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The Rise and Fall of an American Icon

August 26, 2000 By admin Leave a Comment

Forecasts & Strategies
Personal Snapshots
August 2000

by Mark Skousen

“The Chief didn’t believe in the Protestant ethic or trust in Poor Richard’s aphorisms. A penny saved might be a penny earned, but a penny borrowed was worth even more.”
– David Nasaw, author The Chief: The Life of William Randolph Hearst

In the past year, I’ve had the chance of visiting the two biggest mansions in the United States, the Biltmore in Asheville, North Carolina, erected by the Vanderbilts, and the Hearst Castle, built by William Randolph Hearst. Both are monuments of capitalist extravagance, and both bankrupted the owners. The Vanderbilts never recovered and not a single Vanderbilt appears on today’s list of the Forbes 400 Richest People in America. The Hearst family was luckier and somehow survived the excesses of the Chief. Several of the Hearst sons are listed today as billionaires on the Forbes list.

In reading his latest biography, The Chief (Houghton Mifflin), I was surprised to learn that William Randolph’s father, George Hearst, started out as a forty-niner prospector who made a fortune in Homestake Mining and Anaconda Copper. He bought the San Francisco Examiner to advance his political career as a U.S. Senator. His only son, William, was trained by his ambitious mother, Phoebe, who took him overseas and sent him to private schools, where he learned Greek, Latin, French and German. Learning business and finance at a course in “political economy” at Harvard, he took over the Examiner and made it profitable. He had the patience to wait on his investments, which paid off handsomely in the future after heavy initial outlays. He was an incurable optimist, a necessary characteristic to succeed in business. Gradually, Hearst built his media dynasty throughout the nation, and wielded influence like no other publisher in American politics. He was the baron of publishing, just as Carnegie was in steel, Rockefeller in oil, and Morgan in banking.

But, sadly, Hearst omitted a cardinal principle of finance: Live within your means! His newspapers were mostly profitable, but he could never retain the earnings. He was a man of insatiable appetites-in politics, high society and personal possessions. He spent all his profits and borrowed to the hilt to make movies, live the high life with his actress-mistress, and build his dream homes (at his peak, he held over 40 homes, beach houses, castles and other kinds of real estate around the world). During the Great Depression of the 1930s, it all came crashing down, and in many ways he died a broken and friendless man.

William Randolph Hearst was bigger than life, but he could have learned from Poor Richard’s Almanac: “Beware of little expenses, a small leak will sink a great ship.”

Filed Under: Articles, Forecasts & Strategies, Philosophers and Businessmen Tagged With: Capitalism, history

If You Build It – Privately – They Will Come

August 26, 2000 By admin 1 Comment

Ideas on Liberty
Economics on Trial
August 2000

by Mark Skousen

“Government provides certain indispensable public services without which community life would be unthinkable and which by their nature cannot appropriately be left to private enterprise.” – PAUL A. SAMUELSON

If you take a course in public finance, you will invariably encounter the “public goods” argument for government: Some services simply can’t be produced sufficiently by the private sector, such as schools, courts, prisons, roads, welfare, and lighthouses.

The lighthouse example has been highlighted as a classic public good in Paul Samuelson’s famous textbook since 1964. “Its beam helps everyone in sight. A businessman could not build it for a profit, since he cannot claim a price for each user.” 1

Really? Chicago economist Ronald H. Coase revealed that numerous lighthouses in England were built and owned by private individuals and companies prior to the nineteenth century. They earned profits by charging tolls on ships docking at nearby ports. The Trinity House was a prime example of a privately owned operation granted a charter in 1514 to operate lighthouses and charge ships a toll for their use.

Samuelson went on to recommend that lighthouses be financed out of general revenues. According to Coase, such a financing system has never been tried in Britain: “the service [at Trinity House] continued to be financed by tolls levied on ships.”2

What’s even more amazing, Coase wrote his trailblazing article in 1974, but Samuelson continued to use the lighthouse as an ideal public good only the government could supply. After I publicly chided Samuelson for his failure to acknowledge Coase’s revelation,3 Samuelson finally admitted the existence of private lighthouses “in an earlier age,” in a footnote in the 16th edition of his textbook, but insisted that private lighthouses still encountered a “free rider” problem.4

Private Solutions for Public Services

The lighthouse isn’t the only example of a public good that can be provided for by private enterprise. A privately run toll road operates in southern California. Wackenhut Corrections manages state prisons. Catholic schools provide a better education than public schools. The Mormon Church offers a better welfare plan than the USDA food stamp program. Habitat for Humanity builds houses for responsible poor people.

And now, for the first time in 38 years, there is a privately built major league baseball stadium-Pacific Bell Park, new home of the San Francisco Giants. After Bay area voters rejected four separate ballot initiatives to raise government funds to replace the windy and poorly attended Candlestick Park, Peter Magowan, a Safeway and Merrill Lynch heir, teamed with local investors, to buy the club and, with the help of a $155 million Chase Securities loan, built the new stadium for $345 million. The owners also got huge sponsorships from Pacific Bell, Safeway, CocaCola, and Charles Schwab.

