BOGO Sunday

BOGO Sunday

August 23, 2009


This week, we have a twofer of items I did for the Daily Reckoning and the Huffington Post. Nothing new here for regular readers of this site I think, but sometimes it is nice to summarize things in neat 1000-word packages.

This item appeared in the Daily Reckoning on August 13, 2009:


The Magic Formula

It seems that we are in a period of economic decline. This might get a little tiresome eventually (it takes people longer to get fed up than you might think), and then maybe a few will start looking for solutions.

If I could send a fortune cookie to those future leaders – five, ten, or twenty years from now – it would contain the Magic Formula of economic success. Here it is:

Low Taxes
Stable Money

If you look at any of the great economic successes over the past two hundred years, you will usually find this combination. Likewise, most of the great failures have the converse: high (or rising) taxes, and unstable money.

Today, a rather energetic discussion of economic policy is taking place, but you will notice that almost nobody suggests anything that is in line with the Magic Formula. On the contrary, the trend is toward the opposite. Economic weakness begets heavy spending; heavy spending begets large deficits; large deficits beget a political trend toward higher taxes. They will eventually find out that higher taxes beget economic weakness.

President Obama has already outlined his preferences for a reversal of the Bush tax cuts, plus still higher taxes on upper-income earners, plus a removal of the upper-income cap on payroll taxes, plus additional increases in capital gains taxes. But this is just the beginning; there is serious talk of introducing a national VAT in the US.

What about the stable money part of the equation? The most stable money, historically, has always been produced by a gold standard. That is the gold standard’s purpose. However, beginning especially in the 1930s, a new ideology arose. We no longer wanted stable money. We wanted money we could manipulate, so we could fool people into doing things they would not otherwise do. Alas, this sort of thing has consequences, and they are usually not too pleasant. The US dollar has already fallen to 1/50th of its original value due to our belief in monetary manipulation. The next 50-fold decline might take place in a much shorter period.

Thus, we have higher taxes and, I expect, increasingly unstable money. On top of a dozen other things you could name. Do you see what I mean about an era of economic decline?

I know that many learned economists will say: “Yes, that is interesting, but we can’t afford a major tax cut at this time. Plus, we need all the help we can get from monetary policy.” This is what people always say in the early period of an era of economic decline.

The fact of the matter is that you can always reduce taxes. Some of the most brilliant tax cut strategies have come from governments in the direst situations imaginable.

Russia was a disaster zone when Vladmir Putin introduced a 13% flat income tax in 2000. Over the next seven years, the average worker’s salary (in US dollars) increased by an astonishing 30% per annum.

Germany was in even worse shape in 1949. In the years after the war, hyperinflation raged and millions died of starvation. Much the same was happening in Japan. Both enacted huge tax cuts in the early 1950s. Japan even went so far as to require a balanced budget by law. Both introduced gold-linked currencies at the same time.

This is the kind of thing that happens in the early stages of an era of economic success. The results were very much in line with Russia or China over the past few years. You’ll notice that Russia and China today have little interest in monetary manipulation, but are teaming up to establish an international currency regime that promises more stability than the mismanaged US dollar. Russian president Dmitry Medvedev even presented a 1/2 oz. gold bullion coin at the most recent G-8 meeting, as an example of the international currency of the future.

Why did Germany and Japan go this route? They did it because they finally got fed up. Once they got fed up enough, they started to look for answers. The answer was the Magic Formula, although they didn’t call it that in those days.

Politicians today, especially in the US, are nowhere near that point. They still think they can spend and tax and devalue their way… not to prosperity exactly… but to a continuation of the status quo. The status quo in which they are somewhere near the top.

Maybe one of them is reading this essay right now. If they hadn’t heard of the Magic Formula before, they know about it now. And what are they thinking?

“Hmmmm, some kind of libertarian crank by the looks of it.”

It’s just too early in the process. Louis XIV’s finance minister Vauban wanted to replace the hideously corrupt and oppressive French tax system with a simple 10% income tax. Louis fired him.

Maybe Louis XIV himself was corrupt and oppressive. Plus, he was already the Sun King. Why fix what ain’t broken? Taxes got higher and higher, until finally the French “voted” for lower taxes by exterminating the aristocrats altogether.

The French example is from a wonderful book by Charles Adams, called For Good and Evil: the Impact of Taxes on the Course of Civilization. Adams also offers an example from ancient Egypt:

“Scholars have tried to determine what went wrong in Egypt under the Ptolemies, when an empire that had survived for over three thousand years simply withered and died… Egypt had suffered no military disasters, famines or plagues…

The most impressive analysis of Egypt’s demise came from the great Russian scholar Rostovtzeff… Rostovtzeff felt that the continual and unabated tyranny of Egyptian tax collectors produced a nationwide decline in incentive. Egyptian workers and farmers lost their desire to work – agricultural lands fell into disuse, businessmen moved away, and workers fled. Sound money disappeared as a raging inflation destroyed what capital there was. The land became filled with robbers who wrecked commerce and brought fear and despair to the populace.”

