Fiscal Follies and Phonies

One can disregard all the media nonsense addressing the “fiscal cliff.” It’s all about political brinkmanship–a game of chicken–to see who can score a partisan win (at the cost of a national welfare loss). This quote from the WSJ sums up the reality quite accurately:

…[T]he fiscal cliff is an entirely made-in-Washington fiasco that is the result of bad policy choices. It reflects a dominant political class—mostly Democrats but increasingly many Republicans and conservative intellectuals—who think that growth derives from government spending and that tax rates don’t matter. Until that policy fever is broken, the Beltway’s cable ratings aren’t likely to improve.

Zero-Sum Politics

I’ve reprinted an essay written by the satirist P.J. O’Rourke because it hits on a fundamental economic truth when it comes to the assumptions driving economic policy, and this blog is about economics, not partisan politics. Mr. O’Rourke reveals some economic fallacies that underlie the economic and political strategy the current administration is pursuing with redistributive tax and budget policies.

Zero-sum thinking not only fails as policy in a dynamic, changing world, it diminishes the very people it is hoping to lift up. Zero-sum economics is the stepchild of the dismal science in service to the naked pursuit of political power and exploitation, while positive-sum economics is the mother of shared prosperity and good will.

From the WSJ:

Dear Mr. President, Zero-Sum Doesn’t Add Up

Is life like a pizza, where if some people have too many slices, other people have to eat the pizza box?

By P.J. O’ROURKE

Given that hypocrisy is an important part of diplomacy, and diplomacy is necessary to foreign policy, allow me to congratulate you on winning a second term.

I wish I could also congratulate you on your conduct of international affairs. I do thank you for killing Osama bin Laden. It was a creditable action for which you deserve some of the credit you’ve been given. Of course the intelligence was gathered, and the mission was undertaken, by men and women who, although they answer to your command, answer to duty first. And it is difficult to imagine any president of the United States who, under the circumstances, wouldn’t have ordered the strike against bin Laden. Although there is Jimmy Carter. Thank you for not being Jimmy Carter.

But even though it violates the insincere amity that creates a period of calm following national elections, no thank you for the following, and it is only a partial list:

• Telling the Taliban to play by the rules or you’ll take your ball and go home;

• Leaving Iraq in a lurch (and in a hurry);

• Watching the EU go down the sink drain and into the Greece trap and wanting to take America along on the trip;

• Miscalculating human rights and strategic engagement in the Chinese arithmetic of your China policy;

• Being the personification of bad weather during the Arab Spring with your chilly response when you encountered its best aspects and your frozen inaction when you encountered its worst;

• Playing with Russian nesting dolls, opening hollow figurine after hollow figurine hoping to find one that doesn’t look like Vladimir Putin;

• Sitting and doing nothing like a couch potato watching a made-for-TV movie as the Castro and Chávez zombies continue their rampage;

• Hugging the door on your date with Israel;

• Putting the raw meat of incentives in your pants pocket when you go to scold the pit bulls of Iran and North Korea;

But the worst thing that you’ve done internationally is what you’ve done domestically. You sent a message to America in your re-election campaign. Therefore you sent a message to the world. The message is that we live in a zero-sum universe.

There is a fixed amount of good things. Life is a pizza. If some people have too many slices, other people have to eat the pizza box. You had no answer to Mitt Romney’s argument for more pizza parlors baking more pizzas. The solution to our problems, you said, is redistribution of the pizzas we’ve got—with low-cost, government-subsidized pepperoni somehow materializing as the result of higher taxes on pizza-parlor owners.

In this zero-sum universe there is only so much happiness. The idea is that if we wipe the smile off the faces of people with prosperous businesses and successful careers, that will make the rest of us grin.

There is only so much money. The people who have money are hogging it. The way for the rest of us to get money is to turn the hogs into bacon.

Mr. President, your entire campaign platform was redistribution. Take from the rich and give to the . . . Well, actually, you didn’t mention the poor. What you talked and talked about was the middle class, something most well-off Americans consider themselves to be members of. So your plan is to take from the more rich and the more or less rich and give to the less rich, more or less. It is as if Robin Hood stole treasure from the Sheriff of Nottingham and bestowed it on the Deputy Sheriff.

But never mind. The evil of zero-sum thinking and redistributive politics has nothing to do with which things are taken or to whom those things are given or what the sum of zero things is supposed to be. The evil lies in denying people the right, the means, and, indeed, the duty to make more things.

Or maybe you just find it easier to pursue a political policy of sneaking in America’s back door, swiping a laptop, going around to the front door, ringing the bell, and announcing, “Free computer equipment for all school children!”

