Richard J Grant

The Fed and The Power To Redirect and Redistribute Wealth

2012-03-04T15:47:00.007-06:00

Published in The Tennessean, Sunday, February 26, 2012

by Richard J. Grant

A butterfly flapping its wings in a rain forest is nothing compared to a central banker flapping his lips.

Federal Reserve Chairman Ben Bernanke recently told a congressional committee that, although he wouldn't rule out another round of quantitative easing, he did not foresee another round in the near future. With this statement, the dollar rose compared to other assets, as reflected in a sudden 5 percent drop in the price of gold. The silver price also plunged, as did stock prices and Treasury securities.

Other than the good news – that the Fed won't be inflating the money supply as much as it has been recently – it highlights the economic impact of one of many government-created agencies. The Federal Reserve Board, through its statutory power to create currency, does not create wealth but has the power to redirect and redistribute wealth.

When it inflates the money supply to hold down interest rates, it ensures that those who sell bonds get a higher price (at the expense of buyers) and that those who buy and hold bonds receive lower income streams than they would have. Investment choices and patterns are different than they would have been under a different monetary regime. Interest rates no longer reflect the preferences and decentralized market knowledge of millions of market participants. Instead, interest rates are manipulated by a small group of government-appointed individuals according to their much narrower judgment and preferences.

The exercise of such powers usually results in some kind of seemingly unconnected crisis or reversal. This is why periods of deliberately low interest rates are eventually followed by periods of deliberate and systematic increases in the Fed's targeted interest rates. During the period of artificially low interest rates and expanding money supply, credit seems cheap and resources are directed into investments and uses where they might not otherwise have gone. It looks and feels like a boom of prosperity, but it is also a time when businesses are misled by low interest rates to invest as though capital is less scarce than it really is.

What can't go on forever must stop. Expansion of the money supply eventually causes prices to be higher than they would have been. When inflation goes above the Fed's preferred level, as it is now, they must slow or stop the expansion of money supply. Interest rates will rise commensurately. Families and businesses that can't handle the higher rates might have to postpone future plans or reverse previous decisions.

If such reversals are widespread, we call that a recession. We recognize that something is wrong; we change our plans; and while we reorganize, people and resources are often unemployed. All this unfolds because some central planners thought that they could improve on the market.

Other government agencies, such as Fannie Mae and Freddie Mac, use their power to shift risk onto taxpayers through government guarantees of mortgage-backed securities. This lowers the perceived costs of homeownership. They don't really create new wealth; they merely change the patterns of mortgage lending and property ownership. Resources that would have gone into more-productive uses are enticed toward apparently less-risky mortgages.

Still other government agencies interfere in banks’ decisions about creditworthiness and which markets they will serve. Any one of these can create problems for someone, but all of them together multiply the likelihood of financial crises and industrial fluctuations.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

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Copyright © Richard J Grant 2012

There Are Two Kinds Of Austerity. Which Will Greeks Choose?

2012-02-26T16:00:00.007-06:00

Published in The Tennessean and Forbes,

Sunday, February 26, 2012

by Richard J. Grant

The radio announcer asked, “But will the Greek people tolerate another year of recession?” Left unasked was the question, “If they won't, so what? What are they going to do about it?” Some of their compatriots have responded with riots and arson to any suggestion of government austerity.

Such unproductive catharsis and destruction of property seems, however, to compound the austerity rather than mitigate it. Worse, it illustrates just how widespread is the confusion between government austerity and private austerity. Historically, those nations that have run relatively austere and less-interventionist governments have been those in which citizens have most prospered. It is in other countries where government has spent excessively and intervened heavily in the economy that citizens have felt true austerity.

In Greece, as in America, we see in their results the shortcomings of the conventional economic thinking that still reigns in Washington and other capitals. Many still believe that government spending, even beyond basic functions, is a source of economic growth rather than an inhibitor. Certainly those areas that are favored by government spending do tend to grow, at least for a while. But those sectors that are net taxpayers, or are burdened by regulations, are deprived of resources and opportunity and thereby prevented from attaining their full potential.

As government involvement in our lives grows beyond the minimum necessary to maintain the rule of law, especially when it ventures into schemes to redistribute wealth, consumption patterns are increasingly separated from production. As a growing proportion of the population learns that, through the power of the state, it can consume more than it produces, then the productive potential of that nation declines. Those who receive have less incentive to produce, and those who continue to produce must do so with less.

Nations that move in that direction find that they are less able to export manufactured goods and are more likely to export people. As long as there are other lands where people are freer and better able to build their own prosperity, we can predict the direction of migration.

The motive to migrate might not necessarily be a “yearning to be free” so much as a simple yearning to be more prosperous. It is not a prerequisite that the migrant understand the source of his new prosperity; he need bring only a willingness to work and to obey the law. But there is also a danger that the migrant could bring the same old voting habits that collectively created the incentive to emigrate.

The future of Greece depends on Greeks allowing their government to implement the structural reforms required as part of the €130 billion bailout package agreed by its European neighbors. Many will complain that the terms of the deal are too strict. They will not understand that such reforms would be in their best interest even without the bailout money. The path they have followed to this point is not sustainable.

Those who call for more government spending must understand that they are also calling for a commensurately higher level of taxation – either now or in the future. Greeks have tried to get something for nothing by pushing their tax burden onto future generations. Their government debt has ballooned to 145 percent of GDP. Those who stay will have to pay.

If they won't tolerate reform, then they will have to tolerate recession.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

We can't let individual mandate stand

2012-02-19T12:17:00.003-06:00

Published in The Tennessean, Sunday, February 19, 2012 and Forbes

by Richard J. Grant

“Is a thumb a finger?” That is the question Major Muller asks in Michael Ondaatje's, The English Patient, to mock the Geneva Convention before severing his prisoner's thumbs. Were he a present-day Congressman, he might better ask, “Is an individual mandate a tax?”

This is the question that U.S. Rep. Scott Garrett, R-NJ, asked White House budget director Jeff Zients about President Obama's claim that no family earning under $250,000 would be subjected to a tax increase. Rep. Garrett asked, “So if I am part of a family that does not buy health insurance in violation of the president's health-care program and I have to pay [a fine] because of that, that is not a tax increase – that is not a tax on me?”

Sensing the trap, Mr. Zients tried to evade. He replied, “The Affordable Care Act saves money.” But not only was his statement absurd, it further highlighted the weakness of the Obama administration's case. The Affordable Care Act (ACA) raises costs. The individual mandate has no other purpose than to force low-risk, low-cost individuals to purchase medical insurance at a price that would subsidize insurance companies and current consumers for their increased costs.

Even with the individual mandate, costs will be higher and efficiency lower than it would have been in the absence of the ACA. Neither the individual mandate nor the other parts of the ACA will correct, or be justified by, the present-day high-cost environment created by previous government interventions. But without the individual mandate, the higher costs will be glaringly obvious.

Next month, the U.S. Supreme Court will consider the constitutionality of the ACA and its individual mandate, which coerces individuals to purchase a private product. If the act is struck down, due to the inclusion of the individual mandate, the Government will argue that the mandate is “severable” and that the remainder of the act should stand. But even if the remainder survives court scrutiny, the burdensome cost structure would more-rapidly be revealed.

This is why Rep. Garrett's question was so important. He closed in with, “A moment ago you said there's no tax increase.” Mr. Zients replied, “There aren't.” Rep. Garrett: “So that's not a tax?” Mr. Zients: “No.”

Rep. Garrett then put the issue in context, “That's not a tax. Okay. I just want to be clear on that because that's not the argument the administration is making before the Supreme Court.”

Politicians are often accused of saying different things to different audiences, and that is what the Obama administration has been caught doing. When speaking to voters, the administration claims that the individual mandate is not a tax. But if it says the same thing before the Supreme Court, the individual mandate will almost certainly be ruled unconstitutional.

Such mockery of the Constitution worked for the Franklin Roosevelt administration when it was marketing Social Security and defending it in court. But with closer scrutiny and better public awareness, neither the Supreme Court nor future congresses are likely to let the ACA stand.

The ACA shifts us further away from the rule of law toward a regulatory state. The longer it takes to remove this act, the more resources will be wasted by governments and private businesses in preparing to implement the act's provisions.

May checks and balances save us from an administration that is all thumbs.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Is This The End Of "Patient Protection And Affordable Care"?

2012-02-12T14:44:00.002-06:00

Published in The Tennessean, Sunday, February 12, 2012 and Forbes

by Richard J. Grant

Most progressives are not totalitarian at heart, they are totalitarian by accident. When they supported the Patient Protection and Affordable Care Act, they really believed that the title had something to do with the content of the act. They didn't really know what was in it; they had to pass it to find out.

The so-called Affordable Care Act is the product of a rightly felt belief that something is wrong with our health-care system. In that sense, the act is one of many such acts that was initiated to correct the problems created by previous government attempts to improve the economy and particularly the health-care system.

When the federal and state governments force insurance companies, through mandates, to offer expansive policies that bear less and less resemblance to real insurance, it should be no surprise that the policies become painfully expensive and less well-fitted to customers’ needs. When the mandates drive up the cost of the policies, many people decide that it's just not worth it to be “insured.”

This is where proponents of “social justice” show themselves to be divorced from moral reality. As Frederic Bastiat long ago recognized, they focus only on that narrow reality they are capable of seeing directly. They make no conceptual link to the unintended damage also caused by their actions.

What now appears as a crisis of the uninsured is not a consequence of capitalism, but a consequence of its absence. Insurance is a human response to the risks of life. The service is more creative and effective the freer we are to provide it. Creative solutions to such problems as “pre-existing conditions” have been held back or proscribed by a plethora of state and federal mandates and a tax structure that disadvantages personal, portable health insurance. It is to such government-created limitations that the government now responds.

Many proponents of “social justice” are now shocked that the federal government would use the regulatory power granted to it in the Affordable Care Act to force all employers, including those with church affiliations, to offer health insurance that covers contraceptives and related services, all without co-pay. Suddenly we see people standing up with admonitions to the effect of, “When they came for the Catholics we did nothing because we were not...”

But where were they before that, when they believed they would get religious exemptions? Did they stand up for those millions who would be denied the freedom to enter into an insurance contract of their own choosing, and who would be forced to insure for conditions that were not only uninsurable, but might also cause moral conflict?

It is a poor strategy for those who wish to defend the First Amendment of the Constitution to ignore most of what comes before it. It was such practical ignorance that allowed the federal government to interfere in the provision of medical care.

The regulatory and tax-induced distortions inflicted on our health-care system have spawned calls for more of the same, more central planning, to correct the problems. When people fail to act as commanded, they are coerced into the system. The “individual mandate,” which forces people to buy health insurance or pay a fine, is an integral part of the recent health-care reform act. It reflects the true nature of the movement that supports it, and it won't end there.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

When What’s “Good” For General Motors Is Not Good For America – or Built To Last

2012-02-05T14:32:00.002-06:00

Published in The Tennessean, Sunday, February 5, 2012 and Forbes

by Richard J. Grant

An economy that is “built to last” will never be built by government. This might come as a surprise to President Barack Obama, but what is frightening is that it might come as surprise to a plurality of the American electorate. There is nothing like a sweet-sounding, and all but meaningless, phrase to persuade voters to stick it to themselves once again.

The great advantage of using government to subsidize or operate businesses is that we can ignore some or all of the costs. That is why so many people believe that their “green energy” projects are profitable and create numerous jobs. They ignore the burden of the subsidies and mandates that is shifted onto other people. It is also why many people believe that the nationalization of health care services saves resources in those countries so blessed by it. They ignore the burdens shifted to those who face doctor shortages, waiting lists, reduced innovation, and anticompetitive denials of a “certificate of need” for new hospitals.

Audiences are soothed by President Obama's words, “The American auto industry was on the verge of collapse. And some politicians were willing to let it just die. We said no.” And so it came to pass that the benevolent hand of government reached down and raised-up the industry again. The government just happened to find $85 billion supposedly lying around with nothing better to do.

But what was really saved? The American auto industry was not on the verge of collapse, and politicians don't let industries die, former customers do. The “industry” the president referred to was only General Motors, Chrysler, and the United Auto Workers. Ford declined to be messed up by further government intrusion into its affairs. Auto manufacturers with their operations mainly in right-to-work states were never in danger of bankruptcy.

Bankruptcy does not necessarily result in the disappearance of either a company or an industry. Customers will trade voluntarily with any company that offers them valued goods or services at an acceptable price. Whichever company does this best will be supported by customers. Companies that do this poorly will lose their customers, their employees, and their capital to other companies.

Although these transitions might bring periods of discomfort, this is how we make economic progress. But when government overrules our actions in the marketplace, it subverts that progress. When government tries to “protect jobs,” as if they are museum pieces, it ensures only that other more productive jobs will not come into existence.

Even if all the $85 billion of federal auto-bailout money is paid back, which is hardly likely, the net effect on our economy is already a loss. The federal government still owns a quarter of General Motors. Even if the share price rises sufficiently to produce a paper profit, we can never say that we are better off than we would have been had the government stayed out.

Government investment is coercive. It is not equivalent to private investment, which is voluntary and the investors necessarily bear the costs of their decisions. As governments invest in more projects, we are less likely to reach consensus on their worthiness. When local projects are funded by the federal government, with its widespread tax base, we are susceptible to the illusion that the money is free.

That's not a system built to last. It is built to waste.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Forget China. Will the Trade Enforcement Unit be a Currency Manipulator?

2012-01-29T12:55:00.003-06:00

Published at Forbes. A shorter version published in The Tennessean, Sunday, January 29, 2012.

One good thing about President Barack Obama's State of the Union address this week was that he refrained from describing China as a currency manipulator. He did note the need to protect intellectual property rights, though the protection of property rights was not at all central to the theme of the president's speech.

The president's thinking on trade matters is better represented in his announcement of the “creation of a Trade Enforcement Unit that will be charged with investigating unfair trading practices in countries like China.” One task of this new unit will be to push China to increase the value of its currency.

This is not a new task, but it might be helpful that the unit is focused also on the encouragement of greater trade freedom and protection of property rights. Nevertheless, the whole effort is confused by allegations of currency manipulation.

As China emerged from decades of communist repression, its leaders knew that their currency would never be trusted at home or abroad if it maintained an independent monetary policy. Accepting this, for many years China chose to fix the exchange value of its currency to the dollar. What they did, in essence, was to adopt the US dollar as their monetary standard. As long as the exchange rate was fixed, the US dollar served as the Chinese monetary base. The Chinese currency itself was merely for daily domestic use.

Several countries and jurisdictions, such as the United Arab Emirates and Hong Kong, have long had fixed exchange rates between their currencies and the US dollar. Other countries, such as Ecuador and Panama, have been using the US dollar as their de facto currencies. We don't hear complaints about these countries' currency policies.

The currency complaints against the much larger China are purely instrumental, intended to serve protectionist political constituencies in the US. Charges of “currency manipulation” come mainly from politicians who need to please groups, such as trade unions and local manufacturers, who feel threatened by international competition.

Governments have often resorted to currency devaluation as a means to give domestic exporters a competitive advantage. Such a policy of “competitive devaluation” can, at best, give a short-term stimulus to a small subset of the economy. In general, it fails. It has always been a very poor substitute for domestic economic policies of low taxation, light regulation, a small government-sector, and a sound currency.

The Chinese currency is still not convertible, which means that there are controls on the access that Chinese residents have to foreign currencies. Historically, such controls have been applied in attempts to maintain demand for an overinflated currency. But the only goal that it really succeeds in achieving is increased control over citizens and the concentration of power in some government bureau. By standards suitable for public statement, such controls always fail.

Those who insist that the Chinese currency is undervalued should explain to us what the correct exchange rate is and how they determined it to be such. But they can't do that without revealing the subjectivity of the whole exercise. What they really want is to push competitors perpetually to do the opposite of competitive devaluation.

Meanwhile, they are quite content to pretend that the dollar, over which the US government has monopoly control, with the power to inflate the currency and to manipulate interest rates, is a “free-market currency” as long as we advocate flexible exchange rates.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Unemployment is symptom of bigger problem

2012-01-22T13:13:00.004-06:00

Published in The Tennessean, Sunday, January 22, 2012 and Forbes

by Richard J. Grant

Those who argue that construction of the Keystone XL pipeline should be approved by the president because it would support tens of thousands of jobs get the story backwards. The jobs should be created because the product delivered by the pipeline is highly valued by potential customers. There is no problem with demand. No one doubts that American and other customers would willingly pay enough to cover the cost of the project, which would pipe oil south from the Alberta tar sands.

Politicization of the “jobs” issue is understandable. With many people currently unemployed or underemployed, there are many potential voters looking for a sign that help is on the way. This creates a market for politicians who are too quick to put the cart before the horse. “Job creation” becomes an end in itself; the purpose of the job is secondary. The goods or services that are produced are relegated to the role of means.

This approach to economic management explains why we hear politicians, and their favorite economists, decrying the “lack of demand” in the economy. They either don't care, or have no idea, what demand is.

Demand, in any relevant sense, cannot exist other than as expressed through the choices of a real person who, to get what he desires, voluntarily offers in exchange something of value to another person. Whatever work might be involved in carrying out this transaction could be called a job. But any such job is worth doing only if the transaction that necessitated the job is worth carrying out.

When people are free in “the pursuit of happiness,” there is no limit to work opportunities. Compared to our imaginations and desires, there is always a scarcity of workers and other resources to meet those desires. Every unemployed person, regardless of their talents or handicaps, is an entrepreneurial opportunity.

When we observe involuntary unemployment, we need to ask why. In the case of the Keystone XL pipeline project, we know that many workers must now look elsewhere because a politically motivated president had the power to say “no.” This could and should have been a defense against property takings; instead it satisfied only a political constituency with meddlesome preferences.

Involuntary unemployment, when it persists, is not natural. When people are free to set their own terms and prices, work opportunities are unlimited. When people are not free, but subject to inappropriate regulations and excessive taxation, problems arise.

In general, it is a failure to define and protect property rights that results in the unemployment or underemployment of people and their resources. How many businessmen have wasted how many hours justifying themselves and their actions to some committee of politicians or bureaucrats?

Are those politicians and bureaucrats productively employed or destructively employed? When they institute laws that protect people and their property from infringement by others, they facilitate peaceful cooperation. But when they interfere with trade and the use of private property, they are limiting employment and contributing to social strife.

The unemployment that we observe is the result of our failure to limit the size and power of our own government. It is no solution that we now call for that government to treat the symptoms by creating jobs. Nor do we need a government that becomes, like the jobs it creates, an end in itself.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Obama compounds our short-term problems

2012-01-15T11:44:00.004-06:00

Published in The Tennessean, Sunday, January 15, 2012

by Richard J. Grant

We know that federal budget deficits tend to rise during and immediately after recessions. This is not because they should or must according to any moral or inexorable law of nature. It is merely programmed into the current fiscal structure: unemployment rises and incomes fall along with production. This automatically increases government spending and reduces tax revenues.

These effects are usually compounded by a predictable political reaction, which most recently included the extension of unemployment benefits, increased government “stimulus” spending, and the reduction of payroll tax rates.

The political payoff from these reactions will certainly be greater than the real economic payoff. Extending unemployment benefits sounds compassionate, but it draws resources away from other uses and reduces both the incentive to work at finding a job and the likelihood that such job opportunities will be created.

So-called “stimulus” spending might be directed into beneficial infrastructure projects that reasonable people could agree to fund. But, as we have seen, it could just as easily be blown on speculative, too-clever-by-half attempts to create new industries ahead of their time. “Green energy” is one such area where government has demonstrated its incompetence and has probably retarded innovation in the energy sector.

Payroll taxes affect many people. They are low, flat taxes on a relatively stable tax base. Payroll tax revenues fall as employment falls, but they are not as sensitive to downturns as are other taxes on income and capital gains. Also, the reduction in revenues earmarked for Social Security will hasten the day when the trust fund reaches zero and Congress must make new appropriations to keep the checks coming to retirees.

We can forgive a newly elected politician for the automatic increases in the budget deficit that occur in his first year of office. What we can, and should, judge him on is the economic value added or destroyed by his own actions.

In a recent Wall Street Journal article, Austan Goolsbee, a University of Chicago economist and former chairman of President Obama's Council of Economic Advisers, criticizes the Republican presidential candidates for under-appreciating the automatic nature of deficit increases during a downturn. He notes that, “As the economy grows back to health, the government share of the economy will fall.”

But by making this point, he seems to miss the point. Although economic growth is positive, it is about half the long-term average rate. Twenty-eight years ago, after a similar recession, the economic growth rate was double the long-term average. That was during the equivalent period in President Ronald Reagan's first term. This difference is not an accident.

President Reagan knew the difference between reduced tax revenues and reduced tax rates. But Professor Goolsbee points to the recent low tax revenues and wonders why the GOP candidates are not “trumpeting the last three years as one of the greatest tax cutting periods of the century.” If President Obama understood this, he would have copied Reagan rather than attempting the opposite.

President Reagan knew that he was, and would be, plagued by short-term deficits. He focused, not on quick fixes, but on improvements that would be effective and would last. By his presidency’s end, top marginal income-tax rates were less than half what they had been. Economic activities were much freer from government interference and the economy grew accordingly.

After that, what president could complain about his “inheritance”?

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Government debt matters, because everyone's different

2012-01-08T15:29:00.005-06:00

Published in The Tennessean, Sunday, January 8, 2012 and at Forbes.

by Richard J. Grant

When Nobel laureate Paul Krugman began a recent New York Times column by showing concern about “disastrously high unemployment,” we could sympathize with his assertion that too much attention is focused on “the allegedly urgent issue of reducing the budget deficit.” After all, there are many other factors that prevent us from employing our resources in the most productive uses. We are overregulated, overtaxed, overinflated, and the government spends wastefully and too much.

If we were to prioritize any of those policies, such as cutting tax rates, then we could justify tolerating high deficits a little longer. The brighter prospects for higher growth and improved resource employment would increase our future debt-service capacity.

But this is not what Professor Krugman is talking about. He believes that we need more government spending, not less. Drawing inspiration from John Maynard Keynes, he remarks that Keynes wrote about the need to spend our way out of the depression when “Britain was deeper in debt than any advanced nation today, with the exception of Japan.”

Krugman supports his argument by noting that Britain “has had debt exceeding 100 percent of GDP for 81 of the last 170 years.” We could be forgiven for rather doubting that this supports his argument.

The root of Krugman's confusion on debt lies in adherence to what my old professor James Buchanan (also a Nobel laureate) once called the New Orthodoxy. Krugman believes that governments differ from families in that they don't have to pay back their debt. From this, he can deny that debt burden is shifted on to future generations. Krugman also believes that when Americans lend to the U.S. government there is very little burden because “we owe it to ourselves.”

Acceptance of the New Orthodoxy was a boon to big-spending politicians and their special-interest groups. If government debt was less burdensome than once believed, then they could justify the greater use of debt to fund government spending.

Professor Buchanan's great contribution (54 years ago) was to show that the New Orthodoxy was wrong. Government debt really does resemble private debt. Government debt really does shift the burden onto future generations. Also, the distinction between internal and external debt is largely false.

Krugman's debt theory fails for the same reason that his government-spending stimulus theory fails. He sees us in the aggregate, not as individuals. This is why he can claim that “every dollar's worth of foreign claims on America is matched by 89 cents' worth of U.S. claims on foreigners” as if it all just nets out. What he does not mention is that each of us is affected differently.

When someone buys a government bond, it is a voluntary market transaction. The buyer voluntarily gives up current resources for use by the government. There is no symmetry for taxpayers, especially those in future generations. For those who bear the burden of current and future taxation, the transaction is not voluntary.

It makes no sense to say that “we owe it to ourselves.” Even when Americans lend to the U.S. government, those who lend are not necessarily the same as those who bear the burden. Understood this way, Krugman would be correct to downplay the extent to which we are “in hock to the Chinese.” But he is wrong to downplay the extent to which we are in hock.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com
Twitter: @RichardJGrant1

Copyright © Richard J Grant 2012

Government stimulus myth continues to disappoint

2012-01-01T11:46:00.004-06:00

Published in The Tennessean, Sunday, January 1, 2012

by Richard J. Grant

Where there’s a front, there’s a back; and so it is with demand and supply. For over three years, we have been told repeatedly that our sluggish economic recovery is due to an insufficiency of demand. We were urged to get out and spend — to stimulate the economy, we were told.

First, the Bush administration sent us all $600 checks; then the Obama administration pushed a $700 billion “stimulus” package. When we got our $600 checks, in a time of recession, many of us thought it prudent to save as much cash as possible. In our eyes it was prudent, but not in the eyes of government planners. They wanted us to spend — spend on anything.

If we preferred to save and provide for the future, then the government would do an end run around us. The stimulus package did not give us a choice: the government would spend for us — or despite us.

In times of recession or economic uncertainty, it makes sense for individuals to reduce or delay spending. When we do so, we reduce our demand for the products of many businesses. This affects the plans of the owners and employees of these businesses. But clearly, the mere fact that we are facing recession implies that we must all change our plans to some extent. Our plans have already become incompatible, so we need to get back in tune with the realities around us.

This reality is hard if your business is stuck with unsold inventory. It might seem obvious to you that your problem is insufficient demand. You might even be tempted to support increased government spending in the hope that it might help stimulate sales of your products. That might help your business, or someone else’s, but it cannot help everyone at once.

Even if we could separate government stimulus spending from political favoritism, which we cannot, such spending would still not create something from nothing. The stimulus myth implies that government somehow knows better than each of us what is best for us. But this was not true in the 1930s, and it is not true now.

The “demand-side” argument fails from two perspectives. First, need is not currency. Needing or wanting something is not equivalent to making something. Demand, in the economic sense, implies having something to offer in return for that which you desire. Having something to offer is what we call “supply.” In economics, the word “demand” is not an imperative; it is an offer to trade.

Second, demand is not generic. It matters to each of us what we purchase, how much, and at what price. Government policymakers might imagine some magical “aggregate demand” that they can augment through spending programs. But if such programs make us better off, it is only by accident. Policymakers can never have the detailed knowledge necessary either to know what we need or to coordinate the production and trade needed to achieve it. They just get in our way.

The Obama administration likes to tell us that their actions saved us from “another Great Depression.” As luck would have it, they are not as bad as the Franklin D. Roosevelt administration. But they try: taking over industries, controlling prices, imposing mandates and spending money that we have not yet earned.

Here is what they should try this year: Get out of our way.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com --------- Twitter: @RichardJGrant1

Phased-in state tax cuts would boost capital

2011-12-18T12:43:00.003-06:00

Published in The Tennessean, Sunday, December 18, 2011

by Richard J. Grant

Economists call it the “shortsightedness effect.” Government decisions tend to be biased against actions with easily recognized current costs and less-obvious future benefits. Politicians prefer it to be the other way around. They prefer the benefits to show up before the next election — the costs later.

It also applies to tax policy and the timing of tax revenue. Such is the dilemma faced by the governor of Tennessee. Gov. Bill Haslam is worried about a legislative proposal to eliminate Tennessee’s estate tax and its Hall Income Tax on dividends and interest. The governor knows that both of these taxes hurt the state’s economic development. As he put it, they “chase capital away from the state.”

Enough capital is chased away by these taxes to have reduced Tennesseans’ income growth measurably. Recent research by economists Arthur Laf-fer and Wayne Winegarden compared Tennessee to other states with similar policy characteristics. In general, they found that states with the lowest personal and corporate income tax rates had the highest rates of employment and economic growth over the past decade. This high-growth effect was especially pronounced for right-to-work states.

But Tennessee tended to lag in economic performance when compared to other states in each of these categories. Laffer and Winegarden identified Tennessee’s estate tax and the tax on investment income as the main culprits.

So why is Haslam worried? The issue is timing. The governor knows that states without personal income taxes have more stable tax revenues. Also, the elimination of estate, gift and Hall taxes would result in higher economic growth and higher total revenues from sales taxes. These tax cuts would pay for themselves, but not instantly.

State tax revenues fell significantly during the recent economic downturn, and the recovery has been slower than expected. Although the estate and Hall income taxes combined contribute only 2.8 percent of the state’s total revenue, Tennessee has depended on federal transfers to maintain budget balance. When every dollar counts, the governor is right to worry about short-term revenue needs. He also needs to worry about excessive government spending.

