Thursday, August 31, 2006


Macedonian government, under the leadership headed by youthful Nikola Gurevski, emphasized radical economic reform in its campaign. In fact, Macedonia is the very first country in Balkans to stress the gradual approach to economic reforms and step onto a different path of quick, flexible, rapid and radical structural reforming. Gurevski's plan is to let Macedonia to become "Estonia of Balkans" inspired by youthful and courageous reformers in Eastern Europe, namely Mart Laar and Ivan Miklos. The Macedonia government headed by Gurevski has promised to cut public expediture by 2% of the GDP by 2010. It has promised to cut the red-tape as well. The party plans to implement a flat personal tax rate of 10 percent by 2008 - a turnaround from the current progressive income tax rates of 15, 18 and 24 percent. The tax rate on corporate profits will be reduced from 15 percent to 10 percent and, following the example of Estonia, the tax on reinvested profits will be scrapped altogether:

"In the early 1990s the collapse of the Soviet Union and Yugoslavia meant uncertainty for both Estonia and Macedonia. Both were new and unknown countries on the periphery of Europe. Many Westerners confused the Baltics with the Balkans. Estonia had a sizeable Russian-speaking minority that made up 35 percent of the population. Macedonia had an Albanian minority which was 20 percent of population in 1990 and has now increased to 25 percent. The confusion was not simply due to sheer ignorance. There were as many experts predicting doom for Estonia as there were "sovietologists" failing to predict the collapse of the USSR in the 1980s. A possible ethnic conflict or even a war with Russia was seen as likely. Despite the disadvantaged starting position and ethnic mix, combined with post-socialist politicking, Estonia emerged as a phoenix.

The reasons for Estonia's success remained invisible to the casual observer for years. While Macedonia chose a gradual, stop-and-go economic reform path, Estonia chose a radical and rapid approach by relying on the invisible hand of the market instead of on government intervention. The rapid economic development of Estonia is not just economic achievement: having benefited the Russian-speaking population in Estonia - it has contributed to social peace, as well. Good economic circumstances are less likely to feed social unrest. Indeed, Estonia has not had any large-scale ethnic conflicts, even if relations between the various ethnic groups are far from perfect.

The fact that thinking along those lines has reached the Balkans is a major improvement. Economic reforms do not offer absolute guarantees against potential ethnic conflicts but they will certainly reduce the likelihood of such conflicts. If the new Macedonian leaders run out of ideas and options for the rebirth of the Macedonian economy, they need not look far for inspiration: According to Bangs,- the fountain of youth is located in Macedonia's capital, Skopje - a mere 23 kilometers away ( - no subscription required). "

Sunday, August 27, 2006


Many in the Washington establishment were surprised when CBO (Congressional Budget Office) reported a surge of anticipated tax receipts that will sharply reduce this year's deficit. Of course, those who had been proclaiming the Bush tax cuts would result in big reduction of tax revenues tried to hide their disappointment. In fact, every member of the Congress can clearly understand the pure structure of tax reduction with by lowering impediments to work, save and invest which leads to more explosive economic growth. Bigger economic pie inevitably leads to an increase of tax revenue. Read Richard W. Rahn's Commentary to see the whole explanation of this:

The latest major tax rate reductions were enacted in 2003, and the first three-year results are now in. The increase in tax revenues, as in the previous two experiments, has far outstripped inflation, and the economy is close to full employment. The economy was already falling into recession when George W. Bush took office, and he made the mistake then of giving small tax rebates (which had no positive economic effects) rather than cutting marginal tax rates on labor and capital as he did in the bigger tax cut of 2003. The question is always asked, did the "tax cuts pay for themselves?" If, by "paying for themselves," one means more tax revenue was produced for the government after several years than otherwise would have occurred, we can provide a reasonably certain answer. As noted above, the Kennedy tax cuts led to a very high rate of economic growth and no reduction in tax revenue as a percent of gross domestic product (GDP) over the period (average of 17.6 percent). Therefore, with a very high degree of confidence, we can say the Kennedy rate cuts paid for themselves in three years.

Saturday, August 26, 2006


China's leasing industry, which has total fixed assets of 51.4 billion yuan (US$6.4 billion) at present, is likely to enter a relatively rapid growth period, as 12 new leasing companies have been approved for operation this year, and a considerable number of foreign-funded leasing companies have also entered the China market. China's leasing industry offers bright prospects for the future since infrastructure required for its development, such as accounting and taxations are already availible in the country. The penetration rate of China's leasing market is only 2% lower than the world average of 17%. The rate has reached as high as 33% in the US and also exceeded 20% in Japan and Europe. Experts hold that the rate should go up to 20% in China. Such a big gap also means a huge development potential.