So far the private ballpark has been a super success, selling a league-leading 30,000 season tickets for the 41,000seat stadium. The team’s 81 home games are nearly sold out. Other team owners, whose stadiums are heavily subsidized, were skeptical, but a dozen team owners have visited the new operation to study what they’ve done. They include George Steinbrenner, who is considering a $1 billion new Yankee stadium.5

Economists Attack Public Financing

Perhaps private funding of major league sports facilities has been influenced by two recent in-depth studies by professional economists attacking publicly subsidized sports arenas. In Major League Losers, Mark Rosentraub of Indiana University (and a big sports fan) studied stadium financing in five cities and meticulously demonstrated that pro sports produce very few jobs with little ripple effects in the community, take away business for suburban entertainment and food venues, and often leave municipalities with huge losses.6

A Brookings Institution study came to similar conclusions. After reviewing major sports facilities in seven cities, Roger G. Noll (Stanford) and Andrew Zimbalist (Smith College) found they were not a source of local economic growth and employment, and the net subsidy exceeded the financial benefit to the community.7

These empirical studies confirm a longstanding sound principle of public finance: Beneficiaries should pay for the services they use. In my free-market textbook I call this “The Principle of Accountability,” also known as the “benefit principle.” It’s amazing how often politicians violate this basic concept. For example, John Henry, a commodities trader worth $300 million and owner of the Marlins baseball team, is pushing through the Florida state legislature a bill to tax cruiseship passengers to help fund a new Miami ballpark. (Fortunately, Governor Jeb Bush just vetoed the bill.)

Please, will someone send Mr. Henry a copy of my free-market textbook, Economic Logic?

1. Paul A. Samuelson, Economics, 6th ed. (New York; McGraw Hill, 1964), p. 159.
2. Ronald H. Coase, “The Lighthouse in Economics” in The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988), p. 213. Coase’s article originally appeared in The Journal of Law and Economics, October 1974.
3. Mark Skousen, “The Perseverance of Paul Samuelson’s Economics,” Journal of Economic Perspectives, Spring 1997, p. 145.
4. Paul A. Samuelson and William D. Nordhaus, Economics, 16th ed. (New York: McGraw Hill, 1998), p. 36n.
5. Peter Waldman, “If You Build It Without Public Cash, They’ll Still Come,” Wall Street Journal, March 31, 2000, p. 1.
6. Mark S. Rosentraub, Major League Losers: The Real Cost of Sports and Who’s Paying for It (New York: Basic Hooks, 1997).
7. Roger G. Noll and Andrew Zimbalist, Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums (Washington, D.C.., Brookings Institution, 1997).

Filed Under: Articles, Economics, Ideas on Liberty and The Freeman Tagged With: Capitalism, Economics, Free Market, Government, liberty

A Tax by Any Other Name

July 31, 2000 By Mark Skousen Leave a Comment

Personal Snapshots
FORECASTS & STRATEGIES
July 2000

A Tax by Any Other Name
by Mark Skousen

“Do they realize that every measure leading to capital decumulation jeopardizes their prosperity?” — Ludwig von Mises

A tax by any other name….

Whether you call it an estate tax, an inheritance tax or a death tax, it’s all the same — a tax on capital!

Capital is the lifeblood of the economy. It builds and maintains our roads, buildings, bridges, water systems and other infrastructure. It educates our youth and trains our workers. It finances inventions and new technology. In short, capital is the engine of economic growth and makes possible a higher standard of living for all of us. In his 1920 best-seller The Economic Consequences of the Peace, the economist John Maynard Keynes hoped to see the day when capital would be “allowed to grow in the geometrical proportion predicted by Malthus of population,” resulting in an economic nirvana, with no “overwork, overcrowding, and underfeeding.”

Keynes’s book warned about one of the greatest threats to capital formation-world war. But today the biggest threat to capital formation and economic growth is taxes, particularly estate taxes and capital gains taxes. Politicians call them “death” taxes and “profit” taxes, but these taxes have the same effect. They systematically reduce the pool of investment capital in the world, the seeds of economic progress. In 1999, the federal estate tax removed over $30 billion from the capital investment pool of this nation, and the capital gains tax removed over $100 billion-money sent to Washington that will never return to the private sector to be invested. What a tragedy!

I laud the House of Representatives for taking the “revolutionary” step of eliminating the federal estate-tax. But while one hand giveth, the other taketh away. The House also added to their “radical” bill a provision that would actually do worse-tax the gains on all inherited assets at the time of death! Under current law, heirs don’t have to pay taxes on capital gains of stocks and other assets inherited from a deceased loved one. They automatically receive a “stepped up” basis on all stocks, bonds, etc.But under the new law, that “stepped up” basis is eliminated.

