Happy Hannukah to my Jewish readers!

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Embarrassment: Germany doing much better than America

While America stagnates economically, the German economy is going ahead like a train. Why? Martin Hutchinson has some answers

Germany's success in 2010 has surprised most U.S. analysts, who tend to start every sentence about Europe with "sclerotic." However it is by no means the only country that is recovering from the Great Recession in a remarkably healthy fashion. China, Chile and Singapore are also stand-outs in this respect, while the United States, Ireland and southern Europe have done poorly. This year's economic events can teach us again about which models of capitalism can be successful.

Germany's success should not have been surprising. The country had a remarkably successful economy in Wilhelmine times before 1914 and again from 1949 to 1990. The absorption of East Germany was an immense problem for the German economy, largely because it was done in the most expensive way possible, with a 1 to 1 conversion between the Ostmark and the Deutschemark, horribly overvaluing East German labor. However it was very obviously a problem of finite duration, given the language and cultural commonality between the two former countries. By about 2005, symbolized by the accession of the East German Angela Merkel to the Chancellorship, East Germany was ready to play a full part in the united whole. At that point, with the massive subsidies to the former East Germany declining, the traditional German model of capitalism was able to reassert itself and propel the economy forward.

The German economic model works very well for a country with perpetually high labor costs. Education and training are of great importance, as are engineering skill–engineers have a much higher social position in German societies than in Anglo-American ones–while housing finance is given a low priority, since it is correctly regarded as unproductive. Finance plays little role in the system–it was notable during the 2008 debacle to what extent the German banks were helpless victims of Anglo-American shenanigans, with little creative role of their own. The typical successful German company is both smaller and longer established than its U.S. counterpart, with powerful shareholders that prevent management from engaging in self-dealing and mindless empire building.

In very fast-moving innovative markets, the German model works less well than the Anglo-American Silicon Valley model of innovation. Thus the German enterprise software company SAP appears to have stolen technology from Oracle, not the other way around—to the tune of $1.3 billion in damages (a figure that may be reduced on appeal.) However the vast majority of economic activity is not particularly fast moving, and once a technology has become established the Germans have shown time and again that they are more than capable of playing a major role in the market with their skills of engineering and very high-quality manufacturing. They are much more of a threat in the Internet-related technology market than they were 15 years ago, for example.

SOURCE

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How did Australia dodge the GFC?

Martin Hutchinson goes on above to look at how several other countries have done after the GFC but omits the real standout economy -- Australia -- possibly because Bondi beach is all he knows about Australia. So maybe I should fill in a little gap there.

The first point to note is that Australia had NO crisis at all. A Leftist government had come to power just a couple of months before the global financial meltdown and paraded around spending money and offering government guarantees but that was just typical Leftist approval-seeking. They wanted there to be a crisis that they could seem to solve so they went around pretending that there was one.

The major Australian banks were never in trouble and in fact continued to make profits and pay dividends at around their normal levels. And unemployment is about half the U.S. level -- again at around its historically normal levels: A dream by world standards. And, as I have got about half my share portfolio in Australian banks, I am acutely aware of all that. By way of example, I have a parcel of shares in Westpac bank and in the year of the crisis, Westpac announced a profit decline from the previous year -- of only 1.5%

So Australian banks would be the obsessive subject of study by all the economists of the world if there were any mystery about why they did so unusually well. But there is no mystery. The answer can be given in one word: DEREGULATION. Australian banks were extensively deregulated a couple of decades ago and promptly went wild. With the government not telling them what to do they embarked on all sorts of "innovative" lending policies and got badly burnt in the process. The various banks owned by State governments all went bust in fact.

So they learnt their lesson. The surviving banks worked out how to do prudent lending and stuck firmly to those policies from that point on. And there were no government laws dictating that they make unwise loans, unlike the USA. Hence they didn't have any significant overhang of bad debt when the crisis struck. They had all bought small amounts of American paper because of its attractive yields but their now ingrained caution meant that they largely stuck to their own knitting. So losses on the American paper could be absorbed from domestic profits.

All that I have just said any economic historian should be able to dig up but it is not the full story. In my usual wicked way, I will now tell you the rest.

