Two important pieces of
information and some analysis tell the story of a world that is in need of a
new economic order. The information that was provided is to the effect that
approximately 200 million people in the world are seeking work ... unable to
find a job, and that almost this same number of underage children are working
instead of going to school and enjoying being children.
The instantaneous and reflexive
response to these realities is to say send the children to school and give the
work they do to the unemployed adults. But things as they stand now are not as
simple as that because many factors tend to get in the way. Some of these are
discussed in an editorial as well as an article, both of which appear in the New
York Times on October 10, 2014. We shall get to them in a moment but for now,
we need to understand a few things.
The first thing is that the world
– which is becoming ever more integrated economically – is made of sovereign
states that make political decisions to suit local constituencies. Also,
whereas economic blocks such as the EU and NAFTA exist (inside of which goods
and services move freely between the jurisdictions) labor and capital do not
move as freely because it is not as easy for a family to pack up and go live in
another country as it is to ship a bag of sugar from one country to another.
And where money, which is but an
IOU note, is transferred instantly between the jurisdictions, it is used to buy
and sell goods and services rather than plants or equipment. It is also used
for investment purposes that tend to create and accumulate even more IOUs.
Thus, while the “soft capital” that is money can move between the jurisdictions
as easily as the flow of liquid water, the “hard capital” that is physical
plant tends to move more sluggishly. Yes, there are times when production
plants are disassembled in some advanced economy to be reassembled in an
emerging one, but a move such as that can only ease the problem in one place by
aggravating it in another place.
We now look at the editorial which
came under the title: “A Global Economic Malaise” in the New York Times. The
editors begin by drawing attention to the fact that “large parts of the world
seem to be on the verge of a recession.” They view this as being a bad thing to
have happened, and so they lay the blame on the “finance ministers and the
central bankers who are unwilling or ill prepared to respond.” Why is that?
Well, it is because some of them are calling for “restrictive fiscal rules” and
some are “raising the sales tax too fast,” say the editors. What they do not
say openly is that such moves serve the local constituencies – taken at the
expense of everyone else.
The answer, say the editors, is to
adopt an easier fiscal policy in the developing economies by spending more on
“roads, ports and railways [to] help stimulate the economy immediately and for
several more years.” As to the advanced economies, the editors suggest the
adoption of an easier monetary policy with the central bank buying bonds to
help lower the interest rates. They also suggest that the countries of the
European periphery reform their laws to make it easy for entrepreneurs to set
up new businesses.
What the editors do not say is
that Japan
had a severe recession that lasted something like a dozen years during which
time the officials tried all of those remedies without success. Almost the same
thing happened in America
where the slowdown lasted half a dozen years. And when the economy started to
pick up, the recovery remained jobless. This says there is a fundamental
misunderstanding as to how an economy works, which brings us to the article
written by Edward D. Kleinbard under the title: “Don't Soak the Rich” published
in the NY Times where he tries to explain a few things.
By the time you are finished
reading the article, you realize that the author is not interested in solving
any national or international problem; he only has one message to give. It is
what comes in the title: Don't soak the rich. To make that point clear, he
employs a theory which says basically that what is needed is not “more
progressive taxation” but “a more progressive fiscal system.” To elaborate, he
says that what counts is not only the taxation side of the equation but the spending
side as well. In the end, what he wants to get at is this: “The better response
to income disparity is not to tax the rich more, but to boost revenue over all
so that government can invest more, and offer a higher quality social insurance
program.”
What this means, but he is not
saying it, is that the tax base must be enlarged by pulling into it more of the
middle and lower classes. In other words, he says take more from the poor and
give it back to them to make them feel better. And to please the “progressives”
who may object to this sleight of hand, he throws them a bone in the form of a
promise they cannot reject. It is this: “To address troubling trends in income
inequality, we need more government, not less.” More government, he says. How
much sweeter can he make it to a progressive?
But what about the world? The
hundreds of millions who are looking for a job they cannot find, and the
children who are slaving it in sweatshops instead of going to school and
enjoying being children?
Well, it should be obvious by now
that solving such problems cannot be done by manipulating money alone. Printing
more or less of it, and moving it around does not negate the validity of the
most fundamental law of economics which is that for an economy to exist, there
must be a need for goods and services that can be produced and delivered by
someone. Money is good at facilitating such transactions, but when central
bankers and governments use it to artificially create a need that is not there
naturally, the trick may work for a while but will backfire in the long run.