So even under the new bill-if it ever becomes law-estate planning won’t go away. Lawyers and accountants don’t have to worry about seeking added work. They will be busy finding ways to get around the new rules that confiscate capital upon death.

My favorite strategy for avoiding the various capital/estate/wealth taxes is to quietly, privately and legally transfer assets to your heirs. In small amounts, this means investing in gold and silver coins, artworks and other collectibles, all of which can be easily given away. For larger estates, the best strategy involves trusts and foundations. As Larry Abraham says, “There’s never been a tax law without legal loopholes.”

Filed Under: Articles, Benjamin Franklin, Forecasts & Strategies, Free Markets

Neither Left nor Right

July 5, 2000 By Mark Skousen Leave a Comment

Economics on Trial – Ideas on Liberty – July 2000

by Mark Skousen

“Those who control the adjectives win.” — Larry Abraham

The use of the political labels “left” and “right” may be popular in today’s media, but there are several reasons why the dichotomy is a false and misleading guide to political and economic philosophy. It implies that “left” is equally as extreme as “right,” while the “middle of the road” position appears the more moderate and balanced position. I call this system the pendulum approach, where each individual is categorized along a political spectrum from “extreme left” to “extreme right.” Recently I encountered an example in an economics textbook.

Radical
Liberal
Conservative
Extreme Left Extreme Right
MARX
KEYNES
ADAM SMITH

Source: Mark Maier and Steve White, The First Chapter, 3rd ed. (New York: McGraw-Hill, 1998), p. 42.


The problem with the pendulum approach is that Adam Smith is characterized as “extreme” as Karl Marx. By implication, neither economist is sensible. Yet the evidence is overwhelming that Adam Smith’s system of natural liberty has advanced civilization far more than Karl Marx’s inexorable system of alienation and exploitation.

Moreover, in the pendulum approach, the middle-of-the-road position held by John Maynard Keynes appears to be the moderate ideal. A pendulum that experiences friction will eventually come to rest in the middle, between both extremes. But is that the best way to go?

A New Alternative: The Totem-Pole Approach

I prefer a fresh approach, which I call the top-down or “totem pole” way. Instead of left to right, I use top to bottom. In Indian folklore, the most-favored chiefs are placed at the top of the totem pole, followed by less impor tant chiefs below. Look at the next page for my rendition of the same three economists according to the totem-pole method.

In this system, I rank Adam Smith first, Keynes second, and Marx third. Of the three, Adam Smith advocated the highest degree of economic freedom. Nations that have adopted Smith’s vision of laissez-faire capitalism have fared the best. Next is Keynes. He usually favored maximum freedom in the microeconomic sphere, but frequently endorsed heavy intervention (inflation and deficit spending) in the macro sphere. His big-government formula has resulted in slower economic growth in many industrial nations. The low man on the totem pole is Marx, who advocated a command economy at both the micro and macro level. Historically, centrally planned Marxist nations have vastly underperformed the market economies.

Political and economic positions should not be divided by left and right. They are either right or wrong. As Milton Friedman has said many times, “There’s only good economics and bad economics.”

Avoid Being Close-Minded

A second reason why I avoid the left-right labels is that it puts people and ideas into boxes. When someone’s theories are labeled and compartmentalized, thinking stops and name-calling begins. There has been far too much bad blood spilt over the years between camps that spend more time shouting epithets than engaging in legitimate dialogue.

This criticism applies equally to the worn out adjectives “liberal” and “conservative.” If John Kenneth Galbraith is a “liberal,” why should conservatives listen to him’? If Milton Friedman is a “conservative,” why should liberals read his books? I try not to prejudice myself. To me, both are economists who have ideas worth examining.

The media will continue to use the hackneyed political lexicon of yesteryear and engage in character assassination. But I will resist the outdated and misleading left-wing/right-wing/liberal-conservative battlelines, and treat every scholar, candidate, and philosopher on his own merits, and not according to some arbitrary label.

Filed Under: Articles, Ideas on Liberty and The Freeman, Politics

Too Many Free-Market Think Tanks?

May 28, 2000 By Mark Skousen Leave a Comment

Personal Snapshots
FORECASTS & STRATEGIES
May 2000

by Mark Skousen

“Stimulating independent thought… is being done by all too few individuals and institutions, not only in the U.K. but here in the U.S. as well.” — Milton Friedman (1981)

Donating money to a few of my favorite free-market organizations used to be a pleasant duty, but now I’m literally inundated with demands from hundreds of think tanks and public-policy groups, all vying for my limited funds. Maybe you’re wondering if we really need so many foundations and political organizations.