Here’s the trade-off. The trouble with waiting for better times is that it delays the income growth that would result from the tax cuts. It also delays the growth in sales tax revenues that would more than make up for the tiny estate and Hall tax revenues. The sooner the cuts are legislated and brought into effect, the higher will be Tennesseans’ lifetime earnings and their spending power.

Proactive legislators should be able to construct a bill that incrementally reduces the tax rates and raises the exemptions. The phase-out of the taxes can be timed according to estimates of net revenue needs. The important thing is to get the legislation enacted so that everyone can make firmer plans and markets can adjust to the state’s improved investment environment.

For many reasons, Tennessee is a fine place to live. But for those who do well in business, and for those who build their investments, incentives change as they grow older. States with lower tax rates on dividends and interest attract more investors. States with neither gift nor estate taxes are more family-friendly. Fewer family farms and businesses are sold to pay taxes.

Shortsightedness is expensive. The legislature can give the governor the tax cuts he needs when he needs them, which is now.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Progressivism is not progress

2011-12-11T12:40:00.003-06:00

A shortened version was published in The Tennessean, Sunday, December 11, 2011

by Richard J. Grant

“What does not kill him makes him stronger,” wrote Friedrich Nietzsche. This oft-quoted phrase, usually out of context, is misunderstood almost as often – for it is not necessarily true. That which does not kill him leaves him stronger than he would be if he were dead.

Thus history is presented to us as a string of non sequiturs dressed up as a necessary unfolding of events. We look back fondly at our leaders of the past assuming that, if we survived the crisis of that time, whatever our leaders did must have been wise.

We know better, but are sometimes susceptible to rhetoric that reaches into the haze of history to retrieve moral authority from precedent. So it was that President Barack Obama arrived in Kansas last week in search of reflected glory, invoking the memory of a speech by Theodore Roosevelt a century ago.

That President Roosevelt served as a Republican is useful as a rhetorical wedge to drive into the philosophical cracks of present-day Republicanism. Roosevelt did not invent the regulatory state, nor was he the first with a predilection to impose his conception of the good on other people at home and abroad. But Roosevelt was the first president to launch a conscious attack against private property and free markets.

Historian Daniel Boorstin saw Americans’ lack of interest in political philosophy as giving us an advantage over Europe. We were less likely to be led astray by rousing ideologies. But the progressive movement that captured the mind of Theodore Roosevelt was often recognized, indeed praised, as an import of German socialism. German influence on the American college system in the late 1800s is well-known. Philosophical imports were part of the package.

In his 1910 speech, Roosevelt showed a greater philosophical confidence than he had during his two presidential terms. Laying out what he called a “New Nationalism,” he claimed that “We are face-to-face with new conceptions of the relations of property to human welfare.”

Anticipating Obama, he invoked the false opposition of “the rights of property as against the rights of men,” and then claimed that supporters of property rights had pushed their claims “too far.” He showed Obama how to create a strawman, the man “who holds that every human right is secondary to his profit,” and then oppose it with a similarly deceptive construct, “the advocate of human welfare,” who maintains that every man holds his property “subject to the general right of the community to regulate its use to whatever degree the public welfare may require it.”

But who is to decide what constitutes the “public welfare”? That is always the question left open by the authoritarian mind. Roosevelt continued, again anticipating Obama, “Let us admit also the right to regulate the terms and conditions of labor,” in essence claiming to government the right to control all human relations.

Roosevelt's Progressive Party failed, but the philosophical damage was widespread. By the time that government policies had precipitated the economic crisis of 1929, American voters were unequipped to choose wisely. The era of big government had begun: two steps forward, one step back. Now we have a president who is trying to leap forward.

Roosevelt's progressivism did not kill us, nor did it make us stronger. The Obama presidency could make us stronger; but only if we have now learned our lesson.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Estate, gift taxes are a drag on economy

2011-12-04T07:04:00.002-06:00

Published in The Tennessean, Sunday, December 4, 2011

by Richard J. Grant

Some taxes are just not worth the trouble. There are many ways in which a tax can end up costing us more than the revenue it generates. This is especially true when the tax rates are high and the tax base is narrow enough that people can shift to other activities that are less heavily taxed. Resources shift into second-best uses.

Taxes reduce the ability of individuals to accumulate capital. Although some government spending is devoted to long-term capital projects, such as roads and bridges, most of it is shifted into consumption. As social programs become a larger proportion of governmental spending, governments increasingly inhibit our ability to maintain and create capital. With less capital, our future incomes will unfortunately be lower than they would have been.

While this implies a lower future standard of living for individuals, it also implies a lower capacity for the future provision of government services. With less capital and lower incomes than we might otherwise have had, the tax base is lower. Future tax revenues cannot be as high as they would have been.

Perhaps the purpose of the tax is not to raise revenue but to discourage the activity that is being taxed. To discourage officially undesirable activities such as smoking and certain types of industrial pollution, we can estimate the amount of taxation needed to reduce these activities to acceptable levels. We know that when we tax something we tend to get less of it.

This is why a particular tax usually generates less revenue than its governmental sponsors had hoped to receive. People really do work less when they no longer believe that their next dollar of after-tax income is worth the effort. People really do shift their capital away from highly taxed investments. People also move themselves to other countries or states, albeit reluctantly, when the tax savings make it worthwhile.

Such mobility is most feasible for people with higher levels of wealth or income. This is what makes the estate tax one of those not worth the trouble.

Arthur Laffer and Wayne Winegarden of Laffer Associates have recently concluded a study on “The Economic Consequences of Tennessee's Gift and Estate Tax.” Tennessee is one of only 19 states with a separate estate tax and one of only two states with a gift tax. Tennessee has the single lowest exemptions for both its estate tax and its gift tax, which makes them more burdensome.

Gift and estate taxes contribute less than one percent of Tennessee's total tax revenues. They also make Tennessee less attractive to high net-worth people, many of whom would be inclined to invest and build businesses locally. Pennies gained, dollars lost.

Laffer and Winegarden estimate that had Tennessee eliminated its gift and estate taxes 10 years ago, Tennessee's economy would have been over 14 percent larger in 2010 and there would have been more than 200,000 additional jobs in the state. Also, the greater prosperity would have brought state and local governments more than $7 billion in extra tax revenues.

Although Tennessee is a right-to-work state with no income tax (except on interest and dividends), low corporate taxes and a low overall tax burden, its economy has significantly underperformed other states that can boast the same advantages. The difference seems to be Tennessee's gift and estate taxes.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Recent financial crises and economic stagnation are symptoms of constitutional failure

2011-11-27T07:21:00.002-06:00

Published in The Tennessean, Sunday, November 27, 2011

by Richard J. Grant

The progressives among us often insist that we need stronger laws and greater regulation. But they don't really mean it – at least not in any consistent sense. While happy to load us up with regulations at all levels of government, they do so only by either ignoring or defining away any limitations on government at the constitutional level.

If we are now dogged by a flourishing pack of sharp-toothed regulators, it is because the constitutional leash intended to limit the range of politicians’ powers has been loosened from its anchor. The U.S. Constitution was intended as a conservative document that would give the national government a few defined powers and no more. Government was constitutionally limited to protect citizens from the whim of the aspiring oligarch and the appetites of the mob.

The Orwellian phrase, “living constitution,” really describes a constitution that is moribund. Any constitution that is dislodged from its roots and ceases to be an effective anchor on the actions of the government that it once defined will also cease to be worthy of the name “constitution.” If its words can be interpreted to mean whatever our political leaders choose them to mean, then it would be at most a set of rules through which we choose our de facto rulers.

The recent financial failures and economic stagnation, as well as the cynically polarized political environment and increased systemic economic risks, are all symptoms of the process of constitutional failure. They are symptoms of unfettered government and politically empowered greed. Each of us is ever more at the mercy of the vagaries of the political market.

It is a sign of intellectual confusion when people use military terminology to describe business. Such terms as “captains of industry” or “robber barons” or “market power” all imply some coercive command over competitors, employees, and customers. But the defining feature of business is the voluntary exchange of property rights. Power, in the coercive sense, has nothing to do with it except when necessary to defend legitimate property rights.

A constitution that protects property rights from confiscation or arbitrary diminution is a constitution that protects a free people. A person's property is a product of that person's life; and a government that fails to protect that property from predation fails to protect the fullness of that life. This remains true whether people control their property as individuals or in voluntary associations such as cooperatives or corporations.

Such cooperation under well-constructed constitutional rules enables people to improve their property and their lives. This explains the exceptional history and economic development of the United States. Perhaps the exceptional moral leadership that arose in the 18th century was an accident of history, but its constitutional product served to shape the moral destiny of its citizens and to make them better able to withstand future historical accidents.

The progressive breakdown of this morality is manifested in an anti-constitutional mentality. It is now confusing when the President of the United States preaches to the Chinese about “following the rules of trade” as well as the need to “respect intellectual property rights” and have a sound currency. The Chinese need to hear it, but not from a president who is uninhibited in his ambition arbitrarily to redistribute the property of his own citizens, to force them to purchase prescribed products, and to regulate how they live.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

For supercommittee, cuts are all in the details

2011-11-20T06:11:00.002-06:00

Published in The Tennessean, Sunday, November 20, 2011

by Richard J. Grant

During the past week, the total debt of the U.S. government surpassed $15 trillion. This brings the total debt up to about 99 percent of the annual production of the U.S. economy. Given that the debt has been growing more than four times faster than the economy, it should cross the 100 percent barrier by the end of the year.

Meanwhile, in Washington, the congressional “supercommittee” is supposedly working on proposals to reduce, if not eliminate, the annual budget deficit. We know for sure that they have no intention of eliminating the deficit. Their assigned task is to reduce the deficit by $1.2 trillion over the next 10 years.

This leaves two big questions: What is the benchmark from which the cuts will be made, and why will it take 10 years to reduce the deficit by an amount that is less than the last annual deficit?

As for the benchmark, the usual trick is to use projected spending, rather than actual current spending, as the starting point for cuts. Given that projected spending will always be set higher than current spending, it is possible to “cut” projected spending and then ignore the fact that actual future spending will still be higher. Rumors have it that the supercommittee will treat the reductions of planned future war spending as if they are real cuts.

A 10-year time frame allows politicians to spread any big-sounding cuts, real or otherwise, across the years such that the cut in any one year is minuscule. Ten years is also longer than any election cycle, putting any real results safely beyond the next election. The next Congress must deal with the mess left by the previous one, but it is not bound by its predecessor’s decisions. It can then proceed to shift its mess onto the next Congress, and so on.

This cycle will continue until a sufficiently high portion of voters comes to understand that higher government spending guarantees a higher total tax burden. Those who are most likely to believe that someone else is bearing that burden are those who are least likely to have the aptitude to understand that the burden really is being shifted onto them. They are the ones who don’t understand why their salary is so low or why their job has been outsourced or eliminated.

Half of the supercommittee is determined to raise taxes. They like to call this “revenue enhancement” in the hopes that you won’t understand that they really mean to raise your tax burden in order to buy your vote with your own money. But they can’t even be sure that raising tax rates on you or your neighbor will really bring in more tax revenue, at least not in the long run.

Whatever they say, they must know that higher tax rates reduce long-term economic growth even when we’re not in a recession. If your politicians were serious about increasing tax revenue in order to reduce the deficit, then they would look more seriously at reducing the regulatory burden that is crushing the tax base. That is, the regulatory burden that is hindering business and your ability to make a living.

As we let government spend more of our money for us and to tell us what to do with the rest, the more trouble we will have paying our bills.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Even China seems to have learned welfare state flaws

2011-11-13T16:21:00.001-06:00

Published in The Tennessean, Sunday, November 13, 2011

by Richard J. Grant

Of those people that I have met who express an aversion to the welfare state, those who express the strongest feelings are often those who grew up in the system but worked their way out and escaped. They recognize the perverse incentives that separate sustenance from any thought of production.

Charity without thought is unlikely to edify the recipient; and this describes the destination, if not the beginnings, of governmental welfare systems. When charity is transformed into entitlement, any moral obligation to lift oneself up is no longer enforceable by those who pay. To call such payments “a gift” is to insult both parties to the transaction. Society has lost something.

There are those who, like Blanche DuBois, are content to depend on “the kindness of strangers.” But someone must do the world’s work, and societies that understand this are those that survive and prosper. Welfare states throughout history have tended to waste away both morally and materially.

Weakness has always reduced one’s options in the community of nations. When a government runs out of its own citizens’ money, it must either economize on its own profligacy or become dependent on the finances of strangers.

Given our record-high budget deficits and accumulated national debt, the attitude with which the U.S. treasury secretary recently visited Beijing was no doubt very different from that of his predecessor 10 years ago. We can only imagine the thoughts of the Greek finance minister during visits to Brussels.

As the European Union begins to wither from the south up, its various finance ministers look longingly outward for “investment.” But societies that increasingly specialize in consumption are not what investors are looking for.

One such investor has shared his thoughts in an interview with Al-Jazeera news. Jin Liqun, the chairman of China Investment Corp., China’s sovereign wealth fund, makes it clear that his assigned task is to manage a profitable business. In other words, he must be a good steward of the resources that have been entrusted to his care.

If European leaders were listening, perhaps they could take it as a lesson in sustainability. Said Jin, “I think what is most important is to have an appropriate incentive system. We should not follow some of the bad examples as these kinds of so-called welfare societies in which hard working is not encouraged. Now if people who do not work make as much as those who work hard, of course this is an invitation to indolence. This is not what we want to see.”

This is not his father’s communism. Europe’s troubles are “the accumulated troubles of the worn-out welfare society.” Jin adds, “I think the labor laws are outdated. The labor laws induce sloth (and) indolence, rather than hard working. The incentive system is totally out of whack.”

A society that is built around featherbedding and early retirement is not a society that is built to last. It is a society disinclined to provide for itself; and it is a society not yet ready to accept the moral obligations of a recipient of charity.

Mr. Jin is well aware that China has its own troubles. He is not preaching; he is speaking as a steward of property. Whether his motive is profit or pure charity, he has the right to expect the best from those with whom he deals. We do, too.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Feds lead public back toward mortgage trauma

2011-11-06T15:28:00.002-06:00

Published in The Tennessean, Sunday, November 6, 2011

by Richard J. Grant

At a young age I was taught that, were a fire to break out in the stables, I should first cover a horse's eyes with a blanket before leading it to safety. A horse, like other animals and humans, will in a time of trauma have an urge to flee to the familiar, to the formerly safe.

Such human behavior is evident at the time of economic crises. There is a tendency to run to the apparent safety of the very institutions that caused the crisis, some of which continue to burn.

It should be no surprise that Freddie Mac (Federal Home Loan Mortgage Corporation) is asking taxpayers for another $6 billion in bailout money to cover its losses in the July-September quarter. Since the beginning of the 2008 financial crisis, Freddie Mac and its older sister Fanny Mae have burned through at least $169 billion of bailout money. It is estimated that they will come begging for at least another $51 billion in the next three years.

Both of these institutions are creations of government. Freddie Mac was created in 1970 to provide “competition” to the recently, and ostensibly, privatized Fannie Mae. Neither of these companies has ever been truly private. Nor could they be when their core product derives from their power to grant mortgage guarantees backed by the federal government.

Any attempt to insure the uninsurable will, especially when the force of government is brought to bear, lead to loss and corruption in the supposedly insured market. Those who blame the mortgage crisis on “Wall Street greed” are naïve. Greed has always been with us and is benign when the law protects property rights and allows free competition. It was government guarantees and government regulations that encouraged risky behavior and removed the natural checks on greed.

The belief that government can somehow decree an end to scarcity and the risks of life is a symptom of what the late Nobel laureate Friedrich Hayek called the “fatal conceit.” At the heart of this conceit is the belief that some central planner, some governmental institution, could possibly have the knowledge necessary to coordinate all the actions required to achieve their desires.

This is the error of the socialists and all those who assume that government officials have the knowledge necessary to regulate the actions and interactions of individuals in a community. The aspiring central planners seem not to understand that knowledge is dispersed throughout the community and does not exist independently, but is created through the actions of those individuals over whom they presume to rule.

Those who suffer from the fatal conceit are incapable of understanding the damage caused by interventions such as the Community Reinvestment Act. They do not understand that no outside observer, let alone a government official, has the knowledge necessary to direct the lending activity of a private financial institution. Accusations of “discrimination” against banks presume the possession of knowledge that the accusers cannot possibly have.

Eric Holder's Department of Justice, as if to double down on this conceit, has created a “fair lending” unit to toughen enforcement of the laws that pushed banks to increase their subprime lending in the run-up to the previous mortgage meltdown. It is a gift to that subset of voters who are still naïve enough to believe that there must be a horse in there somewhere.

Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Choice, not federal gifts, boosts school outcomes

2011-10-30T16:16:00.003-05:00

Published in The Tennessean, Sunday, October 30, 2011

by Richard J. Grant

The Obama administration recently nationalized the college loan industry. Then this week the president announced an income-based cap on the repayment rates of student loans. After 20 years, any unpaid portion of the loan would be forgiven, that is, paid by taxpayers.

The net effect of this policy will be to encourage disproportionately those students who are least likely to benefit either themselves or taxpayers in the pursuit of higher education. The most heavily subsidized students will be those who enter the lowest value-adding professions.

In the world of educational subsidies, higher education has always offered the lowest returns to taxpayers. This effect is merely exacerbated by the involvement of the federal government. But none of this matters to those who know that the real name of the game is No Vote Left Behind.

In contrast, some state governments have been moving their educational policies toward greater efficiency and better outcomes. After more than a century of increasing state involvement in schooling, they are acting to benefit from decentralized decision-making and the freedom to choose in education. That century of experience has demonstrated that governments are not particularly good at education. They are not even good at picking winners in vocational training.

Perhaps the kindest explanation for why governments got involved in schooling was to ensure that all children, regardless of family circumstances, were introduced to reading, writing, and arithmetic. This could easily be organized at the local level. But as the curricula grew more ambitious, and providers saw gain in political organization, the spending power of state governments was recruited.

The trend toward school choice for government-funded students reflects the recognition that governments have a knack for raising funds but a poor record in running schools. When states such as Indiana, Wisconsin, Ohio, and Florida introduced school voucher programs, they empowered families to find and select their own educational opportunities. The state got out of the way except to ensure adequate funding and the prudent use of those funds.

In Tennessee, State Senator Brian Kelsey is sponsoring a bill called the “Equal Opportunity Scholarship Act,” which would give low-income families the power to send their children to the schools of their choice. Students in the four most populous counties would have available to them vouchers amounting to half of what the state and local school systems would have spent on them. In essence, these are scholarships that can be spent at any approved private or government-run school.

The effect, when tried elsewhere, has been improved student performance. When families are free to choose, and schools are free to compete, the schools have an incentive to be better and the families get to choose what works best for them. To attract and better serve their students, the schools will necessarily direct their resources to those uses that best serve their needs.

School choice depoliticizes the school environment and reduces the need for cumbersome administrative structures and bureaucratic assessment systems. It would also reduce the need for state and local governments to be involved in the expensive construction and management of school grounds and buildings. And it works better when more students are eligible.

Ironically, the acceptance of freedom in education will require education. Special-interest groups, such as teachers unions, will argue against any change that allows families alternatives to unionized schools. Families have something to teach the teachers.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

'9-9-9' would shine light on true tax burden

2011-10-23T14:33:00.003-05:00

Published in The Tennessean, Sunday, October 23, 2011

by Richard J. Grant

Decades ago, while riding an overnight train through Italy, a fellow passenger offered a warning. He had heard that organized criminals would wait until passengers fell asleep and then spray anesthetic into the compartment to deepen that sleep. With the passengers now safely oblivious, the thieves could help themselves to unguarded valuables.

Although almost certainly untrue, this story does serve as a neat allegory for the real-life relationship between taxpayers and tax legislators. It is much easier to get voters’ support for a tax-rate increase when taxpayers are unaware of their true position in the political food chain.

We know that, all else equal, income earners and property owners are happier the more of their income and property that they are allowed to keep. The higher the tax rate on each additional dollar earned, the less likely it is that a worker will put in the extra effort to earn one more dollar. Other activities become relatively more attractive. These might include leisure or the pursuit of some other less-taxed income opportunity.

When taxpayers perceive their own tax rates to be rising, they are likely to offer resistance in their role as voters. But if they believe that someone else is paying those taxes, they are more likely to be neutral or even supportive – especially if those perceived to be bearing the burden are seen as rich or undeserving.

Few people are aware of the difference between the “incidence” and the “burden” of a tax. Although one person is seen to be paying the tax to the government, this does not mean that no one else bears the burden.

Even children are affected. When I was a young teen, an old man once remarked that I did not pay taxes. When I insisted that I did, he laughed. That was until I pointed out that, if my parents did not pay such high taxes, my life would undoubtedly be different.

Many people believe that their Social Security payouts are half free because their employer pays half the tax. They are unaware that the portion of the tax paid by the employer adds to the cost of hiring that employee. This draws away resources that could be used to bid against other employers for the services of that worker. The employer would be just as happy to give the money to the employee as it would be to give it to the government. The employee might, if aware of the trade-off, have a stronger bias in the matter.

Government programs are easier to sell to voters when the full costs are hidden from view. It is well known that the bottom 40 percent of income earners pay no federal income tax. But they would be fools to believe that they bear no burden from the taxes paid by others. The tax disincentives facing investors and the resources taxed away from employers render employees less productive and therefore less valuable. The tax burden is borne as lower wages or, for some, as unemployment.

One of the criticisms of presidential candidate Herman Cain's 9-9-9 tax plan is that it would create a federal sales tax that might later be increased by Congress. But the plan eliminates an array of currently hidden taxes and replaces them with simple taxes that voters can see. Congress would have to operate without anesthetic.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

U.S. economic freedom falls, China rises

2011-10-16T13:55:00.004-05:00

Published in The Tennessean, Sunday, October 16, 2011

by Richard J. Grant

Since June 2010, the Chinese currency has risen in value by about 7 percent compared to the U.S. dollar. This has not stopped accusations of “currency manipulation” from the U.S. and elsewhere. Such accusations are politically useful since not one person in a hundred understands what the charge means and it vaguely sounds as though the accuser has the best interests of U.S. workers at heart.

The U.S. Senate has just passed a bill that would require the U.S. to impose tariffs on goods imported from selected countries in order to punish currency manipulators and to counteract perceived underpricing. House Speaker John Boehner has already indicated that the bill will not proceed in the House. He sees punitive tariffs as harmful to trade relations. But few dispute the charges of currency manipulation.

This is interesting because, of all the problems that Chinese actions might present us with, currency manipulation is the least of them. Of far greater importance, and a prerequisite for civil relations between individuals and nations, is respect for individual property rights. Governments that never come to terms with such basics will always present a threat to their citizens and to international peace.

China is not a free country and, although it is opening up, its people have paid a high price for past repression. According to the Economic Freedom of the World: 2011 Annual Report recently published by the Fraser Institute and the Cato Institute, China now ranks 92nd out of 141 countries studied in terms of economic freedom.

To the extent that economic freedom is a predictor of economic progress, then China has a long way to go in relative terms. But in absolute terms, its score on the freedom index has improved greatly over the past 30 years. This freeing up of economic relations explains the tremendous increase in China's productivity and standard of living.

Any neighborhood is made better by the presence of neighbors who are self-supporting and respectful toward other people and their property. It is in the interests of the Chinese people themselves to become such neighbors. To the extent that they retain state ownership of their enterprises they hurt themselves more than they hurt us. When they subsidize their industries, they hurt their own potential domestic production more than they hurt ours.

Most people can't figure this out for themselves; they must be shown. But what kind of example is it to the world, and to ourselves, if we reject our own economic freedom? Over the past 15 years, the United States has fallen to 10th place on the Economic Freedom of the World index; and in absolute terms, we have shown one of the most significant decreases in economic freedom.

After many years of single-digit growth, since 2008 the U.S. Federal Reserve has tripled the quantity of base money. It has also pushed its target interest rates down to record lows. Does this qualify as currency manipulation? Is not currency manipulation the purpose of all central banks that manage a fiat currency?

After its 20-percent inflation in 1994, China adopted our monetary policy by periodically fixing its currency to ours. But as we expanded our money supply, China had to do the same and suffer price inflation. To avoid this inflation, it was in China's own interest to allow its currency to rise relative to the dollar.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Wal-Mart can't join, tries to beat banks

2011-10-09T07:15:00.002-05:00

Published in The Tennessean, Sunday, October 9, 2011

by Richard J. Grant

There’s an old joke about a senator who, when told that his idea won’t work because of “the law of supply and demand,” retorted, “Then we’ll just repeal that law!” As if to remind us that truth is stranger than fiction, Sen. Dick Durbin, D-Ill., was recently shocked to learn that it really was just a joke.

It was Durbin who inserted the amendment into the 2010 Dodd-Frank financial-regulation law that capped the transaction fees that debit-card issuers could charge retailers. He and his colleagues apparently believe that the forced reduction of prices is the same thing as the reduction of costs. He thought he could get something for nothing.

To recoup revenues lost from debit-card interchange fees, many banks have announced increased monthly fees on debit-card accounts. Real costs didn’t shrink. What changed was the pricing structure through which we bear those costs.

The debit-card interchange fees were invisible to consumers, but the new account fees are not. Just as politicians prefer that you not see the taxes that they impose, Sen. Durbin was doubly outraged that the new fees have been dubbed the “Durbin fee.”

When Bank of America announced a $5 per month fee, Durbin lashed out from the Senate floor and urged a boycott.

But while he and his Democratic colleagues cannot be absolved from responsibility for the law, we can still ask what motivated them.

Columnist Timothy Carney asserted that “the real culprit is Wal-Mart and the retail lobby, which used government to squeeze banks and fatten their own bottom line.”

But why stop there? What motivated Wal-Mart? During the past decade, Wal-Mart has tried to reduce its costs by directly offering credit services to its customers.

It has applied at least three times for an industrial loan charter, but each time has been met with intense opposition and lobbying activity from banks and so-called consumer groups.

The banks are rightly terrified by the prospect of competition from a company with the retail expertise and customer base of Wal-Mart. But reliance on government regulation to thwart competition is to take the road to serfdom; and what goes around comes around.

When market relations become fused with politics, then, with apologies to Clausewitz, politics becomes market competition by other means. Legal obstacles limit our choices and channel us into second-best survival strategies. Resources are diverted from the core business into defensive lobbying.

That is how it began for Microsoft, which, until the mid-1990s, tended to stay out of politics. While Microsoft was focused on serving customers, jealous competitors joined with the U.S. Justice Department in attempts to break up Microsoft. Once “blooded” with its first “hunt,” Microsoft learned to lobby with the best, and the worst, of them.

Wal-Mart’s ventures into politics might have begun the same way. But what kind of worldview would encourage Wal-Mart’s endorsement of the “employer mandate” in the recent health-care reform law?

The mandate would increase Wal-Mart’s employee health-care costs, but its competitors would be forced to pay even higher costs per employee. That’s competition by other means.

With determination and a clear assessment of the legal terrain, Wal-Mart can reduce costs by integrating banking functions into its operations.

Although itself “blooded,” it might be Wal-Mart that shows us that banking is not as different from other types of business as once believed.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Individual choice, not government, fuels prosperity

2011-10-02T12:15:00.007-05:00

Published in The Tennessean, Sunday, October 2, 2011

Richard J. Grant

In the 2003 movie, Master and Commander, a British warship during the Napoleonic Wars is rounding Cape Horn when a severe storm rises. The mizzen-mast breaks and falls into the sea with a square sail and parts of the mast, still held by several lines, dragging behind the ship.

A popular midshipman has also been swept overboard, and his only hope is to swim to the trailing rigging. But the wreckage is acting as an anchor that threatens to sink the ship. The storm won’t wait for the unfortunate midshipman; the commander must choose between losing one man or the possibility of losing everyone.

Suppose that the commander had waited in hope for the man overboard to swim to the rigging, and in the waiting lost the ship. Other than the loss of a military asset, lost also would be the men and their future descendants, as well as all the experience and survival lessons that might have been passed on to the benefit of future colleagues and generations. By that small increment, progress would be slowed, and more losses would be suffered in the relearning.

