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Memo to Politicians: Practice Good Economics - Part 2 (Vol. 149)

Political Nonsense Economics - Stupid and Stupider

How often have we heard about ‘shrinkflation’ or ‘corporate greed’ causing inflation? Or, how valuable it is to subsidize something to promote various businesses in many different ways. Or, how interference in the marketplace is helping us. Or, how ‘soak the rich’ will solve our fiscal problems.

It is all PBS (Political Bull S**t)! Some of these may ‘sound good’ and help a politician get elected, but they ‘feel bad’ when implemented. 

Last week in Part 1, we discussed some basic economic concepts. In light of these concepts, let’s explore some economic malfeasance that our folks in Washington, DC practice.  

Price Controls. Everyone knows prices have gone up a lot, and wages have not kept pace, so we feel the pinch - ‘real’ wages are down over the last four years. Although they are starting to catch up now, remember that wage increases will add to inflation pressure. We all feel it, and that hurts lower income folks the most.  

So let’s just arbitrarily fix the prices so they won’t go up. But the reason they go up is market based supply and demand, as well as cost increases to suppliers. Capping the price does not increase supply, in fact it will often decrease it because the incentive to produce the product is reduced. In economic terms, what this does is create a shortage, because at a price set below market equilibrium, more is demanded than offered. This often leads to illegal black markets, where the market forces determine price. A recent example - the new President of Argentina who understood economics, eliminated rent controls. When they stopped rent controls, many new rentals came on the market and rents actually dropped as the supply increased - a perfect example of supply and demand forces at work.

Subsidies. Our government, in its infinite wisdom, seems to believe that it knows best about what is good for us. (No, I think WE know what is good for us.) It decided that we need Electric Vehicles (EV’s) and ‘green energy’ to solve our climate change issue. So to promote that they subsidize everything at great taxpayer expense. Now my taxes are helping someone buy an EV. The government also subsidizes the manufacturers to produce EV’s and green energy. And by their regulations, they are trying to force us to buy EV’s by creating standards a gas powered vehicle cannot meet. This is causing our costs for energy and vehicles to skyrocket. And their forced solutions do virtually nothing for the environment. The public doesn't even want EV’s in great numbers for many reasons and most auto manufacturers are losing billions of dollars trying to satisfy a forced demand that doesn't exist. If you want an EV, go ahead, there are very good, but expensive, products available, but use your money, not mine.    

And quit promoting alternative energy. When it is technically efficient, the market will naturally move in that direction. Government requirements which reduce fossil fuels and promote ‘green’ energy, just drive up energy prices that then ripple through the whole economy as higher prices (By the way, EV’s do almost nothing to reduce our carbon emissions when you consider the full life cycle of production from mining the raw materials to replacing the battery during the life of the vehicle. See No Spin #1 on Electric Vehicles. And they are heavy, causing more wear and tear on highways, tires, brakes, etc. This increases other pollution and creates other costs for owners and the public.).

Corporate Greed is Inflationary. Really? Have corporations just become greedy in the last few years, and they were altruists before that, with no concern for profits? This is PBS at its finest. Actually understanding inflation is quite simple. When the money supply grows faster than the supply of goods and services, there is inflation. It is simply the market forces of supply and demand at work. Too much money chasing too few goods drives up prices. (And by the way, if profits do rise excessively for an industry, competition is the guardrail, as competitors will come in to increase supply and prices will drop back down.) But that is not what is happening today. Costs are rising to producers, and, as a result, they must raise prices if the market will pay the higher price.  

Corporate Taxes - Pay Your Fair Share. In 2017, Corporate taxes were cut to 21% from 35%. Wow - we all heard the political rhetoric, we are going to lose a lot of revenue from those greedy corporations. So, what actually happened? Corporate revenue went up after a period of time. We became competitive and attracted more businesses and it helped grow our economy and provided more jobs by giving good incentives to businesses to expand. And don’t forget, the tax they pay is really paid by the consumers and employees of the business. A better approach would be to cut taxes on business - to zero. Look what happened in Ireland when they cut taxes to 12 %, the lowest in the industrialized world. They became a corporate behemoth. Incentives matter. And growing businesses is good, not bad, for all of us.  

Tariffs. In general tariffs are bad unless used for some strategic purpose. It is nothing but a hidden ‘sales tax’ on imported goods, paid by consumers, not the importers, it is just passed along like any cost. It is a regressive tax, hurting the lower income folks the most. The rationale is often to protect some industry - which is nonsense. Robust international trade is how our standard of living has risen so much because we have the most efficient producers doing what they do best. Inefficient producers just fall by the wayside.  


Enough said. I could go on and on, but I made my point. To grow and prosper, good economics, with well thought out incentives, and an understanding of market forces is critical.

Stop with the PBS already, the public understands nonsense when they hear it, and for the politicians who really don’t understand economics, perhaps the government should subsidize a good course for them. That would be one subsidy even I could embrace.


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