Read the whole story here.


If you're a stockholder and would like to the stock company to generate excess returns, how to make investment decisions then?. University of Chicago professor Joseph Piotroski introduced a simple method analysis. He back-tested his research by applying his strategy to stocks using data from 1976 to 1996, and he found that by focusing on the bottom dwellers, he could earn outsized returns. His research showed that during the 20-year period he was studying, his approach would have earned an annualized rate of return of 23%:

Some companies whose stocks have been beaten down by the market are destined to turn from pumpkins to princesses. How does one earn such lofty returns when focusing on stocks that the market doesn’t like? It’s quite simple: focus on companies that are basically solid, and filter out those that stink. You have to separate the wheat from the chaff, as they say, which is, not surprisingly, easier said than done. Further, cash from operations for the current fiscal year must be greater than net income for the current fiscal year, and the long-term debt (LTD) to assets ratio for the current fiscal year must be less than or equal to the previous fiscal year’s ratio. As an additional test of solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year ( No subscription required.


There's actually no wonder why England is falling off the cliff. According to an advisor of Tony Blair, high taxes are necessary to make a nation happy. One can only hope – for Britain's sake – that he is wrong in his assumption that hate-and-envy are compelling emotions for the people of the United Kingdom:

David Halpern, who advises the Prime Minister on social issues, said the redistribution of wealth is the key to a nation's contentment. …Mr Halpern, who works in the Prime Minister's strategy unit, said that people are unhappy if they see others earning more than them. He argues if we want a happier society the Government should reduce the gap between rich and poor. d=409205&in_page_id=77


A column by Fraser Institute expert in WSJ explains how the provinces in Western Canada are implementing supply-side tax reductions and enjoy a fascinating economic growth and more prosperity:

"Ontario and Quebec once reigned supreme as the economic hub of Canada, but no more. The western provinces of British Columbia, Alberta and Saskatchewan are quickly taking their place. …Western Canadian governments of all political stripes -- from Progressive Conservatives in Alberta to Liberals in British Columbia to New Democrats (socialists) in Saskatchewan -- have reduced marginal personal income tax rates and overall business taxes. The tax policies pursued by western Canada over the past few years are quintessentially supply-side. That is, the tax relief is largely focused on improving incentives for work, savings, investment and entrepreneurship. Alberta led the way in 2000 by creating Canada's only single-rate personal income tax -- 10%. British Columbia and Saskatchewan soon followed by substantially reducing their personal income tax rates. Top marginal rates in these two provinces were reduced to 14.7% and 15%. Compare that to Ontario's top marginal rate of 17.4% or Quebec's 19.2%. Canada's three western provinces now have the lowest top marginal rates in the country. The changes to personal income taxes were matched, perhaps more importantly, by reductions in business taxes. All three governments pursued two broad measures: reductions in corporate income tax rates and the elimination of corporate capital taxes, a uniquely Canadian tax that severely punishes investment and development. …The economic results of tax reform based on improved incentives have been stunning. Over the past three years British Columbia has grown 3.4% a year on average; Alberta 4%; and Saskatchewan 3.5%, all easily outperforming the Canadian average of 2.6% a year over the same period. Growth in the three provinces also outpaced the U.S. national average for the past two years. Among Canadian provinces and the 50 American states, Alberta ranked seventh in growth, British Columbia ninth, and Saskatchewan 17th." ojcontent=otep (subscription required)

Friday, August 25, 2006


Have you ever asked yourself how much libertarian are you and never came to the effective conclusion? Now you have a chance to test your purity of being a libertarian. The test is not very complicated indeed. After every »short" question there are only two answers offered, "yes" and "no"

Ste se že kdaj vprašali v kolikšni meri vaš nazor ustreza definiciji libertarca in obenem niste nikoli prišli do učinkovitih zaključkov? Sedaj imate priložnost, da svojo libertarno čistost tudi testirate. Na navedeni povezavi obstaja zelo preprost test. Po vsakem zelo kratek vprašanju imate na voljo dva različna odgovora, bodisi "da" ali pa "ne"

Tuesday, August 22, 2006


Economist's paramount concern is always to offer the most productive options in order to maximize the efficiency of economic agents. Macroeconomist is usually finding ways to maximize the efficiency of public finance. From this respect macroeconomic analysis entails constant monetary analysis as well as the issues of corporate and personal taxation. In turn, microeconomist’s general aim is to offer productive options to economic agents on the market (households, individuals) to spent and utilize their resources in the most efficient and productive way. Microeconomist is considering many samples in order to analyze agents’ behavior properly.