Such stark examples are not uncommon in life, but most parallels are obscured by complexity. We dream of “no child left behind,” and in so dreaming become a drag on the entire government education system. Rather than quickening the stragglers, we are turning the schools into slow heats that fail to challenge those who are truly educable. By not-so-small increments, each generation starts from behind what might have been passed on by those who went before.

We dream of universal health coverage, and in so dreaming restrict and retard progress in the entire health-care process. So afraid are we that someone might not get the best available care or insurance coverage, we force everyone into the same regulatory egg crate.

But professional licensing and regulation are rarely harbingers of innovation. We have less healing capacity now to the extent that previous generations allowed government officials to decide for them what the future of medical care should be.

In each of these examples, the political battles that arise are less often over the desired ends than over the means of achieving them. Only party hacks would make political campaign commercials in which Grandma gets pushed over a cliff. The rest of us want what’s best for Grandma and for everyone else. But a desire to have everything for everyone now puts future grandmas at risk.

Present-day grandmas have been put at risk not only by the politically motivated programs of the past but also by the continued weakening of those best able to provide services needed by everyone. At any age, those who are unable to take care of themselves are better off in societies where those around them have the capacity to give care. And the surest way to retard the development of that capacity is to have government force everyone into the same kind of program.

If we truly wish to provide the poor and the helpless with better services — medical, educational, housing or financial — then we need to allow greater individual choice, not less. It is precisely that freedom that allows good people to build a better and more prosperous society. But when government programs crowd out or absorb private initiatives, they risk dragging down the entire ship.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays. E-mail: rjg@richardjgrant.com . Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Protecting postal service while harassing Google is twisted

2011-09-25T16:23:00.005-05:00

Published in The Tennessean, Sunday, September 25, 2011

by Richard J. Grant

While financial markets focus on the latest version of “Operation Twist” in which the Federal Reserve attempts to “twist” the yield curve by reducing long-term interest rates relative to short-term rates, there is another kind of twist going on between businesses that are owned or favored by the government and those that are private. One group is subsidized or protected while the other is taxed or harassed.

The U.S. Postal Service is in serious financial trouble. Like any spoiled child of government, it just can't get the hang of acting like a real business. Despite its privileged position, it faces the prospect of cutting service and very likely defaulting on obligations promised to employees.

Article I of the Constitution gives Congress the power “To establish Post Offices and post Roads;” but it does not give it the obligation to do so. Also, there does not appear to be any command in the Constitution that requires Congress to ban private businesses from delivering first-class mail. But Congress has done just that, thereby giving the U.S. Postal Service a monopoly.

Perhaps Congress should think about this, especially in the wake of Senate hearings held to interrogate Google chairman Eric Schmidt over allegations of anticompetitive behavior. While none of us can remember a time when there was no U.S. Postal Service, most of us had never heard of Google a dozen years ago. Another dozen years from now, neither of these businesses is likely to be operating in the same way if at all.

Whenever a company offers its services with a high-enough quality and a low-enough price to attract the majority of customers in a particular market segment, there is a temptation for politicians and even competitors to hurl charges of monopoly. If “monopoly” means merely “single seller,” then historians would be hard pressed to find any example of a private monopoly that is not protected by government. Certainly Google has a “monopoly” in the use of its name and any technology that it has patented or is able to keep secret. But the same can be said about its competitors in the past, the present, and the future.

The first company to introduce an internet search engine could be said to have had a monopoly at that moment, but it sure didn't last very long. And where is that company now? The freedom to bring your ideas to market means that all existing companies must strive unceasingly to serve their customers better or risk losing them to you. “Lock-in” is never guaranteed when innovators are free to compete.

Ironically, Google offers services that compete with those of the Post Office. But there is a moral dissonance in the different ways that Congress treats the two companies. The Post Office is protected by statute from direct competition to its core product. Until this is changed we will never know how a private entrepreneur might have served this market. Meanwhile, Google faces this threat of competition every day; and a group of senators seem to believe that the company's chairman has nothing more productive to do than to ward off their attempts to look tough on monopoly.

Instead of looking tough and perpetuating the anti-monopoly charade, congressmen would better serve us by focusing on the refinement of laws that actually protect us from theft, force, and fraud – and from twisting.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Good economists warned Obama against stimulus

2011-09-18T13:20:00.002-05:00

Published in The Tennessean, Sunday, September 18, 2011

by Richard J. Grant

When you wake up on the road to Hell, it matters which way you choose to walk. The Obama administration never ceases to remind us that it was their predecessor that dropped us off on that road. But at some point, the not-so-new president needs to take notice of which way he is leading us.

Whatever starting point we might have wished for, as my old professor James Buchanan would say, “We start from here,” and not from someplace else. Call it our “inheritance.” But that's where we started, so get over it.

If everything had been wonderful in the year 2008, then candidate Obama probably would not have stood a chance of becoming president. As it turned out, many years of copious and perverse regulation, unnecessary and excessive government spending, and an unnatural interest-rate policy all began to unwind in a perfect financial storm.

Now, after two and a half years in power, the Obama administration is feeling the political heat. If we are all now sweating, it is not because of CO2 levels but because of the administration's policy direction. They have doubled down on the worst of the Bush administration's policies.

Good economists warned them that “stimulus” programs, whether through high government spending or low interest rates, would fail. Everyone else had to see it before they could believe it. Even now there are apologists who insist that there wasn't enough government spending and that not enough money was created.

Good economists warned them that the subsidization of “green jobs” would be no more productive than any other attempt by government to pick winners. Not only did this over-investment in green dreams drain resources from other more-promising uses, it rendered many “green” projects unsustainable. Easy government money always attracts politically connected hucksters, so we should not be surprised when subsidized industries become corrupted and when taxpayers must pick up the tab for bankruptcies.

Good economists warned them that the subsidization of home ownership and the intimidation of banks into granting mortgages to those with a weak ability to handle debt would result in more foreclosures and losses. But rather than learn from the poor example of the previous two administrations, the Obama administration is once again forcing banks into subprime mortgage lending.

Good economists warned them that declaring medical care to be a “right” and increasing government control over healthcare provision would neither improve service nor reduce costs. Heavy-handed regulation of medical insurance would destroy the risk-reducing character of that industry and ultimately shift more of the risk burden onto taxpayers. But shifting risks and costs onto taxpayers can barely hide the fact that it raises the burden of both.

The Obama administration is either short on good economists or short on its ability to listen to them. What it seems not to be short on is psychologists. But psychology is just not a substitute for good economics.

Calling something a “stimulus” does not make it a healthy economic policy. Calling something “green” does not make it good for the environment or a wise use of resources. Calling something a “right” does not create the resources necessary to satisfy it, nor does it justify confiscating those resources from their legitimate owners.

Perhaps the psychologists could explain to the administration that good intentions are not a substitute for good results – or for road pavement.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Our choice to be strong

2011-09-11T12:09:00.002-05:00

Published in The Tennessean, Sunday, September 11, 2011

by Richard J. Grant

Ten years ago today, I happened to be living in the Middle East. It was early evening, the end of the workday, when I arrived home to see the television on with the image of one of the twin towers burning.

When the second plane hit, we knew that a bigger story was unfolding. The more we learned, the more we had to question the reality of our surroundings. But it was to our surroundings and the events in them that each of us had to react. In some places more than others, we could be reminded of Robert Browning's words, “For sudden the worst turns the best to the brave.”

Watching from 6900 miles away gave an odd sense of safety despite being closer to what might well have been the source of the problem. What soon became apparent, in a land where appearances are always deceiving, was the difference in deeper sentiment. But strength is always respected, especially when applied wisely.

Many shared the thought that we cannot let “them” stop us from carrying on with life. For that evening I had planned to get a haircut, and despite several hours of unplanned television, I still had time to do so. A routine, tedious task had suddenly taken on the aura of defiance. But when I realized that I was sitting in a chair with my Muslim barber standing behind me holding a long blade, it took on the aura of an IQ test.

I already knew about “known unknowns.” Profiling works both ways. Personal relationships give mercy an edge over justice; and slicing customers is bad for business. It is also frowned upon by the local rulers who provide effective incentives to refrain. Even for most sympathizers, martyrdom is no more than a spectator event.

The barber watched me curiously as I met a colleague outside the shop; he seemed puzzled by my hand gestures as I described to my colleague my theory of how the towers collapsed. My colleague and I now had reason to forget that it was also one year since one of our colleagues had been murdered.

Our lost colleague and friend had been in Vietnam in the early days. He described the uncertainty of what he was up against in those days when he worked on the insertion and extraction of special-operations troops. Though he spoke of carrying out injured colleagues and of patching up the helicopters, his only malady was hearing loss from the heavy use of the 50-caliber tools of his trade. Perhaps that is why he did not hear his attacker approaching decades later.

In happier times when asked if he had any desire to go back to Vietnam, he replied, “I didn't leave anything there that I need.”

Another close friend, who had recently headed home by sea, was in the Atlantic on September 11. He did not get caught in the disruptions of air travel, but his ship was compelled to land in Boston rather than New York. A few weeks later, he was back in uniform ready for his fourth war.

Enemies limit our choices. But they can never stop us from choosing wisely. First and always, we must choose to be strong.

When we leave the Middle East and Central Asia, we will see that we didn't leave anything there that we need.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Justice Department a flop on business competition

2011-09-04T12:42:00.004-05:00

Published in The Tennessean, Sunday, September 4, 2011

by Richard J. Grant

It is often said that “a little bit of knowledge is dangerous.” An excellent illustrator of that statement is the U.S. Department of Justice, particularly its Antitrust Division.

Last week, the Department of Justice filed a civil antitrust lawsuit to block the acquisition of T-Mobile USA by the much larger AT&T. According to its own press release, the department said that “the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers who rely on mobile wireless services in their everyday lives.”

In this, the Department of Justice (DOJ) claims for itself not only the knowledge of good and evil but also the knowledge to manage entire industries, if not the entire economy. Were we so rude as to ask where it gets that knowledge, we would be disappointed to learn that it gets it from textbooks that suggest that competition can be measured by the number of “competitors” currently active in a market.

Thus we get the judicial equivalent of painting by numbers. The Antitrust Division has a long history of counting heads within an industry, and if it deems that number to be insufficient, it either breaks up one of the largest companies or, in this case, prevents a merger.

T-Mobile is losing customers and might not survive unless it can add such capabilities as those that AT&T could bring to it. It has been operating for little more than 10 years, which makes it quite old for an industry that is supposedly rather dynamic.

To the Antitrust Division, one less company means less competition. Despite reminders that true competition comes not from total numbers but from the freedom of entry and exit by potential new competitors, the DOJ actively ensures that government remains the biggest entry barrier, and the biggest wet blanket, to innovators in business.

The Antitrust Division is a throwback from the Progressive Era, a period that turned Washington, DC into a sort of Jurassic Park that clones and protects the institutional dinosaurs that continue to stalk us. Central planners are supposed to be extinct, but these wannabe gatekeepers have decided that “AT&T had not demonstrated that the proposed transaction promised any efficiencies that would be sufficient to outweigh the transaction's substantial adverse impact on competition and consumers.”

What the DOJ demonstrates is the assumption that somehow government can have market knowledge that no one else has. This is the assumption that presaged all the interventionist failures in history. Witness our current economic stagnation.

Even if it doesn't stop the merger, the DOJ lawsuit has hurt both companies. They have expended resources to anticipate DOJ objections and weakened their business plans accordingly. Resources needed to innovate and to serve customers in the market have been dissipated once again by government interference.

If we are unhappy with our wireless service, perhaps we should ask ourselves who has monopoly control over the spectrum. Who are the gatekeepers that stand between us and our service providers?

If the DOJ were sincerely interested in promoting competition, then it would disband its Antitrust Division and request that Congress repeal the Sherman Act and reduce its budget accordingly so the funds could be relinquished to the private sector, where the real competitors live.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Tax a moving target?

2011-08-28T12:17:00.006-05:00

Published in The Tennessean, Sunday, August 28, 2011

by Richard J. Grant

The pattern of migratory flows throughout history suggests that people move from situations that they perceive to be relatively unsatisfactory to destinations where the living conditions are expected to be better. In a big world there will always be someone traveling in the other direction, but the greater flows of people tend to be toward those areas perceived to be better-suited to their survival, prosperity, and sense of life.

Border controls are in place to manage the flow of people in both directions. But some borders are particularly geared to controlling traffic in one direction rather than another. That is why Hong Kong had to devote more resources to controlling inward-migration from Canton than did the People's Republic of China have to devote to controlling traffic coming the other direction. China's concern was with losing people, especially the most talented or productive.

The same was true at the Berlin Wall. People of similar culture, language, and history were separated and forced to live under two very different systems of government and economic organization. As long as those differences were enforced, the greatest migratory forces pushed toward the West. People knew that they could live more free and fulfilling lives in an environment where they were treated with individual dignity, and where their choices and productivity were respected.

We see similar migratory flows within the United States. There are no “pass laws” that control migration within the US, but it does matter which state you live in. Each state differs in its level and structure of taxes, the severity and type of regulations, and the types of spending projects it supports. This is why some states tend to be more prosperous or more resilient during recessions, and why they tend to attract people from other states.

Some states resort to gimmicks to attract companies that will supposedly “create jobs.” But the premature promotion of fad-industries, such as solar or wind energy, is based on wild assumptions and takes huge risks with taxpayers’ money. Narrow interest groups visibly benefit while the taxpayer vaguely perceives a net loss. In other words, such projects generally destroy wealth. When the subsidies stop, the wasted effort is revealed.

State governments that commit themselves to unsupportable spending plans often see as their only way out the expansion of the tax base and the increase of tax rates. In January, Illinois increased its income tax rates by about 67 percent and increased corporate tax rates as well. Perhaps the governor now wishes that he could put up a fence around his state much as East Germany had a fence along the entirety of its border with West Germany. Illinois is losing job creators and some of its most productive people.

Even if there were such a fence that could keep the people in, reducing people's disposable incomes is not a way to promote productivity. Taking resources from those who are the most productive stewards of those resources, especially when those resources are transferred to unproductive projects and less-productive people, is a recipe for reduced standards of living.

When the most productive people in a society depart or slow down, it is the least-productive who suffer the most. For they are the ones, whether they know it or not, who benefit the most from their association with those who are wiser or more productive.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Berlin Walls, real and metaphorical, fail

2011-08-21T12:10:00.002-05:00

Published in The Tennessean, Sunday, August 21, 2011

by Richard J. Grant

When I passed through Checkpoint Charlie for the first time, the Berlin Wall was already 19 years old and its final construction had just been completed. It was more than just a wall. Physically, the 12-foot-high concrete slabs that formed the Wall's face to the West were paralleled on the East side by smaller walls, fences, and buildings. In between was the 100-yard-wide “Death Strip,” with various obstacles and little cover for those daring enough to cross it without authorization. East German and Soviet troops patrolled the strip.

Looking beyond the physical, West Berlin was like an island of freedom surrounded by a prison. The Wall was designed to keep East Germans inside East Germany. Before the barriers went up, millions of East Germans had “voted with their feet” and crossed to the West through Berlin.

The contrast between East and West Berlin reminded one of the sudden change from black-and-white to color in the Wizard of Oz movie. The streets and buildings in the East wore a drabness that reflected the sense of life. Food stores offered mostly beets, potatoes, and shriveled apples. Soft drinks contained un-aesthetic sediment. Bookstores offered rows of Marx and Lenin before one found a few other selections at the back.

Passing a pair of soldiers on the street, it was hard not to return their cold stares. I was fresh out of the army and still looked it – a Westerner at that. Their uniforms bore, not coincidentally, an unmistakable resemblance to those that we saw in training films and to those on the pop-up targets that I once happily perforated.

Looking at life in East Berlin, even as a tourist, would make one wonder how it could possibly last. The contrast was too great, and the flow of information could be hampered but not stopped. In the East, the people were forced to live political correctness to its logical conclusions. They lived in a philosophical reign of terror that played out like Muzak in their lives and became the theme for the economic stagnation that eventually, and invariably, comes with it.

As it turned out, the Wall did fall nine years later. I couldn't know then that, 25 years later, I would have an office in the former Communist Party headquarters of a breakaway Soviet republic, and that my home would look across at a former Soviet army base, complete with an old MIG on a pedestal.

Had West Germany continued the price and product controls of the postwar military administration, its economic future might have differed little from the East's. But on the initiative of Ludwig Erhard, many of those controls were removed, clearing the way for the German “economic miracle.”

It was a miracle only to those who did not understand economics; but those were the people with whom one had to compromise. Thanks to Erhard, the “social market economy” that later emerged retained a respect for private property and free enterprise. That made all the difference.

Construction of the Berlin Wall began 50 years ago this month. It was knocked down 28 years later by a people no longer afraid of their Communist masters who were rendered impotent by decades of having their own socialist way.

The Berlin Walls that we face in daily life are not made of concrete. Let us recognize them for what they are.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Brits arm themselves in face of PC government's failure

2011-08-14T15:12:00.003-05:00

Published in The Tennessean, Sunday, August 14, 2011

by Richard J. Grant

If you manufacture aluminum baseball bats, you probably noticed an unusual increase in orders this past week.

Then you noticed the demand is coming from Britain, where one thinks first of cricket, not baseball. You might have wondered why, but were only too happy to increase production to meet this new demand. Markets work.

We often hear about “market failure.” What’s that? Just imagine something that is not provided in the marketplace but you feel should be. You can call that “market failure,” if you wish. The classic example was lighthouses. Surely they couldn’t be profitable, right? This was taught to an entire generation before someone decided to check history and discovered that lighthouses were, indeed, provided by private companies long before governments stepped in.

You don’t need to know what’s happening in Britain to be able to supply them with more bats. But it helps to know more about your customers, so you check the news and learn that violent riots have been breaking out nightly in cities across England. Shops have been trashed, looted and burned. People have been robbed, beaten and even killed.

Where are the police? They are overwhelmed by the volume and brazenness of the outbreaks. They are also constrained in their response by what appears on the surface to be modern Western restraint, but is in fact a symptom of the modern evasion of social realities that we lamely call “political correctness.” The British welfare system has bred personal responsibility out of the class that has become dependent on it; and the shortsighted immigration system has failed to integrate the foreign communities it has created within.

With seriously deficient police protection, victims see themselves at the mercy of the mobs. The victims are also unarmed. The average Brit sees this and exclaims, “That’s not cricket!”

It’s not baseball, either. It is government failure. A succession of left-drifting governments has failed to focus on a government’s primary duty to maintain law and order. They have been too busy protecting their public from all the imaginary market failures they can dream up, especially those that serve as an excuse to redistribute income to their favorite constituents.

Governments like to imagine they have a monopoly on the use of force. Not true. If the police are not there when you need them, it’s up to you. But Brits do not enjoy Second Amendment-type protections; and those who have used firearms in self-defense have sometimes found themselves in jail.

This explains why sales of baseball bats in the U.K. suddenly increased by over 6,000 percent last week. While government fails, the market provides.

Governments also imagine that they have a monopoly in the production of money. That is why gold sales are soaring and the price is reaching record highs. That is also why we suffer repeated booms and busts in all markets. We face unemployment, budget deficits, and over-regulated medical care.

Government has struck out.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Anti-tax pledge is just good shorthand for voters

2011-08-07T12:31:00.002-05:00

Published in The Tennessean, Sunday, August 7, 2011

by Richard J. Grant

Economists call it “rational ignorance.” We all do it; we economize on information. Not only that, we economize on knowledge and education. All these things cost us something and at some point we deem increasing them not to be worth the extra expenditure of time, effort, or money.

Things that are important or interesting to us get more of our attention. If we have a goal, whether it's earning income or helping a friend, we have a strong incentive to learn what is needed to succeed. But if the decision is unlikely to have any effect on our income or on our friend's welfare, then we have little incentive to put more effort into learning about it or even taking any action.

We are helped by anyone who can save us time and energy in learning what we need to know. Often we'll even pay these information-providers, just as we pay the producers of the technology that helps to deliver that information.

In life we can't master everything, so we seek out specialists and those we perceive to be offering useful services. The more complex the product we want to buy or the more complex the organization that we are trying to run, the more willing we are to purchase from, or to hire, those who supply a product or service that relieves us of some of that complexity.

This is easy to see in our private lives and in the private marketplace. But when we step into the realm of government and collective decision-making, our information problems and the corporate governance problem multiply drastically.

It is hard enough to figure out how big a mortgage, and what terms, you can afford. But at least you get to control one side of that transaction. When it comes to the national debt, few people have the ability or the time to understand it. Their vote gives them but a fly speck of influence over it. So, political decisions get less attention from individuals than would private decisions.

At the store, we get the product that we pay for. But when we go to the ballot box, we do not necessarily get the representative that we vote for. The payoff is less certain, the information we acquire is of less direct value than that acquired in our private affairs.

Grover Norquist, president of Americans for Tax Reform, has been both praised and vilified for providing a service that gives voters useful information about the future actions of their elected representatives. He has given these representatives the opportunity to sign a well-publicized “Taxpayer Protection Pledge” that reads as follows:

“I ... pledge to the taxpayers of [my state], and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

This simple statement is a promise to taxpayers and voters. A breach would be publicized. It is information that helps us to monitor the important actions of our representatives.

In the recent negotiations to increase the debt ceiling, representatives on both sides of the argument knew that voters were watching to see who would keep their word. Good information makes a difference.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

While similarities exist, Obama is no Ronald Reagan

2011-07-31T12:05:00.003-05:00

Published in The Tennessean, Sunday, July 31, 2011

by Richard J. Grant

In recent days, President Barack Obama has become quite fond of quoting his esteemed predecessor, President Ronald Reagan. We all know the dangers of quoting out of context and of misunderstanding quotes, but it is also rumored that Obama has been studying Reagan's career.

Perhaps he came across this 1986 Reagan quote: “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” Given President Obama's record so far, it seems that he mistook this for advice.

Superficially, the two men do have some similarities. Both share the same job title and both inherited very poorly performing economies. Both saw unemployment rise during their first two years in office.

At no time during Reagan's two terms did Republicans control both houses of Congress. The Republicans never had a majority in the House of Representatives. The “Reagan revolution” occurred despite this, and sometimes despite the Republican establishment. We never did get to see what Reagan would have done with a less hostile Congress, but we were never in doubt as to which direction he wanted to go.

President Obama began his term with Democrats controlling both houses of Congress. But after 22 months of experience, voters decided to take away that luxury. If we are still in doubt about which direction he wishes to take us, then it is only because it is so hard to believe. He is no Reagan.

Reagan understood that there is pain even when healing from a wound. The transition from bad management to good management means change; it means disruption. To the untrained eye, the initial stages of making things better will appear little different from making things worse. This explains the superficial resemblance between the first two years of the Reagan and Obama administrations.

President Obama uses the nice-sounding words “balanced” and “compromise” as often as possible. By focusing on the budget deficit rather than the total size of government, he implies that tax increases are somehow needed to “balance” spending cuts. By emphasizing compromise, he implies a moral equivalence where there is none. He likes to remind us that President Reagan compromised and agreed to raise taxes on occasion.

In 1982, the Democratic leaders in Congress promised Reagan three dollars in spending cuts for every dollar in tax increases. Reagan agreed. The tax rates increased, but the spending cuts never happened.

Later, President Reagan achieved significant tax-rate reductions. By 1986, the income-tax base had been broadened and the top tax rate had been reduced by over 40 percentage points to 28 percent. He also continued to push deregulation, which allowed oil prices to fall and businesses to serve customers and to grow accordingly. The economy boomed, unemployment fell, and tax revenues increased.

Our current president should study this.

He, and we, might also think about the universal applicability of these words that Reagan spoke in 1983: “I urge you to beware the temptation of pride, the temptation of blithely declaring yourselves above it all and label both sides equally at fault, to ignore the facts of history and the aggressive impulses of an evil empire, to simply call the arms race a giant misunderstanding and thereby remove yourself from the struggle between right and wrong and good and evil.”

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Higher tax rate won't guarantee more revenue

2011-07-24T15:32:00.003-05:00

Published in The Tennessean, Sunday, July 24, 2011

by Richard J. Grant

It is often said that business taxes, such as the corporate income tax, are simply passed on to consumers through higher prices. But it is not that simple. If companies could just raise prices to cover their higher costs, why didn't they just put their prices that high in the first place?

When a company raises its prices, some customers stop buying and others cut back on the quantities that they purchase. This is especially true if competitors do not raise their prices. But even if all businesses are affected by rising tax rates, or any other cost, the company cannot assume that it can raise its prices without losing sales. This is why companies don't like taxes: it hurts them. It hurts their owners by reducing profits, and it hurts their customers because they pay more for less.

Just because a company sets its price does not mean that customers will come forth with the predicted levels of spending. The sales of some products are less sensitive to price than others, so companies might be able to pass more of the burden of rising costs on to customers. But if customers are not willing to pay what the company needs to cover its costs, then that company will need to change or it will go out of business.

The point is that a company cannot raise its prices and expect everything else to stay the same. Customers and competitors react to the changes. The company can set its price, but it cannot set its revenue. And the same is true for a government.

Congress can set a precise dollar debt limit on the U.S. Treasury. Congress can also appropriate a precise number of dollars that serves as an upper limit for total federal government spending. But Congress cannot levy a precise number of dollars in tax revenue.

What Congress does is to designate a tax base and to specify a schedule of tax rates associated with that base. The base might be personal income, corporate income, imported goods, capital gains, or a gallon of gasoline. Although the tax rate and the nature of the base can be specified in advance, the size of the base cannot be known with precision until after the taxable activities occur and incomes are earned.

Projections can be made, but these are based on assumptions about the future. If economic growth is lower than expected, then incomes will be lower than expected. Gasoline sales might also be lower than expected. That means that the projections will turn out to have overestimated the revenues received from income taxes and gasoline taxes.

Taxes always hurt economic growth. The question is whether an increase in the tax rate will bring in more revenue per dollar taxed than is lost due to the shrinking number of dollars in the tax base.

High U.S. corporate tax rates cause businesses to produce less here and to produce more in other countries where the conditions are more favorable. Increases in capital-gains tax rates tend to result in lower tax revenues.

Within the United States, people tend to move to lower-tax states. This might be to protect their personal incomes, or it might be to go where the jobs are.

Raising tax rates is not the same as raising tax revenues. Sometimes more means less.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

President lets truth slip out about Social Security

2011-07-17T07:52:00.003-05:00

Published in The Tennessean, Sunday, July 17, 2011

by Richard J. Grant

Did President Barack Obama just admit that Social Security adds to the deficit? In an interview about the debt ceiling with CBS News last week, the president said, “I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it.”

Clearly it was not the president's intention to admit that Social Security payments are inextricably entwined with the federal budget. His intention was to score political advantage by scaring a politically active voting bloc, composed largely of seniors, into pressuring Republicans to raise the debt limit unconditionally.

There never has been any chance that Social Security payments to current recipients would be missed or even reduced. Although Congress is not legally bound to continue such payments indefinitely, it has a strong political motivation to do so. Over the past 70 years, people have made retirement plans based on a promise, however vague, that they would receive certain payments. No congressman wants to be the first to stand in the way of those payments.

That is precisely why President Obama brought it up. There was no threat to Social Security, so he had to invent one. The hoped-for political payoff would be to panic seniors, a large portion of whom vote Republican, to put pressure on their congressmen to acquiesce in a debt-limit increase.

For many months, Republican House leaders have made it clear that they are willing to raise the debt limit provided that there would also be budget cuts of at least the same magnitude. They even passed a budget that included a deficit, but reduced projected spending. If anything, they have been too soft.

The president's words demonstrate the real political purpose of Social Security. No, it is not to make the elderly more financially secure – and it doesn't really do that. The real effect has been to make the elderly dependent, to some degree, on the political class.

Throughout their working lives, people are required to pay the FICA tax, which is really an income tax paid on the same base as the official income tax. For most people, the FICA payments are at least as large as the income-tax payments. These payments are then channeled into the same uses as any other tax.

Had the working people been allowed to put their FICA payments into personal investment accounts, they would almost certainly have entered their retirement years with much greater and more dependable financial security. A reader, who has the aptitude to make the financial calculations, has provided details showing that private investment of his FICA payments would have yielded him a monthly retirement income over three times larger than the Social Security payment he is now eligible to receive. He is not alone.