Remember the Magic Formula. It will come in handy someday.

Nathan Lewis
for The Daily Reckoning

* * *

Healthcare reform that conservatives could love: This appeared in the Huffington Post on August 16, 2009.

I suppose this will offend some of my libertarian friends, as it is counter to their ideologies. I am mostly interested in positive outcomes. Look: we already have a “free market” healthcare system. It has evolved into little more than an extortion racket. We already ran the experiment. Many other countries have various forms of state-funded healthcare, and almost all of them are reasonably successful — despite all the potential and real pitfalls inherent in government involvement. Honestly, it would be nice if the “libertarian” solution actually worked. Sometimes the world is not quite so convenient, however.

I’m known mostly as a conservative, libertarian economist. So, it is a surprise to some of my friends that I favor some form of government healthcare. For one thing, everyone deserves access to some basic level of service, as is the case in every other developed country. Second, other countries’ government-operated systems are much cheaper.

There: I said it. The primary problem with the U.S. healthcare system is that it is too expensive. Insanely, wantonly, preposterously, ludicrously expensive.

I’m sure you know exactly what I’m talking about. But, here are some interesting facts that you may not have known. Presently, the U.S. accounts for about 50% of all healthcare spending in the world. Second, the U.S. government — federal, state and local — accounts for about 45% of all U.S. healthcare spending. In other words, the U.S. government is already spending about 22% of all the healthcare spending in the world, or about 7.5% of U.S. GDP.

From this, we can come to a quick conclusion: no “healthcare reform” plan is going to work that involves spending more money — via additional taxes, mandatory insurance, and so forth. That would just make the problem worse. You would think this is as obvious as gravity.

I think that 22% of all the healthcare spending in the world is probably enough to put together a pretty good healthcare program for the 5% of the world’s population that lives in the U.S. In other words, a universal program whose budget consists of the money that the government is already spending. Then, we wouldn’t need any new taxes.

We’re already paying for a universal healthcare system. We’re just not getting it.

Overall, healthcare spending might drop to 8.5% of GDP, which is 7.5% for the national program and 1% for additional private-sector services.

This is well below the 16.5%-of-GDP level of spending today. But, 8.5% is rather high by historical standards. Actually, I think about 6% is a more reasonable figure — the level of spending in the U.S. in 1968

Healthcare Reform Conservatives Could Love

source: Casey Research

Most of the world’s developed countries had healthcare expenditures/GDP ratios of about 5.0% in 1970, when most of them had already adopted a national system. By 1990, it had risen only to about 7.0%, and hit 8.5% around 2001. So, 8.5% is more than enough.

What does this mean? We would have the kind of universal coverage that liberals dream of. But — get this, conservatives — we would also have almost no corporate health insurance costs. That defined-benefit healthcare plan that is blowing up? The sort that killed General Motors? Problem solved. And no new taxes!

The healthcare industry wouldn’t like such a plan. So what else is new. However, there are so many other businesses that would benefit that Corporate America would back it. (That 8%-of-GDP that they’d be saving is more than the total profits of all the companies in the United States.)

What form could this plan take? A single-payer system has been successful in many countries. However, we already have a single-payer system — Medicare — that is being scammed remorselessly, and which many people think will disintegrate in the future due to escalating costs. The government’s own economists expect Medicare spending to rise to $884 billion in 2017, from $427 billion in 2007.

In our case, I think a British-style government-operated system might be best. We already have some examples of this, in the form of the nationwide Veterans Affairs hospital system, and the services provided by the U.S. military to its employees. I know doctors that have worked for both, and neither had any particular horror stories to tell.

This would also allow our system to be budget-driven, rather than being driven by “needs”/entitlements/profit — all of which can expand to fill the galaxy if we let them. We would simply set a budget, of about 7.5% of GDP, and tell the managers to do the best they can with the money they’ve got. (In 2004, the British state-run system cost 6.9% of GDP.)

Structurally, it should be decentralized, with most of it organized on the state and municipal level, rather than through a national bureau. There should be some minimal fees, similar to copayments, to discourage overuse.

Some people wouldn’t like the service they got at the state-run hospital — just as they might prefer to have their kids in private schools rather than the public schools. No problem. You can use whatever private service you like, but you have to pay for it. Which is no different than the system we have today, without the option of a state hospital.

Most healthcare proposals today seem to create more problems than they solve. That’s why nobody is very excited about them. Democrats might find that a more ambitious plan would get Republican support if it solved the fundamental problem — excessive costs — while avoiding additional burdens in the form of taxes, mandatory participation and piles of regulation. That’s just good politics.