Reaganomics, a success story (2)

Sorry - Hat tip, Rantburg.com

@ de andere kijk: I missed your comment- i basically said the same thing you did. Great minds...

Thanks Mr. Vreymans. Bookmarked those links. Very, very interesting.

My point is that the first requirement is a corruption-free state apparatus that protects property, enforces the rule of law, and has a judicial system that can enforce civil contracts. When all that is in place, private investment money will automatically jump on business opportunities that have a sufficient level of potential gains. If the level of potential gains is not high, or negative, then I'm calling a state-provided microcredit an allowance. Yes, they have to pay it back, but what if they can't? If the micro-entrepreneur can pay it back with interest, than it would have been (in hindsight) a good opportunity for a private investment. If not, that it was in fact a state-provided living allowance.

And don't look exclusively at banks. There is seed money in venture capital, there are angel investors etc.

In a real free-market-oriented, investment-friendly society, Barco would be more succesfull than today, and without any money that had to be taken from the taxpayer. What has happened now is that the state has forced the citizens to put part of their money (through taxes) into an investment that later proved to be succesful.

- I believe I read some time ago that micro-credits are being granted by the private sector, indeed not by the big banks, but by local entrepreneurs

- Innovative industries do not necessarily have to be financed by the state, there are private equity firms for example, the GIMV by the way has become a multinational private equity firm and the flemish government is considering to sell its stake in the company

- I think that we can all agree that a small, but efficient state providing the necessary insitutions is the best option, the distributive policies, they need to be criticised.

Luc: "Why should governments give microcredits to starters? "

Well, DON'T think I'm a closet socialist. The ONLY reason I suggested that government should do that, is that it looks to me like "ordinary" banks don't seem to be too eager to engage completely in the world of microfinance. The reason: profits too small, the amounts in question negligible (from the P.O.V. of the bank).

After all, the formula of microfinance exists thirty years and only now it seems like we are slowly seeing a breakthough.

Now, you say: "opportunities are huge and potential profits much higher". And then I ask: why isn't microfinance a big success then in those developing countries which are relatively tranquil and stable (I am thinking of Gabon, Benin, Botswana). Caveat: I am not exactly sure about the presence of microfinancing in those countries, but if it had been a huge success, I guess i would have picked it up somewhere.

But Luc, you say: "These are the tasks of the state, and not to give financial support to entrepreneurs who are unable to attract private investments."

But don't you agree that it was a good thing for, say, BARCO, that there was an institution like the GIMV around to provide financial clout in the eighties? It is an established fact that innovative industries can't always get favourable loans (or none at all), and then the state performing the role of the banks can come in handy. I think that if the GIMV and other state-controlled risk funds had not existed, several successful high-tech industries would never have gotten beyond the spinoff state.

In the same manner, I see a similar role in developing countries for providing microcredits IF private banks are unwilling to do it. After all, it is no allowance!!! The borrowers have to pay it back!

A little bit off-topic: You know what I call an allowance? And then on a macro-scale! The silly plan to forgive the African countries' debts, as proposed by Gordon Brown. Now THAT is what I call counterproductive. Good thing Wolfowitz is World bank Director, and not Brown.

Good night, getting awfully late.

Willy, thank you.

"This can be done in numerous ways, for instance in deregulating the economy, simplifying procedures for starting a corporation, no suffocative administrative regulations for economic activities, as we have in Western Europe, encourage the private sector and not discourage it....."

Imho one VERY important action field should be added: microcredits. And although I consider myself a capitalist, I am certainly not a liberatarian because here I do see a field in which the state can and should actively play a role. I am talking about governments setting up what I should call "micro investment funds". Kind of what we have here in Belgium/Flanders with the GIMV or PMV, but on a microscale. I think governments of third world countries should much more get involved in providing bank guarantees for microcredits since the ordinary banks and private financial institutions don't seem to be too eager to really develop the concept. Good link: http://www.deverr...

Adriana: "So no, African countires like the Congo would not benefit too much from Reaganomics until the basis for a free economy, such as titles, was also or had been previously, put into place."

and De Andere Kijk: "The same thing with the absence of legal title on real estate property, resulting in the impossibility to mortgage houses as a collateral for investment... The market economy can only thrive within a framework of efficient institutions. "

This is exactly true. I know that some people on this blog tend to be libertarians and I can live with that, but personally I do not believe in a skeleton state and I am convinced that there is an important role for the government in creating the legal framework and functioning institutions. That will of course involve setting up a multitude of agencies and hiring state-paid cadres. But I think it is necessary. Think of the Somalian example: for more than ten years there has been no formal government, but curiously though it may seem at first, several businesses have thrived, a.o. Nationalink, a cell-phone provider! One of the reasons is of course that they don't pay taxes, because there is no authority to receive taxes! Well, the mere presence of some thriving business has not helped Somaia forward, that is why this year finally a new government got a chance to reassert its authority.

