Posts tagged with: Business/Finance

Acton’s director of research Samuel Gregg has a piece over at The American Spectator that may surprise big government liberals. (We know you read this blog.) In “Free Market Sweden, Social Democratic America,” he lays out the history of Sweden’s social democracy — its nature and its effects on the country’s economy — and then draws lessons for the United States. The Scandinavian country isn’t quite the pinko nanny state Americans like to look down upon, and we’ve missed their reforms of the last two decades.

Gregg explains that Sweden’s dramatic mid-century expansions of government were portrayed as rooted in the traditional values of the homeland, so Social Democrat governments escaped the soft-Marxism tag, and were able to do pretty much as they pleased. Social programs were also characterized as coverage of universal rights, to be imposed by general taxation. Then came

the decision of governments in the 1970s to hasten Sweden’s long march towards the Social Democratic nirvana. This included expanding welfare programs, nationalizing many industries, expanding and deepening regulation, and — of course — increasing taxation to punitive levels to pay for it all.

Over the next twenty years, the Swedish dream turned decidedly nightmarish. The Swedish parliamentarian Johnny Munkhammar points out that “In 1970, Sweden had the world’s fourth-highest GDP per capita. By 1990, it had fallen 13 positions. In those 20 years, real wages inSweden increased by only one percentage point.” So much for helping “the workers.”

Economic reality was painful, but Sweden responded, and began to unravel some of its “progress,” reducing the public sector and even allowing private retirement savings. Unemployment was still high though — about 20 percent — in large part because the country’s tax structure encouraged joblessness.

But with a non-Social Democrat coalition government’s election in 2006, Sweden’s reform agenda resumed. On the revenue side, property taxes were scaled back. Income-tax credits allowing larger numbers of middle and lower-income people to keep more of their incomes were introduced.

To be fair, the path to tax reform was paved here by the Social Democrats. In 2005, they simply abolished — yes, that’s right, abolished — inheritance taxes.

But liberalization wasn’t limited to taxation. Sweden’s new government accelerated privatizations of once-state owned businesses. It also permitted private providers to enter the healthcare market, thereby introducing competition into what had been one of the world’s most socialized medical systems. Industries such as taxis and trains were deregulated. State education and electricity monopolies were ended by the introduction of private competition. Even Swedish agricultural prices are now determined by the market. Finally, unemployment benefits were reformed so that the longer most people stayed on benefits, the less they received.

By 2010, Sweden’s public debt had fallen dramatically and its rate of economic growth was 5.5 percent. Compare that with America’s 2.7 percent growth in 2010, and just try to restrain your jealous impulses.

Gregg cautions that Sweden’s economy is still hampered the Social Democrats’ legacy. High minimum wages keep a full quarter of the country’s youth unemployed, and a carbon tithe to the religion of environmentalism retards growth, but

It’s surely paradoxical — and tragic — that a small Nordic country which remains a byword for its (at times obsessive) commitment to egalitarianism has proved far more willing than America to give economic liberty a chance.

Full article here.

Billionaire Democrat Ted Leonsis wrote a posting titled “Class Warfare – Yuck!” on his blog yesterday, in which he implored the president, to whose campaign he donated the maximum amount: “Hit a reset button ASAP. Rethink how to talk to businesses and sell business leaders on your plan to make America great! Many of us want to be a part of the solution. We aren’t the problem.”

Today, Charles Schwab published an opinion piece in the Wall Street Journal, and again the title says it all: “Every Job Requires an Entrepreneur.” If there is to be an economic recovery, he says,

The leaders of both parties, Republicans and Democrats alike, must lend their voices to encourage and support private enterprise, both for what it can do to turn our economy around and for the spirit of opportunity it represents.

These two men are individually responsible for the creation of hundreds of thousands of jobs because of the innovations they brought to the internet (AOL) and to stock brokerage (Charles Schwab Corp.). And their businesses have done more than employ lots of people; they have lowered the cost of internet access and financial services for millions of Americans. These men have done immense good for “less fortunate Americans,” and Ted Leonsis feels insulted by corporate jet demagoguery,

I own 50 hours on NetJets for the rare occasion I do travel by private plane. Does Air Force One charter out? Stop making private planes an issue. This is a tiny issue for us to deal with for our country.

Trying to shackle investment and entrepreneurial activity does the unemployed no good (nor our national debt). And no rhetorical strategy could be more opposed to the Christian principle of solidarity than the vilifying of successful entrepreneurs — the effects of such a strategy on public morality should be immediately obvious.

The corporate jet talking point is meant to stir envy in the hearts of listeners — it’s a trifling proposal that packs maximum rhetorical punch — and government by envy will get you nowhere.

