Monday, August 1, 2016

Campaigns Spawn Really Bad Economics

Campaigns Spawn Really Bad Economics

  • Trump and Hillary

William L. Anderson

Presidential elections in the United States spawn Really Bad Economic Policies, and 2016 is a vintage year. Bernie Sanders is resurrecting socialism, and others seek to outdo him. However, before leaping into the abyss of campaign rhetoric, I first note that none of the current candidates are doing what Ron Paul did during his presidential primary campaign four years ago: expose misdoings of the Federal Reserve System.
Without Paul, candidates approve of the Fed’s Eternal Bubble Machine that sends false investment signals, and drives crony capitalism malinvestments that either must be liquidated in the future or will continue to gobble resources from profitable sectors. Indeed, one wonders if any of the candidates realize the damage the Fed is doing.

Bernie Sanders

On that happy note, we turn to Sanders. In an earlier article on his economic proposals, I wrote Sanders emulates Benito Mussolini — someone Sanders is supposed to hate. Like Mussolini (who, like his ally Adolf Hitler, hated free markets and fancied himself a socialist), Sanders does not seek actual government seizure of property, but rather seeks de facto government ownership through taxation and regulation.
Sanders definitely will raise taxes. For example, he says he will tax Wall Street “speculation” to raise funds to pay “free” tuition at public institutions. Likewise, he wants to raise the top marginal rates above 50 percent and substantially increase taxes on capital gains and dividends.
Sanders believes that wealthy people absorbing huge tax increases won’t change their behavior afterward, which demonstrates Sanders’s zero understanding of finance or production of goods. In fact, he claims the American middle class is “created” by wealth transfers. Sanders declares: “if you have seen a massive transfer of wealth from the middle class to the top one-tenth of 1 percent, you know what, we’ve got to transfer that back if we’re going to have a vibrant middle class. And you do that in a lot of ways. Certainly one way is tax policy.”
In one sense, Sanders is correct; there is a wealth transfer from the middle class to the wealthy, but it is occurring because of the policies Sanders supports. If Sanders has any criticisms of the Fed, it is his belief that interest rates should be even lower. He supports vast subsidies given to “green energy” producers that involve diversion of resources from higher-valued to lower-valued uses. He supports policies that subsidize home ownership and he supports the huge central bank purchases of sovereign debt that have choked productive economic activity.
I also mention Sanders’s outright hostility toward free exchange, be it international trade or a kid’s lemonade stand. Socialists can’t comprehend how free exchange is mutually beneficial, while Sanders believes free markets are predatory, and government coercion is freedom. (It is true he is speaking out on government trade deals, which are not “free trade” in any sense of the word, but neither has Sanders expressed any support for lowering of trade barriers.)
Economist Gerald Friedman of the University of Massachusetts-Amherst claims that incomes will “soar” under Sanders’s policies, and that poverty would be cut in half. How? Friedman says it would be done by “pouring $14.5 trillion into the economy” via subsidies, public works, health-care “savings,” and new taxes. In other words, Sanders would make opportunity cost disappear.

Hillary Clinton

Since Clinton is favored to win the November presidential election, her proposed economic policies matter more than do Sanders’s (although it is more fun to write about Sanders). Thanks to the Sanders challenge, her stump speeches are full of anti-Wall Street rhetoric, which is ironic, since she has made millions of dollars from speaking fees paid by Wall Street firms, and the very crony capitalism she denounces made Hillary and her husband very wealthy.
One doubts seriously that hedge fund managers pay less tax than an average nurse or truck driver (as she claimed in an Iowa speech), but unlike Sanders, a True Believer in socialism and his left-wing rhetoric, Clinton simply is trying to get elected. This does not mean, however, that Hillary supports free markets. It’s just that she uses populist-left rhetoric to win elections.
If there is an economic model for Clinton to follow, it would be Barack Obama’s current one, for Hillary is a candidate of the status quo. For all of the “change” rhetoric from Obama, his actual economic regime was more of the same, but “more” was on steroids. The Fed continued (and greatly expanded) its late Bush-era policy of purchasing long-term treasuries and mortgage securities, and a Hillary presidency likely would see QE to the “nth” power.
When Clinton talks “free trade,” she speaks not of free exchange, but political trade “deals” in which politically-favored firms receive privileges and benefits in making deals with foreign governments. Instead of simply allowing goods to cross borders unimpeded, these treaties like NAFTA and the newest proposed trade agreement with China, are Rube Goldberg agreements at their finest.
What “new” policies could we expect from a Hillary presidency? According to her website, we should see the following:
 A $12 minimum wage (Call it “Bernie Lite”);
  • New “investment” in “infrastructure,” which is a euphemism for massive public works, an old socialist saw;
  • Raise business and individual income taxes.
Like Obama, she claims she will create a huge “clean energy” economy with “good-paying jobs,” even though the current “clean energy” initiatives are destroying good-paying jobs by forcing the relatively-healthy sectors of the economy to subsidize the losers (such as wind power and ethanol). Destruction lurks at every turn with her environmental policies, with more government “goals” imposed upon Americans with no sense consequences. And why not? Clinton at worst will be inconvenienced by such policies; ordinary Americans will be driven into poverty.
In short, Hillary promises to raise taxes, increase the regulatory burdens on business, force up energy prices through environmental regulation, and force up the nation’s minimum wage by more than 50 percent. At the same time, she will encourage the Fed to continue on its own path of economic destruction by forcing down interest rates and underwriting the crony capitalism regime.

Donald Trump

Then there is The Donald. Unlike Sanders and Clinton, Trump has tapped into people who have seen their own communities devastated by deindustrialization and who have been left behind in the high-tech boom. Trump supporters don’t work for Apple and Google.
Regarding taxes, Trump does seem to have the best plans of the three remaining candidates. Carrying out such tax reform requires the consent of Congress, which tends to worship high tax rates. However, lowering both personal income tax rates and business taxes would be a good start toward removing some of the worst excesses of the Obama administration years.
Trump’s economic Waterloo, however, is trade. Trump always has prided himself on negotiating and deal making, yet unencumbered trade does not need the US Government cutting “deals” with other nations. It needs the government to get out of the way.
While Trump claims he only wants “fair trade,” nonetheless he is flirting with creating some world-wide trade disasters, and the last time this happened during the early 1930s, the results were catastrophic. Part of the problem is that Trump thinks like a Mercantilist, believing that a nation’s survival depends upon the value of exports being greater than imports.
For example, he claims that the value of China’s currency, the yuan, is “too low” relative to the US dollar, so he would declare China to be a “currency manipulator.” As any Austrian economist will tell you, there is no such thing as an “optimal” exchange rate. Each rate has advantages and disadvantages, depending upon whose interests are at stake. Furthermore, given that the Fed truly is a currency manipulator, it seems hypocritical to accuse other nations of doing what the US Government already is doing.
Furthermore, there is something unseemly about running a political campaign against yet another Asian country. In the 1980s and 90s, American politicians blamed Japan and even South Korea for any economic ills this country had. For more than a decade, the bogeyman has been China.
For all of the complaints about “slave labor” in other countries, the main reason that much of the manufacturing of consumer goods (and some capital goods) has moved abroad is because the political climate in the USA is extremely hostile to domestic investment. That politicians like Sanders are extremely popular is unnerving to potential investors, who are not interested in taking huge risks and then having the government confiscate the proceeds.
To his credit, Trump is the only person left in the race that actually understands this last point. One doubts that Sanders has a clue about capital formation, and Clinton is too craven to care.
Have fun in the voting booth.