However, domestic politics aren’t my first concern here. The question is whether you want to convince the international community that zero-sum is the American premise and redistribution is the logical conclusion.

I would argue that the world doesn’t need more encouragement to think in zero-sum terms or act in redistributive ways.

Western Europe has done such a good job redistributing its assets that the European Union now has a Spanish economy, a Swedish foreign policy, an Italian army, and Irish gigolos.

Redistributionist political ideologies, in decline since the fall of the Soviet bloc, are on the rise again. Will you help the neo-Marxists of Latin America redistribute stupidity to their continent?

The Janjaweed are trying to redistribute themselves in Darfur. The Serbs would like to do the same in Kosovo. The Chinese have already done it in Tibet. Al Qaeda offshoots are doing their best to redistribute violence to places that didn’t have enough.

And Russia and China would like the global balance of power to be redistributed. Since China has plenty of money to lend and Russia has plenty of oil to sell, your debt and energy policies should go a long way toward making the balance of power fairer for the Russians and Chinese.

While redistribution—or “plagiarism,” as we writers call it—is a bad idea, zero-sum is even worse. Zero-sum assumptions mean that a country that doesn’t pursue a policy of taking things from other countries is letting its citizens down. That’s pretty much the story of all recorded history, none of which needs to be repeated. It has taken mankind millennia to learn that trade is more profitable than pillage. And we don’t have to carry our plunder home in sacks and saddlebags when we’re willing to accept a certified check.

The Chinese don’t seem to understand this yet. They think trade is a one-way enterprise, the object of which is for China to have all the world’s money. They’ve got most of ours already. Mr. President, validating China’s economic notions isn’t a good thing.

A zero-sum faith in getting what’s wanted by taking it can extend to faith itself. In some places there is only one religion. If other people have a religion of their own they must be taking away from my religion. Give up that faith, infidels.

Speaking of infidel faiths, Mr. President, please consider the message of this Christmas week—a message of giving, not taking. And consider your prominent position as a messenger of peace on earth and goodwill toward men. When you embrace a belief in the zero-sum nature of what’s under the Christmas tree and propose to redistribute everything that’s in our Christmas stockings, you’re asking the world to go sit on the Grinch’s lap instead of Santa’s.

A Failed Political Vision

What follows is a WSJ book review of an excellent exposition of the Russian-Soviet experience. Gaidar’s analysis offers some important insights into our own economic travails. Our monetary and fiscal policies seem to be adopting the same strategy of “destroying value rather than creating it.”

Shock Therapy’s Unsung Hero

The Soviet economy created goods and services that nobody wanted via processes that destroyed value rather than creating it.

By EDWARD LUCAS

The causes of modern economic growth are one great mystery, the sources of Russia’s plight another. Only someone with the intellectual ambition of Yegor Gaidar would try to penetrate both mysteries in a single volume.

Gaidar was for two decades one of the most important intellectual forces in Russia. As deputy prime minister he launched the country’s sprint to a market economy in November 1991, amid the ruins of the Soviet system. Personally austere and intellectually rigorous, he despised the corruption and cronyism that took root in Russia in the 1990s. But he was still more disillusioned by the authoritarian course plotted by Vladimir Putin after he became president in 2000. Gaidar died in 2009, at age 53.

“Russia: A Long View” synthesizes this remarkable man’s thinking about economics, history and politics. It ranges from the puzzles of slowing GDP per capita in the agrarian societies of the Neolithic Age to the quirks of alcohol consumption in 19th-century Germany. It is an uncompromising tombstone of a book, first published in Russia in 2005 but only posthumously in English, in an exemplary translation by Antonina W. Bouis.

Gaidar updated the book after the world economic crisis broke in 2008 and edited it slightly for a foreign audience. But he warns readers not to expect “journalism” and tells them that they will require “the willingness and ability to analyze statistical material.” (The book has scores of tables and graphs.) Despite its Russo-centric title, Anders Åslund, the Swedish economist, describes “Russia: A Long View,” in the book’s foreword, as one of the best single-volume economic histories of the world ever written.

It opens with a survey of Marxist analysis of economic growth. The author has some sympathy for Karl Marx himself, who in Gaidar’s view saw the weaknesses in his own theories more clearly than his followers did. But he blasts the Marxist simplicities that surrounded much Soviet-era thinking about economic development—in particular the Marxian assumption that economies conform to “the iron laws of history.” Far from obeying iron laws, Gaidar says, modern economies find themselves subject to “an incomplete, continuing process of dynamic transformations without precedent in world history.”