Had everyone been allowed to invest privately, then the economy would now be much larger and retirement incomes would be far more than three times current Social Security payments. If President Obama were serious about fulfilling the intent of Social Security, he would give future generations a private option. Instead he is squandering their inheritance with current government spending that is 60 percent higher than revenues.

President Obama has run out of our money, and now he is trying to scare us into giving him more.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Ignored cost of stimulus negated any benefits

2011-07-10T11:52:00.003-05:00

Published in The Tennessean, Sunday, July 10, 2011

by Richard J. Grant

One reason that big government is associated with weak economies is its inability to consider adequately the costs of its actions. This is why the various “stimulus” packages have failed to achieve their stated goals. They did succeed in bailing-out particular companies and classes of investors, but the American economy has been slow to adjust and is showing signs of continued weakness.

Big-spending governments can always point to big results. But these results look good only when some of the costs are ignored. When the federal government spent hundreds of billions of dollars specifically on “stimulus,” the burden on taxpayers and the private sector was greater than that. Taxpayers hand over the levied amount of dollars to the government, but they also bear the burden of tax-compliance costs and the adjustments to maximize after-tax profits.

That is just fiscal policy – the effects of government spending, taxing, and borrowing. But monetary policy is also a tool of first resort in stimulus efforts. Control of the money supply gives influence over the level of interest rates and asset prices.

The power to create base money gives the Federal Reserve the ability to increase liquidity and hold down interest rates. Since mid-2008 the Fed has tripled the quantity of base money, an increase of almost $2 trillion. Its stated intention is to reduce the cost of borrowing and to encourage the purchase of big-ticket items such as cars, houses, and appliances.

Policymakers also quietly hope that the resulting weakness in the dollar relative to other currencies will make American-made goods appear cheaper to foreign buyers while making foreign goods more expensive to Americans. The goal is to encourage exports while discouraging imports in order to create a greater demand for American-made goods.

The Fed buys bonds with newly created money. This bids up the prices of the bonds and reduces their interest rates. Seeking higher returns, many investors switch to the stock market, thereby bidding up stock prices. With bond and stock prices rising, the experience of increased wealth induces many investors to spend more.

Policymakers hope that all this will stimulate production and employment. But they seem to ignore the burden borne by those, especially seniors, who are dependent on income from low-risk interest payments. Fed policy has severely reduced their incomes below what they would have received in a normal post-recession recovery.

Such income reductions have real effects on the economy. Recently published estimates by William F. Ford, a professor of finance at Middle Tennessee State University and former president of the Federal Reserve Bank of Atlanta, and Polina Vlasenko, a research fellow at the American Institute for Economic Research, show reductions in consumption, gross domestic product, and employment that more than cancel out even the most generous claims on behalf of the fiscal stimulus.

By their most conservative estimate for 2010, Ford and Vlasenko found that the Fed's artificially low interest rates caused “$256 billion of lost consumption, a 1.75 percent loss of GDP, and about 2.4 million fewer jobs.” Had these jobs not been lost, the May unemployment rate would have been 7.5 percent instead of 9.1 percent.

When they include more assets in their calculations, the adverse impact of the low-interest-rate policies on employment can be almost double the conservative estimate. Perhaps this helps explain why neither fiscal nor monetary stimulus policies really work.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

We pay for Social Security at cost of liberty

2011-07-03T12:13:00.002-05:00

Published in The Tennessean, Sunday, July 3, 2011

by Richard J. Grant

About a year before the Declaration of Independence, Benjamin Franklin wrote the oft-quoted sentence, “They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.”

Mr. Franklin and his colleagues famously lived up to the admonition implied in his words. But he was not confident that future Americans would consistently do so. When he emerged from the Constitutional Convention a dozen years later and offered his storied description of the result, “A republic, if you can keep it,” he was worried less about physical dangers than democratic dangers.

It has become easy to believe that we can vote ourselves into financial security, but there is no substitute for work and saving. It is easy to believe that we can force people to save for their old age and to administer those savings through governmental programs even though we know that centrally planned economies are less prosperous and less secure than those that are free from governmental interference.

Several American generations have traded their liberty to save and invest for the hoped-for safety of the Social Security system. In so doing, they have made themselves dependent on the benevolence and financial competence of Congress and have imposed an economic burden on future generations. This burden consists of wealth that was never produced, economic progress that was never made, and a moral obligation that is increasingly less likely to be accepted.

For most of its history, the Social Security system has been seen as in need of reform. As the number of beneficiaries has grown relative to the number of taxpayers, the tax rate legally associated with Social Security has grown sixfold. But this is only part of the cost.

Although the rising FICA tax rate has enabled the Social Security program to show operating surpluses for most of its history, this does not mean that it creates net benefits. As the FICA tax rate has increased, and shifted resources from private to government control, it has increasingly distorted the labor market and reduced national saving. As a result, each succeeding generation has earned less from both its labor and investment income than it would have in the absence of the pay-as-you-go Social Security system.

Fifteen years ago, Harvard University professor Martin Feldstein estimated this “deadweight loss” to be the equivalent of an “annual loss of more than 4% of GDP as long as the current system lasts.” If Feldstein's estimate was a fair reflection of reality, then over the past 15 years GDP (gross domestic product) would have grown to a size 80 percent greater than it is now.

Those who claim that Social Security pays for itself clearly fail to take all this into account. They also fail to see how it adds to the federal budget deficit.

Every dollar paid out as Social Security benefits increases the unified budget expenditures by $1 and “uses up” $1 of combined tax revenue. Therefore, the trust fund has one dollar less to lend to the Treasury. That dollar must be borrowed from the public.

This has always been true, even when FICA tax revenues were greater than Social Security outlays. The “surplus” existed only in an accounting sense. The trust fund is an internal account that shows how much one segment of the government “owes” to another. Taxpayers pay it all.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Guaranteed Social Security benefits is a myth

2011-06-26T12:27:00.001-05:00

Published in The Tennessean, Sunday, June 26, 2011

by Richard J. Grant

One evening some years ago, I went to a restaurant with a famous actor. As we entered, and were about to pass the crowded bar, he turned to me and said, “Watch this, I can be anybody I want to be.”

I am reminded of this when observing how politicians can make Social Security appear to be anything they want it to be. When seeking support for the program, they tout it as a freestanding, self-financing, off-budget pension program. But when they need to use the Social Security “surplus” to reduce the federal government's budget deficits, it has been convenient to include the program within the total budget.

When the original law passed in 1935, Social Security was presented in different ways to different audiences. It is a myth that there was public demand at the time for a compulsory, government-run, old-age pension program. Public opinion at the time was not much different with regard to Social Security than it was in 2010 with regard to health-care reform and passage of the Patient Protection and Affordable Care Act.

To gain public acceptance for Social Security, it was sold as an old-age “insurance” program, not a welfare program. Although compulsory, the payroll taxes were referred to as “premiums” or “contributions.” But in the face of a Supreme Court challenge, the presentation had to change.

Too direct a connection between the tax and benefits within the same act put the legislation in conflict with the Constitution, particularly the 10th Amendment. All use of such terms as “insurance” and “benefits” was deliberately avoided while the case was pending before the courts. But as soon as the act's constitutionality was upheld by the U.S. Supreme Court, the publicly acceptable sales language returned.

We see parallels in the marketing of the health-care reform bill to members of Congress and their constituents in 2010 versus the language used to fend off court challenges in 2011. To make the political sale, the Obama administration insisted that the individual mandate provision, which requires the purchase of medical insurance or the payment of a fine, was not a tax. But forcing citizens to purchase such a product is unconstitutional, so in the face of court challenges the administration now insists that the individual mandate really is a tax.

Many citizens believe that they have a right to Social Security benefits because they have “paid in” to the system – and plenty of politicians pander to this belief. Certainly, under the present law there is a menu of benefits and a set of criteria by which an individual may qualify. But this is not a contractual right. As affirmed by the U.S. Supreme Court in the 1960 case, Flemming v. Nestor, Congress can change or eliminate Social Security benefits at any time without consideration to those who have paid the payroll taxes. FICA is a tax, not a “contribution.”

Since 1939, Social Security has been a pay-as-you-go system. This enabled politicians to grant benefits, but to levy taxes that were too low to fully fund the program. It has also enabled politicians to use program surpluses to finance other programs in the federal budget.

The “trust fund” exists only to give statutory authority for payment of Social Security benefits without an appropriation from Congress. But in the political world, it can be anything we want it to be.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

It's not economy that's fragile; it's our freedom

2011-06-19T11:16:00.004-05:00

Published in The Tennessean, Sunday, June 19, 2011

by Richard J. Grant

Is the economy made of glass? We keep hearing how “fragile” it is.

There has long been a tendency to think of the economy as an almost physical, machine-like entity. We still sometimes hear economists refer to “pump priming,” as if the government is needed to inject the initial income into the system to get it flowing. Or perhaps they see the economy as some kind of an organism that just can't rouse itself without some centrally directed “stimulus.”

We think of a machine as needing some kind of control panel or driver's seat. If it is an organism, then we want to put it on a leash. Someone must control it and direct it.

Such a vision of the world either ignores or downplays the role of real, autonomous people. Never mind that the real-world economy is an ever-changing network of a multitude of individuals, each seeking their own purposes. Never mind that these individuals will tend to prosper when they cooperate with one another and learn that conflict and power-seeking lead to relative decline. Such a vision cannot comprehend that a prosperous order can emerge spontaneously without a central planner at the economic control panel.

Earthly experience with attempts at such central planning has been unsatisfactory, to put it mildly. The concentration of power that is necessarily sought by the planners will be used to “do good” as the planners see it. But what is “good” for the planners is not necessarily good for everyone else. Even a benevolent despot cannot possibly know the needs and desires of millions of people, let alone act on such knowledge.

This is why the greatest nations in history have been those in which individuals and their close communities have found themselves relatively free to pursue their own livelihoods. People tend to work around any obstacles, including those imposed by other people. What we call “markets” have always emerged in some form, whether within or outside the laws that have been decreed.

In free countries – those with limited governments and the freest markets – the greatest value is found in voluntary production and cooperation. Political power is of little personal economic value to an individual or his supporters in a free country.

Rivalry for political power is most intense, and takes on its greatest personal economic significance, in those countries that are least-free or are moving in that direction. As the power of governmental leaders grows, the market for lobbyists and political influence grows as well. Increasingly, it pays to devote time and resources to acquiring wealth through political means rather than through productive private-market trade.

In a free country we would care little who the president is, provided that he conducts himself in a dignified manner, is a competent administrator, and can manage the national defense. The president would not have the power to “radically transform” the country, nor would he have the power to transfer wealth from one group arbitrarily to another. Donations to his election campaign would be commensurately small.

In a free country we would not suffer from the illusion that our economy is “fragile.” Our experience would show us that our economy is not a thing in itself but a very real reflection of our virtues and social relations. It is our freedom that is fragile.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Government wastes money on 'creating jobs'

2011-06-12T11:43:00.002-05:00

A shortened version was published in The Tennessean, Sunday, June 12, 2011

by Richard J. Grant

Whenever a president or governor announces that he is going to focus on “creating jobs,” we have reason to worry. Our state and federal governments have grown way beyond the size where any additional government job is likely to contribute more to society than it costs.

It is not an insult to President Barack Obama to say that he cannot create jobs. He can't and we shouldn't expect him to. He can, however, “make work.” Unfortunately, that is what he has done by driving up regulatory and tax-compliance costs, and creating much uncertainty about future policy. That is why the unemployment rate has remained so high for so long and has risen in the past two months to 9.1 percent.

The political need for government office-holders to seem important to voters is sufficient to explain the growth of government intervention. An ideological bent toward bigger government simply makes this worse.

We don't need government to create jobs; there is already plenty of work to do. A job is created whenever a least one of us takes action in an attempt to satisfy a need or desire. We have an endless supply of desires, so we really do have an endless supply of work.

The more thoughtful and quick we are in our work, the more needs we can satisfy each day. If we can reduce the amount of resources we use to satisfy a particular need, then we have more resources to achieve other goals and to improve quality. We can produce more, provide better products, and serve more people.

Politicians who make work for us get all this backwards. This is why government job-creation programs invariably, if not obviously, fail. They lose sight of the real objectives and the real costs.

When Senate majority leader Harry Reid succeeded in diverting taxpayer dollars to fund “cowboy poetry” festivals in Nevada, he also succeeded in taking from you dollars that you devoted part of your life to earn, and that you might have used to invest in your business, or to pay for college, or to pay for a car or gas. Even when the government expenditures are less-obviously wasteful, they are more often than not expenditures on something that you would not have used those dollars to buy. Because of this, part of your work is wasted. To get what you want you have to work longer.

These past few years, our governments have spent or lent trillions of dollars in the hope of saving or creating jobs. In the face of this, the unemployment rate continued to rise, fell slightly, and is now rising again. Whatever number of jobs has been created, it has not kept up with population growth. The amount of government dollars spent per “job created” has been greater than the salary or value of each of these jobs. This means that the government has been wasting people’s time and resources.

Real job creation is a product of thoughtful investment and voluntary cooperation. Government is helpful when it respects private property, protects individuals from real coercion, and assists in the enforcement of contracts. But government destroys jobs when it taxes away capital, subsidizes unprofitable companies, imposes labor law that raises the cost of hiring, and then prevents the company from moving to a better location.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Germany ties its nuclear hand behind its back

2011-06-05T12:14:00.004-05:00

A shortened version was published in The Tennessean, Sunday, June 5, 2011

by Richard J. Grant

A thousand years ago, Mongol invaders displaced the Song Dynasty, which shifted toward the south coast of China. This brought a new commercial and strategic interest in the development of sea travel. By 1132, the Emperor had established a permanent navy and devoted resources to maritime engineering. Knowledge grew, as did the number and sizes of the increasingly sophisticated sailing vessels.

By the 15th century, Chinese traders and the navy operated huge fleets of several hundred ocean-going vessels. But with the Ming Dynasty, which began around 1368, the traditionalist, Confucian bureaucracy grew in power and influence. After the death of the adventurous Emperor Zhu Di in 1424, the Chinese became increasingly bureaucratized and inward looking. The maritime expeditions by the great fleets soon came to an end. An imperial decree restricted Chinese ships to coastal waters and individuals were forbidden to travel abroad.

In the early 16th century, restrictions were placed on ship sizes and eventually the building of ocean-going vessels was forbidden. With this loss of purpose, Chinese shipyards lost the capacity to build the great ships – and knowledge of their specifications and construction died out. This, and the Confucian disdain for commerce, left the Chinese vulnerable to piracy and foreign naval powers. By the time the Portuguese trading ships arrived, the Chinese empire was already in decline.

Five hundred years later we have ships that are powered by nuclear reactors. The U.S. Navy has been one of the world's leaders in the use of nuclear energy, particularly in the application of small-reactor technology. These applications, especially in submarines, brought tremendous strategic advantages.

Energy expenditure is essential to life. The harnessing of nuclear energy, although first achieved during wartime, has enhanced our lives in a growing range of civilian applications. Since the first known man-made fission reactions in 1942, knowledge has expanded and enabled us to recognize and enjoy the benefits of a clean, energy-dense power source.

By freeing-up other resources, the development of nuclear power has increased our standard of living and has continued a centuries-long trend away from carbon-dense energy sources. People have always preferred cleaner and more-economical modes of living. And in the freest societies we were best able to apply our minds to such goals and to act on our discoveries. The same rule of law that gives us this freedom will, when applied rationally, protect us from careless use.

One hundred years ago, Germany was renowned as the place to go for training in science and technology. Repressive governments and periods of conflict caused many Germans, including some top scientists, to depart for freer lands. Knowledge and know-how were lost, at least temporarily, to those other lands.

Today Germany gets almost 23 percent of its electrical-energy supply from nuclear power. German utilities were planning to add nuclear capacity. But that was before a tsunami hit Japan and damaged the Fukushima nuclear plant.

Popular German understanding of nuclear matters is such that polls show 70 percent of the populace opposing the use of nuclear power. Chancellor Angela Merkel, who probably knows better, has announced that all 17 of Germany's nuclear reactors will be closed by 2022.

Germans will pay more while waiting for salvation through wind and solar energy. They will lose their nuclear engineers to other lands and vocations. They will also increase their dependence on Russian oil and gas.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Democrats use oil profits as a campaign device

2011-05-29T16:33:00.003-05:00

Published in The Tennessean, Sunday, May 29, 2011

by Richard J. Grant

History is easier to understand when we remember that the interests of individual politicians regularly differ from those of their constituents. This helps explain the recent grandstanding by Senate Democrats when they summoned oil-company executives to act as political punching bags to help distract attention from the Obama administration's abysmal record on energy supply.

This show trial was the centerpiece for hearings in support of the Democrats' “Close Big Oil Tax Loopholes Act,” which purports to eliminate oil-industry subsidies. The show-trial format fit well with the political exploitation of public distress over rising gasoline and oil prices. The Senators made wild and misleading insinuations in the form of marketable soundbites while the oil executives had to respond in the longer paragraphs that are usually needed to explain reality.

Passive listeners were led to believe that oil companies were making rapacious profits at the expense of consumers and not paying their fair share of taxes. In truth, the profitability rates of the major oil companies are unexceptional and the industry is taxed quite heavily.

Perhaps the Senators who sponsored the bill believe, as the president does, that profits are a cost and impose a burden on customers. They seem to believe that profits should be redistributed to the people through the U.S. Treasury.

Whatever revenue the proposed bill might initially deliver to the Treasury would decrease over time as the industry adjusted. Ironically, the higher tax burden would lead to higher pre-tax rates of profitability in the oil industry as capital allocations shrink and adjust to reflect the new tax structure and to preserve after-tax profitability rates comparable to those in other industries.

If the Senators were successful in passing this bill, the result would be the same as most of their previous interventions. It would drain capital away from domestic energy production, reduce total oil supplies, and increase the demand for imported oil. That means that oil prices will be higher than they would have been otherwise. The Senators will once again hurt their constituents.

Those who do not understand the nature of capital and profits are likely to believe that profits are just a surplus that can be harmlessly redistributed. The presidential candidate, Barack Obama, supported a “windfall-profits tax” on oil companies for just this purpose. Such taxes are a perennial campaign device.

In 1980, Congress enacted a so-called windfall-profits tax, that was really an excise tax, to capture for the Treasury a portion of oil-company profits that rose with high imported-oil prices. The 1970s were years of high inflation and domestic-oil price ceilings that forced U.S. oil producers to sell their product at below-market prices. It is no wonder that these were also the years of energy crises.

The windfall-profits tax reduced the competitiveness of the American oil industry relative to the OPEC producers. American producers had less revenue, a significant portion of which was diverted to the U.S. Treasury leaving less capital for reinvestment in domestic oil production. The relative lack of internally generated funds needed for reinvestment and expansion caused many firms to turn to outside funding sources and increase their debt. Heavier debt loads made more companies vulnerable to bankruptcy when oil prices later dropped.

In the wake of the recent financial crisis and the recent volatility in oil prices, these unhappy consequences of government intervention should sound very familiar.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Inflation subsidizes hot air

2011-05-22T11:53:00.003-05:00

Published in The Tennessean, Sunday, May 22, 2011

by Richard J. Grant

The Federal Reserve Board has been trying to raise prices, particularly house prices. On average, it has more than succeeded: Consumer Price Index figures for April show an annual increase of 3.2 percent in consumer-goods prices. In the past, the Fed has expressed a belief that 2 percent price inflation would be about right to promote growth.

In contrast to the rising CPI, home prices seem not yet to have bottomed out nationally. The Fed has purchased huge blocks of mortgage-backed securities, and has been creating money to buy Treasury securities in unprecedentedly large quantities. This has kept interest rates artificially low and has undoubtedly slowed the adjustment of prices in the property market.

Expansions in the money supply cause prices generally to be higher than they would have been, but prices are not all affected equally. Some prices rise faster than the average while others rise more slowly or, like portions of the real estate market, fall.

From an economic perspective, prices simply reflect the relative supplies and demands for particular goods and services. Prices will adjust as people trade and move resources from lower-valued uses to higher-valued uses. Relative scarcity causes prices to rise while higher productivity tends to keep prices lower. There is nothing special about any particular price.

But from a political perspective, not all prices are treated equally. It has long been politically desirable to stimulate home buying and, more recently, to prevent home prices from falling. But for other prices, such as those for oil and gasoline, the opposite has been desired.

During the past year, gasoline and fuel-oil prices have increased by more than 30 percent. Commodity prices in general have been rising rapidly, and the U.S. dollar has been falling in value relative to other major currencies.

This run-up in oil and gasoline prices has created political heat. But rather than reduce government restrictions on domestic drilling and energy production, the Democratic-controlled Senate attempted to redirect blame toward oil companies. They threatened to eliminate special “subsidies” in the tax code.

The trouble with the Democrats’ argument is that the effective tax treatment of the oil industry is little different from that of other domestic manufacturing industries. Further, their main retail product, gasoline, is subject to a federal sales tax.

To the extent that there are tax differences, Democrats would likely find it relatively easy to gain Republican support for repeal. The more obvious subsidies are not in the tax code at all but are administered by the Department of Energy. Why should taxpayers fund research and development when it can be done better privately?

David Kreutzer, a senior policy analyst at the Heritage Foundation, has noted the unequal subsidy treatment within the energy industry. Wind-energy producers attract huge subsidies, such as the option to take a 30 percent investment tax credit or to receive a significant 2.2 cents per kilowatt-hour production tax credit.

Unlike the wind-energy industry, the oil industry can survive without subsidies. But if an oil company could get the same 30 percent investment tax credit as wind producers, it would receive several million dollars in subsidies for each new oil well completed. If the oil company could get a production tax credit, then a proportionate treatment at current prices would generate a subsidy of about $40 per barrel.

Perhaps the Senate should direct its hot air against wind subsidies.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Deficits imply an increased future tax burden

2011-05-15T12:06:00.004-05:00

Published in The Tennessean, Sunday, May 15, 2011

by Richard J. Grant

Over the years from 1792 to 1930, the federal government ran surpluses twice as often as it ran deficits. But in the 80 years since 1930, the federal government has run annual deficits seven times more often than it has run surpluses. It has been 10 years since the last surplus.

During the first hundred years of the Republic, it was not at all unusual to see significant reductions in the national debt. Debt was always recognized as a useful tool in the pursuit of national interests, but that recognition was balanced by a strong ethical imperative to avoid deficits and to pay down the national debt whenever possible.

The Great Depression marked a turning point in this ethical attitude. In 1932, when government revenue fell to half its 1930 levels and spending rose by more than 40 percent, President Herbert Hoover stumbled through an election-year with a deficit that was almost 58 percent of the budget. His opponent, Franklin Roosevelt, demanded a return to fiscal rectitude. Roosevelt still believed, as did most citizens, that public debt was little different from household debt.

As president, Roosevelt’s attitude changed. He never did balance the budget, but ran pre-war deficits, most of which were higher than in Hoover's worst year. The initial deficits swelled in political response to the pain of the stock market crash and the recession that followed. Only later was the stigma associated with debt accumulation weakened by an effective philosophical assault.

The idea of British economist John Maynard Keynes, that it was prudent deliberately to increase budget deficits during times of recession and then balance them with surpluses after the recovery, provided a new justification and political cover for deficit spending. Just as it has always been easier to water down ethical rules and cultural virtues than to restore them, it was easier to get politicians to create deficits than it was to produce the corresponding surpluses. Political expediency took it from there.

Although the stigma of debt never fully disappeared, it was overwhelmed by optimism and the expectation that we would always outgrow the debt-service burden. The dollar amount of the national debt has grown accordingly. Increases to the legislated debt limit became routine and perfunctory.

The government is now borrowing 40 percent of the dollars it spends. The national debt is growing 3 to 5 times faster than economic output and is approaching 100 percent of GDP. Taxpayers are increasingly aware that current deficits imply an increased future tax burden and that most government spending, especially “stimulus” spending, is counterproductive. The next increase of the debt ceiling will not be perfunctory.

House Speaker John Boehner, R-Ohio, has insisted that any increase in the debt ceiling must be matched by real spending cuts of at least equal size. If Senate Democrats and the president can't agree to this, then the government will run out of legal borrowing capacity by August. Either way, budget cuts are required.

The need for cuts would be mitigated only if increased economic growth were to yield higher government revenues. But this is made less likely by the heavy fiscal and regulatory burdens imposed by the administration and the previous Congress.

We are learning that hope is not currency and that there are real economic and social consequences when we use government to evade old ethical rules.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Canada's Conservative leaders outdo U.S. economically

2011-05-08T11:46:00.005-05:00

A shortened version was published in The Tennessean, Sunday, May 8, 2011

by Richard J. Grant

Canada's forty-year flirtation with socialized medicine has created the impression in the minds of many Americans that Canada is an example of a socialist country. But one sector does not a country make. By recent measures of economic freedom, Canada ranks as high as or higher than the United States.

The “Economic Freedom of the World” report, published in 2010 by the Fraser Institute and the Cato Institute, gave the US and Canada virtually equal overall rankings. The more recent 2011 “Index of Economic Freedom,” published by The Wall Street Journal and the Heritage Foundation, ranks Canada three places higher than the US.

If Canada is less free than the US in its health-care sector, then it more than makes up for it with greater freedom in other areas. But even in the health-care sector, the Canadian government does not interfere with everything and the US government does not interfere with nothing. For several decades, more than half of US medical expenditures have been paid through government. Medical-related services and insurance are among the most heavily regulated activities in both countries.

During the 1960s and 1970s, both countries embraced new welfare programs. Such programs are often described as “popular” and always will be to those who believe that they are getting something for nothing. Canadians love the fact that they can walk into a doctor's office and present a little plastic card. Most have no idea what it costs them or that it costs them anything at all. But the smart ones make the connection between this and the long waiting lists for specialist consultations and procedures, and sometimes long journeys for diagnostic tests. There is also a serious shortage of family physicians.

We can afford certain indulgences as long as we remain prudent and productive in other aspects of our lives. Canadians reached the peak of indulgence more than a decade ago and have made a reluctant peace with the need for fiscal restraint. Like it or not, privatization has been a necessary and successful solution to the inefficiencies and shortages created by government programs. This applies also to segments of the medical sector.

During the past five years, Canadian Prime Minister Stephen Harper has led a minority Conservative government. Despite the need to pull parliamentary votes from liberals and socialists to pass legislation, Harper and his Minister of Finance, Jim Flaherty, cut the national sales-tax rate to 5 percent from 7 percent. They also cut the federal corporate income-tax rate to 16.5 percent and will reduce it to 15 percent next year. This is less than half the US federal rate, which is 35 percent.

I have met Mr. Harper on several occasions and have had lunch with both him and Mr. Flaherty. Both men exhibit a high level of economic understanding and executive competence that is, unfortunately, not matched by their current American counterparts. Last week, their Conservative Party won a majority of the seats in Parliament. Canadians should not be surprised to see reductions in their personal income-tax rates, strengthened national defense, and a greater reliance on private enterprise.

Prime Minister Harper has promised to balance the federal budget by 2015 without raising tax rates. By that time, Canada's national debt will have fallen below 30 percent of GDP, less than half the rate of the US public debt.

This sounds like good medicine.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Seniors would benefit from Ryan's budget proposal

2011-05-01T06:44:00.003-05:00

Published in The Tennessean, Sunday, May 1, 2011

by Richard J. Grant

The “CAP Act of 2011,” as championed by Sen. Bob Corker, R-Tenn., would place a cap on total federal government spending and gradually reduce the maximum level to 20 percent of GDP over 10 years. Placing a legislated cap on spending does not bind future congresses, but it would give them guidance and would provide a benchmark that future taxpayers could easily monitor.

The purpose of a cap is to create an upper limit. It is a ceiling, not a floor. It also leaves open the question of what will be the composition of the spending that does occur. We still need to make specific choices about specific spending programs and specific cuts. That is the purpose of the budget.

President Barack Obama has presented two budgets already this year, neither of which would comply with Corker's spending cap. Obama's first budget would actually have kept spending close to present levels and the second would not even bring spending down to 22 percent of GDP. Both budgets would require tax revenues to increase significantly above historic levels as a percentage of GDP.

The second Obama budget appeared to be a reaction to the budget presented by Rep. Paul Ryan, R-Wis., who chairs the House Budget Committee. The president was outflanked by the Ryan plan, which not only brings spending down to at least 2007 levels, but also offers entitlement reform and tax-rate reduction. Ryan would bring spending down to about 20 percent of GDP within five years. That makes the Ryan plan perfectly compatible with the Corker plan.