Of course governments should never be allowed to grow too big.

But I'd like to conclude that in the absence of at least a minimal state with sufficiently capable institutions (e.g. an authority to register land, an efficient tax system) the "Classic" Reaganomics is imho not that well suited for solving the problems of the developing world. It is however very well suited for e.g. Europe, and if US-style Reagonomics were to be applied in the EU, I guess it would result in unprecedented economic growth and massive job creation. But politics stand in the way here.

To : The Outlaw Michael

Thanks for your reaction. Its encouraging to see that at least some people are paying some attention to the summary of my study on Reaganomics. It was indeed a lot of work to find all the figures and facts and it has involved a lot of reading on this subject. As for the translation I am glad that Luc polished a little bit my English, and put everything in a nice lay-out.

The following on your remark "....Is Reaganomics the correct tool to confront, say, Congo's economic problems..."

In my opinion it is, but not in the same way as in the US. Supply-Side economics is not limited to slashing tax rates, but more in general creating incentives to produce, to take risk, to invest etc... This can be done in numerous ways, for instance in deregulating the economy, simplifying procedures for starting a corporation, no suffocative administrative regulations for economic activities, as we have in Western Europe, encourage the private sector and not discourage it..... I do not know what the situation is in Congo, but I can give you another example for the possibility of applying Reaganomics regardless the tax burden. I think it was in 1989, when I saw a report about the dismal economic situation in PERU. The situation at that time was apparently not the consequence of the tax burden. What were the facts? The more than 250 government owned companies gobbled up half the nations' budget. Money was printed to pay the salaries of the (too many) public workers, causing an hyperinflation of 7000 %. PERU fought individual initiative with socialization and bureaucracy. In the report an example was given about an entrepreneur who wanted to legally set up a small factory in Lima. It took him 289 days of wading through red tape and $ 1.231 in bribes to corrupt government bureaucrats.

I don't know what the present situation is in PERU, but I think that many South American countries have similar diseases. In my opinion in such cases it is perfectly possible to introduce supply-side economics irrespective of the tax rates. It could be done by encourageing private initiative, slashing the role of government and simplifying considerably the suffocative administrative procedures.

Your following remark : ".....suppose that grass roots industry is able to produce new lines of fancy comsumer products (enhancing the supply), how will people without buying power procure them? "

The answer seems rather simple to me. Suppose a country is introducing supply-side economics and suppose 1 million new jobs are created. This million people will produce products (perhaps also fancy consumer products) and services. For their work they receive a salary in proportion to the value of the goods and services produced. These people are now able to buy (with their salary) the goods and services they have produced (or a similir value of products and services). There is a new balance at a higher level. (macro economy).

I don't have any more my manuals on economics. I threw them away because in my opinion they are totally useless for a macro economic policy. But I remember that the above principle has been explained by the French economist Jean Baptiste Say (1769-1832), called "the law of Say". (Apparently at that time France had some intelligent economists.)

On the economic policy of the Nazis, perhaps Martin De Vlieghere will have some comments.

In every case it was a pleasure to read you

While I agree that Reaganomics was THE means to combat the 70's economic crisis, I still think that the technique is often only applicable in those situations where the errors of the predecessor's economic policies have been so blatant that only rectifying them without implementing a wholly new economic philosophy will seem a revolution.

E.g., slashing insanely high income and corporate taxes is only possible when income and corporate taxes are, well, insanely high.

I mean, is Reaganomics the correct tool to confront, say, Congo's economic problems? The government CAN'T slash income taxes and corporate taxes for the simple reason that only very few, if any, of the Congolese are actually paying taxes. And again, suppose that grassroots industry is able to produce new lines of fancy consumer products (enhancing the supply) how will a people without buying power procure them?

Don't get me wrong: I think that Reaganomics was bound to be a major success in the States since, firstly, it was POSSIBLE in the first place to implement drastic tax breaks, and secondly, because even in our western countries with high unemployment te consumer body still has enormous amounts of money to spend.

That is why I DO think that Reaganomics would be a GIGANTIC success in Europe: there's a lot of taxes that can be reduced, and even our unemployed often have quite some money to spend. But I don't consider the implementation as realistic: the stranglehold of the left on politics, the strenght of the unions... simply exclude Reaganomics.

On the other hand, I also think that in different times Reaganomics can't always be the answer. Who will tell whether it would have produced better results than Keynesianism in the thirties?

@martin de vlieghere: I read your interesting post (the one with a.o. Goerdelers objections to Hitler). I heard of Schachts financial wizardry; the economic policy of the Nazis was the real "voodoo economics". But one cannot deny that the Keynesian elements at least INITIALLY provided millions of new jobs. In the very early years even Churchill spoke favourably of Herr Hitler. But I agree that had WWII not broken out, the system would have collapsed.