Having established his theoretical framework, Gaidar turns to the root causes of Russia’s backwardness. He places special emphasis on the eclipse of the self-governing medieval republic of Novgorod in northern Russia, a polity akin, he says, to Italy’s then-thriving city-states. When Novgorod was subjugated by Moscow in the 15th century, becoming part of Russia’s vast feudal apparatus, it lost its self-governance, and Russia became separated “culturally, religiously, politically and ideologically from the center of innovation that Western Europe was rapidly becoming.”

Russia came to perceive Western Europe “as something alien and foreign.” The effect was “the narrowing of cultural exchange and more suspicion and isolationism.” Whereas elements of a “taxpayers’ democracy” were becoming entrenched in Europe, Russia’s system was of the “Eastern despotic type,” based on maximizing the resources that the state could extract from the peasant population. [Hmm, sounds a bit like US Federal tax policy.]

Here Gaidar is echoing a point that has been ably made at greater length by the historian Alexander Etkind of Cambridge University. The natural abundance of Russia—furs and forests in the past, mineral resources later—encourages rulers to loot their country by “internal colonization” rather than to develop it.

In the years before the Russian Revolution, Gaidar argues, the country was beginning to shed the burden of its past, with urbanization and fast economic growth narrowing the gap with Europe. But communist economics brought a sharply different course, marked by the state ownership of property, the bureaucratic allocation of resources, forced industrialization, militarism and ruthless political repression.

The economic growth that followed the revolution was fitful and unsustainable, Gaidar notes, recapitulating a theme of his earlier book, “Collapse of an Empire” (published in English in 2007). In “Russia: A Long View,” he turns quickly to the months after the Soviet collapse, citing the graphic memorandums about impending famine and social breakdown that piled up on his desk in November 1991. He rebuts several ideas about what happened at that time, including the bogus claim that economic reform caused the crisis—i.e., that price liberalization, monetary stabilization and privatization resulted in a catastrophic fall in output.

Such a claim, Gaidar says, comes from viewing the problem the wrong way round. Soviet money wasn’t real money, just as Soviet output wasn’t real production. The economy created goods and services that nobody wanted via processes that destroyed value rather than creating it. Ending phony incentives to produce was bound to send recorded output crashing down. Reform was necessary because the Soviet leadership had bequeathed a crisis that threatened the country’s very existence. [Hmm, sounds like the Greenspan-Bernanke Federal Reserve.]

Gaidar concludes by assessing Russia’s current leadership. “It is not hard to be popular and have political support,” he writes, “when you have ten years of growth of real income at 10 percent a year.” But that era is over. The regime must now choose between repression (“tempting but suicidal”) and what he calls “regulated liberalization.” In particular, he argues that Russia needs to restore freedom of speech, open up its process of decision-making, institute an independent judiciary and wage a “war on corruption.” Taiwan, Spain and Chile, he says, offer examples of how to do it. It would be a task worthy of Gaidar’s own talents, if only he were around to offer them.

Gambling on the Welfare State

State-sponsored gambling is the one acceptable way of raising taxes on lower-income folks to help fund the welfare state. …Dancing in [politicians’] heads are visions of new state-sponsored gambling empires built on online poker, online slot machines and online lottery-ticket sales, with politicians collecting most of the vig.  …With or without federal regulation, legalized online poker is likely coming your way in 2013.

LOL. These are some great quotes from the article cited below. I’ve been waiting for someone to expose this dark secret about one way our politicians seek to fulfill their promises to take care of the poor. A remarkable trend that is probably inevitable, like sin taxes.

In my 2002 article titled CasinoWorld (downloadable pdf), I identified four behavioral types in terms of gaming strategies that explain risk behavior under uncertainty. These four types are explained in the following excerpt from the study:

The two dimensions of risk-taking (odds and stakes) yield four separate categories of agents (see Table 4.1):

1. High odds/variance + high stakes = gambler
2. Low odds/variance + high stakes = investor
3. High odds/variance + low stakes = lottery player
4. Low odds/variance + low stakes = subsistence/saver

————————

If we run a game of chance with these four strategies employed, eventually we end up with only two types: investors who own all the wealth and lottery players who live a subsistence life. Is this the world our leaders have planned for us? The 1% and 99%? Think about it, carefully. Happy Holidays!

From the WSJ:

D.C. Plays Fizzbin With Online Poker

How to make the poor pay for the welfare state: online gambling.

By HOLMAN W. JENKINS, JR.

Sometimes only a Star Trek metaphor will do. Remember the episode about a primitive people who developed a planet-girdling civilization based on the principles of the Chicago gangs? Many modern economic anthropologists would tell you that the state begins as organized crime, dividing up rackets and controlling turf.

Case in point: anything having to do with Internet poker.

