How well is socialism working in Cyprus? The Financial Times explains what happened. (H/T ECM)
International lenders agreed to a €10bn bailout of Cyprus early on Saturday morning after 10 hours of fraught negotiations, which included convincing Nicosia to seize €5.8bn from Cypriot bank deposits to help pay for the rescue, a first for any eurozone bailout.
However an emergency parliamentary session on Sunday to discuss the levy on bank savings was postponed until Monday, according to the Cyprus News Agency. Earlier, Cyprus president Nicos Anastasiades postponed an informal meeting of lawmakers also scheduled for Sunday morning.
The cash from Cypriot account holders will come in the form of a one-time 9.9 per cent levy on all deposits over €100,000 that will be slashed from their savings before banks reopen Tuesday, a day after a Cypriot holiday. An additional 6.75 per cent levy will be imposed on deposits below that level.
Cypriot finance minister Michalis Sarris said his government had already moved to ensure deposit holders could not make large withdrawals electronically before Tuesday’s open; Jörg Asmussen, a member of the European Central Bank executive board, said a portion of deposits equivalent to the levies would likely be frozen immediately.
[…]Mr Asmussen justified the measure by saying it broadened the number of people who will shoulder the burden of the bailout. Without the measures, he said, much of it would fall on Cypriot taxpayers; by going after all large deposit holders – many of whom are Russian or British – outsiders would help fund the rescue.
[…]While Jeroen Dijsselbloem, the Dutch finance minister who chairs the group of eurozone finance ministers that hashed out the deal in all-night talks, declined to categorically rule out hitting depositors in future bank bailouts, he insisted that it was not being currently considered for any other country.
Got that? Even Russian and British depositors are having their funds confiscated, and all electronic transfers have been frozen to stop them from getting their money out. My prediction is that anyone with any money in these poor-performing socialist countries will be pulling it out in the next few days. Property rights are not respected by European socialists – that’s the clear message to people who earn and save their money.
Economist and columnist Paul Krugman declared personal bankruptcy today following a failed attempt to spend his way out of debt.
In a Chapter 13 filing to the United States Bankruptcy Court in the Southern District of New York, lawyers for Krugman listed $7,346,000 in debts versus $33,000 in assets.
The majority of his debts are related to mortgage financing on a $8.7 million apartment in lower Manhattan, but the list also includes $621,537 in credit card debt and $33,642 in store financing at famed jeweler Tiffanys and Co.
The filing says that Krugman got into credit card trouble in 2004 after racking up $84,000 in a single month on his American Express black card in pursuit of rare Portuguese wines and 19th century English cloth
Rather than tighten his belt and pay the sums back, the pseudo-Keynesian economist decided to “stimulate” his way to a personal recovery by investing in expenses he hoped would one day boost his income.
[…]Between 2004 and 2007 Krugman splurged on expensive cars, clothes, and travel in hopes that the new lifestyle would convince his bosses at the New York Times to give him a giant raise.
“They say always dress for the job you want,” Krugman explains. “So I thought maybe if I showed up in $70,000 Alexander Amosu suits they would give me ownership of part of the company. If I had only been granted a sliver of the New York Times Co., I could have paid everything back.”
Even after he realized an equity stake was not going to happen, Krugman continued to spend wildly hoping his bling and media appearances would increase demand for his personal brand and lift his book sales.
His biggest mistake came in 2007, when at the height of the financial bubble he decided to invest in high-end real estate in New York City. His multi-million dollar apartment lost 40 percent of its value just months after its purchase, and has been underwater ever since.
“You’d think a Nobel Prize winning economist could recognize a housing bubble,” says Herman Minsky, a retired television executive who purchased Krugman’s home at a huge discount. “But hey, I’m not complaining.”
From Investors Business Daily, an editorial by Dr. Alberto Alesina of Harvard University, that explains which approach to reducing debt and deficits works best. Is it cutting spending and reducing regulation? Or is it continuing to borrow and spend, and raising taxes?