Back in 1946, there was only one free-market organization in the United States: the Foundation for Economic Education, run by Leonard Read. If you were a classical liberal, you wrote for The Freeman (now Ideas for Liberty) and contributed to FEE. (I write a regular column called “Economics on Trial”; to subscribe, call 800/452-3518, only $35 a year! Or see their web site, www.fee.org) But then along came a British chicken farmer, Sir Anthony Fisher (1915-1988), who established the Institute of Economic Affairs in London. Tony was so enamored with the idea of setting up free-market foundations that he created an organization for the very purpose of creating more institutes around the world: The Atlas Economic Research Foundation, based in Fairfax, Virginia.

Over 350 Institutes in over 50 Countries

By going to their web site, www.atlas-fdn.org, you’ll discover its virtual directory, which contains the web site links of hundreds of public-policy institutes in 50 countries. Of course, the big names are there, such as Heritage, Cato and the American Enterprise Institute. But you’ll also find dozens of smaller, lesser-known groups in Europe, Asia and Latin America.

Think tanks sometimes have an objective name, like the Independent Institute or the National Center for Policy Analysis, while others are purposeful and include in their title terms like reason, liberty, sound economy or free enterprise. Others are named after a location like Manhattan or Mont Pelerin. Many are linked to famous classical liberal philosophers like Adam Smith, Ludwig von Mises, Friedrich Hayek, Henry Hazlitt, James Madison, Alexis de Tocqueville, Lord Acton and Edmund Burke.

Atlas Leads the Charge

The Atlas Foundation doesn’t think there are enough think tanks. It has a section of its web site devoted to showing you how to set up your own institute. In “The Need for More Institutes,” Atlas quotes Milton Friedman (see above). I noticed several free-market think tanks devoted to environmental issues. None of them are very big. Maybe if they combined forces, they could offer a countervailing power” to the Sierra Club or Earth First.

The Growth of State Think Tanks

There are two strong arguments favoring an ever-growing number of educational foundations and public-policy think tanks. First, the wider number of institutes, the greater the ability to specialize and fulfill the needs of reformers. Adam Smith made this point in The Wealth of Nations. An expanding market permits greater specialization and higher consumer satisfaction.

For example, state and local organizations can deal with local issues. Recently a proliferation of state think tanks have attracted substantial sums and made valuable contributions: The Mackinac Center in Michigan, the James Madison Institute in Florida, the Sutherland Institute in Utah, the Cascade Policy Institute in Oregon. Clearly, these organizations are making fresh contributions and avoiding duplication.

Second, increased competition not only means more specialized demands are being met, but the total amount of contributions to free-market causes is maximized.

What is the optimal number of think tanks? The market test is the ultimate decision-maker: whatever the market will bear. Apparently the optimal level has not been reached. When I asked Mary Thoreau of the Independent Institute, “Are there too many think tanks?” her reply was succinct: “Is the world free? Is competition bad?”

Filed Under: Articles, Forecasts & Strategies, Libertarianism, Politics

The Gap Between Rich and Poor Is…Narrowing!

April 30, 2000 By Mark Skousen Leave a Comment

Personal Snapshots
FORECASTS & STRATEGIES
April 2000

by Mark Skousen

“The poor remain poor and the command of income by those in the top income brackets is increasing egregiously.” — John Kenneth Galbraith

“The poor have not gotten poorer. The average family below the poverty line today is doing as well or better than middle-class families in 1971.” — W. Michael Cox and Richard Alm

Recently two Washington, D.C., think tanks warned that the income gap between rich and poor was getting worse, much worse. They blamed differences in education and skills, immigration, and the stock market boom. To remedy this injustice, they urged increasing the minimum wage and unemployment insurance while reducing “regressive” taxes.

I strongly disagree with these findings for several reasons. First, these studies ignore the fact that families and individuals move from poor to middle class, and middle class to rich over time. For example, a report by the Federal Reserve Bank of Dallas indicates that 29% of poor families in 1975 had moved to the top income brackets in 1991. Only 5.1% of those in the bottom in 1975 remained at the bottom in 1991! In a dynamic market economy, there is constant upward mobility.

Second, other more in-depth studies demonstrate that the poor have improved their material condition tremendously during the 20th century and even the past 20 years.


The above chart shows the benefit of looking specifically at examples of living standards instead of relying on income figures. The overwhelming fact is that if we measure standard of living by the quantity, quality and variety of goods and services, we see that our material lives have improved dramatically and profoundly over the past 100 years, for peoples of all incomes. The rich have gotten richer, but so have the poor.

The Rich Aren’t So Different After All

I would go one step further and argue that the poor have actually advanced the most in this country and are gradually and sometimes speedily catching up with the rich. The rich are having a harder time distinguishing themselves from the poor. The rich have cars with air-conditioning and radios, and so do most of the poor. The rich watch the World Series (or an opera) on their big color TVs, and so do the poor. The rich jump on a jet and fly to exotic lands and, with recent cheap excursion fares on the Internet, the poor are doing the same thing. In fact, the Internet is the great leveler. It’s so cheap today that anyone can get online and obtain information with hardly any cost at all. The Internet is increasing dramatically the level of competition and thereby reducing the cost of living. For example, it won’t be long before long-distance telephone calls will cost nothing. What was once the domain of the well-to-do is now open to every one. Compared to yesteryear, every house today is a castle, every man a king.