Each story of the economic success began at two different and separate levels. The first level is the level of government. Many nations are now adopting pro-growth and free-market policies of low taxation, minimal regulations and flexible labor markets. Estonia is a recent example of a little country that could. Instead of active fiscal policies many governments relied on the monetary issues. The results were impressive. Post-war German economic miracle is a perfect example of pro-growth economic policies. Hong Kong is still a champion in economic freedom. The tiny tiger opened its economy and with the principle of low and fair taxation and non-government intervention embodied an economic story of success. Another level where the story of economic success is measured is the level of firms. In turn, macroeconomic policies largely determine microeconomic decisions of firms and individuals. Where macroeconomic policy is stable and productive, microeconomic results are rocketing up. By and large, incomplete financial markets and the failure of government to commit policy enable government to use active fiscal policy in order to consolidate its power. The outcome of an unstable macroeconomic policy was usually a catastrophic failure seen as (1) a large fiscal deficit or public debt, like in Croatia nowdays, or as (2) a high inflation which occurred because government had to print more and more money in order to finance its budget activities.

However, if firms want to increase their competition on a large market they deserve the highest quality of business environment without setting governmental myths. One of such myths is a myth of trade balance. Accordingly, governments are hardly willing to understand trade as a market. They rather use it as a political weapon. Their soundest and the most emotional appeal to the public is to underpinning “trade deficit” with other countries, striving on every way to come into surplus. But trade balance is largely a result of a market. How do we gain from exports as consumers in the country where export has taken place? In turn, we gain a lot from imports. We wear Italian shoes, drive German automobiles, eat Chocolate made in Belgium, buy large Japanese LCDs, talk to our friends with Finnish mobile phones, hike around with bikes made in Taiwan and prepare a dinner with first-class wine from California. In fact, free market gives us a choice to choose whatever we prefer. Consider a perfect example. You own a company and sell computers. Suddenly, there’s a signal on the market when your customers demand for the latest laptops. You find out that this laptops are produced in China and that it is only possible to import directly from China. So you order the latest 100 laptops and introduce them on the market. According to government officials you accounted a deficit in foreign trade with China. But where is the added value created? Here, in your company. The wholesale company got a cut and after you sold those laptops to your customers, you got a cut.

There is another question. Why some companies can’t compete? Business analysts may tell you reasons. One reason may be an inefficient management, unknowledgeable misinformed and inexperienced executive which could be the major source of uncompetitive company. Another, more actual reason why some companies can’t compete very well is the presence of government in certain areas. Strong and powerful presence of government in businesses usually serves as an instrument of price controls and political allocation in several areas of businesses makes them sister companies of the government. As an economist, I believe that government should be used for something more useful and practical.

Governmental function should take place in reforming business environments in terms of promoting and adopting free-market and pro-growth policies with the privatization of health and social security system on top. The governmental function in the reform process must therefore be applied to improve the quality of business environments. Another extremely important area urgently undertaken to be reformed is the tax policy. Progressive taxes are used to punish the most productive people and to allocate tax revenue according to the political measures in terms of large welfare programs. Charity is a lot better than social security. Social security is a way of keeping those on the bottom in poverty while charity is a way to help those people getting out of bottom in a decent and more productive way. Thus social security is a way of prolonging poverty and there is no more direct way to increase poverty and material decrease of well-being as putting social security programs into practice. Instead of promoting active fiscal policy, government should rather focus itself on monetary issues with inflation targeting policies as a basis of monetary policy including the control of the quantity of money and of the money supply.

Over the past ten years, the United States has seen corporations move job after job overseas in search of cheaper labor. An equally large problem has been the corporate tax rate. Five years ago, the U.S. corporate tax rate of 39% was the sixth highest among Organization for Economic Co-operation and Development countries, according to the Tax Foundation. While other countries have lowered taxes, the U.S. rate hasn't budged, and today it has the highest rate among OECD countries, eclipsing former tax gougers such as Germany and Canada.
And when you start factoring in litigation costs, $250 billion per year or 2% of gross domestic product, it's amazing that any companies stay in the U.S. So, what is a company to do in this high-cost, antibusiness environment? Maybe minimize the damage by moving to a more business-friendly state.
In the latest research conducted by Forbes 50 states were ranked from the bottom to the top according to their performance in six major categories:

Business costs
Economic climate
Growth prospects
The quality of life
Regulatory Environment