It starts with the enterprising activities of the Justice Department. Seizing on a 2006 law making it illegal to process U.S. payments for online gambling, federal prosecutors last year brought charges against three offshore poker websites. While admitting no wrongdoing, the sites quickly settled and agreed to hand over substantial sums of money to the department.

Some of these funds were supposed to reimburse the “victims,” U.S. poker players who had money in their accounts when the sites were shut down. But so cumbersome and legalistic is the process created by Justice that many lawyers say they don’t expect their clients to find it worth the trouble or legal fees. Justice may end up keeping much of the loot itself under asset-forfeiture rules.

Don’t expect a hue and cry from gambling interests, however. Bigger stakes are up for grabs, not unlike the turf war Captain Kirk found when he beamed down to the gangster planet Sigma Iotia II.

Having cleared the online poker marketplace of its incumbents, Justice decided that under the 1961 Wire Act most Internet gambling isn’t illegal after all. This new “interpretation,” which came at the behest of Illinois and New York, has inspired a new light in the eyes of state officials looking for ways to fund the welfare state. Dancing in their heads are visions of new state-sponsored gambling empires built on online poker, online slot machines and online lottery-ticket sales, with politicians collecting most of the vig.

Not everyone is pleased by the prospect. Sen. Jon Kyl, an Arizona Republican who is retiring this year, doesn’t like gambling; Sen. Harry Reid, a Nevada Democrat, doesn’t like gambling when it’s not controlled by Nevada casinos.

During the lame-duck session, these improbable bedfellows promoted a bill to halt the online gambling stampede, except for online poker. Why the exception? Poker is a great American tradition, say supporters, including former Sen. Al D’Amato, representing something called the Poker Players Alliance.

More to the point, stopping Americans from playing Internet poker is probably impossible. Under the Kyl-Reid proposal, at least players would be pitted against each other, not the house, which is deemed less iniquitous and corrupting.

The bill satisfies Mr. Reid, meanwhile, because Nevada is already pushing ahead with in-state online poker. Nevada’s casinos and Nevada’s gaming regulators see a federal law as a way to give themselves a headstart in marketing a government-endorsed version of the game to the masses nationally and internationally.

The Kyl-Reid bill, as Captain Kirk would quickly suss out (aided by the deductive powers of Mr. Spock), was destined instantly to become a bone of contention among the various gangs jostling for a piece of the online poker action.

The state lottery commissioners and governors opposed the bill because it would prevent them offering an array of tantalizing new online games to suckers, er, citizens of their states.

Convenience-store owners opposed the bill, fearing it would clear the way for online lottery ticket sales, which would cut into their lucrative piece of the over-the-counter lottery racket.

The Nevada casinos naturally favored any law that would give them a leg up in the emerging marketplace for legal online poker.

In hearings before Congress last year, a Native American spokesman argued that tribes must be allowed to offer online poker on grounds that his 101-year-old grandmother had been a reservation schoolteacher fighting to preserve native culture. Therefore, “if anybody deserves to be at the front line in this industry it’s Native American people.”

Captain Kirk, it will be remembered, invented the deliberately convoluted card game “Fizzbin” as a ruse to distract the gambling-mad, gangster inhabitants of Sigma Iotia II. The Reid-Kyl gambit may have run out of time, but the feds aren’t likely to desist from trying to control so profitable a new racket. State-sponsored gambling is the one acceptable way of raising taxes on lower-income folks to help fund the welfare state. With or without federal regulation, legalized online poker is likely coming your way in 2013. Don’t be surprised if one of the games is called Fizzbin.

Taxes, Spending, and Economic Performance

No big surprises here. The private sector creates value, the public sector spends it. The more of the former means the latter doesn’t go broke. Funny how this gets turned around by the “You didn’t build that!” ideologues.

Excerpt from the WSJ. Full article here. (Subscription req’d)

States that Spend Less, Tax Less—and Grow More

States with an income tax spent 42% more per resident in 2011 than the nine states without an income tax.

In the midst of a dismal recovery where every job counts, one fact stands out: States that tax less achieve better economic performance. Conventional thinking (at least within government) says that low state taxes are dependent upon having access to unusual revenue sources, but that’s not it. A state could be awash in oil and gas severance taxes and still have a high tax burden if the government will not exercise restraint.

The secret to having low taxes is controlling spending, and that’s exactly what low-tax-burden states do.

——

The Anti-Bernanke

What do I want for Christmas? How about Leszek for our Fed Chairman? This is an excellent interview filled with common sense and economic truths (probably the best I’ve read in the past 3-4 years; this is worth ten Greenspan speeches ).

Over the past 12 years Bush and Obama don’t even matter. These failed policies are what matters. From the WSJ:

Leszek Balcerowicz, the man who saved Poland’s economy, on America’s mistakes and the better way to heal from a financial crisis.

