The U.S. Needs More Unions... More Special Interests

>> Tuesday, March 16, 2010

The following letter illustrates the fatal flaw in our government's thinking. Though it's not exclusively a republican or democrat thing; one party is not worse than the other in the grander scheme of things. But this presidency, at the worst time in American history, has chosen to ignore common sense and plow full steam ahead wielding the sword of a deeply flawed economic philosophy. John Maynard Keynes, anyone?

At Geoffrey's place there is a post entitled, "High Taxes, More And Stronger Unions Are Key To A Robust Economy." This, I must confess, is the boldest statement I've read from the blogging Left in quite some time. Yes, I hear it all the time from the Left, but never have I read an article so completely off-kilter with reality. Now, I'm not here to deconstruct Geoff's article. I only offer it as another example of flawed economic philosophy. Because this is the belief Barack Obama is working under-- stronger unions and higher taxes are requirements for a healthy economy. And yet, America is on the verge of economic collapse. But I believe it's a bit myopic to use only California as a bellweather. Is anyone paying attention to what's happening in Greece, and the rest of Europe's response to her irresponsibility?

UNIONS are more to blame for American auto manufacturer collapse. Union demands have made American cars less competitive and more expensive to build. Curiously, with Toyota's problems (and let's remember that all manufacturers have had to deal with recalls), American auto manufacturers are coming out of the woodwork to tout their "bug-free" vehicles as being superior to Toyota's. This may or may not be true, but I can't help but think this particular recall is being used by Washington and American manufacturers to deflect attention from their own union-induced ills, and set up flawed AMERICAN economic philosophies as superior to those of, say, NON-union Toyota-- Just as Geoffrey has done.

And then there's the whole union "card check" deal Obama would love to slam through congress and... well, don't get me started.

Here then is the promised letter. A little light reading for you.

"Masked youths...attacked the head of Greece's largest trade union, who was addressing the crowd, and hurled stones at the police. GSEE union boss Yiannis Panagopoulos traded blows with the rioters before being whisked away, bloodied and with torn clothes."

The Daily Mail account put the blame for these disturbances on Germany's finance minister, who warned the Greeks that "the German government does not intend to give a cent." At least Bild, a popular German newspaper, was trying to be helpful. It suggested that Greece sell Corfu...and that Greeks get up earlier and work harder.

Meanwhile, from Iceland comes news that every voter with an IQ above air temperature has cast his ballot against a bailout plan. The Icelanders were slated to make good $5.3 billion in bank losses. But why shackle common voters to the banks' losses? The plan was so outrageous and so unpopular that Iceland's normally compliant Prime Minister called for a referendum. Given a chance to vote on it, 93% said no. The other 7% probably read it wrong.

Insurrection is in the air. In England, government employees are preparing the biggest strike since the '80s. In America, dissatisfaction with Congress is at record highs; four out of five of those polled say, "Nothing can be accomplished in Washington."

Herewith, an attempt to deconstruct the rebel yell. By way of preview, it's not the principle of the thing, we conclude; it's the money.

There are more clowns in economics than in the circus. They invented an economic model that has been very popular for more than 50 years — particularly in the US and Britain. It began with a bogus insight; John Maynard Keynes thought consumer spending was the key to prosperity; he saw savings as a threat. He had it backwards. Consumer spending is made possible by savings, investment and hard work — not the other way around. Then, William Phillips thought he saw a cause and effect relationship between inflation and employment; increase prices and you increase employment too, he said.

Jacques Rueff had already explained that the Phillips Curve was just a flimflam. Inflation surreptitiously reduced wages. It was lower wages that made it easier to hire people, not enlightened central bank management. But the scam proved attractive. The economy has been biased towards inflation ever since.

Economists enjoyed the illusion of competence; they could hold their heads up at cocktail parties and pretend to know what they were talking about. Now they were movers and shakers, not just observers. The new theories seemed to give everyone what they most wanted. Politicians could spend even more money that didn’t belong to them. Consumers could enjoy a standard of living they couldn't afford. And the financial industry could earn huge fees by selling debt to people who couldn't pay it back.

Never before had so many people been so happily engaged in acts of reckless larceny and legerdemain. But as the system aged, its promises increased. Beginning in the '30s, the government took it upon itself to guarantee the essentials in life - retirement, employment, and to some extent, health care. These were expanded over the years to include minimum salary levels, unemployment compensation, disability payments, free drugs, food stamps and so forth. Households no longer needed to save.