Business costs are essential to the firm. Economic climate often contributes its portion to the business costs. If banking system is inefficient, investors can hardly find a decent source of financial support for future joint-ventures. High and progressive income tax codes could do the unprecedented damage as well. Why should an investor build high-tech facilities in Slovenia where corporate tax rate equals 25% while he can choose Hungary with 16% corporate tax rate? Growth prospects can be decreased if the overwhelming regulation and tax system keep businesses away from putting their potential of growth into practice. If there is no productive labor supply that could ensure future growth of a company, companies will come and go. And if certain business environment is forecasted to grow, more and more fresh graduates will come there and try to give the best of their potential in an environment that grows. The quality of life is a very stimulating area which together with labor determines the mobility, capability and flexibility of workers in their performance. Rigid labor markets and state protection of the labor are the most damaging impacts that reduce the opportunity, choice and mobility as well. Good education score among students ensures companies a good supply of future labor force with highly sophisticated knowledge. Regulatory environment is a considerable area as well. Rigid regulatory codes could force investors to find the opportunities somewhere else. Extensive product market regulation decreases the ability of firms to focus on its market supply and innovation strategy. Instead, investors are often forced to go through thousands of pages of different rules, codes and acts. Inefficient, entrepreneurially hostile and enormously large state or local administration could additionally force investors to move into another place in order to find another place to invest. There would be no new jobs that would bring prosperity, choice and the opportunity for everyone for new graduates and consumers as well.

The outcome of the Forbes research “The Best States for Business” is a useful tool for investors, a sort of a guidebook that concerns where is the best location to do business, reflecting six main categories through which economists and analysts can find new and productive ways of specifying methodology that examines the question of measuring the quality of business environment.

So if you are an investor facing strongly rigid hindrances in the environment where you work I recommend you to come to Virginia where you can find the business environment of the first quality.

I remember how Allan H. Meltzer once perfectly captured the essence of difference between productive and unproductive people when he set the following statement: “The least productive people are those who are in favor of holding meetings.” I think he hit center of the target by telling this very vibrant truth.


France's government wants the world to know something. According to official figures, French citizens created a record 322,000 companies in 2005 -- and they're setting a similar pace this year. Is France, which invented the word "entrepreneur" but has been famously hostile to the breed, finally helping small-business people thrive?

Read the whole story here.

Tuesday, August 15, 2006


Emerging markets and interest rates, Economist, Aug 3rd 2006

As investors become pickier, keen to distinguish one emerging market from another, they may begin to see Hungary in the same light as Turkey and South Africa. It too runs a big current-account deficit, which the IMF thinks will exceed 9% of GDP this year. Indeed, on fiscal matters, the comparison is rather to Hungary's disadvantage. Turkey may labour under heavy public debts, but it is at least running a heroic budget surplus, before interest payments, estimated at 6.4% of GDP. South Africa now runs a modest fiscal deficit, but its stock of debt is quite manageable. Hungary, on the other hand, has both high debts (almost 60% of GDP in 2005) and a wide budget deficit. Nouriel Roubini, of Roubini Global Economics, calls it an “accident waiting to happen”.

Read the whole story here.

Monday, August 07, 2006


The economic policy pursued by Ronald Reagan is often called “Reaganomics” or “supply-side” economics. Fortunately, this policy meant a radical cut of Keynesianism where consumption was stimulated with massive government spending. Keynes put the emphasis of economic policy on the demand-side (consumption). Reagan, by contrast, put the emphasis on the supply-side (production). Keynes believed that demand would create supply, but Reaganomics started from the opposite idea, namely that supply would create demand. In this way of thinking, the supply side of the economy (economic activity, production etc…) had to be stimulated in order to create wealth. The best way to do this was to cut the marginal tax rates on personal income. Such a tax cut would create a strong incentive to increase economic activity and would have spectacular effects on growth, investment, risk-taking and saving.

President Ronald Reagan’s stature will grow as his achievements come to be more widely recognized. It was Reagan’s confidence in capitalism, not his defense buildup that caused Soviet leaders to lose their confidence in further pursuit of destructively devastating state-controlled economy. Ronald Reagan took away the Soviets’ comfort factor when he said that the “Phillips curve” and falling US productivity were the results of the wrong policy mix, not inherent features of a market economy. The U.S. economy, in other words, could be easily fixed, but the Soviet economy could not. Later I will speak about Reagan’s slashing of tax rates from 70 to 28 percent. After imposing genius liberal economic reforms, Margaret Thatcher achieved similar results in reforming Keynesian legacy of British economy. Surprisingly, even French followed and pursued fueled privatization of their socialized economy. Reagan revitalized the U.S. economy. He abandoned the Keynesian policy mix of monetary expansion to stimulate demand and high tax rates to restrain inflation--which was obviously not being restrained by Keynesian demand management. Reagan got the supply-side message that high tax rates were restraining real output while money growth pumped up demand, thus causing inflation.