Filed Under: Articles, Economics, Forecasts & Strategies, Free Markets, Personal Finance

What It Takes to Be an Objective Scholar

April 5, 2000 By Mark Skousen Leave a Comment

Economics on Trial
IDEAS ON LIBERTY
April 2000

by Mark Skousen

“It was the facts that changed my mind.” -Julian Simon (1)

During the 1990s we watched the Dow Jones Industrial Average increase fourfold and Nasdaq stocks tenfold. Yet there were well-known investment advisers-some of them my friends-who were bearish during the entire period, missing out on the greatest bull market in history. (2)

How is this possible? What kind of prejudices would keep an intelligent analyst from missing an overwhelming trend? In the financial business the key to success is a willingness to change your mind when you’re wrong. Stubbornness can be financially ruinous. When a market goes against you, you should always ask, “What am I missing?”

Over the years, I’ve encountered three kinds of investment analysts: those who are always bullish; those who are always bearish; and those whose outlook depends on market conditions. I’ve found that the third type, the most flexible, are the most successful on Wall Street.

Confessions of a Gold-Bug Technician

A good friend of mine is a technical analyst who searches the movement of prices, volume, and other technical indicators to determine the direction of stocks and commodities. Most financial technicians are free of prejudices and will invest their money wherever they see a positive upward trend, and avoid (or sell short) markets that are seen in a downward trend. But my friend is a gold bug and no matter what the charts show, he somehow interprets them to suggest that gold is ready to reverse its downward trend and head back up. Equally, he always seems to think the stock market has peaked and is headed south. As a result, throughout the entire 1990s he missed out on the great bull market on Wall Street and lost his shirt chasing gold stocks.

I also see this type of prejudice in the academic world. Some analysts are anti-market no matter what. Take, for example, Lester Brown, president of the Worldwatch Institute in Washington, D.C., who puts out the annual State of the World and other alarmist surveys and data. He gathers together all kinds of statistics and graphs showing a decline in our standard of living and the growing threat of population growth, environmental degradation, the spread of the AIDS virus, and so on. For example, despite clear evidence of sharply lower fertility rates in most nations, Brown concludes, “stabilizing population may be the most difficult challenge of all.” (3)

Too bad Julian Simon, the late professor of economics at the University of Maryland, is no longer around to dispute Brown and the environmental doomsdayers. Simon was as optimistic about the world as Brown is pessimistic. Simon’s last survey of world economic conditions, The State of Humanity, was published in 1995. That book, along with his The Ultimate Resource (and its second edition), came to the exact opposite of Brown’s conclusions. “Our species is better off in just about every measurable material way.” (4)

Yet Julian Simon was not simply a Pollyanna optimist. He let the facts affect his thinking. In the 1960s, Simon was deeply worried about population and nuclear war, just like Lester Brown, Paul Ehrlich, and their colleagues. But Simon changed his mind after investigating and discovering that “the available empirical data did not support that theory.” (5)

Scholars Who See the Light

The best scholars are those willing to change their minds after looking at the data or discovering a new principle. They admit their mistakes when they have been proven wrong. You don’t see it happen often, though. Once a scholar has built a reputation around a certain point of view and has published books and articles on his pet theory, it’s almost impossible to recant. This propensity applies to scholars across the political spectrum.

We admire those rare intellectuals who are honest enough to admit that their past views were wrong. For example, when New York historian Richard Gid Powers began his history of the anticommunist movement, his attitude was pejorative. He had previously written a highly negative book on J. Edgar Hoover, Secrecy and Power. Yet after several years of painstaking research, he changed his mind: “Writing this book radically altered my view of American anticommunism. I began with the idea that anticommunism displayed America at its worst, but I came to see in anticommunism America at its best.” (6) That’s my kind of scholar.

1. Julian L. Simon, The Ultimate Resource 2 (Princeton, N.J.: Princeton University Press, 1996), preface.
2. See the revealing article, “Down and Out on Wall Street,” New York Times, Money & Business Section, Sunday, December 26, 1999.
3. Lester R. Brown, Gary Gardner, and Brian Halweil, Beyond Malthus (New York: Norton, 1999), p. 30.
4. Julian L. Simon, The State of Humanity (Cambridge, Mass.: Blackwell, 1995), p. 1.
5. Simon, The Ultimate Resource 2, preface.
6. Richard Gid Powers, Not Without Honor: The History of American Anticommunism (Free Press, 1996), p. 503.

Filed Under: Articles, Economics, Ideas on Liberty and The Freeman

Will the Savings Crisis Lead to Stagnation?