Roger Scruton has written an excellent piece on the moral basis of free markets; it’s up at MercatorNet. He begins with the Islamic proscriptions of interest charged, insurance, and other trade in unreal things:

Of course, an economy without interest, insurance, limited liability or the trade in debts would be a very different thing from the world economy today. It would be slow-moving, restricted, and comparatively impoverished. But that’s not the point: the economy proposed by the Prophet was not justified on economic grounds, but on moral grounds, as an economy of righteous conduct.

Our long-term economic malaise may mystify world leaders, but Scruton sees its causes clearly: ways intended to speed economic development have become ways to acquire luxuries without payment; we have confused trade in debts with others’ assumption of our debts. This moral confusion is as much to be found in governments as it is in private markets, because the incentives are exactly the same — anyone who denies it is lying.

If you borrow money you are obliged to repay it. And you should repay it by earning the sum required, and not by borrowing again, and then again, and then again. For some reason, when it comes to the state and its clients, those elementary moral truths are forgotten.

Scruton concludes that morality is inescapable — though we may delay it, judgment will come.

The moral sense emerged in human beings precisely because it has proved to be, in the long run, for their advantage. It is the thing that puts a brake on reckless behaviour, which returns the cost of mistakes to the one who makes them, and which expels cheating from the fold. It hurts to be punished, and states that act wrongly naturally try to avoid the punishment. And since they can pass on their hurt so easily to the rest of us, we turn a blind eye to their behaviour. But I cannot help thinking that the result is at best only a short term economic advantage, and that the long term costs will be all the greater. For what we are seeing, in both Europe andAmerica, is a demoralisation of the economic life. Debts are no longer regarded as obligations to be met, but as assets to be traded. And the cost of them is being passed to future generations, in other words to our children, to whom we owe protection and who will rightly despise us for stealing what is theirs.

Read the full text here.

The Manhattan Institute’s Proxy Monitor project is aimed at “shedding light on the influence of shareholder proposals on corporations.” It provides a thorough analysis of proposals made from 2008 – 2011 by activist investors — and believe it or not, only 35 percent of those proposals were related to corporate governance. Most of the shareholder proposals that these companies deal with are attempts to direct the company in a more green or pacific or fair direction, and they come from small shareholders who do this to dozens of companies.

A new report from Manhattan summarizes the trends — the growing social proposals, and how Dodd-Frank has playing into activists’ activities — and the proxy monitor website allows you to look at any shareholder proposal from the last few years. The proposals are enlightening. The Sisters of Mercy of the Americas have submitted proposals to the stockholders of Lockheed Martin and General Dynamics stating,

WHEREAS: Space has served as a sanctuary where, over the years, nations cooperate rather than confront one another. Satellites save lives…

RESOLVED: Shareholders request that, within six months of the annual meeting, the Board of Directors provide a comprehensive report on Lockheed Martin’s involvement in the space-based weapons program, at reasonable cost and omitting proprietary and classified information.

The well-meaning Sisters of St. Francis of Philadelphia, in a proposal to McDonald’s shareholders that made the news earlier this year, requested that,

WHEREAS,

The Affordable Care Act, signed into law on March 23, 2010, included federal menu-labeling legislation requiring the posting of calories on fast food menu boards….

RESOLVED: Shareholders ask the Board of Directors to issue a report, at reasonable expense and excluding proprietary information, within six months of the 2011 annual meeting, assessing the company’s policy responses to public concerns regarding linkages of fast food to childhood obesity, diet-related diseases and other impacts on children’s health.

Many other equally well-intentioned proposals have been filed, including repeated requests by the Sisters of Charity of St. Elizabeth that various pharmaceutical companies restrain their prices to “reasonable levels.” The Unitarian Universalists have requested that Pepsi Co. “create a comprehensive policy articulating our company’s respect for and commitment to the Human Right to Water.”

This is not to mention the numerous environmental proposals made by religious groups, requesting that the Rights of Humanity and of Mother Earth not be violated by carbon emissions and by the use of genetically engineered plants. Take, for instance, this statement from a proposal to Du Pont’s shareholders, concerning genetically engineered crops:

The right to food requires that we place the needs of the most marginalized groups, including in particular smallholders in developing countries, at the centre of our efforts

One might think the Sisters of Charity of St. Elizabeth were unaware that it has been the genetic improvement of crops that has saved millions of the world’s poor from starvation.

We’ll keep you posted on further developments, and the effects these proposals may have on companies’ performance.