Ryan's plan has been attacked from two directions: from those who feel the cuts should come more quickly and from those who fear that it might adversely affect Medicare. The first group has a reasonable case from a straight economic perspective. This might best be illustrated by a bill proposed early in the new Congress by Sen. Rand Paul, R-Ky., that would have been called the “Cut Federal Spending Act of 2011.” A much more timid budget plan for 2011 has already been passed, but Sen. Paul would have cut $500 billion from the budget in the first year. That would reduce federal spending by about 15 percent and would reduce this year's deficit by a third.

In a clearly written 12-page bill, Sen. Paul suggests numerous significant and clean cuts that would be justifiable on economic and constitutional grounds. It does not touch Social Security or Medicare, but those could be reformed separately.

Attacks on Rep. Ryan's budget from the left insinuate that his plan would jeopardize Medicare. Ryan's plan would actually spend at least as much as that promised in the Affordable Care Act (better known as ObamaCare), but with greater choice and flexibility. Seniors would get a better and more secure deal.

In a growing economy, spending as a percentage of GDP can be reduced without necessarily cutting the dollar amount of spending. Long-term economic growth tends to be higher in those countries where government spending and taxation are kept lower. It is significant that the Ryan plan would also simplify the tax structure and reduce the top individual and corporate rates to 25 percent. This would increase the growth potential of our economy.

The determination to cap and reduce government spending as a share of the economy will ensure for us a larger and better-developed economy.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Corker’s plan to cap federal spending is a step in the right direction

2011-04-24T06:25:00.003-05:00

Published in The Tennessean, Sunday, April 24, 2011

by Richard J. Grant

Most of us know what Charles Dickens meant when he wrote, "Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery."

As individuals, we are quick to see the consequences of spending beyond our incomes. But the lesson is not so obvious when the government does the spending for us.

Currently, the U.S. Government is spending about 25 percent of our Gross Domestic Product (GDP), which means that the federal government alone is spending a quarter of what we produce each year. But tax revenues won't keep up with this level of spending. Revenues have recently been below 15 percent of GDP and rarely reach 20 percent. The government is either unable or unwilling to do what is necessary to raise revenue to match its appetite for spending.

Countries with higher percentages of government spending also tend to have lower rates of long-term economic growth. This means that Americans’ private disposable incomes are not only a smaller proportion of GDP, they are smaller in absolute terms than they would have been. The only way to mitigate this effect without reducing government spending is to reduce government regulations and to strengthen and extend private property rights. But our government is getting this wrong too.

The excess of spending over revenue this year will require the U.S. Treasury to finance a budget deficit of around $1.6 trillion. The national debt will increase by more than 10 percent. And the Dickensian warning will get harder to ignore.

Higher tax rates do not necessarily result in higher tax revenues but are more likely to dampen economic growth. We have a spending problem and that is what we must learn to control.
There are two complementary ways to approach the control of excessive government spending. One is to impose specific cuts or limits on specific programs. The other is to institute clear rules that will limit the total size of the budget.

Sen. Bob Corker, with growing support from his congressional colleagues, has introduced a bill that would place an effective cap on federal spending. It is called the “Commitment to American Prosperity Act of 2011” and goes by the appropriate acronym, “CAP Act.”

The CAP Act’s goal is to reduce the ratio of government spending to GDP gradually over a 10-year period to 20.6 percent, its 40-year average. Beginning with the 2013 Budget, total spending would be capped at 25 percent of the average GDP over the previous three years. Each year thereafter, the nominal spending cap would be reduced by 0.1711 percentage points and applied to a moving average of the GDP over the previous three years.

There is always a danger that Congress will go wobbly again and exceed the spending caps. To counter this, the CAP Act requires the Office of Management and Budget (OMB) to sequester congressionally allocated funds that exceed the spending caps. OMB would then assign spending cuts evenly across all categories to be carried out by a Presidential order.

The spending cap would be applied to all government spending, including the off-budget, ostensibly freestanding programs such as Social Security and Medicare. This would force Congress not only to prioritize its spending but to pay more attention to the effects of its taxation and regulatory programs on economic growth and the tax base.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

The President’s speech misses the point

2011-04-17T14:39:00.002-05:00

A shortened version was published in The Tennessean,
Sunday, April 17, 2011

The President’s speech misses the point

by Richard J. Grant

Last Wednesday, President Barack Obama delivered a televised speech that had been billed as a major policy statement on the budget. What listeners actually received was a campaign speech that played fast and loose with anything resembling fact but did reveal much about the Obama vision of America.

The president attempted to contrast two different visions of America, his own versus one “championed by Republicans in the House of Representatives.” The latter was a reference to the Republican budget plan for Fiscal Year 2012 as presented the week before by Congressman Paul Ryan (R-WI), chairman of the Budget Committee.

The Ryan plan would cut about $6 trillion (over 10 years) from the spending increases projected in the budget previously offered by the president. Even with $6 trillion of cuts, the Ryan plan would not achieve a balanced budget in 10 years. But it is the only serious plan likely to be offered by either party.

Before offering his own watery and less-detailed policy vision, the president set up a Republican strawman. The president approves of deficit reductions and addressing “the challenge of Medicare and Medicaid” in the future, but he can't seem to agree with any of the particular cuts or changes.

The president complained about cuts: “A 70% cut to clean energy. A 25% cut in education. A 30% cut in transportation. Cuts in college Pell grants to grow to more than $1000 per year.” He then asserted, “These are the kind of cuts that tell us we can't afford the America we believe in.”

It is telling that the president offers no defense of the federal government's involvement in these areas of spending in the first place. He seems to see them is self-evident truths.

Then he launches into hyperbole: “It's a vision that says if our roads crumble and our bridges collapse, we can't afford to fix them.” After a string of such wild accusations that include Medicare, Medicaid, and children with disabilities, he decries that “we can somehow afford more than $1 trillion in new tax breaks for the wealthy.” Never mind that the $1 trillion figure is a guess, it all misses the point.

When the president claims to offer two different visions, he is really offering only one. The vision that he claims for himself is only the beginning, and the one he ascribes to the Republicans is really just one version of the inevitable endgame of his own vision. This is how progressivism and its policies end: in deficit, distortion, and conflict.

For some, it all begins with good intentions. For others, complicity with big government is a way to get a leg up on the competition. For the rest of us, it is a loss of freedom and personal responsibility – a world where generosity is replaced by mandates and progressive taxation.

It is also a world where truth must be sacrificed for the cause. It is a world where all government spending is called “investment” and all such investment is assumed to “create jobs.”

It is also a world where the roles of government and citizen are reversed. The progressive sees potential tax revenue that is lost to tax deductions as “spending,” as if the government really owns the money and is being generous when it allows a citizen to keep some.

And the president wants to call that “America.”

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

The Ryan plan offers a serious benchmark for deficit reduction

2011-04-11T14:10:00.002-05:00

April 7, 2011

The Ryan plan offers a serious benchmark for deficit reduction

by Richard J. Grant

During the entirety of 2010, Democrats held majorities in both houses of Congress. Nevertheless, they failed to pass a budget for the 2011 fiscal year. Then, earlier this year, when the newly elected Republican majority in the House of Representatives tried to remedy this by passing HR1, the Democrat-controlled Senate voted the bill down.

Now we witness the spectacle of a series of continuing resolutions to keep the government funded for just a few weeks at a time, with a recurring threat of a government “shutdown.”

HR1 was intended to reduce government spending closer to 2008 levels. Instead, the continuing resolutions have been bringing down spending a few billion dollars at a time. These cuts are helpful, but are a tiny percentage of the total budget, and will have a barely perceptible effect on the projected budget deficit of $1.65 trillion.

With the FY2011 drama still playing out, House Republicans have proposed a budget for FY2012. Under the name “The Path to Prosperity,” it was presented this past week by Congressman Paul Ryan (R-WI), chairman of the Budget Committee.

This new budget plan cuts $6.2 trillion from the president's proposed budget over the next 10 years. Given that spending for the current fiscal year is expected to be “only” $3.6 trillion, the size of the proposed cuts shows the magnitude of spending increases projected in the president's budget.

The Republican plan would reduce spending on domestic government agencies below 2008 levels and hold it at pre-stimulus levels for five years. This would be good for economic growth. It would free up resources for private sector use and it would mean less money with strings attached.

More unhampered private investment is needed if we are serious about job creation. Government attempts to substitute its judgment for that of the private sector have proven disruptive and have slowed recovery from the resulting recessions. Whenever government tries to create jobs artificially through so-called “stimulus” programs that redistribute income from our successes to our failures, it ensures that the jobs we have are less productive and fewer than they would have been.

If carried out, the reduction of business subsidies and the size of the federal bureaucracy, including cuts already proposed by the defense secretary, would allow a better use of resources and rising personal incomes. The shrinking and privatization of Fannie Mae and Freddie Mac would also reduce the future burden on the federal budget; and the phase-out of government mortgage guarantees would reduce taxpayer risk and remove some of the recklessness from the housing market.

The Republican plan takes the lead on long-term reforms to head off the breakdowns in the healthcare and income-security systems. Medicaid would be funded through block grants to the states, and the states would have greater authority in how they serve the needs of Medicaid patients.

Anyone who enters the Medicare system before 2022 would be covered by the current program. But anyone who enters the system after 2022 would be able to choose their own plan from a list, and the premium for that plan would be subsidized by Medicare.

Tax reform proposals would reduce the top marginal personal and corporate tax rates to 25 percent but also remove some of the complex deductions that distort economic activity.

We have a serious spending problem; and now we have a serious plan to deal with it.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Speculators provide a service

2011-04-03T11:49:00.013-05:00

A shortened version was published in The Tennessean,
Sunday, April 3, 2011

Speculators provide a service

by Richard J. Grant

French consumers import significantly more Libyan oil than do American consumers. Knowing this, many Americans believe that a disruption of Libyan oil production would not have much effect on our price of oil. It would appear that the French would bear the brunt of the sudden scarcity and the consequential price increases.

That might be true in the very short term, but then what? As French consumers quickly bid up the price for remaining supplies of oil, their willingness to pay higher prices would attract supplies that might otherwise have gone to other parts of the world. That includes oil that might have come to us, whether produced in the US or abroad.

A characteristic that oil shares with money is that both are fungible. This means that one barrel of a given grade of oil is a substitute for any other -- just as one dollar bill seems the same as any other. With a sudden increase in scarcity, remaining supplies would be directed to their most-valued uses, as signaled by the rising prices. There would also be a tendency to conserve oil.

Higher prices encourage other suppliers to produce more. Each barrel sold brings in more revenue than before, but there are also political considerations. Saudi Arabia has already demonstrated a willingness to produce more oil to dampen the recent price rises. The Saudi government needs more revenue to buy domestic social peace, and its dampening of price rises will also dampen the ire of its customers and strategic allies.

Such ire that remains is often directed toward “speculators.” It is widely imagined that there is no good reason for the oil price to be over $100, given current supply and demand conditions. But business is not a prisoner of the moment. We must always look forward, and that is what speculators do.

Each of us plans for the future. Whatever supplies we expect to need, we buy before we need them. In so doing, we do our small part to keep the prices of the goods we buy higher than they would have been. We are acting as speculators, and in so doing we encourage suppliers to put more resources into the production of those goods that we expect to need.

Countries in the Middle East and North Africa face considerable political uncertainty at this time. It is unlikely that this will result in a long-term disruption of oil supplies. Business is business. But the new regimes could surprise us.

This is the reality that speculators face. When they bid up the price of oil, whether in the spot market or the futures market, they are acting on their belief that market conditions are likely to cause prices to be higher in some future period. If they are correct, they will profit, and in the process will have helped to conserve oil and to encourage future production.

If they are wrong, they will lose. And anyone who believes that they are wrong is free to speculate against them by taking an opposite position in the market.

Speculators serve society by thinking about the future and acting on their thoughts. In that sense, we are all speculators. The opportunity to create a profit encourages us to think harder about how best to employ our resources. And we let government interfere with this at our peril.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Health-care law promises more than it can deliver

2011-03-27T14:06:00.010-05:00

Published in The Tennessean, Sunday, March 27, 2011

Health-care law promises more than it can deliver

by Richard J. Grant

William F. Buckley once asked, “Socialism has long since been discredited, but when did it get so creepy?” He was of course alluding to the term “creeping socialism,” which describes the gradual expansion of statist interventions and control over private lives and property.

Historical attempts to create socialist societies have necessarily also tended toward totalitarian governance. Such governance always seems to imply the existence of a ruling elite that would decide what the rules would be and how they would be applied. Invariably, the rules were applied unevenly. The elites lived differently from the masses.

When the state controls all production, then it also controls all employment. This gives a rather special meaning to the term “getting fired.” In a free society, if you can't get along with your employer, then you have the option of looking for a new one. You might even start your own business. But in a totalitarian society, if you displease your employer, you need to make amends or face unemployment. There is really only one employer.

Even in places that are not-quite-totalitarian, the rulers can raise the cost of doing business for those who lose their favor. A newspaper publisher that fails to toe the party line might suddenly discover that newsprint has become more expensive or is no longer available. An importer might find that his application for foreign currency has been declined or that his allowance has been reduced.

The concentrations of power that make these abuses possible would not exist in a free society. But they make their entrance on the boulevard of good intentions and just keep building momentum. The arguments in favor of new programs and regulations tend to focus on intended results. When the actual results are not quite as expected then these discrepancies are dealt with through new programs and regulations.

History does not offer us many examples of the benevolent despot. But there are many examples of popular and high-minded leaders creating the institutions upon which future despots would build. Whatever the virtues possessed by a first generation of leaders, the redistributive powers of governmental authority become magnets to aspiring tyrants.

In the past few decades we have witnessed the multiplication of such redistributive powers through the creation and expansion of social programs and regulatory bureaucracies. The resulting redirection of resources and the emergence of a culture of dependency have created a political constituency that supports these programs. And many politicians have made their careers catering to that culture and by appearing to grant favors to their constituents.

The Affordable Care Act, better known as “ObamaCare,” is just one of the more recent examples of a program that promises more than it can deliver. But it can promise to attract the support of a dependent class that really believes it can get something for nothing. Its supporters continue to talk it up, but the truth is that they have wildly underestimated its costs. This is evidenced by the fact that over 1000 companies and unions, with nearly 2.4 million employees, have already been granted waivers from compliance with ObamaCare.

It is telling that even some of the biggest supporters of ObamaCare, such as unions, have applied for waivers from its restrictions. Will everyone be granted waivers, or only those who have favor? This concentration of discriminatory power in government is getting a bit creepy.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

http://www.tennessean.com/article/20110327/COLUMNIST0110/103270329/Health-care-law-promises-more-than-can-deliver?odyssey=mod|newswell|text|Opinion|p

Reducing spending should be Congress' top priority

2011-03-20T06:49:00.003-05:00

Published in The Tennessean, Sunday, March 20, 2011

Reducing spending should be Congress' top priority

by Richard J. Grant

The continuing resolution just passed by Congress and signed by President Barack Obama will keep the federal government funded for another three weeks. It will also cut planned spending by $6 billion. But during the previous three weeks the national debt increased by more than $109 billion.

At this rate of $6 billion every three weeks, it will take 825 weeks to reduce spending sufficiently to eliminate the deficit. That is 16 years. An increase in tax revenue will shorten the time, but if there is increased spending within entitlement programs, such as Social Security, Medicare and Medicaid, then it will take much longer. Expect entitlement spending to grow faster than revenue.

House Republicans had originally proposed cutting about $100 billion, but Democrats control the Senate and seem to believe that cutting even $6 billion is too much. This means that the national debt and our interest burden will continue to rise rapidly until voters stop it.

If Republicans propose a spending bill that appropriates $100 billion less than that requested in the president's budget, this does not "shut down'' the government. Previous administrations have functioned better on less. Voters should be intelligent enough to see that if Democrats refuse to make a reasonable deal, then they are in no way absolved from blame for the resulting government shutdown.

Given the high budget deficit, projected to be $1.65 trillion this year, as well as the high levels of constitutionally dubious spending, the Republicans should be prepared to stand firmly (with or without the Democrats) for government spending reductions. Sen. Rand Paul, R-Ky., has identified at least $500 billion worth of budget cuts that would be economically healthy and would not even touch the big entitlement programs.

If the election of 2010 meant anything, then voters are ready to place such limits onhe size of government. Voters are also willing to defund such programs as "ObamaCare,'' which goes by the wildly euphemistic name the Patient Protection and Affordable Care Act.

Normally, such program funding would have to be appropriated each year, or on a regular basis, by Congress. But hidden away by the last Congress is $105.5 billion of funding that is made automatically available. Unless the current Congress can stop it, $23.6 billion is already available, and the rest will be available over the next eight years.

Despite being declared unconstitutional in a federal court ruling in Florida and unconstitutional in part in a federal court in Virginia, and unlikely to survive U.S. Supreme Court scrutiny, "ObamaCare'' is funded and in the process of being entrenched. Given the constitutional consequences and the huge expenditures involved, Republicans should be more focused and resolute in their duty to compel Senate Democrats to agree to defund this program.

Another program set up to be funded without future congressional appropriations is the new Consumer Financial Protection Bureau created by the 2010 Dodd-Frank financial reform. This bureau will soon have widespread regulatory powers over financial institutions. Its funding is drawn from 10 percent (later rising to 12 percent) of the operating expenses of the Federal Reserve System. Defunding this new regulatory bureau would save the Treasury at least $500 million per year.

It would also save us from the insidious unintended consequences that always accompany such sweet-sounding regulatory programs.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

The "need" for unions isn't put into proper economic context

2011-03-13T07:49:00.003-05:00

Published in The Tennessean, Sunday, March 13, 2011

The "need" for unions isn't put into proper economic context

by Richard J. Grant

Some decades ago I went to work for a company that turned out to be a closed union shop. That meant that all non-management workers had to either join the union or not work for the company.

The existence of a closed shop was not a manifestation of the exercise of workers’ natural rights: It was an outcome encouraged by the imposition of various labor laws upon workers and owners. The effect of these labor laws was to reduce the rights of both workers and owners while increasing the powers of those who wished to organize and lead trade unions.

The effect of the closed-shop rules was not to empower individual workers but to grant monopoly powers to the union. Individual workers were denied the right to negotiate separately with the company owners. This meant that both the owners and individual workers had their individual rights to negotiate taken away from them by the labor law.

Monopoly power is not a persistent natural phenomenon. Freedom of choice overwhelms those who expect us to stand still rather than innovate. Historical examples of the existence of monopolies invariably have resulted from the imposition of government charters or regulations. The East India Company is an example that should be vividly imprinted in our memories. The Declaration of Independence was in no small part a reaction to such statist encumbrances, and the Constitution that followed should have protected us from their reappearance in modern times.

History is full of legislatures and kings granting monopoly powers under the guise of charters, licenses, guilds, and closed-shop union laws. As is the case for all such laws, the first victim is freedom of choice. The real purpose is to limit the supply of labor and to limit competition. This is why such laws invariably promote conflict and limit our ability to provide for ourselves.

This is also why many critics of present-day union practices feel the need to preface their remarks with some lame version of “There was a time when unions were needed...” followed by some vague reference to Dickens. These critics mean well, but they fail to put the perceived need for unions into proper economic context.

The agitations and statist interventions that supported the rise of the trade union movement were not a reaction to the evils of what so many like to imagine were “unfettered free markets.” Lobbyists for special interests have existed as long as there have been governments. Work conditions have always reflected the political realities as much as the physical realities of the time. The trade unions were merely the latest interest group to learn how to use state regulatory power to protect their members from competition.

Until the Great Depression, the legality of union activity was ill-defined. But then a succession of legislative actions freed unions from antitrust scrutiny, imposed minimum wages on government contractors, and weakened the federal courts on union matters. Also, the Social Security Act contained provisions for unemployment compensation that served to reduce the cost to workers of strike action.

Over time, this legislated right to strike became confused with a natural right. But it was really nothing more than the granting of monopoly power to a union over an employer. The employer's right to freedom of association was taken away. Ignorance of this explains the self-righteous indignation of Wisconsin teachers’ union activists.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

States press sovereignty by rejecting health reform

2011-03-06T14:03:00.003-06:00

Published in The Tennessean, Sunday, March 6, 2011

States press sovereignty by rejecting health reform

by Richard J. Grant

A law that is not enforced might as well not exist. We see this in property rights as well. An owner that fails to challenge those who use his property, whether land or trademark or any other form, over time risks losing control of that property. This is true for individuals, corporations, and sovereign states. The failure to live on or defend one's territory will result in its forfeiture to those who are willing and able to establish a presence there.

The failure to enforce a law will lead people to believe that it will never be enforced and allow them eventually to forget that the law exists. In this regard, the U.S. Constitution is no different from any other law.

The United States began as a decentralized federal republic within which the states retained sovereignty except for those powers specifically granted to the central government by the Constitution. It largely remains so, but over time the exercise of real power has gravitated toward the center.

The 10th Amendment of the U.S. Constitution states that “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” This amendment has not been repealed, but it has been neglected.

It was once taken for granted that the states were an integral part of a broader federal government. But now when we speak of the “federal government,” we mean the central government not including the states. From the beginning, the natural exercise of its powers led the central government to push out the practical limits of those powers. War and later the 17th Amendment also reduced the practical influence of the states over the central government.

Politicians in any government are tempted to curry favor with voters by visibly, if selectively, spending money on them while de-emphasizing the real source of those funds. As the central government expanded its powers of taxation and money creation, it was increasingly able to buy the cooperation of the states for its own programs. State governments were happy to receive extra funding without having to raise state taxes. Although there were strings attached to the funding, the full burden of the new commitment would usually not be realized until later.

Distracted by such temptations, the state governments have unwittingly abetted the expansion of the central government and its encroachment on their areas of responsibility. Education is not a constitutionally authorized area of federal responsibility. But the offer of federal money weakened the states’ resistance to federal mandates and programs. The centralization of influence over education has weakened private authority and reduced the choices available to students and families.

The central government has overstepped its constitutional authority in the area of health care. Resource-wasting programs such as Medicare and Medicaid impose burdens on the states and all taxpayers. Had the States more-presciently defended their spheres of sovereignty, they might not now be caught in such a regulatory and fiscal trap.

With the passage of the so-called Patient Protection and Affordable Care Act, the central government has claimed even more powers originally reserved to the states and the people. It is also unaffordable.

We now see state governments standing up to defend themselves, particularly in the areas of educational choice and freedom of choice in healthcare. They are returning responsibility to the people.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Unions' real impact has been to impede progress

2011-02-27T12:14:00.003-06:00

Published in The Tennessean, Sunday, February 27, 2011

Unions' real impact has been to impede progress

by Richard J. Grant

When consumers have a choice, they prefer to buy products that are produced by companies that are not held back by a unionized workforce. It's not that consumers inquire as to the company's relationship to a union, but they do select their purchases on the basis of lower price and higher quality. Companies that wish to please their customers will gravitate toward those jurisdictions that best allow them to do this.

The purpose claimed for trade unions is to increase the wages and improve the working conditions of union members. They can never do this for every worker, but only for a few. This is because they can raise wages only by restricting the supply of labor to a particular employer; and that they can do only in the short-term. The real long-term effect of trade unions has been to jump out in front of the parade of economic progress and pretend that they are leading while they are, in fact, merely slowing it down.

The big increases in American wages over the past 200 years have been due to the use of savings as capital and its transformation into tools, machinery, and technological improvements. It has also been due to improvements in management, worker training, and increased knowledge. But most of all, the improvements have been due to the constitutionally protected liberty of Americans to associate freely and to defend themselves against coercion, particularly from government interference.

It is a long-held myth that “employers” hold a power advantage over “workers.” The truth is that labor is scarce, good workers are scarcer still, and employers must compete with one another for the best workers available. This will be true as long as we have unfulfilled desires and entrepreneurs who work long hours seeking ways to fulfill them.

The employment relationship is an exchange, ultimately between free individuals. If two or more individuals decide that the best way to provide a service is to work together, either as a partnership or under the leadership of one individual, then they are free to do so. They choose how to organize their firm, what to produce, and how to produce it. If their customers are willing to pay enough to cover all the firm's costs, then the firm will survive. If not, then they will have to change the way they do things.

In a free society, those who see themselves as employees rather than owners would also be free to form an association to help market their services to the owners of companies. The leaders of the association could also negotiate the terms of employment with the employers on behalf of the association's members. But the employers would accept this arrangement only if it contributed to their efficiency in the service of their customers. No individual could be forced into such an arrangement.

Implicit in the natural right to associate is the right to disassociate. In a free society, workers would always have the right to bargain collectively. What they cannot have is the right to force anyone else to bargain with them. When governments created such an artificial right they did so by trampling on the natural rights of employers.

No civil relationship can survive the arbitrary use of legislative coercion. Modern unions must learn to live without that which they never should have had in the first place.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Obama's promised "budget cuts" actually increase deficit

2011-02-20T12:16:00.003-06:00

Published in The Tennessean, Sunday, February 20, 2011

Obama's promised "budget cuts" actually increase deficit

by Richard J. Grant

The total US national debt has now surpassed $14.1 trillion, which is about 95 percent of annual US economic output. The debt seems to be one of the few things that President Barack Obama is able to make grow, so he is going at it with gusto. His recently proposed budget calls for record spending and is projected to produce a deficit of more than $1.6 trillion. That will increase the total debt by more than 10 percent per year. Expect it to crack $15 trillion just in time for Labor Day.

Before the budget was released, we were told that the “tough choices” had been made and to expect significant spending cuts. The storytellers wanted us to believe that the president had accepted fiscal conservatism, had moved to the center, and was now a well-triangulated moderate.

Then the real news came out: The proposed budget would be greater than $3.7 trillion. So what happened to the budget cuts?

The president has proposed cutting a few programs, but he has also proposed some newly created programs along with increases in others. Politics is full of such dual realities, each designed to please or appease some constituent. During the next election campaign, the president will honestly be able to say that he did propose some cuts, and to another group he can say that he increased funding for their favorite program.

Clearly the president is more predisposed to do the latter. Whatever words he uses, his actions have always been toward a bigger role for government in people's lives. At budget time, this translates into government taking control of a bigger share of people's wealth. That means that we will all spend a greater part of next year working to support some government program.

When predicting the cost of a government program that provides a service that could also be provided privately, a reliable rule of thumb is that the total cost of the government program will be at least double the cost of a private service. Sometimes the government steps in to provide a service that is either not wanted by enough people to be profitable or that has been made unprofitable by other government interventions.

As an example, President Obama seems to have hitched his wagon to high-speed rail. Apparently Amtrak was not losing money fast enough, so the president decided to innovate and build a high-speed rail service to nowhere. Not only does this proposal show irresponsible leadership at the federal level, it would also trap the state governments in the subsidization of this folly.

In a large and prosperous economy, we might not worry very much about the occasional creation of such wasteful showcase projects. But when such projects become the norm rather than the exception, the economy either does not become large and prosperous or ceases to be. The uncontrolled growth of entitlement programs is another sign of squandered potential and a leading indicator of decline.

Government budget deficits add to the debt and push much of the burden of current spending onto our future selves and future generations. This shifting of the burden makes government services appear to be less expensive than they really are. When something appears to be cheaper, we tend to choose more of it.

This is how families get into trouble; and this is how governments get into trouble.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Social Security system a trap foisted on public

2011-02-13T11:19:00.004-06:00

Published in The Tennessean, Sunday, February 13, 2011

Social Security system a trap foisted on public

by Richard J. Grant

Among politicians, there is an old saying that “perception is reality.” This actually applies to any form of human action. People act upon what they believe to be true, which is not necessarily the same as what really is true. This does not protect them from unintended consequences. But from a politician's perspective, what counts is what voters believe at the time that they vote.

This helps explain why government has a tendency to grow. Political leaders and administrators, whether elected or unelected, find it easier to gain the support of those who come to depend on them for income or protection. To hold power, and whatever personal satisfaction that brings, a politician must compete not only with other politicians, but also with the empowerment that each individual finds through personal liberty and a rich array of private alternatives in the pursuit of happiness.