March 29, 2000 By Mark Skousen Leave a Comment

Economics on Trial
IDEAS ON LIBERTY
March 2000

by Mark Skousen

“There is a virtuous cycle in which high growth promotes high saving, and high saving in turn promotes high growth.” — Joseph Stiglitz, Chief Economist, The World Bank

“America’s Expansion Cannot Be Sustained.” — The Economist, November 6, 1999

In a return to the principles of classical economics, more and more economists agree that thrift is a virtue and should be encouraged. In the textbooks, Harvard’s Greg Mankiw promotes the new view toward saving: “Higher saving leads to faster growth.”(1) Contrast Mankiw with the anti-saving mentality held by Paul Samuelson and other old Keynesians, who argued that higher saving may result in a recession or worse (“the paradox of thrift”).

A newly released study by the World Bank reinforces this new positive outlook for saving? Under the guidance of chief economist Joseph Stiglitz, the bank came to the following startling conclusions regarding world saving:

Saving and interest rates: “The world saving rate has been declining and the world real interest rate has been increasing since the 1970s” (p. 7). Of course, saving rates vary dramatically among countries. For example, they have doubled in East Asia, stagnated in Latin America, and collapsed in sub-Saharan Africa.

Saving and income: “Long-term saving rates and income levels are positively correlated across countries” (p. 12). In other words, saving rates tend to rise with per-capita income. As people become wealthier they tend to save more. But only up to a point. The World Bank notes that saving ratios appear to level off at high levels of income.

Saving and economic growth: “Higher-saving regions have also enjoyed faster income growth.” Countries that save more also grow more, although the evidence is not clear which comes first, faster growth or higher saving. In any case, they go hand in hand. Stiglitz concludes, “high saving is associated with good macroeconomic performance and sustainable access to foreign lending” (p. ix).

Saving and foreign aid: “Most [economists] conclude that aid crowds out national saving” (pp. 17-18). Given that the World Bank’s purpose is to dole out foreign aid, this frank admission is amazing.

U.S. Living on Borrowed Time

Given this positive relationship between saving and economic performance, what are we to make of the sharp decline in private net saving in the United States? The latest data indicates that private net saving-the gap between disposable income and spending-has fallen to a record low of negative 5.5 percent of GDP in 1999. (See the graph below.)

Of course, millions of Americans continue to save for retirement, investment, and other reasons, but lately the debtors have outnumbered the savers. The tenuous government surplus has only partly offset the private-sector dissaving. Who makes up for the imbalance? Foreign investors (as reflected in the growing current-account deficit) are pouring billions into U. S. debt and equity securities, bank accounts, and real estate.

A recent study by two British economists, Wynne Godley and Bill Martin, warns that the United States is headed for serious trouble. They point to three unsustainable imbalances: an overvalued stock market, the collapse in private saving, and an alarming increase in debt.(3)

Other countries facing these imbalances — Japan, Britain, and Sweden in the late 1980s — experienced sharp slumps after asset-price bubbles burst.

What has caused the sharp drop in U.S. private net saving? Many economists blame the booming stock market, encouraging households to spend more and firms to invest more. I would add two other factors: the Bush-Clinton increases in the marginal tax rate (higher tax rates reduced disposable income, forcing households to save less) and the Federal Reserve’s liberal monetary policy since the 1997 Asian financial crisis (monetary inflation has fueled the bull market on Wall Street).

Throughout the 1980s and 1990s I was bullish on the U.S. stock market. Supply-side economics and globalization kept inflation under control and the economy out of recession. Now, as we enter a new century, most trends are still positive, but we must not ignore the signs of inflation. If Ludwig von Mises and F. A. Hayek taught us anything, it is that artificial prosperity fueled by debt and monetary inflation cannot last forever. The bust is inevitable, although its severity can be offset by tax cuts, privatization of Social Security and Medicare, and expanded savings.

1. N. Greg Mankiw, Macroeconomics, 2nd ed. (New York: Worth Publishers, 1994), p. 86.
2. All citations are taken from Klaus Schmidt-Hebbel and Luis Serven, eds., The Economics of Saving and Growth (New York: Cambridge University Press, 1999).
3. “Living on Borrowed Time,” The Economist, November 6, 1999.

Filed Under: Articles, Economics, Personal Finance

Yes, The Rich Are Different — They’re Better

March 5, 2000 By Mark Skousen Leave a Comment

Personal Snapshots
Forecasts & Strategies
March 2000

by Mark Skousen

“The rich are different from you and me.” — F. Scott Fitzgerald

“Yes, they have more money.” — Ernest Hemingway

In 1996 when I jogged with President Clinton (see My Jog with Bill Clinton), I complained about his constant attacks on the wealthy. During the presidential campaigns, he would often opine, “The rich don’t pay their fair share of taxes.” Politicians and the media love to take potshots at the well-to-do. Hollywood producers delight in portraying the rich as big spenders who use drugs, engage in white-collar crime, avoid taxes, and dump their companions in favor of trophy wives.