The American practice of making poorly secured loans and apparently thriving by doing so was deeply impressive worldwide and was therefore copied in many other countries -- and they suffered for it along with America in due course.

And in Australia also there sprang up a slew of financial intermediaries who offered what they called "low doc" loans. And they DID suffer from the GFC. But not too badly. They were mostly just taken over by the banks and everything continued on as normal.

So how come they did not cause a huge crash? Easy. As in the USA, the people who were given the poorly secured loans were mostly minorities. But Australia's big minority is very different from America's two large minorities. Australia's big minority is East Asian, mostly Han Chinese racially. And if you know anything about the Han you know that they would rather DIE than default on a home loan. The loss of face would be unendurable. If in trouble they would just get a third job. So loan defaults were relatively rare in Australia because Australia has a better class of minorities. Do you see why no-one else would ever tell you that? -- JR

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Why tax cuts for the rich pay off

Thomas Sowell

Guess who said the following: "It is incredible that a system of taxation which permits a man with an income of $1,000,000 a year to pay not one cent to his Government should remain unaltered."

Franklin D. Roosevelt? Ted Kennedy? Nancy Pelosi?

Not even close. It was Andrew Mellon, Secretary of the Treasury under conservative Republican President Calvin Coolidge.

What was Mellon's point? That high tax rates do not necessarily result in high tax revenues to the government. "It is time to face the facts," he said. Merely having high tax rates on large incomes will not bring in more tax revenues to the treasury, because of "the flight of capital away from taxable investments."

This was all said in 1924, in Mellon's book, "Taxation: The People's Business." Yet here we are, more than 80 years later, still not facing those facts.

It is not just a question of what Andrew Mellon said. It is a question of hard facts, easily checked in official documents available to all-- and ignored all these years.

Internal Revenue Service data show that there were 206 people who reported annual incomes of one million dollars or more in 1916. But, as the tax rate on high incomes skyrocketed under the Woodrow Wilson administration, that number plummeted to just 21 people reporting a million dollars a year in income five years later.

What happened to all those millionaires? Did they flee the country? Were they stricken with fatal diseases? Did they meet with foul play?

Not to worry. Right after Congress enacted the cuts in tax rates that Mellon had been urging, there were suddenly 207 people reporting taxable incomes of a million dollars or more in 1925. As Casey Stengel used to say, "You could look it up." It is on page 21 of an Internal Revenue publication titled "Statistics of Income from Returns of Net Income for 1925."

Where had all the income of those millionaires been hiding? In tax-exempt securities like state and local bonds, among other places. Mellon had urged Congress to end tax exemptions for such securities, even before he got them to cut tax rates. But he succeeded only with the latter, and only after a political struggle with those who made the same kinds of arguments that are still being made today by those who cry out against "tax cuts for the rich."

Still, one out of two is not bad, when it comes to getting Congress to do something that makes sense economically, rather than something that looks good politically.

The government, which collected less than $50 million in taxes on capital gains in 1924, suddenly collected well over $100 million in capital gains taxes in 1925. At lower tax rates, it no longer made sense to keep so much invested in tax-exempt securities, when more money could be made by investing in the economy.

As for "the rich"-- who really were rich in those days, when $100,000 was worth more than a million dollars is worth today-- those in the highest income brackets paid 30 percent of all taxes in 1920 and 65 percent of all taxes by 1929, after "tax cuts for the rich."

How can that be? Because high tax rates on paper, that many people avoid, often does not bring in as much tax revenue as lower tax rates that more people actually pay, after it is safe to come out of tax shelters and earn higher rates of taxable income.

The investors do this because it makes them better off, on net balance, even after they pay more money in taxes on incomes that have gone up. More important, the economy benefits when there is more investment in things that create more jobs and rising output.

None of this was unique to the 1920s. The same scenario played out again in later years, during the Kennedy, Reagan and Bush 43 administrations.

But economic success is not the same as political success. As former House Majority Leader Dick Armey put it, "Demagoguery beats data."

As long as the voters keep buying the "tax cuts for the rich" demagoguery, politicians will keep selling it. And it will keep selling as long as it goes unanswered. The question is whether today's Republicans understand that as well as Andrew Mellon did back in the 1920s.

