Ben Bernanke New Fed Chairman

Horrible news. Ben Bernanke is appointed new Fed Chairman by Bush. Can't Bush do anything right?

Bernanke is highly inappropriate because his views on monetary policy (Which is what he now have been appointed to control) are anything but sound. Had he instead continued as CEA Chairman he might have done some good.

Tax Relief is Not a Subsidy

Good editorial article today in Dagens Nyheter about the irrationality of Social Democratic opposition to tax relief on domestic services. In it they point out that the exact same kind of work is performed by hotel staff as in domestic services and that the Social Democrats are hypocrites for regarding the former as decent work while snearing at the latter. They point out how the opposition is based on some emotional phobia to domestic services who for the Social Democrats symbolize the "Class Society".

They also point out that such a tax relief would in fact likely increase tax revenues as the loss in tax revenues from the few domestic services that are performed in the formal economy today would be more than upweighed by the increase in domestic services performed and the shift from the black market to the formal market. Or as supply-siders would have put it, current tax rates are above the Laffer point (the tax rate which maximizes tax revenues).When Social Democrats claim that it costs a crtain amount of money for the state they're wrong thus.

They also make the important point that the current high tax rates prevent the division of labor that could have occurred where people able to hire someone else to do cleaning etc. rather than having to spend time doing it yourself. Taxes thus works as a kind of internal tariffs, with the same kind of negative effects as tariffs on international trade.

I would also add that it is wrong to regard tax relief as a subsidy since domestic services would still pay a lot of money to the state even after the tax relief. Subsidy is when a activity receieves more money from the state then it pays in taxes, such as they do with government consumption services like government schools, day care centers etc., not when it pays a smaller share of value added to the state.

While I would prefer that the tax cuts where made across-the board and not just on domestic services there is a case for starting with domestic services since they are likely more price sensitive and for that reason it is costless to reduce its taxation even more than other taxes even if radical tax cuts on other products can't be secured.

Ben Bernanke: Cut Government Spending, Don't Raise Taxes

Former Fed Governor, now Chairman of the Council of Economic Advisors Ben "Helicopter" Bernanke may be a crazy inflationist with regards to monetary policy, but at least he correctly notes that the US budget deficit should be reduced through spending cuts, not tax hikes. Considering this, I think it would be best if he stayed on as CEA Chairman rather than to be made the successor of Alan Greenspan as Fed Chairman.

Latvia Grows Even Faster Than Estonia

This may appear finicky, but I feel I should correct Johnny Munkhammar in his post about the two new EU member states Slovenia and Estonia, but only for the reason of strengthening the argument that he made. He correctly cites a The Economist article (not online for non-subscribers) where it is pointed out that while Slovenia is still the richest of the new member states it is growing far slower than Estonia, with Slovenia having a 4% growth rate (Actually it's 4.7% but that error can be traced to the quoted The Economist article) and Estonia a 9.9% growth rate. This may prompt Slovenia to lower taxes to the Estonian 24% flat tax level.

However it is actually as Munkhammar claims (Again this error can be attributed to the article)not the case that Estonia's 9.9% growth is highest in Europe, neighboring Latvia had a incredible 11.6% growth rate! . This however only strengthens the case for Estonian-style low tax, low government spending policies as Latvia have in fact a slightly lower level of government spending and a flat tax rate only slightly higher than Estonia at 25% (The corporate income tax is only 15%).

While some of the growth can be attributed to their low initial income level and while there are also some inflationary excesses, the examples of Estonia and Latvia clearly shows how low taxes promote growth. Incidentally, the third Baltic country, Lithuania came in third among EU countries at 7.1%. Lithuania have a similar level of government spending but its flat tax is higher at 33% (The corporate income tax is only 15% however).

Latvia's high growth rate means that in the future, latvians will not feel the need of working in construction sites in Sweden, where unions have not exactly been very welcoming.

The error from The Economist quoted by Munkhammar is still a lot closer to the truth than a ridiculous claim from Swedish finance minister Par Nuder about Sweden having the highest growth rate in Europe , when it is more like 16th highest among EU members (Were we to include non-EU members Sweden would fall even further behind) as all 10 new member countries as well as 5 of the old ( Ireland, Greece, Spain, Luxembourg and Denmark) have higher growth.

Is This Really Legal?

As workers at the bankrupted auto supplier Delphi face sharp wage cuts and cuts in health and pension benefits (Those who get to keep their jobs, that is), Steve Miller the CEO of Delphi decided to make a goodwill gesture and lower his pay to only $1-per year. That's really nobel of him-but my question is: is this really legal? After all, there is such a thing as a $5.15 minimum wage. Or are we to believe that he is going to work less than 12 minutes?

BTW: You can see in the company fact sheet in the above provided link that Delphi is based in a Michigan city called Troy. Troy as you might remember is the name of a city in what is now western Turkey that according to Greek legend was destroyed by the Greeks after having been deceived into letting a wooden horse secretly filled with Greek warriors in. Almost quite fitting name of the place for the headquarters of a company that have been destroyed .

