Economic Growth is a Function of Capitalism

What happened? Capitalism happened. And the US practiced it at a higher level. 

Recipe for Slower Growth in One Simple Chart

Want to see why our economy is not growing faster? In one easy chart?

You can replicate this on your own if you like. Divide your portfolio into higher and lower yielding investments. Now keep moving money from the former to the latter and see what happens. 

Public Debt=Lower Growth

The chart below should not be surprising to anyone who understands economics. But it needs a bit of explanation. It is not debt itself that produces low growth rates. It is what the debt is used to finance that creates low growth. You would not see this same relationship with regard to corporate debt. That's because private debt is usually incurred to finance economically productive projects. Public debt is usually used to finance economically UNproductive projects -- like transferring money to less productive people and "green" projects that have negative ROIs. 

Surprise. People flee high tax , low growth states.

Mark Perry furnishes this handy chart comparing states with the highest inbound migration to those with the highest outbound migration. As anyone who has taken Econ 101 could tell you, people move away from places with low growth, high taxes and other costs to places with high growth and low taxes. Yet the government states like NY, Illinois and California double down on the things that are driving people away from their states. Apparently they missed Econ 101. 

Prosperity and Free Market Capitalism Are Utterly Linked

The linkage between classic liberalism (free choice, free markets) is so strong, it is a wonder that significant numbers of people -- e.g. virtually all the Democrat candidates for President -- want to move the US  in the opposite direction.  Are they just that ignorant? Or do they actually prefer lower living standards (as long as they get to make the decisions)?

It's The Economy (Again), Stupid

Presidents are seldom responsible for the performance of the stock markets, but this one is an exception.  Market prices are always roughly reflect the present value of future income streams, the expectation of which ratcheted upward last November with the election of a President who promised, and appears to be delivering, lower taxes and regulation for businesses.  Economic growth is driven by corporate profits and the reinvestment that devolves from those profits. We have experienced this twice before when President Kennedy and President Reagan cut tax rates. Democrats -- stuck with their Keynesian assumptions -- seem not to have learned this lesson. Or don't want to. It appears that they will come out in unanimous opposition to lower taxes and higher growth. A rather peculiar platform to run on.  Maybe they ought to remember what James Carville said during the Clinton years -- it's the economy, stupid.

The Economic Costs of Restrictive Housing Practices

It is not unusual for cities to engage in restrictive housing practices that are designed to benefit existing property owners at the expense of new entrants. Restricting competition to benefit incumbents is pretty much what government does.  However, a new study by
Chang-TaiHsieh of the University of Chicago seeks to quantify the cost of these anti-competitive practices -- and they appear to be huge.

We quantify the amount of spatial misallocation of labor across US cities and its aggregate costs. Misallocation arises because high productivity cities like New York and the San Francisco Bay Area have adopted stringent restrictions to new housing supply, effectively limiting the number of workers who have access to such high productivity. Using a spatial equilibrium model and data from 220 metropolitan areas we find that these constraints lowered aggregate US growth by more than 50% from 1964 to 2009.

So while politicians gnash their teeth around strategies to get growth up a percent or two, they are simultaneously working against that growth by employing restrictive housing policies to benefit incumbent property owners. These people who seek protection might actually be better off with higher overall levels of economic growth. But the politicians might not be and, after all, aren't they why government exists?

You can read the entire study here. https://eml.berkeley.edu//~moretti/growth.pdf

Realities of Economic Growth

The Commerce Department just reported that economic growth during the Obama presidency averaged 1.6% annually. This was the lowest of any president's term wince World War II.

Obama bashing aside, here are the economic realities:

Reality #1: There is no way that we can create lots of jobs, continue to pay an aging population promised social security and Medicare benefits and continue to subsidize low income producing Americans without strong economic growth.

Reality #2: You cannot have strong economic growth unless businesses are able to attract investment capital from those who forecast a good return to their investment.

Reality #3: A country which is constantly imposing or threatening to impose new costs on business -- e.g. taxes, health care obligations, burdensome regulations, minimum wage laws -- cannot attract increased investment in businesses located there (want to invest in Venezuelan businesses right now?).

