Well, the other day I warned that too many people discuss
economics, actually argue economics, based on mistaken theories. The primary problem, in my opinion, is that
micro economic principles are attempted to be overlaid on macro economic
topics. And vice versa. These elements are not mixable. Like oil and water,
micro and macro economics each deal with completely separate economic DNA's.
Both may live on the same planet and occur at the same time, but they are separate.
They do have an effect on one another, but they are not inter-related.
Carl Icahn worries about the too low interest rates; he
thinks they will cause real estate bubbles like they did the last time. First
of all, there is no relationship between low interest rates having caused the
bubble last time (2007-2008). It wasn’t interest rates that attracted foolish
investment in an overheated real estate market. It was the promise of ever rising prices for the property in the first place. Too many people were seeking
to buy a fixed quantity of properties then available on the market. Result:
prices spiked; over and over again. If the properties were flipped, buyers made
a killing, until the bubble burst, and the last buyer got stuck with
rapidly deflating prices. Too few buyers for too many available properties on
the market. Classic bubble scenario.
Icahn thinks interest rates dragged us into this. No; they
didn’t. Interest rates were much higher then than now. People were not making
money on interest rates; they were making it on inflating prices for the
properties themselves.
Interestingly, Icahn wants interest rates to rise. Why?
Because then he can idly invest his money in financial instruments bearing
interest rates as the core earning element. Very little risk in that,
especially so if the instruments are insured by the Federal Government. This is
the manner in which most investments were made in the past. Certificates of
Deposits were a primary investment. Treasury notes and bills were another
classic investment vehicle. Corporate bonds is yet another investment vehicle
to pursue, but those embrace more risk should the corporate governance
miscalculate their own markets, return on investment, and such. Not much
guarantee for your invested dollars if the company goofs. You may end up owning
a piece of the company but if it is failing, that’s not much security.
An individual wanting to earn money on his idle funds is
looking for an easy investment vehicle (a financial instrument) carrying a
stated return (interest rate). A person who is a billionaire and wishes to do
the same thing is still an individual. He is not an institution or government
making market wide policy or rate settings. He may be bigger than an
institution because of the size of his wealth, but he is still one person. That
is the definition of micro economics – the economics having to do with the
individual or home, family, very small enterprise or retail shop. Macro
economics has to do with money, banking, dollar values, interest rate setting,
policies which control inflation and deflation, and other policies which will
spur employment higher or dampen over heated labor markets. Governments on the
international financial markets respond to macro economics. So do large
institutions and corporations.
Mixing micro with macro will mess things up worse than they
already are. And if Carl Icahn falls into this trap, what do you think Donald
Trump will do with it? Yes; he will
become entrapped as well.
So, Icahn’s recent video supporting Trump’s candidacy is
completely backward. They are both self serving personal interests, not
interests of our society.
We have little inflation. In many respects we have
deflation, primarily labor rates. Salaries and wages are very low in the
current economy compared to where they have been in the past. The only people
earning much higher incomes are the wealthy. Average workers have suffered
through enormous financial pressures without much adjustment upwards in their
household incomes. Too many people were forced to take low paying jobs, some
two for each bread winner, with many homes covering four jobs (two for the
husband, two for the wife). You know that. I know that. Do Carl and Donald know
that? I doubt it very sincerely.
Lowering taxes? Both Carl and Donald say that’s what’s
needed. Of course the wealthiest first, so they will do more with their money
and cause benefits to trickle down to the rest of us. It doesn’t work that way.
Ronald Reagan tried it and it failed. George H W Bush tried it and it failed.
Bush junior tried it in a big way and it failed big as well. Even bigger!
No, lowering taxes on the wealthy only starves government of
the revenues it needs to perform the functions expected of it – education,
health and welfare, military defense, money and banking systems, etc. In the past trickle down eras only the rich
got richer. Government was downsized, but in Reagan’s era the functions were
defunded at the federal level but mandated at the state level. The result:
states raised taxes to do the things the fed used to pay for. Money saved by
Reagan was spent in increased budgets for the military. No economic expansion
was truly recognized. And living standards began their slide.
Lowering taxes for corporations is only more of the same. The
wealthy own the corporations so they gain with increased corporate earnings,
dividends, and stock prices. They continue to gain over and over again on many
fronts. The Average Joe, of course, is missing in this equation. And he gets
poorer. Besides, corporate tax rates have already been lowered several times. Again, we starve tax revenues in favor of corporate treasuries. That has not worked well, plus the same companies still seek tax havens outside the country.
Now do you see why Trump and Icahn like their own policies?
They win; we lose. But so does the nation. A weak electorate, labor force and
institutions lowers the nation’s ability to excel and build strong futures.
It’s time for politicians to support what does work and
avoid the panaceas that don’t work. Trickle down economics was a disaster.
Let’s correct past mistakes and rebuild the nation on proven principles of
economics.
October 2, 2015
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