Welcome to Finance and Fury, the Furious Friday edition.
Last Furious Friday episode – started on a thought experiment – looking at the reversal of the trends in Monetary policy - who knows if these would work and make for a better economy – these were:
Separate commercial and investment banking Remove reliance on a debt fuelled economy – reforming central banks to remove inflation targeting as a monetary policyAll of these are at the monetary Level – solution isn’t the monetary policy solely – whilst I think that most monetary solutions are a major part of the problem - This week – we will be going through the fiscal side – or governmental or regulatory side –
Focus will be on Supply Side Policies help encourage investment and spending at the business level because interest rate cuts are ineffective in boosting spending and investment alone – especially if firms are too reluctant to invest or consumers are stuck paying back higher levels of mortgages – instead they have been taking on more debt which hasn’t been fuelling economic growth as theorised – as debt hasn’t been used productively – due to low opportunity cost for interest rates Issues with the economy are structural areas – on the fiscal side in this episode – looking at: Reverse the trends in regulations and increase supply side thinking Enforce anti-competitive behaviours – i.e. monopolistic practicesTo start with - Reverse the trends in regulations and increase supply side thinking
Supply side thinking and deregulation go hand in hand - provides another way of thinking about a solution to depressions or underperforming economy – rather than increasing the money supply even further in an aim to boost spending – which is demand side - Supply Side – all about boost domestic demand by cutting taxes and reducing regulations –
Aim is increasing the supply (companies) and making the job market more competitive – allowing greater number of companies demanding workers – over time should help to increase wages and spending = economic growth – not trickledown economics – which doesn’t exist - covered this in an episode in the past - The Myth of trickle-down economics – originally a term used by journalists and Democrats to discredit these policies – but repeat something false enough and it becomes the truth
Summary of why this theory may work better than the demand side economic theories that have determined governmental policies – problems with demand
Keynes -stimulus to boost aggregate demand is only really effective in relatively closed economies (why they tried tariffs back in 1930 – made the economic slump worse though) In the modern economy – with free capital flows, freedom spending and globalization = made most of the stimulus has been in fact relatively ineffective Money can flow off shore – or individuals may not spend domestically when given stimulus checks Created a situation where the multiplier effect has been small - indeed negligible - and the stimulus economic effects have been rather poor Especially when debt funded – so these policies can hardly be justified - I don't think the answer lies in yet more Keynesism, anymore than it necessarily lies in printing yet more money But yet Governments are getting more debts to stimulate the economy - old Economists still love this idea – But how is this money ever repaid? Not their problem – dead before bill is due Meant to boost business demand because people on average have more money – all it has done is fuel house prices – as lending is going towards this Screwed the younger generation – and is having diminishing marginal returns to economic output as debt levels grow What is a potential solution? To look at reversing the trend – looking at the supply side and removing the thought of reliance of governments for economic growth Doesn’t aim for artificial boost of demand – but create real GDP output growth that is sustainable (not just inflationary from increase in prices through expanding money supply)
Solutions to problem
We need to look the structural causes of the underperformance of western economies right now And we have to bear in mind that the one reason the economic growth is sluggish is not just that there is a lack of aggregate demand, there are three other major problems. One is the problem of uncertainty and lack of confidence in the business community, which is stopping cash rich firms from investing within western nations – also with low interest rates – they get lots of debt and do share buy backs at the large corporate sector The other is the serious competition from the Asian end of the world and that competition makes it very hard to create jobs and increase wage growth – especially as regulations in each country is no equal – incentivised companies to more jobs offshore Massive companies turning free market competition into more monopolistic competition – this undermines the whole system of supply side Solutions to these problems are structural rather than what most in the economics departments see as focusing on fiscal monetary policy (stimulus) – which requires more structural implementation (government departments or taxes) to hand money out Need to incentivise companies to come back to Australia and western nations – and incentivise supply rather than disincentivise through uncompetitive business environments
Rather than giving people money – aim is to Increase how much money people have – two sides to this – decreasing taxes and increasing wage growth and employment opportunity
At the individual level - reduce taxes – or flat tax rates – Taxes are Government revenues $474bn p.a. estimated Income Taxes – how much disposable incomes are reduced by – Currently $218bn Pay average of 38% tax, then say you pay now pay 20%, earning $200k = $36k less tax Argument – they will save it all – true that they may save most, but spending still increases Is it better for governments to increase taxes to turn around and pay this out to people? Or is it better to just collect less tax? Increase PP - Consumption and transfers – also eat away at peoples disposable incomes Stamp Duty – property taxes $52bn GST (VAT other countries) - $132bn Excise/custom duties – Tobacco $12.5b, alcohol $5.7b, fuel $19.5b – Adds increased COL almost $38bn, $1800 per Adult Where do wages come from in the private sector? Companies revenues - Increase wages – just pay them more? Not if the money isn’t there to pay – either lower wages, or less staff Company tax rate – Currently $90bn Payroll tax – One hidden tax paid by companies who employ people once they meet a criteria Changes each state – 4-6% on average on taxable wages – if a company pays you more, they get taxed more Incentive for companies to not increase staff wages, and also if they cant then their costs increase Stats: $23.8bn was collected under this last year – but growth in tax slowing (6%-2%) Companies that might move through threshold are holding off (reduces growth rate of larger companies) – cant just start a second on either – related entities Demand for labour – need more companies in operation – competing for people to hire Cant work under high tax environment though – stifles businesses employing more people Specialised labour – if a low number of people who can do something = low supply Additional element - Increase diversity of supply - Increase PPP – Goods that cost less over time – Think about costs (and