Reagan’s policy was a success. But at the time it was misunderstood. Accustomed to thinking of tax cuts as a demand-side measure to stimulate consumer spending, the entire economics profession, along with the Federal Reserve, the Republican Senate, and most of Reagan’s own government, predicted accelerating inflation. Reaganomics is probably the only economic doctrine that made its way into a pop song. In 1985, the British group Simply Red criticized the 'antisocial' policy of Reagan in their song “Money’s Too Tight To Mention” (actually, a cover version of an original American song by the Valentine Brothers from 1982).

The popular perception of Reaganomics is clear: an antisocial policy with a curtailment of social expenses. But criticizing Reaganomics is not the monopoly of the left. Even classical (i.e. pro free market) liberals and libertarians are convinced that although Reagan stimulated the economy, it came at the cost of an enormous budget deficit. Even George Herbert Walker Bush was initially very sceptical of the economic ideas of Reagan. In 1980 he spoke about “voodoo economics”. He changed course when Reagan chose him as running mate for the presidency.

In the sixties and seventies, Keynes' economic theory was applied on a large scale. Keynes developed his ideas in the deep economic recession of the thirties, with its high unemployment. Keynes argued that governments should stimulate aggregate demand by massive spending and infrastructure works in order to invigorate the economy. Through the “multiplier” effect every dollar spent by the government would create a multiple in income. Unemployment would vanish, the tax base would broaden, and the budget deficit would disappear, Keynes argued. But during the oil crisis of the seventies, it became clear that Keynesianism did not work. Higher public spending did not resolve unemployment. On the contrary, unemployment increased in line with the increase of government spending. Moreover, unemployment and inflation appeared simultaneously, a fact which could not be explained by the dogmas of Keynesian thinking. The only thing they were able to do, was to give it a name: “stagflation”, which meant that we had a combination of creeping inflation, recession and unemployment. During the Carter years, inflation was at a staggering 13%. Huge interest rates were necessary to fight it. The interest rate on credit facilities reached the unbelievable level of 21%. The drama was complete when taxes were increased to fight both inflation and government deficits. During the Carter years, the top marginal tax rate on personal income rose to the insane record level of 70%. Experts in Economic & Tax Policy did not know how to agree on any economic policy. They simply had no solution!

Many of the recent studies have indicated that high public spending as Keynes had advocated does not stimulate the economy. The main reason is that money that could otherwise be spent by private sectors, shags off with public jobs which offer very little or even zero return. Money to pay the deficit must come from somewhere else to paid-off and usually it is the taxpayer who must pay it. The fundamental basis of Keynesian logic is that it hardly makes sense to tax money away from productive people, thereby reducing their rewards, so as to spend it on unproductive goals. The United Kingdom which is the home of Keynesianism experienced it long years after the war. Keynesian economic policy was sticking and sticking and everybody seemed that there’s no way to stop it. Finally, Margaret Thatcher stopped putting continued Keynesian economic policy into practice. Another, more recently observed example is Japan. This country has provided one of history’s best demonstrations that the Keynesian demand stimulus is a deeply flawed economic philosophy. Despite huge government outlays, the Japanese economy is still wallowing in the slump that has afflicted it for more than ten years. According to the analysis of the relationship between and the size of governments in 16 European countries, the two main causes leading to poor growth performance are excessive government spending and a demotivating tax structure, which put a heavy burden on work, income and profit. This study has recently been confirmed and underpinned by multiple regression analysis, using econometrics tools to show the results.

There were four young economists who convinced Reagan to completely reserve the economic policy of that time. Those four economists were: Paul Craig Roberts, Robert Mundell, Norman Ture and Steve Entin. And there was another Journalist Jude Wanninski who contributed a great portion to the turnover of economic policy when Ronald Reagan started running his first mandate. The very basic point of view was that tax rates very extreme, too high and worked like a barrier, embodying a strong disincentive to work, risk and save. In a very popular point of view, “Economics of Discouragement” had to be translated into “Economics of Encouragement”. People are producing because it pays to do so. Consumption will not result in increased production when there are no incentives to do so. The logic is simple. When tax rates are becoming higher, people are loosing their interest in taxed working activities such as risk-taking, work and entrepreneurship. When tax rates fall down, people are starting to increase their participation in those activities since they see more incentives to participate in productive behavior and raise their incomes on a permanent basis. Only few people knew that Reagan had a major in Economics from Eureka College (Illinois) in 1932 The economic theory he was taught was untouched by Keynesian thinking and, as a consequence, very appropriate to the problems of the eighties. Reagan immediately took action. He lowered marginal tax rates from 70% in two phases: to 50% (Economic Recovery Tax Act of 1981) and in a later phase to 28% (The Tax Act of 1986).

