State capitalism displaces the market economy

The twenty-first century has evidenced a remarkable worldwide  shift away from both the market economy model and the socialist economy model  in favor of  state capitalism. While the shift is undoubtedly beneficial for those who labored under socialism, it is unequivocally disastrous for those who thrived under market economy conditions.

In this column, I shall focus attention primarily on state capitalism in so-called emerging countries. China and Singapore are usually paraded as examples of high-performing state capitalist economies. China, indeed, is now the leading practitioner of this pervasive phenomenon. Its relative success, however, is an unreliable indicator for the rest of the emerging nations.

First, for state capitalism to have any chance of success is must be directed by a competent state.  China  has a strong Mandarin culture which was not entirely destroyed by the evil dictatorship of Mao Zedong.  India, Brazil, South Africa Argentina, Venezuela and many other emulators do not have such a strong administrative culture.

Second, well-directed state capitalism performs best when copying the innovations of others. This is so because governments are prepared to ignore the property rights of others and are eager to steal technology.  They tend, because of lengthy experience, to be efficient thieves. Notably, however, they are not effective innovators. So as soon as they have to produce new ideas of their own, puff there goes the market miracle!  Japan is the outstanding example of this blow-out phenomenon.

Third, state capitalism always favors well-connected insiders over more innovative outsiders. In China, for example,  unproductive princelings have seized almost all the state capitalist spoils. In Russia, a clique of oligarchs dominates both the Kremlin and business, such as that is. Thus, the state capitalist model induces cronyism, inequality and, eventually (one hopes) revolution. 

Fourth, state capitalism always supports its losers through bail-outs and other subsidies. Americans should be fully aware of this given the hand-outs so recently provided to financial institutions, automobile producers, so-called energy-savers,  rapid-transit rail systems and other political boondoggles favored by the President and compliant members of Congress because of campaign donations received from unscrupulous state capitalist beneficiaries such as Warren Buffet and George Soros.

 

If only pigs could fly

Newt Gingrich is surely one of the fattest politicians to run for the White House in recent years. He is truly a short, rotund porker, looking every ounce a man who loves to take home the bacon and wallop it down.  On the BMI scale Newt is well into the obese category. When  76 year-old Ron Paul challenged the decade-younger Newt to a 25 mile one-on-one  bicycle race in Florida earlier this week, the Fat One almost went into cardiac arrest.

Yet Newt, in his latest flight of fantasy, has no hesitation in declaring that the Moon will become America’s 51st state during his second-term presidency. For Newt, of course, the second -term is viewed as automatic, once his magic wand has restored the United States to prosperity.

“I think the number is 13,000 – when we have 13,000 Americans living on the moon, they can petition  to become a state.   By the end of my second term, we will have the first permanent base on the moon, and it will be American.  We will have commercial near-Earth activities that include science, tourism and manufacturing”  Newt Gingrich at Cocoa Beach, Florida.

Presumably, the Moon State will provide Newt with an inexhaustible supply of ever-younger wenches and an inexhaustible supply of pork to satisfy his twin appetites.

Back on Earth, Newt  still struggles to divert attention from the unfortunate consequences of his more youthful appetites.

“Back on the ground in Florida, Newt continues to try to put to bed his reputation with his wives, if not the wives themselves.  Just when he thought he was in a friendly forum in Miami, another pesky television correspondent asked him why he led the Republican campaign to impeach Bill Clinton for zipper disease when he was losing a struggle with his own zipper.” Wesley Pruden, ‘Off  to the moon with randy Newt’, The Washington Times January 27, 2012

Newt Gingrich is most popular among young voters. For they have no personal remembrance of his history as a political loser, as an unethical Speaker and as a serial philanderer. Yesterday, Bob Dole, a former Majority Leader of the Senate,  published a reminder about Newt Gingrich’s unsavory past.  The Republican primary voters would do well to take heed of his words of warning.

Columnist Mark Shields tells of an exchange – perhaps apocryphal, like so much of Newt – between Newt and Bob Dole who had the sharpest tongue in town. ‘Why do people take such an instant dislike to me?’ Newt asked.  The senator replied: ‘It saves them time.’ Wesley Pruden, ibid.