Millionaires Are Model Citizens!

Thomas J. Stanley, former professor of marketing at Georgia State University, shows that the critics of capitalism are dead wrong. Prof. Stanley, you may recall, is the author of the huge best seller, The Millionaire Next Door, which I reviewed last May in Forecasts & Strategies. Now he has a new book out, and it’s a blockbuster. According to The Millionaire Mind, (available from www.amazon.com or Laissez Faire Books www.lfb.org) millionaires are model citizens. Here are the results of his survey of over 1,000 super-millionaires (people who earn $1,000,000 a year or more):

  • They live far below their means, and have little or no debt. Most pay off their credit cards every month; 40% have no home mortgage at all.
  • Millionaires are frugal; they prepare shopping lists, resole their shoes, and save a lot of money; but they are not misers; they live balanced lives.
  • 97% are homeowners; they tend to live in fine homes in older neighborhoods. (Only 27% have ever built their “dreamhome.”)
  • 92% are married; only 2% are currently divorced. Millionaire couples have less than one-third the divorce rate of non-millionaire couples. The typical couple in the millionaire group has been married for 28 years, and has three children. Nearly 50% of the wives of the super-rich do not work outside the home.
  • Most are one-generation millionaires who became wealthy as business owners or executives; most did not inherit their wealth.
  • Almost all are well educated; 90% are college graduates, and 52% hold advanced degrees; however, few graduated top of their class — most were “B” students. They learned two lessons from college: discipline and tenacity.
  • Most live balanced lives; they are not workaholics; 93% listed socialiazing with family members as their #1 activity; 45% play golf. (Stanley didn’t survey whether they were avid book readers — too bad.)
  • 52% attend church at least once a month; 37% consider themselves very religious.
  • They share five basic ingredients to success: integrity, discipline, social skills, a supportive spouse, and hard work.
  • They contribute heavily to charity, church and community activities (64%).
  • Their #1 worry: taxes! Their average annual federal tax bill: $300,000. The top 1/10 of 1% of U.S. income earners pays 14.7% of all income taxes collected!
  • “Not one millionaire had anything nice to say about gambling.” Okay, but his survey also showed that 33% played the lottery at least once during the year!

Thus, we see how the super upper-income families of this nation are not the ones contributing to crime, welfare, divorce, child abuse, and a spendthrift society. But they are playing a lot of taxes and making a lot of contributions to solve these social problems.

Although Stanley did not cover this issue, I’ve also seen studies indicating that higher-income individuals live longer, on average five to ten years longer, than the average American (76 years) and enjoy better health, fitness and quality of life. They aren’t the ones causing Medicare to go bankrupt.

Instead of bashing the rich, let’s salute them. If indeed the wealthy are such good citizens, as Stanley’s work suggests, our goal should not aim to impoverish the rich, but the enrich the poor. That our goal at Forecasts & Strategies.

Filed Under: Articles, Forecasts & Strategies, Free Markets, Philosophers and Businessmen

A Much-Deserved Triumph in Supply-Side Economics

February 28, 2000 By Mark Skousen Leave a Comment

Economics on Trial
IDEAS ON LIBERTY
February 2000

by Mark Skousen

“After occupying center stage during the 1980s, the supply-side approach to economics disappeared when Ronald Reagan left office.” — Paul Samuelson (1)

Until Robert Mundell won the Nobel Prize in 1999, supply-side economics had been a school without honor among professional economists. Established textbook writers such as Paul Samuelson (MIT), Greg Mankiw (Harvard), and Alan Blinder (Princeton) frequently condemned the supply-side idea that marginal tax cuts increase labor productivity, or that tax cuts stimulate the economy sufficiently to increase government revenues.

The Laffer Curve — the theory that when taxes are too high, reducing them would actually raise tax revenue — is dismissed. “When Reagan cut taxes after he was elected, the result was less revenue, not more,” reports Mankiw in his popular textbook.(2) Never mind that tax revenues actually rose significantly every year of the Reagan administration; the perception is that supply-side economics has been discredited. Arthur Laffer isn’t even listed in the 1999 edition of Who’s Who in Economics, although the Laffer Curve is frequently discussed in college textbooks.(3)

Now that is all about to change with Columbia University economist Robert A. Mundell’s Nobel Prize in economics. According to Jude Wanniski, Mundell, 67, is the theoretical founder of the Laffer Curve.(4) In the early 1970s he told Wanniski, “The level of U.S. taxes has become a drag on economic growth in the United States. The national economy is being choked by taxes–asphyxiated.”(5)

Mundell offered a creative solution to stagflation (inflationary recession) of the 1970s: impose a tight-money, high-interest rate policy to curb inflation and strengthen the dollar, and slash marginal tax rates to fight recession. Mundell’s prescription was adopted by Reagan and Fed chairman Paul Volcker in the early 1980s. “There’s been no downside to tax cuts,” he told reporters recently.