Many politicians have found that they can tip the balance in their favor by closing off some of those private alternatives to individuals. Direct assaults on a voter's individual rights would be as well-received as surgery without anesthesia. But with skillful application of the right political anesthesia, a politician can lead voters to purchase their own gold-plated handcuffs and to wear them gratefully.

The Social Security system did not come into being as a result of any demand from voters. In fact, given the ethic of the time, most Americans would have seen such general dependence on government as offensive – though the experience of economic depression created sympathy for narrow assistance to those who were old and poor. The real incentive to create such a dependency structure was felt by certain politicians and by the bureaucrats who would be paid to administer the system.

The president had a particular system in mind; and congressional leaders managed to put together a coalition to pass the original Social Security Act in 1935. With the act in place, next came the sales job on voters. The new Social Security Board advertised heavily, just as government agencies advertise to manage our perceptions today.

In order to pass the constitutional smell test, the Social Security taxes initially were called what they were, taxes. The portion deducted from the visible wages was called an income tax, and the portion attributed to the employer was called an excise tax on wages paid. But to ease the program's acceptance by the public, these taxes were advertised as “contributions,” as if to an old-age insurance policy. Also, the taxes were introduced gently, with each rate at 1 percent of wages (for a total of 2 percent), later rising in scheduled increments.

Voter resistance was reduced by the low starter rate and the illusion that the employer bore as much as half the tax burden. To this day, most employees do not perceive the reality that they bear virtually all the tax burden associated with Social Security. They believe that the employer's portion is like an extra gift – something for nothing. But the employer's portion of the tax is part of the cost of employing the worker. The cash paid in taxes would otherwise be available to be paid in wages or other benefits. The worker is usually unaware of what he is losing, which means that he does not perceive the full cost of Social Security. And this is only the beginning.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Link: On the burden and viability of Social Security

Social Security deepens nation's deficit

2011-02-06T11:38:00.002-06:00

Published in The Tennessean, Sunday, February 6, 2011

Social Security deepens nation's deficit

by Richard J. Grant

In December 2010 without a Congressional tax compromise, tax rates would have risen significantly for incomes, dividends, and especially capital gains. Those who wanted these tax rates to rise cited the need for more tax revenue and saw foregone taxes as a “cost to government.” They rejected the warnings of “supply-side” economists who suggested that increased marginal tax rates would discourage economic activity and yield little, if any, new tax revenue. But part of their compromise was to reduce the employee portion of FICA tax payments by two percentage points for one year.

The tax compromise also included an extension of unemployment benefits and increased spending on an array of special-interest projects. At a time of record-high budget deficits, support for the FICA rate reduction must have been based on political considerations, not genuine economic concerns.

The FICA payroll-tax payments are dedicated to Social Security. Until last year, the Social Security system produced surpluses that were used to offset deficits in the federal government's operating budget. Although Social Security is often spoken of as a free-standing pension plan, its surpluses have always been lent to the Treasury to be used as if part of a unified budget.

Of all the federal government’s transfer programs, Social Security is the one least likely to carry any stigma for the recipients. The dedicated tax has the appearance of a pension-plan contribution. Eligibility for benefits depends on one’s age, not on anything that might suggest some type of failure, as might be the case with unemployment. After decades of making “contributions,” new retirees feel locked-in to the system and perfectly entitled to the promised benefits.

Increasing retirements would have put the Social Security system into a structural long-term deficit by the middle of this decade. But the recent recession put the system into deficit last year, and the reduction in FICA payments will almost certainly ensure another deficit. Once a net contributor to the operating budget, the Social Security system has begun to draw down the IOUs it holds against the Treasury, thereby imposing a net burden on the general fund.

The political motive to reduce the FICA tax was to appear to be cutting the tax burden on the “little guy.” But it also suggests abandonment of a program model that would run chronic deficits and appear to be in a constant state of failure. At a time when advisers insist that the only way to save the model is either to increase the dedicated taxes or reduce benefits, it might be astute to accept that the program is part of the general fund. It was never a pension program based on saving and investment; it is a current-income transfer program based on current taxation.

Social Security spending comprises more than a quarter of the federal budget. It is larger than the entire defense budget. Sen. Bob Corker and Sen. Claire McCaskill were correct to include Social Security as well as other entitlement programs in their proposed bill to place a cap on federal spending. This bill would not necessarily cut Social Security, but it would force a prioritization of spending.

We should remember all of this when we hear Senate majority leader Harry Reid demagogue the bill by insisting that “Social Security has not contributed one penny to the deficit.” It has. All government spending programs contribute to the deficit.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Innovation versus the Sputnik fallacy

2011-01-30T14:08:00.003-06:00

Published in The Tennessean, Sunday, January 30, 2011

Innovation versus the Sputnik fallacy

by Richard J. Grant

In Lake Wobegon, are all the subsidies above average? Does everyone receive more in payments from the government than they pay in taxes?

Lake Wobegon's above-average students would recognize immediately that it is impossible to receive such across-the-board subsidies from Lake Wobegon's government alone. The extra resources would necessarily come from outsiders, perhaps from a neighboring county.

No doubt President Barack Obama had visions of America as one big Lake Wobegon when he warned us that, “This is our generation's Sputnik moment.” He fears that we might be falling behind in scientific research, noting that China has become “the home to the world's largest solar research facility and the world's fastest computer.” His solution is to subsidize innovation, whatever he imagines that to be.

It is of course quite likely, if we send more research dollars to the people of Lake Wobegon, that we could concentrate their minds on producing better solar panels and faster computers. This would all be so exciting that we would pay no attention to what is happening, or not happening, in the neighboring counties. While the visible achievements in Lake Wobegon would attract all the media attention, we could never see what the neighboring counties might have achieved with the resources that were taxed away.

This is the Sputnik fallacy. The Soviet Union did indeed put the first satellite into orbit. Its top priority was to seize any strategic advantage, and with its government-controlled economy, it could direct resources toward its missile program. But for what else is the Soviet Union remembered? We now know that the collectivization of its industry and agriculture necessarily led to oppression, inefficiency, and widespread poverty.

When Sputnik went into orbit, Americans recognized both a great engineering achievement and the danger of such a capability being possessed by an avowed enemy. What Americans might not have recognized at the time was that it would cost us far less, as a percentage of our wealth, to put a satellite into orbit than it cost the Soviets. And our German scientists were volunteers.

The United States government directed resources into the space program and military related research. In the context of an exceptionally free society and economy, it did not take long for the United States to surpass the Soviet Union in space-related capabilities. But if Americans had attempted to approach everything the way the Soviets did, then the story would have turned out much differently.

Throughout the 1960s, we were reminded of the many inventions and spinoff consumer products that emerged from the space program's research. These were visible and much publicized. We knew the space program was expensive, and most of us agreed on its importance, but we can never know for sure what kinds of inventions never happened or what we lost in their being delayed.

Perhaps our successes in space contributed to an overly optimistic view of government capabilities and to the rise of the Great Society programs for which we have paid so dearly. As we expand the role of government in research and other aspects of our lives we will pay more dearly still.

The country that won the space race is the one that was most successful at limiting the role of government in the lives of its citizens. It was the country where, by world standards, all the subsidies were below average.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Richard J Grant archived at The Tennessean

Healthy government protects citizens, their property

2011-01-23T14:11:00.004-06:00

Published in The Tennessean, Sunday, January 23, 2011

Healthy government protects citizens, their property

by Richard J. Grant

With the advent of personal computers, we heard talk of something called the “information society.” It is certainly true that this new technology enabled us to save, process, and communicate certain types of information more cheaply and efficiently than ever before. But a bigger truth is that we have always lived in an information society.

Thousands of years ago, the acquisition and interpretation of information was no less important to the survival of our ancestors than it is to ours today. Knowledge of how to find food and to evade enemies and other threats has always been important. We have also benefited from the improvement and use of tools and the expanded production of consumer goods that this made possible.

We see the still-evolving Internet as a great and complex innovation, which it is. A spinoff from Defense Department research, it took on a life of its own. But even the Internet, with all its power and potential, is but a relatively crude tool compared to that resilient human-network phenomenon that we call “the market.”

We speak of the market as being the product of human action, but not of human design. Nobody invented, or even thought of inventing, “the market.” As a network of human trade relations, the market, in this broader sense, just emerged. It was natural for individuals to trade goods and services and to produce whatever they couldn't find. Such individual trades enabled goods to change hands many times and to travel long distances.

Such trades generate a type of knowledge that could not exist otherwise. The act of trading reveals information about the desires of the traders and about the availability of the goods that are exchanged and of any resources needed to produce them. By necessity we are interested in prices, quantities, and qualities. Knowledge of particular prices from recent trades tells us how much of one good we might expect to receive in exchange for another.

We are best-served in such relationships when the trades are voluntary and free of coercive interference. Only then can we be sure that the traders are acting on their true preferences and are able to offer their best goods and services.

No matter how sophisticated and powerful our communication technologies become, markets will always remain a human phenomenon. No machine, or committee, or politburo can ever do more than guess at the types of choices that individuals would make. This is why the centralization of economic choices by governments, whether through regulation or direct control, tends toward disappointment.

In this sense, when we coercively collectivize an activity, we tend to dumb it down. That is why successful societies, the societies most likely to survive and prosper, are those in which individuals are relatively free from the coercion of freelance thugs or government officials.

Private associations and corporations distinguish themselves from governmental organizations by their voluntary nature. They demand a mutual respect for each individual's property and person. This is civil society; and this is why private forms of association are superior for most types of activities.

Governments earn their keep only to the extent that they assist in the protection of citizens and residents against force, theft, and fraud. A healthy government will assist in strengthening the definition and enforcement of private property rights. An unhealthy government will infringe on those rights and yield incivility.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Palin's character carries her through adversity

2011-01-16T14:24:00.004-06:00

Published in The Tennessean, Sunday, January 16, 2011

Palin's character carries her through adversity

by Richard J. Grant

In autumn 2008, just before the elections, some colleagues asked whether or not I considered Sarah Palin qualified to be president. My reply was, “She doesn't have to be. She just has to be better qualified than Obama and Biden.”

Was she better qualified? Two years later, a poll by Rasmussen Reports found that “52 percent of likely U.S. voters say their own views are closer to Sarah Palin’s than they are to President Obama’s.” This was reflected in the 2010 election results when voters rejected the president's big-government agenda by severely reducing his congressional support.

Though few admit it, Sarah Palin has shaken up both parties. Character and ideas have consequences. It has not been lost on the political professionals that, after two years of observation, the American people show a greater affinity to the constitutional attitude of the hockey mom than to that of the “constitutional scholar.”

Political professionals never rest, and the worst of them never let a crisis go to waste. That is why a tragic, but local, event that men of integrity would have faced with dutiful strength and perspective has instead been whipped into a national spectacle of character assassination and cheap self-advertisement.

The shooting of 20 people in Tucson became the surreal backdrop for a modern witch hunt, the perfect opportunity to frame and smear a pesky opponent. The media's speedy and drone-like convergence of attention on Sarah Palin was too smooth to be an accident and too incessant to be real.

Palin's accusers, none of whom was morally qualified to cast the first stone, insisted that the shooting was the result of a polarized political atmosphere. Learning the truth about the shooter was apparently a low priority. Palin, and everyone like her, had to be framed.

Facing this, Sarah Palin stood up and responded to her critics firmly, clearly, and with an uncommon civility. She might never be president but, in the face of a media ambush, she certainly set an example for the incumbent.

But maybe she has already had a greater impact on history than her critics will ever admit. The more we listen to her, the more we detect a consistency of thought that improves with experience and refinement. We also see more of what we sensed from the beginning: She has something that runs deeper than love of country. She has more than just a gut feel for who we are and what it means to live here.

The party professionals who claim to hope she will run in 2012, because she would be the easiest to defeat, are bluffing. The clever ones are. If they truly believed it, they would not put so much effort into denigrating her, unless their real goal is to discourage everyone like her.

Her attackers showed during the past two years that they have nothing positive to offer. Voters have already rebuffed them. It is not Sarah Palin who has had to change; the president has had to change. His program is the pig begging for lipstick. He is the one now pretending to be something that he is not, whether we call it “centrist” or some other mushy word.

But at least he has had enough sense to change his staff and to bring in advisers who will spend the next two years asking, “What would Sarah Palin do?”

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Richard J Grant archived at The Tennessean

Charities should reconsider their support for the estate tax

2011-01-09T12:00:00.005-06:00

Published in The Tennessean, Sunday, January 9, 2011

Charities should reconsider their support for the estate tax

by Richard J. Grant

After the recent tax debate, Congress chose to keep most of the major tax rates where they were in 2010. One rate that will be higher is the estate tax. But a more interesting fact is the source of some support for the estate tax.

It is understandable that a benefactor and possible heirs would oppose the existence of an estate tax. It reduces their choices. Any after-tax uses to which they could put their wealth would also likely be available in the absence of the tax. A non-taxed estate could be bequeathed to any heir, which could include any relative, friend, organization, charity, or even a government treasury.

It doesn't work the other way around. The estate tax takes from the estate a portion of any wealth that is not allocated to governmentally approved uses. Contributions to any organization that the government deems to be a “charity” would be deductible from the taxable wealth of the estate. Deductibility gives charitable organizations a relative advantage in the competition for inheritable wealth.

As Paul wrote in his second letter to the Corinthians (9:7), “Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver.” But that seems not to be good enough for many lobbyists for charitable organizations. In their eagerness to do good they forget that their complicity in the unequal imposition of the tax code is a resort to compulsion. They might believe that they are increasing charitable giving, but they are not increasing charity.

The irony is that they might not be increasing charitable giving either. The act of giving implies that there is something to give. But to the extent that taxation diverts and hinders wealth creation, there is a risk that the tax advantages enjoyed by charitable organizations will be offset by the wealth-reducing effects of the tax itself.

Government officials already know that the inheritance tax is a poor source of revenue. The higher the inheritance-tax burden, the more likely it is that wealthy individuals will find ways to avoid paying the tax. Tax avoidance is, of course, never costless. Much wealth is dissipated in the attempt to maximize after-tax wealth and satisfaction. The high-tax reality diverts many people into careers as lawyers, accountants, and financial planners rather than the possibly more-productive careers that they might have enjoyed in a low-tax world.

Economists refer to the tax-deductibility of charitable contributions as “reducing the cost of giving.” Statistical studies that focus on this aspect suggest that higher tax rates encourage charitable giving. But they seem to have missed what economists call the “wealth effect.” Benefactors who wish to allocate their estates between heirs and charitable donations are better able to give to both when their after-tax wealth is higher. But higher tax rates reduce after-tax wealth.

Professors William Beranek, David R. Kamerschen, and Richard H. Timberlake of the University of Georgia have found that this not only makes good theoretical sense but also shows up very clearly in the statistics. Their study on “Charitable Donations and the Estate Tax,” which was recently published in the American Journal of Economics and Sociology, shows that it is far more likely that a reduction in the inheritance-tax rate will be associated with increases in charitable giving.

We need not force people to give.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Richard J Grant archived at The Tennessean

New year means time to repeal ‘euphemisms’

2011-01-02T14:25:00.003-06:00

Published in The Tennessean, Sunday, January 2, 2011

New year means time to repeal ‘euphemisms’

by Richard J. Grant

At the beginning of each New Year, we like to believe that we can have a fresh start. And sometimes we really need one.

The trouble with fresh starts is that they don't start from where we would like to be, they start from “here.” This year we start from where the 111th Congress left off. We must recover from two years of overdosing on a witches’ brew of one part Obama administration with two pinches of Democratic majorities. This year begins with one less pinch.

Historians might one day characterize this political brew as “death by a thousand euphemisms.” The administration began with the “American Recovery and Reinvestment Act of 2009.” This particular act was an attempt to take credit for what would have happened had the act not been passed. As we often say about justice, recovery delayed is recovery denied.

It is a trait of progressives to feel satisfied with their good (and highly acclaimed) intentions regardless of the real outcomes. But for the past two years their intentions, manifested in policies that divert resources away from private stewardship into politicized show projects, have retarded people's efforts to adapt and to make needed changes.

The halfway point of the last Congress was also the peak, capped by the pinnacle of euphemisms, the “Patient Protection and Affordable Care Act.” This was the health-care reform bill that was supposed to fix the old system and reduce costs. It was the bill that turned out to be so complicated, and so full of unrelated payoffs, that we were told by the Speaker that we would have to “pass the bill so you can find out what is in it.” But we found out sooner than we were supposed to.

Due diligence led health-care and insurance providers to price-in the expected effects of the new provisions. In some cases, the threat of unlimited liabilities being imposed on those who dared to offer any viable insurance product resulted in the self-preserving response of discontinuing any product that might be likely to attract uninsurable, but politically favored, pre-existing conditions. As we will quickly learn, the trouble with socialism is that we can impose lower prices but we cannot impose lower costs. The best we can do (to make the costs appear lower) is to lower the level of service.

The euphemisms kept rolling right through the summer of 2010 when the president signed the “Wall Street Reform and Consumer Protection Act.” This act was about as long, complicated, and wide-open to administrative imperialism as was the big health-care reform. It continues a long tradition of enhancing the levers of political favoritism that might be better-reflected in the less-euphemistic title, the “Protecting Wall Street from Consumers Act.”

Voters sort of lost their sense of humor with all this, so the Democrats delayed some of their less-popular projects until they were safely past the November elections. But even afterwards, they dared not enact a statute to embody the euphemism, “net neutrality.” Instead, they relied on the Federal Communications Commission to thumb its nose at the Constitution by claiming regulatory powers over internet service providers and hoping that the next Congress would not have the wherewithal to stand up against it.

We have these and 996 other anti-constitutional euphemisms to repeal. As for fidelity with the Constitution, now that would be a fresh start.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2011

Richard J Grant archived at The Tennessean

No matter what Fed does, interest rates set to rise

2010-12-19T15:32:00.002-06:00

Published in The Tennessean, Sunday, December 19, 2010

No matter what Fed does, interest rates set to rise

by Richard J. Grant

When speaking of national budget deficits, one of the magic numbers that has somehow emerged as a benchmark is 3 percent of gross domestic product (GDP). The International Monetary Fund often recommends this benchmark; and the European Union requires current and prospective members to keep their deficits below 3 percent.

Although 3 percent is way too high, let us not quibble. For the last couple of years the national budget deficit in the U.S. has been running around 10 percent. If we keep overspending at this rate, our national debt will increase by the size of our GDP every seven or eight years. Given that the total public debt outstanding is now more than 90 percent of GDP, the debt itself will double sooner.

We might console ourselves with the fact that the government owes one third of its debt to itself. Government agencies (such as the Social Security Trust Fund) hold U.S. Treasury securities, which are, rather inconveniently, IOUs on future taxpayers. This means that, when accounting for the interest cost on the debt, the government can net out payments to itself.

The Congressional Budget Office (CBO) currently estimates the federal government's net interest outlays to be about 1.4 percent of GDP. Although net borrowing has increased by $3 trillion, a significant decline in interest rates has reduced net interest costs from $253 billion in $2008 to $197 billion in 2010.

Interest rates are currently at very low levels. This is partly due to increased savings rates in households and corporations, all of whom are being a bit more careful in dispensing their cash. Also, the U.S. Federal Reserve is deliberately pushing interest rates down below market levels by creating huge quantities of new dollars.

How long can the Fed keep doing this? The more money it creates, the higher will be prices compared to what they would have been. At current levels of money creation, it won't be long before the Fed achieves its stated desire of pushing price inflation up to 2 percent. Then what?

As inflation expectations increase, so will interest rates necessarily increase. Otherwise, lenders would expect to lose value due to inflation. But once this begins to happen, the Fed will have to slow down its money creation in order to avoid overshooting its inflation target.

This means that, unless savings rates continue to rise, the Fed will have trouble keeping interest rates down below market levels. If it continues to inflate the money supply to hold down real interest rates (which are observed interest rates minus the effect of inflation), then it risks increased price inflation and a weaker dollar. But if it slows its money creation, then it reduces the availability of reserves to the banking system. This will also cause interest rates to rise.

Either way, interest rates are headed higher. And as the federal government refinances and increases its debt, its interest payments are also destined to rise.

To add to the joy of the season, Congress is currently attempting to rush through a 1,924-page, $1.2 trillion omnibus spending bill, spruced up with 6,715 Christmas decorations sometimes called “earmarks.”

By the CBO's reckoning, all this will cause government interest payments to rise to 3.4 percent of GDP by 2020. Now we have one more reason to be glad that we are not inclined to join the European Union.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

We should cut, not increase, top income tax rates

2010-12-12T14:21:00.002-06:00

Published in The Tennessean, Sunday, December 12, 2010

We should cut, not increase, top income tax rates

by Richard J. Grant

Just as there seems to be a universal speed limit, the speed of light, there seems also to be a limit to the proportion of economic output that can be turned into tax revenue. With apologies to Einstein, if we were to accelerate a rocket, it would seem to shorten and grow heavier as we approached the speed of light. We would have to inject increasing amounts of energy for each mile per second that we eke out.

Since the middle of the 20th century, the U.S. government has applied a wide range of top marginal income-tax rates, from 92 percent down to 28 percent. But so far, the level of tax revenue as a proportion of Gross Domestic Product (GDP) has not managed to break above the 20-percent level (though it did test that level at the peak of the tech boom). This is a historical observation, sometimes called “Hauser's Law,” after Kurt Hauser of the Hoover Institution at Stanford University. The 20-percent “barrier” could change over time as legal and social institutions change.

Why should we care about this? Some people believe that we can increase government spending and then fund it by increasing the top marginal tax rates. But Hauser's Law suggests that the only way the dollar amount of government tax receipts can be increased is through an increase in the size of the economy. This further suggests that there is a range of top marginal tax rates above which both economic growth and high-income tax revenues will be reduced.

This has implications for the size of the national debt as well. Budget data over the last 20 years show the actual proportion of tax revenue to GDP fluctuating between 14 percent and 20 percent. During the same period, the level of government spending as a proportion of GDP has fluctuated between 18 percent and 25.5 percent. The Hauser phenomenon suggests that the limit on government revenue collections at any given time is not merely political but also natural. In contrast, the ability of the federal government to borrow raises significantly any natural limit on government spending, at least in the short term. We have federal budget deficits because the federal government spends more than it is currently capable of funding through taxation.

Perhaps if our governments, at all levels, were to reduce the scope and distortion of their fiscal, monetary, and regulatory activities, then the economy would grow more quickly for any given set of tax rates. Similarly, for any given set of spending and regulatory institutions, we are more likely to observe increased economic growth rates when we reduce top marginal tax rates on income and capital than when we increase such rates.

In recognizing the Hauser phenomenon, we are really just looking at the Laffer Curve through a different window. The Laffer Curve describes the relationship between the marginal tax rate on a particular tax base and the amount of tax revenue obtained from that base. The importance of understanding this relationship is that it warns us against inadvertently reducing people's incomes in a futile attempt to increase government revenue by increasing tax rates on relatively fluid tax bases.

The more the government tries to take, the shorter the supply of everything and the heavier the burden on everyone. It's not rocket science; it's a bit more complex than that.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Lame ducks should not let tax rates rise

2010-12-05T14:22:00.003-06:00

Published in The Tennessean, Sunday, December 5, 2010

Lame ducks should not let tax rates rise

by Richard J. Grant

They say that a wounded animal is a dangerous animal. This would seem to apply also to a lame duck, as exemplified in our present lame-duck liberal Congress.

Despite the recent electoral repudiation of big-government liberalism, Democrats continue to grasp for any fin du régime advantage that they might pull out in their last days as the majority. They continue to push the canard that their intended January tax-rate increases will affect only “the rich.” When they say “the rich” they really mean “high income earners,” but the needs of rabble-rousing demagogues will always trump language accuracy.

It is difficult to find real economists who would support tax-rate increases at a time of weak economic recovery and high unemployment. Even those economists who believe that such tax-rate increases might increase tax revenue will, nevertheless, recognize the danger of dampening growth at this time.

For those who put statist ideology ahead of the general welfare, none of this matters. They are holding hard to their story that it is only fair that the rich pay more and that the higher tax rates are needed to increase government revenue. And if wishes were horses, the statists’ dreams would come true. But they aren't and they won't.

The least-productive tax base is the one that is most likely to melt away under the glare of high tax rates. That is more likely to describe high income earners rather than low income earners. It is more likely to describe capital gains taxes rather than payroll taxes. The most productive and creative among us are also likely to be the most agile in the avoidance of tax burdens.

This is not to suggest that anyone can really escape the burden of high tax rates. The mere act of avoidance causes a shift of resources away from their most productive uses. The net aggregate effect is reduced incomes. Special deductions for politically favored interest groups will, of course, bring special advantages to some of those groups, but that cannot apply to the collective whole.

Whether “the rich” are defined as those earning over $250,000 or, as Sen. Charles Schumer is now desperately suggesting, $1 million, the biggest impact of these tax increases will be on Subchapter S corporations and other small businesses. The bottom line is that a tax on employers is ultimately a tax on employees, and on those who would like to be employees. What possible consolation could it give an unemployed worker to know that his former employer pays a higher tax rate than he does?

An increasing number of studies by economists find that government spending provides, at best, only a weak short-term stimulus effect. Whatever stimulus effect there is tends to wear off quickly and turn negative. Even such spending that is financed by deficits (i.e. increasing government debt) creates a need for present and future tax revenue. Whatever immediate stimulus we might get from consuming our “seed-corn” capital, when the effect of the tax burden is added in, the net result of these so-called stimulus programs is glaringly negative.

If Congress fails to extend the current tax rates in December, then all income-tax rates, as well as the rates on dividends, capital gains, and estates will rise in January. We need to get the lame-duck liberals behind us and give the capitalist pigs their wings.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Irish financial crisis has lessons for Americans

2010-11-28T14:44:00.001-06:00

Published in The Tennessean, Sunday, November 28, 2010

Irish financial crisis has lessons for Americans

by Richard J. Grant

The current Irish financial crisis offers lessons to Americans. First, we can learn a lot about fiscal prudence and economic growth from the preceding Irish history. Through the mid-20th century the Irish, like their British neighbors, abandoned common sense in favor of the pseudo-intellectual promises of socialism (what we call “progressivism”). The role of state involvement in their lives grew and their economies stagnated.

Just as the Thatcher revolution pulled Britain back from the precipice and restored, at least temporarily, the people's dignity, the Irish went one better. They cut government spending and tax rates aggressively. They removed trade restrictions and brought down their inflation rate.

As a small country, with a population just under 4.5 million, they needed to offer clear advantages to business in order to stand out from the crowd. They learned well from Thatcher, but perhaps Ireland's most important inheritance from Britain was rule-of-law principles and a common-law legal system that served to protect private property.

In 2007, Ireland's net public debt was only 12 percent of annual economic production (GDP). Compare that to the United States, where net public debt (which excludes the portion of debt held by US government agencies, such as the Social Security Trust Fund) is currently around 62 percent of GDP. (Total U.S. public debt outstanding is 93 percent of GDP.) By world fiscal standards, Ireland was in great shape.

Ireland was so attractive to investors that its banking system grew disproportionately to the size of the country. And bankers who had grown up in a world of government-run deposit insurance schemes and the expectation of government and IMF bailouts succeeded in business without fully developing their sense of prudent restraint. Further, Ireland had delegated control of its money supply and, therefore, interest rates to the European Central Bank (ECB).

During the middle of the last decade, the ECB, like our own Federal Reserve, pushed down interest rates to stimulate recovery from the tech downturn. That set us up for the most recent recession and real-estate downturn.

Government officials rarely foresee or react correctly to the systemic risks created by government-granted monopolies in the supply of money and the power to manipulate interest rates. The Irish blunder, which was the granting of a government guarantee for most of the loans in the banking system, could have been avoided. The Irish government was too small relative to its banking system to make good on such guarantees and, unlike the US government, it no longer had the power to print money to cover its guarantees.

When Ireland joined the European Union, it put its national sovereignty at risk in order to reap the benefits of living in a large free trade zone. Now, however, it has put its national sovereignty at further risk by blundering into the sphere that should have been reserved strictly for private action. Instead of letting the banks and their creditors learn to bear the burden of their own actions, the Irish government made promises that will overburden its taxpayers.