These tax cuts created 18 million new jobs in 8 years, lowered inflation to 4.3% and cut unemployment from 9.7% to 5.4%. One of the longest and strongest economic expansions since World War II had begun, with an average annual growth rate of 3.5%. But the first two years (1981 and 1982) were lost for Reagan. Fed chairman Paul Volcker fought inflation with a tight monetary policy and high interest rates. The Reagan administration urged Volcker to decrease monetary growth by a maximum of 50%, in order not to kill the tax cut program. But as the Federal Reserve is totally independent, Volcker cut money growth by 75% in 1981. The recession became even worse, and unemployment rose further. But after inflation had been defeated, money growth resumed and the Reagan expansion took shape.

Many leftist critics claim that Reagan gave money away to the rich at the expense of poor. Under Reagan’s leadership the so called rich people paid-out comparatively more through income and corporate taxes than ever before. The economic position for the poor was suitable and enabled them to move-up because tax revenues paid by the poor went down. But the reason for that is very simple. Lowering tax rates enabled instant participation in productive behavior. If the rich worked more, they saved more and logically they paid more. Reagan’s tax policy was followed by a principle in which increasing tax rates will not result in an increase of tax revenue. If you want to increase tax revenue you must expand the tax base and consequently lower marginal rates in order to let the economy grow.

It is often claimed that the budget deficit had risen to enormous proportions during the Reagan years. But between 1981 and 1989 the budget deficit increased only slightly, from 2.6% to 2.9% of GDP. The deficit peaked in 1983 to 6.1% of GDP (the Volcker recession with tight money). During the same years the Belgian budget deficit varied between 7% and 13% of GDP. The average budget deficit for the G-7 countries was only slightly lower than that of the US. The public debt of the US as a percentage of GDP, remained below that of the G-7 countries, i.e. below 32% of GDP. But Belgian public debt, the result of years of Keynesian policy, was higher than 100% of GDP and remains around 100% at this moment.

Increasing social outlays doesn’t make sense when you have previously created poverty and unemployment with wrong and possibly destructive economic policy. Redistribution of wealth through high marginal tax rates has no clue. It distributes poverty.

Keynesian thinking explained the economic achievement in terms of the level of spending. Deficit spending will keep employment high and will stimulate the economy. Cutting the deficit (for the Keynesians) would reduce spending and throw people out of work, raising the unemployment rate, reduce national income and hence produce less tax revenues. Reagan on the contrary brought a totally new perspective to economic policy. Instead of putting the emphasis on spending, supply-side economists showed that tax rates directly affect the supply of goods and services. Lowering tax rates mean better incentives to produce, to save, to invest and to take risks. In other words lower tax rates stimulate supply and not demand. The broader tax base will compensate at least partially for the lost revenue caused by the tax cut. Higher savings will result in increased investment and unemployment will disappear. Instead of pumping up demand to stimulate the economy, reliance would be placed on improving incentives on the supply side.

Entire population couldn’t believe that former movie actor could enable the most explosive expansion of the growth of income with revolutionary economic policy that stepped with new supply-side approach.
But Ronald Reagan was not the only one leading a strong, productive and impressive economic policy considering supply-side mechanism. Ludwig Erhard put in practice supply-side economics in Western Germany in 1948. At that time he was in charge of economic policy. He introduced an economic shock therapy completely in line with Reaganomics. He abolished rationing and price-controls, although he restricted his own power with this measure. Erhard believed in the self regulation of the market.

