What Puerto Rico’s Failures Teach us About Economics
Economics are debated
every day. No doubt, you have had disagreements with friends, coworkers or
family members. This year has highlighted the major differences between the
left and right, and when measured by historical examples, leftist policies
aren’t simply inferiors; they are dangerous.
We’re going to use
Puerto Rico as a running example of why the left view on economic policy is
extremely dangerous. As quick history lesson for those who aren’t familiar, the
Puerto Rican economy has been in shambles, and almost all of the decline has
happened over the last ten years.
Minimum
Wage
This has been a major
battleground in politics this year, and protestors are still going strong. Minimum
wage is not an inherently evil idea. Under-educated workers can and have been
exploited by those in power, and a low-scale minimum wage can help prevent it
from happening again.
The problem arises
when the term “livable wage” starts to enter the conversation, mostly because
the bottom “livable wage” varies wildly by region. Case in point, Puerto Rico
is currently defaulting on tens of billions of dollars in debt, and their
problems go back to minimum wage.
The island territory
just can’t sustain the same base wages as the rest of the U.S., but they are
still subject to federal minimums. When the rates went up in 2006, it started
an epidemic of lost jobs that still plagues the territory. Of course, minimum
wage is only the beginning.
Government
Spending
Some facets of
government spending are fairly universal. The big divide between the policies
of the left and right mostly boil down to social programs. An easy example is
education. Democrats want to increase education funding across the board, while
the Republican policies tend to favor voucher systems that redistribute funding
by merit, and this boils down the essence of the conflict: regulation vs
competition.
Social spending is
predicated on reasonable ideals. Provide education, healthcare, housing and
jobs to every American, especially those with the least resources. While the
principle is noble, much is often lost in execution. The primary problem is
that welfare programs typically aim at subsidizing needs. They lead to
indefinite financial commitments from the government.
Medicare and Medicaid
are the most prominent examples. When this happens, it creates a perpetual
strain on tax revenue that does little to promote general economic growth. These programs do put
money into health care, but it’s so mired in bureaucracy that major medical
companies can do little investing with the money they receive through those
programs. It may keep the lights on at the hospital, but it has a lower impact
on innovation and expansion, mostly because it creates stagnant income that
fails to incentivize change. The right still
promotes a large amount of government spending, but they usually argue to spend
the money on more tangible results. Military contracts are almost solely
dependent on innovation and are competitively renegotiated constantly.
Infrastructure is
another big spending point, and it is the real difference maker. Infrastructure
spending is ultimately a bunch of short-term investments. They put mobile money
into construction industries, and the free markets are left to do the rest.
Because contractors know that infrastructure jobs are temporary, they are
forced to invest their gains competitively, and this drives markets forward.
Tax
Revenue
The philosophy of
spending is strongly mirrored in tax revenue. The left takes the direct
approach: raising taxes raises tax revenue. This feels obvious, but the
approach borders on simplistic. Combing back to our example of Puerto Rico, the
root causes of the debt crises are really two-fold. While minimum wage was a huge
problem, a second issue came in the form of corporate taxes.
In 2006, major
corporate tax cuts expired. That drove many large businesses away from the
island in search of more favorable conditions, and with them went thousands of
jobs. That this problem coincided with the minimum wage hikes pretty much
sealed the economy’s fate.
The companies that
could have maintained higher wages left because multiple conditions were
against them. To shorten a long story, declining job numbers cause a sharp decline
in tax revenue, even though overall tax percentages were raised. It was
unsustainable and the result was defaulting loans.
This example teaches
an important less. Raising tax rates doesn’t always raise tax revenues. This is
the core of the mantra of the right, and it is the foundation of Trump’s tax
plans. Basically, short term revenue losses will happen when tax cuts hit the
nation, but the resulting job, wage and profit growths stand to bring more
long-term revenue than the tax hikes proposed by the left.
There’s another
important, hidden message. The wealthiest Americans really do hold a large
chunk of the nation’s wealth. The gut reaction is to think that they can afford
to pay more in taxes, but again, the simplistic outlook is dangerous. In general,
those holding wealth are not going to sacrifice their lifestyle to hire
workers. Instead, disproportionate taxes will cause them to invest less and
take fewer risks, ultimately hurting the entire economy. This is exactly what
happened in Puerto Rico.
Regards, Ethan Warrick
Editor Wealth Authority
http://www.wealthauthority.com/articles/what-puerto-ricos-failures-teach-us-about-economics/
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