The markets didn’t “fail” but were distorted by bad policies. He mentions “too big to fail,” the Fed’s easy money, Fannie Mae and the housing boom. Those are the hard explanations. “Many people like cheap moralizing,” he says. “What a pleasant feeling to condemn greed. It’s popular.”

By MATTHEW KAMINSKI

Warsaw

As an economic crisis manager, Leszek Balcerowicz has few peers. When communism fell in Europe, he pioneered “shock therapy” to slay hyperinflation and build a free market. In the late 1990s, he jammed a debt ceiling into his country’s constitution, handcuffing future free spenders. When he was central-bank governor from 2001 to 2007, his hard-money policies avoided a credit boom and likely bust.

Poland was the only country in the European Union to avoid recession in 2009 and has been the fastest-growing EU economy since. Mr. Balcerowicz dwells little on this achievement. He sounds too busy in “battle”—his word—against bad policy.

“Most problems are the result of bad politics,” he says. “In a democracy, you have lots of pressure groups to expand the state for reasons of money, ideology, etc. Even if they are angels in the government, which is not the case, if there is not a counterbalance in the form of proponents of limited government, then there will be a shift toward more statism and ultimately into stagnation and crisis.”

Looking around the world, there is no shortage of questionable policies. A series of bailouts for Greece and others has saved the euro, but who knows for how long. EU leaders closed their summit in Brussels on Friday by deferring hard decisions on entrenching fiscal discipline and pro-growth policies. Across the Atlantic, Washington looks no closer to a “fiscal cliff” deal. And the Federal Reserve on Wednesday made a fourth foray into “quantitative easing” to keep real interest rates low by buying bonds and printing money.

As a former central banker, Mr. Balcerowicz struggles to find the appropriate word for Fed Chairman Ben Bernanke’s latest invention: “Unprecedented,” “a complete anathema,” “more uncharted waters.” He says such “unconventional” measures trap economies in an unvirtuous cycle. Bankers expect lower interest rates to spur growth. When that fails, as in Japan, they have no choice but to stick with easing.

“While the benefits of non-conventional [monetary] policies are short lived, the costs grow with time,” he says. “The longer you practice these sorts of policies, the more difficult it is to exit it. Japan is trapped.” Anemic Japan is the prime example, but now the U.S., Britain and potentially the European Central Bank are on the same road.

If he were in Mr. Bernanke’s shoes, Mr. Balcerowicz says he’d rethink the link between easy money and economic growth. Over time, he says, lower interest rates and money printing presses harm the economy—though not necessarily or primarily through higher inflation.

First, Bernanke-style policies “weaken incentives for politicians to pursue structural reforms, including fiscal reforms,” he says. “They can maintain large deficits at low current rates.” It indulges the preference of many Western politicians for stimulus spending. It means they don’t have to grapple as seriously with difficult choices, say, on Medicare.

Another unappreciated consequence of easy money, according to Mr. Balcerowicz, is the easing of pressure on the private economy to restructure. With low interest rates, large companies “can just refinance their loans,” he says. Banks are happy to go along. Adjustments are delayed, markets distorted.

By his reading, the increasingly politicized Fed has in turn warped America’s political discourse. The Lehman collapse did help clean up the financial sector, but not the government. Mr. Balcerowicz marvels that federal spending is still much higher than before the crisis, which isn’t the case in Europe. “The greatest neglect in the U.S. is fiscal,” he says. The dollar lets the U.S. “get a lot of cheap financing to finance bad policies,” which is “dangerous to the world and perhaps dangerous to the U.S.”

The Fed model is spreading. Earlier this fall, the European Central Bank announced an equally unprecedented plan to buy the bonds of distressed euro-zone countries. The bank, in essence, said it was willing to print any amount of euros to save the single currency.

Mr. Balcerowicz sides with the head of Germany’s Bundesbank, the sole dissenter on the ECB board to the bond-buying scheme. He says it violates EU treaties. “And second, when the Fed is printing money, it is not buying bonds of distressed states like California—it’s more general, it’s spreading it,” he says. “The ECB is engaging in regional policy. I don’t think you can justify this.”

“So they know better,” says Mr. Balcerowicz, about the latest fads in central banking. “Risk premiums are too high—according to them! They are above the judgments of the markets. I remember this from socialism: ‘We know better!'”

Mr. Balcerowicz, who is 65, was raised in a state-planned Poland. He got a doctorate in economics, worked briefly at the Communist Party’s Institute of Marxism-Leninism, and advised the Solidarity trade union before the imposition of martial law in 1981. He came to prominence in 1989 as the father of the “Balcerowicz Plan.” Overnight, prices were freed, subsidies were slashed and the zloty currency was made convertible. It was harsh medicine, but the Polish economy recovered faster than more gradual reformers in the old Soviet bloc.