Acton’s tireless director of research Samuel Gregg has a post up at NRO’s The Corner in reaction to yesterday’s bad poverty numbers (46.2 million Americans live below the poverty line now—2.6 million more than last year). Gregg is ultimately not surprised about the increase, because not only does the American welfare state produce long term dependence on governmental support, but the huge debt incurred by poverty programs tends to slow economic growth.

It is now surely clear that the trillions of dollars expended on welfare programs since the not-so-glorious days of the 1960s have not apparently made much of a dent in significantly changing the ratio of Americans in poverty.

In some instances, America’s welfare apparatus may have prevented some people (especially the elderly) from falling into abject poverty. There is, however, very little evidence that it has helped millions of people out of relative poverty. There is also plenty of data to indicate that many welfare programs have produced intergenerational dependency on the state—a point that even Bill Clinton seemed to have grasped by the mid-1990s.

Gregg then warns against the temptation to double down on government-as-the-answer, arguing that we don’t have the fiscal leeway to experiment as we did in the 1960s.

We need to keep these serious failures of America’s welfare state in mind because these new poverty numbers will almost certainly be used as an argument by some people of good will (as well as those whose motives are far less noble) to resist any reductions in welfare spending, despite America’s far-from-healthy debt and deficit situation. Yet the sheer size of government spending on entitlement programs (by far the biggest item in the federal government’s budget) makes cuts in these areas inescapable if—I repeat, if—our political masters are serious about wanting to balance the government’s books.

Indeed, such cuts are assuming an ever-increasing urgency in light of the studies which continue to appear indicating that crushing levels of public and government debt run the risk of significantly impeding growth. That’s worrying, not least because a slowdown in growth will hurt those in poverty far more than the wealthy. Strong growth rates are one of the most powerful antidotes to poverty – just ask anyone living in mainland China or India. More welfare spending is simply not the answer.

Full post here.

Economic historian Brian Domitrovic has an interesting post up at his Forbes blog, Past & Present, on the proximate causes of the 2008 meltdown. According to Domitrovic, uncoordinated, even “weird” fiscal and budgetary policy in the early 2000s kept investors on the sidelines, and then flooded the system with easy money. The chickens came home to roost in 2008 (and they’re still perched in the coop).

In 2000, as the stock market was treading water in the context of the mammoth surplus and the electoral contest over fiscal policy, it was indicating that investors wanted to see what would ensue. What came was poorly-crafted tax policy and movement to gobble up the surplus on the spending side.

[After the crash of 2001-2003 and brief recession] the Federal Reserve stepped in to try to pick up the slack since fiscal policy had gotten weird. It was then, 2001-2003, that the Fed plumbed new lows in the federal funds rate

Finally, in 2003, Bush announced that the marginal rate of the income tax would be taken down immediately and somewhat substantially, to 35%. The Fed pivoted to raise rates, giving us an approximation of the Reagan-Volcker policy mix of the 1980s of real tax cuts and tight-ish money.

But for several years, too much money had been in the system, and it proceeded to migrate to monetary policy hedges, above all oil and land, the latter especially desirable because housing debt was fulsomely guaranteed.

Not only were these policies imprudent from a cold hard economic point of view, they weren’t capable of producing the human benefits they were supposed to. The false compassion of Bush-era conservatism is tied up with both the over-spending of the 2000s and the imprudent loans encouraged by an ultra-low interest rate environment and the “Ownership Society” of the 2004 campaign.

Government compassion does nothing to empower the poor—rather than pulling them out of poverty, it encourages reliance and assails their dignity. No matter how nice everyone’s being, nothing changes. And while some of the instincts behind the Ownership Society were right, the idea that it would be good for people to own houses they couldn’t properly afford was destructive. It severed the natural connection between labor and its results.

Domitrovic goes on:

The primary question we must ask about the 2000s is not what caused the crisis as the decade came to a close, but why was growth so subpar the whole time? Ultimately financial crises reflect the declining potential of the real economy to deliver…

And of course the economy will not grow and wealth will not be created under policies which undermine the dignity of Man’s labor. By reducing economics to fiscal calculus, academics and policy makers throw out half their toolbox: if the fiscal and budgetary warnings weren’t enough from 2000 to 2008, there were also human and moral warnings. Domitrovic (who, to be clear, is not one of those who has thrown out half his toolbox) concludes:

By rights, today we should not be mired in economic malaise; rather, we should be enjoying a fourth decade of prosperity on the heels of the roaring 1980s, 1990s, and 2000s.

By rights indeed, but our economists have cast off right, and reduced their science to a materialist one.

