Nathan Lewis explains his “magic formula” for promoting prosperity at Forbes:
Economics is easy. You just have to get two things right: Low Taxes, and Stable Money. Get this right, and everything else tends to follow with relative ease. Get it wrong, and the endless problems and difficulties that ensue will prove insoluble.
I like to call it “the Magic Formula.” If it seems obvious, that’s because it is. Capitalist economies don’t really work very well when taxes are high or money is unstable. Nevertheless, the Magic Formula is often ignored. Taxes today are not very low; money is not very stable; both might get worse, not better. This has consequences.
I think his formula is broken. It assumes a higher level of consumption relative to income for the wealthy than presently exists and lower importants than we presently have. Otherwise the formula may bring prosperity—just not here.
Most incremental income has been going to the wealthiest for decades. The wealthiest aren’t spending their money bigger houses, more cars, or large staffs of servants or, more precisely, they aren’t just spending their money on bigger houses, more cars, or large staffs of servants. They put their money into stocks, bonds, T-bills and other financial assets. Very little of that seeps into the real economy of goods and services so none of us ever see it.
And when much of what you consume (other than health care and education) is manufactured somewhere other than the United States, consumption does not have as great a multiplier effect here as when we made things here.
For the “magic formula” to start working again it will take more than low taxes and stable prices. It will altering the distribution of income and imposing the same costs due to labor and environmental regulations on goods made elsewhere as apply to good made here.
I’m not opposed to low taxes and stable prices. I just want the prosperity that they will promote to be spread around a little more.
Twenty-five years ago, I was in Somalia, and there were low taxes and stable money. I doubt it has become a hotbed of capitalism, but perhaps, Mr. Lewis could pop-over and report back.
The Somali shilling has been just about as stable as the dollar over the period of the last 30 years.
“Very little of that seeps into the real economy of goods and services so none of us ever see it.â€
Seriously, Dave?
Okay, let’s take an example. A share of Amazon stock is sold for $75 in 2000. That share sells for $200 in 2012, $750 in 2016, and $2,000 in 2018. What is the total amount invested in Amazon via that single share? Answer: $75. Everything else is retained in the financial economy except, possibly, for some commissions.
An enormous amount of money is bouncing around in the financial economy.
Bezos himself owns 17% of that stock, making him worth over $100 B.
Amazon is spending money like crazy to get into shipping, grocery, pharmacy, television, on and on. These are investments whether good or ill.
https://www.inc.com/magazine/201705/zoe-henry/will-amazon-buy-you.html
Relatively little of that investment is from new issuance of stock. Most of the Amazon stock in circulation was issued in 1998. Since then while Amazon stock is meaningful to its stockholders it has little relationship to Amazon’s investments.