Shock or no, Mr. Balcerowicz remains adamant that fixes are best implemented as quickly as possible. Europe’s PIGS—Portugal, Italy, Greece, Spain—moved slowly. By contrast, Mr. Balcerowicz offers the BELLs: Bulgaria, Estonia, Latvia and Lithuania.

These EU countries went through a credit boom-bust after 2009. Their economies tanked, Latvia’s alone by nearly 20% that year. Denied EU bailouts, these governments were forced to adopt harsher measures than Greece. Public spending was slashed, including for government salaries. The adjustment hurt but recovery came by 2010. The BELL GDP growth curves are V-shaped. The PIGS decline was less steep, but prolonged and worse over time.

The systemic changes in the BELLs took a while to work, yet Mr. Balcerowicz says the radical approach has another, short-run benefit. He calls it the “confidence effect.” When markets saw governments implement the reforms, their borrowing costs dropped fast, while the yields for the PIGS kept rising.

Greece focused on raising taxes, putting off expenditure cuts. They got it backward, says Mr. Balcerowicz. “If you reduce through reform current spending, which is too excessive, you are far more likely to be successful with fiscal consolidation than if you increase taxes, which are already too high.”

He adds: “Somehow the impression for many people is that increasing taxes is correct and reducing spending is incorrect. It is ideologically loaded.” This applies in Greece, most of Europe and the current debate in the U.S.

During his various stints in government in Poland, the name Balcerowicz was often a curse word. In the 1990s, he was twice deputy prime minister and led the Freedom Union party. As a pol, his cool and abrasive style won him little love and cost him votes, even as his policies worked. At the central bank, he took lots of political heat for his tight monetary policy and wasn’t asked to stay on after his term ended in 2007.

Mr. Balcerowicz admits he was an easy scapegoat. “People tend to personalize reforms. I don’t mind. I take responsibility for the reforms I launched.” He says he “understands politicians when they give in [on reform], but I do not accept it.” It’s up to the proponents of the free market to fight for their ideas and make politicians aware of the electoral cost of not reforming.

On bailouts, Mr. Balcerowicz strikes an agnostic note. They can mitigate a crisis—as long as they don’t reduce the pressure to reform. The BELL vs. PIGS comparison suggests the bailouts have slowed reform, but he notes recent movement in southern Europe to deregulate labor markets, privatize and cut spending—in other words, serious steps to spur growth.

“Once the euro has been created,” Mr. Balcerowicz says, “it’s worth keeping it.” The single currency is no different than the gold standard, “which worked pretty well,” he says. In both cases, member countries have to keep their budget deficits in check and labor markets flexible to stay competitive. Which makes him cautiously optimistic on the euro.

“It’s important to remember that six, eight, 10 years ago Germany was like Italy, and it reformed,” he says. Before Berlin pushed through an overhaul of the welfare state, Germany was called the “sick man of Europe.” “There are no European solutions for the Italians’ problem. But there are Italian solutions. Not bailouts, but better policies.”

Why do some countries change for the better in a crisis and others don’t? Mr. Balcerowicz puts the “popular interpretation of the root causes” of the crisis high on the list.

“There is a lot of intellectual confusion,” he says. “For example, the financial crisis has happened in the financial sector. Therefore the reason for the crisis must be something in the financial sector. Sounds logical, but it’s not. It’s like saying the reason you sneeze through your nose is your nose.”

The markets didn’t “fail” but were distorted by bad policies. He mentions “too big to fail,” the Fed’s easy money, Fannie Mae and the housing boom. Those are the hard explanations. “Many people like cheap moralizing,” he says. “What a pleasant feeling to condemn greed. It’s popular.”

“Generally in the West, intellectuals like to blame the markets,” he says. “There is a widespread belief that crises occur in capitalism mostly. The word crisis is associated with the word capitalism. While if you look in a comparative way, you see that the largest economic and also human catastrophes happen in non-market systems, when there’s a heavy concentration of political power—Stalin, Mao, the Khmer Rouge, many other cases.”

Going back to the 19th century, industrializing economies recovered best after a crisis with no or limited intervention. Yet Keynesians continue to insist that only the state can compensate for the flaws of the market, he says.

“This idea that markets tend to fall into self-perpetuating crises and only wise government can extract the country out of this crisis implicitly assumes that you have two kinds of people. Normal people who are operating in the markets, and better people who work for the state. They deny human nature.”

