Reviving Basket Cases

Mugabe is out in Zimbabwe.  It is not the worst economic and political basket case in the world but there is a great opportunity for its citizens and the world to improve.  Zimbabwe actually moved up in the last year or two as Heritage moved them up to a score of 44 (of 100) that lifts them into the repressive category.  Freedom House kindly puts them into the Partially Free category with a score of 32 of 100.  We have seen this description of the problems of newly found freedom for Zimbabwe in several places.  Here it comes from Neo-neocon:

“In the past we could never criticize the president,” said Felex Share, a political reporter, in the hours before Mugabe’s resignation. “Right now, we can touch anything.”

How will Zimbabwe deal with its opportunity?  What will the world do?  A better question is: What can the world do?  Answer: It can’t do much compared to Zimbabwe because only they can change the culture of corruption and so on that is causing the problem.

It is hard to change as the quote says and Douglas North described more generally.  Cambodia is in the news and we use it as an example.  It was hell on earth during the Khmer Rouge regime in the late 70s.  It is better now but it still only scores 59.5 from Heritage which is still just in the mostly unfree category while Freedom House scores them at 31 and categorizes them as unfree.  Much of Eastern Europe did much better after the fall of Communism but they were not in the Cambodia/Zimbabwe category before freedom returned and they had a capitalistic past to return to.  They also had freedom next door (or reunification for East and West Germany) and that helped too.

We hope that Zimbabwe propers.  We know that some critical elements like rule of law and the basic elements of capitalism are necessary for improvement but the citizens of Zimbabwe need to choose the path themselves because that is the only way to get them to follow it.  We hope you choose capitalism and hope the world makes it easy to do so.

We hope there will be opportunities to remediate additional basket cases like (but not limited to) Venezuela, Cuba, and North Korea in the near future.  Perhaps we can learn something in Zimbabwe that will help us and them.


Reviving An Old Slur

The “news” industry has rediscovered an old slur: Trickle-Down Economics (TDE).  Catherine Rampell is on the editorial page

Sidebar: We know we made fun of Kevin Williamson for stooping to take on Catherine but she is just part of this post.

She is saying things like this:

Of course, Republican lawmakers and administration officials promise that these corporate giveaways will really, truly, honest-to-goodness primarily benefit us regular humans, especially humans in the middle class.

That’s because, they claim, corporate tax cuts will unleash a wave of business investment and therefore economic growth, most of which will trickle down to the little people-people.

Well, heroes one thing Kevin Hassett, The Donald’s chair of the Council of Economic Advisors, said (from Larry Kudlow):

“Economists who have studied the effects of taxes over time have discovered a consensus,” he said. “Lower marginal tax rates and a broader base increase the rate of economic growth and well-being.”

Here is Kevin on CNBC:

The new report from Hassett, out Monday morning, projects that reducing the corporate tax rate to 20 percent will result in a windfall for U.S. workers. He predicted average U.S. household income would increase at least $4,000 a year but could rise as much as $9,000 annually.

It is an interesting question of the incidence of corporate taxes.  What percentage falls on owners and workers?  Catherine is suggesting that 100 percent falls on owners.  That seems unlikely.  It seems even more unlikely that the owners will decide to put all that money in their mattresses.

Taking up almost all of the above the fold back page of the 11/18 La Crosse Tribune  is an associated press (AP) story (yes it is an editorial pretending it is a news story) that we can’t find on the Internet.  The headline is: Giving Trickle-Down Another Try.  Here the AP is going for a triple slur.  They get Reagan, Trump, economics all in one headline.  It gives the Tax Policy Center the highly coveted “nonpartisan” designation.  [Perhaps they are just wrong and not partisan.] It blames the W’s 2001-3 tax cuts for the Great Recession and notes that W’s expansion was one of the weakest.  Hmmm, which President, we wonder, had the weakest?

If you would like a more detailed discussion of the slur check out Thomas Sowell from 2012.

Catherine and the AP seem desperate to make slurs and throw stuff against the wall and hope that something sticks.  To get the success of the Reagan tax cuts from The Donald’s tax cuts we need to couple it with deregulation and good central banking.  There seems to be good news on deregulation.  The Donald doesn’t fill us with confidence and we worry about trade but he is our best chance.


A Reminder On Socialism

Yesterday is was Communism (no, we still don’t reference our stuff0.  Today it is socialism, the slightly less virulent method of restricting economic and personal freedom.   The WSJ Editorial Board tells us:

Venezuela is broke, which takes some doing. For much of the second half of the 20th century, a gusher of oil exports made dollars abundant in Venezuela and the country imported the finest of everything. There were rough patches in the 1980s and 1990s, but by 2001 Venezuela was the richest country in South America.

And now socialist Venezuela is broke.  Yes the country with the largest proven reserves in the world according to Wikipedia is broke.  The socialists are almost as unlucky as the Communists.  There are just too many “unexpected” events every time one of these methods is put in place.

Civil War Choices

Dan McLaughlin at NRO has an excellent article on the Civil War related to comments by Tim Kaine and John Kelly.  We one complaint about it the commentary on compromise and the opportunity for a financial settlement.  A possible way to end slavery would be to set the slaves free by buying the slaves from the slaveholders.  Research has shown that the market in slaves was efficient.