In “Stop Coddling the Super-Rich” investor Warren Buffett, one of the world’s wealthiest men, makes a case for upping the tax rate on the “mega-rich” in America. In a response published on National Review Online, Acton Research Director Samuel Gregg observes that “this is a broken record that Mr. Buffett has taken to re-playing over the past five years.” He points out that the U.S. tax system is already heavily progressive (no pun intended) and that the label “mega-rich” may not be as obvious as Buffett would like us to believe:

It’s safe to say that a substantial number of these people operate small-to-medium-size businesses that don’t play the corporate welfare game a la General Electric, that are already subject to some of the world’s highest corporate tax rates (most of which is paid by the owners of companies), that reinvest much of their income in expanding their activities and taking on new risk, and, above all, that employ people. They are the engine of growth and employment in America today — not the United States government. Why on earth would we disincentivize them from creating value and jobs by raising their taxes?

Read Samuel Gregg’s “Taxing Warren Buffett” on NRO.

Acton On The AirOver the past few weeks, Kishore Jayabalan – Director of Acton’s Rome office – has been called upon a couple of times to comment on Italian and American budget negotiations for Vatican Radio. On Saturday, Jayabalan discussed the then-ongoing US budget negotiations:

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

Kishore also made an appearance on Vatican Radio to discuss Italy’s debt issues back on the 13th of July, making the point that while austerity would be required, economic growth would be a necessity as well for Italy to solve its debt issues:

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

In the discussion of whether the problem with our national public debt is a question of receipts, outlays, or both, I linked to a helpful set of graphs from Anthony Davies, an economics professor at Duquesne University. This data shows that even though a variety of tax rates have changed a great deal over the years, the federal government has basically taken in receipts within the range of 16-20% of GDP over the post-WWII era. If you haven’t looked at this presentation before, you should do so now.

And today, Grove City economics professor and AU faculty lecturer Shawn Ritenour links to another chart, which compares these receipts against historic federal outlays (or spending). He notes (and refutes) Joe Weisenthal’s contention that “any politician who says Washington has a spending problem, rather than a revenue problem, is speaking from a position of anti-tax ideology, rather than empirical data.”

But I think if you look at the history of receipts and outlays a bit closer, you’ll see that the variance in receipts over the last decade are well within the historical norms. But the variance in outlays over that period isn’t outside the norms, either, in the sense that it continues a disturbing trend after 1970. (The data for current and future years is estimated and gleaned from sources here.)
There used to be some correlation between the red and blue lines. But not in today’s Washington.
Again, given this historic perspective, I think it’s hard to blame the blue line for the current debt levels. Keep in mind too that since these figures are a function of GDP, as the economy grows, other things being equal so too does the spending and receipts of the federal government.

In addition to the larger versions of the graphs clickable above, you can download this set of graphs in PDF form here, and visit our “Principles for Budget Reform” page to read more related commentary.

I had the pleasure of appearing on Relevant Radio last Friday to talk to Sheila Liaugminas on her show, “A Closer Look.” I discussed the idea of “intergenerational justice,” a term favored by evangelicals (Roman Catholics tend to talk about “intergenerational solidarity”), and how that concept relates to much of today’s discussion about the federal budget.

One thing you hear from many is that we need a “both/and” solution: we need to both cut spending and raise revenue in order to close the annual deficits. I’m not really convinced of this, in part because the federal government has historically shown that increased revenue always results in increased spending. The government spends what it takes in, with a little bit more to boot. There has to be something structural and meaningful to stop this from continuing to happen, especially since we can’t count on the political culture to do so itself. Whether that structural obstacle is a balanced budget amendment or some other kind of binding agreement, something like that has to be put in place.

I don’t think it’s fair on the other side, though, to say that closing some tax loopholes, making tax avoidance more difficult, and simplifying the tax code is tantamount to “raising taxes” either. So in that sense there might be a case for raising revenues in this limited sense if it gets the tax system focused on what it is supposed to do (raise revenues) rather than using it as a tool for rent-seeking, social engineering, and pandering to special interests.

What’s more important than the question of revenues vs. cuts, however, is recognizing that the size of the federal government has stayed about roughly constant when you look at it in terms of tax receipts relative to GDP. Anthony Davies does a nice job illustrating this. He points out that the government basically takes in amounts roughly equal to 18% of GDP (+/- 2%). So that’s essentially what the government needs to learn to live on. By contrast, we’re spending about 24% of GDP this year, and that number only goes higher as entitlement promises come due.

So how about this for a both/and solution: we cut spending to get within a couple of percentage points of 18% of GDP and we focus on tax policies that will grow GDP in a sustainable way in the longer term.