Gathering the essays for his new collection, “Discovering Freedom,” Mr. Balcerowicz realized that “you don’t need to read modern economists” to understand what’s happening today. Hume, Smith, Hayek and Tocqueville are all there. He loves Madison’s “angels” quote: “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.”

This Polish academic sounds like he might not feel out of place at a U.S. tea party rally. He takes to the idea.

“Their essence is very good. Liberal media try to demonize them, but their instincts are good. Limited government. This is classic. This is James Madison. This is ultra-American! Absolutely.”

The Fed’s Contradiction (and ours)

Madness.

From the WSJ:

Easier money hasn’t led to more growth, so we need still easier money.

Four years ago this month the Federal Reserve began its epic program of monetary easing to rescue an economy in recession. On Wednesday, Chairman Ben Bernanke declared that this has worked so well that the Fed must keep easing money for as long as anyone can predict in order to save a still-sputtering recovery.

That’s the contradiction at the heart of the Fed’s latest foray into “unconventional policy,” which is a euphemism for finding new ways to print money: The economy needs more monetary stimulus because it is still too weak despite four years of previous and historic amounts of monetary stimulus. In the words of the immortal “Saturday Night Live” skit: We need “more cowbell.”

In his press conference Wednesday, Mr. Bernanke was at pains to say this week’s decisions were nothing new, merely an implementation of the policy direction that the Fed’s Open Market Committee had set in September. This is technically true, but the timing and extent of the implementation are more than details.

The Fed committed Wednesday to purchase an additional $45 billion in long-term Treasury securities each month well into 2013, in addition to the $40 billion in mortgage assets it is already buying each month. At $85 billion a month, the Fed’s balance sheet will thus keep growing from its current $2.9 trillion, heading toward $4 trillion by the end of the year. Four years ago it was less than $1 trillion.

The Fed’s goal is to push down long-term interest rates even lower than they are, to the extent that’s possible when the 10-year Treasury note is trading at 1.7%. The theory goes that this will in turn reduce already very low mortgage rates, which will help spur a housing recovery, which will lead the economy out of its despond. This has also been the theory for the last four years.

In case there was any doubt about its resolve, the Fed statement also issued a new implicit annual inflation target: 2.5%. The official target is still 2%. But the Open Market Committee stated that it will keep interest rates near zero, and by implication keep buying bonds, as long as the jobless rate stays above 6.5% and inflation stays “no more than a half-percentage point above the Committee’s 2-percent longer-run goal.”

That is a 2.5% inflation target by any other name, and it’s striking to see a central bank in the post-Paul Volcker era say overtly that it wants more inflation. This is a victory for the Fed’s dovish William Dudley-Janet Yellen faction that echoes economists who think we have to inflate our way out of the debt crisis. Inflation remains quiescent, but central banks that ask for more inflation invariably get it.

These new overt economic targets are part of Mr. Bernanke’s campaign for more “transparency” in monetary policy, but they also have the effect of exposing how much the Fed has misjudged the economy. In January 2012, the Board of Governors and regional bank presidents predicted growth this year in the range of 2.2%-2.7%. On Wednesday, they predicted growth of 1.7%-1.8%, which means they are expecting a downbeat fourth quarter.

Which brings up another irony: Mr. Bernanke may be pulling the trigger on more bond purchases now because he fears economic damage from consumer and business concern over the fiscal cliff. Yet no one has done more to promote public and market worry over the fiscal cliff than Mr. Bernanke, notably in his June testimony to Congress.

Meantime, the Fed’s near-zero interest rate policy will continue to disguise the real cost of government borrowing. One reason the Obama Administration can keep running trillion-dollar deficits is because it can borrow the money at bargain rates. Stanford economist and Journal contributor John Taylor says the Fed has bought more than 70% of new Treasury debt issuance this year.

All of this will create a fiscal cliff of its own when interest rates start to rise. The Congressional Budget Office says that every 100 basis-point increase in interest rates adds about $100 billion a year to government borrowing costs. Pity the President and Congress who have to refinance $15 trillion in debt at 6%. If Mr. Bernanke really wants to drive the President and Congress to reduce future spending, he shouldn’t keep bailing them out with easier money.

The overarching illusion is that ever-easier monetary policy can return the U.S. economy to a durable expansion and broad-based prosperity. The bill for unbridled government spending stimulus is already coming due. Sooner or later the bill for open-ended monetary stimulus will arrive too.

Rich Dad, Poor Baby

Unless you’ve been hiding under a rock for the past decade, you know there’s a popular financial self-help book series titled Rich Dad, Poor Dad written by Robert Kiyosaki. The basic premise of the numerous books Mr. Kiyosaki has spun out can be stated in a few sentences.