To get a bailout from the EU, Ireland faces demands from EU members that it raise its corporate tax rate. This won't help Ireland, but the intention is to make it less competitive so that other EU states don't have to make the effort. This is how American states have sold their own sovereignty to their federal government.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

European Union will bail out Irish mistake

2010-11-21T18:18:00.004-06:00

Published in The Tennessean, Sunday, November 21, 2010

European Union will bail out Irish mistake

by Richard J. Grant

Four years ago, the government of Ireland was running a healthy budget surplus. During the previous 20 years Ireland had transformed its economy into the envy of Europe.

Until the early 1980s Ireland had been a big-government, high-tax, high-inflation, high-unemployment land of economic stagnation. Its main export was people. Government spending consumed more than 50 percent of its economy. The corporate income tax rate was 50 percent and the top personal rate was close to 60 percent. The inflation rate had been in double digits for much of the previous 10 years. Ireland had been phasing out its protectionist tariffs, but in the mid-1980s its unemployment rate reached 17 percent and its economic growth rate was still only about 2.3 percent.

By 2006, Ireland's corporate tax rate was 12.5 percent, the lowest in Europe. Its top personal income tax rate had dropped almost to 40 percent. Government spending was less than 35 percent of gross domestic product (GDP). Tighter control over the money supply kept the rate of price inflation down around 3 percent.

During the previous 10 years, Ireland's growth rate had averaged 7.4 percent and Irish income per person grew to be 10 percent higher than that of the United Kingdom and 20 percent greater than in France and Germany. Irish expatriates had good reason to return to their homeland, and many did. Foreign investment flooded in as well.

As Irish wealth grew, many people bought property. There was big demand for housing and office development. And with the European Central Bank holding interest rates low, credit was easy for construction loans and mortgages. It seemed natural for property prices to keep rising. The banks grew more promiscuous in their lending while regulators grew more complacent.

The Irish property bubble was not the only one in the world to pop in 2008. As was the case in many other countries, the magnitude of the bad debt problem was not immediately recognized. The banks were in serious trouble, but the regulators mistook the signs of insolvency for a mere lack of liquidity. They believed that the stronger banks could absorb some of the bad loans of the weaker banks, and that the Central Bank of Ireland (which cannot create money) could supply sufficient reserves.

Depositors began to pull their funds out of the banks, so bank reserves kept shrinking. Existing government deposit insurance seemed no longer able to ensure depositor complacency. That was when the Irish government made an innocent, but big, mistake.

The government decided to end the crisis by guaranteeing every deposit as well as most of the debt issued by Irish banks. The finance minister believed that this would restore confidence in the banking system thereby solving the liquidity crisis with very little more cash.

The finance minister would soon learn just how expensive a credit guarantee can be. He had, in effect, issued a credit default swap to the banking industry free of charge. He nationalized the losses of the banking industry. Taxpayers now carry the burden.

The surpluses and balanced budgets of the “Irish miracle” have given way to increasing deficits. The budget deficit is expected to rise this year to 32 percent of GDP.

The Irish government has bravely insisted that it can carry the burden. But it will soon accept a bailout from the European Union.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Burdensome regulations slow economic recovery

2010-11-14T15:03:00.003-06:00

Published in The Tennessean, Sunday, November 14, 2010

Burdensome regulations slow economic recovery

Richard J. Grant

It is unfortunate that the Federal Reserve Act gives the Federal Reserve System three different goals to promote: maximum employment, stable prices, and moderate long-term interest rates. Riding three horses at the same time can be dangerous.

Fed Chairman Ben Bernanke simplifies matters somewhat by referring to the Fed's “dual mandate” to promote “a high level of employment and low, stable inflation.” But he is not shy about manipulating interest rates in his attempt to achieve the other two goals. With price inflation low and unemployment high, the Fed has attempted to raise employment by pushing down real interest rates.

This is why the base money supply has increased so drastically since mid-2008 and why prices did not fall more than they did at that time. Chairman Bernanke still believes that the inflation rate is too low and that more inflation can help increase employment.

The trouble is that the Fed does not really have the ability to maintain high levels of employment. Whenever it tries to do this, it just sets us up for the next boom-bust cycle. Its discretionary interventions are best described as disruptive and serve to reduce long-term employment.

Big increases in unemployment, such as we have now, are common symptoms of government-induced boom-bust cycles. But the president and Congress have made matters worse in their attempts to treat these symptoms.

Rather than let the market correct the mal-investments that were encouraged by government incentives, the president and Congress have slowed the recovery process by commandeering resources from the private sector while piling on more burdensome regulations.

Recovery and reemployment are overdue and will be slower than necessary as long as the administration prevents the new Congress from reducing the size and obtrusiveness of government. The president will likely agree to stop tax rates from rising in January, but he is unlikely to acquiesce in the repeal of his cherished, but destructive, health-care and financial regulation laws.

Nothing that the Federal Reserve can do will overcome the job-destroying effects of the administration's heavy handed fiscal and regulatory interventions. The so-called “stimulus” program served only to squander time and resources. Attempts to prop up home prices and failing businesses have delayed necessary adjustments. Attempts to regulate everything from credit to carbon dioxide have created an atmosphere of regime-uncertainty in business and the wider society.

Businesses have streamlined their operations to maintain profitability and to ensure their survival. They will be reluctant to hire new workers until they can see more clearly what the likely costs of future taxes and regulations will be.

These fiscal and regulatory burdens were not imposed by the Fed. But in its attempt to overcome their effects and to boost employment, the Fed risks failure to maintain low inflation and moderate interest rates.

The Fed's previous manipulations of interest rates have induced the booms and precipitated the busts that panicked the government to react with stimulus packages and other ill-conceived interventions. It does not help us that the Fed, in turn, is now reacting to the government's policies with its own ill-conceived inflation of the money supply.

While producer prices are rising rapidly at home, the dollar is falling against currencies around the world. Perhaps it is time to reduce the Fed's discretion and look to a commodity price standard. We could, once again, link the dollar to gold.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

The Fed continues to create money out of nothing

2010-11-07T16:30:00.002-06:00

Published in The Tennessean, Sunday, November 7, 2010

The Fed continues to create money out of nothing

by Richard J. Grant

Federal Reserve Board Chairman Ben Bernanke reminds us that the Fed responded to “the worst financial crisis since the 1930s” by purchasing more than $1 trillion worth of Treasury securities and U.S.-backed mortgage-related securities. This action took several hundred billion dollars worth of risky mortgage-backed securities off the balance sheets of private financial institutions and put them on the Fed's balance sheet.

How did the Fed pay for all these securities? It used its unique statutory powers to create money out of nothing. In the last few months of 2008, the Fed doubled the base money supply to $1.8 trillion, and by the beginning of 2010 had increased it above $2 trillion.

Under normal circumstances, this would almost certainly have resulted in high double-digit price inflation. With all this new cash available, banks would have had plenty of excess reserves to lend, thereby greatly expanding the effective money supply.

But circumstances were not normal. With the property market in decline and the economy heading into recession, increasing default rates knocked down the value of mortgage-backed assets. With the asset side of their balance sheets shrinking, many banks found themselves to be more undercapitalized than usual. So when the Fed supplied them with cash, they did not lend it but held most of it as reserves.

This is why we had monetary inflation but not price inflation. Not yet.

The Federal Reserve Act, which brought the Fed into existence, gives it discretion “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” Depending on which prices we look at, price inflation has been not much above 1 percent and was briefly negative. If we pretend that interest rates are “moderate” then the Fed currently scores two out of three.

But with the unemployment rate stuck over 9 percent, the Fed sees its mandate as unfulfilled. Unfortunately the Fed suffers from the same learning disability as the Obama administration: It does not learn from past mistakes. Just as government spending fails to stimulate long-term growth so does pumping-up the money supply fail.

On November 3, the Fed announced that it will purchase another $600 billion of longer-term Treasury securities through the middle of 2011. The base money supply will increase $75 billion per month. That is a 30 percent increase over eight months.

Does the Fed expect the banks to hold all this new cash as reserves? If so, then how does it expect to create even a short-term stimulus effect? If it does not, then how does it expect to avoid inflationary consequences? Only one member of the Fed committee that is responsible for this decision, Thomas Hoenig, sees the inflation risk as serious enough to dissent.

When the Fed makes large purchases of securities, it pushes interest rates below what they would have been. This creates the illusion of an increased supply of capital available as loanable funds. But, although the Fed can create money, it cannot create wealth.

The Fed gives its profits to the U.S. Treasury. So when it creates money to buy Treasury securities, it is ultimately covering government deficit spending with the money that it creates.

Does this mean that the deficit is covered without cost? No. The cost is borne by everyone that holds U.S. dollars and dollar-denominated assets. Money inflation is a tax.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Health-care bill has given birth to new regulations

2010-10-31T07:19:00.003-05:00

Published in The Tennessean, Sunday, October 31, 2010

Health-care bill and others have given birth to new regulations

by Richard J. Grant

When the Speaker of the U.S. House of Representatives, Nancy Pelosi, famously let slip, “But we have to pass the bill so you can find out what is in it,” she was referring to the health care reform bill of March 2010. She wasn't kidding. The bill had become increasingly unpopular with the American people, so she found it necessary to logroll a coalition by adding big scoops of political sweeteners to buy the support of individual senators and congressmen.

The bill was passed with great urgency but little understanding. It was like a cluster bomb, full of unpleasant surprises. The final bill was so long and complicated that, now seven months later, even its supporters are expressing surprise as insurance companies raise health-care premiums and eliminate particular categories of coverage. These consequences might have been unintended, but they were predictable. Worse, it is still full of unexploded regulatory and tax bomblets.

Another legislative “success” of the Obama administration and the Democratic majority was the passage of the financial regulatory reform bill that was intended to protect consumers by reining in the bad behavior of financial institutions. The financial industry was already one of the most heavily regulated in the country, with protections and restrictions that encouraged much of the moral hazard and bad behavior in the first place.

Passage of the bill began the gestation of a cluster of new regulatory agencies and will give birth to a whole new generation of financial distortions and unintended consequences. Over the past several months, government officials have impugned the financial institutions for not lending more. But at the same time, those officials have deployed regulators to second-guess the actions of bankers and to micromanage the market. While the private debt markets are stilted, the size of the government debt market is exploding. In this we get a hint of what is to come.

Speaker Pelosi, with her large Democratic majority, was successful in passing the carbon dioxide limiting “cap and trade” bill in the House. This would have pounded the entire economy with another cluster of taxes and regulatory bomblets, but public awareness that a better nickname for the bill was “cap and tax” caused some members of the Democratic majority in the Senate to balk.

Where the Senate failed legislatively to impose these new powers of central planning, the Obama administration would fill the gap by mobilizing the already existing regulatory powers of the Environmental Protection Agency. It had already declared carbon dioxide to be a “pollutant,” thereby granting itself the power under the Clean Air Act to impose limits on emissions. Now the EPA stands ready to impose new regulations on electric utilities, particularly those with coal-fired plants. Whether intended or not, it will serve to reduce further our ability to produce energy in America. We will pay more for less.

It should be no surprise that none of the Obama administration's efforts to “stimulate” the economy could succeed. With hundreds of billions of dollars diverted from private sector use into politically selected public works projects, and with the fact and threat of increased regulation, our national productivity levels will continue to suffer. And protectionist currency depreciation is no less destructive than tariffs. Jobs are lost.

Voters can now judge the combined performance of the Obama administration and the Democratic majorities in Congress. It means “not working.”

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Tension between government, voters is nothing new

2010-10-24T13:59:00.002-05:00

Published in The Tennessean, Sunday, October 24, 2010

Tension between government, voters is nothing new

by Richard J. Grant

Just when our epoch seemed to be lost in vacuous notions of “hope and change,” we have suddenly noticed that some things are permanent. The laws of nature, which include the laws of human action, seem to persist no matter how well or poorly we understand them. And recent political events have arisen that remind us of our cultural and political inheritance and of the chain of responsibility that has been passed to us by previous generations. It is for us to build upon and to preserve for our descendents.

The malaise in our nation is more than economic. What we today call the tea party movement is, like the Boston Tea Party of 1773, an act of open defiance by a people against what they see to be their government’s disrespect for, and encroachment upon, their rightful liberties. That original tea party gave rise to events that provided the constitutionally limited democratic tools through which we can now act to replace representatives who fail to respect the original intent of the Constitution that they have sworn to uphold.

This tension between the people and those who would assume power over them is a recurring theme in history. The providential manner in which colonial Americans faced this challenge is succinctly portrayed by Professor Timothy D. Johnson, of Lipscomb University, in Liberty vs. Power: The Founding Fathers’ Vision for America. It is a fine little book that can be read with profit by young and old.

Johnson points to the cultural roots of America extending through the English people who were “notoriously unsubmissive and quick to challenge authority.” As another historian put it, they “made poor subjects for monarchy, and they were proud of it.” They cherished their liberty and passed this trait to their American descendants.

Johnson hints at the timeless parallels between our age and 1773, when Parliament passed the Tea Act. “Believing that the huge but struggling East India Company was too big to fail, the legislation was essentially a government bailout.” The company was failing and was unable to get loans. “So it agreed to a reorganization that gave government officials administrative oversight, and in return Parliament gave the company a monopoly on the sale of tea in the colonies.”

The inflammatory aspect of the Tea Act was that it “reiterated Parliament’s assertion that it had the authority to levy taxes” on the colonists. Johnson, the historian, gives us an eerie reminder of the persistent nature of politics. “Parliament had provided a splendid example of the old adage that oppression is based on fear and favor – in other words, intimidation for those who resist power and privilege for those whose patronage is needed to prop up power.”

Johnson treats the philosophy and events that gave rise to this Republic but also gives attention to what is essential to its preservation. The indispensability of civic virtue was acknowledged by the Founders in their words and their actions. From James Madison: “To suppose that any form of government will secure liberty or happiness without any virtue in the people is a chimerical [delusional] idea.”

A people show their worthiness of liberty in how they live with it and in how they exercise their responsibility to defend it. Each September 17 we passively remember Constitution Day. But this year, we will actively demonstrate our worthiness on November 2.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Reaganomics led to an economic turnaround

2010-10-17T11:15:00.002-05:00

Published in The Tennessean, Sunday, October 17, 2010

Reaganomics led to an economic turnaround

By Richard J. Grant

When judging the results of successive U.S. governments, it is common to focus on the simple matter of who the president was. But this neglects the importance of Congress in all legislative matters. We cannot understand the actions or the results of an administration without examining both its intentions and the context in which it served.

That context includes not only the composition of the contemporary Congress, but also the cumulative legacy of previous governments as well as the economic and strategic conditions in the contemporary world. Strategies and ideologies manifest differently in different contexts.

It is common, for example, to note the increases in the federal budget deficit during the years of the Reagan administration. Shallow analysts look at this one statistic and dismiss “Reaganomics” as a failure. They fail to note that the national debt had been trending upward at an increasing rate during the 1970s, but peaked out during President Ronald Reagan’s first term. That began a twenty-year downtrend in the rate of growth of the national debt.

Interestingly, that downtrend began after the Reagan-initiated cuts to marginal income-tax rates that were partly responsible (along with deregulation and reduced inflation) for the strong economic growth that followed. Analysts with a static view of the world are unable to comprehend that cuts to marginal tax rates can lead ultimately, after an initial dip, to higher tax revenues. Some tax bases, such as capital gains, are more responsive than others.

Reagan recognized the Soviet Union and its contagious ideology for the existential threats that they were and accordingly requested increased defense spending. But he clearly wanted a balanced budget and pushed for spending cuts in other areas. Congress preferred to spend.

Just when we needed it most, Reagan’s policies provided both a challenge and a contrast to the Soviet myth and to the Soviet reality. When the USSR collapsed, leftist ideologues around the world were knocked back on their heels. A window of opportunity opened in many previously oppressed regions to join world markets and to engage in trade and production.

This was the world inherited by the Clinton administration. President George H. W. Bush had failed to maintain the Reagan trend, but President Bill Clinton began his first term as if he had not learned anything from Reagan. The American people checked him in 1994 by giving him a Republican congress that had learned something and would not allow his wide left turns.

As a result, government spending was lower than it would have been, nationalization of heath care was averted, and deficits continued to fall. President Clinton, recognizing the political context, signed a reduction in the capital gains tax rate and championed welfare reform. The economy boomed.

During the administration of President George W. Bush, marginal tax rates were reduced (temporarily) again and contributed to the strong growth. Tax revenues had already fallen in the wake of the 2001 recession, but government spending increased faster than it had under previous Republican congresses before slowing briefly in 2007. War spending contributed, but only a small portion of the total.

As the recent financial crisis emerged with its recession, the Congress was again controlled by Democrats who were far less inhibited about taxing, spending, and regulating. The Bush administration intervened heavily, before handing off to the Obama administration, which will be remembered differently than the Reagan administration.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Paying for government is burdensome to taxpayers

2010-10-10T14:21:00.004-05:00

Published in The Tennessean, Sunday, October 10, 2010

Paying for government is burdensome to taxpayers

by Richard J. Grant

To direct our attention to the cost of government, the Framers of the U.S. Constitution included in Article I, Section 9 that “a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.”

In compliance with this requirement, government agencies provide regular reports and projections of federal revenue and expenditures. The recent content of these reports, such as budget deficits reaching $1.4 trillion, which is about 40 percent of the budget, suggests that our government should try harder to comply with the other parts of the Constitution.

There are also costs of government that go beyond narrow fiscal matters. The expanding federal regulatory structure has costs that few perceive.

The best recent study of the federal regulatory burden is “The Impact of Regulatory Costs on Small Firms,” which was produced for the Small Business Administration by Nicole V. Crain and W. Mark Crain, both of Lafayette College. Their summary finding is that “in 2008, U.S. federal government regulations cost an estimated $1.75 trillion, an amount equal to 14 percent of U.S. national income.”

The Crains note that they have not traced all costs, but the regulatory burden as measured is clearly substantial. It rivals the burden of U.S. federal tax receipts, which equaled 21 percent of national income in 2008. This gives a combined federal tax and regulatory burden of 35 percent of national income. That is more than a third of people’s earnings.

Comparing the burdens of different types of regulations on companies of different sizes and activities, they find that regulatory compliance costs fall disproportionately on small businesses. For firms with more than 500 employees, the estimated cost per employee was $7,755. But for firms with fewer than 20 employees, the cost per employee was $10,585.

Small manufacturing firms are the hardest hit sector with per employee costs of $28,316. This is more than double the per employee burden on large firms, which can spread the fixed costs over a larger base.

The average cost over all firms was $8,086 per employee. The largest share of this cost was categorized as being due to “economic” regulations. The next most burdensome category was “environmental,” followed by “tax compliance” and others.

The total regulatory cost burden on the typical U.S. firm is about $161,000, which corresponds to about 19 percent of payroll expenditures. This burden is greater than the combined payroll taxes paid by employers and employees for Social Security and Medicare, which take 15.3 percent.

Measuring the burden on business is important for our understanding of the regulatory effects on economic growth and employment. The Crains emphasize that, although regulations might initially be incident on businesses, “ultimately all costs must fall on individuals.” We are all consumers, workers, stockholders, owners, and taxpayers.

The regulatory burden per household in 2008 was $15,586. When combined with the tax burden, that total burden is $37,962 per household.

From 1995 to 2008, the regulatory burden per household rose at an average annual real rate of 4.8 percent. This is cause for concern, given that this is higher than the real economic growth rate in the U.S. during the same period.

When we make choices between more or less government involvement in our lives, we are also making choices about the size of the burden that we must bear for any benefit.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.
E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Democrats’ election strategy is to evade responsibility

2010-10-03T14:37:00.006-05:00

Published in The Tennessean, Sunday, October 3, 2010

Democrats’ election strategy is to evade responsibility

by Richard J. Grant

House Majority Leader Steny Hoyer, D-Md., has found a way to blame President George W. Bush for future tax increases. He says that because President Bush’s tax-rate cuts were not permanent, but were set to expire at the end of 2010, it is actually President Bush who is responsible for the coming tax increases.

The trouble with Hoyer’s attempt at logic is that President Bush has been retired for almost two years and the Democrats have all the power they need to prevent the tax rates from rising at the end of the year. They have that power now. They are supposedly in charge right now. But with an election looming – and their ideology clashing with economic reality and voter sentiment – the responsibility is too much for them to handle. So they evade it.

Like the Ancient Mariner who shot the albatross, Democrats have used their majorities during the current session to ram through economy-killing legislation, and they now wear the dead bird of economic stagnation around their necks.

The recent financial reform legislation, they claim, will protect consumers from financial misinformation and predatory lenders. Perhaps voters need some protection against predatory legislators.

Few would suggest raising tax rates at a time of slow and hesitant business activity and high unemployment. But that is what Democrats have chosen to do. They say they won’t raise all the rates to the pre-Bush levels, but they do intend to raise some tax rates.

The intention is to raise rates on “the rich.” By that they mean anyone who has a high income or who leaves a large estate. It also includes anyone who earns dividends or capital gains.

But intentions are not the same thing as outcomes. And those who bear the tax incidence are not necessarily the same people who bear the tax burden. A tax on capital is a tax on our productive capacity. A tax on our productive capacity reduces the demand for labor, thereby reducing wages and employment.

“Tax the rich” might be a popular leftist slogan, but it comes at a high, undisclosed price.

Those with higher levels of either wealth or income tend to be the most adaptable to changes in the business environment, whether commercial or legal. If Plan A is more productive than Plan B before tax, but Plan B leaves more after-tax income, then Plan B gets the go ahead. Plan B might even require shifting operations overseas. Or it might simply offer more leisure.

Those with lower incomes might believe that they are escaping the effects of taxation when only “the rich” are taxed. But they are not. Plan B means lower incomes for everyone on the productive side of the tax equation. When the tax rates on capital gains and dividends rise in January, the burden will be borne by everyone.

Some Democrats recognize this, but their chosen leaders do not. Republicans have offered to support a motion to stop all the scheduled tax increases. But rather than accept this offer, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have chosen to take no action before the November elections. Rather than face voters cleanly, they will probably sneak their tax increases through during the lame-duck session after the election.

Evasion of responsibility might be clever politics, but it is not clever governance in a free republic. It is an old, but contemptuous, political game to extract resources from the people without disclosing the full cost of government.

Rather than reduce the burdens on people, the Democrats have used their time and power to impose on us the highly flawed health-care and financial “reform” bills. Federal regulatory compliance costs already use up more resources than we now spend on health care. But the new health care law has not only increased those compliance costs, it also contains its own tax increases.

For what happens next, voters are responsible.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Majority of voters in 2008 made a hiring mistake

2010-09-26T14:16:00.004-05:00

Published in The Tennessean, Sunday, September 26, 2010

Majority of voters in 2008 made a hiring mistake

by Richard J. Grant

The head of a very large corporation, who is described as a “die-hard Obama fan,” was recently quoted as saying that “the president could have used some executive experience on his all-academic economics team.” Noting that there is no former business executive in the Obama cabinet or among the top economic advisers, he opined, “I think it was a hiring mistake for the administration.”

Who else made a hiring mistake? Was this business leader not also a voter and, possibly, a campaign supporter and contributor? Are the skills needed to run a major corporation not transferable to one’s judgment at the ballot box? Was it terribly difficult to notice that one of the leading presidential candidates was a man in his 40s who had not yet outgrown his schoolboy Marxism?

This top business executive has subsequently discovered that his political actions have imperiled the welfare of not only his shareholders, but also of his customers, his employees and many others. But what is the solution?

Some believe that the president should replace his soon-to-retire, top economic adviser, Lawrence Summers, with a business leader. Would they be happy to bring back Henry Paulson, a former top investment banker who, like Summers, also has previous experience as Treasury Secretary? This is not likely to happen for reasons that include, but also go beyond, party affiliation.

Rumors suggest that the president will replace Summers with a “woman CEO.” This alone would rule out Paulson. Further, given the number of complaints we hear that too few women serve as top executives, it also rules out far more that 50 percent of possible choices. But it also brings our attention back to the priorities and judgment exhibited by the president.

Those of us who have worked in both academia and in business are well aware (or should be) that there are people in both these activities who are suitable to serve as presidential economic advisers. There are also top people in both activities that are clearly not suitable for public policy work.

Business people are just as susceptible as academics to the fantasy that they can cross over seamlessly into that third arena of government management and set everybody straight. Perhaps their experience with office politics and lobbying will prepare them for what is to come. But they are entering into an activity that has no clear bottom line, and the currency of collectivized, all-or-nothing decision making is very different from that offered by business customers.

Those who land in Washington with promises to cut away the “red tape” and get things done, soon discover that they no longer have the same sense of direction that they got from prices and customers in business. They also often discover, perhaps too late, that “red tape” is another name for “checks and balances,” which are essential to protect us all from the otherwise unlimited power potentially exercised by politicians and bureaucrats.

The essential element that is missing from the Obama administration is not business experience but good judgment.

Contrast the 20-month performance of President Barack Obama, with his Ivy League education, to that of a previous president who inherited a similar situation. President Ronald Reagan had majored in economics at Eureka College, a small Midwest liberal arts institution affiliated with the Disciples of Christ. He graduated in 1932, before Keynesian economics and a love of government money came to dominate academia.

President Reagan’s choice of economic advisers worked out for us much better than did President Obama’s. Reagan understood that people thrive on productive activity, and that production must always necessarily come before consumption. Recognition of this natural necessity leads to a moral imperative. It is the antithesis of “stimulus” theory.

Somewhere there is a board of directors of a very large company that might need to choose a new chief executive. Somewhere there is a large country where the voters must definitely do the same thing.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Attempts at control merely show how little we know

2010-09-19T07:07:00.002-05:00

Published in The Tennessean, Sunday, September 19, 2010

Attempts at control merely show how little we know

by Richard J. Grant

In their attempts to understand economic matters, people commonly make two big errors. One is to think of various types of relationships as if they were discrete and durable objects. An example is employment relationships. In this case, we not only speak of “saving” or “creating” jobs, we even think of them as being ends in themselves rather than remembering that any particular job exists to help create those things that we really want.

The other big error is to presume to have knowledge that we cannot possibly have. When there is a disruption in the supply of any good, such as gasoline, the price tends to rise. Such price rises can trigger outrage in people who see the increases as “price gouging.” The question for which these people have no defensible answer is, “What is the correct price?”

They do not know the answer now, just as they did not know it before the supply disruption. Rather than allow the price to rise in order to cover the costs of attracting gasoline supplies from other regions, they invoke “anti-gouging” laws and then wonder why the gas stations in their city have no gas. They have political power, but not the knowledge to avoid unintended consequences.

Attempts to protect preconceived notions of a “fair price” are similar to attempts to protect jobs. A “job” makes no sense when divorced from the purpose that gives it value. A job is just a relationship, an agreement to trade services in the pursuit of some goal or the production of some good. The relationship could last for an hour or for many years. It depends on what people believe they need.

The existence of a job depends on the private knowledge that is generated through many complex relationships. A “market” is not a thing; it is the name that we give to this network of changing, purpose-driven relationships.

We can attempt to count and categorize the jobs, but we cannot stand above the system with governmental powers and truthfully claim to be “saving or creating jobs.” Government officials can never have the detailed knowledge of either the individuals’ desires or the resources available to satisfy them. That is why the only thing that socialism can guarantee is failure.

Politicians always have an incentive to promise something for nothing. When gas prices rise, they try to hold them down. When home prices fall, they try to prop them up. The politicians get votes, but gas supplies don’t arrive and houses don’t sell. Then they blame “markets” and hurl accusations of “greed” at the usual suspects.

In the name of protecting jobs, and winning votes, politicians will often look outward for suspects. Treasury Secretary Timothy Geithner and a significant number of senators and congressmen have decided that China is responsible for some of our current unemployment. They seem to believe that they know what the “correct” exchange rate should be between the yuan and the dollar. They claim to know that the yuan is “undervalued” and that the Chinese government is causing this deliberately.

They disapprove of the recent Chinese policy of fixing the yuan exchange rate to the dollar. Interestingly, the fixing of exchange rates was perfectly acceptable during the quarter century following World War II. It is also acceptable for several other countries today, especially if they export oil. It was also acceptable during most of American history, when the dollar itself was defined as a specific weight of gold or silver.

Instead of being honored that China had chosen to define the yuan in terms of the dollar, Secretary Geithner called the yuan “undervalued.” But what does that say about the dollar?