Not only the Social Democrats were vehement opponents of the abolishment of price-control, but also Lucius D. Clay, the US. military governor, was furious. Erhard had pushed through the economic deregulation without ever asking the general. Clay called Erhard to account, thundering that the professor had infringed upon the Allies’ privileges by changing the rationing regulations. Erhard coolly responded : “you are mistaken, sir, I have not changed them, I have abolished them.” Later on Erhard, as secretary for the economy, cut the high marginal tax rate in two steps: first from 95% to 63% and afterwards to 53%. The first 8000 DM earned became tax free. The decisions taken by Ludwig Erhard allowed West-Germany to rebuild itself at a pace never seen. No surprise that he was called the “father of the wirtschaftswunder”. The German economic miracle cannot be explained by the Marshall Plan. Britain and France received Marshall money too, but they wasted their chances. Britain voted Labour, which brought rationing and price controls. France opted for economic protectionism, which prevented Marshal help to be used in an efficient way. After Reagan, the theory of supply-side economics was applied in numerous countries. In Iceland, David Oddson became prime minister in 1991. He inherited a poorly performing economy burdened by heavy income taxes. He lowered the corporate tax rate from 50% to 30%. During the next five years the economy grew by 5% per year. Government income did not fall and social outlays could be maintained. Ireland is another example. In 1987 this country was the “sick man” of Europe, with a public debt of 135 % of GDP. After the elections of 1987 a new economic policy was introduced. Corporate tax rate was reduced from 32% to 12.5% and capital gains tax was lowered from 40% to 20%. Ireland is now the fastest growing country of the EU. Japan, to the contrary, is a classic example of the failure of a Keynesian demand-side policy. The economy has been in shambles for many years and public debt has risen to a gigantic 170% of GDP. The following graph compares government spending and GDP per capita in Ireland and Belgium between 1960 and 2003. The Irish 'turning point' came with the adoption of supply-side economics.

A Reaganomics Plan for Slovenia

1. A considerable tax cut down to 20% on personal income.

2. The complete abolition of corporate tax rates repealing all public subsidies transferred to public enterprises where government owns major or partial stake

3. The abolition of taxes on dividends. Investment and risk taking has to be encouraged, not punished. A reduction (or abolition) of tax rates can make investment opportunities profitable that formerly were not

4. The abolition of all agricultural subsidies. At this moment 45% of the total EU budget goes to agricultural subsidies, respresenting the huge amount of 45 billion euro per year. This is not only dramatic for the tax payers, but it is also very harmful for the developing world, mainly for the poor countries in Africa. As a consequence of the subsidies, European agricultural products are dumped (at prices far below the cost) on the markets of these countries, preventing them from competing on the world markets with their own products.

5. A radical cut in the size of Government. After Sweden, Slovenia has the second largest part of public expenditures according to Fraser Institute. The government has received more than 2% of total revenues from public enterprises and other forms of government ownership.

Supply-Side and the Laffer curve

Supply-Side economics is widely misinterpreted as the Laffer curve. Arthur Laffer, an economics Professor at University of Southern California claimed that an important feature of supply-side economics is that tax cuts will pay for themselves. Laffer became famous after he illustrated this idea on a napkin in a restaurant in Washington in 1974. But the question is not whether tax cuts pay for themselves, but whether they are more effective in creating economic growth and welfare, compared to a Keynesian policy of increasing government spending. The difference between Keynesianism and the supply side school centers on fiscal policy. Does a successful fiscal policy work by incentives (tax cuts) or by increasing demand (spending)? The important question is not whether such a fiscal policy will pay for itself. The Keynesians stress demand, supply-siders stress incentives. Changing fiscal policy by creating incentives will change the behaviour of people. If tax rates rise, people will reduce their participation in taxed economic activities, such as working, risk-taking, investment and saving. When tax rates go down, people are motivated to increase their economic activity. The economic expansion that will follow a tax cut is far more important than the fact that tax cuts should pay for themselves. Most politicians in Western Europe have not yet understood this very important distinction. Even worse: the media in Europe have killed Reaganomics because they do not understand this difference.

Flat Tax: A Gate to the Future

Flat tax is even better solution to the problem than 5 points program above. If flat tax was introduced it would apply to both personal and corporate income. All relieves, deductions, allowances and subsidies will be eliminated. Loopholes would be impossible. The system would be so simple that it will perhaps take no more than five minutes to file a tax return. In 2004, 85% of Estonians filled their tax returns electronically. In the last ten years flat tax rates have been introduced in several economies. The first among them was Estonia in 1994 after having ignored painful advice from IMF aiming to introduce progressively applied tax rates and increase administrative costs what would push the economy even deeper of the cliff. Luckily, Mart Laar has been smart enough to follow Milton Friedman’s sophisticated solutions from “Free to Choose” in order to let Estonia become the pioneer of classical liberal free market policies shifting its economy ever upward.

A low level of a flat tax is important. The well-known Richard K. Armey, previous Majority Leader of the House of Representatives advocates a tariff for the US of maximum 17%. But this rate could even be lower. An analysis by the French economist Philippe Manière indicates that a flat tax rate of 10% in France would maintain the government revenues at the present level.