Let’s see what Dr. Alesina says:
The evidence speaks loud and clear: When governments reduce deficits by raising taxes, they are indeed likely to witness deep, prolonged recessions. But when governments attack deficits by cutting spending, the results are very different.
In 2011, the International Monetary Fund identified episodes from 1980 to 2005 in which 17 developed countries had aggressively reduced deficits. The IMF classified each episode as either “expenditure-based” or “tax-based,” depending on whether the government had mainly cut spending or hiked taxes.
When Carlo Favero, Francesco Giavazzi and I studied the results, it turned out that the two kinds of deficit reduction had starkly different effects: cutting spending resulted in very small, short-lived — if any — recessions, and raising taxes resulted in prolonged recessions.
[…]The obvious economic challenge to our contention is: What keeps an economy from slumping when government spending, a major component of aggregate demand, goes down? That is, if the economy doesn’t enter recession, some other component of aggregate demand must necessarily be rising to make up for the reduced government spending — and what is it? The answer: private investment.
Our research found that private-sector capital accumulation rose after the spending-cut deficit reductions, with firms investing more in productive activities — for example, buying machinery and opening new plants. After the tax-hike deficit reductions, capital accumulation dropped.
The reason may involve business confidence, which, we found, plummeted during the tax-based adjustments and rose (or at least didn’t fall) during the expenditure-based ones. When governments cut spending, they may signal that tax rates won’t have to rise in the future, thus spurring investors (and possibly consumers) to be more active.
Our findings on business confidence are consistent with the broader argument that American firms, though profitable, aren’t investing or hiring as much as they might right now because they’re uncertain about future fiscal policy, taxation and regulation.
But there’s a second reason that private investment rises when governments cut spending: the cuts are often just part of a larger reform package that includes other pro-growth measures.
In another study, Silvia Ardagna and I showed that the deficit reductions that successfully lower debt-to-GDP ratios without sparking recessions are those that combine spending reductions with such measures as deregulation, the liberalization of labor markets (including, in some cases, explicit agreement with unions for more moderate wages) and tax reforms that increase labor participation.
Let’s be clear: This body of evidence doesn’t mean that cutting government spending always leads to economic booms. Rather, it shows that spending cuts are much less costly for the economy than tax hikes and that a carefully designed deficit-reduction plan, based on spending cuts and pro-growth policies, may completely eliminate the output loss that you’d expect from such cuts. Tax-based deficit reduction, by contrast, is always recessionary.
UPDATE: George Mason University economists agree: debt is wrecking the economy and the right way to stop it is with spending cuts, not tax increases. In order to grow the economy we need a balanced approach of spending cuts and tax cuts.
The United States’ high levels of debt are already contributing to slower economic growth and decreased competitiveness. These impacts will worsen if the nation’s debt-to-GDP levels continue to rise, as is currently projected.
[…]High levels of government debt undermine U.S. competitiveness in several ways, including crowding out private investment, raising costs to private businesses, and contributing to both real and perceived macroeconomic instability.
[…]Carmen Reinhart and Kenneth Rogoff examine historical data from 40 countries over 200 years and find that when a nation’s gross national debt exceeds 90% of GDP, real growth was cut by one percent in mild cases and by half in the most extreme cases. This result was found in both developing and advanced economies.
Similarly, a Bank for International Settlements study finds that when government debt in OECD countries exceeds about 85% of GDP, economic growth slows.
[…]While fundamental tax reform is required to correct a host of structural inefficiencies, policymakers can quickly reduce the U.S. statutory rate of 35% to the OECD average rate of 26% or less.
That’s what research tells us. But that’s not what we are doing, because we voted for Barack Obama.
Exactly what country does New York Times columnist Paul Krugman actually reside in?
Before you answer, consider the following sentence from his article Monday:
Although you’d never know it listening to the ranters, the past year has actually been a pretty good test of the theory that slashing government spending actually creates jobs.