SOURCE

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ELSEWHERE

Google now in the EU crosshairs: "The European Union's competition watchdog will investigate whether Google has abused its dominant position in the online search market - the first major probe into the online giant's business practices. The investigation announced overnight follows complaints from rival search engines that Google put them at a disadvantage in both its regular and sponsored search results, by listing links to their sites below references to its own services in an attempt to shut them out of the market. [Harassing American technology companies is what they do. Ask IBM and Microsoft]

US Senate passes bureaucrat empowerment legislation: "The U.S. Senate has approved the first major food-safety [sic] legislation in more than 70 years, by a 73-to-25 vote. The Food Safety Modernization Act will give the Food and Drug Administration more power …”

US Senate blocks repeal of $600 “transaction reporting” requirement: "The Senate on Monday rejected an effort to reduce tax-related paperwork for businesses when lawmakers couldn’t agree on whether they would make up the revenue the new requirement was expected to produce. … Under the new law, nearly 40 million U.S. businesses would start filing tax forms in 2012 for every vendor that sells them more than $600 in goods. … Senators tried twice on Monday to amend an unrelated food safety bill to repeal the filing requirement. Both proposals, one by Sen. Max Baucus, D-Mont., and another by Sen. Mike Johanns, R-Neb., failed to get the necessary two-thirds majority.”

The triumphant return of Hayek: "Keynesianism and monetarism are now suffering a similar distortion. Keynes would probably never have supported big government deficits during boom times, such as those that led to our current debt crisis. Likewise, Friedman would probably not have backed the new Fed use of monetary policy as a tool to engineer expansion rather than merely cushion the pain in a downturn. The systematic perversion of Keynes’s and Friedman’s thought is now resulting in a fall in their fortunes, leaving Hayek triumphant, once again.”

North Korea runs unchecked: "Fail to forcefully confront a thug and you generally guarantee that his thuggish behavior will continue. … Yet when it comes to the pathological regime in North Korea, the conventional wisdom throws up its hands and laments that there are no good options for confronting Kim Jong-il over his aggressive provocations. North Korea’s attack on a South Korean island last week — a 50-minute barrage that left four people dead and reduced dozens of homes to smoking ruins — was an act of war.”

The set-aside boondoggle: "Government set-aside programs actually require ineffiency in infrastructure projects by demanding that the least competitive contractors be hired to work on them. Success in a contracting business disqualifies a contractor from being designated as a ‘minority business enterprise.’ Only contractors with a net worth below $750,000 and a relatively low annual income may participate. But the bureaucracy required to oversee these programs is reason enough to cut them out, even if they did not guarantee waste in the actual operation of a project.”

The road to fascism: "Fascism is the system in which no specific economic theory is used to guide the rulers. Only one common factor characterizes the system, namely, arbitrary rule by a charismatic head of state. Such a head of state has nearly carte blanche so far as its policies are concerned. Examples of fascist regimes are quite abundant, mainly because at heart nearly all the so called communist countries are ruled by fascist dictators — Cuba, North Korea, the Soviet Union, etc. Yes, under Stalin and other soviet rulers the USSR really come to nothing more than fascism — ‘Stalinism is the most successful variant of fascism’ said the late Susan Sontag and with that declaration (made at the American Workers and Artists for Solidarity rally), she created an uproar among Leftists around the world.”

Wishful regulation in Britain: "Regulators were originally created to bring quasi-competition to newly-privatized markets. But, more than this, the last government used them as wish fulfilment agencies and that still continues. We were all shocked when companies collapsed taking their pension funds with them, so the Pensions Regulator was created to ensure that employee pensions were protected. We want energy sustainability, so Ofgem was tasked with ensuring it. The idea seemed to be that you could appoint a regulator and, hey presto, the government’s wishes would be fulfilled.”

My Twitter.com identity: jonjayray. My Facebook page is also accessible as jonjayray (In full: http://www.facebook.com/jonjayray). For more blog postings from me, see TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH, POLITICAL CORRECTNESS WATCH, GUN WATCH, FOOD & HEALTH SKEPTIC, AUSTRALIAN POLITICS, IMMIGRATION WATCH INTERNATIONAL, EYE ON BRITAIN and Paralipomena

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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)

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