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Archive for August 16th, 2011

I’ve joked on many occasions that bipartisanship occurs in Washington when the evil party and the stupid party come up with an idea that is simultaneously malicious and misguided.

The international version of two-wrongs-don’t-make-a-right occurs whenever the French and the Germans conspire on economic policy. The latest example is a joint proposal for “economic governance” for eurozone nations. Here are some blurbs from the BBC’s report.

The French and German leaders have called for “true economic governance” for the eurozone in response to the euro debt crisis. Speaking at a joint news conference, German Chancellor Angela Merkel and French President Nicolas Sarkozy urged much closer economic and fiscal policy in the eurozone. …They also advocated a tax on financial transactions to raise more revenues.

I don’t pretend to have any predictive ability, but I’ll bet dollars-to-donuts that “true economic governance” will lead to more spending and higher taxes. Why? Because “economic governance” is just a sanitized way of describing a cartel of governments.

When politicians don’t have to worry as much about jobs and capital migrating to jurisdictions with less oppressive tax law, they will behave in a predictable fashion by raising tax rates. In other words, the weakening of tax competition is a recipe for bigger, more expensive government.

Indeed, the tax on financial transactions is a perfect example. Any one nation would be unlikely to impose this perverse levy for fear of losing business to neighbors. But if there’s a one-size-fits-all eurozone government, then bad policy becomes more feasible.

The only good news is that Merkel hasn’t totally lost her mind. Perhaps because her de facto socialist party is not doing well in the polls against the de jure socialist party in Germany, she is temporarily resisting the idea of “eurobonds.”

Ms Merkel again played down the chances of introducing “eurobonds” – jointly guaranteed debts of the 17 eurozone governments – as a solution to the crisis. The idea has been advocated by the Italian finance minister, Giulio Tremonti, as well as billionaire investor George Soros as a way of providing cheap financing to struggling governments while also incentivising them to put their finances in order.

The more profligate European governments like eurobonds for the same reason that California and Illinois would like to jointly issue debt with Texas. It’s a way for the spendthrift to free ride off the frugal.

And speculators like eurobonds because their holdings can dramatically rise in value when downside risk gets transferred to taxpayers (nothing wrong with speculation, by the way, so long as losses aren’t socialized).

Eurobonds might temporarily calm European markets, but only by setting the stage for a bigger collapse in the near future when the Germans are pulled underwater by their reckless neighbors.

For those who want more information, this video is a primer on the importance of jurisdictional competition.

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I’ve poked fun at Paul Krugman for his views on health care and British fiscal policy, and I’ve semi-defended him about unemployment subsidies and housing bubbles.

Now it’s time for some more mockery.

Back in 2001, Paul Krugman received some much-deserved criticism for stating that the 9-11 terrorist attacks would be stimulative for the economy.

He committed the “broken-window” fallacy, explained more than 150 years ago by a famous French economist, Frederic Bastiat.

Breaking a window at the local bakery, Bastiat explained, might generate business for the town glazier, but only at the expense of some other merchant, like a tailor, who would have benefited if the baker didn’t have to spend money on a new window.

In other words, the destruction of wealth is not good for an economy. At best, it makes us poorer and then shifts how current income is allocated. This is why Bastiat wrote (perhaps predicting the emergence of Krugman):

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

But we have to give Krugman credit for a bizarre form of ideological consistency. He is willing to advocate bigger government, no matter how sloppy the reasoning or how quirky the rationale.

His latest outburst was to say on CNN how wonderful it would be for the economy if the people of earth mistakenly thought we were on the verge of an alien invasion, which would lead to lots of military spending.

He even cited an episode of Twilight Zone to justify his assertions. I’m surprised he didn’t also mention the 1996 film, Independence Day.

As I wrote in a previous blog post, this is one of those moments when your only response is to say “wow.” This is even worse than when Keynesians assert that it would be stimulative to pay people to dig holes and fill them in again.

For those who want more info on why government spending does not boost the economy in the short run, here’s my video on Keynesian economics.

And if you want to know why government spending does not boost the economy in the long run, here’s a video looking at some empirical evidence about economic performance and the size of the public sector.

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