For the past year to be a good test of this theory, there would have needed to be a slash to government spending, right?
Was this the case?
In fiscal 2010, total federal outlays were $3.72 trillion. In fiscal 2011 which ends September 30, we’re projected to spend $3.83 trillion. That’s a $111 billion increase.
Yet this Nobel laureate in economics thinks government spending was slashed.
In reality, since the last time such outlays declined year over year was 1965, we should really be testing Krugman, Obama, and the Democrats’ theory that dramatic increases in government spending creates jobs.
Democrats have been radically increasing outlays since they took over Congress in 2007. During this time, as spending rose by 41 percent, the economy lost roughly seven million jobs sending unemployment skyrocketing from 4.4 percent to 9.1 percent.
If Krugman wasn’t delusional, the above referenced sentence from his Monday column would read, “Although you’d never know it listening to the ranters like Barack Obama, the Democrats, Robert Reich, and me, the past four years have actually been a fabulous test of the theory that exploding government spending actually creates jobs.
Isn’t that really the only conclusion that one could draw given what’s happened since this recent Keynesian experiment began in 2007?
Of course, it’s unfair to expect this Nobel laureate in economics to make such an obvious determination.
He thinks a $111 billion increase in spending is a slash.
I think that Paul Krugman is going beyond mere mendacity these days, as his Keynesian worldview is disproved right before his eyes. The whole country is being treated to a massive disproof of all of his ideas, and this must be causing him some mental strain.
Is Paul Krugman seen as reliable?
I’m not the only one to point out how nutty Krugman has become of late.
Why does the New York Times hire a deluded person? Because they don’t so much report the news as they provide their readers with “confirmation” of a worldview that allows them to feel that they are right without having to care about reality. In short, Krugman is a well-paid writer of fiction.
PAUL KRUGMAN, NEW YORK TIMES: Think about World War II, right? That was actually negative social product spending, and yet it brought us out.
I mean, probably because you want to put these things together, if we say, “Look, we could use some inflation.” Ken and I are both saying that, which is, of course, anathema to a lot of people in Washington but is, in fact, what fhe basic logic says.
It’s very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So, if you think about using all of these things together, you could accomplish, you know, a great deal.
If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren’t any aliens, we’d be better –
ROGOFF: And we need Orson Welles, is what you’re saying.
KRUGMAN: No, there was a “Twilight Zone” episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time, we don’t need it, we need it in order to get some fiscal stimulus.
It’s important to note that Paul Krugman’s plan is actually better than Obama’s plan, because Obama doesn’t have a plan.
The Newsbusters piece explains what’s wrong with stimulating the economy with an alien invasion, as seen on the Twilight Zone TV show.
But more importantly, let’s look at the numbers involved to really get a sense of what Krugman advocated here.
The money unsuccessfully thrown at the Depression prior to World War II was staggering. From 1929 to 1939, government spending tripled from $3 billion a year to $9 billion.
And yet unemployment at the end of 1939 was still 17.2 percent.
Not a very good advertisement for Keynesian economics, is it?
Now imagine that kind of “stimulus” today. That would mean the current $3.8 trillion budget would have to rise to $11.4 trillion which would generate about $9 trillion of debt a year.
What do you think would happen to our credit rating and our dollar then? Wouldn’t be pretty, would it?
Yet that didn’t work in the ’30s – a fact that most liberals other than Krugman still contest – so the Nobel laureate is advocating that we spend like we’re being attacked by space aliens in order to get to the level of outlays during World War II.
Total federal spending in 1940 was $9.5 billion. By 1945, this had risen almost tenfold to $93 billion.
Such an increase in today’s budget would create a deficit greater than $30 trillion per year making our dollar and our Treasuries totally worthless.
[…]Consider too that the lasting stimulative quality of even the World War II spending is up for debate.