Barack Obama campaigns from the red corner

Once one penetrates the false rhetoric of the State of the Union Address, it is clear that Barack Obama is now determined to campaign for the 2012 election under his true color – socialist red. Since a majority of Americans do not share this color, the President is gambling on his ability to fool an electoral majority into voting against their long-term interest. 

Such events do happen. Adolf Hitler was voted into office through the democratic process in Germany.  Hugo Chavez was voted into office,  twice, through the democratic process in Venezuela.  Juan Peron was voted into office through the democratic process in Argentina.

‘Fool me once, shame on you’ might be a justifiable defense for those who put Obama into the White House in 2008. ‘  Fool me twice, shame on me’ will be the only viable response, if the Red Corner succeeds yet again in 2012.

So how does Obama aim to pull off a second electoral fraud?

Through the use of lies, damned lies and statistics! No more and no less. ‘America should not settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by.’ (Obama January 24, 2012)

Between 1980 and 2007, free market policies initiated by President Reagan created an environment in which United States gross domestic product grew by more than 3 per cent pert annum and in which 50 million net new jobs were created.  This expansion massively increased the size of middle-class  and upper-middle class America.  Per capita income increased by 65 per cent over that period and household incomes rose substantially across all income categories.

Let us define the middle class as comprising households with incomes between $35,000 and $105,000 per annum (in inflation-adjusted dollars). Over the period 1980-2007, the middle-class so defined surely declined, from 64 per cent to 51 per cent of the total.

It did not decline, however, because a larger percentage of households fell below that range. The percentage of households making less than $35,000 stayed approximately the same, at approximately 25 per cent, despite a rapidly increasing divorce rate that increased the percentage of single-parent households.

The middle class so defined, declined because many households became richer and moved into the upper-middle-class category.  The percentage of households making more than $105,000 in inflation-adjusted dollars more than doubled over that period ,  from 11 to 24 per cent of the total.

So there is lie number 1 on which the Red Corner hopes to stake its claim.

Lie number 2 is advanced to support the so-called Buffet claim that any one earning more than $1 million per annum should pay at least 30 per cent of that income ($336,000) in federal income taxes. This, claims Obama, is the effective federal income tax rate outlayed by middle-class Americans. Obama claims that wealthy taxpayers pay approximately one-half of that rate, because of limits on dividend and capital gains tax rates.

Obama is falsifying the facts with respect to both assertions. Income earned from capital gains and dividends has already been taxed at the rate of 39 percent through the corporate tax. So such wealthy individuals pay an effective rate a little less than 54 per cent (allowing for personal deductions etc).

Middle class households pay average federal income taxes of less than 12 per cent, once brackets, personal exemptions and other tax avoidance is accounted for.  Warren Buffet’s secretary most probably paid less than 10 per cent of her income in federal income taxes. I exclude payroll taxes from this calculation because they are supposed to be personal investments into the Social Security Trust Fund.

So there we have it readers. Are Americans, in 2012, so poorly educated that they cannot locate truth from fantasy on issues as basic as this?  If so, they they will receive what they deserve, as another four years of  Obamamonics destroys the economic freedoms on which prosperity must be grounded.

The proven recipe for American prosperity is economic freedom

More than 50 years of experience clearly demonstrates that America prospers when economic freedom increases and suffers when it contracts. The Founders wisely grounded the Republic in terms of economic freedom. The unfolding years since then have served to prove them correct in this judgment

John B. Taylor succinctly defines the principles of economic freedom in the following terms:

“At their most basic level, these principles are that families, individuals and entrepreneurs must be free to decide what to produce, what to consume, what to buy and sell, and how to help others.  Their decisions are to be made within a predictable government policy framework based on the rule of law, with strong incentives derived from the market system, and with a clearly limited role for government.” John B. Taylor, ‘Economics for the Long Run’, The Wall Street Journal, January 25, 2012

Between 1960 and 2012 American economic policy has displayed major shifts between more and less economic freedom, between more and less emphasis on rules-based fiscal and monetary policy, between more and less expansive roles for government, and more and less reliance on markets and incentives.  Unequivocally, these shifts make the case for more economic freedom as above-defined.