size) of TVs 15 years ago, to today What you do see an increase in costs with are things that we can make cheaper – Technology yes, houses no Here is where it all comes undone – these goods can be produced overseas – as these jobs can be outsourced OS – Where Deregulations to the business world is required - for the economy but not the financial system – one area that needs more regulation and separation More regulations – or the trend of ever increasing regulations doesn’t give much confidence to companies – or people who wish to start a company - Confidence and increased investment come hand in hand Strong political direction to be business friendly helps to attract companies – Israel is an example Politicians don’t have clear direction on anything – can barely explain the policies and outcomes No long-term plan beyond the next election cycle – issue with the political trend – they need to seem busy to justify their jobs – which means passing legislation – 90% approval rate = 180 new laws or changes to legislation every year – not to de-legislate – but more and more – when two of the leading industries growth in employment come from government workers or compliance workers – you have a problem in the economy – not productive in producing new goods or services Promising to have stability in legislation - Leavings things alone helps to build confidence– uncertainty is the worst thing for any market – but if politicians aren’t legislating – then it is hard to justify a $200k+ salary each year which you fund Boost Aggregate Demand - Create jobs - Improve business and consumer confidence. Irony is that the black market economy can still help to boost an economy – back in the 80s in Florida with cocaine – banks had negative interest rates – Everyone was spending more as the illegal cash was spent on their businesses – or investing more – personal investments form part of ‘savings’ in GDP – but allows for companies to have more capital to hire more people, pay them more, increase their long term productivity – Increase productivity – less regulation allows for competition internationally - Has a few components, but measures the ‘bang for your buck’ for how much gets done – Technology, labour, capital Labour - Jobs – either lose them through holding on (and subsidising) – or building new technologies that help to facilitate the work that will inevitably be lost – we are in a global economy – like it or not, have to be competitive with other nations Forcing regulation for labour laws hurts - collective bargaining is great, no problem – but not at the national level where it can be forced onto the economy about no feedback on to what is the affordable rate for a role Why a lot of places are closed on Sundays or operate limited hours on weekends – double time and a half Those who work in the company – speak out to the bosses – that is who can help your grievances – When whole industries get forced into the same regulations – it monopolises the employment into a few bigger places that can afford it – for a little while – eventually more policy is passed – help to subsidise them through tax payer funds (rather than just cutting their costs of regulations) – they go out of business In business/free market – if you require subsidies to survive – not a business providing increasing value (growth) All of the above fails if you have larger corporate powers – Large companies are almost socialist in nature – merging of state with companies – where companies have protection and barriers to entry This is where I have changed my thinking over the years – I used to be very much free market – to the libertarian side – but realised that under a fully de-regulated world leads to companies ruling us instead of governments – similar to what has happened in the financial systems or central banking sectors of the economy over the past 100 years The US has a good bit of legislation called the Sherman Antitrust Act – 1890 - broadly prohibits (1) anticompetitive agreements and (2) unilateral conduct that monopolizes or attempts to monopolize the relevant market Major cases back in the early days – Standard Oil was one of the biggest ones in 1911 – same year America tobacco and GE – Next major one was in 1999 with Microsoft - and that Microsoft had taken actions to crush threats to that monopoly, including Apple – acting like thugs forcing companies to either use versions of MSO and IE or have non-working computer and software’s for distribution – were found guilty – without this – Apple was likely going to go out of business – as they were in constant lawsuits with MS and had to use their MS But since then – the legislation hasn’t been well enforced- or doesn’t go far enough Large companies also reduce the competition for employment – you might have the same number of jobs in the market – but if they are all with Amazon – no competitions and they can pay what they want
The goldilocks zone of regulations – not too hot but not too cold –
Too hot – or too much – you get a situation where you do get monopolies anyway – companies are forced to merge together –
But too much regulation is bad = Corporatocracy -term used to refer to an economic and political system controlled by corporations or corporate interests - It is a form of Plutocracy – and this has been increasing over the years – helping monopolise companies- and become a self-feeding echo chamber between large corporate interests/lobbyists and politicians – who solidify legislation that while hurt all businesses to a limited extent – those at the top are hurt less or have the budget to hire the lawyers to get into the loopholes – companies want to survive – so they merge together as the environment gets harsher – like in nature the largest animals tend to survive longer due to being at the top of the food chain – eats up everything else But then the environment gets harsher – the lions start cannibalising themselves – until one is left – then nothing left to eat but here some humans then have to feed it – which is the government Example – when tech giants are okay for a tax on AI or robotic workers – why? Would cost them more – but not as much as a start up or smaller business that cannot compete – so kill off the competition Too cold – or no regulation – similar situation happens but for different reasons – no protections and you get pricing rackets or forced buyouts – corporate form of Mexican cartel merger Solution – easing regulations to make it an even playing field – but enforcing anti-competitive behaviours -
Why I think these will work - You know what is better to spend your money on – companies need to be able to be flexible and be competitive
Individuals are the best judge for what activity will improve their lives – on average. Some people make poor choices – but learning form them lets people grow – it is part of life – similar to the corporate world – but when large company failures are rewarded with bailouts and government backing – creating zombie companies – not free market – just lets small companies fail and large companies artificially thrive
Why I don’t think these will work – too much money involved with large companies and donors to political parties – also de-regulation puts a lot of Government out of work – cant have that
Also – puts the economy outside of the governments hands
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