For Slovenia, an introduction of maximum 20% flat tax rate applied on both personal and corporate income would have enormous advantages:

1. Economic Growth would explode, leading Slovenia to become one of the fastest growing economies in Europe. Simple, fair and non-discriminatory Flat tax would create beneficial incentives to encourage people to expand their productive behavior with more risk, work, entrepreneurship, investment and saving habits. To find loopholes would be impossible and thus people would find very little reason to hide or offshore their money away from the government

2. Unemployment would be likely to almost disappear.

3. Since it makes almost impossible to avoid paying taxes, people would not evade them since they are willing to pay minimal tax burden when tax rates are less off. Flat tax won’t punish people for their contribution for “working too much” or perhaps “saving too much” since there’s a principle of territorial taxation put into context so you don’t have to pay taxes on your properties if you own one abroad. Tax return can be done in less than 15 minutes on a postcard-sized filling form.

4. At last, an important part of bureaucrats would be ripped off and perhaps they could transform their activity towards more productive tasks.

5. Remember what “Der Vater den Deutschen Wirtschaftswunder” Ludwig Erhard once wisely told: “A compromise is the art of dividing a cake in such a way that everyone believes he has the biggest piece.”

Will Reaganomics or supply-side economics ever be applied in Slovenia? In the UK, Ireland, Iceland and Eastern Europe current economic policy has strong supply-side influences. Currently Germany is in a worse socio-economic situation than Slovenia. Who knows, perhaps some day Slovenia might return to the successful formula of Ludwig Erhard and create a new Wirtschaftswunder, by applying supply-side economics. Such an example could show the way for Germany and other countries too.


Paul Craig Roberts: Reagan Changed the World, Townhall, 7 June 2004

William A. Niskanen: Reaganomics, The Concise Encyclopedia of Economics

Larry Kudlow and Stephen Moore: Reaganomics. Then, Now and Forever, The Growth Club, 12th of June 2004

Murray Rothbard: The Myths of Reaganomics, Mises

William A. Niskanen, Stephen Moore: Supply Tax Cuts and the Truth Aboutthe Reagan Economic Record, CATO

Robert Bartley, Seven Fat Years and How to do it Again, Free Press, 1995

Luc van Braekel, Reaganomics, A Success Story, Brussels Journal
Daniel J. Mitchell: Taxes, Deficits and Economic Growth, Heritage Lecture

Thursday, August 03, 2006


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Suggested Reading:
Milton Friedman, Price Theory, Aldine Transaction, 1976


Just a few minutes ago I eyed an interesting observation in The Economist that points out several findings why there's such a strong tight between the United States and Israel in terms of financial, cultural and political cooperation. As an Economist, I rated that observation somewhere in the middle of the scale. Interestingly I think books written by Friedrich August von Hayek and Milton Friedman would be an appropriate reading to analyze the conflict situation that has separated the Middle East splittedly into two parts.

There's no doubt that Israel's child of hope and truly the home of brave. Why? To be honest it's the only democratic country in the Middle East. Its broad political, economic and cultural system generally entails elements that strongly underpin economic and political freedom. According to Heritage Index of Economic Freedom, "Israel has developed a modern economy with a thriving technology sector." The overall score on Economic Freedom is not that bad at all but taking the Middle East area into account, Israel is somehow "The Hong Kong of Middle East" in broad terms. Sitting on your couch and watch how media tries to brainwash their consumers by trying to blame Israel for everything is actually pretty emotional from viewer's point of view but thinking more broadly, blaming Israel means giving an unconditional support to terrorist organizations in the Middle East.

The most important factor of observation in the Middle East crisis is to ask ourselves what kind of economic and political program do organizations like Hezbollah offer if they come up and gain political authority. First of all, the vast majority of countries in the Middle East with Arabian cultural flow offer destructive policies mostly denying personal and economic freedom. Libertarec has served us pictures displaying how cultural difference in the champion of terrorist leadership, namely Iran, actually looks like in the real life. Fanatical Islamic approach to hampering the economy devastates the seed of economic progress - pioneering property rights through privatization and opening to the world via free trade. According to Heritage Index of Economic Freedom, there's no Middle East country with Islamic tradition to be placed among free or at least mostly free economies. Protectionist trade policy, extreme fiscal pressures, cosmetically held low inflation, hostile foreign investment legislation, centralized and undeveloped banking system, strict price controls, and weak protection of property rights, harmful regulation and highly spread informal business activities.

Culturally, the legal code entails strongly favored torture of women and other criminal acts denying basic ethical rules that our civilization has been devoted to. Quietly favored additional and unconditional support to Hezbollah and other terrorist organizations means expressing silent support to their kind of policies that repressively deny personal and economic freedom and instead their totalitarian leaders prefer to govern upon religious oppression and additionally favored punishment of those who really want to live freely and independently create their fuller and happier tomorrow.