This is the fundamental reason growth was so low during the Obama presidency. While the long-term business outlook in the US was not as dire as in Venezuela, it's clearly been a lot gloomier than any time in recent history. Democrat's response? The beatings will continue until moral improves. The last eight years have been an approximate replay of the Jimmy Carter years. Is it possible that the Trump presidency can turn business pessimism around the way Ronald Reagan did? Reducing taxes and burdensome regulation (starting with Obamacare and overreaching labor and environmental rules) would be a start.

Growth and Productivity. Simple Math

The clueless (e.g. the media and politicians) keep asking why economic growth has remained slow. The answer is simple mathematics (which might explain their inability to understand it). More and more resources are being shifted away from sectors with high productivity into sectors with low productivity (e.g. government, education, and healthcare). These low productivity sectors are all ones that government subsidizes, so it should not be a surprise. Neither should the resulting slow growth be a surprise.

Worldwide Prosperity Explained in One Chart

It's hard to give any other explanation to this chart than "capitalism" or, if you prefer, "classic liberalism" --- the idea that if government protects property rights and otherwise leaves people to employ their own energies and ambitions, great wealth will result. The US, having more aggressively adopted this posture, obviously benefited the most.

Regulations Cost Workers $13,000 Per Year in Lost Income

A new study out of George Mason University shows that Federal regulations create a substantial drag on economi growth estimated at 0.8% of GDP per year. This might not sound like a lot, but:

• If regulation had been held constant at levels observed in 1980, the US economy would have been about 25 percent larger than it actually was as of 2012.
• This means that in 2012, the economy was $4 trillion smaller than it would have been in the absence of regulatory growth since 1980.
• This amounts to a loss of approximately $13,000 per capita, a significant amount of money for most American workers.

I wonder if the workers currently complaining about stagnant wages would like to have gotten a $13,000 raise? They could have.

No Income Tax=Faster Growth

In their 2015 book, “The Wealth of States,” Arthur Laffer, Rex Sinquefield and Travis Brown examined the 11 states that have adopted income taxes since 1960. All 11 grew more slowly than the national average and all of them had slower job growth.  Meanwhile, since 1990 the nine no-income-tax states have had twice the population growth and job creation as measured by payrolls, and about one-third faster total income growth than the high-tax states like New York, California and New Jersey. A no-income-tax policy is a flashing billboard telling employers: We’re open for business.

The Prosperity Link to Fossil Fuels

So what should we make of the chart below? Obviously that the world's standard of living and life expectancy is highly correlated with the exploitation of cheap energy from fossil fuels.



Should this not at the very least give pause to those hell-bent on reducing the further development of fossil fuels in the pursuit of global warming? The ability of mankind to control the earth's constantly changing climate by building windmills is, at best, debatable. Is it worth jeopardizing the continued improvement in the lives of billions of people around the globe? More practically, what do you think the odds are that the governments of nations like China, India and Indonesia are going to say to their people, "We're going to dampen the growth in living standards you've been experiencing because some wealthy liberals in the US and Europe think that they can control the climate"?

Capitalism is the Scourge of the Poor?

If you listen to those on the left -- Democrats, the media -- you would think that capitalism was the scourge of the poor. And then there are the facts . . . .

Something to Remember on May Day

May Day was a day for the leftists in the Seattle population (which seems to be the same thing these days)  to get together for riots proclaiming the evils of capitalism -- how badly the people of the world have suffered from the advent and acceleration of market economics. Perhaps they'll want to use this chart as a discussion point the next time they meet.

Rich States, Poor States

According to Democrats the way to create a workers paradise is to heavily tax The Rich and enact more welfare programs and higher minimum wages. According to the latest Rich States Poor States report from the American Legislative Exchange Council, the five states with the highest taxes -- California, New York, New Jersey, Connecticut and Illinois -- lost 4 million residents over the last decade while low-tax states of Texas, Florida, North Carolina, Arizona and Georgia gained 4 million residents. Not surprisingly economic growth  in the high tax states is much lower than in the low tax states.

