“To be rich is glorious!”

These words, uttered by China’s then paramount leader (but whose only official title at the time was head of Chinese national bridge-players association!).

His brave & wise decision to open China’s economy to trade is behind the wondrous material advances of this great country that marks a triumph of the wealth-producing capacity of markets.

More liberty leads to more wealth. One day, more complete liberty will be available to all.

Long Live the Great Chinese People!

China’s new “Great Leap Forward”

My first trip to China was to teach market-based economics in 1987 at the Shanghai University of Finance & Economics.

While historical perspective may not be necessary to marvel at how modern China has become, it is hard to convey the contrast to those that did not experience the “old” China.

Decades of central planning had brought this great culture with its vibrant mass of humanity to & from the brink of starvation.

China is now a consumerist society on a grand scale with stores offering the most expensive designer labels lining the streets.

This transformation is a tribute to the wisdom of Deng Xiaoping in his understanding that trading would be the way for China to be rich again. Apparently, he chose Adam Smith over Karl Marx in saying that “to be rich is glorious”.

This simple sentence recognized that income differentials are not an economic problem & that by serving others anyone can (and should!) become rich.

Can Conservatives be trusted with the US Constitution?

Well, it seems the answer is NO!

While the debate over Elena Kagan’s nomination to the US Supreme Court rages, American Conservatives are making mischief with the Rule of Law.

“When conservatives like Bork treat rights as islands surrounded by a sea of government powers, they precisely reverse the view of the Founders as enshrined in the Constitution, wherein government powers are limited & specified & rendered as islands surrounded by a sea of individual rights.”
Stephen Macedo, The New Right versus The Constitution

Teaching Free Market Economics in China!

I have been unable to connect to the Internet for some days.

At the moment, I am in Shenyang in the northeast corner of China teaching about free markets to Chinese university students.

The organizer is Ken Schoolland’s wife, Li Zhao. It is going quite well, but there was a lot of attrition of other free-market economists that had planned to come.

With so few of us, it has been quite exhausting with 12+ hour days of lecturing for about 6 hours before speaking individually with students and professors.

Hopefully, this will be the first of other opportunities to bring the message of the merits of the free society to China.

But it ain’t for the faint-hearted. There is no air conditioning and it is VERY hot and humid. The facilities are not the best, but they are adequate. (Anyone that knows about the splendid infrastructure at Universidad Francisco Marroquin would find this place to be rather primitive! THANK YOU, Giancarlo and others for the wonders of UFM!!!)

Value-added tax: nonsense & lies

Searching for ways to avoid making tough decision on reduced government spending, policy makers in the US are seeking new sources of revenues. The flavor of the day is a tax on consumption, in its favored form of a value-added tax (VAT).

Part of the support for a VAT is that most economists believe that taxing consumption is more efficient than taxing income. However, this is a preference of one form of taxation over another.

It is clear that there is no intention to replace income taxes with a VAT. The idea is simply to have both. This will be a stupid mistake that will reduce economic growth by increasing the overall tax burden.

A lot is at stake: it is estimated that a VAT of 5% were imposed on economic activities in the US would raise $161 billion in 2012.

But the amount of anticipated tax revenues almost always disappoints since forecasts tend to underestimate the dynamic effects of a higher tax burden on investment or consumption.

Since politicians tend to base spending plans on such revenue estimates, growing budget deficits will lead to an insistence on raising the VAT rate.

Promoters of VAT are either disingenuous or ignorant in overlooking the inexorable rise of VAT rates in Europe, as well as the introduction or increase in other taxes.

Bolivarian workers’ paradise in Venezuela

Venezuela’s President Hugo Chavez is widely praised for his efforts to uplift the poor. But his “successes” have come at a very high price, including the underperformance of the domestic economy,

After years of economic mismanagement, Venezuela is the only Latin American economy with negative growth. And crime & inflation, both of which harm the poor the most, are high & rising.

While things look bad, they are almost sure to get worse under Plan Socialista Simon Bolivar 2007-13 that calls for nationalizing 70% of private companies with the rest becoming joint ventures. As it is, the number of private firms is down by ½ to 7,000 & those surviving face negative economic growth last year (-3.3%) with a further decline (-5.8%) this year.

Once a net exporter of coffee, sugar & rice, Venezuela now imports many food staples in the wake of massive nationalization of agricultural land.

With the economy increasing dependent on oil revenues generated by a creaking state-run company, production of the state steel firm, Sidor, was down 25% in 2009 & 20% this year.

Venezuela’s experience with Chavez also reveals a problem with majoritarian democracy. Senor Chavez attained power just like Hitler did under the Weimar Republic and then used legal means to create a totalitarian state.

In both instances, charismatic leaders attracted strong electoral support of citizens.

Great moments in Macroeconomics!

Brad DeLong scribbles incessantly about all things political, i.e., macroeconomic since they are the same thing. Both involve willful ignorance of economic processes.

Perhaps the most revealing comment ever made to reveal the vacuousness of macroeconomic pundits is found on his blog:

At this point, anything that boosts the government’s deficit over the next two years passes the benefit-cost test–anything at all. And EPI’s ways of spending money are much better than anything the Senate is likely to come up with by itself.”

Hey Brad! Keynes is still dead, but the rest of us are living in his long-run that is being ruined by his minions that mull over his misguided musings!

It is immoral to support stealing the future of the young, including those that are currently disenfranchised.

Regulations, regulators & financial turmoil

Public outcry & the legislative rush to increase government regulations over financial institutions imply that such oversight has been insufficient & that more is needed to avoid future catastrophes.

But suggestions that the financial sector in the US or elsewhere has been under-regulated seems to describe some alternative universe, unlike the one we live in.

In the case of the US, there are many government agencies that oversee the US financial sector & these entities consume enormous resources in public-sector spending or private-sector compliance.

Consider a few: Federal Deposit Insurance Corporation (FDIC); Office of the Comptroller of the Currency (OCC); Board of Governor of the Federal Reserve System (FRB); Federal Financial Institutions Examination Council (FFIEC); Federal Reserve Regional Banks; individual state bank regulators & conference of state bank supervisors

And there are various agencies involved with long-term financing, including the Federal Home Loan Banks, the Federal Housing Administration (FHA), the Government National Mortgage Association (GNMA, aka “Ginnie Mae”) & the Department of Agriculture’s Rural Housing Service & Rural Development Guaranteed Loan Program.

Also, there is Federal National Mortgage Association (Fannie Mae) & Federal Home Loan Mortgage Corporation (Freddie Mac), government-sponsored entities with implicit (now explicit) guarantees of their debt so they became “too big to fail”, something that would not have happened if paid market interest rates.

It would seem that there was more than sufficient regulation.

Then there is an oft-repeated claim that a single act, the Gramm-Leach-Bliley (GLB), set the conditions for the eventual financial collapse. For its part, GLB repealed a provision of the Glass-Steagall Act (GSA) that had banned affiliations between commercial & investment banks. (It also allowed banking institutions to provide more services, including underwriting & other dealing activities.)

But most of the problems were with investment banks rather than commercial banks. Bear Stearns, Lehman Brothers & Merrill Lynch were investment banks & AIG is an insurance company with no commercial banking division.

As such, GLB probably reduced taxpayer liabilities by allowing commercial banks to take over troubled investment firms with JP Morgan buying Bear Stearns & Merrill Lynch bought by Bank of America.