a little inflation at the expense of the poor…
@Fonzie “…i would say though that capitalism is still the “least worst” way to go”.
I have nothing against capitalism in principle but I do have problems with the propaganda that paints capitalism as cool while socialism is portrayed as a Marxist plot associated with despotic regimes like the former USSR and China.
True socialism as an economic force began in democratic countries like Canada, the UK, Sweden, Australia and New Zealand. It was instigated by workers who were fed up with capitalist excesses and who withdrew their labour as a means of getting concessions from dogmatic capitalists who thought they deserved nothing. Many of them were beaten and killed for protesting.
While mean-spirited capitalists in the US have thrown up roadblocks to universal medicare, Canada has gotten along fine with it. Medicare was introduced in Canada when a socialist Premier from the Prairies, Tommy Douglas, was assisted by a visionary Liberal, Paul Martin Senior, to have Medicare accepted by Parliament.
We don’t need pure capitalism any more. It has run it’s course and we need government control of economies to ensure that corporations and capitalists behave themselves. I don’t advocate imposing restrictive controls on entrepreneurs, or interfering in their businesses. I do envision governments setting guidelines for corporations rather than the present system in which they plot behind the scenes to manipulate economies globally.
the point i’m trying to make is that we don’t have “pure capitalism”. we have the federal reserve killing the economy every time it gets going. let’s do capitalism right before we scrap it…
Are the third world countries better or worse for the trade this generates? If they are worse off – why would they do the work?
Its true the western world has a higher standard of living because of this – but if all manufacturing returned to the western world and the trade to cease – who will it affect the most?
I suspect that on the balance the greatest benefit currently goes to the third world countries.
Australia would do OK if we stopped importing goods from third world countries and a lot of people would welcome it, but ultimately both sides would be worse off.
So getting people to accept beliefs and political ideologies which actively go against their own welfare and security is cool.
Getting people to accept crap wages for whatever job they have to be happy to find and hang on to so they can scrimp and scrape and go into debt to get more things like big pretty HD televisions so they can watch rich bastards tell them that “only they care about what ordinary folk like you go through” is cool.
Oh, and don’t forget that you can get to the same place they are if you just vote in the guys who will do their best to “free” you from the “chains” of “government regulation” so you can happily work more hours for the same wages to go even further into debt to get a new 4K resolution tv in time for the next election season?
Wanting a living wage has nothing to do with “soaking the rich”, wanting corporations to be held responsible for their often deliberately damaging actions, or wanting corporations to pay back into the general pot which keeps the whole system running, the very same system which enabled said success in the first place… that is not something you can equate to “punishing rich people” or whatever other nonsense along those lines one may see fit to bring up.
Corporations are not people, they are powerful entities with an alarming amount of control over the very legal frameworks which are supposed to protect the many from exploitation by the few.
Punishing a corporation for screwing up, or better yet fixing the laws which allow the nonsense that goes on, is not the same as “taking all of the money Bill Gates has to put a grand in the pocket of every poor person”, Bill Gates is apparently a very nice guy and a humanitarian.
Microsoft is a hateful greedy monster which actively screws over anything which doesn’t directly benefit it, and seems almost as if it were the answer to the question “how can we get everyone used to exchanging incredibly insecure data packets and relying upon software which provides a nice stable target to attack” but I can’t accept the idea that I live in a world where such a question would be seriously asked, so I have to instead hope that it just wound up being this way by chance… but hey.
I could go on about patent trolling, copyright abuse, the simple brilliance of ideas like copyleft, and so forth, but I doubt anyone would care enough to go into it anyways.
Like I said though, corporations are not people, patent trolling is very lucrative but it is not producing anything, copyright takedown notices don’t help artists/writers/programmers, suing competitors over vaguely framed patent infringements does nothing to improve the technology behind your smartphones or tv or anything else.
Incidentally, beating up a strawman wearing a sign that says “socialism” and deliberately ignoring actual flaws and problems with your own ideology isn’t a good way to do much of anything but fill an echo chamber. I’m not saying my position is flawless in any way, not even arguing that we should adopt it immediately, but I think we can all agree that certain things are actually harmful to all but a very very small subset of the population, and that there are no benefits worth allowing those activities to continue unhindered as we do currently.
It appears to me you do not understand Dr. Spencer’s position. Furthermore, your position is incoherent.
Can you be specific as to what “certain things are actually harmful to all but a very very small subset of the population, and that there are no benefits worth allowing those activities to continue unhindered as we do currently?”
Great economics essay, as usual, Dr Spencer. I particularly appreciated the insightful observation that the redistributionists assume “that the stuff we all want and need will always get produced anyway”. That really explains a lot, I think.
There seems to be a number of comments above made by, well, I’ll be kinder than my usual and use your term, “low information”, folks. If they are young and idealistic and inexperienced, their thinking is even quite understandable to me – that was me when I was young. Big time.
So what changed me? In a word, reality. Having to actually justify your salary in order to keep getting it tends to diminish thoughts of fairness and idealism and replace them with more practical considerations.
I think that’s the root cause of where we are going wrong in the US. There has been a growing disconnect between economic decisions and their consequences. When you say “government is not punished for its failures”, I have to disagree, with a caveat. While this is very true at the federal level, its less and less true as one descends the levels of government. Even at the state level we get fifty tries to get it right. My favorite analogy: if the federal government took it upon itself to create a water-displacing lubricant, all we’d have today is WD-1, it would be prohibitively expensive and wouldn’t work very well, but we wouldn’t know any better, and all US citizens would be forced to use it for, we are assured by the politicians, the greater good.
The key to reversing the economic down-slide of the US, I believe, is for the states to retake much of the power the federal government has usurped over the years. It will probably take a constitutional convention. The federal income tax has to go, the commerce clause needs some severe restrictions added, and a super-majority of the states need to be given ‘checks and balances’ power to vacate most any federal law, executive order, or supreme court decision (as in go back, you goofed, try again).
Can’t happen, you say? Probably not. Which leaves me with very little hope – I really don’t see any other way out of this growing mess.
BTW, I’m really glad to see that your Fundanomics book is now available on Kindle. I just bought it. (I had a couple of paperback copies which I gave away – I felt a little guilty about that, but the recipients were certainly needful, and I don’t hold on to paperbacks.)
I can recall Robert Heinlein saying the same thing years ago. As true today as it was back then. TANSTAAFL!
From the perspective of a (relatively) functioning democracy in US one problem, which is often perceived as a problem of “right” politics, may be invisible. I make here Ctrl+C on Pope Francis’ recent exhortation, where (in my opinion) certain real problem is described (paragraph 56): “…they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.”
In certain countries the process of “making their own rules” is acute and painful. Not only in Latine America, also in postcommunist countries of Europe. It has a lot to do with the influence of certain “interest groups” on all the functions of the state – including legislation. It would be good to explain to the public whether this problem has anything to do with left – right politics. In my opinion, transition from communism to capitalism is in many cases diverted in this direction – and the situation in developing countries is similar.