Apparently, people think "fairness" is more about growth and having a job than it is about redistributing wealth with "progressive" taxes.

Why China Grows Faster Than The US

One continues to hear a lot of China bashing. They compete "unfairly". American companies are "shipping jobs" to China. What you seldom hear is a discussion of the comparative economic incentives in China versus the US. The fact is, government in China has created a much more friendly place to work and produce than in the US. The US heavily taxes economic success. China does not. Wonder why Chinese businessmen no longer come to the US to set up their businesses? Look at the table below.


                                                              China                                                      United States

Capital Gains Taxes                                  0                                                            20-45%

Property Taxes                                          0                                                         Substantial

State and Local Taxes                               0                                                             10-20%

Top Federal Income Tax Rate                 35%                                                           43%

Corporate Tax Rate                                 15%                                                           39%

Inheritance Tax                                         0                                                               55%




Also consider that this China is not the casino economy the US is where everyone is playing with borrowed money.


Min. Home Loan Down Payment            30%                                                             3%

% Vehicles Purchased on Credit               7%                                                           >50%

Now, you might still rather live in the US for non-economic reasons. China  has a one-party government that can punish people it doesn't like (of course, as we have seen, the IRS behaves that way in the US). But what China has done is create the sort of economic climate that used to exist in the US. One where people were strongly incented to produce. One where people could keep most of what they produced instead of handing it over to government. The result is clear:

GDP Growth Rate                                   10%                                                             2%

Why It's Not Realistic to "Grow Your Way Out of Debt"

You've heard it said often. It also seems to be the premise of the Federal Reserve's "quantitative easing". Debt is not all that onerous if you can grow your way out of it. This is actually a true statement. But is this a plan for the US economy or just a wish?

Total debt in the US -- government, corporate and private -- is $58 trillion.

Total GDP in the US is $18 trillion, but $6 of that is government spending -- taking money from the production of the private sector and spending it on  non-productive activities like transfer payments to Social Security and Medicare. So the part of the economy that actually produces value is about $12 trillion.

Assuming an annual interest of 2%, even if you could restrain annual debt increases to 3% of GDP a year, the productive part of the economy would have to grow at 5% just to stay even. When was the last time you saw the economy grow that fast for more than a quarter?

Now imagine that interest rates jumped to, say, 5% (the ten year treasury was at 5% in 2002). At that level almost a quarter of private sector GDP would have to be devoted to debt service to break even. Hardly likely. So it's pretty easy to see why the Federal Reserve keeps backing off its promise to reduce its funding and allow interest rates to rise. Where (and how) does all this end? 

The Unemployment Rate Does not Measure Labor Market Vitality

Despite what you will hear out of Washington, there is really only one reason that the reported unemployment rate keeps dropping. Each month there are fewer people actually participating in the workforce. The unemployment number you see reported each month is the percentage of the people in the workforce who are unemployed. When the denominator of that ratio drops, the unemployment number drops even though there may be no more people actually employed.

You will sometimes hear that the drop in labor force participation is due to more people taking normal retirement. This may be happening, but take a look at the chart below. Do you think the normal retirement rate suddenly accelerated starting in 2007?

The number of people not working increased by 315,000 this month to a record 92.6 million. Anyway you cut it, that's not good. Fewer people working -- for whatever reason -- means fewer people producing things and (in general) less money to spend buying things. There is no way that the US economy can have robust growth when fewer people are working each money,

Differences in Long-Term Economic Performance

Watching the May Day scum loons protestors in Seattle this week ranting  about the scourge of capitalism prompted me to pull out this chart. from AEI which pretty clearly demonstrates that the United States has been doing something for quite a while that has made it a far wealthier nation than the rest of the world. The the May Day scum loons protestors would probably suggest that the US has been able to adroitly exploit the rest of the world and steal from them. I tend to lean toward the interpretation that, up until recently, policies of  lesser government interference with the productivity of the private sector are the driver. At any rate it's quite clearly that there is something at work that results in a higher performing economy in the United States. And it's been going on for quite a while.