SAM’S THEORY OF ECONOMICS

Historians of the 1930’s Great Depression point to a series of errors the U.S. Government made resulting in the worst period of economic performance in history. The one overriding lesson is that, just like 2010, higher taxes and increased expenses stripped corporations and individuals of spending power.

While the depression took hold the shunned English economist, John Maynard Keynes, argued that we were doing it all wrong. “Don’t be fools, put money in their pockets not take it out!” said Keynes. President Franklin Roosevelt was not sure Keynes was right. But did believe if he put cash in people’s pockets he would get their vote. So, the era of Keynesian economic theory was born. The government stimulus packages you have seen in 2009 and probably 2011 are Keynesian once again.

The problem is that Keynes discovered massive government stimulus could stabilize an economy and banking system. But, did not restimulate significant long term growth. During Keynes time WW11 provided the jobs and growth to put people back to work. The biggest question facing our country today is how, short of a larger war, to stimulate demand.

Japan entered into recession during 1990. They are still in the recession today. 20 years!! Why? As Japan raised taxes and expenses, decreasing competitiveness, companies moved to cheaper countries. The Japanese government also has tried to cover that loss by using stimulus packages many times. Are we foolish enough to make the same mistakes? Does the U.S. want to remain in perpetual recession? .

Enter Sam Walton who never met a product he did not like, as long as he could sell it cheaper than anyone. Could the U.S. use Sam’s company, Wal Mart, as the role model? No I do not mean the government should buy retailers. But by having the lowest income taxes, and fewest government controls, of any country. “If we are the cheapest the corporations will come”.

Our “competition” are other countries which are taking our companies, capital and jobs, by implementing these exact cost reduction strategies. China and Hong Kong reduced income taxes while the U.S. raised theirs. The GDP score in this game? China growth 10% per year. The U.S.? A big fat Zero.

We forgot what Keynes discovered and Sam always knew; you can only succeed if you are the least expensive guy on the block.

Roger Groh

10/7/10

Roger@Grohasset.com