From 1960 to 1980, economic freedom contracted – under the administrations of Kennedy, Johnson, Nixon, Ford, and Carter – as left-leaning Keynesian  economists flooded into Washington, imposing short-term fiscal stimuli, temporary tax rebates or surcharges, stop-go monetary policies and  wage-price controls against a back-cloth of high and rising marginal rates of income tax.

The result was stagflation.

Between 1981 and 2000 – under the administrations of Reagan, Bush Sr., and Clinton – economic freedoms advanced. Long-term tax cuts were implemented, fiscal policy became more predictable and less invasive, monetary policy followed well-articulated rules.

The result was significant economic growth, high rates of employment and price stability.

From 2001 onwards – under the administrations of Bush Jr. and Obama – economic freedoms have contracted, and will continue so to do for certain should Obama gain a second term.

The result is economic stagnation with high unemployment. Inflation lurks in the wings.

The evidence is clear. All rational, thinking individuals must be aware of it by now. The question remains:

Will the electoral majority in November 2012 be rational and thinking, or will it comprise  irrational bundles of emotion driven over the economic abyss  by the false rhetoric of economic fairness?

Obama’s appalling Islamic bequest to Egypt and the Middle East

President Obama’s intervention to bring down President Hosni Mubarek in 2011 predictably has resulted in an American nightmare in Egypt.  Islamists, not liberals or secularists, are poised to profit from the political aftermath of that intervention. The Muslim Brotherhood’s Freedom and Justice Party and the yet more fundamentalist Nour Party have won two-thirds of the seats in Egypt’s next parliament.

However much President Obama personally may rejoice in this advance of Islam across the Middle East, American citizens should be gravely concerned by what is happening.  For a  30-year long security relationship between Washington and Cairo is now in serious jeopardy.

First, Muslim Brotherhood leaders have promised to put Egypt’s 1979 peace treaty with Israel to a popular referendum.  Almost certainly, the referendum will reject that treaty.  Second, a Muslim Brotherhood-governed Egypt is clearly inclined to fueling rather than to countering violent extremism.  From this perspective, the Brotherhood’s invitation for al Gama’a al-Islamiya to join its coalition is a source of grave concern.  For al Gama is a U.S designated terrorist organization.

Third, an Islamist-led Egypt will be inhospitable to religious minorities and to Egyptian secularists. The newly-elected Islamists are committed to making Shariah the exclusive source for all Egyptian legislation and to prosecute any individual who criticizes Islamic law.

The only powerful agent that now stands between the parliamentary majority and Islamic fundamentalism is the Egyptian military.  The US –  as paymaster for that military in the order of $1.2 billion per annum – presumably can impress its will upon that agency. It may already be none too soon for the Egyptian military to intervene to insist on secular rule across Egypt, under a direct threat to suppress parliament and impose military rule, if the Muslim majority does not accede to its demands.

American policy should always be governed by political realism and not by bv bleeding-heart liberalism.

“Merely protecting Egypt-Israel security and defending pluralism and minority rights would be a far cry from the robust partnership of years past.  But given the hand the U.S. has been dealt, this approach stands the best chance of preserving what matters most to long-term American interests.” Robert Satloff and Eric Trager, ‘How the U.S. Should handle the Islamist Rise in Egypt’, The Wall Street Journal, January 23, 2012

Satloff and Trager are far too kind to the United States. The bad hand was dealt to them by its own President. This is just one more example why the U.S. electorate, in its majority,  should refrain from electing political incompetents into the White House.

Implications of America’s cultural and geographical divide

Yesterday, I drew attention to Charles Murray’s statistics on the cultural and geographic  divide between upper-middle class  and working class white Americans aged between 30 and 49 years of age. Today, I shall focus attention on some implications of this division.

Over the past 50 years America’s largely common civil culture among these two white subgroups has unraveled.  The  white upper-middle class group (WUC) is now fairly comprehensively endowed with advanced education, often obtained at elite, non-state universities and colleges, with shared tastes and preferences that set them apart from mainstream America. Simultaneously, a new white working class (WWC) has emerged, characterized not by poverty, but by a withdrawal from America’s core cultural institutions.