Rich Dad passes on the lessons of financial success, which follow the basic dictum to work, save, borrow to invest, take prudent risks, produce, create value, and sell to accumulate tangible wealth and realize financial freedom. Poor Dad ends his lessons at working hard at a good job in order to retire comfortably and securely after a long and hopefully productive career. Poor Dad tends to borrow to bridge consumptions needs and income, in effect buying cars and homes with credit and debt.

The difference here is that Poor Dad’s wealth-creating productivity is captured by someone else, usually an employer or financier, who is taking the risks that pay his salary. In effect, the Poor Dad has traded financial freedom for security, and perhaps foregone accumulated wealth to pass on to heirs in return for future pension promises that may expire with his final breath. Mr. Kiyosaki’s insight is that too many choose Poor Dad’s strategy because they mistakenly feel they have little choice. (Rich Dad’s strategies to invest and accumulate wealth can take an infinite number of forms, but Mr. Kiyosaki’s main strategy is highly-leveraged investment real estate, a profitable strategy in the past because it’s subsidized by government tax and credit policies. Profitable, at least until everybody else tries to get in on the action and inflates prices into a “bubble.”)

The Rich Dad, Poor Dad financial formula can help illuminate the similar choices we face as a nation. From an economic perspective we see that Rich Dad produces more and consumes less of his income, while Poor Dad consumes a greater share of his income. When Poor Dad’s consumption needs outstrip his savings, he borrows against future income. In our current political vernacular, Rich Dad is the 1%, while Poor Dad is the 99% (the true ratios are probably closer to 20-80). At the level of the national economy, the relationship between these two strategies is symbiotic; in other words, the two need each other to thrive in order to survive. Their relationship is simply stated: Without consumers, producers have no market and without producers, consumers have no goods.

The problem is that as a nation, we’ve adopted Poor Dad’s financial strategy. We’ve taxed work, savings, production, investment and capital accumulation, while subsidizing debt and over-consumption. This is marked by greater dependence on government income security in the form of unfunded entitlements (Social Security, Medicare, Medicaid, Obamacare) and the explosion of debt to manage inadequate present consumption demand by borrowing it from the future. The interest on those trillion dollar deficits and $16+ trillion dollar debt will have to be serviced by future tax dollars that will reduce future consumption demand. In effect, the wannabe Rich Dads (and Moms) of today are pushing the burden of unfunded entitlements and debt off on future generations, or the Poor Babies.

One might be tempted to make partisan political hay out of this shameful fact, but both parties and all voters are complicit in the national scam. One party spouts empty rhetoric about ending the tax and spending regime but does little, while the other party puts the pedal to the metal to gain votes. The big government, pro-entitlement pushers expect that future generations will see the wisdom of paying higher taxes and settling for less in order to pay for cradle-to-grave security, but there’s good reason to question this assumption. It seems to directly contradict the technology trend toward greater autonomy and freedom of choice that younger generations have come to take for granted. One thing is for sure, greater dependency on social entitlements must come at the cost of less personal autonomy and freedom of choice. In other words, less freedom. This was not supposed to be Rich Dad’s legacy.

Plus ça change, plus c’est la même chose…

Good quote from the past…

H.L. Mencken, writing in the 1930s, collected in “A Mencken Chrestomathy”:

Here is the perfect pattern of a professional world-saver. His whole life has been devoted to the art and science of spending other people’s money. He has saved millions of the down-trodden from starvation, pestilence, cannibalism, and worse—always at someone else’s expense, and usually at the taxpayer’s. . . .

Of such sort are the young wizards who now sweat to save the plain people from the degradations of capitalism, which is to say, from the degradations of working hard, saving their money, and paying their way. This is what the New Deal and its Planned Economy come to in practise—a series of furious and irrational raids upon the taxpayer, planned casually by professional do-gooders lolling in smoking cars, and executed by professional politicians bent only upon building up an irresistible machine.

Dollars and Sense on Corporate Taxes

Voters are suckered by politicians into believing corporations pay taxes. No, they only collect them and then deliver them to the IRS…

Excerpted from the WSJ article, “Google’s Bermuda Billions” (subscription req’d)

J.P. Morgan estimates that American companies currently hold a cool $1.7 trillion in profits outside the U.S. They keep them there because if they brought them home, they’d be taxed at 35%.  …

In a saner world, a business would pay taxes once, when the profits are distributed, and governments would abandon the idea that the corporation even pays taxes. The truth, as economists understand, is that corporations are essentially tax collectors. Ultimately the corporation’s owners, employees, and customers bear the cost of those levies.

But if that’s a political leap too far, governments that rail against corporate tax-avoidance would do better to lower rates, and with them the incentive to avoid tax in the first place.