The National Bureau of Economic lists a recession that began in February 1945 that lasted until October of that year. This recession happened despite the federal government spending almost tens times as much as it had only five years prior and 30 times more than in 1929.
Once again, not a very good advertisement for Keynesian economics.
But let’s take this a step further, for NBER’s recession numbers might be too conservative. According to the Bureau of Economic Analysis, the Gross Domestic Product shrank by 1.1 percent in 1945, a staggering 10.9 percent in 1946, and 0.9 percent in 1947.
Again, this was after the largest explosion in federal spending in our nation’s history, and this is what Krugman is advocating we repeat.
So what is stimulus spending? Stimulus spending is when you take money OUT of the hands of people who create jobs, and put it into the hand of people who the government thinks deserves that money more. Let’s see who the government thinks deserves the money more than employers.
CBS News reports:
ABC News reports:
And this one features a real economist:
Obama promised that if we let him redirect $864 billion dollars from taxpayers to other people he chose, then that would make unemployment stay below 8%. So did all that “stimulus” keep unemployment below 8%?
(Click for larger image)
Let’s learn some economics and find out why that happened.
Economics in One Lesson
Perhaps it is time to review Henry Hazlitt’s book on basic economics “Economics in One Lesson”. Let’s look in chapter 4, which is entitled “Public Works Mean Taxes”.
Excerpt from that chapter:
Therefore, for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been permitted to come into existence. They are the jobs destroyed by the $10 million taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, television technicians, clothing workers, farmers.
And consider Chapter 5 as well, entitled “Taxes Discourage Production”.
In our modern world there is never the same percentage of income tax levied on everybody. The great burden of income taxes is imposed on a minor percentage of the nation’s income; and these income taxes have to be supplemented by taxes of other kinds. These taxes inevitably affect the actions and incentives of those from whom they are taken. When a corporation loses a hundred cents of every dollar it loses, and is permitted to keep only fifty-two cents of every dollar it gains, and when it cannot adequately offset its years of losses against its years of gains, its policies are affected. It does not expand its operations, or it expands only those attended with a minimum of risk. People who recognize this situation are deterred from starting new enterprises. Thus old employers do not give more employment, or not as much more as they might have; and others decide not to become employers at all. Improved machinery and better-equipped factories come into existence much more slowly than they otherwise would. The result in the long run is that consumers are prevented from getting better and cheaper products to the extent that they otherwise would, and that real wages are held down, compared with what they might have been.
There is a similar effect when personal incomes are taxed 50, 60 or 70 percent. People begin to ask themselves why they should work six, eight or nine months of the entire year for the government, and only six, four or three months for themselves and their families. If they lose the whole dollar when they lose, but can keep only a fraction of it when they win, they decide that it is foolish to take risks with their capital. In addition, the capital available for risk-taking itself shrinks enormously. It is being taxed away before it can be accumulated. In brief, capital to provide new private jobs is first prevented from coming into existence, and the part that does come into existence is then discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.
And the results we see today are consistent with the predictions of basic economic theory.
George W. Bush cut taxes in his first term and created 1 million NEW JOBS. On the other hand, Obama transfered BILLIONS from the private sector to the public sector, where government waste is rampant. Government spending is a job killer. Obama might be a nice man, but he is just wrong on economics and business. What we should have done is elected someone who doesn’t repeat the mistakes made in other countries, like in Japan where massive government spending failed to stimulate the economy. We just need to look at where the ideas of Paul Krugman, Fareed Zakaria and Barack Obama have been tried – like in Spain and Greece – and see whether all of this government spending led to economic prosperity and a low unemployment rate. I know that it makes them feel good to think that they are responsible for punishing those who work, and rewarding those who don’t work. But maybe we should look at the results of their policies and decide that we just can’t afford to sacrifice the entire economy to make three people feel good about themselves. As far as I can tell, Keynesian economics has never created jobs whenever it’s been tried – although it does make the liberal elite feel superior to job creators. It works to do that.