Charles Murray characterizes the divide in terms of  two fictional neighborhoods: Belmont (located near Boston) representative of the WUC and Fishtown (located in Philadelphia) representative of the WWC.  These two neighborhoods are characterized by the statistics that I identified yesterday.

He identifies a number of worrying implications as arising from this division:

1.  single parenthood: In terms of just about any measure of development one can identify, children  born to unmarried women fare worse than children of divorce, and far worse than children raised in intact families.  This reality holds even after controlling for the income and education levels of the parents. Fishtown stands at an enormous disadvantage against Belmont in terms of this metric.

2.  industriousness: In terms of availability for work and willingness to work 40 hours per week, the level of industriousness in Fishtown stands far below that in Belmont. Remember that Murray chose 2008 and not 2010 to measure this difference specifically in order to avoid any uneven impact of the financial crisis.

3.  crime: The surge in crime that began in the mid 1960s, and continued through the 1980s,  left Belmont almost untouched. It ravaged Fishtown.  Between 1960 and 1995, the rate of violent crime in Fishtown more than sextupled, while remaining flat in Belmont. The reduction in crime since the mid-1990s, affecting the nation as a whole, has been much smaller in Fishtown,  than in Belmont, leaving  Fishtown today with a violent crime rate that is still 4.7 times the 1960 rate.

4. religiosity: Approximately 50 per cent of American philanthropy, volunteering, and associational memberships is directly church-related.  Religious Americans account for much more non-religious social capital than their secular neighbors. Although America as a nation has become markedly more secular since 1960, Fishtown has become much more secular than Belmont.  This implies that many more children in Belmont than in Fishtown benefit from Sunday School educational and cultural discipline in an out-of-school environment.  Many more such children obtain an understanding of a well-established and well-tested  moral code that encourages mutually beneficial  social interaction.

5.  other implications: Because of the growing  geographical separation between Belmont and Fishtown significant lifestyle differences exist.  These have to do with the kinds of  food that Belmonters eat, the ages at which they marry (or do not), the ages at which they have children, the books that they read, and their number, the television shows that they watch, and for how long, the way in which they take care of their bodies, the conversations that they have or do not have,  their leisure activities,  their work environments, and their child-raising practices. 

 Taken together, these differences exaggerate initial cultural differences between residents of Belmont and residents of Fishtown. Note that Murray is not focusing here on differences primarily driven by income differentials – although these differences cannot be ignored –  but rather on differences driven by cultural choices.

Murray suggests in his book that these differences are not significantly amenable to government policy-intervention – whether from the Left or from the Right.  He discusses a range of voluntary measures, largely involving the residents of the SUPER ZIP codes diversifying their residencies into other neighborhoods. Quite frankly, that is not going to happen, for reasons that Murray has already identified.

Nevertheless, if Charles Murray is correct in his diagnosis, then he has performed a great service to his country. For, without the diagnosis of a problem, solutions will not be explored at all. And that implies a long-term ossification in the cultural and geographic divide between white upper-middle class and white working class families across this nation. And down the road, that implies serious problems that surely will require government intervention.

 

Obituary for William A. Niskanen Jr by Steve Hanke

In late October 2011, Bill Niskanen died. Many of you will know him as a great classical liberal political economist.  Many others will know about him as a Founding Father of Public Choice. Those of you who are not acquainted with him surely will benefit from learning about his important contributions to knowledge.

On January 4, 2012, Professor Steve H. Hanke (Johns Hopkins University)  posted a superb Remembrance of Bill Niskanen at the Cato Institute website. This Remembrance can be accessed at the following address:

http://www.cato.org/pub_display.php?pub_id=13984

Bill Niskanen was one of my very best and most highly-esteemed colleagues. I miss him greatly.

Charles K. Rowley

Cultural and geographical divides between white American sub-groups

Since the founding of the Republic, upper middle-class and working class Americans have been divided by income. Such is the nature of any market economy. In America, the income divide has not posed serious social problems, not least because of the perceived opportunities for working class families to climb the income ladder from generation to generation.