Spending Cut Fraud

As angers increases among conservative grass root voters over the massive increase in government spending that "their" politicians -President Bush and the Republican Congress- have implemented, despite the fact that they were elected to prevent the Democrats from increasing spending- and as the pork-barrel Transportation and Energy bills and the Prescription Drug Benefit bill and the massive spending on rebuilding New Orleans means that this will likely continue, Republican House Leaders say they now want to cut $50 billion to at leat partially offset this. However as it turns out, 35 of these 50 billion were already planned and this is not annual cuts but cuts over a 5-year period. Read more about it here.

Inflation and Supply-Side Economics

New blog post at the Mises blog.

Bush and the Republican Congress Don't Spend Like Drunken Sailors!

Because of the sharp increase in government spendingthat we have seen under Bush and the Republican Congress, many accuse them of spending like drunken sailors. However as Worldnetdaily editor Joseph Farah points out in a column about how Bush have betrayed conservative values on nearly all issues and why he therefore regrets voting for Bush, that comparison is unfair. Unfair to the drunken sailors, that is. To quote Farah:

"Bush has encouraged the Republican Congress to spend like drunken sailors. Actually, that is an insult to drunken sailors, who only spend their own money – not their grandchildren's and great-grandchildren's money."

GM Worth Only 1½ Years of Toyota Profits

After the collapse of Delphi, the stock price of General Motors tumbled more than 10%. Today it has recovered somewhat, but it is still way below last week's level. Because of GM:s long-term woes and its current losses, the stock is now valued at very low levels. It is nearly 40% lower than a year ago .

Interestingly, the total market value of GM is now less than $15 billion . Compare that with the annual profits of Toyota of $10 billion. This means that Toyota for less than two years earnings could buy GM. Given GM:s deep, deep problems that would perhaps not be a good idea for Toyota, but it illustrates just how low GM -Once America's greatest company- have fallen.

Katrina Likely to Reduce U.S. Trade Deficit

The U.K. goods & services trade deficit expanded sharply in August, from £3.9 billion ( $6.8 billion )in July to £5.3 billion ( $9.3 billion ) in August. Yet the entire increase seems to be attributable to a £1.4 billion ($2.5 billion)insurance claim that Katrina victims is likely to claim from Lloyd's of London. But if the U.K. trade balance is weakened by $2.5 billion due to Katrina, then the U.S. trade balance will be strengthened by the same amount. Indeed it could be even higher if Katrina victims can claim money from insurance companies in other countries too. Month-to month fluctuations in the U.S. trade balance is extremely difficult to predict since it is so volatile, but this factor means that a decline in the deficit is more likely than a increase.

Interestingly, this means also that GDP is likely higher due to the damages since the insurance claims is counted as a positive to GDP while the damages themselves are not counted as a negative (It is however counted as a negative with regards to national income where capital consumption is deducted ).

Bush Expands Government at Record Speed

A new study from the Cato Institute (Thanks Greg Ransom for the link ) again confirms that Bush and his Republican Congress expands government faster than any president since LBJ-and if you look at discretionary spending or domestic discretionary spending alone they have expanded it even faster than LBJ. Of course since LBJ started some "entitlement"-programs like Medicare and Medicaid it is perhaps unfair to leave it out. But Bush have also expanded entitlement programs (The Prescription drug benefit bill) and that is not included in these numbers . Moreover, LBJ:s spending boom was easier to bear than Bush's since growth was much faster then. During 1964-1968 average annual GDP growth was 5.2%, versus 2.5% in 2001-2005.

Economically Ignorant Socialists

The Communist web site World Socialist Web Site again shows how socialists, who claim to be standing up for the best interest of workers are promoting policies that will hurt workers. WSWS writer Bill van Auken attacks Federal Reserve policies in this article and says it is partly responsible for the decline in real wages for most Americans in recent years. So far, so good as I have pointed to the same connection myself.

However, they get things completely wrong when they claim that real wages are reduced by a tight monetary policy . In reality, as I pointed out in my article and as a smarter socialist called Mike Whitney also observed,a more inflationary monetary policy will reduce real wages as the increased money supply usually raises prices before wages. Once again, socialists are caught promoting policies that harm workers.

I Guess It Could Be Worse

As bad as many of "our" policy makers may be, things could always get worse. BBC News reports that GDP continues to fall in Zimbabwe, likely with 7% after falling 4% in 2004 and having fallen for years. Inflation will reach a astonishing 400%. The seizure of white farms have led to a dramatic reduction in farm production and former food exporter Zimbabwe now has to import 37,000 tons of maize(corn) a week to feed the population.

Two Ominous Facts in Latest Personal Income Report

The latest report on personal income in the United States contains two facts which might mean that an economic downturn could come faster than I previously thought.

1) Disposable personal income is rising surprisingly slowly. In fact on a per capita basis and deflated with the PCE deflator (who is the lowest of all inflation gauges) disposable personal income is now lower than it was late last year. As disposable income measures the sustainable growth rate of spending this means that all per capita growth since then have been based on borrowed money.

2) The personal savings rate have now fallen to -0.7%. While that is somewhat lower than the -1.1% reached in July, it is actually higher than the original -0.6% reading for July. This means that for the first time since the Great Depression have the savings rate been negative for three months in a row.

There is thus simply no basis at all for further spending growth. While the expected spending boom for the Federal government may help keep things going at least statistically for a while, the prospects for the U.S. economy seem to worsen faster than I previously thought.

A Message to Bush-Critics

New blog post at the Mises blog.