Yet, oddly enough, Mundell isn’t accorded much attention compared to supply-siders Laffer, Paul Craig Roberts, and Martin Anderson. In their histories of Reaganomics, Roberts and Anderson mention Mundell only once.(6) Two major studies of supply-side economics in 1982 don’t cite his works at all. Nevertheless, Mundell has accomplished a great deal worth lauding. In fact, he is considered the most professional scholar of the supply-siders.

Robert Mundell has had an amazing professional career. A Canadian by birth, he has attended, taught, or worked at over a dozen universities and organizations, including MIT, University of Washington, Chicago, Stanford, Johns Hopkins, the Brookings Institution, Graduate Institute of International Studies in Geneva, Remnin University of China (Beijing), and the IMF. Before going to Columbia in 1974, he was a professor at the University of Chicago and editor of The Journal of Political Economy. Thus the Chicago school can once again claim a Nobel, although Mundell differs markedly from the monetarist school.

Monetary vs. Fiscal Policy

Famed monetarist Milton Friedman says, “I have never believed that fiscal policy, given monetary policy, is an important influence on the ups and downs of the economy.”(7) Supply-siders strongly disagree. Cutting marginal tax rates and slowing government spending can reduce the deficit, lower interest rates, and stimulate long-term economic growth.

Mundell counters, “Monetary policy cannot be the engine of higher noninflationary growth. But fiscal policy-both levers of it can be. . . . The U.S. tax-and-spend system reduces potential growth because it penalizes success and rewards failure.”

Mundell favors spending on education, research and development, and infrastructure rather than government welfare programs. He advocates reducing top marginal income tax rates, slashing the capital gains tax, and cutting the corporate income tax. Such policies would sharply raise saving rates and economic growth-“an increase in the rate of saving by 5% of income (GDP), say from 10% of income to 15%, would increase the rate of [economic] growth by 50%, i.e., from 2.5% to 3.75%.”(8)

Mundell as Gold Bug

Supply-siders also take a different approach to monetary policy. They go beyond the monetarist policy of controlling the growth of the money supply. Unlike the monetarists, supply-siders like Mundell resolutely favor increasing the role of gold in international monetary affairs. “Gold provides a stabilizing effect in a world of entirely flexible currencies,” he told a group of reporters in New York in November 1999. According to Mundell, gold plays an essential role as a hedge against a return of inflation. He predicted that the price of gold could skyrocket in the next decade, to as high as $6,000 an ounce, if G7 central banks continue to expand the money supply at 6 percent a year. “I do not think this an outlandish figure. Gold is a good investment for central bankers.” He did not foresee central banks selling any more gold. “Gold will stay at center stage in the world’s central banking system,” he said.

In awarding Mundell the prize, the Bank of Sweden recognized him as the chief intellectual proponent of the euro, the new currency of the European Community. He considers the euro a super-currency of continental dimensions that will challenge the dollar as the dominant currency. The benefits of a single currency include lower transaction costs, greater monetary stability, and a common monetary policy. Mundell advocates an open global economy, expanded foreign trade, and fewer national currencies. Ultimately, he envisions a universal currency backed by gold as the ideal world monetary system. Under a strict gold standard, “real liquidity balances are generated during recessions and constrained during inflations.”(9)

Mundell is an optimist as we enter a new century. He’s bullish on the global stock markets, the gold standard, globalization, and downsized government. He’s my kind of economist.

1. Paul Samuelson and William D. Nordhaus, Economics, 16th ed. (Boston: Irwin/McGraw-Hill. 1998) p. 640.
2. N. Gregory Mankiw, Principles of Economics (Fort Worth, Tex. Harcourt/Dryden Press, 1998), p. 166.
3. Mark Blaug, compiler of Who’s Who in Economics (Northampton, Mass. Edward Elgar, 1999), determines the top 1,000 names in the book based on frequency of citation in scholarly journals. Among the famous economists missing the cut are Arthur Laffer, Paul Craig Roberts, and Murray N. Rothbard.
4. Jude Wanniski, The Way the World Works, rev. and updated (New York: Simon and Schuster, 1983), p. x.
5. Wanniski, “It’s Time to Cut Taxes,” Wall Street Journal, December 11, 1974.
6. Paul Craig Roberts, The Supply-Side Revolution (Cambridge, Mass.: Harvard University Press, 1984) and Martin Anderson, Revolution (Stanford, Calif.: Hoover Institution Press, 1990).
7. Milton Friedman, “Supply-Side Policies: Where Do We Go from Here?” Supply-Side Economics in the 1980s Conference Proceedings (Federal Reserve Bank of Atlanta, 1982), p. 53.
8. Robert A. Mundell, “A Progrowth Fiscal System,” The Rising Tide, ed. Jerry J. Jasinowski (New York: Wiley, 1998), pp. 198, 203-204.
9. Mundell, The New International Monetary System (New York: Columbia University Press, 1977), p. 242.

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