 In a new book, entitled Coming Apart: The State of White America, 1960-2010, Charles Murray, a widely respected social scientist, pinpoints a much more serious divide between upper-middle and working-class white Americans. For defintional purposes Murray focuses attention on non-Latino whites.

 The divide that Charles Murray identifies is much less amenable to generational adjustment. For it is based on culture rather than on income.  The way of life, rather than the level of economic affluence of the two groups is now seen as the barbed wire fence that separates these two communities, for the most part, perhaps forever. 

Murray is a first-class statistician, so his observations are well-grounded in the cultural data of the nation.  He is an observer rather than an ideologue, though his observations always have significant policy-implications. In this column, I shall pay attention to relevant statistics that identify this new divide. In tomorrow’s column, I shall review Charles Murray’s thinking about the social consequences of the divide itself.

For analytical purposes, Murray focuses attention on two sub-groups:  white upper middle class individuals aged 30-49 with at least a college education working in managerial jobs or high-status professions (WUC)  and white working class individuals aged 30-49 with no more than a high-school education working in blue-collar, low-skill or service jobs(WWC).

The following statistics support his view about the rapidly widening cultural divide between these two population sub-groups over the period 1960 and 2010:

WUC  Married: 1960 94%, 2010 83%   (down 11 percentage points)

WWC Married: 1960 84%, 2010 48%    (down 36 percentage points)

WUC prime age males ‘unavailable for work’ 1960 0%, 2008 0%

WWC prime age males ‘unavailable for work’: 1960 3%, 2008 12%.

WUC Males with jobs working fewer than 40 hours per week: 1960 9%, 2008  12% 

WWC Males with jobs working fewer than 40 hours per week: 1960 10%, 2008  20%

WUC  non-religious 1972-1976 29%, 2006-2010 40%

WWC non-religious 1972-1976 38%, 2006-2010 59%

Nonmarital birth ratio by mother’s education: 16 years and up 5.6%

Nonmarital birth ratio by mother’s education 13-15 years 20%

Nonmarital birth ratio by mother’s education 12 years 40%

Nonmarital birth ratio by mother’s education fewer thaan 12 years 65.4%

Of course, these statistics demonstrate a significant cultural divide. This divide is made yet more significant by the geographic compartmentalism of the upper middle class subgroup as defined by Murray. 

 He identifies the 14 most elite ZIP code areas in the United States, measured  in terms of median family income.  In 1960, those elite ZIP code areas were significantly diversified in terms of income,  with a median family income of $84,000 measured in terms of the 2010 price level. By 2000, those same elite ZIP code areas were far less diversified, with a median family income of $163,000 (again measured in terms of the 2010 price level). Upper middle class whites  no longer cohabit with  working class whites.  They cluster in the SUPER- ZIP code areas.

The two segments of prime -age  white American adults  thus identified constitute significant proportions of white America, with the upper class segment constituting approximately 20 per cent  and with the working class segment constituting 30 per cent of the white population.

As I shall outline tomorrow, this segmentation encourages major lifestyle differences between the two subgroups. These lifestyle differences all but guarantee that the WUC and the WWC subgroups will become increasingly segregated through succeeding generations.

 

 

Who pays more federal taxes?

Because few media columnists and – it would seem – even fewer rich individuals understand the nature of tax incidence a lot of rubbish is published about the tax burden of rich Americans. Warren Buffet and Mitt Romney both display gross ignorance about tax incidence when positioning their personal average federal tax burdens at between 15 and 17  per cent. Back to Economics 101 for all of you!

Those who earn their income in the regular work- place pay two principal  kinds of federal taxes – income tax and payroll tax. Income tax rates rise in line with income from a minimum rate of 10 per cent to a maximum rate  of 35 percent. A range of exemptions apply through which households are able to reduce their income tax liabilities or turn them into tax subsidies. 

Payroll taxes also apply to earned income, up to a limit of $106,000 of earned income. Although employees technically only pay 50 per cent of the payroll tax, the incidence of the employer’s contribution pretty much falls on the employee through wage reductions. The payroll tax rate currently runs at some 13 per cent as a result of a temporary tax holiday of 2 per cent.