If the Chinese are controlling other prices and enforcing regulations that are real trade barriers, then we have something to teach them. But if we fail to protect our own freedom at home, then that is our biggest error.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Obama continues to gamble with the economy

2010-09-12T13:39:00.004-05:00

Published in The Tennessean, Sunday, September 12, 2010

Obama continues to gamble with the economy

By Richard J. Grant

The Obama administration continues to throw “stimulus” mud on the wall with the hope that some of it will eventually stick. The next splat to hit the wall will be $50 billion of spending on infrastructure projects that were, apparently, not of a sufficiently high priority to be included in the previous flurries of stimulus spending.

Any attempt to explain this new spending proposal in terms of the “national interest” will result in bewilderment. It makes sense only from the perspective of the people who are pushing it and stand to gain from it. That would be the politicians and staffers whose futures depend on swaying voters’ minds before the November elections. It would also be those businesses and workers who expect to be the first recipients of the anticipated government spending.

In politics, it is often said that “perception is reality.” It is also said that in comedy, timing is everything. The politicians that best manage voter perceptions in the next eight weeks will be the ones laughing in November.

The new $50 billion won’t be spent before the elections. It might not even get through Congress by then. But it has been promised in the hope that enough voters will fall for it to make a difference on Election Day.

The Obama administration has also called for the creation of a national “infrastructure bank” to allow the federal government to give low-interest loans to local governments. The news reports fall into the trap of referring to these loans as “low-cost,” but that is to confuse the true cost with the nominal price. Federal taxpayers will pay for the road, rail, and airport upgrades way beyond the levels that actual passengers would have been willing to support by themselves.

The “infrastructure bank” is just the latest political vehicle with which to deliver the illusion of something for nothing. But its cost will be a lot more than nothing. It will turn out to be a Fannie and Freddy on wheels.

There is one new proposal by the administration that does make some sense. That is to allow businesses to write off 100 percent of new investments in plants and equipment in the current year, rather than expense it over three to 20 years. A shortcoming is that it will apply only through 2011. That doesn’t allow much time for thoughtful planning of new long-term projects.

Ironically, such tax write-offs are of higher value when tax rates are higher. It just happens that the Obama administration has chosen to let income and investment-related tax rates rise in January 2011. The political gamble is that voters will be silly enough to believe that the value of the temporary write-offs is greater than the long-term supply-side burden of the tax-rate increases.

The obvious question is, “Why not just cancel all the scheduled tax-rate increases?” An even better question would be, “Why not cut tax rates?” Either of these actions would help to make the current majority party less unpopular. There would also be no danger of reduced tax revenues, given that reducing tax rates would increase business returns and encourage business activity. Tax rates are already so high that we have observed an inverse relationship between marginal tax rates and tax revenues. In other words, lower marginal rates would actually increase total tax revenue collections.

If the Obama administration were more concerned about economic recovery and long-term prosperity than about redistribution and leveling, then it would simplify and cut tax rates – and more. It would reduce the size and scope of government spending as well as simplify and reduce the compliance burden of the whole regulatory structure.

Our current governing trend is toward dissipation and loss of international standing. If we don’t soon regain a moral and constitutional attitude, get our government spending under control and eliminate the budget deficit, then it will be more than mud that hits the wall.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Effects of national debt felt in all aspects of life

2010-09-05T14:11:00.004-05:00

Published in The Tennessean, Sunday, September 5, 2010

Effects of national debt felt in all aspects of life

by Richard J. Grant

On a recent speaking tour, Admiral Michael Mullen, Chairman of the Joint Chiefs of Staff, told audiences, “The most significant threat to our national security is our debt.” His point was that a sound economy would be essential to provide the resources needed to maintain a strong defense. This, he believes, is threatened by the increasing interest burden of our national debt.

Admiral Mullen is rightly concerned. New government debt is rarely incurred to finance important, long-term capital investments. Most often it covers only transfers and current consumption. As a percentage of the budget, defense spending has fallen from over 50 percent in 1960, to just over 20 percent in recent times. Now, more than half the budget is taken up by Social Security, Medicare, other health-related spending, and the various income security programs.

Interest payments have hovered around 9 percent of the budget and will likely grow. The White House recently raised its forecast for the fiscal-2011 budget deficit to $1.4 trillion, which means that the total national debt is expected to increase by more than 10 percent. The debt-service burden will grow accordingly; and when interest rates start rising, the refinancing of maturing government debt will amplify that burden.

Increased debt burdens imply increased future tax burdens. In other words, given the low investment value of most government spending, the increased future tax burdens will not be justified by increased future production. That means we’ll come out with lower disposable incomes than we might have otherwise.

There are other, more subtle, factors that Admiral Mullen might have mentioned. The incidence of the various taxes diverts resources to second-best uses. Those uses are judged, not by their total returns, but by their after-tax returns. Politically favored activities will have lower tax rates and will attract more resources as a result.

The complexity of the tax system and the possibility of sudden changes add to the uncertainties of life and make personal and business planning more difficult and expensive. This effect is compounded by the uneven expansion of government spending programs and the kaleidoscopic regulatory system.

Our reactions to all these things in the course of earning a living are reflected in the relative prices of all the goods and services that we trade. Whether we know it or not, those prices and the quantities are full of information about what we want and what resources are available. The less interference we have in our trades, the better we all communicate and coordinate our business plans with each other.

As governments grow in size and influence, they tend to replace private decisions with political decisions. Incentives are changed, actions are influenced, and information is lost. We lose our natural means of deciding and agreeing how best to use most of our time and resources. We turn smart money into stupid money.

Those who have experienced life in a communist country know that as government takes over we become economically blind. Private knowledge and initiative are replaced by glorified guesswork called government “planning.”

There is an old Cold War joke about a Soviet general boasting at an embassy party: “We will conquer every country in the world!” A thoughtful pause, then the refinement: “Every country except New Zealand.” A bewildered westerner asks the obvious: “Why not New Zealand?” The suddenly sober general replies: “Well somebody has to set prices!”

Socialist systems are aided by the existence of market economies outside their borders. The market economies generate price and product information that the socialist planners can copy in their forlorn attempts to postpone the collapse of their systems.

The Soviet system did collapse, and perhaps their old general did learn a thing or two about economics. Old habits of state control die hard, but the new Russia is now somewhat freer and stronger. The personal income-tax rate in Russia is a flat 13 percent. Now there’s something that even we can copy.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Richard J Grant archived at The Tennessean

Stimulus packages failed to ignite the economy

2010-08-29T14:05:00.003-05:00

Published in The Tennessean, Sunday, August 29, 2010

Stimulus packages failed to ignite the economy

by Richard J. Grant

Perhaps the worst effect of the recent recession and financial crisis is the political response and the establishment of new precedents for government intervention. Although the crisis was itself a political creation, this is not yet widely understood. And as long as the most important lessons remain unlearned, we are in danger of prolonged stagnation and future repetitions.

More optimistically, and perhaps naively, we might believe that the severity of the crisis and the almost unambiguous failure of the Keynesian-style “stimulus” packages would make most people skeptical of the value of government interventions. Clearly, the government’s response has failed to remove the symptoms of recession. The various stimulus tricks did little more than to give the economic equivalent of a sugar buzz. Now, we see signs of the economy slumping again.

The Federal Reserve continues to hold interest rates down, thereby depriving the market of honest information about savings and the demand for loans. Just out of uncertainty and fear, people are saving more and borrowing less; so interest rates would be low anyway. But the Fed has pushed rates lower still and is thereby discouraging saving and encouraging borrowing. This is the opposite of what people need; and it thwarts recovery.

The low interest rate policy interferes with businesses’ decisions about capital and production structures. When interest rates are held artificially low, businesses are led to use capital as if it is less scarce than it really is. This is what made the Fed a major culprit in causing the financial crisis. Now it is using even more drastic measures in a futile attempt to make the symptoms go away.

The wide discretionary powers exercised by the Fed are just one more illustration of the broader constitutional failure that has allowed government powers to grow and disrupt the economic order. It is not just a failure of particular economic theories, but a failure to enforce the limits on governmental power that were embedded in the US Constitution from the beginning. These limits reflect values of a much deeper nature than mere administrative rules.

Perhaps it is too much to hope that a growing awareness of this failure will lead to a restoration of an appropriate constitutional attitude. It is the attitude that the fundamental laws, as preserved in the founding documents, place real limits on what can be done under their authority.

A steadfast respect for constitutional restrictions would have saved us from the mushrooming welfare state and the pretensions of state capitalism. We would have been spared the fights over the recent health-care bill, the financial regulation bill, and the cap-and-trade fiasco. We would also have been spared the spectacle of congressmen voting for bills, the effects of which they could not possibly understand.

Constitutional respect would also have prevented the political class from acquiring a taste for, and a dependency on, big helpings of tax revenue. We would not now be facing an imminent increase in tax rates on income, dividends, capital gains, and estates. Such an increase would not be called for at the best of times and is foolish at a time of economic sluggishness and high unemployment. It is particularly foolish in combination with increased regulations and deficit spending.

A renewed constitutional attitude would not remove all economic uncertainty from our lives, but it would restrain the government from creating new uncertainties, as it is now. An overly ambitious government with excessive discretionary powers can, and does now, cause businesses to delay decisions and to delay hiring. The wealth that is lost is lost forever. We can never get that time back.

The longer we go without strict enforcement of the Constitution, the greater the danger that we will lose the habit altogether. The value-laden rules that have worked so well for us will give way to the new precedents that we allow to slide in on the crest of the next crisis.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Government thinks we’re helpless, makes us so

2010-08-22T14:32:00.002-05:00

Published in The Tennessean, Sunday, August 22, 2010

Government thinks we’re helpless, makes us so

By Richard J. Grant

Are we helpless? Apparently our government officials believe we are. They seem less and less able to imagine that we could ever do anything for ourselves.

It becomes a problem when they act on that belief, regularly rushing to our aid even when we don’t need it. There are few things that politicians won’t do to curry our favor and to make them seem indispensible to our lives. After years of repetition and progressive encroachment, it seems normal and to be expected. We increasingly prove them correct.

It no longer seems natural to buy a house without a government-sponsored agency to guarantee our mortgage. We now also expect some kind of home-buyer’s credit as an incentive. And if we still can’t make the payments, the government will find a way to help us shift that burden.

“Energy efficiency” and “green energy” sources are of such importance that we cannot be expected to pay for them ourselves. After all, they don’t pay for themselves. Without a subsidy, the payback period for solar panels would be longer than the life of the panels. Even with a subsidy, the net energy production of solar panels is negative over their life-cycle. But many companies exist on these subsidies.

Greenish technology makes us feel so good that now we are happy to have the government subsidize its application to cars. Why wait for it to become economically and ergonomically viable when we can feel good about ourselves now and let the government find someone to pay for it?

Employers are apparently quite scary. They come up with ideas that make other people productive, and this gives them an advantage in the marketplace. Not to worry: the government has long since passed labor laws and imposed mandates to ensure that employees remain expensive. The current reluctance of employers to hire has nothing to do with this, we are told, and can be counteracted with subsidies financed by the government’s superior ability to borrow.

Selective tax breaks encourage employers to provide medical insurance and payment plans. With all the state mandates, licensing restrictions, and potential regulatory liabilities, this tends to confuse the market and to bid up the costs of medical coverage. But don’t worry; eventually the government will centrally plan the medical system – and we know how well that works.

Through Medicare, the government is already protecting us from some of our medical-planning responsibilities and the hard work of innovation and finding private solutions to real problems. With the assurance that the government will take care of us, we will learn to tolerate the minor inconvenience of collectivized rationing and waiting lists. We can also find comfort in the hope that our grandchildren will be better prepared to handle the trillions of dollars of unfunded liabilities we leave them.

For the economy’s sake, the government urges us to spend money. To the extent that we obey, we are less able to provide financially for our retirement. But the government doesn’t expect us to be that prudent anyway.

Through the Social Security system, a welfare scheme ostensibly funded by dedicated payroll taxes, we can rest assured that the government will take care of us in our old age. We need not worry about how much more our savings might have grown had we been allowed to invest them in real, productive businesses instead of funneling them into current consumption. Thanks to the government deciding for us, we need never worry about what we might have achieved had we been left with all the fruits of our labor and the responsibility of managing them.

To help us find our assigned place in society, and to relieve us of the burden of education, the federal government is increasing its funding of schools and universities. Now we spend as much, or more, per student without the variety or results of private education.

Helplessness comes with practice, and practice makes perfect.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Less government control helps China’s economy

2010-08-15T22:08:00.002-05:00

Published in The Tennessean, Sunday, August 15, 2010

Less government control helps China’s economy

by Richard J. Grant

“That which gets measured, gets managed,” is a common aphorism taught to managers. It certainly does help in many cases to be able to gauge one’s progress toward a goal and to compare that to what is done. Perceiving a link between one’s actions and the results is a positive guide and motivator.

A dark corollary to this aphorism might be stated, “That which gets measured, gets managed even when you don’t want it to be.” This often happens in corporations and administrative bureaucracies but is particularly glaring in the use of macroeconomic data.

Data, such as Gross Domestic Product (GDP) and unemployment rates, are arbitrary in their construction and never better than estimates of amorphous concepts. But their real problem arises when they are politicized and married with the dubious theories of wannabe economic planners.

When politicians imagine that consumption is too low to support their desired level of GDP growth, the result is “stimulus” spending, exploding budget deficits, artificially low interest rates, and subsidies for companies and projects that waste resources. Needing a quick fix before an election, politicians and their advisors imagine that they can micromanage the macroeconomy.

Since the collapse of the post-war, fixed exchange rate monetary system in the early 1970s, the International Monetary Fund has tried to justify its existence by acting as the compiler of international economic statistics and dispenser of advice. Recently the IMF suggested that the People’s Republic of China should maintain “the fiscal stimulus through 2010 while, on the margin, reorienting further toward fiscal measures that will spur consumption.”

China’s GDP growth rate has tended to be in the high single digits and was 11.1 percent in the second quarter of 2010. That’s not recession, but apparently the IMF imagines that growth should be faster or that it might slow without government taking on more spending.

The IMF wants Chinese private consumption to increase in order to achieve “a more balanced economy” but never specifies exactly what a “more balanced” economy is. If the standard is the same as that exhibited by the Obama administration, then no level of consumption is high enough. If we don’t spend, then the government will try to spend for us – or despite us. Even the big-spending Bush (II) administration wanted Chinese residents to spend more, but at least President Bush revealed his true motive of promoting US exports.

Those who marvel at high Chinese growth rates should consider the link between that and the high level of savings and investment. China prospers as its economy is freed relatively from government control and interference. China is still underdeveloped, but its growth rate has soared as ownership and decision-making have been decentralized.

Chinese communists could not ignore the lesson provided by Hong Kong as it grew from post-war poverty to the top tier of prosperity in just a few decades. As a British colony with not much of an economy after the Japanese occupation ended, Hong Kong escaped the attention of the socialist planners that were unleashed on the United Kingdom itself.

Sir John Cowperthwaite, who was the Financial Secretary of Hong Kong from 1961 to 1971, resisted requests from Whitehall bureaucrats for economic data. When later asked what his best reform was, he replied, “I abolished the collection of statistics.” Cowperthwaite knew the danger of handing such statistics to social engineers.

Hong Kong had virtually no restrictions on trade, minimal regulation, and a flat personal income-tax rate of 15%. Cowperthwaite’s policy of “positive non-intervention” consisted of ensuring that government did very few things, but did them well. The people were free to produce, trade, and prosper – which they did. By the end of British rule, Hong Kong had a per capita income that was slightly higher than Britain’s.

Hong Kong might never again have another John Cowperthwaite, and it will decline accordingly. The United States could do worse than copy Cowperthwaite’s example, and it has.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Higher taxes mean less production

2010-08-08T12:35:00.003-05:00

Published in The Tennessean, Sunday, August 8, 2010

Higher taxes mean less production

by Richard J. Grant

When we want to discourage an activity, we might do so by raising the cost associated with doing it. Depending on the activity and the circumstances, that cost increase could take the form of a higher price, a tax increase, a fine, or a disparaging public-relations campaign.

This is the idea behind “sin taxes,” such as those often placed on tobacco and alcohol. The same deterrent is directed toward activities deemed to produce excessive pollution.

Governments use taxes primarily to raise revenue for their operations, not to discourage the activity that is taxed. But the discouragement comes with the imposition. The higher the tax rate, particularly the marginal tax rate, the greater is the disincentive to produce one more dollar of taxable income or profit.

Just as taxation reduces the value of undertaking the activities that are taxed, it also reduces the values of assets. An increase in property taxes will reduce the market value of your house below what it would have been. The total effect does depend on the value to you of the services that are provided from the tax revenues, and we would hope that the net effect is positive, but the tax effect leans against this. All else equal, the higher the property tax compared to other municipalities, the less a potential buyer is willing to pay for a property.

When we buy shares in a corporation, we expect to receive some combination of dividends and capital gains. If we suddenly learn that dividends and capital gains are subject to taxation, the price that we are willing to pay per share will be less than it would have been without the tax. The corporations “themselves” also pay taxes, including a significant corporate income tax. All these taxes reduce the values of corporations and businesses in general. We can only hope that the services the tax revenues pay for will bring a net benefit.

Costs can be increased also by government mandates and regulations. When a regulation is “effective,” that means that it causes us to do things differently than we would have. Even when it doesn’t change our operations significantly, the compliance documentation (paperwork) uses up resources and management attention. It is difficult to find government regulations and associated administrative processes that produce clear net benefits beyond the chain reaction of unintended consequences.

As the regulatory network grows, the net burden grows. As is the case with taxation, beyond a certain range of imposition, the returns are negative. That is why increases in tax rates now cause reductions in revenue. The tax base is discouraged. Other activities, that are “second best” but relatively more tax-efficient, become relatively more attractive to capital and entrepreneurial attention.

Increases in regulatory burdens discourage productive investment and tend to limit the capacity of the tax base. They also reduce the flexibility of everyone in business. We are all hindered in our abilities to adapt to changes in natural conditions, both economic and physical.

This helps explain why economic activity takes longer to “recover” from some downturns than from others. The response to the most recent recession is an example of government increasing the burdens on, and reducing the flexibility of, the productive sector.

As regulations and payroll taxes increase the cost of employing workers, business owners delay hiring and employ fewer workers. They might even decide to change the types of labor they employ in order to change their production and delivery processes. This also forces workers to adapt, often at great expense.

In sum, tax and regulatory increases tend to reduce the returns on stocks, bonds, businesses, and labor. That also reduces the prices and wages that people are willing to pay for these assets and services. This does not mean that we will not see those prices rise over time. It just means that the values will not be as high as they could have been.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Numbers, facts don’t add up for economic adviser

2010-08-01T14:52:00.004-05:00

Published in The Tennessean, Sunday, August 1, 2010

Numbers, facts don’t add up for economic adviser

by Richard J. Grant

There are many economist jokes out there, most of which end in, “you still wouldn’t reach a conclusion.” These jokes are funny because most laymen don’t know what economics is. Nevertheless, there is room for healthy disagreement within any science.

Sometimes we suspect disagreement within the same person. Since becoming the Chair of the Council of Economic Advisers, Christina Romer has been ridiculed for seeming to forget her past as an economist in order to embrace the agenda of the Obama administration. This has come up again recently with the publication in the American Economic Review of an article co-written with her husband, David, who, like her, is a professor at UC Berkeley.

The article is an impressive exercise in economic history in which the authors estimate that a “tax increase of one percent of GDP lowers real GDP by almost three percent.” They focused on changes in postwar tax revenue, not tax rates. Also, they didn’t study all cases but, to avoid complication, narrowed their focus according to their perceptions of policymakers’ motivations for the tax changes.

Romer’s critics are perhaps too quick to ridicule her for inconsistency in her support for letting most of the “Bush tax cuts” expire. In that recent article, she does not directly consider responses to recession. But she does find that tax cuts are most strongly associated with increased long-run economic growth. Also, tax increases intended “to reduce an inherited budget deficit” don’t seem to reduce growth as much as other such tax increases.

In this respect, Romer’s findings (in this academic article) are not really inconsistent with her statements as head of the CEA. In another article, made available to newspapers last week and which reads more like campaign literature, she cheers what she calls “one of the broadest tax cuts in American history, helping 95 percent of working families.” Given that her research focuses on tax revenues as a percentage of GDP, she makes no distinction between tax credits and changes in marginal tax rates. From this perspective, the tax credits more or less offset the effects of the soon-to-rise marginal tax rates by shifting resources from future investment to current consumption.

The trouble with refundable tax credits is that a large portion of them are not “tax cuts” at all: they are government spending. Given that a third of working Americans have no income-tax liability, it is impossible to reduce their income taxes further. It is dishonest to pretend to do so.

When seen in the full context of Obama administration policy, most families are net losers. The increase in the national budget deficit is bigger than the sum of the “stimulus” checks. In other words, current tax liabilities are removed from sight by running up future tax liabilities. Try explaining that to your grandchildren.
The problem exposed here is not so much inconsistency as it is a weakness in the foundation upon which most economic research is conducted. Romer’s real problem is that she gives a veneer of respectability to the administration’s policies, which are consistently bad.

She finds herself making indefensible claims about huge numbers of jobs “created or saved.” How can she say that “clean energy projects alone are responsible for nearly 200,000 new jobs” without admitting that these subsidized jobs produce less value than those same people could have produced in a market unhampered by government interference? Subsidized jobs, even “green” ones, are unsustainable.

Does Romer really believe that – constitutional questions aside – the government is really competent to be “investing” in “expanded broadband access, advanced-vehicle manufacturing and a smart-energy grid”? Where in all her research has she found any hope that any government can be entrusted with such economic planning?

As we already knew, economists can disagree. That doesn’t mean they are both wrong. But one of them is; and if we can’t tell which one, then the joke is on us – and our grandchildren.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Obama swinging but missing on economic policies

2010-07-25T14:31:00.002-05:00

Published in The Tennessean, Sunday, July 25, 2010

Obama swinging but missing on economic policies

by Richard J. Grant

On the economy, there are three areas where the Obama administration and its congressional supporters are failing: fiscal policy, regulatory policy, and monetary policy. They are nothing if not consistent.

1. On the fiscal front, the policy focuses on a hoped-for “stimulus” through increased government spending. The idea is to increase “aggregate demand” by encouraging people to reduce saving and spend more now. Rather than let people do the natural thing at a time of uncertainty and save, the administration wishes to increase their taxes so it can spend the money for them.

It matters what the national government buys for us. Starting from zero, the first dollars spent should go to the highest priorities, such as national security and the essential infrastructures of governance. The desirability of such spending is clear, but as spending increases, the marginal benefits fall. At some point the net benefits become negative. For most other types of government spending, especially the typical pork-barrel project, the first dollar spent yields negative net benefits.

The trouble with “stimulus spending” is that it isn’t working. Nor would a good theorist expect it to work under current conditions. Professor Robert Barro of Harvard University has estimated spending multipliers of “around 0.4 within the same year and about 0.6 over two years.” In other words, the net effect of government spending is to reduce economic activity in one area by $1 in order to increase it by about half a dollar in the area targeted for spending.

The 2009 stimulus package has been financed by increasing government debt, which must be serviced through future taxes. Barro estimates the effect of taxes using a multiplier of minus 1.1, which means that a $1 increase in taxes this year will reduce economic activity next year by $1.10. When adding up the effect over five years, Barro concludes, “This is a bad deal.”

2. Regulatory policy becomes very expensive in ways that go way beyond its budgeted administrative costs. Regulations, though ostensibly enacted to protect people from one another, tend to grow into such a thicket that it is hard, expensive, and too distracting for businesses to serve their customers efficiently.

The biggest costs of the recently passed health-care-reform and financial-regulation laws will be not so much in overt expenditures as in wealth never produced. As things continue to go wrong as a result of these and other regulatory actions, there will be heated political debates over the real causes. These bills have time-bomb effects: they authorize multiple agencies to fill in the details with future regulations. Many of these new regulations will be intended to correct the visible distortions created by earlier regulations.

An administration interested in reducing unemployment, and knowledgeable in good economics, would first remove the existing regulatory overgrowth that is choking innovation and wasting our entrepreneurial energy. Particularly at a time of high unemployment, we need more flexibility, more freedom to act on perceived opportunities and create the voluntary agreements to serve one another that we call “jobs.”

3. Monetary policy centers on the ostensibly independent Federal Reserve System. But the Fed exists at the pleasure of Congress, and its top officers are presidential appointees. Its work is also complicated by the many other agencies and regulations created by Congress. Most notoriously, Fannie Mae and Freddie Mac continue to distort the mortgage market and to drain taxpayers of wealth that might have been put to intelligent use.

The Fed itself acted as expected by providing emergency liquidity to help mitigate the cyclical blowback from its previous looseness. But it is afraid to let go of interest rates and allow them to reflect current market realities. Thus, at a time when we have businesses begging for credit, the Fed is discouraging savers from lending and it is paying banks a quarter percent interest to hold excess reserves at no risk.

That’s three outs for this administration, and we’ve lost this inning.

Richard J. Grant is a professor of finance and economics at Lipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010

Pelosi’s words, like her policies, don’t add up

2010-07-18T15:35:00.004-05:00

Published in The Tennessean, Sunday, July 18, 2010

Pelosi’s words, like her policies, don’t add up

by Richard J. Grant

There is a market for bad economics. That market exists largely to service customers who are active in what we might call the politicized sectors of life.

A recent example of bad economics being put to use was House Speaker Nancy Pelosi’s attempt to justify the extension of unemployment insurance benefits with a stimulus-multiplier type of argument. She now-famously extemporized, "It injects demand into the economy. It creates jobs faster than almost any other initiative you can name."

There is no word yet on whether Speaker Pelosi will test her theory by putting her economic advisers on unemployment. But one begins to see the brilliance of her party's actions in ramming through or threatening legislation that serves to keep up the unemployment rate. If only we lesser souls could understand her theory: the more money we take from people who are working to give to those who are unemployed, the more jobs we create.

True believers in the government's ability to “stimulate” sustainable economic activity correspond to those who, in another era, believed in perpetual motion machines. Perhaps one day we will find a way to receive the benefits of work without any net energy expenditure. But we're not there yet, at least not for the whole system or society.

Work is inseparable from survival. Someone must work to provide for the needs, and some of the wants, of our families. Unemployment, in the sense of not producing what is needed, reduces our assurance of survival. But those who live in a familial community will be helped by their fellows through periods of sickness, injury, or other misfortune. Such charity can be organized in many ways, and we can choose to support those that appear most effective. We could even, where constitutions allow, employ government to undertake charitable activities, and put someone like Nancy Pelosi in charge.

Given the volitional nature of an employment relationship, employment is not truly insurable. We corrupt both our language and our thought when we speak of unemployment “insurance.” If we are going to offer unemployment benefits, and thereby politicize employment, then we need to be honest about what we are really doing. We are shifting both charitable resources and responsibility from civil society to the coercive mechanisms of government. The relationship is changed, but if it is honestly understood and agreed upon, then it has some legitimacy.

This legitimacy is not unlimited, and it is tested by any attempt to extend any government service, including unemployment benefits. The moral environment is further polluted when bad economic theories are promoted in the political market for votes.

A better understanding of reality should help us survive in the “real world.” Systematic improvement in the physical sciences and economic science should help to improve our judgment. But politicization of social functions can corrupt not only those functions but also the sciences that inform them.

The 1930s economic theories of John Maynard Keynes have been warmly embraced by politicians who wish to justify the expansion of government spending and budget deficits in the hopes of promoting economic growth. This political usefulness better explains the longevity of Keynesian theories than does any internal merit.

The physical sciences are just as vulnerable to distortion as a result of political usefulness. Climate science has been brought down by serpentine political agendas and the intoxicating taste of government funding. When politically advantageous, we can replace Albert Einstein with Henny Penny.

Just as Keynesian economics helped to break down the protective stigma against debt, it has been used to promote the illusion that we can get something for nothing through political action. We should not blame Keynes for this but rather those among his followers who allowed political incentives and dreams to stunt the growth of economic science.

We can have an honest debate about the size and direction of government spending “multipliers,” but Nancy Pelosi's words, like her policies, don't add up.

Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail:rjg@richardjgrant.com

Copyright © Richard J Grant 2007-2010