The problem is to consider such a solution you must compare the expected cost of the two alternatives.  So when Dan says this:

Over 600,000 men died in the Civil War, and many more were wounded or crippled. It’s not such a bad thing for a president to be advised by veterans who look at that kind of carnage and linger over whether it was avoidable.

He is making the wrong comparison.  Both sides expected a short war with many fewer deaths.  Using the actual cost of the Civil War to compare to the expected cost of ending slavery overstates the lack of compromise from the South.  The actual opportunity was to free the slaves at birth and death.  That is, current slaves would stay slaves all their lives but their children would be bought out of slavery.

Sidebar: You have to trust us on the data on this.  We wrote this paper in grad school before word processing so there isn’t a record of it.  End Sidebar.

Thus, we are unable to agree with Dan in laying all the failure to compromise at the feet of the South.  We support the John Kelly view.  The available plan would split the abolitionists from the rest of the North because the former group wanted to end slavery now.

Capital Investment And Growth

Recently we were discussing Reihan’s assertion (look it up it is really recent) that we should go for immediate expensing for capital expenditures rather than lowering corporate rates because capital expenditures are the path to productivity.  We were unconvinced because we see the path to productivity including software and R&D which are already immediately expensed.

Today we found a WSJ article by James Mackintosh that suggests some support for our vision.

Sidebar: We at first used argument rather than vision.  We changed it to vision because, as we said at the time, we have no data to provide.  It just makes sense to us that buildings and equipment are just part of the productivity story.  End Sidebar.

James is discussing the potential pitfalls of Amazon’s new headquarters.  As part of the background he reports:

The lesson from the long term is that companies with high capital spending tend to underperform. Kenneth French, a professor at the Tuck School of Business at Dartmouth College, calculates that shares in the 30% of U.S. companies with the lowest investment returned six times as much as those with the highest investment since 1963.

Along the way he gives examples of overspending including the 1840 British railway boom, peak oil, dot-com, and shipping.  In addition, James notes:

Investing in growth is more plausible. Academics have shown that higher R&D spending on average is followed by better stock performance than for companies with lower R&D spending.

James is far from conclusive on the subject but we continue to think that rates are more important than immediate expensing.  One reason is the evidence he provides on capital spending not leading to stock market price increases but R&D does.  Obviously, stock market prices and productivity are only weakly connected through profits.  It is not QED but it suggests some of the problems with capital spending.  It buttresses the basic argument that rates provide the incentive for profits and solve the problem with firms moving out of the country.  We have moved a little more strongly in favor of rate reductions over immediate expensing.

Free Trade II

In the last post we were saying that the benefits of free trade were widespread and the costs were narrow.  We said that the government needed to be part of the solution as tariffs are reduced.  Mark Perry comments on and links to a paper by Scott Lincicome, Doomed To Repeat The Long History Of America’s Protectionist Failures, that quantifies the opportunity to benefit all involved.  Scott concludes:

These surveys show that, contrary to the fashionable rhetoric, American protectionism has repeatedly failed as an economic strategy.

Scott reviews the previous research and shows us the exorbitant costs of protectionism.  Here is Table 7:

So, there is an enormous opportunity for government to find a solution other than higher tariffs.  There is also an enormous opportunity to reduce or eliminate tariffs and provide net benefits.  As we said government should not be the whole solution to change but it can be part of it.  Eliminating tariffs is the best solution.  Not increasing tariffs is the minimum we can expect of responsible government.  Finding useful ways to facilitate change that will happen should be part of responsible government.


Math Depends Upon Assumptions

Glenn Reynolds, Instapundit, discusses aging in his USA Today column.  He is in favor of extending lifespans. One of the arguments he gives is:

If we could extend healthspan by 20 years — so that 85 is the new 65 and 90 is the new 70 — people could retire that much later, and those pension obligations would pose a much less pressing problem. [emphasis added]

Agreed.  If folks worked longer and kept roughly the same retirement span then personal, corporate, and governmental finances would brighten considerably.  Unfortunately, that is not what has happened historically.  Here is a chart we used to help students understand the changes in retirement over generations:

Retirement Age versus Life Expectancy

Year Average Male Retirement Age Average Male Life Expectancy Years in Retirement
1950 66.9 65.5 0
1960 65.2 66.8 1.6
1970 64.0 67.0 3.0
1980 63.0 70.1 7.1
1990 62.6 71.8 9.2
2000 62.3 74.1 11.8
2005 61.7 75.2 13.5

We are not positive where this comes from as it was just class information but we think at least part of it comes from Mark Perry at Carpe Diem so a general h/t to him.  Over 55 years the life expectance went up by almost 10 years but the retirement age went DOWN by over five.  It seems unlikely that increasing the life expectancy by 20 will increase the retirement age much if at all.  Increasing our lifespan seems more likely to darken finances, especially public finances.

We would support increasing our useful lifespan too.  You can’t play too much handball.  But increasing our lifespan is more likely to exacerbate the entitlement problem than solve it.  What do you think is the probability of Congress increasing the age for receiving Social Security to 85?