For those who live entirely off unearned income – and for those who live partially off that same source – the federal tax implications differ sharply. Capital gains and dividends – for smart investors – are taxed at 15 per cent. And,of course, payroll taxes do not apply.

Herein, however,  lies an error of calculation by the Buffets and the Romneys of this world.  Dividends and capital gains reflect profit performance by the corporations involved. Those profits are taxed at the corporate tax rate of 35 per cent before they provide the basis for capital gains and/or dividends.  So unearned income is taxed at an effective rate of 50 per cent, not 15 per cent. The full incidence of the corporate tax falls on the recipients of unearned income. The US corporate tax rate is one of the highest in the world.

On this accurate restatement of federal tax rates, Table 1 identifies who paid more federal taxes in 2011.

                                                                               Table 1

                            Average taxes paid as a share of income

                                            Income taxes                 All federal taxes

Top 1 per cent                     18.8 %                         29.5%

81st-99th percentile      11.8%                             22.8%

21st to 80th percentile    4.2%                           15.1%

Bottom 20th percentile -5.6%                           4.7%

Source Congressional Budget Office 2011

Table 1 shows that some 30 per cent of all federal taxes are paid by the richest 1 per cent of households, hardly a number that is bandied about by the liberal media.  It also shows that the poorest 20 per cent of US households receive income tax subsidies. Their federal tax burden becomes positive only because of the payroll tax.  Again, these are not numbers that are popularized by the liberal media.

The average effective tax rate for the richest 1 per cent of households is already twice that for the middle class. Contrary to the words of the Sage of Omaha, secretaries and plumbers do not on average pay a higher tax rate or less in taxes than the CEOs of their companies.  They pay dramatically higher average rates and far far more in federal taxes.  Indeed, the top 1 per cent  pays a lion’s 30 per cent share of all federal taxes.

Hat Tip: The Wall Street Journal, January 20, 2012

Greed is good for a real market economy

“The difference between North Korea and the US is not that one  society offers more scope for greed than the other.  In both countries, as in many others, there are greedy people and many who are not, and those who are greedy are disproportionately represented in the controlling elite.  The difference lies in the channels of greed – the degree to which the quest for profit is directed towards the creation of new wealth rather than the appropriation of wealth already created by other people.  A successful market economy emphasises the former and restricts the latter through rules and institutions, in a structure that has evolved slowly and requires constant defence against those who would use economic and political power to subvert it.  Success or failure in that endeavour is the central explanation for why some societies are rich and others poor.” John Kay, ‘A real market economy ensures that greed is good’, Financial Times, January 18, 2012

A market economy operating under rules that maintain competition – and with appropriate mechanisms to deal with public goods and relevant externalities – co-ordinates the selfish decisions of households and businesses extremely efficiently. Co-ordination, however, which might, at least in principle, equally be achieved by powerful computers, is not its only, or even its principal function.

Entrepreneurs, seeking private rewards through market process, elicit information on preferences and products from the price mechanism . On this basis, they calculate profitable ventures thus managing the market’s process of discovery.  In this way, a market economy enables endless experimentation – some successful, many not. The successes are emulated while the unsuccessful are quickly abandoned.

Centralized economies cannot emulate this entrepreneurial function for a variety of reasons.  Repressive leaders fear the independence that emanates from successful profit-seeking. They rely instead on corrupt underlings to relay relevant signals from the controlled market-place.  The great leader tends to hear what he wants to hear, rather than the truth about the non-market economy that he oversees.

“Sixty years of division of the Korean peninsula has created two states with very different standards of living in one country.  The Korean example is pathological. The division of Germany resulted in two states, both functional in economic terms, but one far richer.  The less noticed comparison between the modern histories of Finland and Estonia had the same outcome.  There are few controlled experiments in economics, but these are as close as we get, and the results were clear.” John Kay, ibid.

Ayn Rand wrote about all this in Atlas Shrugged, more than half a century ago. She had the enormous advantage of living in the United States as a Jewish refugee from the USSR. Selfishness is far superior to altruism, and greed is far superior to ascetism, in a properly ordered market economy. Greed, within the context of market constraints, is in truth the life-blood of economic progress and the wealth of a nation.