As time wore on, more and more people lived at someone else's expense. Lobbying and lawyering became lucrative professions. Bucket shops and banks neared respectability. Every imperfection was a call for legislation. Every traffic accident was an opportunity for wealth redistribution. And every trend was fully leveraged.

If there was anyone still solvent in America or Britain in the 21st century, it was not the fault of the banks. They invented subprime loans and securitizations to profit from segments of the market that had theretofore been spared. By 2005 even jobless people could get themselves into debt. Then, the bankers found ways to hide debt...and ways to allow the public sector to borrow more heavily. Goldman Sachs did for Greece essentially what it had done for the subprime borrowers in the private sector — it helped them to go broke.

As long as people thought they were getting something for nothing, this economic model enjoyed wide support. But now that they are getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all of them are preparing to increase taxes. In Europe too, taxes are going up. Services are going down. And taxpayers are being asked to pay for the banks' losses...and pay interest on money spent years ago. Until now, they were borrowing money that would have to be repaid sometime in the future. But today is the tomorrow they didn’t worry about yesterday. So, the patsies are in revolt.

Several countries are already past the point of no return. Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports.

The rioters can go home, in other words. The system will collapse on its own.

Bill Bonner
The Daily Reckoning
March 15, 2010
Mumbai, India


Mark March 16, 2010 at 9:13 AM  

I admit I don't understand economics.

If I did, I would probably be rich. All I know is if I don't have money, I can't spend it.

And, I know if I continue to spend money I don't have, it will not decrease the amount of my debt.

Common sense tells me I cannot get out of debt by spending more money.

I don't understand why the Government's convoluted laws of demand and supply are supposed to work for Government, because they have never worked for me.

Marshall Art March 16, 2010 at 3:09 PM  

This was a post of Geoffrey's on which I had intended to comment. Aside from distractions from other posts of his, this one in particular required to me to step back, re-read and wonder if it was for real. I then did a quick history review to confirm what I knew to be correct, as he based the topic on New Deal policies and the unfortunate view that it did any good.

He also thinks that the high tax rates had no affect on productivity, and that New Deal policies spurred the boon of the 50's. But the fact is that both unions and taxes were having quite the opposite effect. Unemployment, thanks to the previous administration, was over 20% and did indeed go down a few points, to around 14% after FDR's election in 1933. But by 1939, it was again heading upward as was near 20% again. This was due in large part because of union pressures upon industry, the introduction of a minimum wage which, like minimum wage increases today, inhibit new new hiring. It wasn't until 1942 that unemployment got into the single digits, around 7-8%, and it had the help of something we call, World War II.

During the war, production of weapons, machinery and all sorts of products and goods needed to fight the war spurred industry. Deadlines never before imagined were met as the whole country seemed to get behind the war effort. With able bodied men at war, women and elderly were filling the positions (which is why unemployment dropped). AFter the war, new technologies were being marketed, thanks to the factories cranking them out on the tails of military production. Military spending continued to spur industry as the Cold War began, GI Bill allowed loans at good rates for vets who bought houses spurring the building trades, and on and on it went.

None of this happens without the war and FDR's own treasury secretary lamented the failure of their economic policies to do they were intended to do. None of FDR's "shovel ready" projects had long term impact toward putting people to work. None of his spending did much of anything. He helped to get the shipping building industry going, but again, what success it had was also enhanced by the need for ships for war. Hard to see if ships would have been needed if everyone was broke.

And of course in the 60's, JFK lowered those tax rates to spur economic growth which, as it happens, was dragging because of the surplus (opposite of the deficit provoking Reagan's tax cuts).

Marshall Art March 16, 2010 at 3:13 PM  

So again we see that despite a surplus or deficit, cutting rather than raising taxes is what spurs growth. The best part, for all those who think the rich are being helped at the expense of the rest of us, that's absolutely true, but not in the way commonly thought.

When the rich get tax cuts, particularly corporate entities, they tend to spend on their business, which enhances productivity and profits, which results in more tax revenues. When looked at as a percentage of all taxes paid, the wealthy end up accounting for an even greater percentage of all revenues paid than they did before the cuts.

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