Friday, April 25, 2014

Larry Summers; Wrong Again

The supposed mainstream economists have absolutely no idea about what macro economic forces causes what. There is no logic to what they say and a complete ignorance of economic history.

This morning prior to an Export Import Bank meeting, Larry Summers, former Treasury Secretary, President of Harvard University and lifelong darling of leftist economists, was on Bloomberg TV discussing economic policy. I can’t quote him exactly but here is the gist of what he said. Export Import Bank subsidies (some of which go to healthy large corporations like Boeing) support US exports and labor. He added that he can’t understand why some economists oppose those subsidies and at the same time support corporate tax reduction, which, he said, only add to corporate profits. This is a perfect example of the Lefts one dimensional thinking and their complete ignorance of how capitalism works.

So far as corporate profits go he is right, but only to a point. A reduction in the corporate tax rate would boost profits temporarily, but (everything being equal) competition would kick in and prices would decline below where they were before the tax cut. The former tax revenue would find it’s way into the customers pockets, not the shareholders.

In a free market system a product is priced in order to return the maximum profit to shareholders. But, that price is not freely arrived at. Competition determines what that maximum price is, and if everyone competing eliminates an expense (as in corporate taxes) at least one competitor will reduce prices proportionately, forcing everyone else to do so.

Of course a profit is necessary to survive, putting a floor on prices, but in theory that price level was determined before the tax reduction and would remain the same afterwards. Better marketing, cheaper production costs and a host of other things always cause variations in pricing and profitability, but these things are ongoing with or without tax reductions. If the coffee growers price goes down you can be sure after an adjustment period the supermarket price will go down as well. The first Ford car cost about $5,000, but after Henry Ford successfully reduced production costs with his assembly line, the price came down to $500. It is no different with taxes.

I will only briefly mention the other positive ramifications of corporate tax reduction. Cheaper prices that would result are a benefit that every consumer enjoys, not only that reviled 1%. Consumer price reductions equate to an earnings increase for everyone, although liberal economists are loath to point that out. And although this simple concept seems too abstract for geniuses such as Summers, lower taxes and thus lower prices support wealth production and economic growth.

My question is, are these ridiculous one dimensional (in a multi dimensional universe) liberal economic theories honestly (albeit foolishly) believed, or are the always decorated liberal economists really doing leftist marketing disguised as scholarship?

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